978-1337276337 Test Bank Chapter 6 Part 5

Unlock access to all the studying documents.

View Full Document

Chapter 6

Page 73

194. Viva Stores has decided to set up a petty cash fund.

A count of the cash in the drawer on January 31 revealed a balance of $53.25. The treasurer wrote and cashed a check on

the same day to restore the fund to its original balance of $250.

Required

1. Explain the necessary steps that Viva Stores must take to set up and maintain the petty cash fund.

2. What are the potential benefits of using the petty cash fund?

Chapter 6

Page 74

195. Marathon Street Bank sent Flank Industries their end-of-month bank statement for October. The end-of-month

balance by the bank is $11,229. From the statement, it can be determined that a deposit for $4,250 is in transit at the end

of the statement period. Also, the statement reveals that checks for $86, $106, and $95 are outstanding. Marathon Street

collected a 90-day, 12% interest, $4,000 note receivable charging $20 for the service. Accrued interest of $120 on the note

has also been collected. The bank charges a monthly account fee of $35. The end-of-month balance per the company

books is $11,127.

Required

1. Complete a bank reconciliation for Flank Industries at October 31, 2017.

2. Identify any necessary adjustments to the accounting records identified in the reconciliation.

2. Adjustments needed in the accounting records are for the bank service charge (expense), collecting the cash for the note

Chapter 6

Page 75

196. At Jungle Industries, all sales are on account. Domenic Marconi is responsible for mailing invoices to customers,

recording the amount billed, opening mail, recording the payment, and making deposits to the bank. The customers know

Domenic and sometimes send personal notes with their payments. Another clerk handles all aspects of accounts payable.

Domenic’s brother, who is president of Jungle Industries, has hired an accountant to help with expansion.

Required

1. List some problems with the current accounts receivable system.

2. What suggestions would you make to improve internal control?

3. How would you explain to Domenic that he personally is not the problem?

ANSWER: 1. Unfortunately, Jungle Industries suffers from a lack of segregation of duties. Domenic handles all tasks

Essay

197. What rational is used in order to determine if an amount is “cash”?

Chapter 6

Page 76

198. What is meant by “cash equivalents”?

199. Why are adjustments often necessary after the reconciliation of a bank account?

200. Why is cash management necessary?

Chapter 6

Page 77

201. Explain how a company can control small payments that must be made in cash rather than by check.

202. Your friend, Mike, has just started a business and comes to you with a question. “I’m confused. I have a memo

included with my bank statement indicating a $55 service charge for printing new checks. Since you’re an accounting

major, maybe you can explain to me why they call it a ‘debit memorandum,’ even though they are deducting this amount

from my account. When I took Accounting in school, I could have sworn that a decrease in the Cash account would be a

credit and not a debit.”

Required

In a short paragraph, explain this issue to your friend.

203. What is the typical composition of a board of directors of a publicly held corporation?

204. Section 404 of the Sarbanes-Oxley Act requires corporations to include an internal control report in their annual

report. Describe, in general, the main elements that should be included in an internal control report.

Chapter 6

Page 79

206. An effective system of internal control is critical to protecting a company’s investment in three of its major assets:

cash, accounts receivable, and inventory. For each asset, describe how a company might protect that asset.

207. What are at least four important internal control procedures?

ANSWER: Student answers may vary but can include:

1. Proper authorizations

Chapter 6

Page 80

208. The garden club is planning a raffle. The president overheard you talking about internal controls to another member

and asked you to set up some guidelines to “make sure” that all money collected for the upcoming raffle is accounted for

by the club.

Required

1. In general, describe some guidelines that the club should follow to achieve an acceptable level of internal control.

2. Regarding the president’s request, is it really possible to make sure that all money is collected and recorded?

ANSWER:

1. Students answers will vary but may include:

2. It may be difficult, if not impossible, to be completely make sure that this happens, due to human errors in counting and

209. McDonald’s Corporation is the largest food service organization in the world. The proper handling of cash and food

is important to the profitability of McDonald’s. Based on your personal knowledge of McDonald’s and the internal control

concepts and procedures described in the textbook, answer the following questions.

Describe procedures that you believe McDonald’s may use to control cash receipts.

Chapter 6

Page 81

210. McDonald’s Corporation is the largest food service organization in the world. The proper handling of cash and food

is important to the profitability of McDonald’s. Based on your personal knowledge of McDonald’s and the internal control

concepts and procedures described in the textbook, answer the following questions.

Describe procedures that you believe McDonald’s may use to control the purchase and payment of food products.

Chapter 6

Page 82

211. Herbert and Evita are planning to open a quick copy center near the local college. They will make both cash and

credit sales. They will hire college students to make copies and to operate the cash register. Either Herbert or Evita will

act as manager during most hours that the business will be open. One student will be designated as assistant manager

when they cannot be present.

Required

Describe procedures that Herbert and Evita might use to provide adequate internal control over cash and credit sales and

bank deposits.

Chapter 6

Page 83

212. Jack’s Jungle Fun, Inc. is a manufacturer of children’s outdoor play equipment. The factory foreman determines

when orders for materials are necessary. The orders are sent to the purchasing department that places orders with the

vendors recommended by the factory foreman. When the materials are received, they are delivered directly to a central

storeroom without counting what has been received. When invoices are received for the materials purchased, they are sent

to the accounting department for payment. The accounting department compares the invoices with purchase orders. If the

two documents are in agreement, the invoice is approved for payment. The accounting department prepares the checks

that are signed by the company treasurer.

Required

Recommend improvements in the company’s procedures for purchasing and paying for purchases of materials that will

provide better internal control over purchases and payment for those purchases.