Chapter 6
CASH AND INTERNAL CONTROLS
True/False Questions
1. A properly designed internal control system is a key part of systems design, analysis, and
performance.
2. The use of internal controls provides a guarantee against losses due to operating activities.
3. Maintaining adequate records is an important internal control principle.
4. Clearly establishing responsibilities and assigning all accounting activities to one person is an
important principle of internal control.
5. Cash registers, check protectors, time clocks and personal identification scanners are examples
of technologies that can improve internal control.
6. An internal control system consists of the policies and procedures companies use to protect
assets, ensure reliable accounting, promote efficient operations, and urge adherence to company
policies.
7. Insuring assets and requiring all accounting personnel to have CPA licenses are two important
principles of internal control.
8. Because employees know that bonding is an insurance policy against loss from theft, bonding
does not generally discourage loss from theft.
9. According to good internal control policies, a person who controls an asset also maintains that
asset’s accounting records.
10. Technologically advanced accounting systems rarely need monitoring for errors because
computers always process transactions correctly.
11. Internal control in technologically advanced accounting systems depends less on the design
and operation of the information system and more on the analysis of its resulting documents.
12. Internal control systems are subject to limitations that usually arise from either (1) human
error or human fraud, or (2) the cost-benefit principle.
13. Collusion is a form of fraud where individuals collaborate to thwart separation of duties.
14. Separation of duties involves dividing responsibility for a transaction or a series of related
transactions between two or more individuals or departments.
15. Cash equivalents are short-term highly liquid investment assets that are readily converted to a
known cash amount, and have maturities of one year.
16. Liquidity refers to a company’s ability to pay its long-term obligations.
17. Money orders, cashier’s checks, and certified checks are all examples of cash.
18. Basic bank services such as bank accounts, bank deposits, and checking contribute to the
control of cash.
19. The payee is the person who signs a check, authorizing its payment.
20. Electronic funds transfers (EFTs) are decreasingly used by companies due to the
inconvenience and high cost.
21. Canceled checks are checks the bank has paid and deducted from the customer’s account
during the period.
22. A check involves 3 parties: a maker who signs the check, a payee who is the recipient, and a
bank on which the check is drawn.
23. Signature cards, deposit tickets, checks, and bank statements are all examples of internal
control devices for banking activities.
24. On a bank statement, deposits are listed as credits because the bank increases its liability to
the depositor when the deposit is made.
25. The days’ sales uncollected ratio measures a company’s ability to manage its debt.
26. The days’ sales uncollected ratio measures the liquidity of accounts receivable.
27. When evaluating the days’ sales uncollected ratio, generally the higher the receivables
balance, the better the ratio.
28. Internal control of cash receipts aims to ensure that all cash received is properly recorded and
deposited.
29. A voucher system is a set of procedures and approvals designed to control cash
disbursements and the acceptance of obligations.
30. Most large thefts occur from payment of fictitious invoices, which makes control of cash
disbursements especially important for companies.
31. If the Cash Over and Short account has a credit balance at the end of the period, the amount
is reported as miscellaneous revenue.
32. The clerk who has access to the cash in the cash register should also have access to the cash
register tape or file.
33. A voucher system’s control over cash disbursements begins when a company incurs an
obligation that will result in eventual payment of cash.
34. A voucher system establishes procedures for verifying, approving, and recording obligations
for eventual cash disbursement.
35. Assigning purchasing, receiving, and paying for merchandise to one department or individual
is a way to streamline a voucher system.
36. A voucher is an external document used to accumulate information to control cash
disbursements and to ensure that a transaction is properly recorded.
37. Vouchers should be used for purchases of inventory and all other expenditures made within a
company.
38. A debit balance in the Cash Over and Short account reflects an expense and is reported on the
income statement as part of general and administrative expenses.
39. The Petty Cash account is a separate bank account used for small amounts.
40. Since petty cash is concerned with such small amounts of cash, it is not necessary to
document all transactions with a petty cash receipt.
41. Petty cash reimbursement requires a journal entry that involves a debit to the appropriate
expenses and a credit to Cash.
42. The petty cash fund should be reimbursed when it is nearing zero and at the end of the
accounting period when financial statements are prepared.
43. The entry to increase the balance in petty cash from $50 to $75 would include a credit to
Petty Cash of $25.
44. A bank reconciliation explains any differences between the balance of a checking account on
the depositor’s records and the balance reported on the bank statement.
45. Outstanding checks are checks the bank has paid and deducted from the customer’s account
during the month.
46. Deposits in transit are deposits made and recorded by the depositor but not yet recorded on
the bank statement.
47. It is generally not necessary for businesses to reconcile their checking accounts since banks
keep accurate records and provide internal control support for cash.
48. After preparing a bank reconciliation, adjustments must be made for items reconciling the
book balance.
49. Outstanding checks, deposits in transit, deductions for bank fees, additions for interest, and
errors are all factors that can cause the bank statement balance for a checking account to be
different from the company’s checking account balance.
50. Outstanding checks, deposits, and bank service charges are added to the beginning balance
of the bank statement to determine the adjusted bank balance.
51. Proper internal control would require that a department manager inform the purchasing
department of its needs for additional merchandise by preparing and signing a purchase
requisition which lists the merchandise needed and requests that it be purchased.
52. An invoice is an itemized statement of goods prepared by the customer listing the customer’s
name, items sold, sales prices, and terms of sale.
53. Approved vouchers are recorded in a journal called the voucher register.
54. A receiving report is a document used within a company to notify the appropriate persons
that ordered goods have been received and to describe the quantities and condition of the goods.
55. When a voucher system is used, an invoice approval is not needed as long as the purchase is
evidenced by an invoice and purchase order.
56. In order to streamline the purchasing process, department managers should place orders
directly with suppliers.
57. A purchase order is a document the purchasing department sends to the vendor to place an
order.
58. The net method for recording purchases records the purchase invoice at its gross amount and
records cash discounts in the Merchandise Inventory account.
59. The Discounts Lost account represents the cost of not taking advantage of purchase
discounts.
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60. Under the net method, an invoice for $2,000 with terms of 2/10, n/30 should be recorded
with a debit to Inventory and a credit to Accounts Payable of $2,000.
61. Which of the following is not one of the policies and procedures that make up an internal
control system?
A. Protect assets.
B. Ensure reliable accounting.
C. Guarantee a return to investors
D. Urge adherence to company policies.
E. Promote efficient operations.
62. Managers place a high priority on internal control systems because the systems assist
managers in all of the following except:
A. Promoting efficient operations.
B. Protecting assets.
C. Urging adherence to company policies.
D. Ensuring reliable accounting.
E. Assuring that no loss will occur.
63. The principles of internal control include:
A. Separate recordkeeping from custody of assets.
B. Maintain minimal records.
C. Use only computerized systems.
D. Bond all employees.
E. Require automated sales systems.
64. Principles of internal control include all of the following except:
A. Apply technological controls.
B. Maintaining security by having one person track and record assets.
C. Perform regular and independent reviews.
D. Separate recordkeeping from custody of assets.
E. Divide responsibilities for related transactions.
65. A properly designed internal control system:
A. Lowers the company’s risk of loss.
B. Insures profitable operations.
C. Eliminates the need for an audit.
D. Requires the use of non-computerized systems.
E. Is not necessary if the company uses a computerized system.
66. A company’s internal control system:
A. Eliminates the company’s risk of loss.
B. Monitors company and employee performance.
C. Eliminates human error.
D. Eliminates the need for audits.
E. Eliminates the need for managers’ certification of controls.
67. Two clerks sharing the same cash register is a violation of which internal control principle?
A. Establish responsibilities.
B. Maintain adequate records.
C. Insure assets.
D. Bond key employees.
E. Apply technological controls.
68. Which internal control principle prescribes the use of pre-numbered printed checks?
A. Technological controls.
B. Maintain adequate records.
C. Perform regular and independent reviews.
D. Establish responsibilities.
E. Divide responsibility for related transactions.
69. The impact of technology on internal controls includes:
A. Reduced processing errors.
B. Elimination of the need for regular audits.
C. Elimination of the need to bond employees.
D. Elimination of separation of duties.
E. Elimination of fraud.
70. Internal control policies and procedures have limitations not including:
A. Human error.
B. Human fraud.
C. Cost-benefit principle.
D. Collusion.
E. Establishing responsibilities.
71. Internal control systems are:
A. Developed by the Securities and Exchange Commission for public companies.
B. Developed by the Small Business Administration for non-public companies.
C. Developed by the Internal Revenue Service for all U.S. companies.
D. Required by Sarbanes-Oxley (SOX) to be documented and certified if the company’s stock is
traded on an exchange.
E. Required only if a company plans to engage in interstate commerce.
72. Cash, not including cash equivalents, includes:
A. Postage stamps.
B. Customer checks, cashier checks, and money orders.
C. IOUs.
D. Two-year certificates of deposit.
E. Money market funds.
73. Cash equivalents:
A. Are short-term, highly liquid investment assets.
B. Include 6-month certificates of deposit.
C. Include checking accounts.
D. Are recorded in petty cash.
E. Include money orders.
74. Cash equivalents:
A. Include savings accounts.
B. Include checking accounts.
C. Are readily converted to a known cash amount.
D. Include time deposits.
E. Have no immediate value.
75. Cash equivalents meet all of the following criteria except:
A. Are readily convertible to a known cash amount.
B. Include short-term investments purchased within 3 months of their maturity dates.
C. Have a market value that is not sensitive to interest rate changes.
D. Include short-term U.S. treasury bills.
E. Are more liquid than cash.
76. The following information is available for Birch Company at December 31:
Money market fund balance $ 2,790
Certificate of deposit maturing June 30 of next year $10,000
Postdated checks from customers $ 1,475
Cash in bank account $21,430
NSF checks from customers returned by bank $ 650
Cash in petty cash fund $ 200
Inventory of postage stamps $ 24
U.S. Treasury bill purchased on December 15 and maturing on
February 28 of following year
$5,000
Based on this information, Birch Company should report Cash and Cash Equivalents on
December 31 of:
A. $29,420
B. $41,345
C. $31,345
D. $39,420
E. $38,770
77. The following information is available for Fenton Manufacturing Company at June 30:
Cash in bank account $11,455
Inventory of postage stamps $ 74
Money market fund balance $10,400
Petty cash balance $ 350
NSF checks from customers returned by bank $ 867
Postdated checks received from customers $ 791
Money orders $ 290
A nine-month certificate of deposit maturing
on December 31 of current year
$ 6,000
Based on this information, Fenton Manufacturing Company should report Cash and Cash
Equivalents on June 30 of:
A. $28,495
B. $29,286
C. $23,286
D. $12,095
E. $22,495
78. The following information is available for Montrose Company at December 31:
Cash in bank account $8,540
Petty cash 250
Money market fund balance $10,400
Checks from customers $ 1,350
NSF checks from customers returned by bank $ 805
Treasury bill maturing in 60 days $10,000
Money orders $ 290
A nine-month certificate of deposit maturing
on March 31 of next year
$ 6,000
Based on this information, the amounts considered Cash and Cash Equivalents, respectively on
December 31 are:
A. Cash $10,430; Cash equivalents $20,400
B. Cash $8,540; Cash equivalents $22,290
C. Cash $8,790; Cash equivalents $26,400
D. Cash $19,190; Cash equivalents $16,000
E. Cash $11,235; Cash equivalents $26,400
79. Basic bank services do not include:
A. Bank accounts.
B. Bank deposits.
C. Checking.
D. Electronic funds transfer.
E. Petty cash management.
80. The three parties involved with a check are:
A. The writer, the cashier, and the bank.
B. The maker, the payee, and the bank.
C. The maker, the manager, and the payee.
D. The bookkeeper, the payee, and the bank.
E. The signer, the cashier, and the company.
81. A remittance advice is a(n):
A. Explanation for a payment by check.
B. Bank statement.
C. Internal voucher.
D. Electronic funds transfer.
E. Cancelled check.
82. A bank statement provided by the bank includes:
A. A list of outstanding checks.
B. A list of petty cash amounts.
C. The beginning and the ending balance of the depositor’s account.
D. A listing of deposits in transit.
E. A reconciliation to the depositor cash account.
83. A bank does not issue a debit memorandum to notify the depositor of which of the
following?
A. All withdrawals through an ATM.
B. A fee assessed to the depositor’s account.
C. An uncollectible check.
D. Periodic payments arranged in advance, by a depositor.
E. A deposit to their account.
84. Preparing a bank reconciliation on a monthly basis is an example of:
A. Establishing responsibility.
B. Separation of duties.
C. Protecting assets by proving the accuracy of cash records.
D. A technological control.
E. Poor internal control.
85. The number of days’ sales uncollected:
A. Is used to evaluate the liquidity of receivables.
B. Is calculated by dividing accounts receivable by sales.
C. Measures a company’s ability to pay its bills on time.
D. Measures a company’s debt to income.
E. Is calculated by dividing sales by accounts receivable.
86. The days’ sales uncollected ratio is used to:
A. Measure how many days of sales remain until the end of the year.
B. Determine the number of days that have passed without collecting on accounts receivable.
C. Identify the likelihood of collecting sales on account.
D. Estimate how much time is likely to pass before the current amount of accounts receivable is
received in cash.
E. Measure the amount of cash sales during a period.
87. The number of days’ sales uncollected is calculated by:
A. Dividing accounts receivable by net sales.
B. Dividing accounts receivable by net sales and multiplying by 365.
C. Dividing net sales by accounts receivable.
D. Dividing net sales by accounts receivable and multiplying by 365.
E. Multiplying net sales by accounts receivable and dividing by 365.
88. All of the following are true of the number of days’ sales uncollected ratio except:
A. Is most effective in evaluating the cash sales of a company.
B. Can be used for comparisons to other companies in the same industry.
C. Can be used for comparisons between current and prior periods.
D. Reflects the liquidity of receivables.
E. Measures how much time is likely to pass before the current amount of accounts receivable is
received in cash.
89. A company had net sales of $21,500 and ending accounts receivable of $2,700 for the current
period. Its days’ sales uncollected equals:
A. 8.0 days.
B. 58.9 days.
C. 45.8 days.
D. 7.4 days.
E. 45.2 days.
90. Freeman Co. had net sales of $4.2 million and ending accounts receivable of $0.8 million. Its
days’ sales uncollected equals:
A. 5.3 days.
B. 69.5 days.
C. 19.2 days.
D. 11.5 days.
E. 292 days.
91. The following information is taken from Reagan Company’s December 31 balance sheet:
Cash and cash equivalents $ 8,419
Accounts receivable 70,422
Merchandise inventories 60,362
Prepaid expenses 4,100
Accounts payable $ 14,950
Notes payable 86,638
Other current liabilities 9,500
If net credit sales for the current year were $612,000, the firm’s days’ sales uncollected for the
year is:
A. 60 days
B. 85 days
C. 42 days
D. 154 days
E. 70 days
92. An income statement account that is used to record cash overages and cash shortages arising
from petty cash transactions or from errors in making change is titled:
A. Cash Lost.
B. Bank Reconciliation.
C. Petty Cash.
D. Cash Over and Short.
E. Cash Receivable.
93. A set of procedures and approvals for verifying, approving and recording obligations for
eventual cash disbursement, and for issuing checks for payment only of verified, approved, and
recorded obligations is referred to as a(n):
A. Internal cash system.
B. Petty cash system.
C. Cash disbursement system.
D. Voucher system.
E. Cash control system.
94. Internal control procedures for cash receipts do not require that:
A. Custody over cash is kept separate from its recordkeeping.
B. All collections for sales are be received immediately upon making the sales.
C. Clerks having access to cash in a cash register should not have access to the register tape or
file.
D. An employee with no access to cash receipts should compare the total cash recorded by the
register with the record of cash receipts reported by the cashier.
E. Cash sales should be recorded on a cash register at the time of each sale.
95. The Cash Over and Short account:
A. Is used when the cash account reports a credit balance.
B. Is used to record the income effects of errors in making change and/or processing petty cash
transactions.
C. Is not necessary in a computerized accounting system.
D. Can never have a debit balance.
E. Can never have a credit balance.
96. The voucher system of control:
A. Is a set of procedures and approvals designed to control cash receipts and the acceptance of
obligations.
B. Establishes procedures for verifying, approving, and recording obligations for eventual cash
disbursement.
C. Establishes procedures for receiving checks for the sale of verified, approved, and recorded
activities.
D. Applies only when multiple purchases are made from the same supplier.
E. Is required in large companies but not beneficial for small to mid-sized companies.
97. A voucher is an internal document or file:
A. Prepared after an invoice is received.
B. Used as a substitute for an invoice if the supplier fails to send one.
C. Used to accumulate information needed to control cash disbursements and to ensure that
transactions are properly recorded.
D. Takes the place of a bank check.
E. Prepared before the company orders goods to make sure that all goods are being ordered from
an approved vendor list.
98. Which of the following procedures would weaken control over cash receipts that arrive
through the mail?
A. After the mail is opened, a list (in triplicate) of the money received is prepared with a record
of the sender’s name, the amount, and an explanation of why the money is sent.
B. The bank reconciliation is prepared by a person who does not handle cash or record cash
receipts.
C. For safety, only one person should open the mail, and that person should immediately deposit
the cash received in the bank.
D. The cashier deposits the money in the bank and the recordkeeper records the amounts
received in the accounting records.
E. The employees handling the cash receipts are bonded.
99. At the end of the day, the cash register’s record shows $1,050, but the count of cash in the
cash register is $1,055. The correct entry to record the cash sales is
A. Debit Cash $1,055; Credit Sales $1,055.
B. Debit Cash $1,055; credit Cash Over and Short $5; credit Sales $1,050.
C. Debit Cash $1,050; credit Sales $1050.
D. Debit Cash $1,050; debit Cash Over and Short $5; credit Sales $1,055.
E. Debit Cash Over and Short $5, credit Sales $5.
100. At the end of the day, the cash register tape shows $1,020 in cash sales but the count of cash
in the register is $1,035. The proper entry to account for this excess is:
A. Debit Cash $1,020; credit Sales $1,020.
B. Debit Cash $1,035; credit Sales $1,035.
C. Debit Cash $1,035; credit Sales $1,020; credit Cash Over and Short $15.
D. Debit Cash $1,020; debit Cash Over and Short for $15; credit Sales $1,035.
E. Debit Cash Over and Short $15; credit Cash $15.
101. A key factor in a voucher system includes all of the following except:
A. Only approved departments and individuals are authorized to incur an obligation that will
result in the payment of cash.
B. Procedures for purchasing, receiving and paying for merchandise are divided among several
departments.
C. The system limits the individuals that can incur cash payment obligations for a company.
D. It is applied to purchases of merchandise inventory and all other expenses.
E. It is not necessary if the supplier provides both receiving report and invoice with the
merchandise shipped.
102. The entry to establish a petty cash fund includes:
A. A debit to Cash and a credit to Petty Cash.
B. A debit to Cash and a credit to Cash Over and Short.
C. A debit to Petty Cash and a credit to Cash.
D. A debit to Petty Cash and a credit to Accounts Receivable.
E. A debit to Cash and a credit to Petty Cash Over and Short.
103. Ferguson Co. decides to establish a petty cash fund with a beginning balance of $200. The
company decides that any purchase under $25 can be processed through petty cash instead of the
voucher system. The journal entry to record establishing the account is:
A. Debit Cash $200 and credit Petty Cash $200.
B. Debit Cash $200 and credit Cash Over and Short $200.
C. Debit Petty Cash $200 and credit Cash $200.
D. Debit Petty Cash $200; credit Cash $175; and credit Cash Over and Short $25.
E. Debit Cash $200 and credit Petty Cash Over and Short $200.
104. The entry to record reimbursement of the petty cash fund for postage expense should
include:
A. A debit to Postage Expense.
B. A debit to Petty Cash.
C. A debit to Cash.
D. A debit to Cash Short and Over.
E. A debit to Supplies.
105. Ferguson Co. has a $200 petty cash fund. At the end of the first month the accumulated
receipts represent $43 for delivery expenses, $127 for merchandise inventory, and $12 for
miscellaneous expenses. The fund has a balance of $18. The journal entry to record the
reimbursement of the account includes a:
A. Debit to Petty Cash for $200.
B. Debit to Cash Over and Short for $18.
C. Credit to Cash for $182.
D. Credit to Inventory for $127.
E. Credit to Cash Over and Short for $18.
106. When a petty cash fund is in use:
A. Expenses paid with petty cash are recorded when the fund is replenished.
B. Petty Cash is debited when funds are replenished.
C. Petty Cash is credited when funds are replenished.
D. Expenses are not recorded.
E. Cash is debited when funds are replenished.
107. When reimbursing the petty cash fund:
A. Cash is debited.
B. Petty Cash is credited.
C. Petty Cash is debited.
D. Appropriate expense accounts are debited.
E. No expenses are recorded.
108. Assume that the custodian of a $450 petty cash fund has $64.50 in coins and currency plus
$382.50 in receipts at the end of the month. The entry to replenish the petty cash fund will
include:
A. A debit to Cash for $379.50.
B. A credit to Cash Over and Short for $3.00.
C. A debit to Petty Cash for $382.50.
D. A credit to Cash for $385.50.
E. A debit to Cash for $385.50.
109. Assume that the custodian of a $450 petty cash fund has $62.50 in coins and currency plus
$382.50 in receipts at the end of the month. The entry to replenish the petty cash fund will
include:
A. A debit to Cash for $377.50.
B. A debit to Cash Over and Short for $5.00.
C. A debit to Petty Cash for $382.50.
D. A credit to Cash for $382.50.
E. A debit to Cash for $387.50.
110. A company wants to decrease its $200 petty cash fund to $175. The entry to reduce the fund
is:
A. Debit Cash Over and Short for $25; credit Petty Cash $25.
B. Debit to Cash $25; credit Petty Cash $25.
C. Debit Miscellaneous Expenses $25; credit Cash $25.
D. Debit Petty Cash for $175; debit Cash Over and Short $25; credit Cash $200.
E. Debit Petty Cash $25; credit Cash $25.
111. A company had $43 missing from petty cash that was not accounted for by petty cash
receipts. The correct procedure is to:
A. Debit Cash Over and Short for $43.
B. Credit Cash Over and Short for $43.
C. Debit Petty Cash for $43.
D. Credit Petty Cash for $43.
E. Credit Cash for $43.
112. On a bank reconciliation, an unrecorded debit memorandum for printing checks is:
A. Noted as a memorandum only.
B. Added to the book balance of cash.
C. Deducted from the book balance of cash.
D. Added to the bank balance of cash.
E. Deducted from the bank balance of cash.
113. Childers Company has an established petty cash fund in the amount of $400. The fund was
last reimbursed on November 30. At the end of December, the fund contained the following petty
cash receipts:
December 4 Freight charge for merchandise purchased $ 62
December 7 Delivery charge for shipping to customer $ 46
December 12 Purchase of office supplies $ 30
December 18 Donation to charitable organization $ 51
If, in addition to these receipts, the petty cash fund contains $201 of cash, the journal entry to
reimburse the fund on December 31 will include:
A. A debit to Transportation-In of $73.
B. A debit to Petty Cash of $189.
C. A credit to Office Supplies of $66.
D. A credit to Cash Over and Short of $10.
E. A credit to Cash of $199.
114. An analysis that explains differences between the checking account balance according to the
depositor’s records and the balance reported on the bank statement is a(n):
A. Internal audit.
B. Bank reconciliation.
C. Bank audit.
D. Trial reconciliation.
E. Analysis of debits and credits.
115. Outstanding checks refer to checks that have been:
A. Written, recorded, sent to payees, and received and paid by the bank.
B. Written and not yet recorded in the company books.
C. Held as blank checks.
D. Written, recorded on the company books, sent to the payee, but not yet paid by the bank.
E. Issued by the bank.
116. On a bank reconciliation, the amount of an unrecorded bank service charge should be:
A. Added to the book balance of cash.
B. Deducted from the book balance of cash.
C. Added to the bank balance of cash.
D. Deducted from the bank balance of cash.
E. Noted in memorandum form only.
117. If a check that was outstanding on last period’s bank reconciliation was not among the
cancelled checks returned by the bank this period, in preparing this period’s reconciliation, the
amount of this check should be:
A. Added to the book balance of cash.
B. Deducted from the book balance of cash.
C. Added to the bank balance of cash.
D. Deducted from the bank balance of cash.
E. Ignored in preparing the period’s bank reconciliation.
118. If a company made a bank deposit on September 30 that did not appear on the bank
statement dated September 30, in preparing the September 30 bank reconciliation, the company
should:
A. Deduct the deposit from the bank statement balance.
B. Send the bank a debit memorandum.
C. Deduct the deposit from the September 30 book balance and add it to the October 1 book
balance.
D. Add the deposit to the book balance of cash.
E. Add the deposit to the bank statement balance.
119. If a check correctly written and paid by the bank for $749 is incorrectly recorded in the
company’s books for $794, how should this error be treated on the bank reconciliation?
A. Subtract $45 from the bank’s balance.
B. Add $45 to the bank’s balance.
C. Subtract $45 from the book balance.
D. Add $45 to the book balance.
E. Subtract $45 from the bank’s balance and add $45 to the book’s balance.
120. If a check correctly written and paid by the bank for $272 is incorrectly recorded in the
company’s books for $227, how should this error be treated on the bank reconciliation?
A. Subtract $45 from the bank’s balance.
B. Add $45 to the bank’s balance.
C. Subtract $45 from the book balance.
D. Add $45 to the book balance.
E. Subtract $45 from the bank’s balance and add $45 to the book’s balance.
121. During the month of July, Clanton Industries issued a check in the amount of $845 to a
supplier on account. The check did not clear the bank during July. In preparing the July 31 bank
reconciliation, the company should:
A. Deduct the check amount from the book balance of cash .
B. Add the check amount to the book balance of cash.
C. Deduct the check amount from the bank balance.
D. Add the check amount to the bank balance.
E. Make a journal entry in the company records for an error.
122. In the process of reconciling its bank statement for April, Donahue Enterprises’ accountant
compiles the following information:
Cash balance per company books on April 30 $6,275
Deposits in transit at month-end $1,300
Outstanding checks at month-end $ 620
Bank charge for printing new checks $ 45
Note receivable and interest collected by bank on Donahue’s behalf $ 770
A check paid to Donahue during the month by a customer is returned
by the bank as NSF
$ 480
The adjusted cash balance per the books on April 30 is:
A. $ 6,900
B. $ 8,160
C. $ 4,600
D. $ 6,520
E. $ 5,840
123. In the process of reconciling its bank statement for January, Maxi’s Clothing’s accountant
compiles the following information:
Cash balance per company books on January 30 $4,725
Deposits in transit at month-end $1,800
Outstanding checks at month-end $ 520
Bank service charges $ 25
EFT automatically paid monthly, not yet recorded by Maxi $ 380
An NSF check returned on a customer account $ 265
The adjusted cash balance per the books on January 31 is:
A. $ 5,855
B. $ 5,335
C. $ 4,055
D. $ 4,815
E. $ 4,585
124. Which of the following events would cause a bank to debit a depositor’s account?
A. The depositor orders new checks through the bank at a cost of $50.
B. The bank collects a note receivable and related interest on the depositor’s behalf.
C. There are outstanding checks drawn on the account at month-end.
D. There are deposits in transit on the account at month-end.
E. The bank corrects an error from previous month by adding $75 to the depositor account.
125. A seller (or provider) of goods or services to a business organization, usually a manufacturer
or wholesaler, is known as a:
A. Vendor.
B. Payee.
C. Vendee.
D. Creditor.
E. Debtor.
126. The internal document prepared by a department manager that informs the purchasing
department of its merchandise needs and requests that the merchandise be purchased is the
A. Purchase requisition.
B. Purchase order.
C. Invoice.
D. Receiving report.
E. Invoice approval.
127. The document that the purchasing department prepares and sends to the vendor to place an
order is called the
A. Purchase requisition.
B. Purchase order.
C. Invoice.
D. Receiving report.
E. Invoice approval.
128. The itemized statement of goods prepared by a vendor listing the customer’s name, items
sold, sales prices, and terms of the sale is called the
A. Purchase requisition.
B. Purchase order.
C. Invoice.
D. Receiving report.
E. Invoice approval.
129. The internal document prepared to notify the appropriate persons that goods ordered have
been received, describing the quantities and condition of the goods is the
A. Purchase requisition.
B. Purchase order.
C. Invoice.
D. Receiving report.
E. Invoice approval.
130. The checklist of steps necessary for approving an invoice for recording and payment, also
known as the check authorization, is the
A. Purchase requisition.
B. Purchase order.
C. Invoice.
D. Receiving report.
E. Invoice approval.
131. A voucher system is a set of procedures and approvals:
A. Designed to eliminate the need for subsidiary ledgers.
B. Designed to determine if the company is operating profitably.
C. Used almost exclusively by small companies.
D. Used to ensure that the company sells on credit only to creditworthy customers.
E. Designed to control cash disbursements and the acceptance of obligations.
132. The gross method of recording purchases refers to recording:
A. Purchases at the invoice price less any cash discounts.
B. Specified amounts and timing of payments that a buyer agrees to in return for being granted
credit.
C. Purchases at the full invoice price, without deducting any cash discounts.
D. Inventory at its selling price.
E. Inventory at the lower of cost or market.
133. An expense resulting from failing to take advantage of cash discounts when using the net
method of recording purchases is called:
A. Sales discounts.
B. Trade discounts.
C. Purchases discounts.
D. Discounts lost.
E. Discounts earned.
134. A company using the net method of recording purchases failed to take advantage of a
discount available. When they pay the full (gross) amount of an invoice at the end of the credit
period the journal entry will include a debit to:
A. Merchandise Inventory.
B. Sales Discounts.
C. Discounts Lost.
D. Cash.
E. Accounts Receivable.
135. A company that uses the net method of recording purchases made a purchase of $400 with
terms of 2/10, n/30. The entry to record the purchase would be:
A. Debit Merchandise Inventory $392; credit Accounts Payable $392.
B. Debit Merchandise Inventory $400; credit Discounts Lost $8; credit Accounts Payable $392.
C. Debit Merchandise Inventory $392; credit Cash for $392.
D. Debit Merchandise Inventory $392; debit Discounts Lost $8; credit Accounts Payable $400.
E. Debit Accounts Payable $400; credit Discounts Lost $8; credit Cash $392.
136. Merchandise with an invoice price of $2,000 was purchased on February 3, terms 2/15,
n/60. The company uses the net method to record purchases. The entry to record the cash
payment of this purchase obligation on February 17 is:
A. Debit Accounts Payable $1,960; credit Cash $1,960.
B. Debit Accounts Payable $2,000; credit Cash $2,000.
C. Debit Accounts Payable $1,960; debit Discounts Lost $40; credit Cash $2,000.
D. Debit Accounts Payable $2,000; credit Merchandise Inventory $40; credit Cash $1,960.
E. Debit Accounts Payable $2,000; credit Discounts Lost $40; credit Cash $1,960.
137. Merchandise with an invoice price of $2,000 was purchased on February 3, terms 2/15,
n/60. The company uses the net method to record purchases. The entry to record the cash
payment of this purchase obligation on February 27 is:
A. Debit Accounts Payable $1,960; credit Cash $1,960.
B. Debit Accounts Payable $2,000; credit Cash $2,000.
C. Debit Accounts Payable $1,960; debit Discounts Lost $40; credit Cash $2,000.
D. Debit Accounts Payable $2,000; credit Merchandise Inventory $40; credit Cash $1,960.
E. Debit Accounts Payable $2,000; credit Discounts Lost $40; credit Cash $1,960.
138. A company records purchases using the net method. On February 1, they purchased
merchandise inventory on account for $7,300 with terms of 1/10, n/30. The February 1 journal
entry to record this transaction would include a:
A. Debit to Merchandise Inventory of $7,300.
B. Debit to Merchandise Inventory of $7,227.
C. Debit to Merchandise Inventory of $73.
D. Credit to Merchandise Inventory of $73.
E. Credit to Accounts Payable of $7,300.
139. Internal controls are crucial to companies that convert from U.S. GAAP to IFRS because of
all of the following risks except:
A. Possible misstatement of financial information.
B. Possible fraud.
C. Controls are significantly different across the globe.
D. Ineffective communication of the change to investors, creditors, and others.
E. Management’s inability to certify the effectiveness of the controls.
141. Ryan Company deposits all cash receipts on the day they are received and makes all cash
payments by check. Ryan’s June bank statement shows $18,361 on deposit in the bank. Ryan’s
comparison of the bank statement to its cash account revealed the following:
Deposit in transit $1,450
Outstanding checks $837
Additionally, a $29 check written and recorded by the company correctly was recorded by the
bank as a $92 deduction.
The adjusted cash balance per the bank records should be:
A. $18,974
B. $18,911
C. $20,711
D. $19,037
E. $16,137
142. Clayborn Company deposits all cash receipts on the day they are received and makes all
cash payments by check. At the close of business on May 31, its Cash account shows a debit
balance of $17,025. Clayborn’s May bank statement shows $15,800 on deposit in the bank.
Determine the adjusted cash balance using the following information:
Deposit in transit……………………………… $5,200
Outstanding checks…………………………… $4,600
Bank service fees, not yet recorded by company $25
A NSF check from a customer, not yet recorded
by the company $600
The adjusted cash balance should be:
A. $16,400
B. $11,200
C. $21,000
D. $16,425
E. $17,000
143. Franklin Company deposits all cash receipts on the day they are received and makes all cash
payments by check. At the close of business on August 31, its Cash account shows a debit
balance of $13,162. Franklin’s August bank statement shows $14,237 on deposit in the bank.
Determine the adjusted cash balance using the following information:
Deposit in transit……………………………… $4,500
Outstanding checks…………………………… $3,900
Bank service fees, not yet recorded by company $50
The bank collected on a note receivable, not
yet recorded by the company $1,725
The adjusted cash balance should be:
A. $18,737
B. $10,337
C. $14,887
D. $13,112
E. $14,837
144. Clayborn Company’ bank reconciliation as of May 31 is shown below
Bank balance $15,800 Book balance $17,025
+ Deposit in transit 5,200 Bank service fees – 25
– Outstanding checks – 4,600 NSF returned – 600
Adjusted book balance $16,400 $16,400
The adjusting journal entries that Clayborn must record as a result of the bank reconciliation
include:
A. A debit to Cash of $625
B. A debit to Cash of $5,200
C. A credit to Cash of $4,600
D. A credit to Cash of $600
E. A debit to cash of $25
145. Franklin Company’s bank reconciliation as of August 31 is shown below.
Bank balance $14,237 Book balance $13,162
+ Deposit in transit 4,500 Bank service fees – 50
– Outstanding checks – 3,900 Note collected 1,725
Adjusted book balance $14,837 $14,837
The adjusting journal entries that Clayborn must record as a result of the bank reconciliation
include:
A. Debit Cash $4,500; credit Sales $4,500.
B. Debit Cash $1,725; credit Notes Receivable $1,725.
C. Debit Cash $50; credit Bank Service Fee Expense $50.
D. Debit Misc. Expense $3,900; credit Cash $3,900.
E. Debit Notes Receivable $1,725; credit Cash $1,725.
146. Easton Co. deposits all cash receipts on the day they are received and makes all cash
payments by check. At the close of business on June 30, its Cash account shows a debit balance
of $60,209. Easton’s June bank statement shows $58,349 on deposit in the bank. Determine the
adjusted cash balance using the following information:
Deposit in transit……………………………… $3,800
Outstanding checks…………………………… $1,925
Check printing fee, not yet recorded by company $15
Interest earned on account, not yet recorded
by the company $30
The adjusted cash balance should be:
A. $60,194
B. $60,239
C. $62,149
D. $56,424
E. $60,224
147. Great Falls Co.’s bank reconciliation as of February 28 is shown below.
Bank balance $37,643 Book balance $38,153
+ Deposit in transit 2,950 Note collection + 745
– Outstanding checks – 1,730 Check printing – 35
Adjusted book balance $38,863 $38,863
The adjusting journal entries that Great Falls must record as a result of the bank reconciliation
include:
A. Debit Note Payable $745; credit Cash $745.
B. Debit Cash $745; credit Note Receivable $745.
C. Debit Cash $2,950; credit Sales $2,950.
D. Debit Cash $2,950; credit Accounts Receivable $2,950
E. Debit Miscellaneous Expense $35; credit Accounts Payable $35.
148. Havermill Co. establishes a $250 petty cash fund on September 1. On September 30, the
fund is replenished. The accumulated receipts on that date represent $73 for Office Supplies,
$137 for merchandise inventory, and $22 for miscellaneous expenses. The fund has a balance of
$18. On October 1, the accountant determines that the fund should be increased by $50. The
journal entry to record the establishment of the fund on September 1 is:
A. Debit Cash $250; credit Petty Cash $250.
B. Debit Petty Cash $250; credit Accounts Payable $250.
C. Debit Miscellaneous Expense $250; credit Cash $250.
D. Debit Petty Cash $250; credit Cash $250.
E. Debit Cash $250; credit Accounts Payable $250.
149. Havermill Co. establishes a $250 petty cash fund on September 1. On September 30, the
fund is replenished. The accumulated receipts on that date represent $73 for Office Supplies,
$137 for merchandise inventory, and $22 for miscellaneous expenses. The fund has a balance of
$18. On October 1, the accountant determines that the fund should be increased by $50. The
journal entry to record the reimbursement of the fund on September 30 includes a:
A. Debit to Office Supplies for $73.
B. Credit to Merchandise Inventory for $137.
C. Credit to Cash for $250.
D. Debit Petty Cash for $232.
E. Credit to Cash for $18.
150. Havermill Co. establishes a $250 petty cash fund on September 1. On September 30, the
fund is replenished. The accumulated receipts on that date represent $73 for Office Supplies,
$137 for merchandise inventory, and $22 for miscellaneous expenses. The fund has a balance of
$18. On October 1, the accountant determines that the fund should be increased by $50. The
journal entry to record the increase in the fund balance on October 1 is:
A. Debit Petty Cash $300; credit Cash $300.
B. Debit Cash $50; credit Petty Cash $50.
C. Debit Miscellaneous Expense $50; credit Cash $50.
D. Debit Petty Cash $50; credit Accounts Payable $50.
E. Debit Petty Cash $50; credit Cash $50.
151. Match each of the following terms with the appropriate definitions.
A. Principles of internal control F. Liquidity
B. Cash Over and Short G. Receiving report
C. Net method H. Days’ sales uncollected
D. Voucher system I. Purchase order
E. Bank reconciliation J. Gross method
____ 1. A report explaining any differences between the checking account balance according to
the depositor’s records and the balance reported on the bank statement.
____ 2. A set of procedures and approvals designed to control cash disbursements and the
acceptance of obligations.
____ 3. Fundamental guidelines applicable to all companies established to minimize the risk of
fraud and theft and to increase the reliability and accuracy of the accounting records.
____ 4. A measure of how quickly a company can convert its accounts receivable into cash.
____ 5. The ability of a company to pay for its near-term obligations.
____ 6. A method of initially recording purchases at the full invoice price ignoring any cash
discount.
____ 7. A method of initially recording purchases at the invoice price less any purchase
discounts offered by the seller.
____ 8. A document the purchasing department uses to place an order with a supplier.
____ 9. A document used within the company to notify the appropriate persons that ordered
goods have been received and to describe the quantity and condition of the goods.
____10. An income statement account used to record the income effects of cash overages and
cash shortages arising from missing petty cash receipts or errors in making change.
1. E; 2. D; 3. A; 4. H; 5. F; 6. J; 7. C; 8. I; 9. G; 10. B
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 2 Medium
Learning Objective: 06-A1
Learning Objective: 06-C1
Learning Objective: 06-C2
Learning Objective: 06-P1
Learning Objective: 06-P3
Learning Objective: 06-P5
Topic: Days’ Sales Uncollected
Topic: Internal Control
Topic: Cash, Cash Equivalents, and Liquidity
Topic: Control of Cash Receipts
Topic: Bank Reconciliation
Topic: Control of Purchase Discounts
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
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152. Match each of the following transactions 1 through 10 with the applicable internal control
principle that is being violated listed in “a” through “g”.
A. Establish responsibility
B. Maintain adequate records
C. Insure assets and bond employees
D. Separate recordkeeping from custody of assets
E. Divide responsibility for related transactions
F. Apply technological controls
G. Perform regular and independent reviews
_____ 1. Cashiers have access to the cash register recorded tape or file.
_____ 2. A company uses a voucher system, but the cash disbursement clerk pays directly from
invoices received.
_____ 3. Only sales clerks use the cash registered, but they all share the same cash drawer.
_____ 4. The bookkeeper prepares and signs checks and completes the bank reconciliation.
_____ 5. A restaurant allows servers to keep cash collected in their aprons and ring in all sales at
the end of the night.
_____ 6. A company fails to hire a CPA to perform an annual audit.
_____ 7. A company does not bond its key cash-handling employees.
_____ 8. A company has a single department that handles purchasing, receiving, and inventory
management.
_____ 9. A large company has no internal auditor on staff.
_____ 10. A company manager keeps pre-signed checks in his desk drawer for employees to
hand write when the accountant is out of the office.
1. D; 2. B; 3. E; 4. D; 5. F; 6. G; 7. C; 8. E; 9. G; 10. F
Blooms: Understand
AACSB: Communication
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 2 Medium
Learning Objective: 06-C1
Topic: Internal Control
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
6-67
153. Identify each of the following items 1 through 10 as either (A) cash or (B) cash equivalent.
_____ 1. Coins
_____ 2. Petty cash
_____ 3. Three-month certificate of deposit
_____ 4. Commercial paper
_____ 5. Currency
_____ 6. Certified check
_____ 7. Cashier’s check
_____ 8. Money market accounts
_____ 9. Money orders
_____ 10. U.S. treasury bills
1. A; 2. A; 3. B; 4. B; 5. A; 6. A; 7. B; 8. B; 9. A; 10. B
Blooms: Understand
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 2 Medium
Learning Objective: 06-C2
Topic: Cash, Cash Equivalents, and Liquidity
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
6-68
154. Match the following terms a through j with the appropriate definition 1 through 10.
A. Check protector F. Cash
B. Vendor G. Purchase requisition
C. Discounts lost H. Liquid assets
D. Invoice I. Sarbanes-Oxley Act
E. Internal control system J. Cash equivalent
____ 1. Currency, coins, and amounts on deposit in bank accounts.
____ 2. Short-term, highly liquid investments that are readily convertible to a known cash
amount and are sufficiently close to their maturity date so that the market value is
not sensitive to interest rate changes.
____ 3. A device that perforates the amount of a check into its face, making it difficult to
alter.
____ 4. An expense used under the net method of accounting for purchases resulting
from failure to take advantage of cash discounts offered.
____ 5. An asset such as cash that can be readily used to settle near-term obligations.
____ 6. The set of policies and procedures managers use to monitor and control business
activities.
____ 7. Regulation requiring public companies to document and certify their system of
internal controls.
____ 8. The supplier (seller) of goods or services.
____ 9. An internal document listing the goods needed by a department and requesting
that the goods be purchased.
____10. A bill sent from the supplier to the buyer.
1. F; 2. J; 3. A; 4. C; 5. H; 6. E; 7. I; 8. B; 9. G; 10. D
Blooms: Remember
AACSB: Communication
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: 06-C1
Learning Objective: 06-C2
Learning Objective: 06-P4
Learning Objective: 06-P5
Topic: Purposes and Principles of Internal Control
Topic: Cash, Cash Equivalents, and Liquidity
Topic: Documentation and Verification
Topic: Control of Purchase Discounts
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
6-69
155. Identify whether each of the following items 1 through 10 would on appear on the bank side
or the book side of a bank reconciliation.
____ 1. Bank service charges
____ 2. Outstanding checks
____ 3. Deposits in transit
____ 4. NSF check
____ 5. Interest on a checking account
____ 6. The company properly wrote a check for $95.80 that the bank incorrectly paid as $9.58.
____ 7. The bank printed checks for the depositor for a fee.
____ 8. Bank debit memorandum
____ 9. Bank credit memorandum
____10. The bank collected a $1,000 note for the depositor.
1. Book; 2. Bank; 3. Bank; 4. Book; 5. Book; 6. Bank; 7. Book; 8. Book; 9. Book; 10. Book
Blooms: Understand
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Decision Making
Difficulty: 2 Medium
Learning Objective: 06-P3
Topic: Bank Reconciliation
Short Answer Questions
156. Define an internal control system and describe its purpose.
157. List the principles of internal control.
158. Explain the difference between cash and cash equivalents.
159. Describe the basic bank services that contribute to the control of cash and identify at least
two internal control objectives served by the banking activities.
160. What is the purpose of the days’ sales uncollected ratio?
161. What is a voucher system and what are the two areas for which it establishes control
procedures?
162. Discuss how the principles of internal control apply to cash receipts over-the-counter by
giving several examples of good control measures that should be implemented.
163. Discuss how the principles of internal control apply to cash receipts through the mail by
giving several examples of good control measures that should be implemented.
164. Describe a petty cash account and its purpose.
165. Describe a bank reconciliation and discuss its purpose.
166. When using a voucher system, what are the steps on the invoice approval checklist that
must be completed before an invoice approval is complete and a voucher prepared?
167. Describe the net method of accounting for purchases. Why might companies use the net
method?
168. The Sarbanes-Oxley Act (SOX) requires managers and auditors of companies whose stock
is traded on an exchange to document and certify the system of internal controls. What are the
specific requirements for auditors set forth by SOX?
169. The treasurer of a company is responsible for cash management. List five cash management
principles that are essential for effective cash management.
170. For each of the independent cases below, identify the principle of internal control that is
violated, and recommend what should be done to remedy the violation.
1. In order to save money, Indigo Company has decided to drop its property insurance on assets;
and stop bonding the cashiers who handle upwards of $5,000 in cash each day.
2. Jobs Company records each sale on a preprinted invoice. Because invoices are sometimes
damaged in the process of preparation, the invoices are not prenumbered. Instead, the sales clerk
writes the next number on each invoice as it is prepared.
3. Keegan Company is a very small business. Dylan Epps, one of the two office clerks, opens
the mail each day and removes the cash receipts that come in the mail. Dylan also records the
receipts in the cash records and the customer’s account and deposits the cash in the bank.
4. Ludwig Company prides itself on hiring only the most competent employees. The owner,
Jeremy Ludwig, believes that since the employees are highly competent he can show he trusts
them completely by not checking up on their performance.
5. Maple Industries is a small business with three accounting employees. Each employee is well-
trained and able to perform any of the accounting tasks, including handling cash receipts and
cash disbursements, and preparing the bank reconciliation. Because of this cross-training, the
employees share responsibilities for all of the tasks.
1. Insure assets and bond key employees. Even though it may save money in the short run, insurance
protects the company if assets are stolen. Bonding reduces the risk of loss from the theft of cash by
employees. It also discourages theft because bonded employees know that an independent company will
be involved when a theft is discovered. It is unlikely that the bonding company will be sympathetic to any
employee involved in the theft.
2. Maintain adequate records. All important documents, including sales invoices, should be pre-
numbered. This will help ensure that all sales are recorded and that salespeople cannot pocket cash from
a sale and destroy the sales invoice.
3. Divide responsibility for related transactions. Dylan has too many responsibilities with respect to cash.
He controls the cash and maintains the records of cash. These responsibilities with respect to cash should
be split up among several employees. One person should open the mail (ideally with a second employee
present), and prepare a list in triplicate that indicates each sender’s name, the amount sent, and an
explanation of why the money was sent. One copy goes to the cashier with the money. The cashier
deposits the money in the bank and records the amounts received in the accounting records for cash. The
second copy goes to the record keeper in the accounting area who records the amounts in the customer’s
records. The third copy stays with the person who opens the mail. Dylan may carry out one of these tasks,
but not all of them.
4. Perform regular and independent reviews. Even the most competent person sometimes makes mistakes.
Sometimes individuals who appear honest may turn out not to be. Jeremy should set up regular,
independent reviews of each employee’s performance to evaluate possible errors and to ensure that
procedures are followed.
5. Establish responsibilities. Each employee should be assigned specific tasks. Now, if a problem occurs,
it is difficult to know who is at fault. It is hard to hold employees accountable for their actions if it cannot
be determined who is responsible for the action.
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McGraw-Hill Education.
6-77
Blooms: Apply
AACSB: Technology
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Difficulty: 3 Hard
Learning Objective: 06-C1
Topic: Internal Control
171. At the end of the current period, a company reported $725,000 in net credit sales and
$100,000 in ending accounts receivable. Calculate this company’s days’ sales uncollected at the
end of the current period.
172. Norman Co. had $5,925 million in sales and $1,155 million in ending accounts receivable
for the current period. For the same period, Opal Co. reported $5,885 million in sales and $790
million in ending accounts receivable. Calculate the days’ sales uncollected for both companies
as of the end of the current period and indicate which company is doing a better job in managing
the collection of its receivables.
173. A company reported net sales for 2014 of $265,000 and $545,000 for 2015. The year-end
balances of accounts receivable were $39,000 for 2014 and $92,000 for 2015. Calculate the days’
sales uncollected at the end of each year for this company and describe any changes in the
apparent liquidity of the company’s receivables.
174. At the end of the day on March 15, the cash register’s record shows $1,957, but the count of
cash in the register is $1,965. Prepare the general journal entry to record the day’s cash sales.
175. Plenty Co. established a petty cash fund of $150 on October 1. On October 10, the petty
cash fund was replenished when there was $49 remaining and there were petty cash receipts for:
office supplies, $47; transportation-in on inventory purchased, $32; and postage, $22. On
October 15, the petty cash fund was decreased to $125 in total. Record the above transactions in
general journal form.
176. A petty cash fund was originally established with a check for $100. On August 31, which is
the period end, the petty cash fund included the following:
Petty cash receipts:
Postage…………………………………………………
$43.50
Office supplies ……………………………….……. 11.85
Office equipment repair………………………… 39.00
Cash…………………………………………………………..…………………….. 4.25
Prepare the general journal entry to record the replenishment of the petty cash fund on August
31.
177. Quibble Company established a $300 petty cash fund by issuing a check to the custodian on
February 1. On February 15, the petty cash fund was replenished and increased to $800 in total.
The contents of the petty cash fund at the time of the February 15 replenishment were:
Currency and coins ……………………………………………………. $ 12
Petty cash receipts for:
Transportation-in for inventory…………………………………. $ 39
Delivery expense…………………………………………………..…. 88
Repairs to office equipment………………………………………. 47
Postage…………………………………………………………………… 64
Entertainment of customers……………………………………….
53
291
Total………………………………………………………………….………. $ 303
Prepare Quibble’s general journal entry to record both the reimbursement and the increase of the
petty fund on February 15.
178. On March 1, a company established a $75 petty cash fund. On March 12, the petty cash
fund contains $3 in cash and the following paid petty cash receipts: transportation-in on
merchandise inventory $14.25; postage, $19.50; and office supplies, $36. Give the general
journal entry to reimburse the fund and to increase its amount to $150 on March 12.
179. On June 1, a company established a $75 petty cash fund. On June 27, the petty cash fund
contains $5.25 in cash and the following paid petty cash receipts: postage, $19.50; office
supplies, $36.25; and miscellaneous expense $14.00. Give the general journal entry to reimburse
the fund on June 27.
180. A company established a petty cash fund in November of the current year and experienced
the following transactions affecting the fund during November:
Nov 1 Established a $200 petty cash fund.
5 Paid $55 to acquire office supplies.
8 Reimbursed the company controller for $30 spent on beverages for recruits
(entertainment expense)
18 Paid $45 for postage.
20 Paid $25 for C.O.D. charges on merchandise inventory, terms FOB shipping point.
25 Paid $40 for janitorial services.
28 When sorting the petty cash receipts to replenish the fund, the custodian noted that
there was $10 cash remaining.
Prepare the journal entries to establish the fund on November 1 and to reimburse the fund on
November 28.
181. Following are seven items a through g that would cause Rembrandt Company’s book
balance of cash to differ from its bank statement balance of cash.
a. A service charge imposed by the bank.
b. A check listed as outstanding on the previous period’s reconciliation and still outstanding at the
end of this month.
c. A customer’s check returned by the bank is marked “Not Sufficient Funds(NSF)”.
d. A deposit mailed to the bank on the last day of the current month and not recorded on this
month’s bank statement.
e. A check paid by the bank at its correct $190 amount recorded in error in the company’s check
register at $109.
f. An unrecorded credit memorandum indicating that bank collected a note receivable for
Rembrandt Company and deposited the proceeds in the company’s account.
g. A check written in the current period that is not yet paid or returned by the bank.
Indicate where each item, letters a–g, would appear on Rembrandt Company’s bank
reconciliation by placing its identifying letter in the parentheses in the proper section of the form
below.
Bank statement cash balance Book balance of cash
Add: ( ) Add: ( )
( ) ( )
( ) ( )
Deduct: ( ) Deduct: ( )
( ) ( )
( ) ( )
Reconciled balance……………. Reconciled balance…………….
182. The following information is available for the Savvy Company for the month of June.
a. On June 30, after all transactions have been recorded, the balance in the company’s Cash
account has a balance of $17,202.
b. The company’s bank statement shows a balance on June 30 of $19,279.
c. Outstanding checks at June 30 total $2,984.
d. A credit memo included with the bank statement indicates that the bank collected $770 on a
noninterest-bearing note receivable for Savvy.
e. A debit memo included with the bank statement shows a $67 NSF check from a customer, J.
Maroon.
f. A deposit placed in the bank’s night depository on June 30 totaling $1,675 did not appear on
the bank statement.
g. Comparing the checks on the bank statement with the entries in the accounting records reveals
that check #3445 for the payment of an account payable was correctly written for $2,450, but
was recorded in the accounting records as $2,540.
h. Included with the bank statement was a debit memorandum in the amount of $25 for bank
service charges. It has not been recorded on the company’s books.
1. Prepare the June bank reconciliation for the Savvy Company.
2. Prepare the general journal entries to bring the company’s book balance of cash into
conformity with the reconciled balance as of June 30.
1.
Savvy Company
Bank Reconciliation
June30
Bank statement balance……….. $19,279 Book balance…………….. $17,202
Add: Add:
Deposit in transit……………… 1,675 Collect a note …………….. 770
Error on cheek #3445…….. 90 860
20,954 18,062
Deduct: Deduct:
Outstanding checks……………. 2,984 NSF check……………….. $ 67
Service charge…………… 25 92
Adjusted bank balance………… $17,970 Adjusted book balance………………. $17,970
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McGraw-Hill Education.
6-86
2.
Jun. 30 Cash……………………………………………………...…..….. 770
Note receivable…..………..……………................. 780
Jun. 30 Cash……………………………………………………...…..….. 90
Accounts payable……………………………....…….. 90
Jun. 30 Accounts receivable—J. Maroon…………….............. 67
Cash………………………………………………..…..…. 67
Jun. 30 Miscellaneous expense….…………............................ 25
Cash………………………………………………..…..…. 25
Blooms: Apply
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: 3 Hard
Learning Objective: 06-P3
Topic: Bank Reconciliation
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McGraw-Hill Education.
6-87
183. The following information is available for the Topper Company for the month of July.
a. On July 31, after all transactions have been recorded, the balance in the company’s Cash
account has a balance of $15,244.
b. The company’s bank statement shows a balance on July of $16,450.
c. Outstanding checks at July total $2,063.
d. A credit memo included with the bank statement indicates that the bank collected $570 on a
note receivable for Topper. The $570 includes $550 principle and $20 interest.
e. A debit memo included with the bank statement shows a $107 NSF check from a customer, P.
Flank.
f. A deposit placed in the bank’s night depository on July 31 totaling $1,275 did not appear on the
bank statement.
h. Included with the bank statement was a debit memorandum in the amount of $45 for check
printing charges that have not been recorded on the company’s books.
Prepare the July bank reconciliation for the Topper Company.
184. Umber Company’s bank reconciliation for September is presented below. Prepare the
necessary adjusting journal entries based on the reconciliation report.
UMBER COMPANY
Bank Reconciliation
September 30
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6-88
Bank statement balance.............. $1,350 Book balance of cash……..................... $ 995
Add: Add:
Deposit in transit...................... 1,250 Proceeds of note……………….900
Bank error……………………......... 275 Less note collection fee………..25 875
$2,875 1,870
Deduct: Deduct:
Outstanding checks................... 1,145 NSF check plus processing fee........... 125
Bank service charge……..…................ 15
Reconciled balance………… $1,730 Reconciled balance………… $1,730
185. The following information is available for the Victor Company for its March 31 bank
reconciliation:
From the March 31 bank statement:
Previous Balance Total Checks and
Debits
Total Deposits and
Credits
Current Balance
$9,908
$7,805
$11,905
$14,008
Checks and Debits
Deposits and Credits
Daily Balance
Date
No.
Amount
Date
Amount
Date
Amount
03/03
2874
1,210
03/02
4,340
03/01
9,908
03/11
2906
3,850
03/27
7,270
03/02
14,248
03/15
2905
170
03/31
295
IN
03/03
1,038
03/25
2909
725
03/11
9,188
03/29
2908
1,350
03/15
9,018
03/30
500
NSF
03/25
8,293
03/27
15,563
03/29
14,213
03/30
13,713
__
03/31
14,008
NSF: A check from a customer, Booker Co. in payment of their account.
IN: Interest earned on the account.
From the Victor Company’s accounting records:
Cash Receipts Deposited Cash Disbursements
Date Cash Debit Check No. Cash Debit
March 7 4,340 2905 170
27 7,270 2906 3,850
31 2,090 2907 460
13, 700 2908 1,350
2909 725
2910 340
6,895
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Cash Acct. No. 101
Date Explanation PR Debit Credit Balance
February 28 Balance 8,698
March 31 Total receipts R4 13,700 22,398
31 Total disbursements D5 6,895 15,503
1. Based on the above information, prepare a bank reconciliation for the Victor Company.
2. Prepare the necessary general journal entries to adjust cash to the reconciled balance.
186. On June 3, Zhang Co. received and recorded a $3,500 invoice for merchandise on which the
terms were 2/10, n/60. The company uses the net method to records invoices. On June 17, the
company discovered that the invoice had been incorrectly filed and the discount lost. Prepare the
June 3 general journal entry to record the purchase, the June 17 entry to record the discount lost,
and the August 2 entry to record payment of the invoice.
187. Akron Company purchased merchandise inventory costing $10,000 with credit terms of
2/10, n/30 on March 7. On March 15, the company paid 1/2 of the amount due. The remaining
balance was paid on April 7.
Required:
a. Record the journal entries related to this transaction using the gross method of recording
purchases.
b. Record the journal entries related to this transaction using the net method of recording
purchases.
188. On August 25, Barrymore Co. purchased $5,000 worth of merchandise on terms 2/10, n/30;
on September 4, the amount due was paid. Using the net method of recording purchases, prepare
general journal entries to record (a) the purchase on August 25, and (b) the cash payment on
September 4.
189. A company had the following transactions during January:
Jan. 2 Purchased merchandise, invoice price of $16,000, with terms 2/10, n/30.
4 Received a credit memorandum for $4,000, the invoice price on merchandise returned
from the purchase of January 2.
12 Purchased merchandise, invoice price of $15,000, with terms 3/15, n/30.
26 Paid for the merchandise purchased on January 12.
30 Paid for the merchandise purchased on January 2.
Using the net method of recording purchases, prepare the journal entries to record these January
transactions.
190. A company records purchase invoices at net amounts. On March 5, the company recorded
merchandise purchased, invoice price $17,000, terms 2/15, n/60. On March 24, this company
discovered that the invoice had been incorrectly filed and the discount had been lost. The invoice
was paid on April 1. Prepare journal entries to record these events.
191. The following information is available to reconcile Dibble Co.’s book balance of cash with
its bank statement cash balance as of April 30. The April 30 cash balance according to the
accounting records is $68,356, and the bank statement cash balance for that date is $73,525.
a. The bank erroneously cleared a $480 check against the account in April that was not issued by
Dibble. The check documentation included with the bank statement indicates the check was
actually issued by Flushing Co.
b. On April 30, the bank issued a credit memorandum for $53 interest earned on Dibble’s
account.
c. When the April checks are compared with entries in the accounting records, it is found that
Check No. 1828 had been correctly drawn for $1,530 to pay for advertising but was erroneously
entered in the accounting records as $1,350
d. A credit memorandum indicates that the bank collected $10,000 cash on a note receivable for
Dibble, deducted a $30 collection fee, and credited the balance to the company’s Cash account.
Dibble did not record this transaction before receiving the statement.
e. A debit memorandum of $895 is enclosed with the bank statement for an NSF check for $870
received from a customer. The bank assessed a $25 fee for processing it.
f. Dibble’s April 30 daily cash receipts of $5,102 were placed in the bank’s night depository on
that date, but do not appear on the April 30 bank statement.
g. Dibble’s April 30 cash disbursements journal indicates that Check No. 1837 for $584 and
Check No. 1840 for $1,219 were both written and entered in the accounting records, but are not
among the canceled checks.
1. Prepare the bank reconciliation for this company as of April 30.
2. Prepare the journal entries necessary to bring the company’s book balance of cash into
conformity with the reconciled cash balance as of April 30.
192. The following account balances are taken from Everest Events at December 31.
2016 2015
Accounts receivable 170,230 260,450
Net sales 1,500,750 1,450,600
Calculate the number of days’ sales uncollected for both years. According to this analysis, is the
company’s collection of receivables improving? Explain.
193. The following account balances are taken from Ferguson Sports at December 31.
2016 2015
Accounts receivable 18,020 23,450
Net sales 163,500 157,100
Calculate the number of days’ sales uncollected for both years. According to this analysis, is the
company’s collection of receivables improving? Explain.
194. Gardener Company had the following transactions during January:
Jan. 10 Purchased merchandise at a $8,900 price, invoice dated January 10, terms
1/10, n/30.
13 Received a $900 credit memorandum (at full invoice price) for the return of
merchandise that it purchased on January 10.
18 Purchased merchandise at a $8,500 price, invoice dated January 18, terms
2/10, n/30.
27 Paid for the merchandise purchased on January 18, less the discount.
31 Paid for the merchandise purchased on January 10. Payment was delayed
because the invoice was mistakenly filed for payment today. This error
caused the discount to be lost.
Using the net method of recording purchases, prepare the journal entries to record these January
transactions.
195. A company established a petty cash fund in April of the current year and experienced the
following transactions affecting the fund during April. Prepare journal entries to establish the
fund on April 1, to replenish it on April 25, and to record the increase in the fund on April 25.
April 1 Prepared a company check for $300.00 to establish the petty cash fund.
25 Prepared a company check to replenish the fund for the following
expenditures made since April 1.
Paid $84.50 for cleaning services
Paid $84.00 for postage expense.
Paid $103.15 for office supplies.
Counted $23.35 remaining in the petty cash box
25 The company decides to increase the fund by $100.
196. The following information is available to reconcile Hinckley Company’s book balance of
cash with its bank statement cash balance as of June 30. The June 30 cash balance according to
the accounting records is $57,542, and the bank statement cash balance for that date is $67,047.
a. The bank erroneously cleared a $295 check against the account in June that was not issued by
Hinckley. The check documentation included with the bank statement indicates the check was
actually issued by Dancer Co.
b. On June 30, the bank issued a credit memorandum for $35 interest earned on Hinckley’s
account.
c. When the June checks are compared with entries in the accounting records, it is found that
Check No. 1727 had been correctly drawn for $1,450 to pay for advertising but was erroneously
entered in the accounting records as $1,540.
d. A credit memorandum indicates that the bank collected $9,000 cash on a note receivable for
Hinckley, deducted a $30 collection fee, and credited the balance to the company’s Cash account.
Hinckley did not record this transaction before receiving the statement.
e. A debit memorandum of $865 is enclosed with the bank statement for an NSF check for $840
received from a customer. The bank assessed a $25 fee for processing it.
f. Hinckley’s June 30 daily cash receipts of $6,425 were placed in the bank’s night depository on
that date, but do not appear on the June 30 bank statement.
g. Hinckley’s June 30 cash disbursements journal indicates that Check No. 1737 for $4,830 and
Check No. 1740 for $3,280 were both written and entered in the accounting records, but are not
among the canceled checks.
h. A debit memorandum for $115.00 indicates the bank deducted the annual lock box fee for the
company.
1. Prepare the bank reconciliation for this company as of June 30.
2. Prepare the journal entries necessary to bring the company’s book balance of cash into
conformity with the reconciled cash balance as of June 30.
197. An ____________________________ refers to the policies and procedures managers use to
protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to
company policies.
198. When a company purchases an insurance policy against losses from theft by an employee,
that employee is ________________.
199. Two sales clerks not being permitted to share the same cash register is an example of the
internal control principle of _______________________.
200. A sales system with pre-numbered, controlled sales slips is an example of the internal
control principle of _______________________.
201. A person who controls or has access to an asset must not keep that asset’s accounting
records. This describes the internal control principle of ________________________.
202. Having external auditors test the company’s financial records and evaluate the effectiveness
of the internal control system is part of the internal control principle of ___________________.
203. Two limitations of internal control systems are ______________ and ________________.
204. ____________________ are short-term, highly liquid investment assets that are readily
convertible to a known amount of cash.
205. ________________ includes currency, coins, and amounts on deposit in checking accounts
and savings accounts.
206. The use of electronic communication to transfer cash from one party to another is called
__________________________________.
207. A __________________________ is a document explaining the payment of a check.
208. On a bank statement, deposits are shown as __________________, because the depositor’s
account is a liability on the bank’s records.
209. __________________________ reflects the liquidity of a company’s accounts receivable.
210. The ________________________________ account is used to record the effects of cash
overages and shortages from errors in making change or managing a petty cash fund.
211. A ___________ is an internal document (or file) that is used to accumulate information to
control cash disbursements.
212. A ________________ fund is used to make cash disbursements of small amounts to avoid
the time and cost of writing checks.
214. Deposits made and recorded by the depositor but not yet recorded on the bank statement are
called _______________________.
215. A ____________________ is a report explaining any differences between the checking
account balance according to the depositor’s records and the balance reported on the bank
statement.
216. The document the purchasing department sends to the vendor that is used to place an order
is the __________________________.
217. The document prepared by the vendor that is an itemized statement of goods listing the
customer’s name, items sold, sales prices, and terms of the sale is the _________________.
218. The internal document that is used to notify the appropriate person that ordered goods have
been received and to describe the quantities and condition of the goods is the _______________.
219. The means of recording purchases under the assumption that the cash discount for prompt
payment will be taken is called the _________________________.
220. The __________ requires the managers and auditors of companies whose stock is traded on
an exchange (called public companies) to document and certify the system of internal controls.