Question 1

A company that uses the net method of recording invoices made a purchase of $400 with terms of 2/10, n/30. The entry to record the purchase would include:
A) A debit to Merchandise Inventory for $392.
B) A credit to Discounts Lost for $8.
C) A credit to Cash for $392.
D) A debit to Discounts Lost for $8.
E) A debit to Cash for $392.

Accepted Answer

The net method records purchases at the net amount (after discount), so $400 less 2% ($8) equals $392, which is debited to Merchandise Inventory.

Question 2

A company records purchases using the net method. On February 1, they purchased merchandise inventory on account for $8,300 with terms of 1/10, n/30. The February 1 journal entry to record this transaction would include a:
A) Debit to Merchandise Inventory of $8,300.
B) Debit to Merchandise Inventory of $8,217.
C) Debit to Merchandise Inventory of $83.
D) Credit to Merchandise Inventory of $83.
E) Credit to Accounts Payable of $8,300.

Accepted Answer

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Question 3

What is the purpose of the days' sales uncollected ratio?

Accepted Answer

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Question 4

Effective cash management involves applying all of the following cash management principles except:
A) Encourage collection of receivables, offer discounts for payments received early.
B) Keep only necessary levels of assets.
C) Plan expenditures.
D) Leave excess cash available for unexpected expenditures.
E) Delay payment of liabilities until the last possible day.

Accepted Answer

Effective cash management aims to optimize the use of cash, ensuring that it is invested to earn a return rather than leaving excess cash idle, which does not contribute to the financial health of a company. Choices A, B, C, and E are all strategies aimed at improving cash flow and utilization.

Question 5

An expense resulting from failing to take advantage of cash discounts on purchases is called:
A) Sales discounts.
B) Trade discounts.
C) Purchases discounts.
D) Discounts lost.
E) Discounts earned.

Accepted Answer

Discounts lost are expenses that result from failing to take advantage of cash discounts on purchases, as opposed to discounts earned, which are incentives provided by sellers to encourage early payment, or trade discounts, which reduce the listed price of goods or services to specific buyers. Sales discounts and purchases discounts are terms that refer to the same type of cash discount, one from the perspective of the seller and the other from the perspective of the buyer.

Question 6

What is a voucher system?

Accepted Answer

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Question 7

The document, also known as the check authorization, that is a checklist of steps necessary for approving an invoice for recording and payment is the
A) Purchase requisition.
B) Purchase order.
C) Invoice.
D) Receiving report.
E) Invoice approval.

Accepted Answer

The document described in the question is the Invoice Approval. It is a checklist of steps required for approving an invoice for payment and recording purposes. It ensures that all necessary information and approvals have been obtained before the invoice is paid. The Purchase Requisition is a request for the purchase of goods or services, the Purchase Order is a document authorizing the procurement of goods or services, and the Receiving Report is a record of goods received by a company. The Invoice is the bill sent by a supplier to the purchaser for goods or services rendered. None of these documents serve as a checklist for approving an invoice for payment and recording.

Question 8

A voucher system is a series of prescribed control procedures:
A) Designed to eliminate the need for subsidiary ledgers.
B) Designed to determine if the company is operating profitably.
C) Used almost exclusively by small companies.
D) Used to ensure that the company sells on credit only to creditworthy customers.
E) Designed to control cash disbursements and the acceptance of obligations.

Accepted Answer

A voucher system is designed to control cash disbursements and the acceptance of obligations. It establishes a uniform system for the approval and documentation of all company expenditures, ensuring that all disbursements are for valid business expenses and are properly authorized.

Question 9

The document that the purchasing department prepares and sends to the vendor to place an order is the
A) Purchase requisition.
B) Purchase order.
C) Invoice.
D) Receiving report.
E) Invoice approval.

Accepted Answer

The document prepared and sent by the purchasing department to the vendor to place an order is the Purchase Order. A purchase requisition is an internal document used to request the purchase of goods or services, while an invoice is a document sent by the vendor requesting payment for goods or services provided. A receiving report is a document used to confirm that the goods or services ordered were received in good condition, and invoice approval is a document used to authorize payment for the goods or services received.

Question 10

A company using the net method of recording purchases failed to take advantage of a discount available. When they pay the full (gross) amount of an invoice at the end of the credit period the journal entry will include a debit to:
A) Merchandise Inventory.
B) Sales Discounts.
C) Discounts Lost.
D) Cash.
E) Accounts Receivable.

Accepted Answer

Since the company failed to take advantage of the discount available, they lost the opportunity to reduce the overall cost of their purchases. The journal entry will include a debit to Discounts Lost, which represents the amount of the discount that was not taken.

Question 11

The document that is an itemized statement of goods prepared by a vendor listing the customer's name, items sold, sales prices, and terms of the sale is the
A) Purchase requisition.
B) Purchase order.
C) Invoice.
D) Receiving report.
E) Invoice approval.

Accepted Answer

An invoice is an itemized statement of goods prepared by a vendor listing the customer's name, items sold, sales prices, and terms of the sale. A purchase requisition is a document used by an employee to request goods or services. A purchase order is a document issued by a buyer to a seller that confirms the details of a purchase. A receiving report is a document used to record the receipt of goods. Invoice approval is a process where invoices are reviewed and approved for payment.

Question 12

Reasons that internal controls are crucial to companies that convert from U.S. GAAP to IFRS include all of the following except:
A) Possible misstatement of financial information.
B) Possible fraud.
C) Controls are significantly different across the globe.
D) Ineffective communication of the change to investors, creditors, and others.
E) Management's inability to certify the effectiveness of the controls.

Accepted Answer

While it is true that controls can differ across countries, this is not a reason why internal controls are crucial for companies converting to IFRS. The other choices all represent potential risks associated with the conversion and highlight the importance of having strong internal controls in place to mitigate those risks.

Question 13

List the principles of internal control.

Accepted Answer

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Question 14

The gross method of recording purchases refers to the method of recording:
A) Purchases at the invoice price less any cash discounts.
B) Specified amounts and timing of payments that a buyer agrees to make in return for being granted credit.
C) Purchases at the full invoice price, without deducting any cash discounts.
D) Inventory at its selling price.
E) Inventory at the lower of cost or market.

Accepted Answer

The gross method of recording purchases refers to the method of recording purchases at the full invoice price, without deducting any cash discounts. This method assumes that the buyer will not take advantage of any cash discounts and will pay the full amount due.

Question 15

Define an internal control system and describe its purpose.

Accepted Answer

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Question 16

The internal document that is prepared to notify the appropriate persons that ordered goods have been received and describes the quantities and condition of the goods is the
A) Purchase requisition.
B) Purchase order.
C) Invoice.
D) Receiving report.
E) Invoice approval.

Accepted Answer

The document that notifies the appropriate persons that ordered goods have been received and describes the quantities and condition of the goods is called the Receiving Report. The other options listed are related to the ordering and payment processes.

Question 17

Discuss how the principles of internal control apply to cash receipts.

Accepted Answer

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Question 18

Describe the banking activities that promote the control of cash and identify the internal control objectives served by the banking activities.

Accepted Answer

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Question 19

Explain the difference between cash and cash equivalents.

Accepted Answer

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Question 20

Merchandise with an invoice price of $2,000 was purchased on October 3, terms 1/15, n/60. The company uses the net method to record purchases. The entry to record the cash payment of this purchase obligation on October 17 is:
A) Debit Accounts Payable $1,980; credit Cash $1,980.
B) Debit Accounts Payable $2,000; credit Cash $2,000.
C) Debit Accounts Payable $1,980; credit Discounts Lost $20; credit Cash $2,000.
D) Debit Accounts Payable $2,000; credit Merchandise Inventory $20; credit Cash $1,980.
E) Debit Accounts Payable $2,000; credit Merchandise Inventory $40; credit Cash $1,960.

Accepted Answer

The net method assumes discounts are taken. The invoice is initially recorded at its net amount ($2,000 less 1% = $1,980). Since the payment is within the discount period, the payment is $1,980, matching the recorded payable amount.

Quiz 8: Cash and Internal Controls

A company that uses the net method of recording invoices made a purchase of $400 with terms of 2/10, n/30. The entry to record the purchase would include:

A company records purchases using the net method. On February 1, they purchased merchandise inventory on account for $8,300 with terms of 1/10, n/30. The February 1 journal entry to record this transaction would include a:

What is the purpose of the days' sales uncollected ratio?

Effective cash management involves applying all of the following cash management principles except:

An expense resulting from failing to take advantage of cash discounts on purchases is called:

What is a voucher system?

The document, also known as the check authorization, that is a checklist of steps necessary for approving an invoice for recording and payment is the

A voucher system is a series of prescribed control procedures:

The document that the purchasing department prepares and sends to the vendor to place an order is the

A company using the net method of recording purchases failed to take advantage of a discount available. When they pay the full (gross) amount of an invoice at the end of the credit period the journal entry will include a debit to:

The document that is an itemized statement of goods prepared by a vendor listing the customer's name, items sold, sales prices, and terms of the sale is the

Reasons that internal controls are crucial to companies that convert from U.S. GAAP to IFRS include all of the following except:

List the principles of internal control.

The gross method of recording purchases refers to the method of recording:

Define an internal control system and describe its purpose.

The internal document that is prepared to notify the appropriate persons that ordered goods have been received and describes the quantities and condition of the goods is the

Discuss how the principles of internal control apply to cash receipts.

Describe the banking activities that promote the control of cash and identify the internal control objectives served by the banking activities.

Explain the difference between cash and cash equivalents.

Merchandise with an invoice price of $2,000 was purchased on October 3, terms 1/15, n/60. The company uses the net method to record purchases. The entry to record the cash payment of this purchase obligation on October 17 is: