Solution Manual for Financial Accounting , 12th Edition

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Chapter 1 - The Financial Statements
Directed Reading Worksheet Answer Key
Part I: Explain why accounting is critical to businesses (LO1)
1. What are financial statements?
Business documents companies use to report the results of their activities to people and groups
that can include managers, investors, creditors, and regulatory agencies
2. List the basic financial statements.
a. Income statement
b. Statement of retained earnings
c. Balance sheet
d. Statement of cash flows
3. What does the word net refer to in accounting?
An amount after a subtraction
4. What is net income (profit)?
The excess of revenues (net sales) over expenses
5. What were net sales for The Walt Disney Company, for its year ended October 1, 2016? For its
year ended October 3, 2015? On what statement do you find this information?
2016: $55,632 million
2015: $52,465 million
Income Statement
6. _____________________ is an information system that measures business activities, processes
data into financial statements and reports, and communicates results to decision makers.
Accounting
7. What is the accounting cycle?
The process by which a company’s financial statements are prepared
8. _____________________ is a mechanical part of accounting, just as arithmetic is a part of
mathematics; accounting as a field is much more than this mechanical part.
Bookkeeping
9. Who uses accounting information?
a. Individuals
b. Investors and creditors

c. Regulatory bodies
d. Nonprofit organizations
10. What two branches of accounting are based on whether the user is external or internal?
a. Financial accounting (external)
b. Managerial accounting (internal)
11. A _____________________ form of business organization consists of a single owner and the
owner is personally liable for all the business’s debts.
Proprietorship
12. Income from the ______________________ form of business organization “flows through” to
the owners; each owner can legally bind all partners into unlimited debt.
Partnership
13. When organized as a _____________________, the owners are not personally liable for the
business’s debts and the business’s income “flows through” to the owners to be taxed at the
owners’ own tax rates.
Limited-Liability Company
14. Although its advantages include the ability to raise large sums of capital and the no personal
liability for its owners, one potential disadvantage of the _______________________ form of
business organization is that its income is subject to double taxation.
Corporation
15. Who (or what) ultimately controls a corporation?
Stockholders or shareholders who own stock in the corporation
Part II: Explain and apply underlying accounting concepts, assumptions, and principles (LO2)
16. Two professional frameworks for the measurement and disclosure of financial information are:
a. Generally Accepted Accounting Principles (GAAP)
b. International Financial Reporting Standards (IFRS)
17. What regulatory bodies formulate the standards for each respective framework in Question 16
above?
Financial Accounting Standards Board (FASB); International Accounting Standards Board (IASB)
18. Fill in the conceptual foundation of accounting in the following diagram. Also draw arrows
where appropriate to show relationships.

19. In your own words, describe the difference between relevance and faithful representation.
Relevance means that the information could change the outcome or make a decision maker
chose a different path. If information would have no impact on the decision, then it is not
relevant. If the information could change the decision makers mind, it is relevant.
Faithful representation means that the information is accurate. Faithful representation makes
the information reliable for decision makers to use it.
20. List and describe the four enhancing qualitative characteristics for accounting information.
a. Comparability: capable of being compared with information from other companies in the
same period
b. Verifiability: capable of being checked for accuracy, completeness, and reliability
c. Timeliness: made available to users early enough to help them make decisions
d. Understandability: transparent and clear enough so that it would make sense to the
reasonably informed user of information
21. List and describe the four accounting assumptions/principles.
a. Entity Assumption: This is the idea that the entity (organization or person) stands apart as a
separate economic unit. It is to keep entities and their affairs separate from others.
b. Continuity (Going-Concern Assumption): This says that a business should stay in business
long enough to convert its inventories and receivables to cash, pay off liabilities regularly, and

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continue operations in the future.
c. Historical Cost Principle: This states that assets should be recorded at the cost paid for them
in cash and noncash compensation on the date of purchase.
d. Stable-Monetary-Unit Assumption: This ignores inflation and change in purchasing power to
assume that the value of the dollar is stable over time. This helps with comparability from year
to year.
22. _________________ is the amount that the business could sell the asset for, or the amount that
the business could pay to settle the liability.
Fair value
23. Why did the International Accounting Standards Board (IASB) develop International Financial
Reporting Standards (IFRS)?
The purpose was to create a uniform set of principles across the developed world and make
comparability of financial results simple and inexpensive.
Part III: Apply the accounting equation to business organizations (LO3)
24. Assets are economic resources that are expected to produce a _____________________ in the
future. Liabilities are debts that are payable to _____________________. Owners’ equity
represents the _____________________ claims of a business.
Benefit; Outsiders/Creditors; Insider
25. What is the accounting equation?
Assets = Liabilities + Owners’ (Stockholders’) Equity
26. ________________ are liquid assets that can be readily converted to cash. Give 2 examples.
Cash equivalents
Certificate of deposit, U.S. treasury bill
27. Liabilities payable beyond __________________ from the date of the financial statements are
long-term. Liabilities payable within __________________ from the date of the financial
statements are short-term.
One year; One year
28. What are the two main subparts of stockholders’ equity and what is the difference between
them?
Paid-in capital: the amount the stockholders have invested in the corporation
Retained earnings: the amount earned by income-producing activities and kept for use in the
business

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The main difference is that paid-in capital comes from the stockholders while retained earnings
is from the operations of the business.
29. Dividends (ARE or ARE NOT) expenses. They (NEVER or ALWAYS) affect net income
ARE NOT; NEVER
30. When a company’s total revenues exceed total expenses, what is the result? When total
expenses exceed total revenues?
Net income/net earnings/net profit; Net loss
31. How is retained earnings calculated?
Retained earnings = Revenues – Expenses – Dividends
Or
Retained earnings = Net income (net loss) – Dividends
Part IV: Construct financial statements and analyze the relationships among them (LO4)
32. You can determine how well the company performed during the year by looking at its
___________________. You can determine a company’s financial position by looking at its
___________________.
Income statement; balance sheet
33. A company’s fiscal year always corresponds to a calendar year (January 1—December 31). TRUE
or FALSE
False
34. An income statement reports two main categories. What are they?
Revenues and gains; expenses and losses
35. What is the single most important item in the financial statements?
Net income
36. Selling, general, administrative, and other expenses are the costs of everyday operations that
are not directly related to performing services or selling products. TRUE or FALSE
True
37. Income taxes are not taken into consideration on the income statement. TRUE or FALSE
False
38. What does the statement of the retained earnings show about a company?
The statement of retained earnings shows the portion of net income that a company has
retained over the years. If the company has been profitable, it will have a positive balance in

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retained earnings. If it has had losses, then its retained earnings will be in a deficit. The
statement of retained earnings also shows if the company has distributed dividends.
39. Who decides whether to pay a dividend to the stockholders?
The board of directors
40. List the three items (sections) on a balance sheet
a. Assets
b. Liabilities
c. Stockholders’ Equity
41. Put the following assets in order of liquidity: equipment, cash, inventory, and short-term
investments.
Cash, Short-term investments, Inventory, Equipment
42. When the term “net” is used on a financial statement regarding property and equipment, it
means that the historical acquisition cost of the assets has been reduced by ________________
________________________.
Accumulated depreciation
43. ____________________ assets have no physical substance; you can neither see nor touch them.
Intangible
44. Unearned royalties (revenues) represents cash received in advance of performing services or
shipping goods and is a liability account. TRUE or FALSE
True
45. Describe additional paid-in capital in your own words.
Additional paid-in capital is the excess amount over par shareholders pay for securities of a
company.
46. ____________________ stock represents amounts paid by the company to repurchase its own
stock.
Treasury
47. Operating activities show how the company operates by selling ___________ and ___________
to customers. Investing activities show a company’s investment in ______-______ ___________.
Financing activities include _______________________________________________.
Goods; services; long-term assets; issuing stock, paying dividends, borrowing, and repaying
borrowed funds.
48. How is a cash payment indicated on the statement of cash flows?
They are enclosed by parentheses to show a negative amount.

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49. If you were considering investing in The Walt Disney Company, what should you look for?
Students’ answers will vary. Possibilities include:
• Can the company sell its services and products? → Look at revenue on the income statement
• What are the main income measures and trends? → Calculate and analyze gross profit,
operating income, and net income
• What percentage of revenue ends up as profit? → Divide net income by sales revenue
• Can the company pay its current and long-term liabilities? → Compare assets to liabilities on
the balance sheet (both current and long-term)
• Where is the company’s cash coming from and how is it being used? → Examine the statement
of cash flows
Part V: Evaluate business decisions ethically (LO5)
50. Describe ethics in your own words.
Answers will vary. Ethics are shaped by our own background and experiences. They are like our
morals. What is legal may not always be the most ethical thing to do.
51. List and describe the three types of factors that influence business and accounting decisions.
a. Economic factor: the decision should be made to maximize economic benefits to the decision
maker
b. Legal factor: based on the proposition that free societies are governed by laws
c. Ethical factor: recognizes that while certain actions might be both economically profitable and
legal, they still may not be right
52. Ethics is a practice that does not have to be taken seriously in accounting. TRUE or FALSE
False
53. The four core values of the Business Ethics Leadership Alliance include __________________,
transparency, __________ ________, and accountability.
Legal compliance; conflict identification

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54. A good decision framework for making ethical judgements would be the following:
• Ask yourself, what is the issue?
• Identify who the stakeholders are and what the consequence of the decision would be
to each of them.
• Weigh the alternatives.
• Make the decision and prepare yourself to deal with the consequences.
This can be simplified into three questions. (1) Is the action legal? (2) Who will be affected and
how? (3) How will this decision make me feel after? How would it make me feel if my family
reads about it in the newspaper?
55. List the basic principles of the American Institute of Certified Public Accountants Code of
Professional Conduct.
a. Responsibilities principle
b. Public interest principle
c. Integrity principle
d. Objectivity and independence principle
e. Due care principle
f. Scope and nature of services

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Chapter 2 - Transaction Analysis
Directed Reading Worksheet Answer Key
Part I: Recognize a business transaction and the various types of accounts in which it can be recorded
(LO1)
1. A(n) __________________ is any event that has a financial impact on a business and can be
measured reliably.
Transaction
2. What two things must happen for an event to be considered a transaction?
1. It gives something
2. It receives something in return.
3. An account is the record of all the changes in an asset, liability or stockholders’ equity during a
period. TRUE or FALSE
True
4. What is the definition of an asset?
An economic resource that provides a future benefit for a business
5. List seven asset accounts that a company is likely to have.
1. Cash
2. Accounts receivable
3. Notes receivable
4. Inventory
5. Prepaid expenses
6. Investments
7. Property, Plant and Equipment
6. What is the definition of a liability?
Liabilities are debt. Amounts owed to other parties (payables).
7. List the three most common types of liabilities
1. Accounts payable
2. Notes payable (borrowings)
3. Accrued liabilities
8. What is stockholders’ equity?
The owners’ claims to the assets of a corporation

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9. What five main types of accounts are in stockholders’ equity?
1. Common stock
2. Retained earnings
3. Dividends
4. Revenues
5. Expenses
Part II: Analyze the impact of business transactions on the accounting equation (LO2)
10. Every transaction of the business affects its financial statements. TRUE or FALSE
True
11. For each item, indicate the impact of that transaction on assets, liabilities, and equity. Assume
that all transactions, unless stated otherwise, are in cash.
Transaction
Assets
(increase + or
decrease -)
=
Liabilities
(increase + or
decrease -)
+
Equity
(increase + or
decrease -)
1. Received $50,000 cash and issued
stock to the owners 50,000 = + 50,000
2. Paid $40,000 cash for land (40,000)
+40,000 = +
3. Bought $3,700 of supplies on
account 3,700 = 3,700 +
4.
Received $7,000 cash from
customers for service revenue
earned
7,000 = + 7,000
5. Performed services for customers on
account, $3,000 3,000 = + 3,000
6.
Paid cash expenses: rent, $1,100;
employee salary, $1,200; utilities,
$400
(2,700) = + (2,700)

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7. Paid $1,900 on the account payable
created in transaction 3 (1,900) = (1,900) +
8.
Major stockholder paid personal
funds to remodel home, not a
business transaction
N/A = N/A + N/A
9. Received $1,000 on account +1,000
(1,000) = +
10. Sold land for cash at the land’s cost
of $22,000
+22,000
(22,000) = +
11. Declared and paid a dividend of
$2,100 to the stockholders (2,100) = + (2,100)
12. What effect do revenues have on stockholders’ equity? What effect do expenses have on
stockholders’ equity?
Revenues increase stockholders’ equity.
Expenses decrease stockholders’ equity.
13. What effect does a dividend declaration have on retained earnings?
Dividends decrease retained earnings
14. Fill in the equation for the statement of retained earnings:
Beginning retained earnings
+ Net income
- Dividends
= Ending retained earnings
15. What line item is carried from the Income Statement to the Statement of Retained Earnings?
What line item is carried from the Statement of Retained Earnings to the Balance Sheet?
Net income
Ending retained earnings
Part III: Analyze the impact of business transactions on accounts (LO3)
16. Describe how accounting is based on a double-entry system?

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The dual effects of each transaction are always recorded. Every transaction affects at
least two accounts.
17. How does the letter T represent an account?
The vertical line in the T splits the account into two halves. The account title appears on
the top of the T.
18. The left side of each T-account is the ____________ side, and the right side is the ____________
side.
Debit; credit
19. Describe how debits and credits affect asset, liability, and stockholders’ equity accounts.
Debits increase assets and decrease liabilities and stockholders’ equity. Credits decrease
assets and increase liabilities and stockholders’ equity.
20. The amount remaining in an account is called its _________________.
Balance
21. How do debits and credits affect dividend, expense, and revenue accounts?
Debits increase dividends and expenses but decrease revenues. Credits decrease
dividends and expenses but increase revenues.
Part IV: Journalize transactions and post journal entries to the ledger (LO4)
22. What is the chronological record of transactions that accountants use?
A journal
23. List the three steps of the journalizing process.
1. Specify each account affected by the transaction and classify each account by type.
2. Determine whether each account is increased or decreased by the transaction. Use the
rules of debit and credit to increase or decrease each account.
3. Record the transaction in the journal, including a brief explanation. The debit side is
entered on the left margin, and the credit side is indented to the right.
24. The _________________ is a grouping of all the T-accounts, with their balances.
Ledger
25. What does “posting” mean?
Posting means to copy data (amounts) from the journal to the ledger.

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26. Post the following transactions to the ledger accounts. Use t-accounts to represent the ledger
accounts. (Transactions 1-4 from question 13)
1. Received $50,000 cash and issued stock to the owners
2. Paid $40,000 cash for land
3. Bought $3,700 of supplies on account
4. Received $7,000 cash from customers for service revenue earned
27. The difference between an account’s total debits and its total credits is denoted as what in the
T-account?
Bal
Part V: Construct and use a trial balance (LO5)
28. Describe a trial balance, including its purpose
A trial balance lists all accounts with their balances. It starts with assets, then liabilities
and stockholders’ equity. The trial balance summarizes all the account balances and
proves whether total debits equal total credits. The trial balance facilitates in the
preparation of the financial statements.
29. What formula could you use to analyze the cash account and compute cash payments for the
period if you were unsure of the amount of cash payments?
Cash payments = Beginning balance + Cash receipts – Ending balance
30. What three strategies could help you detect and correct accounting errors made during the
period?
1. Search the records for a missing account.
2. Divide the out-of-balance amount by 2.
3. Divide the out-of-balance amount by 9.

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31. Organizations use a _______________________ to list all their accounts and account numbers.
Chart of accounts
32. Describe what an account’s “normal balance” means.
Normal balance is the side of the account where increases are recorded. To increase an
asset, you debit it, therefore assets have a normal debit balance.
33. Indicate the normal balance for each of the following types of accounts:
1. Assets – debit
2. Liabilities – credit
3. Stockholders’ equity – overall – credit
i. Common stock – credit
ii. Retained earnings – credit
iii. Dividends – debit
iv. Revenues – credit
v. Expenses – debit

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Chapter 3 - Accrual Accounting & Income
Directed Reading Worksheet Answer Key
Part I: Explain how accrual accounting differs from cash-basis accounting
1. What two methods may be used in accounting? Which one is required by Generally Accepted
Accounting Principles (GAAP)?
1. Accrual basis
2. Cash-basis
The accrual basis is required by GAAP.
2. Under accrual accounting, a business records revenue when _______Earned__________ and
expenses when _____Incurred____________.
3. What cash transactions does accrual accounting record?
• Collecting cash from customers
• Receiving cash from interest earned
• Paying salaries, rent and other expenses
• Borrowing money
• Paying off loans
• Issuing stock
4. Which of the following noncash transactions does accrual accounting record?
A. Sales and purchases on account
B. Usage of prepaid rent, insurance, and supplies
C. Earning of revenue prior to cash collection
D. Accrual of expenses incurred but not yet paid
E. All of the above

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5. In your own words, describe the time-period concept.
Student answers will vary. The time-period concept ensures that accounting information
is reported at regular intervals. The time-period concept is necessary because business’s
need regular progress reports. They certainly cannot wait until liquidation to measure
income; therefore, the time-period concept must be utilized.
6. How long is the basic accounting period?
One year
7. Virtually all companies prepare annual financial statements. At what other interim periods do
companies often prepare financial statements for?
Month, quarter (three months) or a semiannual period (six months)
Part II: Apply the revenue and expense recognition principles
8. What two issues does the revenue principle deal with?
1. When to record (recognize) revenue
2. What amount of revenue to record
9. What is the general rule for when revenue should be recognized?
Revenue should be recognized after it has been earned – when the business transfers
the promised goods or services to the customer.
10. What amount of revenue should be recorded?
The amount of cash or its equivalent that is transferred from the customer to the seller
11. In your own words, describe the expense recognition principle.
Student answers will vary. The expense recognition principle is the basis for recording
expenses. Expenses are costs incurred during the process of creating revenue that
provide no future benefit to the company. Expenses should be recognized against the
related revenues of that period.

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12. List the two steps of the expense recognition principle.
1. Identify all the expenses incurred during the accounting period.
2. Measure the expenses and recognize them in the same period in which any related
revenues are earned.
13. What is another name for the expense recognition principle?
A. Expense rule
B. Matching principle
C. Time-period concept
D. Revenue principle
Part III: Adjust the accounts
14. What are the three categories of accounting adjusting entries?
1. Deferrals
2. Depreciation
3. Accruals
15. What is the definition of a deferral?
A deferral is an adjustment for payment of an item or receipt of cash in advance.
16. What is the definition of depreciation?
Depreciation allocates the cost of a plant asset to expense over the asset’s useful life.
17. What is the definition of an accrual?
An accrual is the opposite of a deferral. It is an expense or a revenue that occurs before
the business pays or receives cash.

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18. (a) What accounts would be debited and credited to record the prepayment of three months’
rent? (b) What accounts would be debited and credited to make the adjustment after the
prepaid rent has been used up?
a. Prepaid rent is debited, and Cash is credited
b. Rent expense is debited and Prepaid rent is credited
19. What would the journal entry to record $500 worth of depreciation be?
Depreciation Expense 500
Accumulated Depreciation 500
20. What type of account is Accumulated depreciation? What is its normal balance?
Accumulated depreciation is a contra asset account with a normal credit balance.
21. What two distinguishing characteristics do contra accounts have?
1. Contra accounts always have a companion account.
2. Their normal balance is opposite that of their companion account.
22. How is the book value of a plant asset calculated?
Cost minus accumulated depreciation
23. Which of the following would be an accrual adjustment?
A. Salary expense
B. Unearned revenue
C. Service Revenue
D. All of the above
24. What is a revenue that has been earned but not yet collected called?
Accrued revenue
25. All accrued revenues are accounted for similarly – debit a ___Receivable____________ and
credit a ____Revenue___________.

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26. What type of account is unearned revenue?
A. Revenue
B. Asset
C. Liability
D. Equity
27. When would a company record unearned revenue?
A company would record unearned revenue when it collects cash from a customer prior
to earning the revenue – before it delivers the goods and/or service.
28. Two purposes of the adjusting process are to
A. _____Measure income_________________________, and
B. _____Update the balance sheet_________________________
Therefore, every adjusting entry affects both of the following:
C. _____Revenue or expense (to measure income)_____________
D. _____Asset or liability (to update the balance sheet)__________
29. What is typically a company’s final adjusting entry of the period?
The accrual of income tax expense
30. What is the document that lists all the accounts and their final adjusted balances in a single
place called?
The adjusted trial balance

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Part IV: Construct the financial statements
31. What order must the financial statements be prepared in? Explain why the statements must be
prepared in this order.
The income statement → The statement of retained earnings → Balance sheet →
Statement of cash flows. The statements must be prepared in this order because net
income is calculated on the income statement. Net income then flows through to the
statement of retained earnings and is used to calculate ending retained earnings. Ending
retained earnings is carried forward to the balance sheet to calculate total liabilities and
stockholders’ equity.
Part V: Close the books
32. What three types of accounts require closing entries?
1. Revenue
2. Expense
3. Dividend
33. Are temporary or permanent accounts closed each period?
Temporary
34. List the three types of permanent accounts.
1. Assets
2. Liabilities
3. Stockholders’ equity
35. Put the following steps to close a company’s books in the correct order.
A. Credit the Dividends account for its debit balance. Debit Retained Earnings.
B. Debit each revenue account for its credit balance. Credit Retained Earnings for the sum
of the revenues.
C. Credit each expense account for its debit balance. Debit Retained Earnings for the sum
of the expenses.
BCA

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36. Dividends is an expense account. True or False?
False
37. What is the most liquid asset?
Cash
38. Are current or long-term assets more liquid?
Current
39. List five examples of current assets. (Student answers can vary.)
1. Cash
2. Short-term investments
3. Accounts receivable
4. Merchandise inventory
5. Prepaid expenses
40. List five examples of long-term assets. (Student answers can vary.)
1. Property, Plant, and Equipment
2. Land
3. Buildings
4. Furniture and Fixtures
5. Equipment
41. What is the definition of current liabilities?
Current liabilities are debts that must be paid within one year after the balance sheet
date or within the business’s operating cycle if longer than one year.
42. What is an example of a long-term liability? (Student answers can vary.)
Note payable (portion not due within one year)

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43. What are the two basic formats of the balance sheet?
1. Report format
2. Account format
44. What are the two basic formats of the income statement?
1. Single-step income statement
2. Multi-step income statement
Part VI: Analyze and evaluation a company’s debt-paying ability
45. Which of the following is the equation for calculating net working capital?
A. Total current assets – Total current liabilities
B. Net income – Liabilities
C. Total current assets / Total current liabilities
D. Net income / Liabilities
46. What is the formula to calculate the current ratio? What does the current ratio measure?
Total current assets / Total current liabilities. The current ratio measures the company’s
ability to pay current liabilities with current assets.
47. What is typically considered a strong current ratio?
1.50
48. What is the formula to calculate the debt ratio?
Total liabilities / Total assets
49. What does the debt ratio measure?
The debt ratio indicates the proportion of a company’s assets that is financed with debt.
It measures a business’s ability to pay both current and long-term debts.

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Chapter 4 - Internal Control & Cash
Directed Reading Worksheet Answer Key
Part I: Describe fraud and its impact
1. What is the definition of fraud?
Fraud is the intentional misrepresentation of facts, designed to persuade another party
to act in a way that causes injury or damage to that party.
2. The longer a perpetrator has worked for an organization, the higher the fraud losses tend to be.
True or false?
True
3. What are the two most common types of fraud that impact the financial statements?
1. Misappropriation of assets
2. Fraudulent financial reporting
4. What are the three elements that make up virtually every fraud?
1. Motive
2. Opportunity
3. Rationalization
5. Fraud is the ultimate ________unethical_________ ___act__________ in business.
Part II: Explain the objectives and components of internal control
6. Define internal control.
Internal control is a plan of organization and a system of procedures implemented by
company management and the board of directors to prevent, detect and/or correct
fraud.

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7. List the five objectives of internal control.
1. Safeguard assets.
2. Encourage employees to follow company policies.
3. Promote operational efficiency.
4. Ensure accurate, reliable accounting records.
5. Comply with legal requirements.
8. The U.S. Congress requires public companies to maintain a system of internal controls and
requires their auditors to examine those controls. True or False?
True
9. List the five components of internal control.
1. Control environment
2. Risk assessment
3. Information system
4. Control procedures
5. Monitoring of controls
10. Which component of internal control is described as the “tone at the top” of the business?
Control environment
11. Which component of internal control provides “eyes and ears” so that no one person or group
can process a transaction without being checked by another person or group?
Monitoring of controls
12. What three key duties need to be separated for proper segregation of duties?
1. Asset handling
2. Record keeping
3. Transaction approval

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13. Describe the difference between internal and external auditors.
Internal auditors are employees of the business. They ensure that employees are
following company policies and determine whether the company is following legal
requirements. External auditors are usually CPAs who are completely independent of
the business. They are hired to determine whether the company’s financial statements
are prepared in accordance with U.S. GAAP. Auditors examine the client’s financial
statements and underlying transactions to form a professional opinion on the accuracy
and reliability of the company’s financial statements.
14. List the SCALP principles.
1. Smart hiring practices and Separation of duties
2. Comparisons and Compliance monitoring
3. Adequate records
4. Limited access to both assets and records
5. Proper approvals (either general or specific) for each class of transaction
15. What is a fidelity bond?
A fidelity bond is an insurance policy that reimburses the company for any losses due to
employee theft.
16. List three risks that are created with the use of e-commerce.
1. Stolen credit card numbers
2. Malware
3. Phishing expeditions
17. __Encryption____________ rearranges messages by mathematical process to protect
confidential information.
18. ____Firewalls_____________ limit access into a local network. Usually several are built into the
system.

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Part III: Evaluate internal controls over cash receipts and cash payments
19. Describe the controls in place during a typical over the counter cash purchase.
The point-of-sale terminal provides control of the cash receipt, while also recording the
sale and reducing inventory for the cost of the goods sold. For each transaction, the
customer receives a receipt as proof of purchase. The cash drawer opens, and the
machine electronically records the sale as each transaction occurs. At the end of each
shift, the cash drawer is delivered to the main office, where it is combined with the rest
of the cash and then delivered to a bank for deposit via an armored car. A separate
employee in accounting will then reconcile the electronic record with the cash turned in.
20. What is the final step in the process to control cash receipts received through the mail?
The controller compares the bank deposit amount from the treasurer and the debit to
Cash from the accounting department to ensure they balance.
21. Companies make most payments with cash. True or false?
False
22. To help prevent fraud, companies split what four duties among different employees whenever
possible?
1. Purchasing goods
2. Receiving goods
3. Preparing check or EFT for payment
4. Approval of the payment
23. What documents are included in a company’s payment packet?
a. Receiving report, invoice, and purchase order
b. Invoice, check, and receiving report
c. Purchase order, remittance advice, and deposit check
d. Remittance advice, invoice, and check

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Solution Manual for Financial Accounting , 12th Edition

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