978-0134125053 Chapter 7 Part 1

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Financial Accounting, 4e (Kemp)

Chapter 7 Cash and Receivables

7.1 Discuss internal controls for cash and prepare a bank reconciliation

1) Cash is one of the least vulnerable assets that a business has.

Question Type: Concept

2) The cash register provides control over the cash receipts for a retail business.

Question Type: Concept

3) Cash receipts should never be deposited more than once a business day.

Question Type: Concept

4) Separation of duties is essential for internal control over cash receipts and cash payments.

Question Type: Concept

5) Streamlined payment procedures now involve the use of electronic data interchange and

electronic funds transfer between and among suppliers and merchandisers.

Question Type: Concept

6) Bank reconciliations are an important part of internal control that should be performed daily.

Question Type: Concept

7) In a bank reconciliation, the bank balance and the book balance must be adjusted to be

reconciled.

Question Type: Concept

8) Differences between when a company records a transaction and when the bank records the

same transaction are called “timing” differences.

Question Type: Concept

9) If possible, the bank reconciler should have no other duties relating to cash transactions in the

business.

Question Type: Concept

10) Online banking should NOT be used to reconcile the bank account.

Question Type: Concept

11) Which of the following situations would cause Danio Corp. to have an NSF check amount on

its bank reconciliation?

A) Danio writes a check to a supplier that bounces.

B) A customer writes a check to pay Danio and that check bounces.

C) Both situations A and B will cause Danio to have an NSF check on its’ bank reconciliation.

D) Neither situation A nor B will cause Danio to have an NSF check on its’ bank reconciliation.

Question Type: Concept

12) As part of the procedure to properly control cash payments received in the mail, after the

mailroom employee opens the cash receipts, the checks then go to the:

A) bank.

B) Controller.

C) Treasurer.

D) accounting department.

Question Type: Concept

13) As part of the procedure to properly control cash payments received in the mail, after the

mailroom employee opens the cash receipts, the remittance advices go to the:

A) Controller.

B) accounting department.

C) Treasurer.

D) bank.

Question Type: Concept

14) In the last step of the procedure to properly control cash payments received in the mail, the

________ verifies the amount of the deposit and the total amount posted to the cash account.

A) bank

B) accounting department

C) Treasurer

D) Controller

Question Type: Concept

15) The process of acquiring merchandise from a supplier begins with the:

A) check for payment.

B) receiving report.

C) purchase order.

D) invoice.

Question Type: Concept

16) Once the merchandise is received from the supplier, the company:

A) issues an invoice.

B) issues a check.

C) completes a purchase order.

D) completes a receiving report.

Question Type: Concept

17) Good internal control policies dictate that the purchasing agent should prepare the:

A) checks for payment.

B) purchase order.

C) receiving report.

D) purchase order and receiving report.

Question Type: Concept

18) Before signing a check to pay for a purchase, the ________ should examine the documents

supporting the purchase.

A) Controller

B) purchasing agent

C) Treasurer

D) manager

Question Type: Concept

19) To prevent a second payment for an invoice, the check signer should ________ the

documents relating to the transaction.

A) deface

B) sign

C) file

D) throw away

Question Type: Application

20) A bank statement shows the:

A) ending book balance as of a specific date.

B) ending bank balance as of a specific date.

C) reconciled balance as of a specific date.

D) book errors as of a specific date.

Question Type: Concept

21) Deposits in transit are:

A) subtracted from the book balance.

B) added to the book balance.

C) subtracted from the bank balance.

D) added to the bank balance.

Question Type: Application

22) The bank recorded a $49 deposit as $66. On a bank reconciliation this error would be

corrected by:

A) subtracting $17 from the bank balance.

B) adding $17 to the bank balance.

C) adding $17 to the book balance.

D) subtracting $17 from the book balance.

Question Type: Application

23) On a bank reconciliation, outstanding checks are:

A) added to the book balance.

B) added to the bank balance.

C) subtracted from the book balance.

D) subtracted from the bank balance.

Question Type: Application

24) A $575 collection on a note from a customer was reflected on Ronaldo Co’s bank statement.

When doing the bank reconciliation, Ronaldo Co. should:

A) add $575 to the bank balance.

B) subtract $575 from the bank balance.

C) add $575 to their book balance.

D) subtract $575 from their book balance.

Question Type: Application

25) Illusions, Inc. deposited $1,000 into its bank account at the end of the month, but the bank

statement does not show the deposit. This $1,000 is an example of a(n):

A) outstanding check.

B) bank error.

C) bank collection.

D) deposit in transit.

Question Type: Application

26) Leo’s Leather Shoppe has a checking account that earns interest. The current bank statement

shows interest earned of $22.14. This amount should be:

A) added to Leo’s book balance.

B) subtracted from Leo’s book balance.

C) ignored, as the bank has added it to Leo’s book balance.

D) subtracted from Leo’s bank balance.

Question Type: Application

27) Pirates Party Supply deposited a check for $695, but it was recorded on their books as a

check for $536. This error of $159 would be:

A) added to the bank balance.

B) added to Pirate’s book balance.

C) subtracted from the bank balance.

D) subtracted from Pirate’s book balance.

Question Type: Application

28) Northwest Plumbing‘s bank statement shows a bank balance of $43,667. The statement

shows a bank service charge of $95. Northwest Plumbing’s book balance shows outstanding

checks of $5,292 and deposits in transit of $9,325. The adjusted balance on the bank side of the

reconciliation would be:

A) $43,667.

B) $43,572.

C) $39,634.

D) $47,700.

Question Type: Application

29) Cesario Auto‘s bank statement shows a bank balance of $43,567. The statement shows a

bank service charge of $20 and a note collection of $840 on Cesario Auto’s behalf. Cesario

Auto‘s book balance should be adjusted by a total of:

A) +$860.

B) +$840.

C) +$820.

D) –$820.

Question Type: Application

30) Which of the following is NOT true concerning NSF checks:

A) NSF checks represent customer checks that the business previously deposited but have turned

out to be worthless.

B) The amount of the NSF check will need to be subtracted from the book balance.

C) The amount of the NSF check will need to be added to the book balance.

D) NSF stands for nonsufficient funds.

Question Type: Concept

31) During a bank reconciliation, Bach Inc. discovered a NSF check from their customer, Larry

Bobble for $70. The journal entry required to update the cash balance would be:

A) Debit cash, credit Accounts Receivable

B) Debit Accounts Receivable, credit Cash

C) Debit Accounts Receivable — L. Bobble, credit Cash

D) No journal entry is required.

Question Type: Application

32) After a bank reconciliation is prepared, journal entries must be made for ______ on the book

side of the reconciliation and for _______ on the bank side of the reconciliation.

A) no items; all items

B) all items; service charges

C) receivable accounts; all items

D) all items; no items

Question Type: Concept

7.2 Report cash on the balance sheet

1) Cash is listed first on the Balance Sheet because it is the least liquid asset.

Question Type: Concept

2) Each cash account is listed separately on the Balance Sheet.

Question Type: Concept

3) Cash equivalents may include money orders and traveler‘s checks.

Question Type: Concept

4) Ninety-day U.S. Treasury notes are considered cash equivalents.

Question Type: Concept

5) Cash consists of anything that a bank will take as a deposit.

Question Type: Concept

6) Which of the following would NOT be considered cash?

A) Currency

B) Money market funds

C) Money orders

D) Checking accounts

Question Type: Concept

7) Which of the following would NOT be considered a cash equivalent?

A) Money market funds

B) Foreign currency

C) 90-day treasury notes

D) 2 month certificates of deposits

Question Type: Concept

8) Cash equivalents are:

A) very liquid and carry high risk.

B) not liquid and carry little risk.

C) very liquid and carry little risk.

D) not liquid and carry high risk.

Question Type: Concept

9) U.S. Treasury notes must mature within ________ days of the Balance Sheet date in order to

be considered cash equivalents.

A) 60

B) 90

C) 120

D) 180

Question Type: Concept

10) Which of the following would be considered a cash equivalent?

A) Currency

B) Time deposits

C) Checks

D) Money orders

Question Type: Concept

11) Cash on the Balance Sheet includes:

A) checks on hand.

B) traveler‘s checks.

C) petty cash.

D) all of the above.

12) A fund that contains a small amount of cash and is used to pay for minor expenditures is

known as:

A) the emergency fund.

B) the checking account.

C) the petty cash fund.

D) the cash account.

Question Type: Concept

13) Given the following information from Mozart & Co, what would the current assets section of

the balance sheet include?

Accounts Receivable

$11,000

60-day Treasury Note

$3,000

Cash in Checking Account

$20,000

Inventory

$42,000

A) Cash $23,000; Accounts Receivable $11,000; Inventory $42,000

B) Cash $20,000; Accounts Receivable$11,000; Inventory $42,000

C) Cash & Cash Equivalents $34,000; Inventory $42,000

D) Cash $20,000; Accounts Receivable $11,000

Question Type: Application

14) Given the following information from Leo Company, what would the current assets section

of the balance sheet include?

Accounts Receivable

$12,000

90-day Treasury Note

$7,000

Cash in Checking Account

$24,000

2-year Certificate of Deposit

$5,000

A) Cash $36,000; Accounts Receivable $12,000

B) Cash & Cash Equivalents $48,000

C) Cash $31,000; Accounts Receivable $12,000

D) Cash $24,000; Cash Equivalents $12,000; Accounts Receivable $12,000

Question Type: Application

7.3 Identify the different types of receivables and discuss related internal controls for accounts

receivable

1) Accounts Receivable are more formal and usually longer in terms than notes receivable.

Question Type: Concept

2) Notes receivable generally include a charge for interest.

Question Type: Concept

3) A company may have receivables such as loans to employees and interest receivable.

Question Type: Concept

4) Accounts Receivable are classified as Current Assets.

Question Type: Concept

5) To ensure consistency, a good internal control policy would be to have the same person who

grants credit be in charge of writing off bad debts.

Question Type: Concept

6) Which of the following would indicate poor internal control over Accounts Receivable?

A) The person handling cash receipts passes the receipts to someone who enters them into

Accounts Receivable.

B) The same person handling cash receipts also records the Accounts Receivable transactions.

C) The mailroom employees open the mail and give the cash receipts to another employee.

D) The person who handles Accounts Receivable would not write off accounts as uncollectible.

Question Type: Application

7) Companies who sell on account expect:

A) the benefit to outweigh the cost.

B) to incur bad debt expense.

C) to reach a wider range of customers.

D) all of the above.

Question Type: Concept