D774 Introduction to Business Accounting - Set 2 - Part 3

Correct Answer: Outstanding checks, bank side

Checks the company wrote and deducted from its records but that recipients have not yet cashed are outstanding checks. Since the bank has not removed them yet, they subtract from the bank side of the reconciliation. Option a is incorrect because deposits in transit are recorded additions the bank has not yet entered, adjusting the bank side, not the book side. Uncashed checks the company already deducted are outstanding checks. Option b is incorrect because service fees are bank charges that adjust the book side. The scenario involves checks the company deducted but the bank has yet to clear, which are outstanding checks on the bank side. Option d is incorrect because bounced deposits, written for more than a customer had, reduce the company's book balance. Checks the firm issued that remain uncashed are instead outstanding checks adjusting the bank side.

Correct Answer: The book balance

A bank service fee is something the bank has already recorded but the company has not, so the adjustment lands on the book balance. The company subtracts the fee to bring its records into line. Option a is incorrect because the bank already knows about its own fee, so the bank balance needs no change for it. The side that has not yet recorded the charge, and therefore adjusts, is the book balance. Option c is incorrect because the fee genuinely lowers the company's true cash and must be recorded somewhere. Leaving both balances untouched would prevent them from reconciling; the book balance must drop. Option d is incorrect because a service fee reduces cash rather than raising it, and only the company's side is behind. The correct move lowers the book balance, not an increase to both.

Correct Answer: NSF check, book side

A check written for more than the account balance is a non-sufficient-funds check, which bounces. Because the bank already reversed it but the company has not, the adjustment reduces the book side of the reconciliation. Option a is incorrect because a deposit in transit is money the company recorded that the bank has not yet entered, adjusting the bank side and adding to it. A bounced customer check instead reduces the book side. Option b is incorrect because an outstanding check is one the company wrote that has not cleared, subtracting from the bank side. The item here is a returned customer deposit, an NSF check that lowers the book balance. Option c is incorrect because there is no service-fee credit adding to the bank side; an NSF event triggers a charge, not a credit. The bounced check is recorded as a reduction on the company's book side.

Correct Answer: Outstanding checks adjust the bank side

Outstanding checks and deposits in transit are items the company recorded but the bank has not, so they adjust the bank side. Service fees and NSF checks, which the bank recorded first, adjust the book side. Option b is incorrect because outstanding checks and deposits in transit do not touch the book side. Those company-recorded items the bank has not yet entered belong on the bank side of the reconciliation. Option c is incorrect because outstanding checks were recorded by the company before the bank cleared them, placing them on the bank side. Assigning them to the book side reverses the correct rule. Option d is incorrect because not every item lands on the bank side. Service fees and bounced checks, which the bank recorded before the company did, adjust the book balance instead.

Correct Answer: The Sarbanes-Oxley Act

The Sarbanes-Oxley Act was the federal law passed in response to major accounting scandals such as Enron. It brought legal requirements for stronger internal controls and greater executive accountability in financial reporting. Option a is incorrect because the earlier Securities Act established the SEC and required investors to receive accurate information before buying securities. The scandal-driven law on controls and executive accountability is Sarbanes-Oxley. Option b is incorrect because the later Securities Act set the rules for annual financial-statement reporting. The statute that responded to the Enron-era scandals with tougher control mandates came decades afterward instead. Option d is incorrect because COSO offers a voluntary blueprint for designing internal controls rather than a binding federal law. A study guide would classify it as guidance, not as the scandal-driven statute being sought.

Correct Answer: The PCAOB pillar

The fourth pillar of SOX created the Public Company Accounting Oversight Board to oversee auditing firms. That board, the PCAOB, is the brand-new oversight body the act established to watch over public-company auditors. Option a is incorrect because the internal-control pillar requires companies to test and document their controls. Important as that is, it created no new board; forming the oversight body was the PCAOB pillar. Option b is incorrect because auditor independence requires external auditors to be independent from the companies they audit. It addresses the auditor relationship but did not create a new oversight board, which the PCAOB pillar did. Option c is incorrect because executive certification makes senior executives personally vouch for the statements' accuracy. It increases personal accountability but established no oversight board; the PCAOB pillar did that.

Correct Answer: Certifying and documenting internal controls

SOX requires the certification and documentation of internal controls, with an auditor issuing an internal report after evaluating those controls. The law does not merely ask for good controls; it demands formal evaluation and reporting. Option a is incorrect because marketing the company's strengths is a promotional task unrelated to control evaluation. SOX requires the auditor to formally certify and document the internal controls after assessing them. Option b is incorrect because filing a tax return satisfies tax obligations, not the control-reporting mandate. The SOX requirement at issue is the certification and documentation of internal controls. Option d is incorrect because setting international accounting standards is the IASB's work, not a SOX duty. The law requires certifying and documenting internal controls through an auditor's report after evaluation.

Correct Answer: The FASB

The FASB is the independent, nonprofit organization responsible for creating and issuing financial accounting standards, which collectively form the foundation of GAAP used in the United States. In short, FASB sets GAAP. Option b is incorrect because the SEC is the federal agency that regulates securities markets and receives company filings. It does not write the accounting standards; the body that creates GAAP is the FASB. Option c is incorrect because the PCAOB oversees the audits of public companies to protect investors. Watching the auditors is its mission, whereas authoring U.S. GAAP belongs to the FASB. Option d is incorrect because the IASB develops IFRS for international use, not U.S. GAAP. The independent nonprofit that issues the standards underlying GAAP in the United States is the FASB.

Correct Answer: The SEC

The SEC is the federal government agency that regulates securities markets, and a publicly traded company issuing stock must submit its financial disclosures and filings to it. The SEC is the government regulator in this picture. Option a is incorrect because the FASB is a private standard-setter that writes GAAP, not a government agency that collects filings. Public companies submit their disclosures to the SEC instead. Option b is incorrect because the IASB develops international standards rather than receiving U.S. company filings. The federal agency that regulates the markets and takes those filings is the SEC. Option c is incorrect because the PCAOB oversees auditors of public companies rather than collecting their financial disclosures. The agency that receives stock-issuance filings and regulates the markets is the SEC.

Correct Answer: The catastrophic market crash

The catastrophic market crash exposed how little reliable information investors had, and the resulting securities legislation created the SEC. That collapse set the early reform chain in motion before any later scandal. Option a is incorrect because the Industrial Revolution boom created demand for capital and reporting earlier in the timeline, but it was not the crash that produced the securities acts and the SEC. That crisis was the market crash. Option b is incorrect because the dot-com bubble is not part of the course's reform sequence. The collapse that led to the early securities legislation and the creation of the markets regulator was the catastrophic crash. Option d is incorrect because the Enron collapse triggered the later Sarbanes-Oxley reforms, not the original securities acts and the founding of the SEC. The crisis that began that earlier chain was the market crash.