Accounting Internal Controls Quiz

Questions and Answers

Internal control systems involve a series of checks and balances that separate each of the functional duties involved in processing a transaction, and are normally designed to do all of the following except:

Ensure compliance with laws and regulations

Safeguard assets against loss or misuse

Provide accurate financial reporting

Prevent groups of employees from committing collusive acts of fraud (correct)

What are the current assets of most companies usually made up of?

Cash and assets expected to be converted to cash within a year.

What is a cash equivalent?

A current asset that is readily convertible into cash with minimal risk.

What is the principal reason for reconciling the cash balance per books with the balance shown on the bank statement?

To determine the amount of cash in the account actually available. Signup and view all the answers

Why is bad debt expense recognized in the same accounting period as the related revenue?

Because all costs incurred in the current period should be subtracted from current period revenues. Signup and view all the answers

A note receivable is a more formal document than an account receivable.

True Signup and view all the answers

What are the effects of FIFO during an inflationary time when compared to LIFO?

Increase net income and increase total assets. Signup and view all the answers

What is the effect of an error resulting in an understatement of ending inventory?

To overstate the cost of goods sold of the current period. Signup and view all the answers

What do prepaid expenses classified as current assets represent?

Current year cash payments that will not be treated as expenses and thus matched against revenues until the next year. Signup and view all the answers

How are inventories recorded?

As debits to assets when purchased and as debits to expenses when used. Signup and view all the answers

What happens when a firm buys land with an existing building and tears down the building?

The total cost of the land and old building are capitalized as land cost. Signup and view all the answers

What expenditures are capitalized as noncurrent assets?

Expenditures that are material and that have an economic benefit to the entity that extends beyond the current year. Signup and view all the answers

What best describes the process of accounting depreciation?

A process for recognizing the cost of an asset that should be matched against revenue earned as a result of using the asset over a period of time. Signup and view all the answers

What is the entry to record depreciation on long-term assets?

Decreases total assets and decreases earnings before taxes. Signup and view all the answers

Which depreciation method results in equal depreciation expense for each year of an asset's useful life?

Straight-line. Signup and view all the answers

Why is the present value concept widely applied in business?

Because money has value over time. Signup and view all the answers

What happens when a depreciable asset is sold?

A gain arises if the sales proceeds exceed the net book value. Signup and view all the answers

What is the present value of paying $200 at the end of each year for the next three years compared to paying $300 today?

Less than it would be if you had to pay $300 today and $300 at the end of this year. Signup and view all the answers

What are noncurrent intangible assets such as leasehold improvements, patents, and copyrights subject to?

Amortization. Signup and view all the answers

What is goodwill?

An asset that arises because the present value of an acquired company's estimated future earnings, discounted at the acquiring firm's ROI is more than the fair value of the net assets of the acquired company. Signup and view all the answers

Study Notes

Internal Control Systems

Designed to separate functional duties in transaction processing to prevent collusion among employees.

Current Assets

Composed of cash and assets expected to convert to cash within one year.

Cash Equivalents

Defined as current assets that can be easily converted to cash with minimal risk.

Cash Reconciliation

Reconciling cash balances is essential to determine actual available cash in the account.

Bad Debt Expense

Recognized in the same accounting period as related revenue to ensure accurate matching of costs and revenues.

Note Receivable

A formal document that signifies a promise for payment, more refined than an account receivable.

FIFO vs. LIFO

During inflation, FIFO leads to increased net income and total assets compared to LIFO.

Inventory Understatement

An understatement of ending inventory results in an overstatement of the cost of goods sold for the current period.

Prepaid Expenses

Classified as current assets; they represent cash payments for current year expenses that will be matched against revenues in the following year.

Inventories Accounting

Recorded as debits to assets upon purchase and as debits to expenses when utilized.

Land Purchase and Cost Capitalization

When land with an existing structure is acquired, both the land and building costs are capitalized as the land cost if the building is demolished.

Noncurrent Asset Expenditures

Expenditures are capitalized if they are material and provide economic benefits extending beyond the current year.

Accounting Depreciation Process

Recognizes the cost of an asset, matching it with the revenue generated from using the asset over time.

Depreciation Entry Effects

Recording depreciation reduces total assets and lowers earnings before taxes.

Straight-Line Depreciation

Results in equal depreciation expense for each year throughout an asset's useful life.

Present Value Concept

Money possesses value over time, making present value calculations essential in business.

Sale of Depreciable Assets

A gain is recognized when the selling price exceeds the net book value of the asset.

Obligation Present Value

The present value of multiple obligations is often less than a single payment made today due to the time value of money.

Intangible Assets Amortization

Noncurrent intangible assets, like patents and copyrights, undergo amortization.

Goodwill

Represents an asset arising when the present value of an acquired company's future earnings exceeds the fair value of its net assets.

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Description

Test your understanding of internal control systems in accounting with this quiz. You'll explore various functions of these systems and their role in preventing fraud and managing current assets. Perfect for students studying accounting principles.