TestBank financial accounting 2n spiceland ch4

Ch4 Student: _ Managers of the company act as stewards or caretakers of the company's assets True Common types of financial statement fraud include creating fictitious revenues from a fake customer, improperly valuing assets, and mismatching revenues and expenses True False Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets True False Section 404 of the Sarbanes-Oxley Act requires that a company's management document and assess the effectiveness of all internal control processes that could affect financial reporting True False Auditors of public companies can perform the full range of audit and nonaudit consulting services for their audit clients True False The Public Company Accounting Oversight Board (PCAOB) has the authority to establish standards dealing with auditing, quality control, ethics, independence, and other activities relating to the preparation of audited financial reports True False The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles True False In response to corporate accounting scandals and to public outrage over seemingly widespread unethical behavior of top executives, Congress passed the Sarbanes-Oxley Act True False False One benefit of internal control is greater reliance by investors on reported financial statements True False 10 A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB) True False 11 The control environment refers to the overall top-to-bottom attitude of the company with respect to internal controls True False 12 Risk assessment procedures include periodic reviews of internal controls, assessing management's oversight of the internal control, developing solutions to known cases of internal control failures, and determining whether each division or operation within a company is meeting its objectives True False 13 Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the same client True False 14 An example of separation of duties would be not allowing an employee who receives cash to also be responsible for depositing that cash in the bank account True False 15 The internal control component of information and communication relates to the effectiveness of accurately measuring and communicating business transactions True False 16 Management needs to monitor the internal control system, just like any other system Any control deficiencies spotted by employees should be reported immediately to management True False 17 Separation of duties occurs when two or more people act in coordination to circumvent internal controls True False 18 Effective internal controls ensure a company's success and survival True False 19 The amount of cash reported in a company's balance sheet includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers True False 20 The amount of cash reported in a company's balance sheet includes items acceptable for deposit in bank accounts, such as checks received from customers True False 21 The amount of cash reported in a company's balance sheet includes the balance of accounts receivable if cash collection is highly likely in the near future True False 22 The amount of cash reported in a company's balance sheet does not include cash equivalents, defined as short-term investments that have a maturity date no longer than three months from the date of purchase True False 23 Common examples of cash equivalents are money market funds, Treasury bills, and certificates of deposit True False 24 Recording all cash receipts as soon as possible is considered a good internal control True False 25 Opening mail and making a list of checks received once per week is considered a good internal control over cash receipts True False 26 Whether a customer uses cash, a check, or a debit card to make a purchase, the company records the transaction as a cash sale True False 27 When customers pay for services with a check, the company should debit Accounts Receivable and credit Service Revenue True False 28 When customers pay for services with a debit card, the company should debit Cash and credit Service Revenue True False 29 When a company pays for services received using a check, it should credit Accounts Payable until the check is paid by the bank True False 30 When a company pays for services received using a credit card, it should credit Accounts Payable True False 31 Allowing the employee who authorizes purchases to also prepare the check is an example of good internal control True False 32 Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls True False 33 A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company's own records True False 34 Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors True False 35 An example of a bank error that causes the company's balance and bank's balance of cash to differ is the purchase of supplies with a check True False 36 Cash receipts of the company that have not been added to the bank's record of the company's balance are referred to as checks outstanding True False 37 Checks outstanding are checks the company has written that have not been subtracted from the bank's record of the company's balance True False 38 A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance True False 39 A check outstanding will cause the bank's cash balance to be higher than the company's cash balance True False 40 An NSF check is an example of a cash transaction that is initially recorded by the bank and later by the company after notification True False 41 Interest earned on a bank account is an example of a cash transaction recorded by the company and then later by the bank after notification True False 42 The final step in reconciling the bank's cash balance and the company's cash balance is to update the company's cash balance for the items used to reconcile the bank's cash balance True False 43 The petty cash fund represents cash on hand and is used to pay for minor purchases True False 44 The petty cash fund should have just enough cash to make minor expenditures over a reasonable period (such as a week or a month) True False 45 A company's cash is reported in two financial statements - income statement and statement of cash flows True False 46 Cash is typically reported as a current asset in the balance sheet True False 47 The statement of cash flows reports a company's cash inflows and cash outflows related to (1) operating activities, (2) investing activities, and (3) financing activities True False 48 Investing activities include cash transactions involving revenue and expense events during the period True False 49 Investing activities include cash investments in long-term assets and investment securities True False 50 Investing activities include transactions designed to raise cash or finance the business True False 51 Only transactions involving cash affect a company's cash flows True False 52 A company's operating cash inflows less operating cash outflows generally equals the reported amount of net income in the income statement True False 53 Earnings quality is the ability of net income to report the true underlying performance of the company True False 54 A company's free cash flows equal operating cash flows plus financing cash flows during the period True False 55 Generally, when a company's net income and free cash flows trend in the same direction over time, earnings are believed to have higher quality True False 56 What key piece of legislation was passed in response to corporate accounting scandals by Enron, WorldCom, and others? A B C D Sarbanes-Oxley Act 1933 Securities Act 1934 Securities Exchange Act Regulation Fair Disclosure 57 Which of the following does not represent a major provision of the Sarbanes-Oxley Act? A B C D Nonaudit services Quarterly financial statements Auditor rotation Corporate executive accountability 58 Under the provisions of the Sarbanes-Oxley Act, corporate executives: A B C D Have limited responsibility for financial statements Must personally prepare the company's financial statements Must personally certify the company's financial statements Are not allowed to view the company's financial statements 59 Under the provisions of the Sarbanes-Oxley Act, auditors must which of the following? A B C D Provide nonaudit services for their clients Audit public companies whose chief executives worked for the audit firm in the preceding year Be hired by company management Maintain working papers for at least seven years following an audit 60 Which of the following is NOT a design feature of effective internal controls? A B C D Allow greater reliance by investors on reported financial statements Prevent fraudulent or errant financial reporting Ensure the company's price advantage over competitors Prevent misuse of company funds by employees 61 A framework for designing an internal control system is provided by the: A B C D Committee of Sponsoring Organizations Financial Accounting Standards Board Securities and Exchange Commission International Accounting Standards Board 62 The components of internal control not directly include: A B C D Risk assessment Inflation adjustment Monitoring Control activities 63 Separation of duties refers to: A Making each manager personally responsible for his/her department B Keeping functions across different departments separate C Preventing top management and lower-level employees from interacting D Individuals who have physical responsibility for assets should not also have access to accounting records 64 Which employees have an impact on the operation and effectiveness of internal controls? A B C D Upper management Mid-level managers Lower-level employees All employees 65 Cash may not include: A B C D Foreign currency Money orders Accounts receivable Undeposited customer checks 66 Common examples of cash equivalents include all of the following except: A B C D Money market funds Treasury bills Certificates of deposit Accounts receivable 67 Which of the following would NOT represent good controls over cash receipts? A B C D Record all cash receipts as soon as possible The employee that receives cash and checks should also deposit them in the bank Open mail each day and make a list of checks received with the amount and payer's name Verify cash receipts by comparing the bank deposit slip with the accounting records 68 Which of the following would NOT be recorded as a cash sale? A B C D Customer who pays with a check Customer who pays with a debit card Customer who pays with a credit card A customers who buys on account 69 McGregor Company allows customers to pay with credit cards The credit card company charges McGregor 3% of the sale When a customer uses a credit card to pay McGregor $200 for services provided, McGregor would: A B C D Debit Cash for $200 Credit Service Revenue for $194 Debit Service Fee Expense for $6 Credit Service Revenue for $206 70 A customer purchased a $2,000 item at ApplianceWorld, paying with a credit card ApplianceWorld is charged a 2% fee by the credit card company When recording this sale, ApplianceWorld would: A B C D Debit Accounts Receivable for $2,000 Credit Sales Revenue for $2,000 Credit Sales Revenue for $1,960 Credit Unearned Revenue for $2,000 71 Which of the following would NOT represent good controls over cash disbursements? A B C D Make all disbursements, other than very small ones, by check, debit card, or credit card Require only one signature for checks, especially larger ones Authorize all expenditures before purchase and verify the accuracy of the purchase itself The employee who authorizes payment should not also be the employee who prepares the check 72 Which of the following would NOT represent good controls over cash disbursements? A Periodically check amounts shown in the debit card and credit card statements against purchase receipts B The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases C Set maximum purchase limits on debit cards and credit cards D Employees responsible for making cash disbursements should also be in charge of cash receipts 73 Which of the following would NOT need to be accounted for in a bank reconciliation? A B C D Deposits outstanding recorded by the company but not the bank Interest earned recorded by the bank but not the company NSF checks recorded by the bank but not by the company Checks written by the company and recorded by the bank 74 On May 31, Money Corporation's Cash account showed a balance of $10,000 before the bank reconciliation was prepared After examining the May bank statement and items included with it, the company's accountant found the following items: What is the amount of cash that should be reported in the company's balance sheet as of May 31? A B C D $9,860 $9,650 $10,130 $10,410 75 Cash transactions recorded by the bank but not yet recorded by the company include all of the following except A B C D Service fees Interest earned Checks outstanding NSF checks 76 The following information was taken from the bank reconciliation for Mooner Sooner Inc at the end of 2012: Bank balance: $8,000 Checks outstanding: $5,800 Note collected by the bank: $1,500 Service fee: $20 Deposits outstanding: $4,000 NSF check (bad check) returned for $300 What is the correct cash balance that should be reported in Mooner Sooner's balance sheet at the end of 2012? A B C D $10,200 $7,400 $6,200 $6,160 77 Cash transactions that have been recorded by the company but not the bank include: A B C D NSF checks Interest earned Service fees Deposits outstanding 78 Which of the following is NOT a reason why a bank reconciliation is necessary? A B C D The company has transactions that the bank has not recorded Petty cash has a low balance The bank has transactions that the company has not recorded Reconciliations provide a control over cash 79 Which of the following is correct with respect to a bank reconciliation? A B C D Subtract interest earned from the bank's balance Add service charge to the company's balance Subtract NSF checks from the company's balance Add deposits outstanding to the company's balance 80 After preparing a bank reconciliation, the collection of a note by the bank on a company's behalf would be recorded with: A B C D A credit to Notes Receivable A credit to Cash A debit to Notes Receivable A credit to Accounts Receivable 81 After preparing a bank reconciliation, the service fee charged by the bank would be recorded with: A B C D A credit to Service Fees Expense A debit to Cash A credit to Service Fees Revenue A debit to Service Fees Expense 82 After preparing a bank reconciliation, a check outstanding for the payment of advertising would be recorded with: A B C D A debit to Advertising Expense A debit to Cash A credit to Advertising Expense No entry is needed 83 The following data were obtained from the bank statement and from the process of reconciling it: Bank service charges = $20 Deposit outstanding = $150 Interest earned on the bank account = $10 Checks outstanding = $400 Which items should be deducted from and added to the bank balance in completing the reconciliation? A B C D Deduct checks outstanding; add service charges and deposit outstanding Deduct interest earned; add deposit outstanding Deduct checks outstanding; add deposit outstanding Deduct deposit outstanding; add checks outstanding 84 The balance in the Colt Company's Cash account on August 31 was $19,700, before the bank reconciliation was prepared After examining the August bank statement and items included with it, the company's accountant found: What is the amount of cash that should be reported in the balance sheet as of August 31? A B C D $20,700 $17,200 $18,700 $22,200 85 The balance shown in the August bank statement of Colt Company was $23,200 After examining the August bank statement and items included with it, the company's accountant found: Checks outstanding $4,300 NSF check 140 Note collected by bank for the Colt Company 1,200 Deposits outstanding 1,800 Bank service fees 60 What is the amount of cash that should be reported in the balance sheet as of August 31? A B C D $20,700 $17,200 $18,700 $22,200 68 D 69 C 70 B 71 B 72 D 73 D 74 C 75 C 76 C 77 D 78 B 79 C 80 A 81 D 82 D 83 C 84 A 85 A 86 A 87 C 88 D 89 B 90 C 91 C 92 C 93 D 94 A 95 C 96 A 97 $1,500,000 98 99 100 $4,475 101 $3,400 102 $1,580 103 $2,060 104 105 106 107 108 109 110 $425,000 111 -$20,000 112 ($50,000) 113 $150,000 114 -$30,000 115 Operating Financing No Cash No Cash Financing Operating No Cash Operating 116 Operating activities = $8,500; Investing activities = -$2,000; Financing activities = $3,200 117 118 Two of the highest-profile cases (Enron and WorldCom) of fraudulent financial reporting in 2001 and 2002, as well as other fraudulent reporting by many others, led Congress to pass the Sarbanes-Oxley Act Fraudulent financial reporting was associated with poor social consequences such as bankruptcy, employee termination, reduced salaries, increased workloads, and loss of employee retirement funds, stock options, and health benefits The major provisions of the Sarbanes-Oxley Act include formation of the Public Company Accounting Oversight Board (PCAOB), corporate executive accountability, limitation on nonaudit services, retention of work papers, auditor rotation, restrictions related to conflicts of interest, audit committee hires the auditor, and documentation of internal control 119 Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets Control Environment - overall top-to-bottom attitude of the company with respect to internal controls Risk Assessment - development of formal policies to assess the risk that internal or external sources are preventing a company from achieving its objectives Control Activities - systems for approving cash payments, authorizing purchases, reviewing operating performance, and safeguarding assets Monitoring - Continuous observation of the internal control system Information and Communication - systems designed to ensure accurate measurement of business transactions and reliability of financial reports 120 Cash should be recorded and deposited daily The employee recording cash receipts should not also be the employee making the deposit The bank reconciliation should be prepared monthly by a person with no other cash responsibilities 121 For the bank's cash balance, deposits outstanding should be added and checks outstanding should be subtracted For the company's cash balance, notes collected by the bank and interest earned should be added; service fees and NSF checks should be subtracted As a final step in the reconciliation process, the company must record cash items used to reconcile the company's cash balance 122 The purpose of the statement of cash flows is to summarize the transactions that caused cash to change during the reporting period The statement of cash flows summarizes cash flows in three categories: operating, investing, and financing Operating activities include cash flows related to transactions entering into the determination of net income, such as cash collections from customers, payments for operating expenses, and other receipts such as interest and dividends Investing activities include purchasing and selling long-term assets or certain investment securities Financing activities include borrowing or repaying loans, issuing stock, and payment of dividends 123 The balance sheet reports the final balance of cash at the end of the reporting period The statement of cash flows reports inflows and outflows of cash during the reporting period The beginning balance of cash plus net cash flows reported in the statement of cash flows equals the ending balance of cash reported in the balance sheet Operating activities include cash transactions involving revenue and expense events during the period Investing activities include cash investments in long-term assets and investment securities Financing activities include transactions designed to raise cash or finance the business 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 B 152 C 153 A 154 D 155 A 156 C 157 B 158 B 159 D 160 D 161 B 162 C 163 C 164 C 165 C 166 D 167 C 168 D 169 A 170 A 171 B 172 D 173 D 174 B 175 C 176 D 177 B 178 C 179 TRUE 180 TRUE 181 TRUE 182 FALSE 183 TRUE 184 FALSE 185 TRUE 186 TRUE 187 TRUE 188 FALSE 189 TRUE 190 TRUE 191 FALSE 192 TRUE 193 TRUE 194 TRUE 195 FALSE 196 FALSE 197 TRUE 198 TRUE 199 FALSE 200 FALSE 201 TRUE 202 TRUE 203 FALSE 204 TRUE 205 FALSE 206 TRUE 207 FALSE 208 TRUE 209 FALSE 210 TRUE 211 TRUE 212 TRUE 213 FALSE 214 FALSE 215 TRUE 216 FALSE 217 TRUE 218 TRUE 219 FALSE 220 FALSE 221 TRUE 222 TRUE 223 FALSE 224 TRUE 225 TRUE 226 FALSE 227 TRUE 228 FALSE 229 TRUE 230 FALSE 231 TRUE 232 FALSE 233 TRUE 234 A 235 B 236 C 237 D 238 C 239 A 240 B 241 D 242 D 243 C 244 D 245 B 246 D 247 C 248 B 249 B 250 D 251 D 252 C 253 C 254 C 255 D 256 B 257 C 258 A 259 D 260 D 261 C 262 A 263 A 264 A 265 C 266 D 267 B 268 C 269 C 270 C 271 D 272 A 273 C 274 A 275 $1,500,000 276 277 278 $4,475 279 $3,400 280 $1,580 281 $2,060 282 283 284 285 286 287 288 $425,000 289 -$20,000 290 ($50,000) 291 $150,000 292 -$30,000 293 Operating Financing No Cash No Cash Financing Operating No Cash Operating 294 Operating activities = $8,500; Investing activities = -$2,000; Financing activities = $3,200 295 296 Two of the highest-profile cases (Enron and WorldCom) of fraudulent financial reporting in 2001 and 2002, as well as other fraudulent reporting by many others, led Congress to pass the Sarbanes-Oxley Act Fraudulent financial reporting was associated with poor social consequences such as bankruptcy, employee termination, reduced salaries, increased workloads, and loss of employee retirement funds, stock options, and health benefits The major provisions of the Sarbanes-Oxley Act include formation of the Public Company Accounting Oversight Board (PCAOB), corporate executive accountability, limitation on nonaudit services, retention of work papers, auditor rotation, restrictions related to conflicts of interest, audit committee hires the auditor, and documentation of internal control 297 Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets Control Environment - overall top-to-bottom attitude of the company with respect to internal controls Risk Assessment - development of formal policies to assess the risk that internal or external sources are preventing a company from achieving its objectives Control Activities - systems for approving cash payments, authorizing purchases, reviewing operating performance, and safeguarding assets Monitoring - Continuous observation of the internal control system Information and Communication - systems designed to ensure accurate measurement of business transactions and reliability of financial reports 298 Cash should be recorded and deposited daily The employee recording cash receipts should not also be the employee making the deposit The bank reconciliation should be prepared monthly by a person with no other cash responsibilities 299 For the bank's cash balance, deposits outstanding should be added and checks outstanding should be subtracted For the company's cash balance, notes collected by the bank and interest earned should be added; service fees and NSF checks should be subtracted As a final step in the reconciliation process, the company must record cash items used to reconcile the company's cash balance 300 The purpose of the statement of cash flows is to summarize the transactions that caused cash to change during the reporting period The statement of cash flows summarizes cash flows in three categories: operating, investing, and financing Operating activities include cash flows related to transactions entering into the determination of net income, such as cash collections from customers, payments for operating expenses, and other receipts such as interest and dividends Investing activities include purchasing and selling long-term assets or certain investment securities Financing activities include borrowing or repaying loans, issuing stock, and payment of dividends 301 The balance sheet reports the final balance of cash at the end of the reporting period The statement of cash flows reports inflows and outflows of cash during the reporting period The beginning balance of cash plus net cash flows reported in the statement of cash flows equals the ending balance of cash reported in the balance sheet Operating activities include cash transactions involving revenue and expense events during the period Investing activities include cash investments in long-term assets and investment securities Financing activities include transactions designed to raise cash or finance the business 302 303 304 305 306 307 308 309 310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 B 330 C 331 A 332 D 333 A 334 C 335 B 336 B 337 D 338 D 339 B 340 C 341 C 342 C 343 C 344 D 345 C 346 D 347 A 348 A 349 B 350 D 351 D 352 B 353 C 354 D 355 B 356 C Ch4 Summary Category AACSB: Analytic AACSB: Ethics AACSB: Reflective Thinking AICPA: Critical Thinking AICPA: Decision Making AICPA: Measurement AICPA: Reporting Blooms: Analysis Blooms: Analysis Blooms: Application Blooms: Application Blooms: Comprehension Blooms: Comprehension Blooms: Evaluation Blooms: Evaluation Blooms: Knowledge Blooms: Knowledge Blooms: Synthesis Blooms: Synthesis Difficulty: Easy Difficulty: Hard Difficulty: Hard (or Medium??) Other similar questions are coded "Medium" (see Questions 101-105) Difficulty: Medium Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act Learning Objective: 04-02 Identify the components; responsibilities; and limitations of internal control Learning Objective: 04-03 Define cash and cash equivalents Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements Learning Objective: 04-05 Reconcile a bank statement Learning Objective: 04-06 Account for petty cash Learning Objective: 04-07 Identify the major inflows and outflows of cash Learning Objective: 04-08 Assess earnings quality by comparing net income and cash flows Spiceland - Chapter 04 # of Questions 82 12 262 206 96 50 31 31 3 73 73 4 63 63 4 110 64 180 50 76 26 48 96 26 72 12 361 ... Must personally prepare the company's financial statements Must personally certify the company's financial statements Are not allowed to view the company's financial statements 59 Under the provisions... by the: A B C D Committee of Sponsoring Organizations Financial Accounting Standards Board Securities and Exchange Commission International Accounting Standards Board 62 The components of internal... greater reliance by investors on reported financial statements True False 188.A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB) True