Accounting Chapter 4 Concept Review
Internal control consists of plans to
safeguard company assets.provide accurate and reliable accounting information.
A company sells goods to a customer on account for $800, terms 3/10, n/30. The customer pays within the discount period. On the date of payment, the company will debit:
sales discount for $24 (800 * 3%)
Effective internal control over cash requires segregation of duties. Which of the following duties should be segregated?
Depositing checks into the bank and recording receipts in the accounting records Opening the mail and deposit of checks in the bank
Determine whether the firm reports each of the following items as part of cash and cash equivalents in the balance sheet.
1. currency - yes 2. inventory sales for sale to customers - no 3. balance in savings account - yes 4. checks - yes 5. accounts receivable - no 6. investments purchased with maturities of less than three months - yes
Which of the following is an example of a detective control in a company?
Accounting personnel routinely reconciles the company's cash records with those of its bank to identify discrepancies.
Which of the following steps are necessary to reconcile the bank balance and the cash account balance.
Adjust bank's cash balance Adjust the company's cash balance Record items that reconcile the company's cash balance
In a bank reconciliation, which of the following will require a journal entry by the company?
Adjustments to the balance per books for items discovered on the bank reconciliation that were not yet recorded on the books
When an account previously written off is collected in full, which is required to ensure the accounting for the complete payment history of the customer?
An entry to reinstate the account receivable and an entry to record payment.
Which of the following items are included in cash?
Balance in checking accounts Currency and coins Checks from customers
Which of the following items are included in cash?
Balance in checking accountsCurrency and coinsChecks from customers
Amend Inc. debited Accounts Receivable and credited Allowance for Uncollectible Accounts to reestablish an account previously written off. Amend Inc. should also debit _______ and credit _______. Multiple choice question.
Cash; Accounts Receivable
When adjusting the company's cash account balance in a bank reconciliation, which items reduce the company's cash account balance?
Charges for NSF checks Service charges
The framework for designing an internal control system is provided by the
Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
Which of the following is an example of a preventive control in a company?
Employees responsible for making cash disbursements are not in charge of cash receipts.
The allowance method is required by
GAAP
Where is a note receivable reported in the balance sheet?
In either current or noncurrent assets, as appropriate.
Which of the following items will require a journal entry following a bank reconciliation?
NSF checks, notes collected by the bank
Effective internal control over cash requires segregation of duties. Which of the following duties should be segregated?
Opening the mail and deposit of checks in the bank Depositing checks into the bank and recording receipts in the accounting records
What would cause a bank statement not to agree with the cash balance in the accounting records?
The bank paid interest that the company has not recorded.The company made an error in recording a deposit. The bank made an error in recording a deposit made by the company. Deposits outstanding that have been recorded on the company's records, but not on the bank's.
Deposits outstanding are additions to the balance per bank and checks outstanding are subtractions from the balance per bank. t/f
True Explanation: We adjust the cash balance per bank statement by adding deposits outstanding and subtracting checks outstanding.
Which of the following is not a step in preparing a bank reconciliation?
Update the company's Cash account by recording reconciling items related to the bank's cash balance do: reconcile the banks cash balance reconcile the company's cash balance update the company's cash account
The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the _______ method of accounts receivable. (Enter only one word.)
aging
The account "Allowance for Uncollectible Accounts" is classified as
a contra asset to accounts receivable.
a trade discounts is
a percentage reduction from list price
Select the appropriate term associated with a bank reconciliation for each of the following descriptions.
a. Cash receipts received by the company but not yet recorded by the bank. - deposits outstanding b. Fees imposed by the bank to the company for providing routine services. - bank service fees c. Checks written to the company that are returned by the bank as not having adequate funds. - NSF checks d. Checks written by the company but not yet recorded by the bank. - Checks outstanding e. Money earned on the average daily balance of the checking account. - Interest earned f. The company recorded a deposit twice. - Company error
Select the appropriate control activities for each of the following definitions.
a. The company should maintain security over assets and accounting records. - physical controls b. Management should periodically determine whether the amounts of physical assets of the company match the accounting records. - reconciliations c. The company should provide employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties. - employee management d. The actual performance of individuals or processes should be checked against their expected performance. - performance reviews e. Authorising transactions, recording transactions, and maintaining control of the related assets should be separated among employees. - separation of duties f. To prevent improper use of the company's resources, only certain employees are allowed to carry out certain business activities. - Proper authorization
Select the appropriate provisions of the Sarbanes-Oxley Act (SOX) for each of the following descriptions.
a. executives must personally certify the company's financial statements - corporate executive accountability b. audit firm cannot provide a variety of other services to its client such as investment advising - nonaudit services c. PCAOB establishes standards related to the preparation of audited financial reports - oversight board d. lead audit partners are required to change every five years - auditor rotation e. management must document the effectiveness of procedures that could affect financial reporting - internal control
Select the appropriate components of internal control for each of the following descriptions.
a. procedures for maintaining separation of duties - control activities b. routine activities that are meant to continually observe internal control activities - monitoring c. transfer of data from lower managers to top executives for accurate financial reporting - info and communication d. formal policies to evaluate internal and external threats to achieving company objectives - risk assessment e. overall attitude of the company with respect to internal controls - control environment
the allowance for uncollectible accounts is a contra account to
acc. receivable
An informal credit arrangement with a customer for payment to be received after the sale is classified as a(n)
account receivable
The amount of cash owed to a company by its customers from the sale of goods or services is referred to as
accounts receivable
Which of the following items are not included in cash?
accounts receivable from customers
List the steps for a bank reconciliation in the correct order.
adjust bank, adjust company, update company cash
To record an estimate for future bad debts at the end of the period, an adjustment would be made with a credit to
allowance for uncollectible accounts.
A company that expects that some of its customers will not pay the agreed upon sales price must utilize the
allowance method
Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?
as a non current asset
Accounts receivable should be classified as a(n)
asset
Two important ratios that help in understanding a company's effectiveness in managing receivables are the:
average collection period receivable turnover ratio
The cost of estimated accounts receivable that will not be collected is referred to as _______ _______ expense.
bad debt
The estimated expense for accounts that may not be collected is referred to as
bad debt expense
Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to
be more accurate
how are trade discounts recognised
by recording the sale at a discounted price
The asset that is most easily stolen and susceptible to fraud is
cash
The asset that is most susceptible to employee fraud is
cash
A bank reconciliation reconciles the bank statement with the company's
cash in account balance sheet
Cash disbursements that have been recorded in the company's accounting records but are not yet recorded by the bank are called
checks outstanding.
When adjusting the company's cash account balance in a bank reconciliation, which item must be added to the cash account balance?
collection of funds by bank
When a business provides services to a customer, and the customer promises to pay later, this is referred to as
credit sales
Sales to customers in which the customers pay within 30 to 60 days are referred to as (Select all that apply.)
credit sales sales on account
On May 1, Arden Wholesale sells $800 worth of goods on account to an out-of-state customer. Upon receiving the order on May 7, the customer notifies Arden that approximately 5% of the goods arrived damaged. As a result, Arden reduces the amount owed by the customer by $50. The journal entry by Arden Wholesale on May 7 will include a:
credit to accounts receivable
A customer paid $250 using a check for purchases made in the first week of January. The bank statement received at the end of the month showed that this was an NSF check. The entry needed to adjust the company's cash balance for this reconciling item will include a:
credit to cash $250
A landscaping company accepts MasterCard as payment for $1,000 worth of services. MasterCard charges a service fee of 2 percent. Which of the following would be recorded by the store?
debit $20 to service fee expense
The journal entry to record bad debt expense includes: (Select all that apply.)
debit to bad debt expense credit to allowance for uncollectible accounts
True or false: Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.
false
On November 5, Phelps Outerwear sells a coat on account to a customer for $200. On November 15, the customer decides to return the coat to the retailer. The journal entry on November 15 will include a:
debit to sales return
When a company finds out that an NSF check was written to the company, the company must ______ the balance in the cash account.
decrease
Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a(n):
decrease in acc receivable
Cash receipts that have been recorded in the company's accounting records but are not yet recorded by the bank are
deposits outstanding
The Committee of Sponsoring Organizations (COSO) of the Treadway Commission provided a framework for
designing an internal control system
The two types of control procedures are preventive and
detective
The Accounts Receivable account is reduced when the seller:
determines that a specific customer account will not be collectible
A trade discount is a reduction from the list price, which is used to: (Select all that apply.)
disguise real prices from competitors change prices without publishing a new catalog give quantity discounts to customers
The receivables turnover ratio and the average collection period provide information about a company's
effectiveness in managing receivables
The corporate form of business is an entity separate from its owners. This means that corporate executives need not personally certify the company's financial statements and financial disclosures. t/f
false
The employee who deposits cash and checks into the company's bank account each day should also receive cash and checks. t/f
false
To pay for minor purchases, companies keep some cash on hand in a petty cash fund. At the end of the period, expenditures from the petty cash fund are recorded with debits to appropriate accounts and a credit to Cash, and the fund is replenished.
false
When accountants make accidental errors in recording (or failing to record) transactions or in applying accounting rules, they have committed fraud.
false
The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources is called occupational .
fraud
When a person intentionally deceives another person or company for personal gain, this is referred to as
fraud
Under the allowance method, companies estimate _____ uncollectible amounts and report those estimates in the _____ year.
future; current
Which of the following are common controls over cash receipts? (Select all that apply.) Multiple select question.
having two different employees take custody of the checks and make the deposit opening mail daily and making a detailed list of checks received
The direct write-off method is required for
income tax purposes.
A company's plans to safeguard company assets and enhance the reliability and accuracy of accounting information are referred to as
internal controls
Which of the following is a good internal control mechanism for cash disbursements?
maximum purchase limits set on debit and credit cards
identify cash equivalents from the listed items.
money market funds three month treasury bills
fraud triangle elements
motivation, opportunity, rationalization
Receivables not expected to be collected should
not be counted in assets of the company.
A formal credit arrangement between a creditor and debtor is called a(n)
note receivable
A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender.
note receivable
Which of the following are common controls over cash receipts?
opening mail daily and making a detailed list of checks received, AND having two different employees take custody of the checks and make the deposit
A small amount of cash on hand to pay for minor purchases is commonly referred to as a(n)_____ _____ fund.
petty cash fund
An appropriate use of a petty cash fund is for the purchase of:
postage
Two types of control activities are
preventive and detective controls
One of the most important internal controls for cash is the bank
reconciliation
Preparation of a bank ______ helps maintain control of cash accounts.
reconciliation
Revenue Recognition Principle
revenue is recorded at the time of goods or services are provided, regardless of when cash is received
A petty cash fund is used for
small amounts of cash needed for low-cost items.
Accounts receivable are typically classified as current assets because
they will be converted to cash within 1 year.
A(n) difference in cash occurs when a company records a transaction either before or after the bank records the same transaction.
time
A bank statement may not agree with the amount of cash recorded by the company in the cash account because of _____ differences and errors.
timing
if a company records a transaction before the bank records the same transaction, this is called a/an ______ difference. Multiple choice question.
timing
A bank reconciliation compares the company's cash records with the bank statement and discovers differences in those amounts due to
timing and difference errors
A non-sufficient funds check requiring an adjustment to the cash balance was written:
to the company preparing the bank reconciliation
In reconciling the balance of cash in the bank account with the balance of cash per the company's records, differences in the two balances are due to either timing differences or errors. t/f
true
Recording revenue is similar for debit card transactions and credit card transactions. t/f
true
The accountant at Zepha Consulting works with the manager authorized to make purchases in order to steal cash from the company. This is an example of collusion. t/f
true
To pay for minor purchases, companies keep some cash on hand in a petty cash fund. At the end of the period, expenditures from the petty cash fund are recorded with debits to appropriate accounts and a credit to Cash, and the fund is replenished.
true
the allowance method estimates
uncollectible accounts
the direct write - off method is used when
uncollectible accounts are not anticipated or are immaterial.