978-1337276337 Test Bank Chapter 6 Part 1

Chapter 6

Page 1

True / False

1. A six-month bank certificate of deposit would be classified as a cash equivalent.

a. True

b. False

2. Petty cash typically is composed of coins and currency kept on hand in a business to make minor disbursements.

a. True

b. False

3. The key to the classification of an amount as cash is that it be available to pay debts within a three-month period of

time.

a. True

b. False

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4. For a buyer, a purchase order is not the basis for recording a purchase and an account payable.

a. True

b. False

5. Coin and currency on hand and cash on deposit in the form of checking and savings accounts are the most obvious

forms of cash.

a. True

b. False

6. A bank does not have the legal right to demand that a customer notify it before making a withdrawal from a savings

account.

a. True

b. False

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7. The key to the classification of an amount as cash is that it be readily available to pay debts.

a. True

b. False

8. Cash equivalents are investments that are readily convertible to a known amount of cash, where readily means six

months or less.

a. True

b. False

9. Treasury notes with a maturity of six months or less that are issued by the federal government are cash equivalents.

a. True

b. False

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10. A check written by a company but not yet presented to the bank for payment is called a check in transit.

a. True

b. False

11. When reconciling a bank account, the company does not have to prepare an adjusting entry for outstanding checks.

a. True

b. False

12. When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.

a. True

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13. In a sound internal control system, all cash receipts should be deposited intact in the bank on a daily basis.

a. True

b. False

14. Checks received from customers are considered to be cash in the company’s books.

a. True

b. False

15. A bank informs a customer that a service charge has been assessed on its account by including a credit memorandum

on the monthly bank statement.

a. True

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16. On a bank reconciliation, outstanding checks are added to the cash balance per the bank statement.

a. True

b. False

17. When a bank pays interest or collects an amount owed to a company by one of the bank’s customers, the bank issues a

debit memorandum.

a. True

b. False

18. When a bank pays interest or collects an amount owed to a company by one of the bank’s customers, the bank issues a

credit memorandum.

a. True

b. False

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19. On a bank reconciliation, bank charges for the month are added to the cash balance per the books.

a. True

b. False

20. On a bank reconciliation, interest earned for the month is added to the cash balance per the books.

a. True

b. False

21. A company prepares adjusting entries for debit memorandums but not for credit memorandums.

a. True

b. False

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22. At the time a petty cash fund is replenished, an adjustment must be made to record its replenishment and to recognize

the various expenses incurred.

a. True

b. False

23. The Sarbanes-Oxley Act requires that a company’s internal audit staff issue a report on their assessment of the

company’s internal control.

a. True

b. False

24. After it completes a bank reconciliation, a business must prepare a number of adjustments to its records. The additions

and deductions from the Cash account on the books should be the basis for the adjustments.

a. True

b. False

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25. A good system of internal control is important to make a company’s accounting records completely foolproof.

a. True

b. False

26. An accounting system must be fully computerized in order to ensure the company has proper internal control.

a. True

b. False

27. Audit committees are required to consist of only directors who are key officers of the company.

a. True

b. False

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28. A company policy that requires all prospective employees to be interviewed by the personnel department is an

example of an accounting control.

a. True

b. False

29. One concern of the internal auditor is the efficiency with which the organization is run.

a. True

b. False

30. If a company has internal auditors, it does not need to have external auditors.

a. True

b. False

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31. Accounting controls primarily concern safeguarding assets and ensuring the reliability of the financial statements.

a. True

b. False

32. A company’s internal control system is designed by its external auditors.

a. True

b. False

33. The only reason a company needs to create an internal control system is to deter intentional fraudulent acts.

a. True

b. False

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34. A good system of internal control requires that the physical custody of assets be separated from the accounting for

those assets. This concept is known as safeguarding assets and records.

a. True

b. False

35. Independent verification can be effective in preventing collusion.

a. True

b. False

36. As part of good internal control, disbursements can be made either by check or cash.

a. True

b. False

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37. Most merchandisers receive checks and currency from customers in two ways: (1) cash received over the counter from

cash sales and (2) cash received in the mail from credit sales.

a. True

b. False

38. Only one copy of the list of cash received should be prepared when an employee opens mail with customer payments

to avoid complexity in the accounting system and maintain control.

a. True

b. False

39. The use of customer statements as a control device will be effective only if the employees responsible for the custody

of cash received through the mail, for record keeping, and for authorization of adjustments to customers’ accounts are not

allowed to prepare and mail statements to customers.

a. True

b. False

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Multiple Choice

40. Which of the following assets is considered the most liquid?

a. Cash

b. Accounts receivable

c. Merchandise inventory

d. Prepaid expenses

41. Which of the following items is not included in cash?

a. A bank certificate of deposit for one year

b. A savings account at the bank

c. A checking account at the bank

d. All of these are included in cash.

42. Which of the following is not considered to be a cash equivalent?

a. Corporate commercial paper due in 90 days after purchase

b. U.S. Treasury bills with an original maturity of six months

c. A money market account with a stock brokerage firm

d. A certificate of deposit with a term of 75 days when acquired

43. How are cash equivalents reported or disclosed in the financial statements?

a. They appear only on the statement of cash flows.

b. They are included with short-term investments under current assets on the balance sheet.

c. They are included with cash under current assets on the balance sheet.

d. They are disclosed only in a footnote to the balance sheet.

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46. Effective cash management and control includes all of the following except

a. the use of a petty cash fund.

b. bank reconciliations.

c. short-term investments of excess cash.

d. purchase of stocks and bonds.

47. Checks presented for payment and paid by the bank are known as

a. canceled checks.

b. certified checks.

c. NSF checks.

d. outstanding checks.

48. Deposits made by a company but not yet reflected on a bank statement are called

a. debit memoranda.

b. deposits in transit.

c. credit memoranda.

d. none of these are correct.

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49. Which of the following statements is true?

a. Good cash management practices dictate that a company should maintain as large a balance as possible in its Cash

account.

b. Sound internal control practice dictates that all cash payments should be made by check.

c. The person handling the cash should also prepare the bank reconciliation.

d. Petty cash can be substituted for a checking account to expedite the payment of all disbursements.

50. Checks returned by a bank because customers did not have sufficient funds in their account are called

a. canceled checks.

b. certified checks.

c. NSF checks.

d. outstanding checks.

51. Which of the following would not appear on a bank statement for a checking account?

a. Service charges

b. Interest earned

c. Outstanding checks

d. Deposits

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52. Which of the following procedures is not part of preparing a bank reconciliation of a checking account?

a. Tracing deposits listed on the bank statement to the books to identify deposits in transit

b. Arranging canceled checks in numerical order and tracing them to the books to identify outstanding checks

c. Identifying items added on the bank statement which have not been recorded as cash receipts by the company

d. Preparing adjustments to reverse the transactions recorded for checks that are still outstanding

53. Which of the following items would not be a reconciling item?

a. Canceled checks

b. NSF checks

c. Outstanding checks

d. Deposits in transit

54. Which of the following items would be added to the balance per books on a bank reconciliation?

a. Outstanding checks

b. Deposit in transit

c. Service charge assessed by the bank

d. Interest collected by the bank on a customer note

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55. Which of the following items would be added to the balance per bank statement on a bank reconciliation?

a. Outstanding checks

b. Deposit in transit

c. Service charge assessed by the bank

d. Interest collected by the bank on a customer note

56. Which of the following items would be subtracted from the balance per books on a bank reconciliation?

a. Outstanding checks

b. Deposit in transit

c. Service charge assessed by the bank

d. Interest collected by the bank on a customer note

57. Which of the following items would be subtracted from the balance per bank statement on a bank reconciliation?

a. Outstanding checks

b. Deposit in transit

c. Service charge assessed by the bank

d. Interest collected by the bank on a customer note

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58. Which of the following statements best describes the term “outstanding check?”

a. A check written by a company and presented to the bank for payment.

b. A check written by a company but not yet presented to the bank for payment.

c. A check written by a customer that has been presented to the bank for payment.

d. A check written by a customer that has not yet been presented to the bank for payment.

59. The accountant for Fazzi Corp. was preparing a bank reconciliation as of April 30, 2017. The following items were

identified:

Fazzi’s book balance $46,200

Outstanding checks 1,100

Interest earned on checking account 50

Customer’s NSF check returned by the bank 500

In addition, Fazzi incorrectly recorded a customer’s check in cash receipts as $150; the bank recorded the amount correctly

as $510. What amount will Fazzi report as its adjusted cash balance at April 30, 2017?

a. $44,650

b. $45,890

c. $46,110

d. $46,250