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Chapter 16
Chapter 16
16.1 Describe the information processing operations required to update the general ledger and
to produce reports for internal and external users.
1) The general ledger and reporting system consists of the ________ involved in ________ the
general ledger and ________ reports.
A) business transactions; updating; processing
B) data processing; business transactions for; printing
C) information processing; updating; creating
D) business transactions; data processing; preparing
Answer: C
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic
2) Which item below is not considered a major input to the general ledger and reporting system?
A) summary entries from the major subsystems
B) reports from managers
C) adjusting entries
D) financing and investing activities
Answer: B
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
3) Who should provide the adjusting entries in a well-designed general ledger and reporting
system?
A) various user departments
B) the treasurer's area
C) the other major AIS subsystems
D) the controller's area
Answer: D
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
1
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4) Which of the following user groups generally receive information produced by the general
ledger and reporting system?
A) internal users
B) external users
C) inquiry processing by internal or external users
D) all of the above
Answer: D
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
5) The general ledger system of an organization should be designed to serve the information
requirements of both internal and external users. This means that the system should support
A) producing expansive regular periodic reports to cover all information needs.
B) the real-time inquiry needs of all users.
C) producing regular periodic reports and respond to real-time inquiry needs.
D) access by investors and creditors of the organization to general ledger balances.
Answer: C
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic
6) Identify the most correct statement with regard to how the various accounting subsystems
update the general ledger.
A) Individual journal entries for each accounting subsystem transaction update the general ledger
every 24 hours.
B) Summary journal entries that represent the results of all transactions for a certain time period
are used to update the general ledger.
C) The controller or treasurer must approve accounting subsystem journal entries before any
updating may occur.
D) Nonroutine transactions are entered into the system by the treasurer's office.
Answer: B
Objective: Learning Objective 1
Difficulty: Difficult
AACSB: Analytic
7) When updating the general ledger, sales, purchases, and production are examples of ________
entries, and issuance or retirement of debt and the purchase or sale of investment securities are
examples of ________ entries.
A) adjusting; controller originated
B) accounting subsystem; treasurer originated
C) adjusting; special journal
D) controller generated; special journal
Answer: B
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic
2
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8) Which of the following are used to document entries made to update the general ledger?
A) general journal
B) subsidiary journal
C) subsidiary ledgers
D) journal vouchers
Answer: D
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
9) Not all journal entries affect cash flow. Adjusting entries that reflect events that have already
occurred, but have no effect on cash, are classified as
A) accruals.
B) deferrals.
C) revaluations.
D) corrections.
Answer: A
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
10) Recording interest earned on an investment is an example of which type of adjusting journal
entry?
A) accrual entry
B) deferral entry
C) revaluation entry
D) correcting entry
Answer: A
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic
11) Identify the adjusting entry that is made at the end of an accounting period to reflect an
exchange of cash prior to the performance of a related event is classified as a(n)
A) accrual entry.
B) deferral entry.
C) revaluation entry.
D) correcting entry.
Answer: B
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
3
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12) Depreciation expense and bad debt expense are examples of which type of adjusting journal
entry?
A) deferrals
B) accruals
C) revaluations
D) estimates
Answer: D
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
13) Adjusting entries that are made to reflect differences between the actual and recorded value
of an asset or a change in accounting principle are called
A) reconciliations.
B) revaluations.
C) estimates.
D) accruals.
Answer: B
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
14) Adjusting entries that are made to counteract the effects of errors found in the general ledger
are called
A) accruals.
B) corrections.
C) deferrals.
D) estimates.
Answer: B
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
4
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16) Immediately after the adjusting entries are posted, the next step in the general ledger and
reporting system is to prepare
A) an adjusted trial balance.
B) closing entries.
C) financial statements.
D) an unadjusted trial balance.
Answer: A
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic
17) Financial statements are prepared in a certain sequence. Which statement is prepared last?
A) the adjusted trial balance
B) the income statement
C) the balance sheet
D) the statement of cash flows
Answer: D
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
18) A listing of journal vouchers by numerical sequence, account number, or date is an example
of
A) a general ledger control report.
B) a budget report.
C) a batch to be processed.
D) responsibility accounting.
Answer: A
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic
19) Who generally is responsible for providing the accounting department with information
about financing and investing activities to create the appropriate general ledger journal entries?
A) budget department
B) controller
C) treasurer
D) chief executive officer
Answer: C
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
5
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20) Adjusting entries that are made to recognize revenue that has been received but not yet
earned are classified as
A) estimates.
B) deferrals.
C) accruals.
D) revaluations.
Answer: B
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
21) Adjusting entries that reflect a change in accounting principle used to value inventories are
classified as
A) corrections.
B) estimates.
C) deferrals.
D) revaluations.
Answer: D
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
16.2 Identify the major threats in general ledger and reporting activities and evaluate the
adequacy of various control procedures for dealing with them.
1) If you believe not all adjusting entries were posted in the general ledger, you should prepare a
general ledger control report listing journal vouchers in
A) numerical sequence.
B) chronological order.
C) general ledger account number order.
D) any order, since you have to review them all anyway.
Answer: A
Objective: Learning Objective 2
Difficulty: Difficult
AACSB: Reflective Thinking
6
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2) If you believe a general ledger account was not adjusted properly or at all, you should prepare
a general ledger control report listing journal vouchers in
A) numerical sequence.
B) chronological order.
C) general ledger account number order.
D) any order, since you have to review them all anyway.
Answer: C
Objective: Learning Objective 2
Difficulty: Difficult
AACSB: Reflective Thinking
3) Which of the following are appropriate controls for the general ledger and reporting system?
A) using well-designed documents and records
B) online data entry with the use of appropriate edit checks
C) prenumbering documents and accounting for the sequence numbers
D) All of the above are appropriate.
Answer: D
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic
4) A type of data entry control that would ensure that adjusting entries are posted to existing
general ledger accounts is called a(n) ________ check.
A) validity
B) existence
C) closed loop verification
D) reasonableness
Answer: A
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic
5) One way of ensuring that recurring adjusting journal entries are made each month would be to
A) make all the entries a month in advance.
B) rotate the responsibility among the accounting staff.
C) program the entries to be made automatically.
D) create a standard adjusting journal entry file.
Answer: D
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic
7
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6) Which of the following tasks are facilitated by maintaining a strong and secure audit trail?
A) tracing a transaction from original source document to the general ledger to a report
B) tracing an item in a report back through the general ledger to the original source document
C) tracing changes in general ledger accounts from beginning to ending balances
D) All of the above are facilitated by the audit trail.
Answer: D
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytic
7) Marina Filimena is an accountant at Jasmina Hair Products. Marina received the following
error message while making an adjusting entry to the general ledger: "The account number
referenced in your journal entry does not exist. Create a new account?" This is an example of a
A) validity check.
B) closed loop verification.
C) zero-balance check.
D) completeness test.
Answer: A
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytic
8) Marina Filimena is an accountant at Jasmina Hair Products. Marina received the following
error message while making an adjusting entry to the general ledger: "Your journal entry must be
a numeric value. Please reenter." This is an example of a
A) validity check.
B) field check.
C) zero-balance check.
D) completeness test.
Answer: B
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic
9) Marina Filimena is an accountant at Jasmina Hair Products. Marina received the following
error message while making an adjusting entry to the general ledger: "The amounts debited and
credited are not equal. Please correct and try again." This is an example of a
A) validity check.
B) field check.
C) zero-balance check.
D) completeness test.
Answer: C
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic
8
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10) Marina Filimena is an accountant at Jasmina Hair Products. Marina received the following
error message while making an adjusting entry to the general ledger: "The data you have entered
does not include a source reference code. Please enter this data before saving." This is an
example of a
A) validity check.
B) field check.
C) zero-balance check.
D) completeness test.
Answer: D
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic
11) How is an audit trail used in the general ledger and reporting system?
Answer: An audit trail shows the path of a transaction through the accounting system. It can
provide information needed to trace any changes made to the general ledger by tracing either to
or from an original source document to the general ledger. It helps in tracing all changes in
general ledger accounts from beginning balances to ending balances as well as any adjustments
made to the accounts.
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytic
9
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12) Describe three threats in the general ledger and reporting system and identify corresponding
controls for each threat.
Answer:
THREAT 1: Errors in updating the general ledger because of inaccurate/incomplete journal
entries or posting of journal entries — Controls: (1) Input, edit, and processing controls over
summary entries from subsystems. (a) Validity check over existence of general ledger accounts.
(b) Field check over numeric data in amount field. (c) Zero-balance check ensures equality of
debits and credits (d) Completeness test — all pertinent data are entered (e) Redundant data
check — closed loop verification to see if on account numbers and descriptions, to ensure that
the correct general ledger account is being accessed (f) Standard adjusting entry file for recurring
entries — improves accuracy of the process (g) Sign check on debit and credit entries
(h) Calculation of run-to-run totals can verify the accuracy of journal voucher batch processing
(2) Reconciliation and control reports — can detect errors made during updating and processing;
trial balances, clearing, and suspense accounts are examples (a) Balancing of control and
subsidiary accounts (b) Control reports can help identify the source of errors in the general
ledger update process — listings of journal vouchers and general journal entries will show
entries posted to the general ledger and ensures equality of debits and credits (3) The audit trail
— the path of transactions through the system-should be able to perform the following tasks:
(a) Trace any transaction from its original source document to the general ledger; any other
document or report using that data (b) Trace any item from a report or an output document to the
general ledger and thence to the source document (c) Trace all changes in the general ledger
balances from their beginning balance to their ending balance.
THREAT 2: Loss or unauthorized disclosure or alteration of financial data — Controls:
(1) User IDs, passwords, and access controls should be used (2) Enforce segregation of duties
(3) Adjusting entries only from the controller's area (4) Valid authorization for journal voucher
submission.
THREAT 3: Loss or destruction of the general ledger — Controls: (1) Use of internal and
external file labels to protect from accidental data loss (2) Make regular backup copies of the
general ledger, one copy stored off-site (3) A good disaster recovery plan and (4) access and
processing integrity controls to ensure confidentiality and accuracy of data transmitted to branch
offices or externally.
THREAT 4: Poor performance — Controls: (1) XBRL, (2) redesign business processes,
and (3) redesign metrics used to report results of business activities.
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytic
10
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14) What system privileges should an employee involved in the general ledger and reporting
system be given?
A) general privileges to create, delete, update, or modify data
B) no privileges permitting the creation, deletion, updating, or modification of data
C) only the specific privileges necessary to perform an employee's assigned duties
D) read-only privileges
Answer: C
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic
15) What control procedure(s) should be used to reduce the risk of unauthorized disclosure of the
financial statements?
A) multifactor authentication
B) physical security
C) encryption
D) all of the above
Answer: D
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic
16) What control procedure(s) should be used to reduce the risk of the destruction of financial
statement master data?
A) multifactor authentication
B) backup and disaster recovery
C) encryption
D) all of the above
Answer: B
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytic
17) True or False: It is important to verify that all temporary accounts have a zero balance at
least two times during the time period covered by the financial statements.
Answer: FALSE
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic
18) True or False: Periodic account reconciliations are a control that can be used to reduce the
risk of employees creating unauthorized adjusting entries.
Answer: FALSE
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic
11
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16.3 Understand the implications of new IT developments, such as XBRL, and changes in the
external reporting requirements, such as IFRS, for the design and operation of the general ledger
and reporting system.
3) Communications technology and the Internet can be used to reduce the time and costs
involved in disseminating financial statement information. Users of such financial information
still struggle in that many recipients have different information delivery requirements and may
have to manually reenter the information into their own decision analysis tools. The ideal
solution to solve these problems and efficiently transmit financial information via the Internet is
to use
A) HTML code.
B) XML.
C) pdf file.
D) XBRL.
Answer: D
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic
12
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4) Which of the following statements is not true about an XBRL instance document?
A) An instance document includes instruction code as to how the document should be physically
arranged and displayed.
B) An instance document contains facts about specific financial statement line items.
C) An instance document uses separate tags for each specific element.
D) An instance document can be used to tag financial and nonfinancial elements.
Answer: A
Objective: Learning Objective 3
Difficulty: Difficult
AACSB: Analytic
13
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8) Which of the following is true about accounting for fixed assets?
A) Depreciation expense under IFRS will likely be higher than under GAAP, because
acquisitions of assets with multiple components must be separately depreciated under IFRS,
whereas under GAAP assets could be bundled and depreciated over the longest of the useful life
for any of the components.
B) IFRS doesn't allow capitalization of any asset that separately accounts for less than 20% of
total assets.
C) Depreciation expense under IFRS will likely be less than under GAAP, because standards for
depreciable lives on asset classes are much longer than under GAAP.
D) IFRS and GAAP account for fixed assets in much the same way.
Answer: A
Objective: Learning Objective 3
Difficulty: Difficult
AACSB: Reflective Thinking
10) Identify the year the SEC will require American companies to switch from U.S.-based
GAAP to IFRS as the basis for preparing financial statements.
A) 2016
B) 2018
C) 2020
D) At this point it is unclear when the SEC will require American companies to implement IFRS,
though the SEC remains committed to requiring U.S. companies use IFRS at some point.
Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic
14
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11) A major way in which IFRS differs from GAAP that will affect the design of a company's
general ledger and reporting system is an IFRS principle known as
A) componentization.
B) monetization.
C) securitization.
D) none of the above
Answer: A
Objective: Learning Objective 3
Difficulty: Difficult
AACSB: Analytic
12) At a minimum, a switch to IFRS from GAAP will affect companies' accounting information
system by
A) requiring companies to increase the processing power of their existing accounting information
systems.
B) requiring IT departments to hire programmers that are fluent in languages besides English.
C) requiring the creation of additional fields in research and development (R&D) records to
capture information about the stage of research and development that costs are incurred in.
D) requiring firms to completely redesign their existing accounting information systems because
current systems are not compatible with IFRS accounting principles.
Answer: C
Objective: Learning Objective 3
Difficulty: Difficult
AACSB: Analytic
14) True or False: The SEC requires U.S. companies to use XBRL when submitting their filings.
Answer: TRUE
Objective: Learning Objective 3
Difficulty: Easy
AACSB: Analytic
15
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15) Each specific data item in an XBRL document is called a(n)
A) taxonomy.
B) element.
C) instance.
D) schema.
Answer: B
Objective: Learning Objective 3
Difficulty: Moderate
AACSB: Analytic
16.4 Discuss how tools like responsibility accounting, balanced scorecards, and graphs can be
used to provide information managers need to effectively monitor performance.
1) The ________ is the managerial report that shows planned cash inflows and outflows for
major investments or acquisitions.
A) journal voucher list
B) statement of cash flows
C) operating budget
D) capital expenditures budget
Answer: D
Objective: Learning Objective 4
Difficulty: Easy
AACSB: Analytic
3) Budgets used for internal planning purposes and performance evaluation should be developed
on the basis of
A) responsibility accounting.
B) generally accepted accounting principles.
C) financial accounting standards.
D) managerial accounting standards.
Answer: A
Objective: Learning Objective 4
Difficulty: Easy
AACSB: Analytic
16
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4) Performance reports for cost centers should compare actual versus budget ________ costs.
A) controllable
B) uncontrollable
C) fixed
D) variable
Answer: A
Objective: Learning Objective 4
Difficulty: Easy
AACSB: Analytic
5) Performance reports for sales departments should compare actual revenue versus budgeted
A) revenue.
B) cost.
C) return on investment.
D) profit.
Answer: A
Objective: Learning Objective 4
Difficulty: Easy
AACSB: Analytic
6) Departments that mostly provide services to other units and charge those units for services
rendered should be evaluated as ________ centers.
A) cost
B) profit
C) investment
D) revenue
Answer: B
Objective: Learning Objective 4
Difficulty: Moderate
AACSB: Analytic
7) As responsibility reports are rolled up into reports for higher level executives, they
A) become less detailed.
B) become more detailed.
C) become narrower in scope.
D) look about the same.
Answer: A
Objective: Learning Objective 4
Difficulty: Moderate
AACSB: Reflective Thinking
17
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8) Variances for variable costs will be misleading when the planned output differs from budgeted
output. A solution to this problem would be
A) calling all costs fixed.
B) to use flexible budgeting.
C) better prediction of output.
D) to eliminate the budgeting process.
Answer: B
Objective: Learning Objective 4
Difficulty: Easy
AACSB: Analytic
9) Which of the following balanced scorecard dimensions provides measures on how efficiently
and effectively the organization is performing key business processes?
A) financial
B) internal operations
C) innovation and learning
D) customer
Answer: B
Objective: Learning Objective 4
Difficulty: Easy
AACSB: Analytic
10) Which of the following is not one of the principles of proper graph design for bar charts?
A) Include data values with each element.
B) Use 3-D rather than 2-D bars to make reading easier.
C) Use colors or shades instead of patterns to represent different variables.
D) Use titles that summarize the basic message.
Answer: B
Objective: Learning Objective 4
Difficulty: Easy
AACSB: Analytic
18
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11) Which of the following statements is true about the chart below?
A) The x-axis is in reverse chronological order, which violates a principle of proper graph
design.
B) The chart appears to conform to the principles of proper graph design.
C) The vertical axis doesn't appear to start at the origin (zero).
D) The chart used 2-D bars instead of 3-D, which violates a principle of proper graph design.
Answer: A
Objective: Learning Objective 4
Difficulty: Moderate
AACSB: Analytic
19
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14) Discuss the value and role of budgets as managerial reports.
Answer: Budgets are managerial reports that can be extracted from the general ledger and
reporting system. Budgets are used for planning and evaluating the organization's performance.
There are several different types of budgets that an organization may use in this regard. The
operating budget shows the planned revenues and expenditures for each organizational unit.
Cash flow budgets compare the estimated cash inflows from operations with planned
expenditures, and they are particularly useful to determine the borrowing needs of the
organization. A capital expenditure budget shows the projected cash inflows and outflows for a
given project. Budgetary reports should be tailored to the nature of the unit or department being
evaluated, and they should show actual versus projected budget amounts. Unfortunately, many
budget amounts are viewed as fixed targets, and they are therefore static and inflexible. Such an
approach may either reward or penalize managers for factors that are beyond their control. A
solution to this problem is to develop a flexible budget, in which variable budgeted amounts
change in relation to some measure of organizational activity, such as labor hours, or a
percentage of sales. A flexible budget may also break amounts into their respective fixed and
variable components. Variable amounts can then be adjusted for fluctuations in sales or
production.
Objective: Learning Objective 4
Difficulty: Moderate
AACSB: Reflective Thinking
15) The balanced scorecard attempts to solve what major issue associated with traditional
accounting reports?
A) Traditional accounting reports focus too narrowly on financial performance.
B) Traditional accounting reports are not easily understood by non-accountants.
C) Traditional accounting reports are expensive to produce.
D) Traditional accounting reports are produced too slowly to provide value.
Answer: A
Objective: Learning Objective 4
Difficulty: Moderate
AACSB: Analytic
16) Which of the following is not a perspective reflected in the balanced scorecard?
A) customer perspective
B) internal operations perspective
C) financial perspective
D) efficiency and effectiveness perspective
Answer: D
Objective: Learning Objective 4
Difficulty: Moderate
AACSB: Analytic
20
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17) True or False: Organizations should set their balanced scorecard targets to reflect industry
benchmark values.
Answer: FALSE
Objective: Learning Objective 4
Difficulty: Easy
AACSB: Analytic
18) Which type of graph is the most commonly used to display trends in financial data?
A) pie chart
B) scatterplot chart
C) bar chart
D) stochastic chart
Answer: C
Objective: Learning Objective 4
Difficulty: Moderate
AACSB: Analytic
19) Which of the following balanced scorecard dimensions provides measures on new products?
A) financial
B) internal operations
C) innovation and learning
D) customer
Answer: C
Objective: Learning Objective 4
Difficulty: Moderate
AACSB: Analytic
21
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