Chapter 4 Quiz

1. What is a direct purpose of internal controls?

1. To help managers determine which projects are likely to be more profitable.
2. To minimize tax payments to the Internal Revenue Service (IRS).
3. To improve the accuracy and reliability of accounting information.
4. To assist top executives in planning employment capacity.

 

2. Sarbanes-Oxley Act (SOX) was passed in response to:

1. Increasing inflation.
2. The establishment of the Securities and Exchange Commission (SEC).
3. Increasing pressure of foreign competition for American products and services.
4. Corporate scandals involving unethical behavior of top executives.

 

3. Employee purchases of supplies with a company-issued credit card is typically recorded with a credit to

1. Accounts Payable.
2. Cash.
3. Supplies.
4. Supplies Expense.

 

4. Who is ultimately responsible for the establishment and success of a company’s internal control system?

1. The company’s external auditors.
2. The company’s board of directors.
3. The company’s stockholders.
4. The company’s top executives.

 

5. Which of the following adjusts the company’s balance of cash in a bank reconciliation?

1. Deposits outstanding.
2. Checks outstanding.
3. Interest earned.
4. An error by the bank.

 

6. What is the concept behind separation of duties in establishing internal control?

1. The external auditors of the company should have no contact with managers while the audit is taking place.
2. The company’s financial accountant should not share information with the company’s tax accountant.
3. Employee fraud is less likely to occur when access to assets and access to accounting records are separated.
4. Duties of middle-level managers of the company should be clearly separated from those of top executives.

 

7. When employee expenditures with company-issued credit cards are recorded:

1. Cash is debited.
2. Accounts Payable is credited.
3. Retained Earnings is debited.
4. Expenses are credited.

 

8.  Which of the following is considered cash for financial reporting purposes?

1. Amounts held in checking accounts.
2. Prepaid insurance.
3. Investments in a 6-month Certificate of Deposit.
4. Credit card purchases.

 

9. Consistent with the COSO framework, an effective internal control system includes the control environment. The control environment refers to:

1. The reliability of financial information.
2. The risk of failing to achieve company objectives.
3. Accountability through separation of duties.
4. The ethical tone set by top management.

 

10. Effective internal control over cash includes the requirement that:

1. The person who makes deposits should NOT record the deposits.
2. Only checks are used for payment of purchases.
3. The same person who makes deposits should also record the deposits.
4. Only checks are used for payment of purchases and the same person who makes deposits should also record the deposits.

 

11. At the end of the previous year, a company’s balance sheet reports cash of $30,000. For the current year, the company’s statement of cash flows reports operating cash inflows of $90,000; investing outflows of $110,000; and financing inflows of $40,000. What amount of cash will be reported in the current year’s balance sheet?

1. $50,000.
2. $20,000.
3. $90,000.
4. $120,000.

 

12. Investing cash flows would include which of the following?

1. Payment of dividends to stockholders.
2. Cash sales to customers.
3. Payment for advertising.
4. Payment for land.
5. Bottom of Form

 

13. The primary reason the balance of cash in the company’s records will differ from the balance of cash in the bank’s records includes:

1. Accounting errors made by the company.
2. Timing differences of recording cash transactions by the company and by the bank.
3. Accounting errors made by the bank.
4. Cash theft by the company’s employees.

 

14. Fraudulent reporting by management could include

1. Mismatching revenues and expenses.
2. All of the answer choices are correct.
3. Improper asset valuation.
4. Fictitious revenues from a fake customer.

 

15. Which of the following adjusts the bank’s balance of cash in a bank reconciliation?

1. An error by the company.
2. NSF checks.
3. Service fees.
4. Checks outstanding.

 

16. Which of the following generally would not be considered good internal control of cash receipts?

1. Allowing customers to pay with a debit card.
2. Allowing customers to pay with a credit card.
3. Requiring the employee receiving the cash from the customer to also deposit the cash into the company’s bank account.
4. Recording cash receipts as soon as they are received.

 

17. Section 404 of the Sarbanes-Oxley Act requires companies to:

1. Provide financial statements.
2. File their tax return with the Internal Revenue Service.
3. Document and assess internal controls.
4. Provide healthcare for employees.

 

18. A company’s petty cash refers to:

1. Cash used to pay employee salaries.
2. Cash held in the bank.
3. Investment in short-term securities.
4. Cash on hand to pay for minor purchases.

 

19. When preparing a bank reconciliation, nonsufficient funds (NSF) checks would be:

1. Subtracted from the bank’s cash balance.
2. Added to the company’s cash balance.
3. Added to the bank’s cash balance.
4. Subtracted from the company’s cash balance.

 

20. Which of the following adjusts the bank’s balance of cash in a bank reconciliation?

1. Bank service fees.
2. Interest on bank deposit.
3. Deposits outstanding.
4. NSF check.

 

21. When preparing a bank reconciliation, outstanding checks would be:

1. Added to the company’s cash balance.
2. Subtracted from the bank’s cash balance.
3. Added to the bank’s cash balance.
4. Subtracted from the company’s cash balance.

 

22. Which of the following is considered cash for financial reporting purposes?

1. Accounts payable.
2. Accounts receivable.
3. Checks received from customers.
4. Investments with maturity dates greater than three months.

 

23. At any given time, the amount of cash in the petty cash fund should equal:

1. All vouchers written during the accounting period.
2. The amount of cash withdrawn from the fund during the accounting period.
3. The amount of cash used to establish the fund.
4. The established balance of the fund less all vouchers written during the accounting period.

 

24. A company’s ratio of cash to noncash assets provides some indication of the company’s ability to:

1. Maintain normal operations.
2. Respond quickly to new opportunities.
3. Prevent bankruptcy.
4. All of the choices are correct.

 

25. Which of the following generally would be considered good internal control of cash disbursements?

1. The employee responsible for making cash disbursements should be in charge of cash receipts.
2. Set maximum purchase limits on debit cards and credit cards.
3. The employee who authorizes payments should also prepare the check.
4. Make all cash disbursements using cash rather than debit cards or credit cards.

 

26. Operating cash flows would include which of the following?

1. Payment for a new operating equipment.
2. Payment for employee salaries.
3. Repayment of borrowed money.
4. Services provided to customers on account.

 

27. The Sarbanes-Oxley Act (SOX) mandates which of the following?

1. All of the answer choices are correct.
2. Increased regulations related to auditor–client relations.
3. Increased regulations related to corporate executive accountability.
4. Increased regulations related to internal control.

 

28. Which of the following is considered cash for financial reporting purposes?

1. Debit card sales.
2. All of the choices are correct.
3. Checks received from customers.
4. Coins and currency.

 

29. Operating cash flows include which of the following?

1. Cash paid for supplies.
2. Cash received from the sale of a used company truck.
3. Cash received from the issuance of common stock.
4. Cash received from a bank loan.

 

30. Financing cash flows would include which of the following?

1. Repayment of long-term borrowing to the bank.
2. Payment of salaries to employees.
3. Sale of services to customers for cash.
4. Purchase of equipment for cash for company operations.

 

31. Which of the following is considered cash for financial reporting purposes?

1. Balances in savings accounts.
2. Inventory that is likely to be sold within three months.
3. Amounts to be collected from customers.
4. Amounts owed to suppliers.

 

32. Financing cash flows include which of the following?

1. Cash received from the issuance of common stock.
2. Cash received from the sale of a used company truck.
3. Cash paid for supplies.
4. Cash received from a customer.

 

33. In response to widespread fraudulent reporting in the late 1990’s and early 2000’s, Congress:

1. Organized the Internal Revenue Service.
2. Passed the Sarbanes-Oxley Act.
3. Enacted the Securities and Exchange Commission.
4. Established the Financial Accounting Standards Board.

 

34. The Sarbanes-Oxley Act of 2002 applies to all companies that:

1. File their tax return with the Internal Revenue Service.
2. Use either cash or accrual- basis accounting.
3. File reports with the Securities and Exchange Commission.
4. Use accrual-basis accounting.

 

35. The purpose of a petty cash fund is to

1. Provide cash on hand for minor expenditures.
2. Provide a convenient form of payment for the company’s customers.
3. Allow the company to save cash for major future purchases.
4. Pay employee salaries at the end of each period.

 

36. Managers should act:

1. As stewards of the company’s assets.
2. In their own best interest.
3. As owners of the company.
4. As creditors of the company.

 

37. Which of the following generally would be considered a good internal control over cash payments?

1. The employee who authorizes payment should also be the employee who prepares the check.
2. Ensure checks are serially numbered and signed only by authorized employees.
3. Employees responsible for making cash disbursements should also be in charge of cash receipts.
4. Require only one signature for larger checks.

 

38. Which of the following is an example of detective controls?

1. The company should establish formal guidelines to handle cash receipts and make purchases.
2. Management periodically determines whether the amount of physical assets agree with the accounting records.
3. Important documents should be kept in a safe place, and electronic files should be backed up regularly.
4. Employees should be made aware of the company’s internal control policies.

 

39. Operating cash flows would include which of the following?

1. Receipt of cash from selling a building.
2. Payment for prepaid insurance.
3. Receipt of cash from bank borrowing.
4. Payment of dividends to stockholders.

 

40. Which of the following adjusts the company’s balance of cash in a bank reconciliation?

1. Checks outstanding.
2. An error by the bank.
3. Deposits outstanding.
4. Interest on bank deposit.

 

41. Corporate executive accountability under the Sarbanes-Oxley Act requires corporate executives to:

1. Work more than 40 hours per week.
2. Be compensated only when the company is profitable.
3. Personally certify the company’s financial statements.
4. Hire an independent auditor.

 

42. Investing cash flows include which of the following?

1. Cash received from the sale of a used company truck.
2. Cash received from the issuance of common stock.
3. Cash received from a customer.
4. Cash paid for supplies.

 

Chapter 4 Quiz Answer

1. C. To improve the accuracy and reliability of accounting information.

2. D. Corporate scandals involving unethical behavior of top executives.