Exam 4 ACCT 2110
Outstanding checks are
checks that have been issued and recorded by the business but have not been "cashed" by the recipients of the checks.
On a bank reconciliation, bank service charges for the month are added to the cash balance per the company records.
false
On the balance sheet, a company reports plant assets by subtracting residual value from the original cost of the plant asset.
false
Plant assets, current assets, property, plant and equipment, and fixed assets are all tangible assets.
false
Research and Development costs should be added to the cost of patents.
false
The accountant must make journal entries for all items in the bank section of the bank reconciliation.
false
The best response to an employee caught stealing from the company is to say, "Don't ever let me catch you doing that again!"
false
The sole purpose for creating an internal control system is to deter embezzlement.
false
When a company sells goods or provides services for a customer but the customer intends to pay later, the company must record a current liability.
false
When making lending decisions, lenders generally are not interested in the company's operating assets.
false
When plant assets are reported, the current period's depreciation expense is subtracted from the original cost on the balance sheet.
false
When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.
false
The stronger the system of internal control, the higher the accuracy of the company's accounting records and financial reports.
true
Cash and cash equivalents include
All of these choices are correct.
Internal control systems are designed to provide reasonable assurance that the company's objectives are being met in
All of these choices are correct.
Which of the following activities is part of the operating cycle of a business?
Collecting cash from customers
Which of the following is the second step to revise the calculation of depreciation expense?
Compute depreciation expense using the revised amounts for book value, useful life, and/or residual value.
Upon completion of the bank reconciliation, the accounting records may require some adjustment. Which of the following would NOT require an adjusting entry?
Deposits in transit
When acquiring a building, which of the following costs would NOT be capitalized?
First month's electricity bill
Which of the following statements about intangible assets is true?
Goodwill is considered to have an indefinite life unless it is found to be impaired.
Which of the following is true of a credit memo issued by a bank?
If it has not yet been recorded by the business, the bank balance will be larger than the cash account balance.
Why do companies invest their cash in short-term investments?
Investments earn a greater rate of return than the return of a bank account.
What is the impact on the accounting equation of recording the accrual of wages expense?
Liabilities increase and stockholders' equity decreases.
The disposal of a fixed asset may result in a gain or loss on disposal. Which of the following would be part of the entry to record a loss on the disposal of a fixed asset?
Loss on Disposal is debited.
Which of the following activities would be a good way for a company to manage its cash?
Selling account receivables for less than face value
When a fixed asset is disposed of, the asset's book value (cost and accumulated depreciation) is removed from the accounting records. At that time, any gain or loss on disposition of the asset is recognized. Which of the following statements describes a gain?
The book value of the asset is less than the proceeds received from disposal.
Three items of information are necessary in order to measure depreciation. Which of the following is NOT one of these three items?
The fair market value of the fixed asset
An impairment of an asset may be due to which of the following?
Too little depreciation expense being recorded in previous years
Bank reconciliations often identify differences between the cash account and the bank statement. Which of the following is NOT a reason for the difference?
Transactions were recorded by both the bank and the business.
The periodic depreciation expense rises and falls with the asset's use when which of the following depreciation methods is applied?
Units-of-production method
The amount of a current liability reported on the balance sheet for interest payable includes
all interest currently owed related to amounts borrowed in past transactions.
As the service potential of operating assets declines, the costs of these assets are allocated to an expense for the accounting periods in which the assets are used. This process is called __________ for property, plant, and equipment.
depletion
The impairment loss is equal to the
difference between the book value and the fair value of the asset.
net sales / property, plant, and equip
fixed asset turnover ratio
Capitalizing an expenditure rather than recording it as a revenue expenditure
impacts the total book value of plant assets reported on the balance sheet and the amount of net income reported during a period.
All of the following are true EXCEPT that
in certain industries, such as computer software, operating assets are nonexistent.
Cash Over and Short with a debit balance is generally reported on the
income statement as part of other expenses.
The stage of the operating cycle and cash management that focuses on earning interest on its cash is
paying for inventory
The stage of the operating cycle and cash management that focuses on speeding up collection of receivables is
selling inventory
A company determined that it had incorrectly estimated the useful life of equipment that it had purchased two years ago. It must now depreciate the asset's remaining book value over the current and future accounting periods.
true
An example of a current liability is a note payable that is due in 8 months.
true
An example of a current liability is the current maturity of a long-term debt.
true
A patent has a legal life of 20 years. On January 1, Alpha Company acquires a patent that has a remaining legal life of 15 years. The company expects to receive economic benefits from the patent for only 5 years. How many years of amortization expense will the company have?
5 years
Investors are concerned with the condition and age of a company's fixed assets. Which of the following would help an investor estimate the average age of a company's fixed assets?
Accumulated Depreciation/Depreciation Expense
Which of the following statements about warranties is true?
Actual warranty claims are unlikely to exactly equal the business' estimate.
Control activities are the policies and procedures top management establishes to help ensure that its objectives are met. Which of the following is NOT one of the control activities?
Adequate information communicated (information)
Generally accepted accounting principles (GAAP) do not require a specific depreciation method for any company. Which of the following depreciation methods results in the greatest total amount of depreciation expense over the entire life of the asset?
All depreciation methods result in the same amount being recorded as depreciation expense over the life of the fixed asset.
Employee theft and fraud result in losses because which of the following components of internal control is NOT followed?
Control activities
Which of the following accounting principles provides the conceptual basis for measuring and recognizing depreciation?
Matching principle
Which of the following is NOT a reason to revise the calculation of depreciation expense?
The number of units produced by the asset in the current year is higher than the number produced last year.
Which of the following is NOT important with regard to accounting for operating assets?
The physical location of an asset in the manufacturing facility
Periodically, the company should verify the petty cash balance. Which of the following equals the petty cash balance?
The sum of the receipts and the petty cash on hand
As the service potential of operating assets declines, the costs of these assets are allocated to an expense for the accounting periods in which the assets are used and benefits received. This process is called __________ for intangible assets and __________ for natural resources.
amortization; depletion
The Sarbanes-Oxley Act requires all publicly traded corporations to have an internal audit function that reports to the
audit committee of the board of directors.
The stage of the operating cycle and cash management that focuses on inventory levels is
buying inventory
In addition to expenditures made when property, plant, and equipment are acquired, companies will incur costs over the life of the asset that range from ordinary repairs and maintenance to major overhauls, additions, improvements, and betterments. When a manufacturing firm spends $150,000 to upgrade one of its robotic machines to make it more productive, the expenditure would be classified as a(n)
capital expenditure
The book value of an asset is calculated as
cost minus accumulated depreciation
DualPower's total of cash register tapes and other documents supporting the receipt of cash on that day is $8,415.60. DualPower has $8,417.35 prepared for deposit. The entry to record the day's receipts will include a
credit to Cash Over and Short for $1.75.
The periodic depreciation expense remains constant with the asset's use when which of the following depreciation methods is applied?
straight-line method
All of the following are strategic risks EXCEPT
employees.
A check written by a company but not yet presented to the bank for payment is called a check in transit.
false
A company expects to receive a substantial cash settlement from a lawsuit. Therefore, the company must record this on its accounting records if a reasonable estimate can be made of the amount to be received.
false
A company's internal control system must be designed and maintained by its external auditors.
false
A company's management expects to incur future expenses related to the repair or replacement of defective products sold. Those expenses must be matched to revenues in the period of the repair or replacement.
false
A good system of internal control requires that the physical custody of assets be separated from the accounting for those assets. This concept is known as safeguarding of assets and records.
false
A probable loss from a lawsuit that can be reasonably estimated should not be reported on the balance sheet as a current liability.
false
Acquisition cost includes all of the costs that are normal and necessary to acquire and maintain a plant asset over its useful life.
false
An impairment is a temporary decline in the future benefit or service potential of an asset.
false
Cash equivalents typically appear in the long-term investments section of a balance sheet.
false
Federal income taxes payable is not a current liability.
false
If a company has an internal audit function, it does not need to have external auditors.
false
Liquidity relates to a company's ability to sell its assets for amounts that exceed the assets' book values.
false
No special internal control procedures are necessary with a petty cash fund because the amount is so small.
false
An improvement is an expenditure that
increases efficiency or productivity of an asset
Operating assets with no physical properties are called
intangible assets
Accounting for natural resources is similar to accounting for fixed assets. Which of the following accounts is debited when recording the entry for the depletion of a coal mine?
inventory
Operating assets are long-lived assets. Which of the following is NOT an operating asset?
inventory
Investors and creditors are interested in a company's liquidity. Which of the following ratios is NOT used to analyze a company's ability to meet its current obligations?
inventory turnover ratio
On January 1, a company sold a machine for $5,000 that it had used for several years. The machine cost $11,000, and had accumulated depreciation of $4,500 at the time of sale. What gain or loss will be reported on the income statement for the sale of the machine for the year ended December 31?
loss of $1,500
The operating cycle transforms cash into goods and services and then back, through sales, into cash. All of the following are part of good cash management EXCEPT
making payments to supplier as quickly as possible
The balance sheet typically reports the amount of cash and equivalents available
on the balance sheet date.
On January 1, Alpha Company acquires a patent for $70,000 and expects to receive economic benefits from it for 5 years, so amortization expense is $14,000. What account will be credited for the amortization expense entry?
patent for $14,000
Rarely do disposals occur on the first or last day of an accounting period. Therefore, the disposal of property, plant, and equipment usually first requires a journal entry to
record depreciation expense up to the date of disposal.
The efficient use of assets can be measured by how well a company generates
revenue
An impairment of an asset is a permanent decline in the future benefit or __________ of the asset.
service potential
Cash is reported on both the balance sheet and the
statement of cash flows.
The Sarbanes-Oxley Act of 2002 requires top management of publicly traded corporations to ensure the reliability of financial statements. The Act requires all of the following EXCEPT
that the internal control report acknowledge that management is allowed to deny knowledge or understanding of any deceptive financial reporting.
A company is required to review an asset for impairment if events or circumstances lead the company to believe that the asset may be impaired. An impairment exists if
the future cash flows expected to be generated by the asset are less than the asset's book value.
Contingent liabilities must be recorded in the accounting records if they are probable and the amount can be reasonably estimated.
true
Costs incurred to keep plant assets in normal operating condition are called revenue expenditures.
true
In a sound system of internal control, cash receipts should be deposited daily.
true
Interest on a note payable can be calculated by multiplying the amount owed by the interest rate by the fraction of year that represents the time elapsed since borrowing.
true
Money market accounts with original maturities of less than 90 days are cash equivalents.
true
Natural resources can be replaced or restored only by an act of nature.
true
Sales taxes collected from customers should be recorded in a liability account until the cash is passed along to the taxing authority.
true
The accountant must make journal entries for all items in the book section of the bank reconciliation.
true
The current ratio is calculated as follows: Current Assets / Current Liabilities.
true
The reason some major intangible assets are not in the financial statements is because they cannot be measured.
true
When accrual basis accounting matches an expense to a period before it is actually paid, an adjusting entry is necessary to record the accrued expense and corresponding liability.
true