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  • Bank reconciliation

    Matching the balance of cash in the bank account with the balance of cash in the company's own records. (If you have your own checking account, you know that the balance of cash in your checkbook often does not equal the balance of cash in your bank account.)

    Cash

    Currency, coins, balances in savings and checking accounts, items acceptable for deposit in these accounts (such as checks received from customers), and cash equivalents

    Cash equivalents

    Short-term investments that have a maturity date no longer than 3 months from the date of purchase. Common examples of such investments are money market funds, Treasury bills, and certificates of deposit.

    Earnings quality

    The ability of net income to help predict future performance of the company

    Free cash flow

    Operating cash flows plus investing cash flows during the period

    Occupational fraud

    The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources

    In response to the corporate accounting scandals and to public outrage over seemingly widespread unethical behavior of top executives such as Enron and WorldCom, Congress passed the...

    Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX.

    SOX established what company?

    Public Company Accounting Oversight Board (PCAOB),

    The PCAOB has the authority to...

    has the authority to establish standards dealing with auditing, quality control, ethics, independence, and other activities relating to the preparation of audited financial reports.

    SOX also made it unlawful for the auditors of public companies to perform

    certain non-audit services, such as consulting, for their clients.

    Auditors must retain all work papers for...

    7 years or face a prison term for willful violation.

    The provision of auditor rotation meant ...

    that the lead auditor in charge of auditing a particular company must rotate off that company within five years and allow a new audit partner to take the lead.

    To address conflicts of interest issues, audit firms are not allowed to ...

    audit public companies whose chief executives worked for the audit firm and participated in that company's audit during the preceding year.

    SOX also required audit firms to be hired by the...

    audit committee of the Board of Directors of the company, not by company management.

    Section 404 requires company management and auditors to document and assess the effectiveness of a company's ..

    Internal Controls

    Internal controls

    A company's plans to (1) safeguard the company's assets and (2) improve the accuracy and reliability of accounting information

    The corporate form of business is an entity separate from its owners. This means that corporate executives need not personally certify the company's financial statements and financial disclosures.

    True
    False

    False, Think of responsibilities of executives after the passing of the Sarbanes-Oxley Act.

    According to the provisions of the Sarbanes-Oxley Act, audit firms are not allowed to audit public companies whose chief executives worked for the audit firm and participated in that company's audit during the preceding year.

    True
    False

    True

    Five key components to an internal control system are ...

    control environment, risk assessment, control activities, monitoring, and information and communication.

    The control environment ...

    sets the overall ethical tone of the company with respect to internal control.

    Risk assessment ...

    identifies and analyzes internal and external risk factors that could prevent a company's objectives from being achieved.

    Give an example of Risk Assesment in a movie theator. Give internal risks and external risks.

    Internal risks for the theatre include issues such as unsafe lighting, faulty video projectors, unsanitary bathrooms, and employee incompetence with regard to food preparation. Common examples of external risks include a vendor supplying lower-grade or unsafe popcorn, moviegoers' security in the parking lot, or perhaps the decline in customer demand from DVD rentals or On Demand at home.

    Control activities are the..

    policies and procedures that help ensure that management's directives are being carried out. These activities include authorizations, reconciliations, and separation of duties.

    Separation of duties

    Authorizing transactions, recording transactions, and maintaining control of the related assets should be separated among employees

    What are the two types of control activities?

    preventive and detective

    What are Physical Controls

    The company should maintain security over assets and accounting records.

    What are reconciliations

    Management should periodically determine whether the amounts of physical assets of the company match the accounting records.

    What is employee management

    The company should provide employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties.

    What are performance reviews

    The actual performance of individuals or processes should be checked against their expected performance.

    what is separation of duties

    Authorizing transactions, recording transactions, and maintaining control of the related assets should be separated among employees.

    What is proper authorization

    To prevent improper use of the company's resources, only certain employees are allowed to carry out certain business activities.

    Preventive controls are designed to..

    keep errors or fraud from occurring in the first place. These include separation of duties, physical controls over assets and accounting records, proper authorization to prevent improper use of the company's resources, and employee management.

    Detective controls are designed to..

    detect errors or fraud that already have occurred. These include reconciliations and performance reviews.

    Monitoring includes..

    formal procedures for reporting control deficiencies. Monitoring of internal controls needs to occur on an ongoing basis. For instance, a movie theater manager should compare daily cash from sales with the number of tickets issued, compare concession sales with units purchased, and make sure employees are paid only for actual hours worked.

    Information and communication depend on..

    the reliability of the accounting information system itself. If the accountant's office has papers scattered everywhere, and you learn the company still does all its accounting by hand without a computer, wouldn't you, as an investor or lender, be a bit worried?
    Example:an anonymous tip hotline should be in place to encourage communication about unethical activities, such as an employee giving concession items free to her friends.

    The CEO and CFO sign a report each year assessing ..

    whether the internal controls are adequate.

    Internal control systems are especially susceptible to ..

    Collusion

    Collusion

    Two+ people acting in coordination to circumvent internal controls.

    What is an example of Collusion?

    If the cashier and the accountant in a firm decide to work together to steal cash, theft will be much more difficult to detect.

    Which of the following is an example of a detective control in a company?

    Accounting personnel routinely reconciles the company's cash records with those of its bank to identify discrepancies.

    Only senior managers are authorized to make purchases over a certain amount.

    Electronic records are backed up daily, and require user-ID and password for access.

    Concession supplies are kept in a locked room with access allowed only to authorized personnel.

    Accounting personnel routinely reconciles the company's cash records with those of its bank to identify discrepancies. (Bank reconciliation is an example of a detective control.)

    Which of the following is an example of a preventive control in a company?

    The management evaluates the overall performance by comparing sales for the current year with sales for the previous year.

    Employees responsible for making cash disbursements are not in charge of cash receipts.

    Management periodically determines whether the amount of physical assets of the company match the accounting records.

    Actual performance of individuals are routinely checked against their expected performance.

    Employees responsible for making cash disbursements are not in charge of cash receipts. ( Preventive controls are designed to keep errors or fraud from occurring in the first place.)

    Among all of the company's assets, what is the most susceptible to employee fraud?

    Cash

    What provides control by reducing employees' need to directly handle cash?

    Acceptance of Credit Cards

    Suppose an electronic services store accepts MasterCard as payment for $5,000 worth of products, and MasterCard charges the store a service fee of 3 percent (or $150 on sales of $5,000). How would the store record this transaction?

    the store records the $5,000 credit card transaction as $4,850 cash received and $150 service fee expense.

    Cash disbursements include..

    disbursing physical cash, writing checks and using credit cards and debit cards to make payments.

    Important elements of a cash disbursement control system include the following steps..(5)

    Make all disbursements, other than small ones, by check, debit card, or credit card.

    Authorize all expenditures before purchase and verify the accuracy of the purchase itself.

    Make sure checks are serially numbered and signed only by authorized employees. Require two signatures for larger checks.

    Periodically check amounts shown in the debit card and credit card statements against purchase receipts.

    Make sure that duties are separated. Employees responsible for making cash disbursements should not also be in charge of cash receipts.

    A furniture store accepts MasterCard as payment for $1,000 worth of furniture. MasterCard charges a service fee of 2 percent. Which of the following would be recorded by the store?

    Debit $20 to Service Fee Expense
    Debit $1,000 to Cash
    Credit $980 to Service Revenue
    Credit $980 to Cash

    Debit $20 to Service Fee Expense

    Recording revenue is similar for debit card transactions and credit card transactions.

    True
    False

    True, From a store's perspective, think of similarities between debit cards and credit cards.

    Which account would be credited when a firm pays for supplies using a credit card?

    Notes Payable
    Cash
    Service Fee Expense
    Accounts Payable

    Accounts Payable

    Which of the following is a good internal control mechanism for cash disbursements?

    Maximum purchase limits set on debit and credit cards.
    (Think about authorization for all purchases and use of credit and debit cards.)

    Reconciling the bank account involves what three steps?

    reconciling the bank's cash balance, reconciling the company's cash balance, and adjusting the company's cash balance.

    What errors should you catch in the steps of reconciling the bank account?

    In the first two steps, we should catch timing differences as well as errors made by either the company or the bank. In the third step, we update the company's accounting records for cash transactions that have occurred but have not yet been recorded.

    Deposits outstanding

    Cash receipts of the company that have not been added to the bank's record of the company's balance

    Checks outstanding

    Checks the company has written that have not been subtracted from the bank's record of the company's balance

    What are some examples of cash transactions recorded by a bank but not yet recorded by the company?

    These include items such as interest earned by the company, collections made by the bank on the company's behalf, service fees, and charges for NSF checks.

    NSF Checks

    Checks drawn on nonsufficient funds, or "bad" checks from customers

    A chocolate store pays its supplier $800 by check. The company records a decrease in cash immediately, but the bank doesn't record a decrease in cash until the supplier later deposits the check. This gives rise to a(n) __________.
    Timing difference or error

    Timing Difference

    A company records a daily deposit of $1,000, but an employee deposits only $100 into the bank account and pockets the rest. This is an example of a(n) __________.
    Timing Difference or error

    Error

    A customer paid $250 using a check for purchases made in the first week of January. The bank statement received at the end of the month showed that this was an NSF check. The entry needed to adjust this in the company's cash balance for reconciliation will include a credit to __________.
    Cash for $250 or Accounts Recievable for $250

    Cash for 250 (Think of the asset account that the company would have increased earlier, when it recieved the check.)

    __________ could decrease a bank's cash balance during the reconciliation process.
    Debit Outstanding or Outstanding Check

    Outstanding Check (After a bank recieves the checks outstanding, the banks cash balance will decrease.)

    Petty cash fund

    Small amount of cash kept on hand to pay for minor purchases

    Accounting for the petty cash fund involves..

    recording transactions to establish the fund, recognize expenditures from the fund, and replenish the fund as the cash balance becomes sufficiently low.

    The management establishes a petty cash fund by writing a check for ..

    cash against the company's checking account and putting that amount of withdrawn cash in the hands of an employee who becomes responsible for it.

    The fund should have just enough cash to make minor expenditures over a reasonable period, such as ..

    A week or Month

    To pay for minor purchases, companies keep some cash on hand in a petty cash fund. At the end of the period, expenditures from the petty cash fund are recorded with a debit to Miscellaneous Expense and a credit to Cash, and the fund is replenished.

    True
    False

    False, Think about the requirement for appropriate documentation.

    Recording the establishment of a petty cash account will include _____.

    a debit to Accounts Payable
    a credit to Petty Cash
    a debit to Miscellaneous Expense
    a credit to Cash

    A credit to Cash (Recording the establishment of a petty cash account will include a debit to the Petty Cash account and a credit to Cash.)

    Recording expenditures from the petty cash fund will involve a credit to the Petty Cash account.

    True
    False

    True, We need to reduce the balance in the petty cash account to recognize expenditures.

    Recording the replenishment of the petty fund cash fund will involve a debit to the Cash account.

    True
    False

    False, The journal entry is similar to the one required to establish a petty cash fund.

    Halle's Berry Farm establishes a $560 petty cash fund on September 4 to pay for minor cash expenditures. The fund is replenished at the end of each month. At the end of September, the fund contains $233 in cash and the following receipts:


    Office party decorations $ 75
    Lawn maintenance $116
    Postage $62
    Fuel for delivery $74

    Record the establishment of the petty cash fund on September 4, the expenditures made during the month, and the replenishment of the fund on September 30. (Omit the "$" sign in your response.)

    Information for next Problem

    Prepare a bank reconciliation for Oscar's checking account on February 29, 2012. (Amounts to be deducted should be indicated with a minus sign. Omit the "$" sign in your response.)

    Record the necessary cash adjustments.

    last one is credit cash 2458

    Separation of duties refers to..

    Making each manager personally responsible for his/her department.

    Keeping functions across different departments separate.

    Preventing top management and lower-level employees from interacting.

    Individuals who have physical responsibility for assets should not also have access to accounting records.

    Individuals who have physical responsibility for assets should not also have access to accounting records.

    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:

    Debit Cash for $200.
    Credit Service Revenue for $194.
    Debit Service Fee Expense for $6.
    Credit Service Revenue for $206.

    Debit Service Fee Expense for $6.

    After preparing the bank reconciliation, an NSF check would result in which of the following when recording the adjustment to the company's cash balance?

    Debit to Service Fee Expense.
    Credit to Accounts Payable.
    Credit to Service Revenue.
    Debit to Accounts Receivable.

    Debit to Accounts Receivable.

    At the time a $400 petty cash fund is being replenished, the company's accountant finds vouchers totaling $350 and petty cash of $50. The vouchers include: postage, $100; business lunches, $150; delivery fees, $75; and office supplies, $25. Which of the following is not recorded when recognizing expenditures from the petty cash fund?

    Debit Postage Expense, $100.
    Debit Supplies, $25.
    Credit Petty Cash, $350.
    Debit Petty Cash, $350.

    Debit Petty Cash, $350.

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