Exam 2 study guide

Which of the following best describes the goal of internal controls?

• Ensuring the compliance with tax regulations

• Ensuring the business is profitable

• Improving the accuracy and the reliability of financial information

• Enhancing the health of employees

Air France collected cash on February 4 from the sale of a ticket to a customer on January 26. The flight took place on April 5. According to the revenue recognition principle, in which month should Air France have recorded this revenue?

• January

• February

• Evenly in each of the three months

• April

Which one of the following best describes the characteristics of adjusting entries?

• Adjusting entries update balances for the recognition of investments from and distributions to stockholders.

• Adjusting entries reduce the balance of revenue, expense, and dividend accounts to zero.

• Adjusting entries update balances for the recognition of cash flows.

• Adjusting entries update the balances of assets and liabilities (and their related revenues and expenses).

Which of the following elements is part of the fraud triangle?

• All of the other answers are elements of the fraud triangle.

• Rationalization.

• Motivation.

• Opportunity.

The term commonly used to refer to short-term investments that have a maturity date no longer than three months from the date of purchase is:

• Accounts receivable.

• Accounts payable.

• Notes receivable.

• Cash equivalents.

The primary difference between accrual-basis and cash-basis accounting is:

• Under accrual-basis accounting, an attempt is made to record economic events as they occur, regardless of when cash is received or paid.

• Accrual-basis accounting is not part of GAAP.

• Adjusting entries are only a necessary part of cash-basis accounting.

• Cash-basis accounting is allowed for financial reporting purposes but not accrual-basis accounting.

An accrued revenue represents:

• Revenue being recorded at the same time the cash is collected from the customer.

• Customers paying cash in advance of the good or service to be provided.

• Cash being collected from the customer prior to the revenue being recorded.

• Revenue being recorded prior to the collection of cash from the customer.

Current assets include:

• Assets that must be paid for within 12 months.

• Any assets that were purchased for cash.

• Assets that will be used up or converted to cash within 12 months.

• Assets that will be used for many years.

Deferred revenues refer to:

• Cash being collected from the customer after the revenue is recorded.

• Revenue being recorded prior to cash collection from the customer.

• Customers paying cash in advance of the good or service to be provided.

• Revenue being recorded at the same time the cash is collected from the customer.

Prepayments occur when:

• Customers are unable to pay the full amount due when goods are delivered.

• Sales are delayed pending credit approval.

• Cash payment occurs after the cost is used in running the company and liability is recorded.

• Cash payment (or an obligation to pay cash) occurs before the cost is incurred.