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Key Terms & Definitions:
Direct Write-off Method and Allowance Method. Which does
GAAP require?
Cash Ratio. What does a higher number indicate?
Maturity Value of a Note is..
Acid Test Ratio
Days Sales in Receivables
A/R Turnover Ratio
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Chapter 7 Accounting Information Systems
Learning Objective 7-
An accounting information system (AIS) collects, records, stores, and processes accounting data to produce information that is useful for decision makers. Answer: TRUE An effective accounting information system with adequate internal controls can safeguard a business's assets and reduce the likelihood of fraud and errors. Answer: TRUE An accounting information system has three basic components: source documents and input devices, processing and storage, and outputs. Answer: TRUE Pre-numbered source documents provide necessary control in a system by automatically assigning a sequential number to each new transaction. Answer: TRUE A source document provides the evidence and data for accounting transactions. Answer: TRUE Which of the following is true of data processing and storage in a computerized information system? A) In a computerized accounting information system, processing includes manually journalizing transactions and posting to the accounts. B) In a computerized accounting information system, there will be a main centralized computer where data is stored, which cannot be accessed from any other computers. C) In both manual and computerized systems, all data are contained in paper documents and are often stored in filing cabinets and off-site document warehouses. D) In a computerized accounting information system, companies need to spend large amounts of cash to ensure that their data and information are secure. Answer: D The main computer where data is stored, which can be accessed from many different computers is known as a(n) ________. A) internet protocol B) RAM C) server
D) router Answer: C Which of the following is an example of a storage device in an accounting information system? A) monitor B) network C) printer D) server Answer: D Which of the following is an input device in an accounting information system? A) keyboard B) internet protocol C) printer D) router Answer: A Which of the following is an output device in an accounting information system? A) keyboard B) internet protocol C) printer D) mouse Answer: C Which of the following is true of outputs in an accounting information system? A) In a manual system, reports and financial statements must be created using Word documents, Excel spreadsheets, or PowerPoint. B) In a computerized system, the software can generate reports instantaneously that can never be manipulated. C) Examples of outputs in an accounting information system include purchase invoices, bank checks, and sales invoices. D) Since the output in an accounting information system are audited and error-free, it provides the evidence and data for accounting transactions. Answer: A Which of the following is true of the comparison between a manual and a computerized accounting information system? A) In both manual and computerized systems, reports and financial statements must be created using Word documents, Excel spreadsheets, or PowerPoint. B) In a computerized system, the software can generate financial reports instantaneously that can never be manipulated. C) In a manual system, data are contained in paper documents that are often stored in filing cabinets and off-site document warehouses; whereas in a computerized system, data are stored on a main computer called a server. D) In both manual and computerized systems, processing data includes manually journalizing transactions and posting to the accounts. Answer: C
Learning Objective 7-
A subsidiary ledger is a record of accounts that provides supporting details on individual balances, the total of which appears in a general ledger account. Answer: TRUE
C) It is equivalent to a contra account and represents the offsetting nature of debits and credits on a firm's financial statements. D) It holds individual accounts that support a general ledger account. Answer: B Which of the following is true of an accounts receivable subsidiary ledger? A) It does not include a receivable account for each customer, but includes a cumulative account for all customers. B) It contains information about the amount each customer purchased on credit, but excludes the customer name. C) The total of the accounts in the accounts receivable subsidiary ledger must equal the accounts receivable balance in the general ledger. D) Companies keep an accounts payable subsidiary ledger that is entirely different than the accounts receivable subsidiary ledger. Answer: C Assume that a company has only four customers: A, B, C, and D. The accounts receivable balance in the general ledger is $7,983 and the accounts receivable subsidiary ledger of customers A, C, and D have $1,246, $2,596 and $3,240 respectively. Calculate the amount in the accounts receivable subsidiary ledger account of customer B. A) $7, B) $2, C) $1, D) $ Answer: D Explanation: D) The accounts receivable balance of $7,983 in the general ledger equals the sum of the accounts in the accounts receivable subsidiary ledger ($1,246 + $2,596 +? + $3,240). Therefore, the amount in the accounts receivable subsidiary ledger account of customer B = $7,983 - ($1,246 + $2,596 + $3,240) = $
A company has four vendors and the accounts payable subsidiary ledger shows the following balances. Alpha $275, Beta 143, Gamma 78, Delta 34, Calculate the accounts payable balance in the general ledger. A) $419, B) $532, C) $275, D) $256, Answer: B Which of the following is true of a sales journal? A) It is a special journal used to record all the cash sales. B) It is used to record the sales of capital assets, such as buildings. C) It is a special journal used to record credit sales. D) It is a general journal that is used to record the adjustments in revenue account. Answer: C Tangent Corporation sold a product for $7,150 to Michael on credit. The cost of goods sold is $5,650.Assuming that the firm is following a perpetual inventory system and using a sales journal, it will record $5,650 in the: A) Accounts Receivable DR, Sales Revenue CR column. B) Cost of Goods Sold DR, Merchandise Inventory CR column. C) Merchandise Inventory DR, Cost of Goods Sold CR column. D) Sales Revenue DR, Accounts Receivable CR column. Answer: B Which of the following is true of a sales journal prepared under the perpetual inventory system? A) It includes a Cost of Goods Sold DR, Merchandise Inventory CR column. B) It records both cash and credit sales transactions. C) All transactions recorded in a sales journal are also entered in the general journal. D) It cannot be used with a perpetual inventory system. Answer: A If a business uses the periodic inventory system, the sales journal: A) will record both the cash and credit sales. B) will include a Purchase DR and Account Receivable CR column. C) will exclude the Accounts Receivable DR and Sales Revenue CR column. D) will not include the Cost of Goods Sold DR and Merchandise Inventory CR column. Answer: D
Answer: B The purchases journal of a business that uses periodic inventory system will include a column titled: A) Cost of Goods Sold DR. B) Purchases DR. C) Accounts Payable DR. D) Merchandise Inventory DR. Answer: B Cash purchases are generally recorded in the: A) sales journal. B) cash receipts journal. C) cash payments journal. D) purchases journal. Answer: C On July 4, a hardware manufacturing firm purchased inventory on account for $1,300. The company plans to pay $700 in the next week and the remaining in the week after. Which of the following is the correct entry to record this transaction in a purchases journal? Assume a perpetual inventory system is used. A) $650 will be recorded in the Accounts Payable CR and Merchandise Inventory CR column. B) $2,000 will be recorded in the Accounts Payable DR and Merchandise Inventory DR column. C) $1,300 will be recorded in the Merchandise Inventory CR and Accounts Payable DR column. D) $1,300 will be recorded in the Accounts Payable CR and Merchandise Inventory DR column. Answer: D On April 1, a hardware manufacturing firm purchases inventory on account for $700. Which of the following correctly describes the effect of this transaction? Assume a perpetual inventory system is used. A) Merchandise Inventory decreases by $700 and Accounts Receivable decreases by $700. B) Merchandise Inventory decreases by $700 and Accounts Receivable increases by $700. C) Merchandise Inventory increases by $700 and Accounts Payable decreases by $700. D) Merchandise Inventory increases by $700 and Accounts Payable increases by $700. Answer: D Which of the following is true of posting entries from a purchases journal to the general ledger? A) The posting references are not mentioned in the subsidiary ledger. B) The Accounts Payable balance in the general ledger should be less than the sum of the individual vendor balances in the subsidiary ledger. C) The amounts in the Other Accounts DR column are posted individually to the specific accounts. D) It is done on a daily basis for all the accounts. Answer: C On May 4, a retail firm pays a rent of $1,500 for the month of April. Which of the following is true when this transaction is recorded in a cash payment journal? A) Both assets and equity will increase by $1,500.
B) Both assets and liabilities will decrease by $1,500. C) Both assets and equity will decrease by $1,500. D) Both liabilities and equity will increase by $1,500. Answer: C Which of the following is true of posting entries from a cash payment journal to a general ledger? A) Entries in the cash payments journal are posted monthly to the accounts payable subsidiary ledger and daily to the general ledger. B) The postings of accounts payable are credits and increase the balance in the individual accounts payable account. C) After posting, a check mark is entered in the cash payments journal and the posting reference is printed in the subsidiary ledger. D) At the end of the month, each column is totaled and the totals, including the Other Accounts DR column, are posted to the specific general ledger accounts. Answer: C When using a manual accounting information system, which of the following will be recorded in the general journal? A) depreciation on equipment B) payment of accounts payable C) purchase of merchandise inventory on account D) receipt of cash from a debtor Answer: A
D) Receive Payments Answer: D BM Corporation makes a sale on account to Roger. In which of the following functions of QuickBooks will this transaction be recorded? A) Pay Bills B) Enter Bills C) Invoices D) Receive Payments Answer: C Mercury Corporation receives a landscaping bill on January 15 and is required to pay it before February 15. In which of the following functions of QuickBooks will this transaction be recorded on the date of receipt of the bill? A) Pay Bills B) Enter Bills C) Invoices D) Receive Payments Answer: B Mercury Corporation receives a landscaping bill on January 15 and is required to pay it before February 15. In which of the following functions of QuickBooks will this transaction be recorded on the date of payment of the bill? A) Receive Payments B) Enter Bills C) Invoices D) Pay Bills Answer: D
Chapter 8 Internal Control and Cash
Learning Objective 8-
Sarbanes-Oxley Act requires all the private companies in the U.S. to maintain an internal control system. Answer: FALSE Under the Sarbanes-Oxley Act, accounting firms are allowed to audit a public company and provide certain consulting services for the same client. Answer: FALSE Separation of duties is a part of the definition of internal control. Answer: FALSE Internal auditors monitor company controls to safeguard assets and ensure that employees are following company policies. Answer: TRUE External auditors evaluate company controls to ensure the financial statements are presented fairly in accordance with Generally Accepted Accounting Principles. Answer: TRUE
The Sarbanes-Oxley Act was passed by the Public Company Accounting Oversight Board. Answer: FALSE Separating the custody of assets from accounting implies that the accountants must not handle cash, and the cashier must not have access to the accounting records. Answer: TRUE Which of the following is true of internal control? A) A company's outside auditor is responsible for the company's internal control system. B) One of the major purposes of internal control is to ensure that the assets are safeguarded. C) Internal control procedures tend to diminish the importance of operational efficiency. D) Internal controls are mainly used to ensure timely payment of liabilities. Answer: B Which of the following is one of the purposes of internal control? A) to encourage employees to follow company policy B) to ensure timely payment of Accounts Payables C) to ensure timely collection of Accounts Receivable D) to guarantee that a business makes a profit Answer: A Which of the following is representative of safeguarding assets? A) keeping office supplies under lock and key B) reducing expense to increase operating profit C) increasing operating profit to increase net income D) ensuring maximum use of resources Answer: A Which of the following is one of the benefits provided by internal control? A) ensures timely collection of Accounts Receivables B) ensures that financial statements are produced timely C) guarantees that a business makes profit D) promotes operational efficiency Answer: D Which of the following is a key element of good internal control? A) having latest version of information system installed B) having audits at periodic intervals C) having a good working environment for employees D) allowing no vacations and job rotations Answer: B Which of the following describes "firewall"? A) a malicious program that enters program code or destroys data without authorization B) when two or more people cooperate together to defraud a company C) a technique for protecting data D) when a company defrauds its suppliers by making false claims Answer: C Which of the following describes the control environment? A) Internal auditors monitor company controls to safeguard assets, and external auditors monitor the controls to ensure that the accounting records are accurate. B) The control environment is the "tone at the top" of the business.
In the following situation, which internal control procedure needs strengthening? Santhom Inc. does not have a separate accounting department. Its operating departments are also responsible for recording transactions in the books of accounts of the company apart from their main operations. A) assignment of responsibilities B) competent, reliable, and ethical personnel C) separation of duties D) documents Answer: C A pharmaceutical company testing drugs to determine possible side effects is a part of: A) monitoring controls. B) information systems. C) control procedures. D) risk assessment. Answer: D Which of the following is a problem that must be addressed in the internal controls for e- commerce? A) encryption B) firewall C) phishing expeditions D) separation of duties Answer: C A(n) ________ is a security procedure designed for e-commerce. A) burglar alarm B) firewall C) fireproof vault D) inventory storage Answer: B Two or more people working together to circumvent internal controls and defraud a company is known as: A) encryption. B) firewalls. C) collusion. D) separation of duties. Answer: C
Learning Objective 8-
A point-of-sale terminal provides control over cash receipts over the counter. Answer: TRUE As a part of the internal control over cash receipts by mail, the mailroom sends both the customer checks and the remittance advices to the accounting department. Answer: FALSE Regarding controls over cash receipts by mail, the bank deposit slip should be compared to the remittance advices by the accounting department. Answer: FALSE For strong controls over cash receipts, the checks to be deposited should be sent to the treasurer, and the remittance advices should be sent to the accounting department.
Answer: TRUE As long as the same person deposits customer checks and records the deposits into the journal, there will be good internal control over cash receipts. Answer: FALSE A basic principle of internal control over cash receipts is that the deposit of the cash and the recording of the receipts into the journal should be separated. Answer: TRUE Which of the following is the last step in the daily control over cash receipts by mail? A) A mailroom employee sends all customer checks to the treasurer who has the cashier make the bank deposit. B) The controller opens the mail and sends the remittance advices to the accounting department. C) The controller compares the records of the day's bank deposit amount from the treasurer and the debit to cash from the accounting department. D) The accounting department prepares journal entries to cash and the customers' accounts. Answer: C Which of the following is described as a system where customers send their checks directly to a post office box that belongs to a bank? A) an encryption system B) an imprest system C) a lock-box system D) a firewall system Answer: C In a large company, the person who is responsible for comparing cash and the bank balance is the: A) CEO. B) CFO. C) controller. D) treasurer. Answer: C
Learning Objective 8-
Before signing a check, the controller or the treasurer should examine the purchase order, the invoice, and the receiving report to determine that the company received the goods and that the company is paying only for the goods received. Answer: TRUE A receiving report should be matched with the supplier invoice before a payment to the supplier is approved. Answer: TRUE For good controls over cash payments, the company officer approving a payment voucher should be the same as the person who ordered the goods, to ensure that the correct amount of cash is paid. Answer: FALSE Which of the following is the first step in the purchasing and payment process? A) The supplier ships the goods and sends an invoice to the purchaser.
Answer: FALSE Petty cash is a fund containing a small amount of cash that is used to pay for minor expenditures. Answer: TRUE The journal entry to replenish a petty cash fund includes a debit to the Petty Cash account and a credit to the Expense account. Answer: FALSE The journal entry to open a new petty cash fund includes a debit to the Petty Cash account and a credit to the Cash account. Answer: TRUE A key to strong control over petty cash is to ensure that several persons serve as custodian at one time. Answer: FALSE Diff: 1 LO: 8- AACSB: Concept AICPA Functional: Measurement An imprest system is a way to account for petty cash by maintaining a constant balance in the petty cash account, supported by the fund, cash plus payment tickets, totaling the same amount. Answer: TRUE Which is the most liquid form of assets? A) Cash B) Accounts Receivable C) Inventory D) Supplies Answer: A A company has a petty cash fund amount of $300. When replenished, it has petty cash receipts of $30 for gas expense, $32 for postage expense, $16 for supplies expense and $ for miscellaneous expenses. Assume the cash balance is not over or short. In the journal entry, Cash would be credited with: A) $ B) $ C) $ D) $ Answer: A Explanation: A) Amount of cash spent = $30 + $32 + $16 + $10 = $ The petty cash fund had an initial imprest balance of $200. It currently has $17 in cash, $ in miscellaneous cash receipts and an additional $180 in specific cash receipts. The debit to Cash Short & Over would be: A) $0. B) $17. C) $180. D) $183. Answer: A Explanation: A) Cash short & over = $200 - $17 - $3 - $180 = 0 Which of the following would be included in the entry to record the replenishment of a
petty cash fund? A) a credit to Petty cash B) a debit to Accounts Receivable C) a credit to Cash D) a credit to various expenses and assets Answer: C A petty cash fund was established with a $350 balance. It currently has cash of $41 and petty cash tickets totaling $309. Which of the following would be included in the entry to replenish the fund? A) a credit to Petty Cash for $ B) a debit to Petty Cash for $ C) a credit to Cash for $ D) debits to various expenses for $ Answer: D Explanation: D) Calculations: $350 - $41 = $ A petty cash fund was established with a $350 balance. It currently has cash of $41 and petty cash tickets totaling $309. Which of the following would be included in the entry to replenish the fund? A) a credit to Petty Cash for $ B) a debit to Petty Cash for $ C) a credit to Cash for $ D) a credit to Cash for $ Answer: D Explanation: D) Calculations: $350 - $41 = $ Petty cash is accounted for by maintaining a constant balance in the petty cash account, supported by the fund, cash plus payment tickets, totaling the same amount. Such a system is known as the: A) control system. B) voucher system. C) balanced system. D) imprest system. Answer: D A petty cash fund was established with a $500 balance. It currently has cash of $20 and petty cash tickets as shown below. Travel expense $ Office supplies expense 300 Equipment rental expense 50 Which of the following would be the journal entry to replenish the Petty Cash account? A) debit various expenses $480; credit Cash $ B) debit various expenses $480; credit Petty Cash $ C) debit Cash $20; credit various expenses $ D) credit Petty Cash $480; debit Cash $ Answer: A Explanation: A) Calculations: $500 - $20 = $ A petty cash fund was established with a $500 balance. It currently has cash of $19 and
Learning Objective 8-
The cash balance in a company's general ledger and the bank's balance on the bank statement will always be the same. Answer: FALSE All items on the book side of the bank reconciliation require journal entries. Answer: TRUE
Bank errors are posting errors made by the bank that either incorrectly increase or decrease the bank balance. Answer: TRUE On a bank reconciliation, deposits in transit are added on the bank side of the reconciliation. Answer: TRUE If the bank reconciliation includes a bank service charge, a journal entry is required, which debits Bank Expense and credits Cash. Answer: TRUE If the bank reconciliation includes a deposit in transit, a journal entry is required which includes a debit to cash. Answer: FALSE Journal entries are required if the bank reconciliation includes a book error. Answer: TRUE Journal entries that are necessitated by reconciling items on the book side of the reconciliation include either a debit to Cash or a credit to Cash. Answer: TRUE Which of the following is true of the bank reconciliation? A) It should not be prepared by an employee who handles cash transactions. B) It is prepared in place of the cash ledger. C) It is a financial statement. D) It guarantees that no errors have been made. Answer: A A check for which a maker's bank account has inadequate money to pay the check is known as: A) a nonsufficient funds check. B) an outstanding check. C) a restrictive check. D) a canceled check. Answer: A
