Accounting Chapter 4 Learn Smart Flashcards

Questions and Answers

What is the effect of a company paying for a purchase with a credit card?

Accounts payable will increase.

What is a critical aspect of a good internal control system?

Separation of duties.

Preparation of a bank __________ helps maintain control of cash accounts.

reconciliation.

A(n) _________ difference in cash occurs when a company records a transaction either before or after the bank.

timing. Signup and view all the answers

When a person intentionally deceives another person or company for personal gain, this is referred to as?

Fraud. Signup and view all the answers

What is the most common source of occupational fraud?

Misuse of company resources. Signup and view all the answers

What are the three main objectives of internal control?

<ol> <li>Minimize errors and theft, 2) Safeguard company assets, 3) Encourage adherence to company policies and procedures.</li> </ol> Signup and view all the answers

The Public Company Accounting Reform and Investor Protection Act of 2002 is known as the?

Sarbanes-Oxley Act. Signup and view all the answers

Which events led to the passage of the Sarbanes-Oxley Act of 2002?

High profile accounting scandals during the early 2000s. Signup and view all the answers

What framework did the Committee of Sponsoring Organizations (COSO) provide?

Designing an internal control system. Signup and view all the answers

What are the two types of control activities?

Preventive and detective controls. Signup and view all the answers

What are some examples of preventive controls?

Physical controls and separation of duties. Signup and view all the answers

What are some examples of detective controls?

Audits, reconciliations, performance reviews. Signup and view all the answers

Who has the responsibility to apply accounting standards when communicating with investors and creditors?

Management. Signup and view all the answers

What is collusion in terms of internal control?

When two or more persons work together to circumvent internal control procedures and commit fraud. Signup and view all the answers

One of the most important internal controls for cash is the bank?

Reconciliation. Signup and view all the answers

If a company records a transaction before the bank records the same transaction, this is called a/an _______ difference.

timing. Signup and view all the answers

The Sarbanes-Oxley Act applies to?

Companies that are publicly traded. Signup and view all the answers

The framework for designing an internal control system is provided by the?

Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Signup and view all the answers

Separation of duties and E-commerce controls are examples of _______ controls.

Preventive. Signup and view all the answers

List the steps for a bank reconciliation in the correct order.

<ol> <li>Adjust bank's cash balance, 2) Adjust the company's cash balance, 3) Update the company's Cash account by recording items identified in the previous step.</li> </ol> Signup and view all the answers

What affects cash flows?

Any debit or credit to cash will affect a company's cash flow. Signup and view all the answers

Give some examples of cash inflows.

Collections on account, sale of services for cash. Signup and view all the answers

Give some examples of cash outflows.

Payment on account, payment of salaries. Signup and view all the answers

Selling goods to customers is a(n) ________ activity.

operating. Signup and view all the answers

Selling stocks to investors is a ____________ activity.

financing. Signup and view all the answers

Purchasing equipment is a(n) ___________ activity.

investing. Signup and view all the answers

The entry for a sale to customers is different depending on whether the customer pays with cash or a check.

False Signup and view all the answers

If a prospective investor wants to know how much cash a company has on December 31st, where could she find the information?

On the statement of cash flows and on the balance sheet. Signup and view all the answers

What asset is most easily stolen and susceptible to fraud?

Cash. Signup and view all the answers

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

Petty cash fund. Signup and view all the answers

What is required if a non-sufficient funds check is written?

An adjustment to the cash balance is required. Signup and view all the answers

How will the bank show a customer's deposit on bank statements?

As a credit, because a deposit is a liability for the bank. Signup and view all the answers

Study Notes

Accounting Principles and Internal Controls

Accounts payable increases when a purchase is made using a credit card.
Effective internal control systems rely on the separation of duties to prevent errors and fraud.
Bank reconciliation is vital for maintaining accurate cash account controls.

Timing Differences and Fraud

A timing difference in cash occurs when transaction recording by a company does not align with bank recording.
Fraud is the intentional deception for personal gain and often involves misuse of company resources.
Collusion occurs when two or more individuals work together to bypass internal controls and commit fraud.

Legislation and Frameworks

The Sarbanes-Oxley Act, enacted in response to high-profile accounting scandals, mandates stricter compliance for publicly traded companies.
The Committee of Sponsoring Organizations (COSO) provides a framework for designing effective internal control systems.

Types of Controls

Control activities are categorized into preventive and detective controls.
Preventive controls include physical measures and separation of duties to minimize risks before they occur.
Detective controls identify issues after they arise, including audits and reconciliations.

Cash Flow Management

Changes in cash flows result from any debit or credit transactions involving cash.
Cash inflows can arise from collections on accounts and sales of services, while cash outflows include payments on accounts and salaries.
Operating activities involve selling goods, financing activities involve selling stocks, and investing activities pertain to purchasing equipment.

Cash Management Practices

A petty cash fund is used for minor, miscellaneous purchases.
Cash remains the most vulnerable asset to theft and fraud.
A bank review will show customer deposits as credits, reflecting increases in bank liabilities.

Reconciliation Process

To perform a bank reconciliation, first adjust the bank's cash balance, followed by adjusting the company's cash balance, and finally update the company's cash account.
Non-sufficient funds checks require cash balance adjustments on reconciliations.

Accounting and Reporting Standards

Management is responsible for applying accounting standards effectively when dealing with investors and creditors.
Cash information as of a specific date can be found on the statement of cash flows or the balance sheet.

Summary of True/False Concept

Transactions involving customer payments do not differ in entry method whether cash or check is used, both are treated as cash transactions.

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Test your knowledge of key concepts in Accounting Chapter 4 with these smart flashcards. Topics include accounts payable, internal controls, and cash account reconciliations. Perfect for reinforcing your understanding of accounting fundamentals.