Exam 2 AC 210

True or False Independent auditors are advisors who analyze financial statements and other economic information to formulate forecasts and stock recommendations.

False

True or False Internal controls are a way of attacking the incentive component of the fraud triangle.

False

True or False Most companies hope to receive a qualified audit opinion following an external audit.

False

True or False Net sales revenue is calculated by subtracting cost of goods sold from sales revenue.

False

True or False The Sarbanes Oxley Act of 2002 only focused on the incentive component of the fraud triangle; it was criticized for not attacking the opportunity or character/rationalization components.

False

True or False The Sarbanes-Oxley Act recommends, but does not require, an assessment by management of the internal control structure.

False

True or False The Securities & Exchange Commission requires publically traded companies to have their financial statements audited by their internal auditors.

False

True or False The Securities and Exchange Commission regulates financial reporting of all U.S. companies, regardless of their size or ownership.

False

True or False The U.S. used to require the use of IFRS in accounting for publicly traded companies but has adopted GAAP in the last 5 years.

False

1. Using its aging of accounts receivable, Age Old, Inc. estimates that $90,000 of its $4,000,000 of accounts receivable will be uncollectible. Prior to making its adjusting entry, the unadjusted Allowance for Doubtful Accounts has a debit balance of $1,000. After the adjustment, the: a. Allowance for Doubtful Accounts will have an $89,000 credit balance. b. Allowance for Doubtful Accounts will have a $91,000 credit balance. c. Allowance for Doubtful Accounts will have a $90,000 credit balance. d. Bad Debt Expense will equal $90,000.

c. Allowance for Doubtful Accounts will have a $90,000 credit balance.

1. Beachside Corporation estimates its bad debt expense for the month to be $120. To record this estimate of bad debts, Beachside Corporation would debit: a. Accounts Receivable and credit Allowance for Doubtful Accounts for $120. b. Allowance for Doubtful Accounts and credit Bad Debt Expense for $120. c. Bad Debt Expense and credit Allowance for Doubtful Accounts for $120. d. Bad Debt Expense and credit Accounts Receivable for $120.

c. Bad Debt Expense and credit Allowance for Doubtful Accounts for $120.

1. Which of the following elements of the fraud triangle is present when one employee both receives and deposits customer checks? a. Incentive b. Misappropriation c. Opportunity d. Rationalization Reconciliation

c. Opportunity

1. The internal control principle related to assigning responsibilities so that one employee cannot make a mistake or commit a dishonest act without someone else discovering it is referred to as: a. duplication of responsibility. b. restriction of access. c. segregation of duties. d. rotation of duties.

c. segregation of duties.

1. Connect Co. writes-off a $250 customer account as uncollectible. As a result of this write-off, its: a. total assets increases by $250. b. net income increases by $250. c. total assets remains the same. d. stockholders' equity increases by $250.

c. total assets remains the same.

Would the following the added or subtracted from the company's book or the bank statement side of a bank reconciliation? Outstanding checks of $12,000

subtracted from bank statement

Would the following the added or subtracted from the company's book or the bank statement side of a bank reconciliation? Bank service charge of 15

subtracted from companies books

23. If a company returns an item to a supplier, the supplier will record the return as: A. An increase in a contra-revenue account. B. An increase in a revenue account. C. An increase in a contra-asset account or direct reduction in Inventory. D. An increase in an expense account. E. A decrease in an expense account.

A. An increase in a contra-revenue account.

1. Which of the following would most likely increase the net profit margin ratio? A. An increase in the unit selling price. B. A decrease in the overall sales volume. C. An increase in operating expenses. An increase in cost of goods sold.

A. An increase in the unit selling price.

13. Which one of the following is not an accurate description of the Allowance for Doubtful Accounts? A. The account is an income statement account. B. The account is a contra-asset account. C. The amount of the Allowance for Doubtful Accounts decreases the net realizable value of a company's receivables. D. The account is increased by an estimate of uncollectible accounts (bad debt) expense.

A. The account is an income statement account.

17. Which of the following statements is false? A. When goods are shipped FOB destination, the revenue from the sale is recognized on the shipment date. B. An audit report expressing an unqualified opinion is generally desired by the company presenting its financial statements. C. Sales returns and allowances is a contra-revenue account. D. The year-end journal entry to record bad debt expense reduces current assets and net income.

A. When goods are shipped FOB destination, the revenue from the sale is recognized on the shipment date.

14. Which of the following businesses is most likely to use a specific identification cost flow method? A. Yacht dealership B. Greeting card company C. Hardware store D. Roofing company E. Grocery store

A. Yacht dealership

17. Ryland Company returns merchandise previously purchased on account. It had not yet been paid for. Ryland uses the perpetual inventory system. Which of the following answers reflects the effects of the purchase return on the financial statements of Ryland? A. debit to Accounts Payable and credit to Inventory B. debit to Sales Returns and credit to Inventory C. debit to Accounts Receivable and credit to Sales Revenue D. debit to Cost of Goods Sold and credit to Inventory E. debit to Accounts Receivable and credit to Inventory

A. debit to Accounts Payable and credit to Inventory

2. A bank reconciliation has been prepared by Fluffy Corporation. The journal entry to be made by Fluffy Corp to record a customer's NSF check will: A. increase the Accounts Receivable balance. B. decrease the Accounts Receivable balance. C. decrease equity because an expense is recorded. D. increase the Accounts Payable balance. E. Increase the Cash balance.

A. increase the Accounts Receivable balance.

25. If a company sold merchandise which cost $1,000 for a selling price of $3,000, the accounting equation would show a: A. net increase in assets and net increase in stockholders' equity. B. net increase in assets and net decrease in liabilities. C. net decrease in assets and net increase in liabilities. D. net decrease in assets and net decrease in stockholders' equity.

A. net increase in assets and net increase in stockholders' equity.

31. The Weed Man Corporation provides $45,000 worth of lawn care on account during the month. Experience suggests that about 2% of net credit sales will not be collected. According to the revenue recognition principle and the matching principle, the company should: A. record an estimate of bad debt expense in the same period as the lawn care is provided. B. not report the sales revenue until it collects payment. C. increase the value of its liabilities with an adjustment. D. wait until the accounts are determined to be uncollectible before making an entry for bad debt expense.

A. record an estimate of bad debt expense in the same period as the lawn care is provided.

Would the following the added or subtracted from the company's book or the bank statement side of a bank reconciliation? Deposit in transit of $2,300

Added to bank statement

10. Which of the following businesses is most likely to use a specific identification cost flow method? A. Hardware store B. Grocery store C. Greeting card company D. Roofing company E. Airplane dealership

Airplane dealership

24. When merchandise is sold, the cost of the merchandise is removed from Inventory and reported on a multistep the income statement as A. Inventory expense after gross profit subtotal B. Cost of goods sold before gross profit subtotal C. General & administrative expenses after gross profit subtotal D. Non-operating expenses after gross profit subtotal

B. Cost of goods sold before gross profit subtotal

1. Which of the following statements is false? A. Gross profit percentage is calculated as gross profit divided by net sales revenue. B. Gross profit should only be viewed for each reporting company and is not useful in comparing different companies in the same industry. C. Gross profit is calculated as net sales revenue less cost of goods sold. D. Gross profit is a subtotal used in the multi-step income statement and does not appear on the balance sheet.

B. Gross profit should only be viewed for each reporting company and is not useful in comparing different companies in the same industry.

8. An adjustment to ending inventory under the lower of cost or market (LCM) rule would be most likely to be recorded by a company that sells: A. Storage containers made of plastic. B. High-fashion, trendy clothes. C. Hand lotion. D. Paper clips.

B. High-fashion, trendy clothes.

Which of the following statements is true? A. FOB shipping point means that purchaser's responsibility for the inventory ends at shipping point. B. With a perpetual inventory system, the cost of goods sold is recorded at the time of a sale of merchandise. C. For a company that uses a periodic inventory system, a physical count of the inventory can reveal the amount of inventory shrinkage the company has experienced. D. Net sales revenue is calculated by subtracting cost of goods sold from sales revenue.

B. With a perpetual inventory system, the cost of goods sold is recorded at the time of a sale of merchandise.

16. Karma Company uses the allowance method to record uncollectible accounts. The year-end adjusting entry to recognize uncollectible accounts for the period (management's estimate of the uncollectible amount) will include A. debit to Accounts Receivable and credit to Allowance for Doubtful Accounts. B. debit to Bad Debt Expense and credit to Allowance for Doubtful Accounts. C. debit to Bad Debt Expense and credit to Accounts Receivable. D. debit to Allowance for Doubtful Accounts and credit to Bad Debt Expense.

B. debit to Bad Debt Expense and credit to Allowance for Doubtful Accounts.

30. All other things equal, a company is better off when it's inventory turnover ratio: A. and its days-to-sell ratio are both low. B. is high and its days-to-sell ratio is low. C. and its days-to-sell ratio are both high. D. is low and its days-to-sell ratio is high.

B. is high and its days-to-sell ratio is low.

1. Which of the following businesses would not be as likely to use the specific identification method of inventory valuation? A. An automobile dealer. B. A custom jewelry store. C. A grocery store. D. An art dealer.

C. A grocery store.

17. A deposit in transit on a bank reconciliation should be: A. Added to the depositor's book cash balance. B. Subtracted from the depositor's book cash balance. C. Added to the bank statement balance. D. Subtracted from the bank statement balance.

C. Added to the bank statement balance

21. Which of the following is not one of the regular components of an annual report filed with the SEC? A. Management's report on internal controls B. Auditor's report C. Bank reconciliation performed by the company D. Notes to the financial statements E. Management's discussion and analysis

C. Bank reconciliation performed by the company

17. Which of the following statements is false? A. Internal controls include the policies and procedures a company implements to protect against theft of assets, to promote efficiency, and to ensure compliance with laws and regulations. B. A voucher system is designed to provide internal control over cash disbursements. C. Internal control policies and procedures are identical across all companies. D. Segregation of duties means that a company assigns responsibilities so that responsibilities for related activities are assigned to two or more people.

C. Internal control policies and procedures are identical across all companies.

. Which of the following measures is most useful in analyzing a company's ability to control expenses? A. Debt-to-assets ratio. B. Asset turnover ratio. C. Net profit margin ratio. D. Current ratio. E. Accounts receivable turnover ratio.

C. Net profit margin ratio.

1. Which of the following statements does not accurately describe the lower of cost or market (LCM) valuation method? A. The journal entry to write-down inventory decreases gross profit. B. The journal entry to write-down inventory decreases current assets. C. The journal entry to write-down inventory does not affect net income. The journal entry to write-down inventory increases cost of goods sold.

C. The journal entry to write-down inventory does not affect net income.

1. Which of the following statements is false? A. The journal entry to record bad debt expense decreases current assets. B. The journal entry to record bad debt expense decreases retained earnings. C. The journal entry to write-off an uncollectible account receivable decreases operating income. D. The journal entry to write-off an uncollectible account receivable does not affect current assets.

C. The journal entry to write-off an uncollectible account receivable decreases operating income.

17. Which of the following statements is true? A. The main objective of The Sarbanes Oxley Act of 2002 was to encourage publicly traded companies to operate more efficiently and improve their marketing and sales strategies. B. Independent auditors are advisors who analyze financial statements and other economic information to formulate forecasts and stock recommendations. C. The primary responsibility for the information in a corporation's financial statements lies with the chief executive officer and the chief financial officer. D. The Securities & Exchange Commission requires publically traded companies to have their financial statements audited by their internal auditors. E. The Sarbanes Oxley Act of 2002 only focused on the incentive component of the fraud triangle; it was criticized for not attacking the opportunity or character/rationalization components.

C. The primary responsibility for the information in a corporation's financial statements lies with the chief executive officer and the chief financial officer.

1. Which of the following is an objective of the external audit of a company's financial statements? A. To provide a forecast of the company's future earnings. B. To assure no fraud has been committed by the company's management. C. To provide credibility that the financial statements are presented in accordance with GAAP. D. To detect all accounting errors made by the accounting system and employees. E. All of the above.

C. To provide credibility that the financial statements are presented in accordance with GAAP.

In order to calculate shrinkage: A. both periodic and perpetual inventory systems are needed. B. a periodic inventory system is more effective. C. a perpetual inventory system requires an occasional count of actual inventory. D. it does not matter which system one uses.

C. a perpetual inventory system requires an occasional count of actual inventory.

20. The custodian of an asset (such as cash received by the company) should A. be an accountant. B. be someone from outside the company, such as an external auditor. C. not have access to the accounting records for the asset. D. control the cash receipts through a voucher system.

C. not have access to the accounting records for the asset.

16. In September, a customer signed a contract to have his house painted and paid for the job in October. The painting company bought the paint in August on account and paid for it in September. The painting company painted the house in November. According to the revenue recognition and matching principles, the painting company should record: A. the revenues in November and the expenses in September. B. the revenues and the expenses in September. C. the revenues and the expenses in November. D. the revenues in September and the expenses in August. E. the revenues and the expenses in October x

C. the revenues and the expenses in November

27. The asset turnover ratio measures: A. the profit generated by efficient cost control. B. the level of financing risk assumed by the company. C. the sales revenue generated by effective management of assets. D. the ability to earn profit for the stockholders.

C. the sales revenue generated by effective management of assets.

The asset turnover ratio measures: A. the profit generated by efficient management of assets. B. the level of financing risk assumed by the company. C. the sales revenue generated by efficient management of assets. D. the ability to earn profit for the stockholders.

C. the sales revenue generated by efficient management of assets.

4. Which of the following statements is false? A. U.S. GAAP allows the cost flow pattern chosen by management for merchandise inventory (e.g., LIFO, FIFO) to differ from the actual physical flow of merchandise within the business. B. During a period of rising prices, the FIFO cost flow method will result in higher total assets than LIFO. C. During a period of rising prices, a company's cost of goods sold would be higher using the LIFO cost flow method than with FIFO. D. A company uses a cost flow method (such as LIFO or FIFO) to allocate product costs between cost of goods sold and beginning inventory. E. A company's gross profit reported on the income statement is directly affected by the inventory cost flow method it uses.

D. A company uses a cost flow method (such as LIFO or FIFO) to allocate product costs between cost of goods sold and beginning inventory.

1. Which of the following statements is incorrect when inventory unit costs are increasing? A. Cost of goods sold computed under LIFO will be the largest among the inventory costing methods. B. Income taxes computed under LIFO will be the lowest among the inventory costing methods. C. Ending inventory using the average cost method will be larger than the ending inventory when the LIFO method is used. D. Cost of goods sold using the average cost method will be less than cost of goods sold when the FIFO method is used.

D. Cost of goods sold using the average cost method will be less than cost of goods sold when the FIFO method is used.

33. An adjustment to ending inventory under the lower of cost or market (LCM) rule would be most likely to be recorded by a company that sells: A. Plastic storage containers. B. Paper clips. C. Body lotion. D. Designer clothes.

D. Designer clothes.

17. Which of the following statements does not correctly describe the allowance for doubtful accounts balance? A. It is reported on the balance sheet as a component of current assets. B. It is a contra-asset account. C. It is used instead of directly decreasing the accounts receivable account. D. It is reported on the balance sheet as a stockholders' equity account. E. It is created as a result of the adjusting entry to record bad debt expense.

D. It is reported on the balance sheet as a stockholders' equity account.

12. Accounts receivable turnover is computed by dividing: A. 365 divided by Accounts Receivable. B. Accounts Receivable divided by Sales Revenue. C. Cost of Goods Sold divided by Inventory. D. Sales Revenue divided by Accounts Receivable.

D. Sales Revenue divided by Accounts Receivable.

9. Which of the following statements is true? A. An audit involves an examination of every transaction that occurred during the year by an independent auditor. B. The Sarbanes-Oxley Act recommends, but does not require, an assessment by management of the internal control structure. C. The U.S. used to require the use of IFRS in accounting for publicly traded companies but has adopted GAAP in the last 5 years. D. The order in which assets and liabilities are reported on the balance sheet under IFRS is different than the order under GAAP rules. E. All of the above.

D. The order in which assets and liabilities are reported on the balance sheet under IFRS is different than the order under GAAP rules.

28. Numerous accounting scandals and misrepresentation of financial results have been reported in the news during the past few years. As a result the SEC recently has: A. taken over responsibility for setting accounting rules in the United States. B. required companies to issue monthly reports on financial data, called the 10-M. C. required companies to have two different accounting firms audit the financial statements included in the annual report on Form 10-K. D. introduced severe fraud charges for managers found guilty of such actions.

D. introduced severe fraud charges for managers found guilty of such actions.

Numerous accounting scandals and misrepresentation of financial results have been reported in the news during the past few years. As a result the SEC recently has: A. switch from GAAP to IFRS. B. required companies to issue monthly reports on financial data. C. required companies to have two different accounting firms audit the financial statements included in the annual report on Form 10-K. D. introduced severe fraud charges for managers found guilty of such actions. E. All of the above.

D. introduced severe fraud charges for managers found guilty of such actions.

15. Karma Company used the allowance method to record uncollectible accounts (bad debts). Karma's entry to recognize the write-off of the uncollectible accounts will A. increase total assets and total equity. B. increase total assets and decrease total equity. C. decrease total assets and total equity. D. not affect total assets or total equity.

D. not affect total assets or total equity.

2. The Ding Corporation provides $60,000 worth of lawn care on account during the month. Experience suggests that about 1% of net credit sales will not be collected. According to the revenue recognition principle and the matching principle, the company should: A. not report the sales revenue until it collects payment. B. wait until the accounts are determined to be uncollectible before making an entry for bad debt expense. C. increase the value of its liabilities with an adjustment. D. record an estimate of bad debt expense in the same period as the lawn care is provided.

D. record an estimate of bad debt expense in the same period as the lawn care is provided.

3. Which of the following statements is true? A. A well-designed system of internal controls will eliminate all employee theft and fraud in a company. B. Most companies hope to receive a qualified audit opinion following an external audit. C. Internal controls are a way of attacking the incentive component of the fraud triangle. D. The Securities and Exchange Commission regulates financial reporting of all U.S. companies, regardless of their size or ownership. E. None of the above.

E. None of the above.

True or False The main objective of The Sarbanes Oxley Act of 2002 was to encourage publicly traded companies to operate more efficiently and improve their marketing and sales strategies.

False

True or False A well-designed system of internal controls will eliminate all employee theft and fraud in a company.

False

True or False An audit involves an examination of every transaction that occurred during the year by an independent auditor.

False

True or False FOB shipping point means that purchaser's responsibility for the inventory ends at shipping point.

False

True or False For a company that uses a periodic inventory system, a physical count of the inventory can reveal the amount of inventory shrinkage the company has experienced.

False

True or False Gross profit percentage is calculated as gross profit divided by net sales revenue.

True

True or False Sales returns and allowances is a contra-revenue account.

True

True or False A company's gross profit reported on the income statement is directly affected by the inventory cost flow method it uses.

True

True or False A voucher system is designed to provide internal control over cash disbursements.

True

True or False An audit report expressing an unqualified opinion is generally desired by the company presenting its financial statements.

True

True or False During a period of rising prices, a company's cost of goods sold would be higher using the LIFO cost flow method than with FIFO.

True

True or False During a period of rising prices, the FIFO cost flow method will result in higher total assets than LIFO.

True

True or False Gross profit is a subtotal used in the multi-step income statement and does not appear on the balance sheet.

True

True or False Gross profit is calculated as net sales revenue less cost of goods sold.

True

True or False Internal controls include the policies and procedures a company implements to protect against theft of assets, to promote efficiency, and to ensure compliance with laws and regulations.

True

True or False Segregation of duties means that a company assigns responsibilities so that responsibilities for related activities are assigned to two or more people.

True

True or False The journal entry to record bad debt expense decreases current assets.

True

True or False The journal entry to record bad debt expense decreases retained earnings.

True

True or False The journal entry to write-off an uncollectible account receivable does not affect current assets.

True

True or False The year-end journal entry to record bad debt expense reduces current assets and net income.

True

True or False U.S. GAAP allows the cost flow pattern chosen by management for merchandise inventory (e.g., LIFO, FIFO) to differ from the actual physical flow of merchandise within the business.

True

1. A company stores its unused checks in the vault. Which internal control procedure does this reflect? a. Restrict access b. Independent verification c. Document procedures Segregate duties

a. Restrict access

1. Which element is not part of the fraud triangle? a. Sustainability b. Incentive c. Rationalization Opportunity

a. Sustainability

Would the following the added or subtracted from the company's book or the bank statement side of a bank reconciliation? Interest earned of $5

added to companies book

1. Which of the following statements is false? a. In a perpetual inventory system, the inventory count is compared to the inventory account balance to reveal shrinkage. b. Cost of goods sold is reported on the balance sheet. c. A perpetual inventory system is better for internal control purposes than a periodic inventory system. Credit terms of "2/10, n/30" mean that if payment is made in ten days, a 2% discount may be taken; if not paid within ten days, the full invoice price will be due in thirty days.

b. Cost of goods sold is reported on the balance sheet.

3. Davis Hardware Company uses a perpetual inventory system. How should Davis (the purchaser) record the return of inventory previously purchased on account for $200? a. Debit Inventory $200; Credit Accounts Payable $200 b. Debit Accounts Payable $200; Credit Inventory $200 c. Debit Inventory $200; Credit Accounts Receivable $200 d. Debit Sales Returns $200; Credit Accounts Receivable $200 e. Debit Cost of Goods Sold $200; Credit Inventory $200

b. Debit Accounts Payable $200; Credit Inventory $200

1. At Ajax Company, goods billed by suppliers are compared to purchase orders and receiving reports before being paid. Which internal control procedure does this reflect? a. Restrict access b. Independent verification c. Document procedures d. Segregate duties Establish responsibility

b. Independent verification

1. Which of the following statements about The Sarbanes-Oxley Act is true? a. Its primary purpose was to form The Securities Exchange Commission (SEC) to regulate publicly traded companies. b. Its primary purpose was to improve financial reporting and restore investor confidence. c. Its primary purpose was to improve international relations and global trading. Its primary purpose was to make U.S. GAAP conform more closely to international reporting standards.

b. Its primary purpose was to improve financial reporting and restore investor confidence.

1. Which of the following rules established by The Sarbanes-Oxley Act addresses the incentive component of the fraud triangle? a. Companies must adopt a code of ethics covering the top executives. b. Management can be sentenced to jail terms up to 20 years for violations. c. Companies must adopt of a whistleblower protection system. d. Companies must establish an audit committee of independent directors. All of the above.

b. Management can be sentenced to jail terms up to 20 years for violations.

1. A weak system of internal ______ provides the ______ to commit fraud. a. loan covenants; incentive b. controls; opportunity c. financial statements; opportunity d. audits; rationalization

b. controls; opportunity

3. Under the periodic inventory system: a. inventory records are updated immediately after each purchase. b. inventory must be counted at the end of each accounting period. c. inventory does not have to be counted. (It can be taken from the accounting records.) inventory levels must be counted every day.

b. inventory must be counted at the end of each accounting period.

1. Which method requires first estimating the desired amount for the Allowance for Doubtful Accounts and then determining the amount of the expense required to get to this desired balance given the amount of the unadjusted balance? a. Percentage of credit sales method b. Direct write-off method c. Percentage of bad debts method d. Aging of accounts receivable method

d. Aging of accounts receivable method

1. Delicious, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000, a credit balance in its Allowance for Doubtful Accounts of $50, and Sales Revenue of $100,000. Based on an aging of its receivable, management estimates that $1,000 of receivables will be uncollectible. Delicious's financial statements will show: a. Bad Debt Expense of $1,000 b. Allowance for Doubtful Accounts of $1,050, credit balance c. Allowance for Doubtful Accounts of $950, credit balance d. Bad Debt Expense of $950

d. Bad Debt Expense of $950

3. Klugg Company made a purchase of merchandise on credit from Claude Corporation on August 3, for $4,000, terms 2/10, n/45. On August 10, Klugg makes the appropriate payment to Claude. The entry on August 10 for Klugg Company is a. Debit Accounts Payable $4,000, Credit Cash $4,000 b. Debit Accounts Payable $3,920, Credit Cash $3,920 c. Debit Accounts Payable $4,000, Credit Sales Returns and Allowances $80, Credit Cash $3920 d. Debit Accounts Payable $4,000, Credit Inventory $80, Credit Cash $3,920

d. Debit Accounts Payable $4,000, Credit Inventory $80, Credit Cash $3,920

3. How does the purchase of inventory on credit affect the accounting equation of the purchaser? a. Total assets increase, total liabilities stay the same, total equity increases b. Total assets stay the same, total liabilities stay the same, total equity stays the same c. Total assets stay the same, total liabilites increase, total equity increases d. Total assets increase, total liabilities increase, total equity stays the same

d. Total assets increase, total liabilities increase, total equity stays the same