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Quizzes > Quizzes for Business > Finance

Master Accounting Cash Flow and Internal Controls Quiz

Assess Your Cash Flow and Controls Skills

Difficulty: Moderate
Questions: 20
Learning OutcomesStudy Material
Colorful paper art depicting elements related to Accounting Cash Flow and Internal Controls Quiz

Are you ready to test your grasp of cash flow reporting and safeguards? This Accounting Cash Flow and Internal Controls Quiz challenges students with practical multiple-choice questions on cash management strategies and internal control frameworks. Ideal for finance students and professionals seeking a quick self-assessment, this free quiz can be tailored further in our editor. Explore similar Accounting Knowledge Assessment Quiz or deepen your understanding with the Internal Control and Compliance Quiz. Check out more quizzes to reinforce your accounting skills.

In the cash flow statement, cash payments to suppliers for inventory purchases are reported in which section?
Investing activities
Supplementary schedule
Operating activities
Financing activities
Payments to suppliers relate to the core business operations and are thus classified under operating activities. Investing activities cover long-term asset transactions, and financing activities cover debt or equity changes. The supplementary schedule is not a primary section of the cash flow statement.
Under the indirect method of preparing a cash flow statement, why is depreciation expense added back to net income?
It is recorded under investing activities
It increases accounts payable
It is a non-cash expense
It represents a cash outflow
Depreciation is a non-cash expense that reduces net income but does not affect cash. Adding it back ensures the cash flow statement reflects actual cash movements. It does not increase liabilities or represent a cash outflow.
Segregation of duties in an internal control system requires that one individual should not have control over which aspects of a transaction?
Setting performance targets
Reviewing financial statements
Authorization, recording, and custody of the same transaction
Performing bank reconciliations only
Segregation of duties prevents a single person from authorizing, recording, and having custody of the same transaction to reduce fraud risk. Reviewing statements or reconciling accounts are control tasks but not the core segregation principle. Setting targets is a managerial function, not a transactional control.
The primary purpose of preparing a bank reconciliation each month is to:
Detect errors and fraud
Calculate earnings per share
Forecast future cash flows
Allocate overhead costs
A bank reconciliation matches book and bank balances to identify discrepancies caused by errors or fraudulent activity. Forecasting cash flows, allocating overhead, and calculating EPS are different accounting tasks. Detecting errors and fraud helps maintain accurate cash records.
Petty cash funds are typically used for:
Capital equipment purchases
Minor, incidental expenses
Payroll disbursements
Long-term investments
Petty cash is a small fund used for incidental, low-value expenses that require immediate payment. Capital purchases, long-term investments, and payroll are managed through formal payment processes, not petty cash.
When using the direct method for the cash flow statement, which adjustment is needed to calculate cash received from customers from sales revenue?
Add depreciation expense
Subtract increase in accounts receivable
Add increase in inventory
Subtract increase in accounts payable
Under the direct method, cash received from customers is sales revenue adjusted for changes in accounts receivable. An increase in receivables indicates revenue not yet collected in cash, so it must be subtracted. Inventory and payables adjustments pertain to other cash outflows or operating items.
Which of the following represents a key internal control weakness?
The same person approves and processes vendor payments
Using prenumbered invoices for all sales
Requiring dual signatures on checks over a threshold
Performing independent bank reconciliations
When one person approves and processes payments, there is no independent check on the transaction, increasing fraud risk. Prenumbered invoices, independent reconciliations, and dual signatures are all examples of proper controls that enhance security.
Which best practice can help maximize interest earnings on idle cash balances?
Maintain separate petty cash for long-term investments
Delay depositing customer payments to align with disbursements
Implement a cash sweep to invest idle balances daily
Keep idle cash in non-interest checking accounts
A cash sweep automatically transfers idle funds into interest-bearing accounts or investments each day, maximizing earnings. Petty cash is for small expenses, delaying deposits reduces liquidity, and non-interest accounts forgo potential earnings.
What is a best practice for safeguarding unused company checks?
Allow all employees open access to check stock for efficiency
Keep blank checks in a locked safe and require dual signatures for issuance
Pre-sign blank checks to speed up payments
Store checks in a desk drawer for easy retrieval
Storing checks in a locked safe and requiring dual signatures prevents unauthorized issuance or alteration. Open access or desk storage increases theft risk, and pre-signing blank checks removes an important control step.
In a bank reconciliation, an outstanding deposit will:
Be deducted from the bank statement balance
Be deducted from the book balance
Be added to the book balance
Be added to the bank statement balance
Outstanding deposits have been recorded in the company's books but not yet by the bank, so they are added to the bank statement balance. They do not affect the book balance and are not deducted from the bank balance.
Under the indirect method, how does a decrease in accounts payable during the period affect cash from operations?
It has no effect on cash flows
It decreases cash from operations
It increases cash from operations
It is reclassified as a financing activity
A decrease in accounts payable means cash was used to pay creditors, reducing cash from operating activities. It is not reclassified as financing and does affect cash flow rather than being neutral.
Which component of the COSO framework focuses on the overall tone set by management and the importance of control consciousness?
Monitoring
Control activities
Control environment
Risk assessment
The control environment establishes the organizational culture and sets the 'tone at the top.' Risk assessment, control activities, and monitoring are other COSO components but do not primarily define management's attitude toward controls.
Which scenario indicates poor short-term cash management?
Using short-term investments for temporary surpluses
Implementing daily cash forecasting
Centralizing surplus cash into a money market account
Maintaining excessively high idle cash balances
Holding too much idle cash means lost investment opportunities and inefficient use of resources. Centralizing cash, investing surpluses, and forecasting daily are recognized best practices for effective cash management.
Using prenumbered invoices primarily strengthens which internal control objective?
Accuracy of classification
Completeness of transactions
Valuation of assets
Existence of liabilities
Prenumbered invoices ensure that all sales transactions are recorded and none are missing, supporting transaction completeness. Valuation, existence, and classification are other control objectives but are addressed by different controls.
The purchase of a new manufacturing machine should be classified under which section of the cash flow statement?
Investing activities
Financing activities
Operating activities
Equity transactions
Acquiring long-lived assets like machinery is an investing activity because it involves spending cash on capital assets. Operating activities cover daily business operations, and financing activities relate to debt and equity funding.
A company reports net income of $100,000, depreciation expense of $10,000, an increase in accounts receivable of $5,000, a decrease in inventory of $8,000, and an increase in accounts payable of $6,000. What is the cash from operating activities using the indirect method?
$117,000
$111,000
$119,000
$103,000
Start with net income of $100,000, add back depreciation ($10,000), subtract the $5,000 increase in receivables, add the $8,000 decrease in inventory, and add the $6,000 increase in payables to arrive at $119,000 of cash from operations.
A small company discovers that one employee both authorizes vendor invoices and enters them into the accounting system. Which COSO component is most directly violated?
Information and communication
Control activities
Control environment
Monitoring
Control activities are the policies and procedures designed to ensure management directives are carried out, including segregation of duties. Authorizing and recording by the same person violates these control activity requirements.
When reconciling cash flow variances, how should a non-cash charge such as stock”based compensation be treated in the operating section under the indirect method?
Subtract from net income
Classify under investing activities
Add back to net income
Ignore it entirely
Non-cash charges like stock”based compensation reduce net income but do not affect cash, so they must be added back in the operating section. They are not subtracted or reclassified to investing activities.
Under IFRS, interest paid can be classified as either operating or financing. To reduce volatility in operating cash flows, interest paid is best classified as:
Investing activities
Equity transactions
Operating activities
Financing activities
Classifying interest paid as a financing activity under IFRS removes its impact from operating cash flows, reducing volatility in the core business section. Operating and investing classifications would not achieve this objective.
A treasury policy requires daily cash forecasts to be updated and approved by the treasury manager. Which risk does this policy primarily mitigate?
Credit risk
Liquidity risk
Operational risk
Market risk
Daily forecasting ensures the company can meet its cash obligations, directly addressing liquidity risk. Credit risk relates to counterparty defaults, market risk to price fluctuations, and operational risk to process failures.
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Learning Outcomes

  1. Analyse key components of cash flow statements
  2. Identify internal control weaknesses in accounting processes
  3. Evaluate cash management best practice scenarios
  4. Apply control procedures to safeguard financial transactions
  5. Demonstrate reconciliation of cash flow variances accurately

Cheat Sheet

  1. Understand the Three Sections of a Cash Flow Statement - Think of the cash flow statement as the company's financial GPS, guiding you through operating, investing, and financing activities. Mastering these three sections helps you track cash movements like a detective on the case. Internal Controls Overview
  2. Master the Indirect Method for Cash Flow Statements - The indirect method transforms net income into cash flow by adjusting for non-cash items and working capital changes - imagine turning your favorite smoothie recipe into a solid cake! This approach gives you a clearer picture of actual cash movements behind the profit numbers. Indirect Method Guide
  3. Recognize Common Internal Control Weaknesses - Spotting red flags like missing duty segregation or sloppy documentation is like playing "Where's Waldo?" in your financial records. Identifying these gaps helps prevent errors and keeps fraudsters at bay. Internal Controls Deep Dive
  4. Implement Segregation of Duties - Splitting tasks among multiple people is the ultimate power-up against theft or mistakes - no one can game the system if different heroes handle each step. This clear division of labor cuts risks and boosts accountability. Segregation of Duties Tips
  5. Apply the COSO Framework's Five Components - Think of COSO's five pillars - control environment, risk assessment, control activities, information & communication, and monitoring - as the Avengers of internal controls, each with its own superpower. Combining their forces helps you build an unbreakable control system. COSO Framework Explained
  6. Utilize Physical Controls to Safeguard Assets - Locks, safes, and secure passwords are your financial fortress walls, keeping cash and sensitive data safe from intruders. Simple tools like these make a huge difference in protecting valuable resources. Physical Controls Best Practices
  7. Conduct Regular Bank Reconciliations - Reconciling your books with bank statements is like matching puzzle pieces - it ensures every cent is where it should be. This practice catches sneaky errors and helps you sleep soundly at night. Bank Reconciliation Process
  8. Establish Clear Documentation Procedures - Clear, pre-numbered forms and thorough record-keeping mean you'll never lose track of a transaction again. This organized approach makes audits a breeze and keeps everyone on the same page. Documentation Procedures
  9. Monitor Cash Flow Ratios - Liquidity ratios like the current ratio and quick ratio are your financial health checkups - use them to see if the company can cover its short-term bills. Consistent monitoring alerts you to potential cash crunches before they become nightmares. Cash Flow Ratios Explained
  10. Stay Informed About the Sarbanes-Oxley Act (SOX) - SOX isn't just an acronym to memorize - it's the law that keeps public companies honest by tightening internal controls and financial reporting. Knowing its requirements helps you avoid hefty fines and maintain investor trust. Sarbanes-Oxley Act Overview
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