ch2

Student: _______________________________________________________________________________________

1. Accounting is often confused with: A. B. C. D. Bookkeeping. Finance. Information systems. Tax research.

2. Which of the following statements is most true? A. B. C. D. Accounting is the part of bookkeeping devoted to identifying and measuring economic information. Bookkeeping is the part of accounting devoted to identifying and measuring economic information. Bookkeeping is the part of accounting associated with making informed judgments. Accounting is the part of bookkeeping associated with making informed judgments.

3. The American Accounting Association defined: A. B. C. D. Neither accounting nor bookkeeping. Both accounting and bookkeeping. Accounting only. Bookkeeping only.

4. Which of the following steps in the accounting cycle occurs first? A. B. C. D. Record transactions in the journal. Prepare financial statements. Prepare an unadjusted trial balance. Analyze transactions.

5. Which of the following steps in the accounting cycle happens only at the end of the year? A. B. C. D. Prepare financial statements. Close temporary accounts to retained earnings. Record adjusting entries. Prepare a trial balance.

6. In the accounting cycle, which step immediately comes before analyzing transactions? A. B. C. D. Prepare financial statements. Close the temporary accounts. Obtain information from source documents. Noneanalyzing transactions is the first step in the accounting cycle.

7. Common internal controls associated with source documents include: (i) sequential numbering, (ii) transaction limits, (iii) trial balance.

A. B. C. D.

i and ii only. ii and iii only. i and iii only. i, ii, and iii.

8. Physical security of source documents refers to: A. B. C. D. Keeping them in a locked cabinet. Numbering them sequentially. Printing each document on a different colored paper. Analyzing them to prepare journal entries.

9. Which of the following is a form of internal control that ensures the ledger is balanced? A. B. C. D. Financial statements. Sequentially numbered source documents. Trial balance. Adjusted entries.

10. Which of the following is not a coding system for a chart of accounts? A. B. C. D. Alphabetic. Sequential. Block. Mnemonic.

11. Which type of coding system helps users remember the meaning of the code? A. B. C. D. Sequential. Hierarchical. Mnemonic. Block.

12. ___ codes are a more sophisticated form of ___ codes. A. B. C. D. Block, hierarchical. Block, mnemonic. Mnemonic, sequential. Hierarchical, block.

13. Human judgment is important in the accounting cycle for: A. B. C. D. Preparing a trial balance. Recognizing recordable transactions. Filling out source documents. Posting transactions to the ledger.

14. Which of the following accounting cycle steps is most impacted by information technology? A. Analyzing transactions.

B. Posting transactions to the ledger. C. Preparing adjusting entries. D. Designing a chart of accounts. 15. Interpreting accounting rules involves: A. B. C. D. Understanding the accounting cycle. Applying human judgment. Using information technology. Preparing financial statements.

16. Which of the following is not part of the American Accounting Association's definition of accounting? A. B. C. D. Distinguishing. Determining. Sharing. Documenting.

17. One difference between accounting and bookkeeping is: A. B. C. D. Accounting requires human judgment, while bookkeeping does not. Bookkeeping requires human judgment, but accounting does not. Bookkeeping is more procedural than accounting. Accounting is more procedural than bookkeeping.

18. As used in the American Accounting Association's definition of accounting, "measuring economic information" refers most directly to: A. B. C. D. Human judgment. The steps in the accounting cycle. The process of bookkeeping. Making journal entries.

19. Which of the following best distinguishes adjusting entries from closing entries? A. Adjusting entries involve only balance sheet accounts; closing entries involve only income statement accounts. B. Closing entries cannot be journalized using information technology, while adjusting entries can. C. Adjusting entries happen before preparing financial statements; closing entries occur after preparing financial statements. D. In adjusting entries, debits must equal credits; in closing entries, debits should be greater than credits. 20. Which of the following adjusting entry types helps determine the value of fixed assets: (i) depreciation, (ii) prepaid expenses. A. i only. B. ii only. C. Both i and ii.

D. Neither i nor ii. 21. An organization paid for a six-month insurance policy in November. At the end of December, the organization should make an adjusting entry for: A. B. C. D. Depreciation. An accrued expense. A prepaid expense. Uncollectible accounts.

22. Which of the following best explains "transaction limits" as an internal control? A. B. C. D. Two signatures are required on all checks. A bank teller needs management approval to accept deposits over $500. Purchasing agents cannot complete more than six purchase orders each day. Sales staff must verify a client's credit before making a sale.

23. As a form of internal control, information technology is most likely to prevent which of the following types of errors? A. B. C. D. Debiting the wrong account in a journal entry. Crediting the wrong account in a journal entry. Posting "39" instead of "93". Using human judgment inefficiently.

24. Which of the following forms of internal control eliminates the need for human judgment in the accounting information system: (i) audits, (ii) trial balances, (iii) information technology. A. B. C. D. i and ii only. ii and iii only. i, ii and iii. Neither i, ii nor iii.

25. Which of the following describes a difference between sequential coding and block coding? A. B. C. D. Sequential coding uses letters; block coding uses numbers. Block coding uses letters; sequential coding uses numbers. Sequential coding cannot be used for a chart of accounts, while block coding can. Individual digits and groups of digits have meaning in block coding, but not in sequential coding.

26. In RKH Corporation's chart of accounts, the account number for cash is "1.1.1," while the account number for "land" is "1.2.1." From that information, we can infer that: A. B. C. D. RKH uses mnemonic coding in its chart of accounts. The middle digit distinguishes current assets from long-term assets. RKH employs information technology in its accounting information system. No other company utilizes RKH's system for chart of accounts coding.

27. A "uniform chart of accounts" means:

A. B. C. D.

All accounts have the same number. The chart of accounts was developed without human intervention. A company and its subsidiaries use the same chart of accounts. The chart of accounts uses block coding.

28. Which of the following types of adjusting entries is most likely to involve human judgment? A. B. C. D. Uncollectible receivables. Prepaid expenses. Deferred revenues. Closing entries.

29. Human judgment is least important in: A. B. C. D. Closing entries. Adjusting entries. Designing source documents. Making journal entries.

30. Information technology can be used in: (i) preparing financial statements, (ii) closing the accounts. A. B. C. D. i only. ii only. Both i and ii. Neither i nor ii.

31. Which of the following requires the most human judgment? A. B. C. D. Accounting. Bookkeeping. Posting. Journalizing.

32. Which of the following requires the least human judgment? A. B. C. D. Accounting. Bookkeeping. Making estimates. Preparing financial statements.

33. Which of the following best demonstrates an "informed judgment" as the term is used in the a. American Accounting Association's definition of accounting? A. B. C. D. Deciding whether to debit or credit an account. Completing the steps in the accounting cycle. Choosing between borrowing money and issuing capital stock. Listing the elements of financial statements.

34. A company purchased a three-month insurance policy for $450 on December 1. On December 31, the company should:

A. B. C. D.

Debit prepaid insurance and credit insurance expense, $450. Debit insurance expense and credit prepaid insurance, $450. Debit prepaid insurance and credit insurance expense, $150. Debit insurance expense and credit prepaid insurance, $150.

35. In preparing an adjusting entry for depreciation, an accountant debited depreciation expense and credited accumulated depreciation $500. The adjusting entry meAns (i) the value of the equipment decreased by $500, (ii) future periods will not benefit from the use of the equipment. A. B. C. D. Neither i nor ii. Both i and ii. i only. ii only.

36. RKH Corporation reported a cash balance of $10,000 on its 12/31/2006 balance sheet. We can therefore assume: A. B. C. D. The company's cash flow from operations was $10,000. The company's cash flow from operations was less than $10,000. The company's cash flow from operations was more than $10,000. Nothing about the company's cash flow from operations.

37. RKH Corporation requires two signatures on all checks over $1,500. We can therefore assume (i) RKH will never have cash stolen; (ii) checks are sequentially numbered. A. B. C. D. i only. ii only. Both i and ii. Neither i nor ii.

38. Which of the following is the best transaction limit for a clerk in a retail store? A. B. C. D. $100. $500. $1,000. Cannot be determined from the information given.

39. Which of the following forms of internal control relies most heavily on human judgment? A. B. C. D. Preparing a trial balance. Enforcing transaction limits. Numbering documents sequentially. Locking a filing cabinet.

40. Which of the following tasks would most likely involve mnemonic coding? A. B. C. D. Assigning three-letter codes to inventory items. Developing a chart of accounts. Numbering documents sequentially. Completing the steps in the accounting cycle.

41. A company's chart of accounts is block coded and contains the following information: Accounts payable (201), Wages payable (204), Interest payable (207). The account number for "accounts receivable" is therefore likely to be: A. B. C. D. 302. 211. 202. 102.

42. Which of the following is most likely to employ sequential coding? A. B. C. D. Amounts on a cash register tape. Chart of accounts. License plate numbers. Street addresses.

43. RKH Corporation wants to design its chart of accounts to facilitate the use of information technology in its closing entries. Which coding system should RKH use? A. B. C. D. Mnemonic. Block. Sequential. Random.

44. RKH Corporation's net income for 2002 was $10,000. In 2003, its income was $15,000. We can therefore assume its 2004 income was: A. B. C. D. Less than $20,000. Exactly $20,000. More than $20,000. Not determinable from the information given.

45. Information technology would be least useful for: A. B. C. D. Designing internal controls. Eliminating human judgment. Calculating depreciation. Auditing.

46. Which of the following is (are) facts about accounting and bookkeeping: (i) Both involve human judgment. (ii) Both require the use of information technology. A. B. C. D. i only. ii only. Both i and ii. Neither i nor ii.

47. A company's adjusting entry for prepaid insurance debited insurance expense for $600. If the policy had a six-month duration, how much did it cost originally?

A. B. C. D.

$100. $600. $3,600. Cannot be determined from the information given.

48. Which of the following would provide the most effective internal control for cash? A. Numbering checks sequentially. B. Using a specific amount of daily cash receipts for operating expenses without depositing them in the bank. C. Reconciling the bank statement twice a year. D. Keeping cash in a reputable bank. 49. Company A's chart of accounts contains the following: Cash (101), Accounts receivable (102), inventory (103), equipment (201), accounts payable (301). Company B's chart of accounts shows: Wages payable (112), Taxes payable (113), Retained earnings (114). Which of the following is true? A. B. C. D. Company A uses block coding; Company B uses sequential coding. Company A uses sequential coding; Company B uses hierarchical coding. Both Company A and Company B use block coding. Both Company A and Company B use sequential coding.

50. Which of the following is most true when comparing the information in an income statement with the information in a statement of cash flows? A. B. C. D. Information in the income statement is more useful for decisions. Information in the statement of cash flows is more useful for decisions. The two report the same information in different formats. Both statements report information for a period of time.

51. Definition of accounting. Fill in the blanks to complete the American Accounting Association's definition of accounting. Accounting is the process of ______, ______, and communicating ______ information to permit ______ ______ and decisions by ______ of the ______.

52.

Accounting cycle The steps in the accounting cycle are listed below in random order. Indicate the correct order in the space provided. If a step does not belong in the accounting cycle, mark it with an "X." _____ Analyze transactions _____ Audit financial statements _____ Close the temporary accounts to retained earnings _____ Design internal controls _____ Exercise human judgment _____ Obtain information about external transactions from source documents

_____ Post from the journal to the general ledger accounts _____ Prepare a post-closing trial balance _____ Prepare an adjusted trial balance _____ Prepare an unadjusted trial balance _____ Prepare financial statements _____ Record adjusting entries and post to the general ledger accounts _____ Record the transactions in a journal

53. Accounting cycle Explain the meaning of each of the following journal entries. The first is provided as an example.

54. Accounting and bookkeeping comparison Indicate whether each of the following statements applies to: (a) accounting alone, (b) bookkeeping alone, (c) both accounting and bookkeeping or (d) neither accounting nor bookkeeping. ____ Subject to internal controls ____ Requires analysis ____ Primarily involves cyclical activities ____ Involves human judgment ____ Focuses on economic information ____ Defined by American Accounting Association ____ Concerned with measuring ____ Can incorporate computers ____ Can be principles-based ____ Always involves information technology

55. Sebastian's Coffee Shop makes and sells specialty coffee drinks, sandwiches and pastries. Several risks associated with the shop's operations are listed below on the left; several internal controls are listed on the right. Match each risk with the internal control most likely to reduce it. Use each internal control only once. ____ 1. Computer viruses ____ 2. Damage from flood, fire or earthquake ____ 3. Incorrect change given to a customer ____ 4. Incorrectly prepared drinks ____ 5. Insufficient inventory quantities ____ 6. Power failure ____ 7. Robbery ____ 8. Spoiled food ____ 9. Theft of cash by employees ____ 10.Theft of inventory by employees a. Backup electrical generators b. Cash registers c. Insurance d. Monthly bank reconciliation e. Placing orders when goods reach a specific level f. Proper storage conditions g. Software h. Video monitoring systems i. Video surveillance and alarm systems j. Worker training

56.

Internal controls Sebastian's Coffee Shop makes and sells specialty coffee drinks, sandwiches and pastries. Sebastian has hired you to construct the shop's first chart of accounts; he wants to use a block coding system. Use the principles of block coding to assign account numbers to the accounts listed below.

57. Chart of accounts coding Bumble Beasley attempted to design a hierarchical chart of accounts in the following format: x.y.z. "X" stands for the type of account (1 = asset, 2= liability, etc.), while "Y" indicates whether the account is current (1) or non-current (2). If the current/non-current designation doesn't apply, "Y" is the number "zero." "Z" identifies the specific account. He developed the following account numbers:

Identify the accounts that are correctly coded.

58. Internal controls analysis Dewey, Cheatam and Howe is a consulting firm in southern California. The firm employs the internal control procedures listed below as part of its operations. Place an "X" in the appropriate column to indicate whether each item listed is a strength or a weakness for the firm's internal control system.

59. Internal controls revision Consider the list of internal control weaknesses listed below. Revise each one to make it stronger. Any employee in a firm can sign checks. Checks from clients can be made out to the firm or any of the partners individually. One of the partners deposits all credit card receipts and checks in the bank at the end of each month. Signature cards, which specify who can sign checks, are re-done only when a new employee is hired. The cash receipts clerk reconciles the bank statement.

60. Human judgment and information technology The text explains the importance of human judgment and information technology in the accounting information system. Indicate with an "X" in the appropriate column which of the following tasks rely primarily on human judgment and which rely primarily on information technology.

You're "doing the books" for a local consulting firm as part of an internship. The rest of the consultants don't have much background in accounting; they're very curious about the work you do and your college studies. 61. List and discuss two ways human judgment and information technology impact the accounting cycle.

62. Give two specific examples of how accounting is different from bookkeeping. Do not quote or paraphrase from the text.

63. Employees in the consulting firm are paid twice a month. They track their own hours and report them via e-mail to you on the 17th for the first half of the month (i.e., on July 17 for the first half of July) and on the 2nd for the second half of the preceding month (i.e., on August 2 for the second half of July). You use Excel to compute each employee's gross pay; you then prepare paychecks using the firm's general ledger software. The senior manager signs the payroll checks and leaves them in each staff member's mailbox. Prepare a list of three internal controls you would recommend for the firm's payroll process.

64. Explain, at a conceptual level, the "accounting cycle." Outline the steps in the cycle for your coworkers; provide a brief explanation of each step.

65. Use the principles of "block coding" to create a partial chart of accounts for the consulting firm. Include three accounts in each area.

ch2 KEY
1. Accounting is often confused with: A. B. C. D. Bookkeeping. Finance. Information systems. Tax research.
Difficulty: Easy Hurt - Chapter 02 #1 Learning Objective: Knowledge

2. Which of the following statements is most true? A. B. C. D. Accounting is the part of bookkeeping devoted to identifying and measuring economic information. Bookkeeping is the part of accounting devoted to identifying and measuring economic information. Bookkeeping is the part of accounting associated with making informed judgments. Accounting is the part of bookkeeping associated with making informed judgments.
Difficulty: Easy Hurt - Chapter 02 #2 Learning Objective: Knowledge

3. The American Accounting Association defined: A. B. C. D. Neither accounting nor bookkeeping. Both accounting and bookkeeping. Accounting only. Bookkeeping only.
Difficulty: Easy Hurt - Chapter 02 #3 Learning Objective: Knowledge

4. Which of the following steps in the accounting cycle occurs first? A. B. C. D. Record transactions in the journal. Prepare financial statements. Prepare an unadjusted trial balance. Analyze transactions.
Difficulty: Easy Hurt - Chapter 02 #4 Learning Objective: Comprehension

5. Which of the following steps in the accounting cycle happens only at the end of the year? A. B. C. D. Prepare financial statements. Close temporary accounts to retained earnings. Record adjusting entries. Prepare a trial balance.
Difficulty: Easy Hurt - Chapter 02 #5 Learning Objective: Comprehensive

6. In the accounting cycle, which step immediately comes before analyzing transactions? A. B. C. D. Prepare financial statements. Close the temporary accounts. Obtain information from source documents. Noneanalyzing transactions is the first step in the accounting cycle.
Difficulty: Easy Hurt - Chapter 02 #6 Learning Objective: Comprehension

7. Common internal controls associated with source documents include: (i) sequential numbering, (ii) transaction limits, (iii) trial balance. A. B. C. D. i and ii only. ii and iii only. i and iii only. i, ii, and iii.
Difficulty: Moderate Hurt - Chapter 02 #7 Learning Objective: Application

8. Physical security of source documents refers to: A. B. C. D. Keeping them in a locked cabinet. Numbering them sequentially. Printing each document on a different colored paper. Analyzing them to prepare journal entries.
Difficulty: Moderate Hurt - Chapter 02 #8 Learning Objective: Application

9. Which of the following is a form of internal control that ensures the ledger is balanced? A. B. C. D. Financial statements. Sequentially numbered source documents. Trial balance. Adjusted entries.
Difficulty: Moderate Hurt - Chapter 02 #9 Learning Objective: Application

10. Which of the following is not a coding system for a chart of accounts? A. B. C. D. Alphabetic. Sequential. Block. Mnemonic.
Difficulty: Moderate Hurt - Chapter 02 #10 Learning Objective: Analysis

11. Which type of coding system helps users remember the meaning of the code?

A. B. C. D.

Sequential. Hierarchical. Mnemonic. Block.

12. ___ codes are a more sophisticated form of ___ codes. A. B. C. D. Block, hierarchical. Block, mnemonic. Mnemonic, sequential. Hierarchical, block.
Difficulty: Moderate Hurt - Chapter 02 #12 Learning Objective: Analysis

13. Human judgment is important in the accounting cycle for: A. B. C. D. Preparing a trial balance. Recognizing recordable transactions. Filling out source documents. Posting transactions to the ledger.
Difficulty: Difficult Hurt - Chapter 02 #13 Learning Objective: Synthesis

14. Which of the following accounting cycle steps is most impacted by information technology? A. B. C. D. Analyzing transactions. Posting transactions to the ledger. Preparing adjusting entries. Designing a chart of accounts.
Difficulty: Difficult Hurt - Chapter 02 #14 Learning Objective: Synthesis

15. Interpreting accounting rules involves: A. B. C. D. Understanding the accounting cycle. Applying human judgment. Using information technology. Preparing financial statements.
Difficulty: Difficult Hurt - Chapter 02 #15 Learning Objective: Synthesis

16. Which of the following is not part of the American Accounting Association's definition of accounting? A. Distinguishing.

B. Determining. C. Sharing. D. Documenting.

17. One difference between accounting and bookkeeping is: A. B. C. D. Accounting requires human judgment, while bookkeeping does not. Bookkeeping requires human judgment, but accounting does not. Bookkeeping is more procedural than accounting. Accounting is more procedural than bookkeeping.
Difficulty: Easy Hurt - Chapter 02 #17 Learning Objective: Knowledge

18. As used in the American Accounting Association's definition of accounting, "measuring economic information" refers most directly to: A. B. C. D. Human judgment. The steps in the accounting cycle. The process of bookkeeping. Making journal entries.
Difficulty: Easy Hurt - Chapter 02 #18 Learning Objective: Knowledge

19. Which of the following best distinguishes adjusting entries from closing entries? A. Adjusting entries involve only balance sheet accounts; closing entries involve only income statement accounts. B. Closing entries cannot be journalized using information technology, while adjusting entries can. C. Adjusting entries happen before preparing financial statements; closing entries occur after preparing financial statements. D. In adjusting entries, debits must equal credits; in closing entries, debits should be greater than credits.
Difficulty: Easy Hurt - Chapter 02 #19 Learning Objective: Comprehension

20. Which of the following adjusting entry types helps determine the value of fixed assets: (i) depreciation, (ii) prepaid expenses. A. B. C. D. i only. ii only. Both i and ii. Neither i nor ii.
Difficulty: Easy Hurt - Chapter 02 #20 Learning Objective: Comprehension

21. An organization paid for a six-month insurance policy in November. At the end of December, the organization should make an adjusting entry for: A. B. C. D. Depreciation. An accrued expense. A prepaid expense. Uncollectible accounts.
Difficulty: Easy Hurt - Chapter 02 #21 Learning Objective: Comprehension

22. Which of the following best explains "transaction limits" as an internal control? A. B. C. D. Two signatures are required on all checks. A bank teller needs management approval to accept deposits over $500. Purchasing agents cannot complete more than six purchase orders each day. Sales staff must verify a client's credit before making a sale.
Difficulty: Moderate Hurt - Chapter 02 #22 Learning Objective: Application

23. As a form of internal control, information technology is most likely to prevent which of the following types of errors? A. B. C. D. Debiting the wrong account in a journal entry. Crediting the wrong account in a journal entry. Posting "39" instead of "93". Using human judgment inefficiently.
Difficulty: Moderate Hurt - Chapter 02 #23 Learning Objective: Application

24. Which of the following forms of internal control eliminates the need for human judgment in the accounting information system: (i) audits, (ii) trial balances, (iii) information technology. A. B. C. D. i and ii only. ii and iii only. i, ii and iii. Neither i, ii nor iii.
Difficulty: Moderate Hurt - Chapter 02 #24 Learning Objective: Application

25. Which of the following describes a difference between sequential coding and block coding? A. B. C. D. Sequential coding uses letters; block coding uses numbers. Block coding uses letters; sequential coding uses numbers. Sequential coding cannot be used for a chart of accounts, while block coding can. Individual digits and groups of digits have meaning in block coding, but not in sequential coding.
Difficulty: Moderate Hurt - Chapter 02 #25 Learning Objective: Analysis

26. In RKH Corporation's chart of accounts, the account number for cash is "1.1.1," while the account number for "land" is "1.2.1." From that information, we can infer that: A. B. C. D. RKH uses mnemonic coding in its chart of accounts. The middle digit distinguishes current assets from long-term assets. RKH employs information technology in its accounting information system. No other company utilizes RKH's system for chart of accounts coding.
Difficulty: Moderate Hurt - Chapter 02 #26 Learning Objective: Analysis

27. A "uniform chart of accounts" means: A. B. C. D. All accounts have the same number. The chart of accounts was developed without human intervention. A company and its subsidiaries use the same chart of accounts. The chart of accounts uses block coding.
Difficulty: Moderate Hurt - Chapter 02 #27 Learning Objective: Analysis

28. Which of the following types of adjusting entries is most likely to involve human judgment? A. B. C. D. Uncollectible receivables. Prepaid expenses. Deferred revenues. Closing entries.
Difficulty: Difficult Hurt - Chapter 02 #28 Learning Objective: Synthesis

29. Human judgment is least important in: A. B. C. D. Closing entries. Adjusting entries. Designing source documents. Making journal entries.
Difficulty: Difficult Hurt - Chapter 02 #29 Learning Objective: Synthesis

30. Information technology can be used in: (i) preparing financial statements, (ii) closing the accounts. A. B. C. D. i only. ii only. Both i and ii. Neither i nor ii.
Difficulty: Difficult Hurt - Chapter 02 #30 Learning Objective: Synthesis

31. Which of the following requires the most human judgment? A. B. C. D. Accounting. Bookkeeping. Posting. Journalizing.
Difficulty: Easy Hurt - Chapter 02 #31 Learning Objective: Knowledge

32. Which of the following requires the least human judgment? A. B. C. D. Accounting. Bookkeeping. Making estimates. Preparing financial statements.
Difficulty: Easy Hurt - Chapter 02 #32 Learning Objective: Knowledge

33. Which of the following best demonstrates an "informed judgment" as the term is used in the a. American Accounting Association's definition of accounting? A. B. C. D. Deciding whether to debit or credit an account. Completing the steps in the accounting cycle. Choosing between borrowing money and issuing capital stock. Listing the elements of financial statements.
Difficulty: Easy Hurt - Chapter 02 #33 Learning Objective: Knowledge

34. A company purchased a three-month insurance policy for $450 on December 1. On December 31, the company should: A. B. C. D. Debit prepaid insurance and credit insurance expense, $450. Debit insurance expense and credit prepaid insurance, $450. Debit prepaid insurance and credit insurance expense, $150. Debit insurance expense and credit prepaid insurance, $150.
Difficulty: Easy Hurt - Chapter 02 #34 Learning Objective: Comprehension

35. In preparing an adjusting entry for depreciation, an accountant debited depreciation expense and credited accumulated depreciation $500. The adjusting entry meAns (i) the value of the equipment decreased by $500, (ii) future periods will not benefit from the use of the equipment. A. B. C. D. Neither i nor ii. Both i and ii. i only. ii only.
Difficulty: Easy

Hurt - Chapter 02 #35 Learning Objective: Comprehension

36. RKH Corporation reported a cash balance of $10,000 on its 12/31/2006 balance sheet. We can therefore assume: A. B. C. D. The company's cash flow from operations was $10,000. The company's cash flow from operations was less than $10,000. The company's cash flow from operations was more than $10,000. Nothing about the company's cash flow from operations.
Difficulty: Easy Hurt - Chapter 02 #36 Learning Objective: Comprehensive

37. RKH Corporation requires two signatures on all checks over $1,500. We can therefore assume (i) RKH will never have cash stolen; (ii) checks are sequentially numbered. A. B. C. D. i only. ii only. Both i and ii. Neither i nor ii.
Difficulty: Moderate Hurt - Chapter 02 #37 Learning Objective: Application

38. Which of the following is the best transaction limit for a clerk in a retail store? A. B. C. D. $100. $500. $1,000. Cannot be determined from the information given.
Difficulty: Moderate Hurt - Chapter 02 #38 Learning Objective: Application

39. Which of the following forms of internal control relies most heavily on human judgment? A. B. C. D. Preparing a trial balance. Enforcing transaction limits. Numbering documents sequentially. Locking a filing cabinet.
Difficulty: Moderate Hurt - Chapter 02 #39 Learning Objective: Application

40. Which of the following tasks would most likely involve mnemonic coding? A. B. C. D. Assigning three-letter codes to inventory items. Developing a chart of accounts. Numbering documents sequentially. Completing the steps in the accounting cycle.
Difficulty: Moderate

Hurt - Chapter 02 #40 Learning Objective: Analysis

41. A company's chart of accounts is block coded and contains the following information: Accounts payable (201), Wages payable (204), Interest payable (207). The account number for "accounts receivable" is therefore likely to be: A. B. C. D. 302. 211. 202. 102.
Difficulty: Moderate Hurt - Chapter 02 #41 Learning Objective: Analysis

42. Which of the following is most likely to employ sequential coding? A. B. C. D. Amounts on a cash register tape. Chart of accounts. License plate numbers. Street addresses.
Difficulty: Moderate Hurt - Chapter 02 #42 Learning Objective: Analysis

43. RKH Corporation wants to design its chart of accounts to facilitate the use of information technology in its closing entries. Which coding system should RKH use? A. B. C. D. Mnemonic. Block. Sequential. Random.
Difficulty: Difficult Hurt - Chapter 02 #43 Learning Objective: Synthesis

44. RKH Corporation's net income for 2002 was $10,000. In 2003, its income was $15,000. We can therefore assume its 2004 income was: A. B. C. D. Less than $20,000. Exactly $20,000. More than $20,000. Not determinable from the information given.
Difficulty: Difficult Hurt - Chapter 02 #44 Learning Objective: Synthesis

45. Information technology would be least useful for: A. B. C. D. Designing internal controls. Eliminating human judgment. Calculating depreciation. Auditing.

Difficulty: Difficult Hurt - Chapter 02 #45 Learning Objective: Synthesis

46. Which of the following is (are) facts about accounting and bookkeeping: (i) Both involve human judgment. (ii) Both require the use of information technology. A. B. C. D. i only. ii only. Both i and ii. Neither i nor ii.
Difficulty: Easy Hurt - Chapter 02 #46 Learning Objective: Knowledge

47. A company's adjusting entry for prepaid insurance debited insurance expense for $600. If the policy had a six-month duration, how much did it cost originally? A. B. C. D. $100. $600. $3,600. Cannot be determined from the information given.
Difficulty: Easy Hurt - Chapter 02 #47 Learning Objective: Comprehension

48. Which of the following would provide the most effective internal control for cash? A. Numbering checks sequentially. B. Using a specific amount of daily cash receipts for operating expenses without depositing them in the bank. C. Reconciling the bank statement twice a year. D. Keeping cash in a reputable bank.
Difficulty: Moderate Hurt - Chapter 02 #48 Learning Objective: Application

49. Company A's chart of accounts contains the following: Cash (101), Accounts receivable (102), inventory (103), equipment (201), accounts payable (301). Company B's chart of accounts shows: Wages payable (112), Taxes payable (113), Retained earnings (114). Which of the following is true? A. B. C. D. Company A uses block coding; Company B uses sequential coding. Company A uses sequential coding; Company B uses hierarchical coding. Both Company A and Company B use block coding. Both Company A and Company B use sequential coding.
Difficulty: Moderate Hurt - Chapter 02 #49 Learning Objective: Analysis

50. Which of the following is most true when comparing the information in an income statement with the information in a statement of cash flows?

A. B. C. D.

Information in the income statement is more useful for decisions. Information in the statement of cash flows is more useful for decisions. The two report the same information in different formats. Both statements report information for a period of time.
Difficulty: Easy Hurt - Chapter 02 #50 Learning Objective: Comprehension

51. Definition of accounting. Fill in the blanks to complete the American Accounting Association's definition of accounting. Accounting is the process of ______, ______, and communicating ______ information to permit ______ ______ and decisions by ______ of the ______. Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.
Difficulty: Easy Hurt - Chapter 02 #51 Learning Objective: Knowledge

52. Accounting cycle The steps in the accounting cycle are listed below in random order. Indicate the correct order in the space provided. If a step does not belong in the accounting cycle, mark it with an "X." _____ Analyze transactions _____ Audit financial statements _____ Close the temporary accounts to retained earnings _____ Design internal controls _____ Exercise human judgment _____ Obtain information about external transactions from source documents _____ Post from the journal to the general ledger accounts _____ Prepare a post-closing trial balance _____ Prepare an adjusted trial balance _____ Prepare an unadjusted trial balance _____ Prepare financial statements _____ Record adjusting entries and post to the general ledger accounts _____ Record the transactions in a journal 2 - Analyze transactions X - Audit financial statements 9 - Close the temporary accounts to retained earnings X - Design internal controls X - Exercise human judgment 1 - Obtain information about external transactions from source documents 4 - Post from the journal to the general ledger accounts 10 - Prepare a post-closing trial balance 7 - Prepare an adjusted trial balance 5 - Prepare an unadjusted trial balance 8 - Prepare financial statements 6 - Record adjusting entries and post to the general ledger accounts 3 - Record the transactions in a journal
Difficulty: Easy Hurt - Chapter 02 #52

Learning Objective: Comprehension

53. Accounting cycle Explain the meaning of each of the following journal entries. The first is provided as an example.

Difficulty: Easy Hurt - Chapter 02 #53 Learning Objective: Comprehension

54. Accounting and bookkeeping comparison Indicate whether each of the following statements applies to: (a) accounting alone, (b) bookkeeping alone, (c) both accounting and bookkeeping or (d) neither accounting nor bookkeeping. ____ Subject to internal controls ____ Requires analysis ____ Primarily involves cyclical activities ____ Involves human judgment ____ Focuses on economic information ____ Defined by American Accounting Association ____ Concerned with measuring ____ Can incorporate computers ____ Can be principles-based ____ Always involves information technology

C - Subject to internal controls C - Requires analysis B - Primarily involves cyclical activities C - Involves human judgment C - Focuses on economic information A - Defined by American Accounting Association C - Concerned with measuring C - Can incorporate computers A - Can be principles-based D - Always involves information technology
Difficulty: Easy Hurt - Chapter 02 #54 Learning Objective: Knowledge

55. Sebastian's Coffee Shop makes and sells specialty coffee drinks, sandwiches and pastries. Several risks associated with the shop's operations are listed below on the left; several internal controls are listed on the right. Match each risk with the internal control most likely to reduce it. Use each internal control only once. ____ 1. Computer viruses ____ 2. Damage from flood, fire or earthquake ____ 3. Incorrect change given to a customer ____ 4. Incorrectly prepared drinks ____ 5. Insufficient inventory quantities ____ 6. Power failure ____ 7. Robbery ____ 8. Spoiled food ____ 9. Theft of cash by employees ____ 10.Theft of inventory by employees a. Backup electrical generators b. Cash registers c. Insurance d. Monthly bank reconciliation e. Placing orders when goods reach a specific level f. Proper storage conditions g. Software h. Video monitoring systems i. Video surveillance and alarm systems j. Worker training 1 G; 2 C; 3 B; 4 J; 5 E; 6 A; 7 I; 8 F; 9 D; 10 H
Difficulty: Moderate Hurt - Chapter 02 #55 Learning Objective: Application

56. Internal controls Sebastian's Coffee Shop makes and sells specialty coffee drinks, sandwiches and pastries. Sebastian

has hired you to construct the shop's first chart of accounts; he wants to use a block coding system. Use the principles of block coding to assign account numbers to the accounts listed below.

Difficulty: Moderate Hurt - Chapter 02 #56 Learning Objective: Analysis

57. Chart of accounts coding Bumble Beasley attempted to design a hierarchical chart of accounts in the following format: x.y.z. "X" stands for the type of account (1 = asset, 2= liability, etc.), while "Y" indicates whether the account is current (1) or non-current (2). If the current/non-current designation doesn't apply, "Y" is the number "zero." "Z" identifies the specific account. He developed the following account numbers:

Identify the accounts that are correctly coded. Correctly coded accounts are: Accounts payable; Cash; Equipment; Long-term notes payable; Retained earnings
Difficulty: Moderate Hurt - Chapter 02 #57 Learning Objective: Analysis

58. Internal controls analysis Dewey, Cheatam and Howe is a consulting firm in southern California. The firm employs the internal control procedures listed below as part of its operations. Place an "X" in the appropriate column to indicate whether each item listed is a strength or a weakness for the firm's internal control system.

Difficulty: Moderate Hurt - Chapter 02 #58 Learning Objective: Application

59. Internal controls revision Consider the list of internal control weaknesses listed below. Revise each one to make it stronger. Any employee in a firm can sign checks. Checks from clients can be made out to the firm or any of the partners individually. One of the partners deposits all credit card receipts and checks in the bank at the end of each month. Signature cards, which specify who can sign checks, are re-done only when a new employee is hired. The cash receipts clerk reconciles the bank statement. 1. Any Designated employees in a firm can sign checks. 2. Checks from clients can be made out to the firm or any of the partners individually. 3. One of the partners deposits all credit card receipts and checks in the bank at the end of each month daily. 4. Signature cards, which specify who can sign checks, are re-done only when a new employee is hired when a signer needs to be added or deleted. 5. The cash receipts clerk independent accountant reconciles the bank statement.
Difficulty: Moderate Hurt - Chapter 02 #59 Learning Objective: Application

60. Human judgment and information technology The text explains the importance of human judgment and information technology in the accounting information system. Indicate with an "X" in the appropriate column which of the following tasks rely primarily on human judgment and which rely primarily on information technology.

Difficulty: Difficult Hurt - Chapter 02 #60 Learning Objective: Synthesis

You're "doing the books" for a local consulting firm as part of an internship. The rest of the consultants don't have much background in accounting; they're very curious about the work you do and your college studies.
Hurt - Chapter 02

61. List and discuss two ways human judgment and information technology impact the accounting cycle. Human judgment and information technology impact the accounting cycle in at least two ways. First, accountants must recognize which source documents trigger action and which don't; for example, a sales invoice would trigger a journal entry, but an appraisal of land would not. Second, information technology can make the accounting cycle more efficient; for example, transactions can be posted with the "touch of a button."
Difficulty: Difficult Hurt - Chapter 02 #61 Learning Objective: Synthesis

62. Give two specific examples of how accounting is different from bookkeeping. Do not quote or paraphrase from the text. Accounting differs from bookkeeping in at least two ways: (a) Accounting is more complexit requires a more sophisticated set of skills than simple bookkeeping. (b) And, while information technology can definitely enhance accounting, IT makes a bigger difference in efficiency when it comes to bookkeeping.
Difficulty: Easy Hurt - Chapter 02 #62 Learning Objective: Knowledge

63. Employees in the consulting firm are paid twice a month. They track their own hours and report them via e-mail to you on the 17th for the first half of the month (i.e., on July 17 for the first half of July) and on the 2nd for the second half of the preceding month (i.e., on August 2 for the second half of July). You use Excel to compute each employee's gross pay; you then prepare paychecks using the firm's general ledger software. The senior manager signs the payroll checks and leaves them in each staff member's mailbox. Prepare a list of three internal controls you would recommend for the firm's payroll process. Recommended internal controls include (but are not limited to): (a) delivering paychecks in person, rather than leaving them in the mailboxes, (b) initiating a more efficient system for reporting hours, such as a time clock or software application and (c) maintaining a payroll account separate from the regular operating cash account.
Difficulty: Moderate Hurt - Chapter 02 #63 Learning Objective: Application

64. Explain, at a conceptual level, the "accounting cycle." Outline the steps in the cycle for your coworkers; provide a brief explanation of each step. Conceptually, the accounting cycle is the set of activities involved in processing data in the accounting information system. It starts with recognizing recordable events from source documents, culminating in the preparation of the general purpose financial statements. The cycle comprises ten steps: a. Obtain information about external transactions from source documents. b. Analyze transactions. c. Record the transactions in a journal. d. Post from the journal to the general ledger accounts. e. Prepare an unadjusted trial balance. f. Record adjusting entries and post to the general ledger accounts.

g. Prepare an adjusted trial balance. h. Prepare financial statements. i. Close the temporary accounts to retained earnings (at year-end only). j. Prepare a post-closing trial balance (at year-end only).
Difficulty: Easy Hurt - Chapter 02 #64 Learning Objective: Comprehension

65. Use the principles of "block coding" to create a partial chart of accounts for the consulting firm. Include three accounts in each area. Account numbers in a block coding system would look like this: a.

b.

c.

d.

e.

Difficulty: Moderate Hurt - Chapter 02 #65 Learning Objective: Analysis

ch2 Summary
Category # of Questions

Difficulty: Difficult Difficulty: Easy Difficulty: Moderate Hurt - Chapter 02 Learning Objective: Analysis Learning Objective: Application Learning Objective: Comprehension Learning Objective: Comprehensive Learning Objective: Knowledge Learning Objective: Synthesis

11 27 27 66 13 14 12 2 13 11