Chapter 4

Financial Accounting

Business
356
Questions
110
True/False
138
Choices
108
Essay
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Questions

Q1
Free

Managers of the company act as stewards or caretakers of the company's assets.

True/False
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A) True.
B) False.
Answer:
True
Q2
Free

Common types of financial statement fraud include creating fictitious revenues from a fake customer, improperly valuing assets, and mismatching revenues and expenses.

True/False
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A) True.
B) False.
Answer:
True
Q3
Free

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
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A) True.
B) False.
Answer:
True
Q4

The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles.

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A) True.
B) False.
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Q5

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.

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A) True.
B) False.
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Q6

Auditors of public companies can perform the full range of audit and nonaudit consulting services for their audit clients.

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A) True.
B) False.
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Q7

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.

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A) True.
B) False.
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Q8

Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets.

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A) True.
B) False.
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Q9

One benefit of internal control is greater reliance by investors on reported financial statements.

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A) True.
B) False.
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Q10

A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB).

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A) True.
B) False.
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Q11

The control environment refers to the overall top-to-bottom attitude of the company with respect to internal controls.

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A) True.
B) False.
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Q12

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.

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A) True.
B) False.
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Q13

Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the same client.

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A) True.
B) False.
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Q14

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.

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B) False.
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Q15

The internal control component of information and communication relates to the effectiveness of accurately measuring and communicating business transactions.

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B) False.
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Q16

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.

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B) False.
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Q17

Separation of duties occurs when two or more people act in coordination to circumvent internal controls.

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B) False.
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Q18

Effective internal controls ensure a company's success and survival.

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B) False.
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Q19

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.

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B) False.
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Q20

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.

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A) True.
B) False.
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Q21

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.

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A) True.
B) False.
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Q22

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.

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B) False.
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Q23

Common examples of cash equivalents are money market funds, Treasury bills, and certificates of deposit.

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A) True.
B) False.
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Q24

Recording all cash receipts as soon as possible is considered a good internal control.

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B) False.
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Q25

Opening mail and making a list of checks received once per week is considered a good internal control over cash receipts.

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B) False.
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Q26

Whether a customer uses cash, a check, or a debit card to make a purchase, the company records the transaction as a cash sale.

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B) False.
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Q27

When customers pay for services with a check, the company should debit Accounts Receivable and credit Service Revenue.

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A) True.
B) False.
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Q28

When customers pay for services with a debit card, the company should debit Cash and credit Service Revenue.

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A) True.
B) False.
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Q29

When a company pays for services received using a check, it should credit Accounts Payable until the check is paid by the bank.

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A) True.
B) False.
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Q30

When a company pays for services received using a credit card, it should credit Accounts Payable.

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A) True.
B) False.
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Q31

Allowing the employee who authorizes purchases to also prepare the check is an example of good internal control.

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A) True.
B) False.
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Q32

Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls.

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A) True.
B) False.
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Q33

A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company's own records.

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A) True.
B) False.
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Q34

Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors.

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A) True.
B) False.
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Q35

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.

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A) True.
B) False.
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Q36

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.

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A) True.
B) False.
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Q37

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

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A) True.
B) False.
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Q38

A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance.

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B) False.
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Q39

A check outstanding will cause the bank's cash balance to be higher than the company's cash balance.

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B) False.
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Q40

An NSF check is an example of a cash transaction that is initially recorded by the bank and later by the company after notification.

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A) True.
B) False.
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Q41

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.

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A) True.
B) False.
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Q42

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.

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B) False.
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Q43

The petty cash fund represents cash on hand and is used to pay for minor purchases.

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A) True.
B) False.
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Q44

The petty cash fund should have just enough cash to make minor expenditures over a reasonable period (such as a week or a month).

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A) True.
B) False.
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Q45

A company's cash is reported in two financial statements - income statement and statement of cash flows.

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A) True.
B) False.
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Q46

Cash is typically reported as a current asset in the balance sheet.

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A) True.
B) False.
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Q47

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.

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A) True.
B) False.
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Q48

Investing activities include cash transactions involving revenue and expense events during the period.

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A) True.
B) False.
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Q49

Investing activities include cash investments in long-term assets and investment securities.

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A) True.
B) False.
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Q50

Investing activities include transactions designed to raise cash or finance the business.

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A) True.
B) False.
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Q51

Only transactions involving cash affect a company's cash flows.

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A) True.
B) False.
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Q52

A company's operating cash inflows less operating cash outflows generally equals the reported amount of net income in the income statement.

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A) True.
B) False.
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Q53

Earnings quality is the ability of net income to report the true underlying performance of the company.

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B) False.
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Q54

A company's free cash flows equal operating cash flows plus financing cash flows during the period.

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B) False.
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Q55

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.

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A) True.
B) False.
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Q56

What key piece of legislation was passed in response to corporate accounting scandals by Enron, WorldCom, and others?

Multiple Choice
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A) Sarbanes-Oxley Act
B) 1933 Securities Act
C) 1934 Securities Exchange Act
D) Regulation Fair Disclosure
Answer:

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Q57

Which of the following does not represent a major provision of the Sarbanes-Oxley Act?

Multiple Choice
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A) Nonaudit services
B) Quarterly financial statements
C) Auditor rotation
D) Corporate executive accountability
Answer:

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Q58

Under the provisions of the Sarbanes-Oxley Act, corporate executives:

Multiple Choice
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A) Have limited responsibility for financial statements
B) Must personally prepare the company's financial statements
C) Must personally certify the company's financial statements
D) Are not allowed to view the company's financial statements
Answer:

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Q59

Under the provisions of the Sarbanes-Oxley Act, auditors must do which of the following?

Multiple Choice
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A) Provide nonaudit services for their clients
B) Audit public companies whose chief executives worked for the audit firm in the preceding year
C) Be hired by company management
D) Maintain working papers for at least seven years following an audit
Answer:

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Q60

Which of the following is NOT a design feature of effective internal controls?

Multiple Choice
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A) Allow greater reliance by investors on reported financial statements
B) Prevent fraudulent or errant financial reporting
C) Ensure the company's price advantage over competitors
D) Prevent misuse of company funds by employees
Answer:

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Q61

A framework for designing an internal control system is provided by the:

Multiple Choice
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A) Committee of Sponsoring Organizations
B) Financial Accounting Standards Board
C) Securities and Exchange Commission
D) International Accounting Standards Board
Answer:

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Q62

The components of internal control do not directly include:

Multiple Choice
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A) Risk assessment
B) Inflation adjustment
C) Monitoring
D) Control activities
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Q63

Separation of duties refers to:

Multiple Choice
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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
Answer:

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Q64

Which employees have an impact on the operation and effectiveness of internal controls?

Multiple Choice
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A) Upper management
B) Mid-level managers
C) Lower-level employees
D) All employees
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Q65

Cash may not include:

Multiple Choice
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A) Foreign currency
B) Money orders
C) Accounts receivable
D) Undeposited customer checks
Answer:

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Q66

Common examples of cash equivalents include all of the following except:

Multiple Choice
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A) Money market funds
B) Treasury bills
C) Certificates of deposit
D) Accounts receivable
Answer:

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Q67

Which of the following would NOT represent good controls over cash receipts?

Multiple Choice
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A) Record all cash receipts as soon as possible
B) The employee that receives cash and checks should also deposit them in the bank
C) Open mail each day and make a list of checks received with the amount and payer's name
D) Verify cash receipts by comparing the bank deposit slip with the accounting records
Answer:

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Q68

Which of the following would NOT be recorded as a cash sale?

Multiple Choice
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A) Customer who pays with a check
B) Customer who pays with a debit card
C) Customer who pays with a credit card
D) A customers who buys on account
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Q69

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:

Multiple Choice
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A) Debit Cash for $200
B) Credit Service Revenue for $194
C) Debit Service Fee Expense for $6
D) Credit Service Revenue for $206
Answer:

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Q70

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:

Multiple Choice
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A) Debit Accounts Receivable for $2,000
B) Credit Sales Revenue for $2,000
C) Credit Sales Revenue for $1,960
D) Credit Unearned Revenue for $2,000
Answer:

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Q71

Which of the following would NOT represent good controls over cash disbursements?

Multiple Choice
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A) Make all disbursements, other than very small ones, by check, debit card, or credit card
B) Require only one signature for checks, especially larger ones
C) Authorize all expenditures before purchase and verify the accuracy of the purchase itself
D) The employee who authorizes payment should not also be the employee who prepares the check
Answer:

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Q72

Which of the following would NOT represent good controls over cash disbursements?

Multiple Choice
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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
Answer:

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Q73

Which of the following would NOT need to be accounted for in a bank reconciliation?

Multiple Choice
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A) Deposits outstanding recorded by the company but not the bank
B) Interest earned recorded by the bank but not the company
C) NSF checks recorded by the bank but not by the company
D) Checks written by the company and recorded by the bank
Answer:

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Q74

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:

Multiple Choice
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A) $9,860
B) $9,650
C) $10,130
D) $10,410
Answer:

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Q75

Cash transactions recorded by the bank but not yet recorded by the company include all of the following except

Multiple Choice
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A) Service fees
B) Interest earned
C) Checks outstanding
D) NSF checks
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Q76

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?

Multiple Choice
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A) $10,200
B) $7,400
C) $6,200
D) $6,160
Answer:

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Q77

Cash transactions that have been recorded by the company but not the bank include:

Multiple Choice
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A) NSF checks
B) Interest earned
C) Service fees
D) Deposits outstanding
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Q78

Which of the following is NOT a reason why a bank reconciliation is necessary?

Multiple Choice
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A) The company has transactions that the bank has not recorded
B) Petty cash has a low balance
C) The bank has transactions that the company has not recorded
D) Reconciliations provide a control over cash
Answer:

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Q79

Which of the following is correct with respect to a bank reconciliation?

Multiple Choice
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A) Subtract interest earned from the bank's balance
B) Add service charge to the company's balance
C) Subtract NSF checks from the company's balance
D) Add deposits outstanding to the company's balance
Answer:

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Q80

After preparing a bank reconciliation, the collection of a note by the bank on a company's behalf would be recorded with:

Multiple Choice
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A) A credit to Notes Receivable
B) A credit to Cash
C) A debit to Notes Receivable
D) A credit to Accounts Receivable
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Q81

After preparing a bank reconciliation, the service fee charged by the bank would be recorded with:

Multiple Choice
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A) A credit to Service Fees Expense
B) A debit to Cash
C) A credit to Service Fees Revenue
D) A debit to Service Fees Expense
Answer:

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Q82

After preparing a bank reconciliation, a check outstanding for the payment of advertising would be recorded with:

Multiple Choice
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A) A debit to Advertising Expense
B) A debit to Cash
C) A credit to Advertising Expense
D) No entry is needed
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Q83

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?

Multiple Choice
expand_more
A) Deduct checks outstanding; add service charges and deposit outstanding
B) Deduct interest earned; add deposit outstanding
C) Deduct checks outstanding; add deposit outstanding
D) Deduct deposit outstanding; add checks outstanding
Answer:

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Q84

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:

Multiple Choice
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A) $20,700
B) $17,200
C) $18,700
D) $22,200
Answer:

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Q85

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?

Multiple Choice
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A) $20,700
B) $17,200
C) $18,700
D) $22,200
Answer:

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Q86

A minor amount of cash kept on hand to pay for small purchases is referred to as a:

Multiple Choice
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A) Petty cash fund
B) Cash receipts fund
C) Cash payments fund
D) Cookie jar fund
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Q87

Which of the following is NOT involved in the replenishment of the petty cash fund?

Multiple Choice
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A) Transactions related to vouchers will be recorded
B) Management will verify that the total of all vouchers equals the amount of cash missing from the petty cash fund
C) Weekly payroll checks will be recorded
D) Management will withdraw cash from the bank and place it in the petty cash fund
Answer:

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Q88

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?

Multiple Choice
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A) Debit Postage Expense, $100
B) Debit Supplies, $25
C) Credit Petty Cash, $350
D) Debit Petty Cash, $350
Answer:

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Q89

A company's cash balance is reported in which two financial statements?

Multiple Choice
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A) Income statement and statement of cash flows
B) Balance sheet and statement of cash flows
C) Income statement and balance sheet
D) Balance sheet and statement of stockholders' equity
Answer:

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Q90

The statement of cash flows reports cash flows from the activities of:

Multiple Choice
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A) Operating, purchasing, and investing
B) Borrowing, paying, and investing
C) Financing, investing, and operating
D) Using, investing, and financing
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Q91

Operating cash flows would exclude:

Multiple Choice
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A) Payment of employee salaries
B) Receipt of cash from customers
C) Payment of dividends
D) Payment for advertising
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Q92

Cash flows from investing do not include cash flows from:

Multiple Choice
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A) Lending
B) The sale of equipment
C) Borrowing
D) The purchase of a building
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Q93

Cash flows from financing activities include:

Multiple Choice
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A) Lending
B) Salaries paid
C) The sale of land
D) Dividends paid
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Q94

Cash flows from investing activities do not include:

Multiple Choice
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A) Borrowing
B) The purchase of equipment
C) The sale of land
D) The purchase of a building
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Q95

Terastar Corp. reports the following amounts for 2012 and 2013:

Multiple Choice
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A) $3,000
B) $13,000
C) $9,000
D) $7,000
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Q96

Terastar Corp. reports the following amounts for 2012 and 2013.

Multiple Choice
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A) Both are increasing
B) Net income is trending upward and free cash flows are trending downward
C) Both are decreasing
D) Net income is trending downward and free cash flows are trending upward
Answer:

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Q97

A company had the following sales transactions: 1. Total debit card sales = $200,000. 2. Total credit card sales = $400,000. 3. Total cash sales = $800,000. 4. Total check sales = $100,000. There is a charge of 2% on all credit card transactions. Calculate total sales revenue recorded for the year.

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Q98

A company had the following transactions: 1. Paid $150 for office supplies using a debit card. 2. Purchased office equipment costing $700 using a credit card. 3. Paid utilities bill of $400 by issuing a check. Record each transaction.

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Q99

Indicate whether the firm should add or subtract each item below from its

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A company's general ledger shows a cash balance of $4,570. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,840, bank service fees of $110, and interest earned of $15. Calculate the correct balance of cash.

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A company's general ledger shows a cash balance of $2,380. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as deposits outstanding of $1,760, note collected by the bank on the company's behalf of $1,000, and interest earned of $20. The company also finds an error by the bank of an additional deposit of $100. Calculate the correct balance of cash.

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A company's bank statement shows a cash balance of $4,230. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $3,880, deposits outstanding of $1,230, NSF check of $300, and service fee of $50. Calculate the correct balance of cash.

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A company's bank statement shows a cash balance of $4,170. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,110, NSF check of $200, interest earned of $30, service fee of $40, and a check for $150 recorded twice by the company. Calculate the correct balance of cash.

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A company's Cash account shows a balance of $3,450 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as bank service fees ($50), an NSF check from a customer ($300), a customer's note receivable collected by the bank ($1,000), and interest earned ($100). Prepare the necessary entries to adjust the balance of cash.

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A company's Cash account shows a balance of $5,680 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as deposits outstanding ($1,250), checks outstanding ($2,380), bank service fees ($40), an NSF check from a customer ($150), a customer's note receivable collected by the bank ($500), and interest earned ($60). Prepare the necessary entries to adjust the balance of cash.

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Peterson Company's general ledger shows a cash balance of $7,850 on May 31, 2012. May cash receipts of $1,250, included in the general ledger balance, are placed in the night depository at the bank on May 31 and processed by the bank on June 1. The bank statement dated May 31 shows an NSF check for $200 and a service fee of $50. The bank processes all checks written by the company by May 31 and lists them on the bank statement, except for one check totaling $1,640. The bank statement shows a balance of $7,990 on May 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on May 31, 2012.

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Madison Company's cash ledger reports the following for the month ending March 31, 2012.

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A company establishes a petty cash fund for $400. By the end of the month, employees had made the following expenditures from the fund: supplies, $150; fuel for deliveries, $120; postage, $75; miscellaneous, $35. Record the entry to recognize expenditures from the petty cash fund.

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A company establishes a $300 petty cash fund on August 3 to pay for minor cash expenditures. The fund is replenished at the end of each month. At the end of August, the fund contains $40 in cash and the following receipts:

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A company provides services on account during the current year totaling $400,000. By the end of the year, $350,000 of this amount had been received. In addition, $75,000 was received on account from customers for services provided in the prior year. Determine the amount of operating cash flows the company will report as received from customers in the current year.

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During the current year, a company provides services on account for $100,000. By the end of the year, $60,000 of this amount had been received. In addition, cash payments for the year were employees' salaries, $50,000; office supplies, $10,000; and utilities $20,000. Determine the amount of operating cash flows the company will report in the current year.

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During the current year, a company purchases equipment for $250,000, paying $50,000 immediately and promising to pay the remainder within 30 days after the end of the year. Determine the amount of investing cash flows the company will report in the current year.

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At the beginning of the current year, a company issued stock for $100,000 and borrowed $50,000 from the bank. By the end of the year, the company had provided services of $80,000 for cash, paid employee salaries of $30,000, and paid utilities of $10,000. Determine the amount of financing cash flows the company will report in the current year.

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During the year, a company issues common stock for $50,000 and repays previously borrowed amounts of $75,000. In addition, the company pays dividends of $5,000 to stockholders. Determine the amount of financing cash flows the company will report in the current year.

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Consider the following transactions: 1. Pay employees' salaries. 2. Repay borrowing to the bank. 3. Purchase equipment with note payable. 4. Provide services to customers on account. 5. Pay dividends to stockholders. 6. Collect cash from customers for services provided. 7. Purchase supplies on account. 8. Pay for supplies purchased in transaction 7 above. For each transaction, indicate the type of cash flow involved based on the classifications in the statement of cash flows. If a transaction does not involve cash, write ‘No Cash.'

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A company had the following transactions during the year: 1. Paid rent for the next two years, $8,000. 2. Purchased office supplies on account, $2,400. 3. Purchased equipment, paying $12,000 cash and issuing a note payable for $4,000. 4. Borrowed from the bank, $6,000. 5. Paid employee salaries, $7,200. 6. Paid $2,000 on account related to transaction 2 above. 7. Paid dividends to stockholders, $2,800. 8. Sold land for $10,000 that was purchased in a prior year for $7,500. 9. Collected cash from customers for services provided, $25,700. Calculate cash flows from operating activities, investing activities, and financing activities.

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Below is a summary of all the transactions of Sampson Consulting for the month of April 2012.

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Discuss the events leading up to the passage of the Sarbanes-Oxley Act and its major provisions. 04-119

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What is internal control? Briefly describe the five components of internal control outlined by the Committee of Sponsoring Organizations (COSO). 04-119

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A company uses the following process for its cash receipts. At the end of each day, the secretary places all cash and checks received from customers in a desk drawer. Each Monday, the secretary totals all amounts received, records this in the accounting records, and deposits the money in the bank account. Then, once every three months, the office manager requests information from the bank necessary to prepare a bank reconciliation. Discuss the company's internal control procedures related to cash receipts. 04-119

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Describe the procedures used to reconcile a company's cash balance. 04-119

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What is the purpose of the statement of cash flows? List the three major categories of cash flows and give an example of a cash transaction for each category. 04-119

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What is the link between the balance sheet and the statement of cash flows? Describe the operating, investing, and financing sections of the statement of cash flows. 04-119 Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term by placing the letter designating the term in the space provided. Terms: a. Monitoring b. Oversight board c. Control activities d. Corporate executive accountability e. Nonaudit services f. Control environment g. Internal control h. Information and communication i. Auditor rotation j. Risk assessment

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____ Procedures for maintaining separation of duties.

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____ PCAOB establishes standards related to the preparation of audited financial reports.

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____ Formal policies to evaluate internal and external threats to achieving company objectives.

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____ Audit firm cannot provide a variety of other services to its client, such as consulting.

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____ Management must document the effectiveness of procedures that could affect financial reporting.

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____ Lead audit partners are required to change every five years.

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____ Transfer of data from lower managers to top executives for accurate financial reporting.

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____ Executives must personally certify the financial statements.

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____ Overall attitude of the company with respect to internal controls.

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____ Routine activities that are meant to continually observe internal control activities.

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____ Minor amount of cash kept on hand.

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____ Short-term investments that have a maturity date no longer than three months from the date of purchase.

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____ Matches the balance of cash in the bank account with the balance of cash in the company's own records.

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____ Withdraws funds directly from the user's account at the time of use.

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____ Allows users to purchase items without having to pay cash immediately.

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____ Fees imposed by the bank to the company for providing routine services.

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____ Checks written to the company that are returned by the bank as not having adequate funds.

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____ The company recorded a deposit twice.

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____ Checks written by the company but not yet recorded by the bank.

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____ Cash receipts received by the company but not yet recorded by the bank.

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____ Money earned on the average daily balance of the checking account.

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____ Pay dividends to stockholders.

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____ Pay salaries to employees.

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____ Purchase equipment.

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____ Receive payment from customers.

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____ Issue common stock.

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____ Sell office building.

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Consider the following cash flow items: Pay amount owed to bank for previous borrowing. Pay utility costs. Purchase equipment to be used in operations. Purchase office supplies. Pay one year of rent in advance. Pay workers' salaries. Pay for research and development costs. Pay taxes to the IRS. Sell common stock to investors. How many of these cash flow items involve investing activities?

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A) Zero
B) One
C) Two
D) Three
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Consider the following cash flow items: Pay amount owed to bank for previous borrowing. Pay utility costs. Purchase equipment to be used in operations. Purchase office supplies. Purchase one year of rent in advance. Pay workers' salaries. Pay for research and development costs. Pay taxes to the IRS. Sell common stock to investors. How many of these cash flow items involve financing activities?

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A) Zero
B) One
C) Two
D) Three
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Regarding a bank reconciliation, which one of the following is an item recorded by the company but not by the bank?

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A) Checks outstanding
B) Interest earned
C) Service charges
D) NSF checks
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Which of the following is correct regarding a petty cash fund?

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A) Petty cash fund represents cash on hand at the business for quick access
B) Petty cash fund is used for minor purposes
C) When cash from this fund is taken out, it should be replaced with a voucher
D) All of the above are correct
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The following information pertains to Sooner Company's cash balance and bank reconciliation as of August 31:

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A) Option a
B) Option b
C) Option c
D) Option d
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Which of the following best describes the goal of internal controls?

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A) Ensuring the business is profitable
B) Enhancing the health of employees
C) Improving the accuracy and the reliability of financial information
D) Ensuring the compliance with tax regulations
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Which of the following is NOT correct regarding the reporting of cash?

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A) Cash is reported in both the balance sheet and the statement of cash flows
B) Cash flows from buying and selling investments and long-term productive assets are called operating cash flows
C) Cash flows from transactions with stockholders and creditors are called financing cash flows
D) Net cash flows reported in the statement of cash flows should equal the change in cash reported in the balance sheet
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When preparing a bank reconciliation, a deposit outstanding would be:

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A) Added to the company's cash balance
B) Added to the bank's cash balance
C) Subtracted from the company's cash balance
D) Subtracted from the bank's cash balance
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Fraudulent reporting by management could include:

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A) Fictitious revenues from a fake customer
B) Improper asset valuation
C) Mismatching revenues and expenses
D) All of the above
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The Sarbanes-Oxley Act (SOX) mandates which of the following?

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A) Increased regulations related to auditor-client relations
B) Increased regulations related to internal control
C) Increased regulations related to corporate executive accountability
D) All of the above
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Which of the following would not be considered good internal control for cash receipts?

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A) Allowing customers to pay with a debit card
B) Requiring the employee receiving cash from customers to also deposit the cash into the company's bank account
C) Recording cash receipts as soon as they are recorded
D) Allowing customers to pay with a credit card
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Investing cash flows would include which of the following?

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A) Payment of cash dividends to stockholders
B) Purchase of office supplies with cash
C) Purchase of a building with cash
D) Cash sales to customers
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What is the concept behind separation of duties in establishing internal controls?

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A) The company's financial accountant should not share information with the company's tax accountant
B) Duties of middle-level managers should be clearly separated from those of top executives
C) Employee fraud is less likely to occur when access to assets and access to accounting records are separated
D) The external auditors of the company should have no contact with managers while the audit is taking place
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Which of the following is considered cash for financial reporting purposes?

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A) Accounts receivable
B) Investments with maturity dates greater than three months
C) Checks received from customers
D) Accounts payable
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Payment of dividends to stockholders is considered a(n):

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A) Operating cash flow
B) Investing cash flow
C) Financing cash flow
D) Not a cash flow
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Providing services to customers on account is considered a(n):

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A) Operating cash flow
B) Investing cash flow
C) Financing cash flow
D) Not a cash flow
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Issuing common stock for cash is considered a(n):

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A) Operating cash flow
B) Investing cash flow
C) Financing cash flow
D) Not a cash flow
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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?

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A) Debit to Service Fee Expense
B) Credit to Accounts Payable
C) Credit to Service Revenue
D) Debit to Accounts Receivable
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Which employees are the ones who must take final responsibility for the establishment and success of internal controls?

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A) Top executives
B) Mid-level managers
C) Lower-level employees
D) All employees
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Occupational fraud:

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A) Is the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources
B) Occurs in only a few organizations and generally involves minor amounts
C) Will be prevented when companies employ an auditor
D) Is committed only by lower-level employees
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The act of collusion refers to:

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A) Top management and lower-level employees working together to share information necessary for effective internal controls
B) Two or more people acting in coordination to circumvent internal controls
C) Management working with an auditor to prevent occupational fraud
D) Middle-level managers taking full responsibility for effective internal controls
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Which of the following is not an example of preventive controls?

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A) Separation of duties
B) Physical controls
C) Proper authorization
D) Reconciliations
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Which of the following is an example of detective controls?

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A) Separation of duties
B) Physical controls
C) Proper authorization
D) Reconciliations
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Keeping supplies in a locked room with access allowed only to authorized personnel is an example of which preventive control?

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A) Separation of duties
B) Physical controls
C) Proper authorization
D) Employee management
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Giving only management the right to make purchases over a certain amount is an example of which preventive control?

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A) Separation of duties
B) Physical controls
C) Proper authorization
D) Employee management
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Providing employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties is an example of which preventive control?

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A) Separation of duties
B) Physical controls
C) Proper authorization
D) Employee management
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Having management periodically determine whether the amount of physical assets of the company match the accounting records is an example of which detective control?

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A) Separation of duties
B) Reconciliations
C) Performance reviews
D) Employee management
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Checking actual outcome of individuals or processes against their expected outcome is an example of which detective control?

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A) Separation of duties
B) Reconciliations
C) Performance reviews
D) Employee management
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Managers of the company act as stewards or caretakers of the company's assets.

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B) False.
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Common types of financial statement fraud include creating fictitious revenues from a fake customer, improperly valuing assets, and mismatching revenues and expenses.

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B) False.
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In response to corporate accounting scandals and to public outrage over seemingly widespread unethical behavior of top executives, Congress passed the Sarbanes-Oxley Act.

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B) False.
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The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles.

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B) False.
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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.

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B) False.
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Auditors of public companies can perform the full range of audit and nonaudit consulting services for their audit clients.

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B) False.
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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.

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B) False.
Answer:

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Internal control is a company's plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company's assets.

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B) False.
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One benefit of internal control is greater reliance by investors on reported financial statements.

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A) True.
B) False.
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A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB).

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A) True.
B) False.
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The control environment refers to the overall top-to-bottom attitude of the company with respect to internal controls.

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B) False.
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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.

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B) False.
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Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the same client.

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A) True.
B) False.
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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.

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A) True.
B) False.
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The internal control component of information and communication relates to the effectiveness of accurately measuring and communicating business transactions.

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A) True.
B) False.
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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.

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A) True.
B) False.
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Separation of duties occurs when two or more people act in coordination to circumvent internal controls.

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A) True.
B) False.
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Effective internal controls ensure a company's success and survival.

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B) False.
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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.

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B) False.
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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.

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A) True.
B) False.
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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.

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A) True.
B) False.
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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.

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A) True.
B) False.
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Common examples of cash equivalents are money market funds, Treasury bills, and certificates of deposit.

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A) True.
B) False.
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Recording all cash receipts as soon as possible is considered a good internal control.

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A) True.
B) False.
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Opening mail and making a list of checks received once per week is considered a good internal control over cash receipts.

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A) True.
B) False.
Answer:

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Whether a customer uses cash, a check, or a debit card to make a purchase, the company records the transaction as a cash sale.

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A) True.
B) False.
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When customers pay for services with a check, the company should debit Accounts Receivable and credit Service Revenue.

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A) True.
B) False.
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When customers pay for services with a debit card, the company should debit Cash and credit Service Revenue.

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A) True.
B) False.
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When a company pays for services received using a check, it should credit Accounts Payable until the check is paid by the bank.

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A) True.
B) False.
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When a company pays for services received using a credit card, it should credit Accounts Payable.

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A) True.
B) False.
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Allowing the employee who authorizes purchases to also prepare the check is an example of good internal control.

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A) True.
B) False.
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Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls.

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A) True.
B) False.
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A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company's own records.

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A) True.
B) False.
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Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors.

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A) True.
B) False.
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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.

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A) True.
B) False.
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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.

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A) True.
B) False.
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Checks outstanding are checks the company has written that have not been subtracted from the bank's record of the company's balance.

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A) True.
B) False.
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A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance.

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A) True.
B) False.
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A check outstanding will cause the bank's cash balance to be higher than the company's cash balance.

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A) True.
B) False.
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An NSF check is an example of a cash transaction that is initially recorded by the bank and later by the company after notification.

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A) True.
B) False.
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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.

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A) True.
B) False.
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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.

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B) False.
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The petty cash fund represents cash on hand and is used to pay for minor purchases.

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A) True.
B) False.
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The petty cash fund should have just enough cash to make minor expenditures over a reasonable period (such as a week or a month).

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A) True.
B) False.
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A company's cash is reported in two financial statements - income statement and statement of cash flows.

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A) True.
B) False.
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Cash is typically reported as a current asset in the balance sheet.

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B) False.
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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.

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B) False.
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Investing activities include cash transactions involving revenue and expense events during the period.

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B) False.
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Investing activities include cash investments in long-term assets and investment securities.

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B) False.
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Investing activities include transactions designed to raise cash or finance the business.

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B) False.
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Only transactions involving cash affect a company's cash flows.

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B) False.
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A company's operating cash inflows less operating cash outflows generally equals the reported amount of net income in the income statement.

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B) False.
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Earnings quality is the ability of net income to report the true underlying performance of the company.

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B) False.
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A company's free cash flows equal operating cash flows plus financing cash flows during the period.

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B) False.
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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.

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A) True.
B) False.
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What key piece of legislation was passed in response to corporate accounting scandals by Enron, WorldCom, and others?

Multiple Choice
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A) Sarbanes-Oxley Act
B) 1933 Securities Act
C) 1934 Securities Exchange Act
D) Regulation Fair Disclosure
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Which of the following does not represent a major provision of the Sarbanes-Oxley Act?

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A) Nonaudit services
B) Quarterly financial statements
C) Auditor rotation
D) Corporate executive accountability
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Under the provisions of the Sarbanes-Oxley Act, corporate executives:

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A) Have limited responsibility for financial statements
B) Must personally prepare the company's financial statements
C) Must personally certify the company's financial statements
D) Are not allowed to view the company's financial statements
Answer:

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Under the provisions of the Sarbanes-Oxley Act, auditors must do which of the following?

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A) Provide nonaudit services for their clients
B) Audit public companies whose chief executives worked for the audit firm in the preceding year
C) Be hired by company management
D) Maintain working papers for at least seven years following an audit
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Which of the following is NOT a design feature of effective internal controls?

Multiple Choice
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A) Allow greater reliance by investors on reported financial statements
B) Prevent fraudulent or errant financial reporting
C) Ensure the company's price advantage over competitors
D) Prevent misuse of company funds by employees
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A framework for designing an internal control system is provided by the:

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A) Committee of Sponsoring Organizations
B) Financial Accounting Standards Board
C) Securities and Exchange Commission
D) International Accounting Standards Board
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The components of internal control do not directly include:

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A) Risk assessment
B) Inflation adjustment
C) Monitoring
D) Control activities
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Separation of duties refers to:

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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
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Which employees have an impact on the operation and effectiveness of internal controls?

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A) Upper management
B) Mid-level managers
C) Lower-level employees
D) All employees
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Cash may not include:

Multiple Choice
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A) Foreign currency
B) Money orders
C) Accounts receivable
D) Undeposited customer checks
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Common examples of cash equivalents include all of the following except:

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A) Money market funds
B) Treasury bills
C) Certificates of deposit
D) Accounts receivable
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Which of the following would NOT represent good controls over cash receipts?

Multiple Choice
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A) Record all cash receipts as soon as possible
B) The employee that receives cash and checks should also deposit them in the bank
C) Open mail each day and make a list of checks received with the amount and payer's name
D) Verify cash receipts by comparing the bank deposit slip with the accounting records
Answer:

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Which of the following would NOT be recorded as a cash sale?

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A) Customer who pays with a check
B) Customer who pays with a debit card
C) Customer who pays with a credit card
D) A customers who buys on account
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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:

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A) Debit Cash for $200
B) Credit Service Revenue for $194
C) Debit Service Fee Expense for $6
D) Credit Service Revenue for $206
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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:

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A) Debit Accounts Receivable for $2,000
B) Credit Sales Revenue for $2,000
C) Credit Sales Revenue for $1,960
D) Credit Unearned Revenue for $2,000
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Which of the following would NOT represent good controls over cash disbursements?

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A) Make all disbursements, other than very small ones, by check, debit card, or credit card
B) Require only one signature for checks, especially larger ones
C) Authorize all expenditures before purchase and verify the accuracy of the purchase itself
D) The employee who authorizes payment should not also be the employee who prepares the check
Answer:

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Which of the following would NOT represent good controls over cash disbursements?

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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
Answer:

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Which of the following would NOT need to be accounted for in a bank reconciliation?

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A) Deposits outstanding recorded by the company but not the bank
B) Interest earned recorded by the bank but not the company
C) NSF checks recorded by the bank but not by the company
D) Checks written by the company and recorded by the bank
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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:

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A) $9,860
B) $9,650
C) $10,130
D) $10,410
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Cash transactions recorded by the bank but not yet recorded by the company include all of the following except

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A) Service fees
B) Interest earned
C) Checks outstanding
D) NSF checks
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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?

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A) $10,200
B) $7,400
C) $6,200
D) $6,160
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Cash transactions that have been recorded by the company but not the bank include:

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A) NSF checks
B) Interest earned
C) Service fees
D) Deposits outstanding
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Which of the following is NOT a reason why a bank reconciliation is necessary?

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A) The company has transactions that the bank has not recorded
B) Petty cash has a low balance
C) The bank has transactions that the company has not recorded
D) Reconciliations provide a control over cash
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Which of the following is correct with respect to a bank reconciliation?

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A) Subtract interest earned from the bank's balance
B) Add service charge to the company's balance
C) Subtract NSF checks from the company's balance
D) Add deposits outstanding to the company's balance
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After preparing a bank reconciliation, the collection of a note by the bank on a company's behalf would be recorded with:

Multiple Choice
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A) A credit to Notes Receivable
B) A credit to Cash
C) A debit to Notes Receivable
D) A credit to Accounts Receivable
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After preparing a bank reconciliation, the service fee charged by the bank would be recorded with:

Multiple Choice
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A) A credit to Service Fees Expense
B) A debit to Cash
C) A credit to Service Fees Revenue
D) A debit to Service Fees Expense
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After preparing a bank reconciliation, a check outstanding for the payment of advertising would be recorded with:

Multiple Choice
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A) A debit to Advertising Expense
B) A debit to Cash
C) A credit to Advertising Expense
D) No entry is needed
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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?

Multiple Choice
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A) Deduct checks outstanding; add service charges and deposit outstanding
B) Deduct interest earned; add deposit outstanding
C) Deduct checks outstanding; add deposit outstanding
D) Deduct deposit outstanding; add checks outstanding
Answer:

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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:

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A) $20,700
B) $17,200
C) $18,700
D) $22,200
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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?

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A) $20,700
B) $17,200
C) $18,700
D) $22,200
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A minor amount of cash kept on hand to pay for small purchases is referred to as a:

Multiple Choice
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A) Petty cash fund
B) Cash receipts fund
C) Cash payments fund
D) Cookie jar fund
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Which of the following is NOT involved in the replenishment of the petty cash fund?

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A) Transactions related to vouchers will be recorded
B) Management will verify that the total of all vouchers equals the amount of cash missing from the petty cash fund
C) Weekly payroll checks will be recorded
D) Management will withdraw cash from the bank and place it in the petty cash fund
Answer:

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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?

Multiple Choice
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A) Debit Postage Expense, $100
B) Debit Supplies, $25
C) Credit Petty Cash, $350
D) Debit Petty Cash, $350
Answer:

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A company's cash balance is reported in which two financial statements?

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A) Income statement and statement of cash flows
B) Balance sheet and statement of cash flows
C) Income statement and balance sheet
D) Balance sheet and statement of stockholders' equity
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The statement of cash flows reports cash flows from the activities of:

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A) Operating, purchasing, and investing
B) Borrowing, paying, and investing
C) Financing, investing, and operating
D) Using, investing, and financing
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Operating cash flows would exclude:

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A) Payment of employee salaries
B) Receipt of cash from customers
C) Payment of dividends
D) Payment for advertising
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Cash flows from investing do not include cash flows from:

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A) Lending
B) The sale of equipment
C) Borrowing
D) The purchase of a building
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Cash flows from financing activities include:

Multiple Choice
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A) Lending
B) Salaries paid
C) The sale of land
D) Dividends paid
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Cash flows from investing activities do not include:

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A) Borrowing
B) The purchase of equipment
C) The sale of land
D) The purchase of a building
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Terastar Corp. reports the following amounts for 2012 and 2013:

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A) $3,000
B) $13,000
C) $9,000
D) $7,000
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Terastar Corp. reports the following amounts for 2012 and 2013.

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A) Both are increasing
B) Net income is trending upward and free cash flows are trending downward
C) Both are decreasing
D) Net income is trending downward and free cash flows are trending upward
Answer:

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A company had the following sales transactions: 1. Total debit card sales = $200,000. 2. Total credit card sales = $400,000. 3. Total cash sales = $800,000. 4. Total check sales = $100,000. There is a charge of 2% on all credit card transactions. Calculate total sales revenue recorded for the year.

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A company had the following transactions: 1. Paid $150 for office supplies using a debit card. 2. Purchased office equipment costing $700 using a credit card. 3. Paid utilities bill of $400 by issuing a check. Record each transaction.

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Indicate whether the firm should add or subtract each item below from its

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A company's general ledger shows a cash balance of $4,570. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,840, bank service fees of $110, and interest earned of $15. Calculate the correct balance of cash.

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A company's general ledger shows a cash balance of $2,380. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as deposits outstanding of $1,760, note collected by the bank on the company's behalf of $1,000, and interest earned of $20. The company also finds an error by the bank of an additional deposit of $100. Calculate the correct balance of cash.

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A company's bank statement shows a cash balance of $4,230. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $3,880, deposits outstanding of $1,230, NSF check of $300, and service fee of $50. Calculate the correct balance of cash.

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A company's bank statement shows a cash balance of $4,170. Comparing the company's cash records with the monthly bank statement reveals several additional cash transactions such as checks outstanding of $2,110, NSF check of $200, interest earned of $30, service fee of $40, and a check for $150 recorded twice by the company. Calculate the correct balance of cash.

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A company's Cash account shows a balance of $3,450 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as bank service fees ($50), an NSF check from a customer ($300), a customer's note receivable collected by the bank ($1,000), and interest earned ($100). Prepare the necessary entries to adjust the balance of cash.

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A company's Cash account shows a balance of $5,680 at the end of the month. Comparing the company's Cash account with the monthly bank statement reveals several additional cash transactions such as deposits outstanding ($1,250), checks outstanding ($2,380), bank service fees ($40), an NSF check from a customer ($150), a customer's note receivable collected by the bank ($500), and interest earned ($60). Prepare the necessary entries to adjust the balance of cash.

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Peterson Company's general ledger shows a cash balance of $7,850 on May 31, 2012. May cash receipts of $1,250, included in the general ledger balance, are placed in the night depository at the bank on May 31 and processed by the bank on June 1. The bank statement dated May 31 shows an NSF check for $200 and a service fee of $50. The bank processes all checks written by the company by May 31 and lists them on the bank statement, except for one check totaling $1,640. The bank statement shows a balance of $7,990 on May 31. Prepare a bank reconciliation to calculate the correct ending balance of cash on May 31, 2012.

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Madison Company's cash ledger reports the following for the month ending March 31, 2012.

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A company establishes a petty cash fund for $400. By the end of the month, employees had made the following expenditures from the fund: supplies, $150; fuel for deliveries, $120; postage, $75; miscellaneous, $35. Record the entry to recognize expenditures from the petty cash fund.

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A company establishes a $300 petty cash fund on August 3 to pay for minor cash expenditures. The fund is replenished at the end of each month. At the end of August, the fund contains $40 in cash and the following receipts:

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A company provides services on account during the current year totaling $400,000. By the end of the year, $350,000 of this amount had been received. In addition, $75,000 was received on account from customers for services provided in the prior year. Determine the amount of operating cash flows the company will report as received from customers in the current year.

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During the current year, a company provides services on account for $100,000. By the end of the year, $60,000 of this amount had been received. In addition, cash payments for the year were employees' salaries, $50,000; office supplies, $10,000; and utilities $20,000. Determine the amount of operating cash flows the company will report in the current year.

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During the current year, a company purchases equipment for $250,000, paying $50,000 immediately and promising to pay the remainder within 30 days after the end of the year. Determine the amount of investing cash flows the company will report in the current year.

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At the beginning of the current year, a company issued stock for $100,000 and borrowed $50,000 from the bank. By the end of the year, the company had provided services of $80,000 for cash, paid employee salaries of $30,000, and paid utilities of $10,000. Determine the amount of financing cash flows the company will report in the current year.

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During the year, a company issues common stock for $50,000 and repays previously borrowed amounts of $75,000. In addition, the company pays dividends of $5,000 to stockholders. Determine the amount of financing cash flows the company will report in the current year.

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Consider the following transactions: 1. Pay employees' salaries. 2. Repay borrowing to the bank. 3. Purchase equipment with note payable. 4. Provide services to customers on account. 5. Pay dividends to stockholders. 6. Collect cash from customers for services provided. 7. Purchase supplies on account. 8. Pay for supplies purchased in transaction 7 above. For each transaction, indicate the type of cash flow involved based on the classifications in the statement of cash flows. If a transaction does not involve cash, write ‘No Cash.'

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A company had the following transactions during the year: 1. Paid rent for the next two years, $8,000. 2. Purchased office supplies on account, $2,400. 3. Purchased equipment, paying $12,000 cash and issuing a note payable for $4,000. 4. Borrowed from the bank, $6,000. 5. Paid employee salaries, $7,200. 6. Paid $2,000 on account related to transaction 2 above. 7. Paid dividends to stockholders, $2,800. 8. Sold land for $10,000 that was purchased in a prior year for $7,500. 9. Collected cash from customers for services provided, $25,700. Calculate cash flows from operating activities, investing activities, and financing activities.

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Below is a summary of all the transactions of Sampson Consulting for the month of April 2012.

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Discuss the events leading up to the passage of the Sarbanes-Oxley Act and its major provisions. 04-119

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What is internal control? Briefly describe the five components of internal control outlined by the Committee of Sponsoring Organizations (COSO). 04-119

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A company uses the following process for its cash receipts. At the end of each day, the secretary places all cash and checks received from customers in a desk drawer. Each Monday, the secretary totals all amounts received, records this in the accounting records, and deposits the money in the bank account. Then, once every three months, the office manager requests information from the bank necessary to prepare a bank reconciliation. Discuss the company's internal control procedures related to cash receipts. 04-119

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Describe the procedures used to reconcile a company's cash balance. 04-119

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What is the purpose of the statement of cash flows? List the three major categories of cash flows and give an example of a cash transaction for each category. 04-119

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What is the link between the balance sheet and the statement of cash flows? Describe the operating, investing, and financing sections of the statement of cash flows. 04-119

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____ Procedures for maintaining separation of duties.

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____ PCAOB establishes standards related to the preparation of audited financial reports.

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____ Formal policies to evaluate internal and external threats to achieving company objectives.

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____ Audit firm cannot provide a variety of other services to its client, such as consulting.

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____ Management must document the effectiveness of procedures that could affect financial reporting.

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____ Lead audit partners are required to change every five years.

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____ Transfer of data from lower managers to top executives for accurate financial reporting.

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____ Executives must personally certify the financial statements.

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____ Overall attitude of the company with respect to internal controls.

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____ Routine activities that are meant to continually observe internal control activities.

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____ Minor amount of cash kept on hand.

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____ Short-term investments that have a maturity date no longer than three months from the date of purchase.

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____ Matches the balance of cash in the bank account with the balance of cash in the company's own records.

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____ Withdraws funds directly from the user's account at the time of use.

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____ Allows users to purchase items without having to pay cash immediately.

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____ Fees imposed by the bank to the company for providing routine services.

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____ Checks written to the company that are returned by the bank as not having adequate funds.

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____ The company recorded a deposit twice.

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____ Checks written by the company but not yet recorded by the bank.

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____ Cash receipts received by the company but not yet recorded by the bank.

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____ Money earned on the average daily balance of the checking account.

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____ Pay dividends to stockholders.

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____ Pay salaries to employees.

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____ Purchase equipment.

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____ Receive payment from customers.

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____ Issue common stock.

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____ Sell office building.

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Consider the following cash flow items: Pay amount owed to bank for previous borrowing. Pay utility costs. Purchase equipment to be used in operations. Purchase office supplies. Pay one year of rent in advance. Pay workers' salaries. Pay for research and development costs. Pay taxes to the IRS. Sell common stock to investors. How many of these cash flow items involve investing activities?

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A) Zero
B) One
C) Two
D) Three
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Consider the following cash flow items: Pay amount owed to bank for previous borrowing. Pay utility costs. Purchase equipment to be used in operations. Purchase office supplies. Purchase one year of rent in advance. Pay workers' salaries. Pay for research and development costs. Pay taxes to the IRS. Sell common stock to investors. How many of these cash flow items involve financing activities?

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A) Zero
B) One
C) Two
D) Three
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Regarding a bank reconciliation, which one of the following is an item recorded by the company but not by the bank?

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A) Checks outstanding
B) Interest earned
C) Service charges
D) NSF checks
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Which of the following is correct regarding a petty cash fund?

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A) Petty cash fund represents cash on hand at the business for quick access
B) Petty cash fund is used for minor purposes
C) When cash from this fund is taken out, it should be replaced with a voucher
D) All of the above are correct
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The following information pertains to Sooner Company's cash balance and bank reconciliation as of August 31:

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A) Option a
B) Option b
C) Option c
D) Option d
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Which of the following best describes the goal of internal controls?

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A) Ensuring the business is profitable
B) Enhancing the health of employees
C) Improving the accuracy and the reliability of financial information
D) Ensuring the compliance with tax regulations
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Which of the following is NOT correct regarding the reporting of cash?

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A) Cash is reported in both the balance sheet and the statement of cash flows
B) Cash flows from buying and selling investments and long-term productive assets are called operating cash flows
C) Cash flows from transactions with stockholders and creditors are called financing cash flows
D) Net cash flows reported in the statement of cash flows should equal the change in cash reported in the balance sheet
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When preparing a bank reconciliation, a deposit outstanding would be:

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A) Added to the company's cash balance
B) Added to the bank's cash balance
C) Subtracted from the company's cash balance
D) Subtracted from the bank's cash balance
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Fraudulent reporting by management could include:

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A) Fictitious revenues from a fake customer
B) Improper asset valuation
C) Mismatching revenues and expenses
D) All of the above
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The Sarbanes-Oxley Act (SOX) mandates which of the following?

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A) Increased regulations related to auditor-client relations
B) Increased regulations related to internal control
C) Increased regulations related to corporate executive accountability
D) All of the above
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Which of the following would not be considered good internal control for cash receipts?

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A) Allowing customers to pay with a debit card
B) Requiring the employee receiving cash from customers to also deposit the cash into the company's bank account
C) Recording cash receipts as soon as they are recorded
D) Allowing customers to pay with a credit card
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Investing cash flows would include which of the following?

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A) Payment of cash dividends to stockholders
B) Purchase of office supplies with cash
C) Purchase of a building with cash
D) Cash sales to customers
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What is the concept behind separation of duties in establishing internal controls?

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A) The company's financial accountant should not share information with the company's tax accountant
B) Duties of middle-level managers should be clearly separated from those of top executives
C) Employee fraud is less likely to occur when access to assets and access to accounting records are separated
D) The external auditors of the company should have no contact with managers while the audit is taking place
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Which of the following is considered cash for financial reporting purposes?

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A) Accounts receivable
B) Investments with maturity dates greater than three months
C) Checks received from customers
D) Accounts payable
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Payment of dividends to stockholders is considered a(n):

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A) Operating cash flow
B) Investing cash flow
C) Financing cash flow
D) Not a cash flow
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Providing services to customers on account is considered a(n):

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A) Operating cash flow
B) Investing cash flow
C) Financing cash flow
D) Not a cash flow
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Issuing common stock for cash is considered a(n):

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A) Operating cash flow
B) Investing cash flow
C) Financing cash flow
D) Not a cash flow
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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?

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A) Debit to Service Fee Expense
B) Credit to Accounts Payable
C) Credit to Service Revenue
D) Debit to Accounts Receivable
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Which employees are the ones who must take final responsibility for the establishment and success of internal controls?

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A) Top executives
B) Mid-level managers
C) Lower-level employees
D) All employees
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Occupational fraud:

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A) Is the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources
B) Occurs in only a few organizations and generally involves minor amounts
C) Will be prevented when companies employ an auditor
D) Is committed only by lower-level employees
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The act of collusion refers to:

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A) Top management and lower-level employees working together to share information necessary for effective internal controls
B) Two or more people acting in coordination to circumvent internal controls
C) Management working with an auditor to prevent occupational fraud
D) Middle-level managers taking full responsibility for effective internal controls
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Which of the following is not an example of preventive controls?

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A) Separation of duties
B) Physical controls
C) Proper authorization
D) Reconciliations
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Which of the following is an example of detective controls?

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A) Separation of duties
B) Physical controls
C) Proper authorization
D) Reconciliations
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Keeping supplies in a locked room with access allowed only to authorized personnel is an example of which preventive control?

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A) Separation of duties
B) Physical controls
C) Proper authorization
D) Employee management
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Giving only management the right to make purchases over a certain amount is an example of which preventive control?

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A) Separation of duties
B) Physical controls
C) Proper authorization
D) Employee management
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Providing employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties is an example of which preventive control?

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A) Separation of duties
B) Physical controls
C) Proper authorization
D) Employee management
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Having management periodically determine whether the amount of physical assets of the company match the accounting records is an example of which detective control?

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A) Separation of duties
B) Reconciliations
C) Performance reviews
D) Employee management
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Checking actual outcome of individuals or processes against their expected outcome is an example of which detective control?

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A) Separation of duties
B) Reconciliations
C) Performance reviews
D) Employee management
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