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Indicate whether the statement is true or false.
1. Money orders are considered cash.
a. True
b. False
2. A voucher is the notification accompanying the check issued to a creditor that indicates the specific invoice being paid.
a. True
b. False
3. In preparing a bank reconciliation, the amount indicated by a credit memorandum for a note receivable collected by the
bank is added to the cash balance per books.
a. True
b. False
4. The amount of the “adjusted balance” appearing on a bank reconciliation as of a given date is the amount that is shown
on the balance sheet for that date after all adjusting entries have been entered.
a. True
b. False
5. A voucher is a form where pertinent data about a liability and the particulars of its payment are recorded.
a. True
b. False
6. A debit memorandum from the bank indicates that the bank has deducted an amount from the depositor’s account.
a. True
b. False
7. Information and communication are essential elements of an organization’s internal control.
a. True
b. False
8. Minimum cash balance maintained in the bank account is called line of credit.
a. True
b. False
9. A bank reconciliation is an important part of the system of internal controls.
a. True
b. False
10. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank service charges is added to
the cash balance per books.
a. True
b. False
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11. In a computerized system, paid vouchers are transferred to a paid voucher file.
a. True
b. False
12. The Sarbanes-Oxley Act of 2002 requires companies to maintain strong and effective internal controls over recording
transactions and preparing financial statements.
a. True
b. False
13. For a strong internal control system over cash, it is important to have the duties related to cash receipts and cash
payments divided among different employees.
a. True
b. False
14. The data needed to adjust a depositor’s books are shown in the “adjustments to the depositor’s records” section of a
bank reconciliation.
a. True
b. False
15. The Sarbanes-Oxley Act requires companies and their independent accountants to report on the effectiveness of the
company’s internal controls.
a. True
b. False
16. Adding a review of operations by an internal audit staff weakens internal control.
a. True
b. False
17. In preparing a bank reconciliation, the amount of a canceled check omitted from the depositor’s records is deducted
from the cash balance per books.
a. True
b. False
18. The internal control environment is enhanced by the hiring and retention of competent, honest employees.
a. True
b. False
19. Employee fraud is the intentional act of deceiving an employer for personal gain.
a. True
b. False
20. The bank informs the depositor of bank service charges by including a credit memorandum with a monthly bank
statement.
a. True
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b. False
21. If a business has several bank accounts, it will have a separate record for each of them.
a. True
b. False
22. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank service charges is deducted
from the cash balance per bank.
a. True
b. False
23. All organizations face risks, and the assessment of these risks is necessary so that the objectives of internal control can
be achieved.
a. True
b. False
24. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the cash balance per bank.
a. True
b. False
25. There are only two internal control objectives: to ensure accurate financial reports and to ensure compliance with
applicable laws.
a. True
b. False
26. In preparing a bank reconciliation, the amount of outstanding checks is deducted from the cash balance per books.
a. True
b. False
27. Internal control is enhanced by combining the control of a transaction with the record-keeping function.
a. True
b. False
28. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the cash balance per books.
a. True
b. False
29. Bank customers are considered owners of the bank, so the bank shows their accounts as an asset on the bank’s records.
a. True
b. False
30. A voucher is a written authorization to make a cash payment.
a. True
b. False
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31. A check for $456 was erroneously charged by the bank as $654. In order for the bank reconciliation to balance, $198
must be subtracted from the bank statement balance.
a. True
b. False
32. A credit memorandum received with a bank statement means the company’s bank account has been increased.
a. True
b. False
33. A remittance advice is the notification accompanying the check issued to a creditor that states the specific invoice
being paid.
a. True
b. False
34. The bank section begins with the cash balance according to the bank statement and ends with the adjusted balance.
a. True
b. False
35. A business that requires all cash payments be made by check cannot use a petty cash system.
a. True
b. False
36. Depositing all cash, checks, etc. in a bank and paying with checks is an internal control procedure over cash.
a. True
b. False
37. The depositor reconciles the bank’s statement to the depositor’s records.
a. True
b. False
38. The bank reconciles its statement to the depositor’s records.
a. True
b. False
39. Separating the responsibilities for purchasing, receiving, and paying for equipment is an example of the control
procedure: separating operations, custody of assets, and accounting.
a. True
b. False
40. A voucher system is an example of an internal control procedure over cash receipts.
a. True
b. False
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41. The Sarbanes-Oxley Act of 2002 applies to all publicly held companies.
a. True
b. False
42. Money market funds, commercial paper, and U.S. Treasury Bills are examples of cash equivalents.
a. True
b. False
43. For efficiency of operations and better control over cash, a company should maintain only one bank account.
a. True
b. False
44. Outstanding checks are checks that have been issued but have not cleared by the bank.
a. True
b. False
45. A customer’s check received in settlement of an account receivable is considered cash.
a. True
b. False
46. All bank memorandums reported on the bank reconciliation require entries in the depositor’s accounts.
a. True
b. False
47. When the petty cash fund is replenished, the petty cash account is adjusted for the total of all expenditures made since
the fund was last replenished.
a. True
b. False
48. A voucher system is an example of an internal control procedure over cash payments.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
49. When a firm uses internal auditors, it is adhering to which of the following internal control elements?
a. Risk assessment
b. Control procedures
c. Monitoring
d. Information and communication
50. The purpose of the Sarbanes-Oxley Act of 2002 is to ____.
a. restore public confidence and trust in the financial statements of publicly held companies
b. require all companies to prepare financial statements
c. protect companies from demands of investors, stockholders, and creditors
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d. do all of these
51. Internal control consist of policies and procedures that _____.
a. involve cost-benefit considerations
b. deal with human element of controls such as, fatigue, carelessness, etc.
c. ensure public relations
d. ensure the accuracy of business information
52. The Sarbanes-Oxley Act of 2002 requires companies and their independent accountants to ____.
a. report on the effectiveness of the company’s internal controls
b. report on any fraud and theft detected in the company
c. report on the state of the economy and likelihood of fraud
d. report on the financial activities of the company
53. Separating the custody of assets from accounting for assets is a part of which element of internal control?
a. Information and communication
b. Monitoring
c. Control environment
d. Control procedures
54. A canceled check for $1,900 was erroneously recorded by the bank as $9,100. How is the error adjusted in a bank
reconciliation?
a. The amount is deducted from the cash balance in the bank section of the reconciliation.
b. The amount is deducted from the cash balance in the company section of the reconciliation.
c. The amount is added to the cash balance in the bank section of the reconciliation.
d. The amount is added to the cash balance in the company section of the reconciliation.
55. MMC Inc. recorded the receipt from cash sales of $2,600 as $6,200. This error is adjusted on the bank reconciliation
as a(n) ____.
a. $2,600 addition to the cash balance per books
b. $8,800 addition to the cash balance per bank
c. $6,200 deduction from the cash balance per bank
d. $3,600 deduction from the cash balance per books
56. Which of the following warning signs could mean receipts are being pocketed before being deposited?
a. Missing documents or gaps in transaction numbers
b. An unusual increase in customer refunds
c. A sudden increase in cash payments
d. A difference between daily bank and cash balance
57. The ratio of cash to monthly cash expenses is computed as _____.
a. monthly cash expenses divided by cash
b. current assets divided by monthly cash expenses
c. cash divided by cash equivalents
d. cash and cash equivalents divided by monthly cash expenses
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58. Accompanying the bank statement was a debit memorandum for an NSF check received from a customer. This item
would require an adjusting entry including a ____.
a. debit to Accounts Receivable
b. debit to Cash
c. debit to Accounts Payable
d. credit to Accounts Payable
59. On the bank’s accounting records, customers’ accounts are normally shown as a(n) ____.
a. revenue
b. liability
c. asset
d. expenses
60. When preparing a bank reconciliation statement, outstanding checks would ____.
a. increase the cash balance according to the bank statement
b. deduct the cash balance according to the bank statement
c. increase the cash balance according to the company statement
d. deduct the cash balance according to the company statement
61. WFC Co.’s petty cash receipts indicate the following expenditures for the end of October:
Office supplies $500
Miscellaneous selling expense $350
Miscellaneous administrative expense $160
As a result of these transactions, WFC Co.’s stockholders’ equity ____.
a. remains unchanged
b. increases by $500
c. decreases by $1,010
d. decreases by $510
62. Which of the following is true of EFT?
a. It cost more than receiving cash payments through the mail.
b. It can process certain cash transactions at less cost than by using the mail.
c. It is easy to document purchase and sale transactions.
d. It means Effective Funds Transfer.
63. The highly liquid investments that a company may invest in when they temporarily have excess cash are called _____.
a. cash equivalents
b. bank overdrafts
c. cash short and over
d. vouchers
64. If a company’s net cash flows from operating activities is $1,500,000 for a year and its end of the year cash and cash
equivalents balance is $750,000, determine the company’s ratio of cash to monthly cash expenses.
a. 6:1
b. 2:1
c. 5:1
d. 9 :1
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65. Accompanying the bank statement was a credit memorandum for a short-term note collected by the bank for the
depositor. This item would be included on the bank reconciliation as a(n) ____.
a. deduction from the cash balance per books
b. addition to the cash balance per bank
c. deduction from the cash balance per bank
d. addition to the cash balance per books
66. Which of the following elements of internal control includes maintaining records of employees documenting their
compensation and promotion?
a. Risk assessment
b. Control environment
c. Monitoring
d. Control procedures
67. What adjustment is required in the depositor’s accounts to record outstanding checks?
a. None
b. Increase Cash; decrease Accounts Receivable
c. Increase Cash; increase Accounts Payable
d. Increase Accounts Receivable; decrease Cash
68. The following data is given for DGR Company:
Net cash flows from operating activities $6,000,000
Cash and cash equivalents at end of year $2,700,000
DGR Company’s ratio of cash to monthly cash expenses is ____.
a. 4.5 months
b. 5.4 months
c. 8.1 months
d. 3.2 months
69. Which element of internal control observes employees’ behavior and the accounting system for indicators of control
problems?
a. Control environment
b. Risk assessment
c. Control procedures
d. Monitoring
70. Day Time Company records the receipts from cash sales of $41,200 as $12,400. What adjustment is required in the
bank’s accounts?
a. No adjustment needed
b. Increase Sales; decrease Cash
c. Increase Cash; decrease Sales
d. Increase Cash; decrease Accounts Receivable
71. A bank issues credit memos for ____.
a. payments made by electronic funds transfer
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b. interest earned on the company’s account
c. service charges
d. customer checks returned for not sufficient funds
72. The framework that has become widely accepted as the standard by which companies design, analyze, and evaluate
internal controls is the ____.
a. Internal Control–Integrated Framework by the Committee of Sponsoring Organizations
b. Internal Control–Integrated Framework by the Congress of Special Offerings
c. Internal Control Localized Structure by the Committee of Sponsoring Organizations
d. Internal Control Localized Structure by the Congress of Special Offerings
73. Internal controls are important because they ____.
a. deter fraud and prevent misleading financial statements
b. eliminate fraud
c. ensure that the company maintains a compensating balance
d. guarantee accurate financial statements
74. Terri Co. established a petty cash fund of $2,300. What is the effect of this transaction?
a. Accounts payable increases
b. Retained earnings decreases
c. Cash decreases
d. Expenses increases
75. Which of the following scenarios reduces the risk of an employee fraud?
a. An accountant being responsible for approving payments to a vendor
b. The bank reconciliation being prepared by an accountant
c. A sales clerk having access to the cash register
d. Remittance advices being sent directly to the cashier
76. Which of the following of internal control deals with hiring, training, evaluation, compensation, and promotion of
employees?
a. Monitoring
b. Control environment
c. Risk assessment
d. Control procedures
77. ABC Co.’s petty cash receipts indicate the following expenditures for the end of October:
Office supplies $490
Miscellaneous selling expense $300
Miscellaneous administrative expense $120
What is the cumulative effect of these transactions on the statement of cash flows?
a. $420 decrease in financing activities
b. $490 increase in operating activities
c. $910 decrease in operating activities
d. No effect on the statement of cash flows
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78. A special cash fund used to make small payments that occur frequently is called a(n) ____.
a. operating expenses fund
b. change fund
c. market fund
d. petty cash fund
79. A bank reconciliation should be prepared periodically because ____.
a. the depositor’s records and the bank’s records are in agreement
b. the bank has not recorded all of its transactions
c. any differences between the depositor’s records and the bank’s records should be determined, and any errors made
by either party should be discovered and corrected.
d. the bank must make sure that its records are correct.
80. Accompanying the bank statement was a debit memorandum for an NSF check received from a customer. This item
would be included on the bank reconciliation as a(n) ____.
a. deduction from the cash balance per books
b. addition to the cash balance per bank
c. deduction from the cash balance per bank
d. addition to the cash balance per books
81. The ratio of cash to monthly cash expenses can be used to _____.
a. assess how long a company with positive cash flows from investing activities can continue to operate
b. assess how long a company with negative cash flows from operations can continue to operate
c. assess how long a company with negative cash flows from investing activities can continue to operate
d. assess how long a company with positive cash flows from financing activities can continue to operate
82. Which of the following is an element of the control environment?
a. Control procedures
b. Managements’ operating styles
c. Information and communication activities
d. Risk assessment plans
83. When a company reports negative net cash flows from operations _____.
a. ratio of equity to annual cash expenses helps in assessing the survival of the company
b. ratio of equity to monthly cash expenses helps in assessing the survival of the company
c. ratio of cash to monthly cash expenses helps in assessing the survival of the company
d. ratio of accounts payable to annual financing expenses helps in assessing the survival of the company
84. A check drawn by a depositor for $810 in payment of a liability was recorded by the depositor as $180. The $630
difference would be included on the bank reconciliation as a(n) ____.
a. addition to the cash balance per books
b. addition to the cash balance per bank
c. deduction from the cash balance per bank
d. deduction from the cash balance per books
85. A credit memorandum from the bank ____.
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a. decreases a bank customer’s account
b. is used to show a bank service charge
c. shows that a company has deposited a customer’s NSF check
d. shows the bank has collected a note receivable for the customer
86. Denominator in the ratio of cash to monthly cash expense is calculated as _____.
a. total revenues divided by 12
b. net cash flows from investing activities divided by 12
c. earnings before taxes divided by 12
d. net cash flows from operations divided by 12
87. _____, which constitutes as one of the most important elements of internal control, include separating responsibilities
for related operations.
a. Control procedures
b. Risk assessment activities
c. Risk monitoring procedures
d. Information and communication activities
88. Zorro Inc. has the following cash register data for December 31:
Cash register total for cash sales $23,500
Cash receipts from cash sales $23,480
How should the difference be recorded?
a. $20 cash overage as miscellaneous operating expense
b. $20 cash overage as revenue
c. $20 cash shortage as normal operating expense
d. $20 cash shortage as other revenue
89. The amount of deposits in transit is included on the bank statement as a(n) ____.
a. deduction from the cash balance per books
b. deduction from the cash balance per bank
c. addition to the cash balance per bank
d. addition to the cash balance per books
90. XYZ Co.’s petty cash receipts indicate the following expenditures for the end of October:
Office supplies $490
Miscellaneous selling expense $300
Miscellaneous administrative expense $120
These transactions would result in a ____.
a. $910 increase in total assets
b. $490 decrease in stockholders’ equity
c. $420 decrease in total assets
d. $910 increase in stockholders’ equity
91. The bank statement of Jade Co. shows a balance of $4,555 as of December 31. The following reconciling items were
identified:
(i) Deposit not recorded on bank statement, $50
(ii) Total outstanding checks, $105