Bookkeeping for Small Business

1. As the system posts summary journal totals to the general ledger, most systems also generate subsidiary ledgers for selected balance sheet accounts, such as accounts receivable, inventory, property and equipment, and accounts payable. Which subsidiary ledger typically shows the balance owed by a customer? Incorrect A) Accounts receivable subsidiary ledger B) Inventory subsidiary ledger C) Property and equipment subsidiary ledger D) Accounts payable subsidiary ledger

A) Accounts receivable subsidiary ledger

11. To properly withhold federal income taxes and calculate the employee's net wages, the employer must ask each new employee to complete a Form W-4, Federal Withholding Allowance Certificate, before or on employment commencement. Regarding the Form W-4, which of the following statements is false? Incorrect A) Because claims for excessive allowances and exemptions may result in civil and criminal penalties, the payroll bookkeeper should suggest or recommend to the employee a number of withholding allowances. B) Some employees may claim a total exemption ("exempt status") from federal income tax withholding. (However, withholding Social Security and Medicare taxes may still be required). To qualify for exempt status, the employee must meet certain conditions. C) The IRS requires that employees file an amended Form W-4 within 10 days of an event that decreases their number of withholding allowances. D) When an employer receives the Form W-4, the employer must comply with its withholding instructions no later than the start of the first payroll period ending on or after 30 days from the receipt of the Form W-4.

A) Because claims for excessive allowances and exemptions may result in civil and criminal penalties, the payroll bookkeeper should suggest or recommend to the employee a number of withholding allowances.

2. Which internal control involves allocating bookkeeping tasks among personnel so that one individual does not have the ability to make an accounting error (either intentionally or unintentionally) and also cover it up? This principle implies that the person with physical access to cash or other moveable assets (investments or inventory) should not also be involved with the related record keeping. Incorrect A) Segregation of duties B) Restricted access C) Document controls D) Processing controls E) Reconciliation controls

A) Segregation of duties

19. General ledger processing is an ongoing activity in most small businesses. It consists of various phases that are repeated each month. If the phases are performed in a routine and systematic manner, the closing process becomes much more predictable and manageable. Which one of the following statements regarding general ledger processing is false? Incorrect A) The trial balance presents each account's ending balance and the total of all general ledger debit and credit balances. In contrast to a complete general ledger, it shows any entries posted to the accounts. B) Unlike the trial balance, which just shows the ending account balance, the detailed general ledger also presents the beginning of the month balance and entries posted to each account during the month. C) After generating the preliminary detailed general ledger, accounting personnel should perform certain procedures in preparation for generating the preliminary financial statements. The preliminary financial statements generally include a summary of the general ledger accounts grouped into specified balance sheet and income statement captions. D) After generating the preliminary financial statements, accounting personnel should review the balance sheet and income statement amounts for reasonableness. This review represents a high level analytical review of financial statement amounts to locate unusual items indicating a possible undetected error.

A) The trial balance presents each account's ending balance and the total of all general ledger debit and credit balances. In contrast to a complete general ledger, it shows any entries posted to the accounts.

8. After the accounting staff has completed the initial invoice processing (received the invoice, obtained approval for its payment, and updated the vendor information), the staff performs clerical processes to record the purchases in the accounting records. Which of the following statements is false? Incorrect A) Traditionally, the bookkeeper performed calculations to determine the clerical accuracy of the invoice. With the advent of computer prepared invoices, recalculating invoices is no longer necessary. B) The accounting staff must assign accounting codes to each invoice to record the transaction in the form a computer will understand. Because detecting and correcting a miscoded transaction is often difficult and time-consuming, the staff should take extra care to ensure the initial transaction coding is correct. C) When coding invoices, accounting staff may encounter transactions that require the establishment of new account codes in the general ledger. The bookkeeper has two basic options. The first option is to suspend processing until the code is set up, which may delay the recording of the entire invoice batch. The second option is to record the transaction in a suspense account. D) An bookkeeper may find that by documenting the invoice processing steps as they are performed, the bookkeeper can better keep track of what steps remain for each invoice.

A) Traditionally, the bookkeeper performed calculations to determine the clerical accuracy of the invoice. With the advent of computer prepared invoices, recalculating invoices is no longer necessary.

6. Reconciling the accounts receivable subsidiary ledger (or aged trial balance) to the accounts receivable account in the general ledger is crucial to most small businesses. If differences between the aged trial balance and subsidiary ledger are not resolved, either the company's financial statements or billing statements mailed to customers (or both) are misstated. If differences go back beyond the current month, locating and resolving the individual differences becomes increasingly difficult and time-consuming. Which of the following statements is false? Incorrect A) Small businesses can gain some assurance that cash receipts journals and sales journals were posted to the general ledger by recalculating the accounts receivable general ledger balance. B) Accounting persons recalculate the ending general ledger balance by starting with the beginning general ledger balance, subtracting totals per the sales journals, adding totals per the cash receipts journals, and adjusting for any other transactions posted to the general ledger. C) Accounting persons should compare (reconcile) the subsidiary ledger or the aged trial balance to the general ledger. If the two balances do not agree, accounting persons must identify and resolve the differences. Frequently, differences are caused by entries posted to the general ledger accounts receivable from manual journal entries or sources other than the cash receipts or sales journals. D) Accounting personnel should review the aged trial balance at the end of each period as a regular part of the monthly closeout process. The reviewer should quickly scan each page looking for obvious errors or anything else unusual. Common examples might include significant individual credits or accounts with overall credit balances, unusually large debits in the current period, or large balances slipping into the older aging categories. Accounting personnel should investigate any unusual items and make any necessary corrections to the aged trial balance and general ledger.

B) Accounting persons recalculate the ending general ledger balance by starting with the beginning general ledger balance, subtracting totals per the sales journals, adding totals per the cash receipts journals, and adjusting for any other transactions posted to the general ledger.

3. Which cash receipts system keeps details of only the current period's activity and groups all other open items into a single beginning balance amount? Incorrect A) Open item system B) Balance Forward system C) Order-entry system D) Point of sale system

B) Balance Forward system

9. After recording vendor invoices in the accounting system, the bookkeeper is ready to pay the invoices. The bookkeeper has two major activities when disbursing cash: 1. selecting the invoices to pay, and 2. issuing checks. During these activities, the bookkeeper's concerns include taking full advantage of the vendor's credit terms and protecting the business's cash from misuse. Which of the following statements regarding these two activities is false? Incorrect A) Many businesses take advantage of the vendor's credit terms by delaying the payment of invoices until near the end of the credit term. This practice requires that each invoice be assigned a payment date. B) Credit terms is the key factor in deciding when to pay an invoice, thus other important factors including the business's cash on hand, expected cash flow, relations with the vendor, and credit rating considerations are not considered. C) Prior to preparing the disbursement checks, the bookkeeper often prepares a proposed "scheduled to pay" listing of the invoices. D) The scheduled to pay listing usually groups invoices by date within vendor, includes the vendor total, and calculates the grand total of the check run. Some versions of the report also include the amount and due dates of proposed payment discounts.

B) Credit terms is the key factor in deciding when to pay an invoice, thus other important factors including the business's cash on hand, expected cash flow, relations with the vendor, and credit rating considerations are not considered.

16. Most employers report wages, tips, federal income tax withholding, and FICA taxes to the IRS quarterly using Form 941, Employer's Quarterly Payroll Tax Return. Regarding Form 941, which of the following statements is false? Incorrect A) If a business is sold or transferred during a quarter, the prior owner and the new owner must both file Form 941 for that quarter. Each party should only report the wages it paid during the quarter, however. Businesses that cease operations or cease to be employers should write "Final Return" on the last return filed. B) Form 941 generally is due on the first day of the month following the quarter. C) Accounting staff generally should not sign the Form 941 (or the Form 940 unemployment tax return). Employment tax returns must be signed by an authorized representative of the company under penalty of perjury. D) The IRS may assess penalties for filing a return late unless there is a reasonable cause. For each whole or partial month the employer fails to file a return when required, the IRS imposes a penalty of 5% (up to a maximum of 25%) of the amount the employer should have reported on the return.

B) Form 941 generally is due on the first day of the month following the quarter.

18. Expenditures that directly benefit a limited number of future periods must be initially recorded as assets and written off to expense over those periods. The process of writing off the assets is called either depreciation or amortization. Depreciation applies to tangible assets, such as property and equipment, and amortization applies to intangible assets, such as prepaid insurance. Which of the following regarding depreciation and amortization is false? Incorrect A) Certain expenditures commonly paid in advance by small businesses include property and casualty insurance, property taxes, and advertising. Since these expenditures benefit more than one month, they should be recorded as prepaid assets when paid and amortized over the appropriate number of months covered by the expenditure. B) Generally accepted accounting principles (GAAP) allow businesses to choose among several different methods to depreciate fixed assets including the Accelerated Cost Recovery System (ACRS) for assets acquired after 1980 and Modified ACRS (MACRS) for assets acquired after 1986. C) There are three common depreciation methods allowed by GAAP. Each method requires accounting personnel to depreciate the fixed assets over their estimated useful lives. Some methods require estimated salvage value (if significant) to be considered before making the calculation, but others do not. D) The accumulated depreciation account is a "contra" account to the fixed asset accounts. It carries a negative (credit) balance and is presented as an offset against the fixed asset balances in the financial statements.

B) Generally accepted accounting principles (GAAP) allow businesses to choose among several different methods to depreciate fixed assets including the Accelerated Cost Recovery System (ACRS) for assets acquired after 1980 and Modified ACRS (MACRS) for assets acquired after 1986.

9. The IRS is actively auditing the status of workers and is often aggressive in claiming that workers are employees. The penalties for misclassification can be very severe and have been responsible for the liquidation of many smaller businesses. Under federal income tax laws, there are three rules for classifying workers. Which one of the following is not one of these three rules? Incorrect A) Direct sellers and licensed real estate agents are independent contractors. B) Indirect sellers and real estate agents are independent contractors. C) Corporate officers are employees. D) All other workers are classified by using twenty "common law" factors. E) In general, the common law rule is that an independent contractor is free to determine how the work for the business is to be performed.

B) Indirect sellers and real estate agents are independent contractors.

23. Which of the following statements regarding the Balance Sheet is false? Incorrect A) The cash balance sheet caption should ordinarily include cash on deposit with banks and other institutions and cash on hand (for example, petty cash funds). B) Receivables is a broad term that includes amounts due from others as a result of sales of merchandise, services, or other assets, or as a result of a loan. Receivables may be divided into three categories: current, long-term, and related party. C) Current prepaid expenses are advance payments for products or services that will be used in operations during the next 12 months. D) Property and equipment includes all tangible assets used in a company's operations that have an estimated useful life longer than one year.

B) Receivables is a broad term that includes amounts due from others as a result of sales of merchandise, services, or other assets, or as a result of a loan. Receivables may be divided into three categories: current, long-term, and related party.

2. What is the primary advantage of a POS system over a traditional cash register? Incorrect A) The POS classifies cash receipts by type and provides a total of each day's sales B) The POS eliminates duplicate processing tasks and automates certain tasks. C) The POS prepares manual journal entries to record each day's sales D) The POS captures over-the-counter sales.

B) The POS eliminates duplicate processing tasks and automates certain tasks.

5. The bookkeeper's first step in processing the invoice is to obtain approval to pay the invoice. The approval procedure should confirm that the business actually received its purchase in accordance with the agreed upon cost, quantity, quality, and other purchase terms. Which of the following statements is false? Incorrect A) Some small companies rely on the check signer (usually the owner) to approve all disbursements. This control often is not effective for two reasons. First, the check signer is often too busy to carefully examine each disbursement and its support. Second, in many businesses, one check signer does not have sufficient information to be the primary control over every payment. B) The authorized check signer's review should serve as the only form of approval for the transaction. C) Direct approval's biggest challenge is that the managers may delay or lose the invoices. In some businesses, managers are very responsible in approving and returning invoices. In other situations, however, the bookkeeper may find it necessary to implement a procedure to ensure that invoices sent for approval are returned promptly. D) Not all purchases arise from invoices. For example, travel advances are not initiated by an invoice, Instead, the business may use a check request form to initiate a purchase transaction. The check request form is prepared by the purchase initiator, approved by an authorized manager, and forwarded to the bookkeeper. Upon receipt, the bookkeeper basically processes the check request in the same way as an authorized invoice.

B) The authorized check signer's review should serve as the only form of approval for the transaction.

20. There are four types of financial statements required by generally accepted accounting principles: balance sheet, income statement, statement of retained earnings or changes in stockholders' equity, and statement of cash flows. Most small businesses prepare a balance sheet and an income statement on a monthly basis, but fewer businesses routinely prepare a statement of retained earnings (or changes in stockholders' equity) and a cash flow statement. Which of the following statements regarding the four types of financial statements is false? Incorrect A) The balance sheet presents a company's assets, liabilities, and equity balances at the end of a company's accounting period, such as the end of the calendar month. The total assets must equal the combined total of the liabilities and equity balances. B) The income statement presents a company's operating results (that is, revenues, expenses, and other income and expense) at the end of a company's accounting period, such as the current month or current year. C) The statement of retained earnings or changes in stockholders' equity simply shows the changes in retained earnings or stockholders' equity that have occurred during the period. D) The statement of cash flows shows the company's cash transactions during the period. Using balance sheet and income statement amounts, the cash flow statement reconciles the company's beginning and ending cash balances by showing all cash receipts and disbursements during the period. The statement classifies the receipts and disbursements into three broad categories: operating, investing, and financing activities.

B) The income statement presents a company's operating results (that is, revenues, expenses, and other income and expense) at the end of a company's accounting period, such as the current month or current year.

22. There are four types of financial statements required by generally accepted accounting principles: balance sheet, income statement, statement of retained earnings or changes in stockholders' equity, and statement of cash flows. Most small businesses prepare a balance sheet and an income statement on a monthly basis, but fewer businesses routinely prepare a statement of retained earnings (or changes in stockholders' equity) and a cash flow statement. Which of the following statements regarding the four types of financial statements is false? Incorrect A) The balance sheet presents a company's assets, liabilities, and equity balances at the end of a company's accounting period, such as the end of the calendar month. The total assets must equal the combined total of the liabilities and equity balances. B) The income statement presents a company's operating results (that is, revenues, expenses, and other income and expense) at the end of a company's accounting period, such as the current month or current year. C) The statement of retained earnings or changes in stockholders' equity simply shows the changes in retained earnings or stockholders' equity that have occurred during the period. D) The statement of cash flows shows the company's cash transactions during the period. Using balance sheet and income statement amounts, the cash flow statement reconciles the company's beginning and ending cash balances by showing all cash receipts and disbursements during the period. The statement classifies the receipts and disbursements into three broad categories: operating, investing, and financing activities.

B) The income statement presents a company's operating results (that is, revenues, expenses, and other income and expense) at the end of a company's accounting period, such as the current month or current year.

7. Which of the following statements regarding disbursing cash is false? Incorrect A) Sometimes the bookkeeper may decide to pay only part of an invoice. As a general rule, the bookkeeper should associate the partial payment with a specific vendor invoice and should not list the payment as a "payment on account." B) An bookkeeper may decide to put a payment "on hold," that is, to delay the payment indefinitely (usually until a dispute is resolved). In both manual and computerized systems, the bookkeeper needs a means to ensure that the held payment is not forgotten. C) Generally, it is wise to offset a payable with a receivable from the same company, if the receivable and payable arose from separate types of transactions (such as the business's purchase of services from the ABC Company and the business's sale of merchandise to the ABC Company). D) Debit balances in accounts payable, however, may be offset against credit balances in accounts payable since the debits usually do arise from purchase transactions (returns, price adjustments for damaged merchandise, overpayments, or discounts).

C) Generally, it is wise to offset a payable with a receivable from the same company, if the receivable and payable arose from separate types of transactions (such as the business's purchase of services from the ABC Company and the business's sale of merchandise to the ABC Company).

21. Unlike the detailed, account-by-account approach used when reviewing the general ledger, the financial statement review uses a high-level analytical review approach. In other words, instead of assessing the reasonableness of an amount by looking at it in isolation, the analytical approach assesses the reasonableness of an amount by comparing it to other amounts and relationships within the financial statement. The type of review generally varies depending on whether balance sheet or income statement accounts are being reviewed. Which of the following statements regarding the financial statement review is false? Incorrect A) Analytical procedures are generally very effective when applied to income statement amounts. Certain income statement amounts are often fairly fixed from one period to the next, while others tend to fluctuate in relation to sales. Once these relationships are understood, accounting personnel can use them to identify potential income statement errors. B) Accounting personnel should determine each line item's general nature (that is, remains relatively constant or fluctuates with sales) and use the information each month to review the income statement amounts. C) In comparison to income statement amounts, balance sheet amounts are typically more predictable from one period to the next. Therefore, analytical reviews are generally more effective on balance sheet amounts. D) Similar to income statements, analytical reviews on balance sheets generally include comparing current period balances with the corresponding balances for the prior year or prior month. Percentage comparisons are less useful, but occasionally accounting personnel will compute the percentage of each balance sheet line item to total assets (or to total liabilities plus equity) and compare the percentage to the company's historical percentages.

C) In comparison to income statement amounts, balance sheet amounts are typically more predictable from one period to the next. Therefore, analytical reviews are generally more effective on balance sheet amounts.

5. The bank statement reconciliation process is a very effective after-the-fact internal control tool. Moreover, the process is crucial to many small businesses since their accounting systems are often cash-driven. Which of the following statements regarding the bank statement reconciliation process is false? Incorrect A) The bank statement reconciliation helps detect errors (both the company's and B) The bank statement reconciliation reveals bank debits and credits that have not C) The bank statement reconciliation should be performed by someone with other D) The bank statements should be received by the person responsible for receiving

C) The bank statement reconciliation should be performed by someone with other

8. To help ensure that all authorized purchase transactions, and only such transactions, are recorded in the accounting records, the bookkeeper should perform certain activities at period end, including: 1. reconciling internal records, 2. reconciling to outside vendor records, 3. reviewing the accounts payable listing, and 4. "Cutting off" accounts payable. Which of the following statements regarding these activities is false? Incorrect A) The bookkeeper should compare the beginning and ending general ledger balances. B) The bookkeeper should compare the accounts payable subsidiary ledger to the general ledger. C) The bookkeeper need not review the accounts payable subsidiary ledger monthly for debits and old invoices. D) When period-end reports are prepared for outsiders (such as quarterly or annual reports to the bank or shareholders), the bookkeeper should take special precautions to ensure that all purchases and purchase obligations are recorded ("cutoff") in the proper period.

C) The bookkeeper need not review the accounts payable subsidiary ledger monthly for debits and old invoices.

10. When issuing checks the bookkeeper usually performs the following steps: 1. preparing the checks, 2. getting the checks signed, 3. distributing the checks, 4. filing the paid invoices and check copies. Which of the following statements regarding these steps is false? Incorrect A) When preparing checks using a computer and special check stock, the bookkeeper's goals include ensuring that only authorized and recorded disbursements are made. B) The bookkeeper typically gives the check signer the following: 1. approved and initialed "scheduled to pay" listing, 2. checks, and 3. support. C) The bookkeeper should take as much time as possible to distribute the checks after they have been signed. D) Businesses vary in how many check copies they prepare. The simplest system is for the business to prepare one copy along with the original. The copy is placed in a check history file, which consists simply of all checks in numerical order. The bookkeeper writes the check number on the invoice to provide an "audit trail" as well as to prevent the double payment of the invoice.

C) The bookkeeper should take as much time as possible to distribute the checks after they have been signed.

10. Job positions can either be exempt or nonexempt from the Fair Labor Standards Act (FLSA) FLSA's minimum wage and overtime requirements. A job's FLSA category (exempt or nonexempt status) has consequences for the wage rate, pay deductions, and time records used to calculate the employee's paycheck. Which one of the following statements is true? Incorrect A) The employer pays a nonexempt employee a fixed salary for any and all work performed during a workweek. Pay does not vary with quality or quantity of work. B) The employer may pay an exempt employee using an hourly, salary, piece, commission, or any other method. However, the total compensation must be at least the minimum wage for all hours worked, plus over time pay for hours over the maximum. C) The employer may pay a nonexempt employee only for the hours worked. Therefore, deductions may be made from wages for lateness, full or partial day absences, and any time the employee doesn't work. D) Employers must maintain accurate daily and weekly records of all hours worked for exempt employees.

C) The employer may pay a nonexempt employee only for the hours worked. Therefore, deductions may be made from wages for lateness, full or partial day absences, and any time the employee doesn't work.

4. Which of the following is not a recommendation for controlling and safeguarding receipts when processing mail receipts? Incorrect A) The company should assign someone with no other cash receipt or processing B) The secretary or receptionist opening the mail should separate customer C) The secretary or receptionist should forward the actual checks to accounting D) The secretary or receptionist should prepare the original deposit slip along with a

C) The secretary or receptionist should forward the actual checks to accounting

13. Late deposit penalties vary with the time the deposit is overdue. Which of the following late deposit penalties is false? Incorrect A) 1 to 5 days is 2% B) 6 to 15 days is 5% C) 16 or more days is 10% D) 10 days or more after demand is made by IRS is 20%

D) 10 days or more after demand is made by IRS is 20%

17. Accounting personnel should ensure that the cost of any other goods or services are recorded in the month they are received. Which of the following statements regarding the cost of any other goods or services are recorded is false? Incorrect A) Debtors are typically required to make interest payments in monthly installments beginning 30 days after the date of the note. Thus, accounting personnel generally should make a monthly journal entry to accrue interest income through the end of each month if amounts are significant. B) Accounting personnel are sometimes less concerned about accruing payables at month end for inventory items since the company's earnings are thought to be unaffected. That is, the credit to trade payables is merely offset by a balance sheet debit to the inventory account. Although this reasoning is often accurate, failing to accrue inventory-related payables can be misleading if physical inventory counts are being taken. C) Companies with certificates of deposit (CDs) or similar short-term investments often require financial institutions to remit interest payments monthly. Thus, at month end, there is generally no more than 30 days of unremitted interest. In this situation, companies often record interest income as it is received and record accrued interest receivable only at year end. However, if unrecorded interest amounts are significant, accrued interest income should also be recorded at each month end. D) Accounting personnel need not prepare reversing journal entries in the following month for the accrual entries.

D) Accounting personnel need not prepare reversing journal entries in the following month for the accrual entries.

19. As the general ledger and related financial statements are generated, accounting personnel perform various procedures to help ensure their accuracy. An effective review of the general ledger and statements can help detect possible errors. The general ledger review tends to focus more on balance sheet accounts, whereas the financial statement review focuses more on income statement accounts. Which of the following statements is not a common "red flag" that may indicate a problem in a specific account during a general ledger review? Incorrect A) Some accounts naturally carry debit balances (assets and expenses) and others carry credit balances (liability, equity, and revenues), If one of these accounts are unexpectedly in a debit or credit position, there may be a potential problem. B) Some accounts normally receive debit entries (expense accounts) and others receive credit postings (revenues). If credit entries were posted to an expense account or debit entries were posted to a revenue account, further investigation may be warranted. C) Most accounts have a normal monetary range of transactions. Unusually large or small amounts may indicate coding or data entry errors. D) Balance sheet account balances are not comparable from one period to the next. An ending balance for an account that differs significantly from the balance at the beginning of the period, is not generally a potential problem.

D) Balance sheet account balances are not comparable from one period to the next. An ending balance for an account that differs significantly from the balance at the beginning of the period, is not generally a potential problem.

7. Which of the following is not a processing and recording purchases activity? Incorrect A) Processing invoices B) Recording invoices in the accounting system C) Disbursing cash D) Bank reconciliation

D) Bank reconciliation

12. To accurately calculate a payroll, the bookkeeper needs the following information about the employer: 1. Employer identification number (EIN), 2. The workweek, and 3. The pay period. Which of the following statements regarding this information is false? Incorrect A) The federal employment tax system identifies employers by their federal employer identification number (EIN), a nine digit number in the form "xx-xxxxxxx." Before paying its first employee wages, a business should obtain an EIN by filing with the IRS a Form SS-4, Application for Employer Identification Number. B) The federal law governing employee wages and work hours, the Fair Labor Standards Act (FLSA), requires the employer to designate and document the day and time when the workweek begins. The workweek consists of the seven consecutive 24-hour periods (168 consecutive hours) following the designated time. C) The pay period is a grouping of workweeks and days, and the payroll bookkeeper must know the pay period in order to accumulate all the wages owed. D) Employers may not set different pay periods for different groups of employees within the bounds set by state laws regulating when wages must be paid.

D) Employers may not set different pay periods for different groups of employees within the bounds set by state laws regulating when wages must be paid.

14. The Federal Unemployment Tax Act (FUTA), together with state unemployment systems, provides for payments of unemployment compensation to workers that have lost their jobs. Incorrect A) Each state sets its state unemployment insurance (SUI) tax rate and wage base so that sufficient funds are raised to pay anticipated benefit claims (and provide a surplus for solvency). State rates currently vary from 0.05% to 10%, and the wage base levels range from $7,000 to $22,700. B) The federal government sets a federal unemployment tax rate and wage base sufficient to establish a pool from which states may borrow if their benefit funds become depleted. The federal tax rate in 2009 is 6.2% and the wage base is $7,000. C) State and federal unemployment taxes are interrelated. The federal government generally allows employers a credit against FUTA taxes of up to 5.4% for fully paying state unemployment taxes. (The credit generally is allowed even if the employer's state unemployment tax rate is less than 5.4%.) Thus, an employer that fully pays its state unemployment taxes would actually be assessed federal unemployment taxes of only 0.8% (6.2% - 5.4%). D) Employers must calculate and deposit FUTA taxes quarterly. The quarterly FUTA tax deposit is due on April 30, July 31, October 31, and January 31. If the liability at quarter end is $500 or less, the balance may be carried over to the next quarter. If the liability at year end is $500 or less, the business has the option to include the tax payment with the Form 940 return (due on January 31).

D) Employers must calculate and deposit FUTA taxes quarterly. The quarterly FUTA tax deposit is due on April 30, July 31, October 31, and January 31. If the liability at quarter end is $500 or less, the balance may be carried over to the next quarter. If the liability at year end is $500 or less, the business has the option to include the tax payment with the Form 940 return (due on January 31).

15. Regarding depositing FICA and FITW taxes, which of the following statements is false? Incorrect A) If the business fails to withhold employment taxes or to remit the taxes, the IRS can levy a 100% penalty for the taxes due on either (a) the business or (b) the business's individual officers and employees. B) Employers who deposited $50,000 or less in the lookback period are classified as monthly depositors. Each month's employment taxes are due by the 15th of the following month. C) Employers reporting more than $50,000 in the lookback period are classified as semi-weekly depositors. D) Employers with a deposit liability less than $500 during the quarter may remit their taxes with the quarterly employment tax return.

D) Employers with a deposit liability less than $500 during the quarter may remit their taxes with the quarterly employment tax return.

15. Which of the following statements regarding preparation of Forms W-2, Wage and Tax Statement and Form W-3, Transmittal of Income and Tax Statements is false? Incorrect A) A Form W-2 should be prepared for each employee for whom the employer would have withheld income tax if the employee had not claimed two or more exemptions (including total exemption). B) Forms W-2 are due to employees by the earlier of January 31st or if requested by a terminated employee, 30 days after the employee's request or after the final wage payment. C) A copy of Forms W-2, along with Form W-3, is due to the SSA by the last day of February. D) Forms W-2 are not required to be filed with states or cities.

D) Forms W-2 are not required to be filed with states or cities.

4. The bank reconciliation is a relatively straightforward process that involves reconciling the balance per the bank statement with the balance per the company's cash account balance per the general ledger. Which of the following does not cause a difference between the bank statement and the balance per the company's cash account balance per the general ledger? Incorrect A) Deposits in transit B) Outstanding checks C) Bank service charges D) Interest expense

D) Interest expense

17. In addition to fixed assets, accounting personnel are sometimes confronted with how to record and amortize certain other long-term intangible assets. Which of the following statements regarding accounting for goodwill and organizational costs is false? Incorrect A) When a company acquires another business, it often pays more than the fair market value of the net tangible assets. When this occurs, the difference is recorded by the acquiring company as an asset usually called "goodwill." The goodwill is generally assumed to relate to intangible assets, such as good customer relations, patents, trademarks, customer lists, company name, and sales force. B) Although amortization expense is usually recorded to an accumulated amortization account, it is usually netted against the goodwill asset account in the financial statements. C) Generally, goodwill should be amortized over the estimated life of the intangible assets underlying the goodwill, not to exceed forty years for GAAP purposes. D) Newly-formed businesses generally incur various legal costs and other expenses relating to establishing the legal entity. Because the IRS allows these costs to be recorded as assets and amortized over a five year period, businesses will occasionally treat them the same way for GAAP purposes. Therefore, for GAAP purposes, these costs qualify as assets and should be capitalized.

D) Newly-formed businesses generally incur various legal costs and other expenses relating to establishing the legal entity. Because the IRS allows these costs to be recorded as assets and amortized over a five year period, businesses will occasionally treat them the same way for GAAP purposes. Therefore, for GAAP purposes, these costs qualify as assets and should be capitalized.

20. Journal entries generally fall into two categories: standard journal entries and adjusting journal entries. Which of the following statements regarding journal entries is false? Incorrect A) Standard journal entries are prepared to make regular entries to the general ledger. B) Adjusting journal entries are made to correct errors noted in the general ledger. C) As a general rule, standard journal entries are made earlier in the monthly closing process and adjusting journal entries are made in the later stages. D) Only standard journal entries require "reversing entries" in the following month.

D) Only standard journal entries require "reversing entries" in the following month.

3. After processing and posting sales and cash receipts for the period, accounting personnel should then perform certain period-end procedures in preparation for closing out the general ledger. Which of the following is not a sales and cash receipts period-end procedure? Incorrect A) Reconciling the bank accounts B) Reconciling the subsidiary ledger to the general ledger C) Reviewing the accounts receivable aged trial balance D) Reviewing the accounts payable aged trial balance

D) Reviewing the accounts payable aged trial balance

1. Each accounting transactions begins with some type of source document, which differs depending on the type of transaction. Which source document is not a purchases source document? Incorrect A) Vendor invoices B) Purchase orders C) Packing slips D) Sales orders E) Receiving reports

D) Sales orders

18. Closing out the general ledger accurately and in a timely manner is extremely difficult without supporting workpapers. The workpapers show what makes up the balance sheet account balances and reduce time spent constantly analyzing account balances. At month end, the workpapers are updated and agreed to general ledger balances. If the two amounts agree, accounting personnel have additional assurance that the general ledger balances are accurate. Which of the following statements regarding closing out the general ledger accurately and in a timely manner is false? Incorrect A) The basic bank reconciliation generally provides sufficient supporting documentation for the company's checking accounts since it reconciles the general ledger balance with actual cash in the bank. B) Subsidiary ledgers serve as the primary supporting records for many significant balance sheet accounts, such as trade accounts receivable, inventory, fixed assets, and accounts payable. The workpaper showing the reconciliation of the subsidiary ledger to the general ledger represents the supporting workpaper for these accounts. C) Amortization schedules should serve as the primary supporting workpapers for accounts whose monthly balances decline by a predictable amount, such as prepaid assets and long-term debt with fixed principal and interest payments. The schedules generally show the beginning balance and monthly decreases until the balance reaches zero. D) Subsidiary ledgers and amortization schedules are generally appropriate for monitoring certain key accounts such as Certificates of Deposit (CD).

D) Subsidiary ledgers and amortization schedules are generally appropriate for monitoring certain key accounts such as Certificates of Deposit (CD).

12. Regardless of whether manual or computerized payroll systems are used, it is important that bookkeepers understand the steps needed to calculate payroll information. Which one of the following statements regarding payroll calculation is false? Incorrect A) The calculation of gross pay depends largely on whether the job position is exempt or nonexempt from the Fair Labor Standards Act, and, if nonexempt, whether overtime was worked. B) If the exempt employee's salary is expressed as an annual amount, the payroll bookkeeper can compute gross pay by dividing the annual salary by the number of pay periods during the year. C) For nonexempt employees, gross pay usually is computed by multiplying the hourly pay rate by the number of hours worked and paid leave during the workweek. D) The Fair Labor Standards Act requires no overtime pay for employees in nonexempt positions regardless of the hours worked.

D) The Fair Labor Standards Act requires no overtime pay for employees in nonexempt positions regardless of the hours worked.

16. Generally accepted accounting principles (GAAP) require that certain asset accounts be written down below their "book" or recorded value if it appears the book or recorded amounts will not be fully recovered. Which of the following statements regarding uncollectible accounts receivable is false? Incorrect A) GAAP requires companies to record a loss when all or a portion of a receivable is estimated to be uncollectible. The loss is generally recognized by debiting bad debt expense and crediting the allowance for doubtful accounts. B) Accounting personnel generally estimate uncollectible accounts using the percentage of sales method or the aging method. When the company gives up on collecting a receivable, the company "writes off" the receivable. C) The percentage of sales method is most often used when a company has a large number of uniformly sized accounts with a stable market and customer base. Under this method, uncollectible accounts are estimated by applying a predetermined "bad debt" percentage to each month's sales. D) The aging method is generally used when accounts are less uniform in size and sales activity fluctuates widely. Under this method, the balance for the allowance account is the same each month.

D) The aging method is generally used when accounts are less uniform in size and sales activity fluctuates widely. Under this method, the balance for the allowance account is the same each month.

14. To accurately calculate the payroll, accounting staff must know (a) how much time was used and (b) what type of time was used. Which of the following statements regarding payroll time information is false? Incorrect A) Many businessmen's time records are not in compliance with federal timekeeping requirements, and these businesses are often penalized when a wage and hour audit occurs. Courts have ruled that this timekeeping duty is the employer's, not the employee's. B) Not all time is compensated at the same rate; some time is paid at the regular rate, some at an overtime rate, and some leave time is unpaid. To properly prepare a payroll, the payroll bookkeeper must first determine what type of time has been used. C) Paid or unpaid leave does not count towards overtime. D) Time worked during one workweek can be averaged with the time worked in a second workweek.

D) Time worked during one workweek can be averaged with the time worked in a second workweek.

11. Businesses obtain certain information about vendors in order to avoid the risk of substantial IRS penalties, to lower their insurance costs, or to lower their exposure to legal damages. Ideally, this information is obtained on or before the time an order has been placed with a vendor. In practice, however, the business often obtains or updates the information when the bookkeeper begins to process the invoice. Which of the following statements is false? Incorrect A) Under the federal income tax rules, most vendors that small businesses use are considered to be independent contractors in business for themselves, rather than employees of the business. However, small businesses that rely on individuals to routinely provide services may be at risk for misclassifying as independent contractors persons the IRS views as employees. B) As part of its program to collect income taxes, the IRS requires businesses to report payments made to many "nonemployees" (basically, independent contractors). IRS Form 1099-MISC is most commonly used to report these payments. C) The IRS requires businesses not only to report payments made to independent contractors, but also in certain cases to withhold 30% of the payment as income tax and remit the withholding to the IRS. This withholding is called backup withholding. D) Workers' compensation insurance policies automatically will credit premiums to cover independent contractors who receive Form 1099-MISC, if the business can show that the independent contractor has separate workers' compensation coverage.

D) Workers' compensation insurance policies automatically will credit premiums to cover independent contractors who receive Form 1099-MISC, if the business can show that the independent contractor has separate workers' compensation coverage.

6. Which of the following goals is not a goal the accounting staff should have when entering vendor invoice information into a computer system? Incorrect A) All the required information on the invoice is entered B) The information entered is accurate C) Invoices are entered only once D) All the invoices to be processed are entered E) All the invoices processed are paid immediately

E) All the invoices processed are paid immediately

13. Payroll bookkeepers need employee information to accurately prepare a payroll. Which of the following statements regarding employee payroll information is false? Incorrect A) Because the employee's name is used by the Social Security Administration and IRS, bookkeepers should not change an employee's name (such as through marriage or divorce) in the payroll records until the employee can produce a revised Social Security card. B) The employee's job is important in (a) establishing whether overtime must be paid and (b) determining that wage differences between men and women working the same job do not reflect sex discrimination. C) Under the Fair Labor Standards Act, the employer's records must reveal the two components of the employee's wage rate: (a) the wage base (how the employee is paid—for example, by the hour, commissions, by the number of pieces produced, or by a weekly salary) and (b) the wage amount (the amount that is paid for each hour or week worked, unit sold, or piece produced). D) The payroll bookkeeper should ensure that the wage rate for nonexempt employees is expressed in terms other than a salary. In some companies it is common practice to describe the wages paid an office worker, such as a secretary, as a weekly "salary." However, such workers are usually in nonexempt jobs and must be paid overtime. E) None of the above.

E) None of the above.

24. Which of the following statements regarding the Income Statement is false? Incorrect A) Generally, the revenue caption represents a business's gross income from operations (that is, the gross income obtained by selling goods or performing services). B) The cost of sales caption represents the cost of merchandise or products sold. Therefore, the costs that should be included in cost of sales are the same as those that would be included in inventory if the merchandise had not been sold. C) Operating expenses generally include the expenses incurred to produce operating revenue. Therefore, they include selling expenses (i.e., the costs incurred to make a sale and deliver the merchandise to the customer, such as sales commissions, advertising, and delivery costs) and general and administrative expenses (e.g., administrative salaries, office rent, insurance on office equipment, etc.). D) Other income and expenses generally include incidental sources of revenue and expense from nonoperating activities. Examples include dividend income, interest income, and interest expense. E) None of the above.

E) None of the above.

25. Which of the following statements regarding the Income Statement is false? Incorrect A) Generally, the revenue caption represents a business's gross income from operations (that is, the gross income obtained by selling goods or performing services). B) The cost of sales caption represents the cost of merchandise or products sold. Therefore, the costs that should be included in cost of sales are the same as those that would be included in inventory if the merchandise had not been sold. C) Operating expenses generally include the expenses incurred to produce operating revenue. Therefore, they include selling expenses (i.e., the costs incurred to make a sale and deliver the merchandise to the customer, such as sales commissions, advertising, and delivery costs) and general and administrative expenses (e.g., administrative salaries, office rent, insurance on office equipment, etc.). D) Other income and expenses generally include incidental sources of revenue and expense from nonoperating activities. Examples include dividend income, interest income, and interest expense. E) None of the above.

E) None of the above.