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Financial Accounting
Financial Accounting Unit 4
| Question | Answer |
|---|---|
| Why are accounting errors important to understand? | They distort financial statements and affect decision-making, even if unintentional. |
| What is an example of an incorrect amount error? | Recording $90 for rent instead of $900. |
| What is a transposition error? | Switching digits in a number (e.g., $729 written as $792). |
| What is an omitted transaction error? | A transaction that isn’t recorded, such as a payment made from an alternate bank account. |
| What is a duplicate entry error? | Entering or paying the same transaction twice from different accounts. |
| What’s an example of a wrong account classification? | Recording rent as an equipment purchase. |
| What can counting errors lead to? | Misstated inventory or COGS, affecting the income statement and balance sheet. |
| What causes journal entry errors? | Missing source documents, incorrect amounts, or wrong accounts used. |
| Give an example of a posting error. | Posting a legal expense to Prepaid Insurance instead of Legal Expense. |
| What are severe posting errors? | Misclassifying expenses as assets or recognizing revenue before it's earned. |
| How do internal controls help minimize errors? | By enforcing procedures, automating systems, and ensuring verification and documentation. |
| Name two internal control strategies. | Automated information systems Reviewed and consistent human procedures |
| What are the two main categories of accounting errors? | Journal Entry Errors Ledger Posting Errors |
| How can financial statement reliability be preserved? | Through strong internal controls, documentation, and regular reviews. |
| If an expense is improperly recorded as an asset, what impact does this have on the income statement? | Net income is overstated. |
| What is the impact of posting the correct amount to the wrong expense account? | Incorrect totals for individual expense accounts |
| What is one way that an error can be made in recording a transaction in a journal entry? | Accounts involved in the journal entry are incorrectly identified. |
| What are internal controls? | Policies and procedures that ensure accurate financial reporting, operational efficiency, and legal compliance. |
| Who is responsible for internal controls? | Management is responsible for designing, implementing, and maintaining them. |
| What are the two main types of control activities? | Preventative controls – Stop errors/fraud before they happen Detective controls – Identify errors/fraud after they occur |
| What is the control environment? | The organizational tone set by leadership that shapes internal control culture and ethical behavior. |
| What is segregation of duties? | Dividing responsibilities for authorization, custody, and recordkeeping to prevent fraud or errors. |
| What is proper authorization? | Only approved personnel may authorize specific transactions, ensuring accountability. |
| How are assets physically protected? | Using safes, secure rooms, passwords, fireproof storage, and backups. |
| What are adequate documents and records? | Pre-numbered, well-designed forms (digital or paper) that verify and track transactions. |
| What are examples of independent checks on performance? | Surprise cash counts Internal/external audits Job rotations Bank reconciliations |
| What is the role of an audit committee under Sarbanes-Oxley? | Made of independent, financially literate directors Oversees auditors Ensures integrity of financial reporting |
| What does “tone at the top” mean? | Leadership’s behavior sets the ethical and control standards for the entire organization. |
| Why do internal controls matter? | They prevent fraud, increase financial accuracy, promote efficiency, and enhance stakeholder trust. |
| What’s the relationship between preventative and detective controls? | Preventative controls reduce risk upfront; detective controls help catch issues that slip through. |
| What are control activities? | Policies and procedures to provide reasonable assurance that the company’s established objectives will be met |
| A policy requiring employees to take mandatory vacations is what type of control activity? | Independent check |
| In a corporation, who has the power to properly authorize the payment of dividends? | The board of directors |
| Why is cash considered the most vulnerable asset? | Why is cash considered the most vulnerable asset? |
| What are two essential cash control activities? | Separation of duties and physical controls. |
| Separation of duties and physical controls. | Separation of duties and physical controls. |
| What physical controls help safeguard cash? | Locked registers, safes, and secure digital systems. |
| What is included in the “Cash” account on the balance sheet? | Coins, currency, checks, money orders, and available bank deposits. |
| How is a cash and credit sale recorded initially? | Debit Cash, Debit Accounts Receivable, Credit Sales Revenue. |
| What is the journal entry when a customer pays off an account receivable? | Debit Cash, Credit Accounts Receivable. |
| What are the benefits of daily cash deposits? | Reduces theft, improves accountability, and aids cash management. |
| Why use pre-numbered checks and electronic payments? | To create an audit trail, prevent unauthorized payments, and simplify reconciliations. |
| What are two safe ways to invest idle cash? | Certificates of Deposit (CDs) and short-term Treasury securities. |
| According to accrual accounting, when is revenue recognized? | When value is delivered to the customer, not when cash is received. |
| In a sale, when should revenue be recorded? | When the product or service is delivered. |
| Should you record revenue again when cash is collected? | No—revenue was already recorded when earned. |
| What’s a common mistake in recording revenue? | Recording revenue a second time when cash is collected. |
| What are the best practices for internal cash control? | Separate duties, deposit all cash daily, use pre-numbered disbursements. |
| Why do strong cash controls matter? | They ensure accurate financial reporting, prevent fraud, and build trust. |
| Why is the separation-of-duties control so important with cash? | Without separation of duties, an employee who takes cash can cover up the shortage by adjusting the accounting records. |
| How does the use of a cash register in a supermarket illustrate separation of duties? | The cash register maintains the record of how much cash should be in the drawer. |
| Without the proper separation of duties, how might a dishonest warehouse employee conceal the theft of inventory? | The employee handling the inventory can also falsify the inventory accounting records. |
| What is the purpose of reconciling a bank account? | To align the company’s cash records with the bank statement and confirm accuracy. |
| Why might a company’s cash records differ from the bank statement? | Due to timing differences, bank transactions unknown to the company, or company errors. |
| What are timing differences in bank reconciliation? | Deposits or checks recorded by the company but not yet processed by the bank. |
| Name three common adjustments to the bank balance. | + Deposits in transit, – Outstanding checks, +/- Bank errors. |
| Name three common adjustments to the book (company) balance. | + Interest earned, – Bank fees or NSF checks, +/- Company errors. |
| What is a deposit in transit? | A deposit recorded by the company that hasn’t yet been processed by the bank. |
| What are outstanding checks? | Checks written by the company that have not yet cleared the bank. |
| Why are bank reconciliations important? | They detect errors or fraud and ensure accurate financial reporting. |
| What are examples of bank transactions the company might not know about? | Service charges, interest income, direct deposits, NSF checks. |
| What is the final step of a bank reconciliation? | Ensure that the adjusted bank and book balances match. |
| In the Hunt Company example, what was the final reconciled cash balance? | $16,585 for both bank and book balances. |
| What were key adjustments in the Hunt Company reconciliation? | + $3,200 direct deposit, + $60 interest, – $7 fee, – $425 transfer, – $180 wage check error. |
| What is the format for the bank side of a reconciliation? | Balance per bank + Deposits in transit – Outstanding checks = Adjusted bank balance. |
| What is the format for the book side of a reconciliation? | Balance per books + Interest/deposits – Fees/errors = Adjusted book balance. |
| In the Clapton Company example, what made the bank and book balances match at $8,300? | Adjustments: +$45 interest and –$65 bank fee. |
| What does NSF stand for, and how is it treated in reconciliation? | Non-sufficient funds; it reduces the book balance. |
| How often should a company perform a bank reconciliation? | Regularly—typically monthly or at each statement period. |
| What is the meaning of the acronym NSF? | Not sufficient funds |
| For balance sheet purposes, what, under the accounting rules, is defined as cash? | Coins, currency, checks, and money on deposit at banks |
| What is one cash management tool? | Cash budget |
| Why are daily cash deposits important? | They prevent the accumulation of a large amount of cash. |
| For a public company, who must compose the audit committee? | Outside directors |
| What is a company’s control environment? | The actions, policies, and procedures that reflect the overall attitudes of top management |
| What represents an obvious error a controller should be concerned about in the general ledger? | Omitting completely the posting of a series of transactions |
Created by:
heavenlypure
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