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What is the primary role of internal controls in managing a business?
A) To prevent cash from being stolen
B) To ensure that the financial statements are presented in such a manner as to provide relevant and reliable information for financial statement users and the company's creditors
C) To constrain subordinates' activities in order to prevent employees from deviating from the scope of their responsibilities an encouraging them to act in the best interest of the business
D) To encourage theft and to ensure that segregation of duties does not take place
Which of the following is not one of the three areas for which internal control systems are intended to provide reasonable assurance?
A) Reliability of financial reporting
B) Compliance with applicable laws and regulations
C) Effectiveness and efficiency of operations
D) Certification that the financial statements are without error
Which of the following is not one of the five components of internal control?
A) Analysis of control procedures
B) Information and communication
C) Risk assessment
D) Control environment
Which of the following is not one of the five categories of control activities?
A) Checks on recorded amounts
B) Defalcation and financial reporting
C) Clearly defined authority and responsibility
D) Segregation of duties
The internal audit function is part of what element of the internal control system?
A) Control environment
C) Risk assessment
D) Control activities
Which of the following is not generally an internal control activity?
A) Establishing clear lines of authority to carry out specific tasks
B) Physically counting inventory in a perpetual inventory system
C) Reducing the cost of hiring seasonal employees
D) Limiting access to computerized accounting records
Allowing only certain employees to order goods and services for the company is an example of what internal control procedure?
A) Independent authorizations
B) Proper authorizations
C) Safeguarding of assets and records
D) Segregation of duties
Deposits made by a company but not yet reflected in a bank statement are called...
A) Deposits in transit
B) Debit memoranda
C) Credit memoranda
D) None of the above
Which one of the following would not appear on a bank statement for a checking account?
B) Interest earned
C) Service charges
D) Outstanding checks
Which one of the following is not a cash equivalent?
A) 180-day note issued by a local or state government
B) 90-day U.S. Treasury bill
C) 60-day corporate commercial paper
D) 30-day certificate of deposit
Business activity is best described as...
A) Lacking deviation
The five primary activities of a business generally consist of...
A) Making a profit, issuing financial statements, repaying debts, issuing dividends to stockholders, and complying with laws and regulations
B) Receiving assets, selling assets, issuing financial statements, collecting cash, and making cash disbursements
C) Receiving assets, purchasing assets, selling goods or services, collecting cash from customers, and repaying owners and creditors
D) Receiving cash, disbursing cash, buying assets, issuing dividends, and paying off liabilities
Effective cash management and control includes all of the following except...
A) The use of a petty cash fund
B) Bank reconciliations
C) Purchase of stocks and bonds
D) Short-term investments of excess cash
Cash management principles do not include...
A) Earning the greatest return possible on excess cash
B) Paying suppliers promptly
C) Speeding up collection from customers
D) Delaying payment of suppliers
Which one of the following statements is true?
A) Sound internal control practice dictates that cash disbursements should be made by check, unless the disbursement is very small
B) Petty cash can be substituted for a checking account to expedite the payment of all disbursements
C) Good cash management practices dictate that a company should maintain as large a balance as possible in its cash account
D) The person handling the cash should also prepare the bank reconciliation
Which of the following is not one of the criteria fro revenue recognition?
A) Delivery has occurred or services have been provided
B) Persuasive evidence of an arrangement exists
C) Collectability is certain
D) The seller's price to the buyer is fixed and determinable
Food To Go is a local catering service. Conceptually, when should Food To Go recognize revenue from its catering service?
A) At the date the meals are served
B) At the date the invoice is mailed to the customer
C) At the date the costumer places the order
D) At the date the customer's payment is received
When is revenue from the sale of merchandise normally recognized?
A) When the customer takes possession of the merchandise, if sold for cash, or when payment is received, if sold on credit
B) When the customer pays for the merchandise
C) Either on the date the customer takes possession of the merchandise or the date on which the customer pays
D) When the customer takes possession of the merchandise
What does the phrase, "Revenue is recognized at the point of sale" mean?
A) Revenue is recorded in the accounting records when the cash is received from a customer and reported on the income statement when sold to the customer
B) Revenue is recorded in the accounting records and reported on the income statement when goods are sold and delivered to the customer
C) Revenue is recorded in the accounting records when the goods are sold to a customer and reported on the income statement when the cash payment is received from the customer
D) Revenue is recorded in the accounting records and reported on the income statement when the cash is received from the customer
On August 3, 2013, Montana Corporation signed a 4-year contract to provide services for Minefield Company at 30,000 per year. Minefield will pay for each year of services on the first day of each service year, starting with September 1, 2013. Using the accrual basis of accounting, when should Montana recognize revenue?
A) On the first day of each year when the cash is received
B) Equally throughout the year as services are provided
C) On the last day of each year after the services have been provided
D) Only at the end of the entire contract
Under the gross method, the seller records discounts taken by the buyer...
A) At the time of sale
B) At the end of the period in question
C) Never; discounts are irrelevant under the gross method
D) In a contra-revenue account
Which of the following statements concerning internal control procedures for merchandise sales is not correct?
A) A sale and its associated receivable are recorded only when the order, shipping, and billing documents are all present
B) Shipping and billing documents are prepared based on the order document
C) Accounting for a sale begins with the receipt of a purchase order or some similar document from a customer
D) The order document is not necessary for the buyer to be obligated to accept and pay for the ordered goods
All of the following are ways in which receivables are commonly distinguished except...
A) Collectible or uncollectible
B) Trade or nontrade receivable
C) Current or noncurrent
D) Accounts or notes receivable
Which one of the following best describes the allowance for doubtful accounts?
A) Cash flow account
B) Income statement account
D) Liability account
If a company uses the direct write-off method of accounting for bad debts,...
A) It will report accounts receivable on the balance sheet at their net realizable value
B) It is applying the matching principle
C) It will reduce the Accounts Receivable account at the end of the accounting period for estimated uncollectible accounts
D) It will record bad debt expense only when an account is determined to be uncollectible
Which of the following best describes the objective of estimating bad debt expense with the percentage of credit sales method?
A) To estimate the amount of bad debt expense based on an aging of accounts receivable
B) To determine the amount of uncollectible accounts during a given period
C) To estimate bad debt expense based on a percentage of credit sales made during the period
D) To facilitate the use of the direct write-off method
Which of the following best describes the concept of the aging method of receivables?
A) An accurate estimate of bad debt expense may be arrived at by multiplying historical bad debt rates by the amount of credit sales made during a period
B) The precise amount of bad debt expense may be arrived at by multiplying historical bad debt rates by the amount of credit sales made during a period
C) Estimating the appropriate balance for the allowance for doubtful accounts results in the appropriate value for net accounts receivable on the balance sheet
D) Accounts receivable should be directly written off when the due date arrives and the customers have not paid the bill
The aging method is closely related to the...
A) Income statement
B) Balance sheet
C) Statement of cash flows
D) Statement of retained earnings
The percentage of credit sales approach is closely related to the...
A) Income statement
B) Balance Sheet
C) Statement of cash flows
D) Statement of retained earnings
The process by which firms package factored receivables as financial instruments on securities and sell them to investors is known as...
A) Credit expansion
C) Aging of accounts receivable
Which one of the following statements is true if a company's collection period for accounts receivable is unacceptably long?
A) Cash flows from operations may be higher than expected for the company's sales
B) The company may offer trade discounts to lengthen the collection period
C) The company should expand operations with its excess cash
D) The company may need to borrow to acquire operating cash
Zenephia Corp. accepted a 9-month note receivable from a customer on October 1, 2013. If Zenephia has an accounting period which ends on December 31, 2013, when would it most likely recognize interest income from the note?
A) December 31, 2013 and June 30, 2014
B) October 1, 2014
C) December 31, 2013, only
D) June 30, 2014, only
The "principal" of a note receivable refers to...
A) The amount of interest due
B) The amount of cash borrowed
C) The present value of the note
D) The financing company that is lending the money
Net profit margin is calculated by...
A) Dividing operating income by (net) sales
B) Subtracting operating income from (net) sales
C) Dividing net income by (net) sales
D) Subtracting net income from (net) sales
If the shipping terms are F.O.B shipping point, ownership of the inventory passes from the buyer to the seller at the shipping point. True or False?
- Correct Answer: the shipping terms are F.O.B. shipping point, ownership of the inventory passes from the seller to the buyer
Under F.O.B. shipping point terms, the buyer normally pays the transportation costs, commonly termed freight-in. These costs are considered part of the total cost of purchases and the inventory account is increased. The seller would normally recognize revenue at the time of the shipment. True or False?
The process of F.OB. Shipping Point is Ownership passes from the seller to the buyer when the goods are shipped. Next, Seller recognizes revenue at shipment. Then, Buyer usually pays freight costs. True or False?
- Correct Answer: Ownership passes from the seller to the buyer when the goods are shipped. Next, buyer usually pays freight costs (a process called freight-in). Then, seller recognizes revenue at the shipment.
If purchase price increases then FIFO produces highest ending inventory, lowest cost of goods sold, and highest income. While LIFO produces lowest ending inventory, highest cost of goods sold, and lowest income. True or False?
If purchase price decreases then FIFO produces highest ending inventory, lowest cost of goods sold, and highest income. While LIFO produces lowest ending inventory, highest cost of goods sold, and lowest income. True or False?
- Correct Answer: If purchase price decreases then FIFO produces lowest ending inventory, highest cost of goods sold, and lowest income. While LIFO produces highest ending inventory, lowest cost of goods sold, and highest income.
If the inventory is understated then in the current period the cost of goods sold will be overstated, net income understated, and total assets understated. While the next period, inventory is correct, cost of goods sold understated, net income overstated, and total assets correct. True or False?
If the inventory is overstated then the current period cost of goods sold will be overstated, net income overstated, and total assets understated. While the next period inventory is correct, cost of goods sold understated, net income understated, and total assets correct. True or False?
- Correct Answer: If inventory is overstated then the current period cost of goods sold understated, net income overstated, and total assets overstated. While in the next period, the inventory is correct, cost of goods sold is overstated, net income understated, and total assets correct.
Which of the following transactions would not result in an entry to the inventory account in the buyer's accounting records under a perpetual inventory system?
A) Purchase of merchandise on credit
B) Return of merchandise to the supplier
C) Payment of a credit purchase of merchandise within the discount period
D) Payment of freight by the seller for goods received from a supplier
Which of the following transactions would not result in an adjustment to the inventory account under a perpetual inventory system?
A) Sale of merchandise for cash
B) Sale of merchandise on credit
C) Receipt of payment from a customer within discount period
D) Return of merchandise by a customer
When purchase prices are rising, which of the following statements is true?
A) LIFO produces a higher cost of goods sold than FIFO
B) LIFO produces a higher cost for ending inventory than FIFO
C) FIFO produces a lower amount for net income than LIFO
D) Average cost produces a high net income than FIFO or LIFO
Which of the following statements regarding the lower of cost or market (LCM) rule is true?
A) The LCM rule is an application of the historical cost principle
B) When the replacement cost of inventory drops below the historical cost of inventory
C) If a company uses the LCM rule, there is no need to use a cost flow assumption such as FIFO, LIFO, or average cost
D) When the market value of inventory is above the historical cost of inventory, an adjustment is made to increase inventory to its market value and increase income
Which of the following statements is true with regard to the gross profit ratio?
1. An increase in the cost of goods sold would increase the gross profit rate (assuming sales remain constant).
2. An increase in the gross profit rate may indicate that a company is efficiently managing its inventory.
3. An increase in selling expenses would lower the gross profit rate.
C) 1 and 2
D) 2 and 3
An increasing inventory turnover ratio indicates that a company:
A) Has reduced the time it takes to purchase and sell inventory
B) Is having trouble selling its inventory
C) May be holding too much inventory
D) Has sold inventory at a higher profit
Ignoring taxes, if a company understates its ending inventory by $10,000 in the current year:
A) Assets for the current year will be overstated by $10,000
B) Net income for the subsequent year will be overstated by $10,000
C) Cost of goods sold for the current year will be understated by $10,000
D) Retained earnings for the current year will be unaffected
Which of the following statements is true for a company that uses a periodic system inventory system?
A) The purchase of inventory requires a debit to Inventory
B) The return of defective inventory requires a debit to debit to Purchase Returns and Allowances
C) The payment of a purchase within a discount period requires a credit to Purchase Discounts
D) Any amounts paid for freight are debited to Inventory
In this system, balances for inventory and cost of goods sold are continually updated with each sale or purchase of inventory. This system records both the revenue and cost side of sales transactions. This system also keeps an up-to-date record of both ending inventory and cost of goods sold at any point in time.
Perpetual Inventory System
In this system, does not require companies to keep detailed, up-to-date inventory records. Instead, this system records the cost of purchases as they occur (in an account separate from the inventory account), take a physical count of inventory at the end of the period, and applies the cost of goods sold. Thus, this system only produces balances for ending inventory and cost of goods sold at the end of each accounting period.
Periodic Inventory System