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Financial Accounting 5th Edition David Spiceland 5th Edition- Test Bank
Sample Questions
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Chapter 2 The Accounting Cycle: During the Period
1) External transactions are transactions the company conducts with a separate economic entity, such as selling products to a customer, purchasing supplies from a vendor, paying salaries to an employee, and borrowing money from a bank.
Answer: TRUE
Difficulty: 1 Easy
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
2) Internal transactions are events that affect the financial position of the company but do not include an exchange with a separate economic entity.
Answer: TRUE
Difficulty: 1 Easy
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
3) A list of all account names used to record transactions of a company is referred to as a T-account.
Answer: FALSE
Explanation: This is referred to as a chart of accounts.
Difficulty: 1 Easy
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
4) A source document provides information related to external transactions.
Answer: TRUE
Difficulty: 1 Easy
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
5) After recording each transaction, total assets must equal total liabilities plus stockholders’ equity.
Answer: TRUE
Difficulty: 1 Easy
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement
6) If a transaction causes total assets of the company to increase by $2,000, then liabilities plus stockholders’ equity also increases by $2,000.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: FN Measurement
7) If a transaction causes total assets of the company to increase by $5,000 and total liabilities to increase by $3,000, then stockholders’ equity increases by $8,000.
Answer: FALSE
Explanation: Stockholders’ equity increases by $2,000.
Difficulty: 3 Hard
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
8) Borrowing cash from the bank causes assets to increase and liabilities to increase.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
9) Purchasing equipment using cash causes assets to increase.
Answer: FALSE
Explanation: One asset goes up; another asset goes down. There is no change to total assets.
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
10) Providing services to customers for cash causes stockholders’ equity to increase.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
11) Paying employees’ salaries for the current month causes no change to stockholders’ equity.
Answer: FALSE
Explanation: Salaries expense would reduce stockholders’ equity.
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
12) Paying dividends to its stockholders causes a company’s stockholders’ equity to decrease.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
13) Selling common stock for cash causes assets to increase and stockholders’ equity to decrease.
Answer: FALSE
Explanation: Stockholders’ equity increases.
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
14) Purchasing office supplies on account causes assets to increase and liabilities to increase.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
15) Providing services to customers on account causes assets to increase and stockholders’ equity to increase.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
16) Receiving cash in advance from a customer for services to be provided in the future causes assets to increase and stockholders’ equity to increase.
Answer: FALSE
Explanation: Assets increase and liabilities increase.
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
17) Paying for one year of rent in advance causes one asset to increase and another asset to decrease, so there is no effect on the accounting equation.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
18) Purchasing supplies on account increases the balance of the Accounts Receivable account.
Answer: FALSE
Explanation: The balance of Accounts Payable increases.
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
19) Amounts owed from customers are recorded in the Accounts Receivable account.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
20) The two components of stockholders’ equity are Debits and Credits.
Answer: FALSE
Explanation: The two components of stockholders’ equity are Common Stock and Retained Earnings.
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
21) Revenues have the effect of increasing retained earnings.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
22) Expenses have the effect of decreasing retained earnings.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
23) Receiving cash in advance from customers increases the Service Revenue account.
Answer: FALSE
Explanation: Receiving cash in advance from customers increases the Deferred Revenue account.
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
24) Deferred Revenue is a liability account.
Answer: TRUE
Difficulty: 1 Easy
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement
25) Liability accounts increase with a debit and decrease with a credit.
Answer: FALSE
Explanation: Liability accounts increase with a credit and decrease with a debit.
Difficulty: 2 Medium
Topic: Effects of Debits and Credits on Account Balances
Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
26) Liability accounts increase with a credit and decrease with a debit.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Debits and Credits on Account Balances
Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
27) Common Stock increases with a credit and decreases with a debit.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Debits and Credits on Account Balances
Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
28) Revenue accounts increase with a debit and decrease with a credit.
Answer: FALSE
Explanation: Revenue accounts increase with a credit and decrease with a debit.
Difficulty: 2 Medium
Topic: Effects of Debits and Credits on Account Balances
Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
29) Expense accounts increase with a debit and decrease with a credit.
Answer: TRUE
Difficulty: 2 Medium
Topic: Effects of Debits and Credits on Account Balances
Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
30) The Dividends account increases with a credit and decreases with a debit.
Answer: FALSE
Explanation: The Dividends account increases with a debit and decreases with a credit.
Difficulty: 2 Medium
Topic: Effects of Debits and Credits on Account Balances
Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
31) A debit to an account balance always results in the balance increasing.
Answer: FALSE
Explanation: A debit increases assets, dividends, and expenses, but decreases liabilities, stockholders’ equity, and revenues.
Difficulty: 2 Medium
Topic: Effects of Debits and Credits on Account Balances
Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
32) A credit to an account balance always results in the balance decreasing.
Answer: FALSE
Explanation: A credit decreases assets, dividends, and expenses, but increases liabilities, stockholders’ equity, and revenues.
Difficulty: 2 Medium
Topic: Effects of Debits and Credits on Account Balances
Learning Objective: 02-03 Assess whether the impact of external transactions results in a debit or credit to an account balance.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
33) A journal provides a chronological record of all transactions affecting a firm.
Answer: TRUE
Difficulty: 1 Easy
Topic: Recording Transactions in a Journal
Learning Objective: 02-04 Record transactions in a journal using debits and credits.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
34) For each transaction, there must be at least one debit amount and one credit amount.
Answer: TRUE
Difficulty: 2 Medium
Topic: Recording Transactions in a Journal
Learning Objective: 02-04 Record transactions in a journal using debits and credits.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
35) For each transaction, the total debit amounts must equal the total credit amounts.
Answer: TRUE
Difficulty: 2 Medium
Topic: Recording Transactions in a Journal
Learning Objective: 02-04 Record transactions in a journal using debits and credits.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
36) Selling common stock for cash is recorded with a debit to common stock.
Answer: FALSE
Explanation: Selling common stock for cash is recorded with a credit to common stock.
Difficulty: 2 Medium
Topic: Recording Transactions in a Journal
Learning Objective: 02-04 Record transactions in a journal using debits and credits.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
37) Borrowing cash from the bank is recorded with a debit to cash.
Answer: TRUE
Difficulty: 2 Medium
Topic: Recording Transactions in a Journal
Learning Objective: 02-04 Record transactions in a journal using debits and credits.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
38) Purchasing office supplies is recorded with a credit to office supplies.
Answer: FALSE
Explanation: Purchasing office supplies is recorded with a debit to office supplies.
Difficulty: 2 Medium
Topic: Recording Transactions in a Journal
Learning Objective: 02-04 Record transactions in a journal using debits and credits.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
39) Paying employees’ salaries for the current period is recorded with a debit to Salaries Expense.
Answer: TRUE
Difficulty: 2 Medium
Topic: Recording Transactions in a Journal
Learning Objective: 02-04 Record transactions in a journal using debits and credits.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
40) Providing services to customers is recorded with a debit to Service Revenue.
Answer: FALSE
Explanation: Providing services to customers is recorded with a credit to Service Revenue.
Difficulty: 2 Medium
Topic: Recording Transactions in a Journal
Learning Objective: 02-04 Record transactions in a journal using debits and credits.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
41) The general ledger includes all accounts used to record the company’s transactions.
Answer: TRUE
Difficulty: 1 Easy
Topic: Posting to the General Ledger
Learning Objective: 02-05 Post transactions to the general ledger.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
42) The process of transferring the debit and credit information from the journal to individual accounts in the general ledger is called journalizing.
Answer: FALSE
Explanation: This process is called posting.
Difficulty: 1 Easy
Topic: Posting to the General Ledger
Learning Objective: 02-05 Post transactions to the general ledger.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
43) After posting transactions to the general ledger accounts, the sum of the accounts with debit balances should equal the sum of the accounts with credit balances.
Answer: TRUE
Difficulty: 2 Medium
Topic: Trial Balance
Learning Objective: 02-06 Prepare a trial balance.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
44) A trial balance is a list of all accounts and their balances at a particular date, showing that assets equal liabilities.
Answer: FALSE
Explanation: The trial balance shows that total debits equal total credits.
Difficulty: 1 Easy
Topic: Trial Balance
Learning Objective: 02-06 Prepare a trial balance.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
45) If total debits equal total credits in the trial balance, then all balances are correct.
Answer: FALSE
Explanation: A trial balance could contain offsetting errors where the balance of one account is misstated in one direction but the balance of another account (with the same type of debit or credit balance) is misstated in the other direction.
Difficulty: 2 Medium
Topic: Trial Balance
Learning Objective: 02-06 Prepare a trial balance.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
46) Which of the following is not part of measuring external transactions?
- A) Using source documents to analyze accounts affected.
- B) Recording transactions.
- C) Making payments on all amounts owed.
- D) Analyzing transactions for their effect on the accounting equation.
Answer: C
Difficulty: 1 Easy
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
47) External events include all of the following except:
- A) Paying rent.
- B) Purchasing equipment.
- C) Using office supplies.
- D) Collecting an account receivable.
Answer: C
Difficulty: 2 Medium
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
48) The full set of procedures used to accomplish the measurement/communication process of financial accounting is referred to as the:
- A) Trial balance.
- B) Accounting cycle.
- C) Chart of accounts.
- D) General ledger.
Answer: B
Difficulty: 1 Easy
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
49) Which step in the process of measuring external transactions involves assessing the equality of total debits and total credits for the period?
- A) Use source documents to determine accounts affected by the transaction.
- B) Prepare a trial balance.
- C) Analyze the impact of the transaction on the accounting equation.
- D) Post the transaction to the T-account in the general ledger.
Answer: B
Difficulty: 2 Medium
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
50) Which step in the process of measuring external transactions involves determining the effect on assets, liabilities, and stockholders’ equity?
- A) Use source documents to determine accounts affected by the transaction.
- B) Prepare a trial balance.
- C) Analyze the impact of the transaction on the accounting equation.
- D) Post the transaction to the T-account in the general ledger.
Answer: C
Difficulty: 2 Medium
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
51) Which of the following typically is considered a source document for gathering information about a transaction?
- A) Trial balance.
- B) Income statement.
- C) Sales invoice.
- D) General ledger.
Answer: C
Difficulty: 1 Easy
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
52) Which of the following best describes a purpose of source documents?
- A) Provide information related to external transactions, such as date and amount.
- B) Used by accountants to record transactions in specific accounts.
- C) Keep a record of transactions between the company and its vendors, customers, and other parties with whom the company conducts business.
- D) All of the other answers provide a correct statement.
Answer: D
Difficulty: 2 Medium
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
53) A(n) ________ summarizes all transactions related to a particular item over a period of time.
- A) Debit
- B) Account
- C) Chart of accounts
- D) Source document
Answer: B
Difficulty: 1 Easy
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
54) A list of all account names used to record transactions of a company is referred to as the:
- A) Chart of Accounts.
- B) Income statement.
- C) General journal.
- D) Balance sheet.
Answer: A
Difficulty: 1 Easy
Topic: External Transactions
Learning Objective: 02-01 Identify the basic steps in measuring external transactions.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
55) For each transaction recorded in an accounting system, the basic equation that must be maintained at all times is:
- A) Assets = Liabilities + Stockholders’ Equity.
- B) Cash Increases = Cash Decreases.
- C) Revenues = Expenses + Dividends.
- D) Assets = Liabilities.
Answer: A
Difficulty: 1 Easy
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement
56) The equation which shows a company’s resources equal claims to those resources is:
- A) Revenues − Expenses = Net Income.
- B) Cash Increases − Cash Decreases = Change in Cash.
- C) Common Stock + Retained Earnings = Stockholders’ Equity.
- D) Assets = Liabilities + Stockholders’ Equity.
Answer: D
Difficulty: 1 Easy
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement
57) The equation that shows assets equal liabilities plus stockholders’ equity signifies that a company:
- A) Is able to pay its obligations as they come due.
- B) Is profitable.
- C) Has resources equal to claims to those resources.
- D) All of the other answers provide a correct statement.
Answer: C
Difficulty: 1 Easy
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement
58) The following amounts are reported in the ledger of Mariah Company:
| Assets | $ | 80,000 | |
| Liabilities | 36,000 | ||
| Retained Earnings | 12,000 |
What is the balance in the Common Stock account?
- A) $44,000.
- B) $32,000.
- C) $48,000.
- D) $42,000.
Answer: B
Explanation: Assets ($80,000) = Liabilities ($36,000) + Stockholders’ Equity ($32,000 + $12,000)
Difficulty: 3 Hard
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
59) When a company pays employees’ salaries for the current period, how will the basic accounting equation be affected?
- A) Stockholders’ equity decreases.
- B) Revenues decrease.
- C) Expenses decrease.
- D) Liabilities decrease.
Answer: A
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
60) When cash payments are made to stockholders, what is the effect on the company’s accounts?
- A) Cash decreases and dividends increase.
- B) Cash increases and dividends decrease.
- C) Cash decreases and common stock decreases.
- D) Cash increases and common stock increases.
Answer: A
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
61) Receiving cash from customers before services are performed results in:
- A) Prepaid Assets.
- B) Service Revenue.
- C) Deferred Revenues.
- D) Accounts Receivable.
Answer: C
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
62) When the company pays stockholders a dividend, what is the effect on the accounting equation for that company?
- A) Decrease stockholders’ equity and increase assets.
- B) Increase liabilities and increase assets.
- C) Decrease assets and decrease liabilities.
- D) Decrease assets and decrease stockholders’ equity.
Answer: D
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
63) Pumpkin Inc. sold $500 in pumpkins to a customer on account on January 1. On January 11, Pumpkin collected the cash from that customer. What is the impact on Pumpkin’s accounting equation from the collection of cash?
- A) No net effect to the accounting equation.
- B) Decrease assets and increase liabilities.
- C) Increase assets and increase liabilities.
- D) Decrease assets and decrease liabilities.
Answer: A
Difficulty: 3 Hard
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
64) A company receives a $50,000 cash deposit from a customer on October 15, but will not provide services until November 20. Which of the following statements is true?
- A) The company records service revenue on October 15.
- B) The company records cash collection on November 20.
- C) The company records deferred revenue on October 15.
- D) The company records nothing on October 15.
Answer: C
Difficulty: 3 Hard
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Apply
AACSB: Knowledge Application
AICPA: FN Measurement
65) Which of the following would increase assets and increase liabilities?
- A) Provide services to customers on account.
- B) Purchase office supplies on account.
- C) Pay dividends to stockholders.
- D) Receive a utility bill for the current month. Plan to pay bill beginning of next month.
Answer: B
Difficulty: 2 Medium
Topic: Effects of Transactions on the Accounting Equation
Learning Objective: 02-02 Analyze the impact of external transactions on the accounting equation.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
Financial Accounting, 5e (Spiceland)
Chapter 4 Cash and Internal Controls
1) Managers of the company act as stewards or caretakers of the company’s assets.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
2) Common types of financial statement fraud include creating fictitious revenues from a fake customer, improperly valuing assets, and mismatching revenues and expenses.
Answer: TRUE
Difficulty: 2 Medium
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Understand
AACSB: Ethics
AICPA: BB Critical Thinking
3) In response to corporate accounting scandals and to public outrage over seemingly widespread unethical behavior of top executives, Congress passed the Sarbanes-Oxley Act.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
4) The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles.
Answer: FALSE
Explanation: The Sarbanes-Oxley Act is also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX.
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
5) 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.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
6) Auditors of public companies can perform the full range of audit and nonaudit consulting services for their audit clients.
Answer: FALSE
Explanation: Auditors are prohibited from providing most nonaudit services, such as consulting, to their clients by the Sarbanes-Oxley Act.
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
7) 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.
Answer: TRUE
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
8) Internal control is a company’s plan to (1) improve the accuracy and reliability of accounting information and (2) safeguard the company’s assets.
Answer: TRUE
Difficulty: 1 Easy
Topic: Framework for Internal Control
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
9) One benefit of internal control is greater reliance by investors on reported financial statements.
Answer: TRUE
Difficulty: 1 Easy
Topic: Framework for Internal Control
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
10) A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB).
Answer: FALSE
Explanation: A framework for designing an internal control system is provided by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
Difficulty: 1 Easy
Topic: Framework for Internal Control
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
11) The control environment refers to the overall top-to-bottom attitude of the company with respect to internal control.
Answer: TRUE
Difficulty: 1 Easy
Topic: Framework for Internal Control
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
12) Risk assessment identifies and analyzes internal and external threats to achieving a company’s objectives.
Answer: TRUE
Difficulty: 2 Medium
Topic: Framework for Internal Control
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
13) Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the same client.
Answer: FALSE
Explanation: Separation of duties is where individuals who have physical responsibility for assets should not also have access to accounting records.
Difficulty: 1 Easy
Topic: Framework for Internal Control
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
14) 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.
Answer: TRUE
Difficulty: 2 Medium
Topic: Framework for Internal Control
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
15) The internal control component of information and communication relates to the effectiveness of accurately measuring and communicating business transactions.
Answer: TRUE
Difficulty: 1 Easy
Topic: Framework for Internal Control
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Reporting
16) 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.
Answer: TRUE
Difficulty: 1 Easy
Topic: Framework for Internal Control
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
17) Separation of duties occurs when two or more people act in coordination to circumvent internal controls.
Answer: FALSE
Explanation: This is the act of collusion.
Difficulty: 1 Easy
Topic: Framework for Internal Control
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
18) Effective internal controls ensure a company’s success and survival.
Answer: FALSE
Explanation: Effective internal controls improve the company’s likelihood of success and survival, but do not provide a guarantee.
Difficulty: 1 Easy
Topic: Framework for Internal Control
Learning Objective: 04-02 Identify the components, responsibilities, and limitations of internal control.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement
19) 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.
Answer: TRUE
Difficulty: 2 Medium
Topic: Cash and Cash Equivalents
Learning Objective: 04-03 Define cash and cash equivalents.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Reporting
20) 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.
Answer: TRUE
Difficulty: 2 Medium
Topic: Cash and Cash Equivalents
Learning Objective: 04-03 Define cash and cash equivalents.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Reporting
21) 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.
Answer: FALSE
Explanation: Accounts receivable is a separately reported asset from cash.
Difficulty: 2 Medium
Topic: Cash and Cash Equivalents
Learning Objective: 04-03 Define cash and cash equivalents.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Reporting
22) 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.
Answer: FALSE
Explanation: Cash equivalents are included in the cash balance.
Difficulty: 2 Medium
Topic: Cash and Cash Equivalents
Learning Objective: 04-03 Define cash and cash equivalents.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Reporting
23) Common examples of cash equivalents are money market funds, Treasury bills, and certificates of deposit.
Answer: TRUE
Difficulty: 2 Medium
Topic: Cash and Cash Equivalents
Learning Objective: 04-03 Define cash and cash equivalents.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
24) Recording all cash receipts as soon as possible is considered a good internal control.
Answer: TRUE
Difficulty: 2 Medium
Topic: Cash Controls – Receipts
Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
25) Opening mail and making a list of checks received once per week is considered a good internal control over cash receipts.
Answer: FALSE
Explanation: These tasks should be performed each day.
Difficulty: 2 Medium
Topic: Cash Controls – Receipts
Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
26) Whether a customer uses cash, a check, or a debit card to make a purchase, the company records the transaction as a cash sale.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cash Controls – Receipts
Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement
27) When customers pay for services with a check, the company should debit Accounts Receivable and credit Service Revenue.
Answer: FALSE
Explanation: The debit should be to Cash.
Difficulty: 2 Medium
Topic: Cash Controls – Receipts
Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
28) When customers pay for services with a debit card, the company should debit Cash and credit Service Revenue.
Answer: TRUE
Difficulty: 2 Medium
Topic: Cash Controls – Receipts
Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
29) When a company pays for services received using a check, it should credit Accounts Payable until the check is paid by the bank.
Answer: FALSE
Explanation: The credit is to the Cash account.
Difficulty: 2 Medium
Topic: Cash Controls – Disbursements
Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
30) When a company pays for services received using a credit card, it should credit Accounts Payable.
Answer: TRUE
Difficulty: 2 Medium
Topic: Cash Controls – Disbursements
Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
31) Allowing the employee who authorizes purchases to also prepare the check is an example of good internal control.
Answer: FALSE
Explanation: A single employee should not perform both of these tasks.
Difficulty: 2 Medium
Topic: Cash Controls – Disbursements
Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
32) Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls.
Answer: TRUE
Difficulty: 1 Easy
Topic: Cash Controls – Disbursements
Learning Objective: 04-04 Understand controls over cash receipts and cash disbursements.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
33) A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company’s own records.
Answer: TRUE
Difficulty: 1 Easy
Topic: Bank Reconciliation
Learning Objective: 04-05 Reconcile a bank statement.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
34) Differences in the company’s cash balance and the bank’s cash balance occur because of either timing differences or errors.
Answer: TRUE
Difficulty: 2 Medium
Topic: Bank Reconciliation
Learning Objective: 04-05 Reconcile a bank statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
35) 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.
Answer: FALSE
Explanation: This is an example of a timing difference.
Difficulty: 2 Medium
Topic: Bank Reconciliation
Learning Objective: 04-05 Reconcile a bank statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
36) Cash receipts of the company that have not yet been recorded by the bank are referred to as checks outstanding.
Answer: FALSE
Explanation: These are referred to as deposits outstanding.
Difficulty: 1 Easy
Topic: Bank Reconciliation
Learning Objective: 04-05 Reconcile a bank statement.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
37) Checks outstanding are checks the company has written that have not yet been recorded by the bank.
Answer: TRUE
Difficulty: 1 Easy
Topic: Bank Reconciliation
Learning Objective: 04-05 Reconcile a bank statement.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
38) A deposit outstanding will cause the bank’s cash balance to be higher than the company’s cash balance.
Answer: FALSE
Explanation: The company’s balance will be higher.
Difficulty: 2 Medium
Topic: Bank Reconciliation
Learning Objective: 04-05 Reconcile a bank statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
39) A check outstanding will cause the bank’s cash balance to be higher than the company’s cash balance.
Answer: TRUE
Difficulty: 2 Medium
Topic: Bank Reconciliation
Learning Objective: 04-05 Reconcile a bank statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
40) An NSF check is an example of a cash transaction that is initially recorded by the bank and later by the company after notification.
Answer: TRUE
Difficulty: 2 Medium
Topic: Bank Reconciliation
Learning Objective: 04-05 Reconcile a bank statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
41) 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.
Answer: FALSE
Explanation: Interest earned is initially recorded by the bank.
Difficulty: 2 Medium
Topic: Bank Reconciliation
Learning Objective: 04-05 Reconcile a bank statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
42) 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.
Answer: FALSE
Explanation: The cash balance needs to be updated for items used to reconcile the company’s cash balance.
Difficulty: 2 Medium
Topic: Bank Reconciliation
Learning Objective: 04-05 Reconcile a bank statement.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement
43) A petty cash fund represents cash on hand and is used to pay for minor purchases.
Answer: TRUE
Difficulty: 1 Easy
Topic: Employee Purchases
Learning Objective: 04-06 Account for employee purchases.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
44) A petty cash fund should have just enough cash to make minor expenditures over a reasonable period (such as a week or a month).
Answer: TRUE
Difficulty: 1 Easy
Topic: Employee Purchases
Learning Objective: 04-06 Account for employee purchases.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
45) A company’s cash is reported in two financial statements-income statement and statement of cash flows.
Answer: FALSE
Explanation: Cash is reported in the balance sheet and in the statement of cash flows.
Difficulty: 1 Easy
Topic: Statement of Cash Flows
Learning Objective: 04-07 Identify the major inflows and outflows of cash.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Reporting
46) A company’s cash balance is typically reported as a current asset in the balance sheet and information about the company’s cash receipts and cash payments during the period is reported in the statement of cash flows.
Answer: TRUE
Difficulty: 2 Medium
Topic: Statement of Cash Flows
Learning Objective: 04-07 Identify the major inflows and outflows of cash.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Reporting
47) 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.
Answer: TRUE
Difficulty: 1 Easy
Topic: Statement of Cash Flows
Learning Objective: 04-07 Identify the major inflows and outflows of cash.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Reporting
48) Investing activities include cash transactions involving revenue and expense events during the period.
Answer: FALSE
Explanation: These are operating activities.
Difficulty: 2 Medium
Topic: Statement of Cash Flows
Learning Objective: 04-07 Identify the major inflows and outflows of cash.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Reporting
49) Investing activities include cash investments in long-term assets and investment securities.
Answer: TRUE
Difficulty: 2 Medium
Topic: Statement of Cash Flows
Learning Objective: 04-07 Identify the major inflows and outflows of cash.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Reporting
50) Investing activities include transactions designed to raise cash or finance the business.
Answer: FALSE
Explanation: These are financing activities.
Difficulty: 2 Medium
Topic: Statement of Cash Flows
Learning Objective: 04-07 Identify the major inflows and outflows of cash.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Reporting
51) Only transactions involving cash affect a company’s cash flows.
Answer: TRUE
Difficulty: 2 Medium
Topic: Statement of Cash Flows
Learning Objective: 04-07 Identify the major inflows and outflows of cash.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Reporting
52) A company’s ratio of cash to noncash assets is calculated as the total cash balance divided by all noncash assets.
Answer: TRUE
Difficulty: 1 Easy
Topic: Analysis – Cash Holdings
Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: FN Measurement
53) Companies often have a high ratio of cash to noncash assets when they consistently pay cash dividends.
Answer: FALSE
Explanation: Cash dividends represent the return of cash to stockholders and therefore reduce the balance of cash.
Difficulty: 3 Hard
Topic: Analysis – Cash Holdings
Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
54) Typically, the more volatile the company’s trend in operating cash flows, the higher the operating risk of the company.
Answer: TRUE
Difficulty: 3 Hard
Topic: Analysis – Cash Holdings
Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Decision Making
55) An advantage of a high ratio of cash to noncash assets is that the company has funds to pay obligations as they become due.
Answer: TRUE
Difficulty: 3 Hard
Topic: Analysis – Cash Holdings
Learning Objective: 04-08 Demonstrate the link between cash reported in the balance sheet and cash reported in the statement of cash flows.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Decision Making
56) Occupational fraud:
- A) Is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employer’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.
Answer: A
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Ethics
AICPA: BB Critical Thinking
57) The phrase “cooking the books” is commonly used to refer to:
- A) The company’s accounting records being thoroughly audited at the end of the year.
- B) The company’s financial statements being presented in a deceptive form.
- C) The company’s ability to provide timely financial information under operating pressure.
- D) The inclusion of a variety of information in the financial statements.
Answer: B
Difficulty: 2 Medium
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
58) The three elements of the fraud triangle are:
- A) Motivation.
- B) Rationalization.
- C) Opportunity.
- D) All of the other answers are elements of the fraud triangle.
Answer: D
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Ethics
AICPA: BB Critical Thinking
59) The three elements present in every fraud are commonly referred to as the ________.
- A) Triple threat
- B) Three-way manipulation
- C) Fraud triangle
- D) Three-alarm fire
Answer: C
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Ethics
AICPA: BB Critical Thinking
60) Which element of the fraud triangle do companies have the greatest ability to eliminate?
- A) Motivation.
- B) Rationalization.
- C) Opportunity.
- D) Intelligence.
Answer: C
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Ethics
AICPA: BB Critical Thinking
61) Fraudulent reporting by management could include:
- A) Fictitious revenues from a fake customer.
- B) Improper asset valuation.
- C) Mismatching revenues and expenses.
- D) All of the other answers could involve fraudulent reporting.
Answer: D
Difficulty: 2 Medium
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Understand
AACSB: Ethics
AICPA: BB Critical Thinking
62) A company’s plans to minimize theft and enhance the accuracy of accounting information are referred to as:
- A) Corporate controls.
- B) Security controls.
- C) Internal controls.
- D) General controls.
Answer: C
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
63) What key piece of legislation was passed in response to corporate accounting scandals by Enron, WorldCom, and others?
- A) Sarbanes-Oxley Act.
- B) 1933 Securities Act.
- C) 1934 Securities Exchange Act.
- D) Regulation Fair Disclosure.
Answer: A
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
64) The Sarbanes-Oxley Act requires that companies must:
- A) Conduct customer surveys each year to ensure satisfaction with products and services.
- B) Document internal controls and assess their effectiveness each year.
- C) Pay taxes owed to the Internal Revenue Service by the tax filing date.
- D) Devise a budget each year to ensure cash outflows are not greater than cash inflows.
Answer: B
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
65) Under the Sarbanes-Oxley Act, management is responsible for:
- A) Analysts’ having positive comments about the company’s operations.
- B) The reliability of financial statements.
- C) Increasing the company’s stock price.
- D) All of the other answers represent management responsibilities under the Sarbanes-Oxley Act.
Answer: B
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
66) Which of the following does not represent a major provision of the Sarbanes-Oxley Act?
- A) Nonaudit services.
- B) Quarterly financial statements.
- C) Auditor rotation.
- D) Corporate executive accountability.
Answer: B
Difficulty: 1 Easy
Topic: Accounting Scandals and Response by Congress
Learning Objective: 04-01 Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act.
Bloom’s: Remember
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
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