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Chapter 10
Cash and Internal Controls
assessment Questions
as-1 LO 1
What are internal controls? Explain.
Internal controls are the policies and procedures that a business uses to protect its assets, encourage effectiveness
and efficiency of operations, ensure that the accounting records are accurate, and ensure adherence to company
practices as well as compliance to laws and regulations.
as-2 LO 1
List three reasons for designing internal controls in a company.
• align managers and employees with the objectives of the business
• safeguard assets against loss, misuse and theft
• prevent and detect fraud and error
as-3 LO 1 2
List two general controls that can be used for petty cash.
• establish guidelines
• maintain documentation
as-4 LO 2
List two controls that can be used to prevent the misuse of cash.
• record cash immediately when it is received
• protect cash when it is on the premises
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learnIng oBJeCtIVes
LO 1 Describe and apply internal controls for a business
LO 2 Apply cash controls
LO 3 Prepare a bank reconciliation and related journal
entries
LO 4 Prepare a petty cash fund and record related journal
entries
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as-5 LO 2
Define cash equivalents.
A highly liquid investment made for three months (90 days) or less.
as-6 LO 2
Briefly describe what it means to be in bank overdraft.
The cash available in a bank account is negative.
as-7 LO 2
Describe the position of cash equivalents on the balance sheet.
They are listed below cash in the current assets section.
as-8 LO 2
List two reasons why cash equivalents are entered with cash on the balance sheet.
They are short-term, highly liquid, and can be converted into cash quickly.
as-9 LO 2
List three examples of cash equivalent items.
• treasury bills
• money market funds
• commercial paper
• short-term government bonds
as-10 LO 2
Why would a business invest in cash equivalents?
It would invest to earn a higher return than a regular bank account.
as-11 LO 2
What are the two different ways a business usually receives cash from customers?
One way a business can receive cash from customers is immediately from cash sales made at the cash counter
when the products or services are sold. The other way is from credit sales when a customer pays on account after
an invoice has been issued for products or services. Payment may be made by sending it in the mail, or by sending
it electronically.
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as-12 LO 2
Considering controls for a cash sale, what is important for the customer to do as part of the transaction?
When a receipt is provided, the customer is expected to examine the receipt to ensure that it reflects the correct
amount of cash paid.
as-13 LO 2
Describe how a business can protect cash on its premises.
A business can keep cash in a safe area such as a locked office, lock box or safe that only select employees have
access to. A business can also make regular, frequent deposits to remove cash from the premises. Security can
be employed to protect the premises and transport cash from a business to a bank. Cheques received should be
stamped “for deposit only” on the back to discourage fraudulent cashing of cheques.
as-14 LO 2
What is the overall goal of a business in managing its cash?
The overall goal is to ensure that the cash received is the same amount of cash recorded, which in turn is the
same amount of cash deposited.
as-15 LO 2
What is a voucher system for cash payments?
It is a set of control procedures that a business uses to authorize, record and disburse cash payments.
as-16 LO 2
What is a remittance advice on an invoice?
It is a detachable part of the invoice that is returned along with the customer’s payment. A remittance advice
includes details such as the customer’s account number, the amount of payment requested and the date the
payment is due.
as-17 LO 3
What is a bank reconciliation?
A bank reconciliation is part of an internal control process where the differences between a company’s bank
statement and its own cash accounting records are compared, reconciled and explained.
as-18 LO 3
List three typical reasons for a bank to make additional deductions from a company’s cash account.
• loaninterestcharges
• repaymentofabankloan
• bankcharges
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as-19 LO 3
What are two typical reasons for a bank making additional deposits to a company’s cash account?
• interestearnedonthedepositor’saccount
• paymentfromacustomerdepositeddirectlyintotheaccount
as-20 LO 3
In a typical bank reconciliation, what are the titles of the two column headers?
• Cash balance per bank statement
• Cash balance per company books
as-21 LO 3
What are non-sufficient funds (NSF) cheques?
NSF cheques are payments made to the company by a customer that does not have sufficient funds in a bank
account to cover the amount of the cheque.
as-22 LO 3
What is an outstanding deposit?
An outstanding deposit is one that has been recorded in the company’s general ledger but is not shown on the
bank statement.
as-23 LO 3
When is a journal entry required during a bank reconciliation?
A journal entry is required if an adjustment is made in the “Ledger” balance in the bank reconciliation.
as-24 LO 3
How are outstanding cheques recorded on the bank reconciliation?
Outstanding cheques are subtracted from the bank balance.
as-25 LO 4
What is an imprest system for petty cash?
An imprest system for petty cash ensures that spending is limited to the amount available in the petty cash fund.
as-26 LO 4
Briefly describe the responsibilities of the petty cash custodian.
The petty cash custodian ensures that petty cash is properly safeguarded and disbursed for legitimate reasons and
that an accurate record is maintained for all activities related to the fund.
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as-27 LO 4
What does an employee who requires petty cash need to present to the petty cash custodian?
Any employee who requires petty cash needs to provide a receipt from the supplier indicating the amount of
money spent and the reason for the purchase.
as-28 LO 4
What is a petty cash summary sheet?
A petty cash summary sheet is a detailed list of funds reimbursed.
as-29 LO 4
Why do petty cash overages or shortages occur?
These discrepancies can result from a miscount of coins or an overpayment during the period.
as-30 LO 4
When does the cash over and short account behave like an expense account?
The cash over and short account behaves like an expense account when there is a shortage.
as-31 LO 4
What are the only two times that the petty cash account in the ledger is debited or credited?
The petty cash account in the ledger is debited or credited when the account is established and when the float
amount is increased or decreased.
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application Questions group a
aP-1a LO 1 2
Gordon Green operates a golf ball driving range called Greenaway Golf, open from May 1 to November 1. Gordon
employs two people, one who works from 6 a.m. until 2 p.m. and the other who works from 2 p.m. to close at 10
p.m., 7 days a week. The two employees are cousins of Gordon, so he saw no reason to have to bond them. The
office and equipment are located in a trailer at the front of the property, close to the road and parking lot. Gordon
takes pride in the fact that he accepts only cash and pays all his bills using cash. No cheques or credit cards may
be used by customers for sales or by his staff when paying bills. Gordon keeps all cash on the premises until he
counts it and prepares a bank deposit once per week.
List all of the internal control weaknesses with Gordon’s business.
Note to instructor: Student answers may vary from solution.
1. Should have more than 2 employees who are trained to operate the business in the event one of the two
regular employees is unavailable for their shift
2. All employees should be bonded, regardless of their relationship with the owner
3. Office and equipment should be located at the back of the property, away from the highway and easy
access in the event a theft occurs
4. Should consider allowing customers to use debit/credit cards to increase revenue
5. Should pay bills with cheque/credit card where feasible
6. Cash should be removed from premises at night. Excess cash should also be removed during day when
possible
7. Should deposit money in bank more frequently than once per week, especially during peak times (summer)
aP-2a LO 2
A business dealing with cash transactions needs to ensure adequate internals controls are in place to protect this
asset from loss due to theft or error. Identify which control would be the most effective in preventing/detecting
violations of internal controls over cash in each of the following scenarios.
Cash Control
1. Invest idle cash into highly liquid investments
2. Use EFT for cash payments
3. Allow customers to deposit cheques directly into company bank account
4. Provide each cashier with their own cash drawer with a predetermined amount of cash included at the
beginning of their shift
5. Display sale amounts for customers to see while sale is being keyed into cash register
6. Provide customer with a remittance copy of their statement that can be sent with payment to ensure it is applied
to the correct account
7. Have cashier prepare a duplicate bank deposit slip, where one copy goes with the deposit to the bank and is
stamped as verified and then returned to the business for filing
8. Use a cash over and short account to account for differences due to rounding
9. Require that all cash payments are independently authorized
10. Prepare monthly bank reconciliation
Chapter 10Cash and Internal Controls
scenario
5 Customers claim they have been overcharged for items.
3 Customers have difficulty getting their payment to the business because of their remote location.
9 The business owner is concerned unauthorized payments are being made.
10 The balance of the business bank account at the end of the year does not agree with the balance reported in
the general ledger cash account.
8 The account is used to track discrepancies in cash received for cash sales with actual amount of sales.
6 Customer payments received in the mail are not getting posted to their account properly.
7 The amount of a bank deposit does not agree with what was prepared by the cashier.
4 Errors are being made by one of the cashiers, but it is difficult to determine who, since four cashiers use the
same cash register during the day.
1 The balance of cash is consistently the highest of all assets.
2 Monthly payments for things like insurance or utility bills are sometimes missed.
aP-3a LO 3
Quality Electronic is preparing a bank reconciliation and has identified the following potential reconciling items.
For each item, indicate in the action column if it is (i) added to the balance of the ledger, (ii) deducted from the
balance of the ledger, (iii) added to the balance of the bank statement, or (iv) deducted from the balance of the
bank statement.
Item action
a) deposits that are not shown on the bank statement added to the balance of the bank statement
