Chapter 4—Internal Control and Cash Key
1. Petty Cash is NOT considered to be a cash equivalent.
2. The key to being classified as a cash equivalent is that the amount must be available to pay debts within a
year’s time or less.
3. Cash equivalents typically appear in the long-term investments section of a balance sheet.
4. Money market accounts with original maturities of less than 90 days are cash equivalents.
5. A check written by a company but not yet presented to the bank for payment is called a check in transit.
6. When reconciling a bank account, the company has to prepare an adjusting entry for outstanding checks.
7. When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.
8. In a sound system of internal control, cash receipts should be deposited daily.
9. Collections of accounts receivable are considered to be cash equivalents.
10. A debit memo may be issued in the monthly bank statement in order for the bank to notify a company that a
service charge has been assessed on the company’s account.
11. On a bank reconciliation, outstanding checks are added to the cash balance per the bank statement.
12. When a bank pays interest on a company’s checking account balance, the bank will likely issue a credit
memo.
13. When a bank collects a note on behalf of a company, the bank is likely to issue a debit memo.
14. On a bank reconciliation, bank service charges for the month are added to the cash balance per the company
records.
15. On a bank reconciliation, interest earned for the month is added to the cash balance per the company
records.
16. As a result of the bank reconciliation process, a company will prepare an adjusting entry for a debit memo
but not for a credit memo.
17. The establishment of a petty cash fund has no effect on the company’s total cash balance.
18. No special internal control procedures are necessary with a petty cash fund because the amount is so small.
19. The stronger the system of internal control, the higher the accuracy of the company’s accounting records and
financial reports.
20. An accounting system must be computerized in order to ensure the company has proper internal control.
21. If a company has an internal audit function, it does not need to have external auditors.
22. Internal control over financial reporting is concerned with ensuring the reliability of the financial
statements.
23. A company’s internal control system must be designed and maintained by its external auditors.
24. The sole purpose for creating an internal control system is to deter embezzlement.
25. 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 of assets and records.
26. If a company hires honest employees and its top management acts with integrity, no internal control
procedures will be necessary.
27. As part of a sound system of internal controls, all disbursements (with the exception of petty cash) should be
made by check.
28. If the bank credits a customer’s account, then that customer’s cash account balance increases.
29. If the bank debits its customer’s checking account, then the customer’s cash balance increases.
30. The accountant must make journal entries for all items in the bank section of the bank reconciliation.
31. The accountant must make journal entries for all items in the book section of the bank reconciliation.
32. The best response to an employee caught stealing from the company is to say, “Don’t ever let me catch you
doing that again!”
33. ____________________ are those investments and deposits with financial institutions that are readily
convertible into known amounts of cash and that have original maturities of three months or less.
34. A(n) ____________________ is the process used by an accountant to ensure consistency between the
balance shown on the bank statement for a particular account and the balance shown on the accounting records.
35. A check written by a company but not yet presented to the bank for payment is called a(n)
____________________.
36. Items that are included on a bank statement and increase the bank account balance are called
____________________.
37. A check that “bounced” or was returned by the bank due to lack of funds is called a(n)
____________________.
38. An amount recorded as an increase in the company’s cash account at the end of the period, but which has
not yet been reflected on the bank statement is called a(n) ____________________.
39. Items that are included on a bank statement and decrease the bank account balance are called
____________________.
40. If a company records a $450 receipt as $540, this type of mistake is called a(n) ____________________.
41. Under the ____________________ Act, management of publicly-traded corporations has increased
responsibility for a system of internal controls that ensures reliability of financial statements.
42. The foundation of the internal control system is the control _____________ – the collection of
environmental factors that influence the effectiveness of control procedures.
43. Strategic risk assessment is designed to identify, analyze, and manage possible threats to the organization’s
success concerning ____________________ forces such as competitors, customers, suppliers, and PEST
factors.
44. Business process risk assessment is designed to identify, analyze, and manage possible threats to the
organization’s success concerning ____________________ forces such as resource allocations.
45. An internal control activity that separates responsibilities so that no one person handles all the tasks for a
particular activity is referred to as ____________________.
46. When there is proper segregation of duties, the likelihood of fraud is reduced so that an employee
attempting to carry out a fraudulent scheme would have to work in ____________________ with another
employee.
47. Whenever feasible, cash handling activities and cash record-keeping activities should be assigned to
different employees, according to the internal control activity called ____________________.
48. The account used to record the discrepancies that will occasionally occur between the amounts deposited
and amounts shown on cash register tapes is called ____________________.
49. A cost-cutting measure used in many business organization is the use of a(n) ____________________ fund,
whereby a custodian handles disbursements and documentation for small expenditures.
50. The elapsed time between the purchase of goods for resale and the collection of cash from customers is
referred to as the ____________________ cycle.
51. The practices of delaying payments to suppliers, speeding up collection from customers, and earning the
greatest possible return on any excess cash are known as ____________________ principles.
52. Choose the proper category of internal control activities that best matches the following actions. Each
action should be matched with a different numbered item within the internal controls list.
1. Adequate documents and
Specific approval is given by management for
2. Clearly defined authority
Accounting and cash collections should be
Initial entry into the accounting system should
be from a consistent source with complete
4. Safeguards over assets
Blank checks should be stored in a locked
5. Checks on recorded
One employee or department should verify the
53. Match the following terms with their correct definition.
1. A bank reconciling item that must be subtracted from
2. The process of ensuring that the company’s
accounting records are consistent with the bank’s
3. A bank reconciling item that must be subtracted from
the unadjusted book balance when preparing a bank
4. Fees charged by the bank for checking accounting
5. An amount received and recorded by the business but
54. Match the following terms with their correct definitions.
1. Consists of the methods and records used to identify,
measure, record, and communicate financial information
Control
the effectiveness of control procedures
7
2. The collection of environmental factors that influence
financial statements are as accurate as possible
2
3. Policies and procedures established by top management
to help ensure that the company’s accounting system and
Control
resources to meet its objectives
6
4. Risks associated with how the company allocates its
Segregation of
5. Collective term for procedures put into place to ensure
that employees operate within the scope of their assigned
responsibilities and act for the good of the business
Business process
risks
4
used to conceal intentional misstatements, theft, or fraud
8
6. Action that reduces the likelihood that records could be
accomplishing its goals
1
7. Possible external threats to the organization’s success in
Accounting
8. Providing physical protection of the company’s assets
5
Internal control
55. Match the following terms with their correct definition.
and the collection of cash from customers
1
1. The elapsed time between the purchase of goods for resale
Operating
cash records and the actual amount of cash received
2
2. An account used to record any discrepancies between the
Cash over
expense of paying by check
4
3. A fund used to pay for small amounts to avoid the time and
Cash
original maturities of less than 90 days
3
4. Amounts on deposit with financial institutions and
investments primarily held in money market accounts, with
56. Which of the assets listed below is considered the most liquid?
57. Which of the following is not included in Cash and Cash Equivalents on a company’s balance sheet?
3
58. Which of the following is not considered to be a Cash Equivalent?
59. How are cash equivalents reported or disclosed in the financial statements?
60. Which one of the following would never be considered a cash equivalent?
61. Each of the following items is considered a cash equivalent except:
62. Effective cash management and control for a company’s operating cycle includes all of the following
except:
63. Checks presented for payment and paid by the bank are known as
64. Cash collected and recorded by a company but not yet reflected in a bank statement are known as
65. Which one of the following statements is true?
66. Each of the following represents an effective cash management practice except:
67. A check returned by a bank because the issuer’s cash account balance could not cover the check is called
a(n)
68. Which of the following would not appear on a bank statement for a checking account?
69. Which of the following procedures is not part of the preparation of a bank reconciliation for a checking
account?
70. Which of the following items would not be a reconciling item on a bank reconciliation?
71. Which of the following items would be added to the company’s cash balance on a bank reconciliation?
72. While preparing a bank reconciliation, which of the following items would be added to the bank statement
balance?
73. While preparing a bank reconciliation, which of the following items would be subtracted from the balance
per the bank statement?
74. While preparing a bank reconciliation, which of the following items would be subtracted from the balance
per the company records?
75. Which of the following statements best describes the term “outstanding check” from a company’s point of
view?
76. While preparing the February 28th bank reconciliation, the accountant identified the following items:
Company’s balance according to the general ledger
$23,100
Outstanding checks
550
Interest earned on the checking account
100
A customer’s NSF check returned by the bank
1,000
In the process of preparing the reconciliation, the accountant discovered an error in recording a customer’s check; the amount was incorrectly
recorded on the books as a cash receipt of $600, while the bank correctly recorded the amount as $650. What is the company’s adjusted cash balance
on February 28th?
77. While preparing the April 30th bank reconciliation, the accountant identified the following items:
Company’s balance according to the general ledger
$15,000
Outstanding checks
2,500
Bank service charge
15
A customer’s NSF check returned by the bank
100
What is the company’s adjusted cash balance at April 30th?
78. Dance Town Academy
The items listed below were identified while preparing a bank reconciliation for the company’s checking
account as of March 31, 2013.
Cash balance according to the general ledger
?
Bank statement balance
$18,500
Outstanding checks
2,700
Customer’s bounced check
350
Bank service charges
100
Deposits in transit
1,000
Interest earned on the checking account
60
Refer to Dance Town Academy. How will the deposits in transit be handled on a bank reconciliation?
79. Dance Town Academy
The items listed below were identified while preparing a bank reconciliation for the company’s checking
account as of March 31, 2013.
Cash balance according to the general ledger
?
Bank statement balance
$18,500
Outstanding checks
2,700
Customer’s bounced check
350
Bank service charges
100
Deposits in transit
1,000
Interest earned on the checking account
60
Refer to Dance Town Academy. How will the customer’s bounced checks be handled on a bank reconciliation?
80. Dance Town Academy
The items listed below were identified while preparing a bank reconciliation for the company’s checking
account as of March 31, 2013.
Cash balance according to the general ledger
?
Bank statement balance
$18,500
Outstanding checks
2,700
Customer’s bounced check
350
Bank service charges
100
Deposits in transit
1,000
Interest earned on the checking account
60
Refer to Dance Town Academy. How will the interest earned on the checking account be handled on a bank reconciliation?
81. Dance Town Academy
The items listed below were identified while preparing a bank reconciliation for the company’s checking
account as of March 31, 2013.
Cash balance according to the general ledger
?
Bank statement balance
$18,500
Outstanding checks
2,700
Customer’s bounced check
350
Bank service charges
100
Deposits in transit
1,000
Interest earned on the checking account
60
Refer to Dance Town Academy. How will the outstanding checks be handled on a bank reconciliation?
82. Dance Town Academy
The items listed below were identified while preparing a bank reconciliation for the company’s checking
account as of March 31, 2013.
Cash balance according to the general ledger
?
Bank statement balance
$18,500
Outstanding checks
2,700
Customer’s bounced check
350
Bank service charges
100
Deposits in transit
1,000
Interest earned on the checking account
60
Refer to Dance Town Academy. How will the bank services charges be handled on a bank reconciliation?
83. Dance Town Academy
The items listed below were identified while preparing a bank reconciliation for the company’s checking
account as of March 31, 2013.
Cash balance according to the general ledger
?
Bank statement balance
$18,500
Outstanding checks
2,700
Customer’s bounced check
350
Bank service charges
100
Deposits in transit
1,000
Interest earned on the checking account
60
Refer to Dance Town Academy. Determine the amount of the company’s adjusted cash balance.
84. Dance Town Academy
The items listed below were identified while preparing a bank reconciliation for the company’s checking
account as of March 31, 2013.
Cash balance according to the general ledger
?
Bank statement balance
$18,500
Outstanding checks
2,700
Customer’s bounced check
350
Bank service charges
100
Deposits in transit
1,000
Interest earned on the checking account
60
Refer to Dance Town Academy. Determine the company’s cash balance before adjustment.
85. While reconciling the checking account, the accountant noticed that an error had been made in recording a
check received by the company. The bookkeeper had recorded the receipt as $729 but the correct amount of the
check was $279. Which of the following reconciling adjustments is necessary?
86. A debit memo appeared on the May bank statement. How should this amount be treated on the May bank
reconciliation?
87. A credit memo appeared on the September bank statement. How should this amount be treated on the
September bank reconciliation?
88. Which of the following is an example of a debit memo?
89. Which of the following is an example of a credit memo?
90. Which of the following procedures is incorrect for establishing and maintaining a petty cash fund?
91. Which of the following statements is true regarding a credit memo and its relationship to a company’s bank
reconciliation procedures?
92. Which of the following statements is false regarding a credit memo and its relationship to a company’s bank
reconciliation procedures?
93. If a company erroneously records a $500 deposit as $50 in its records, which of the following must occur
when reconciling its bank statement?
94. If a company erroneously records a $50 check received from a customer as $500 in its records, which of the
following must occur when reconciling its bank statement?
95. A company’s unadjusted bank balance is $3,000. Outstanding checks amount to $500 and deposits in transit
total $300. Based on this information alone, what is the company’s adjusted cash balance for the purpose of
preparing a bank reconciliation?
96. A Day Spa accepted a check from a customer as payment for services. Unfortunately, the customer’s check
bounced. The journal entry required on the company’s books as a result of this bank reconciliation item will:
97. If the balance on the bank statement does not equal the balance per the company’s records, then it can be
assumed that:
98. Which of the following is a reconciling item on the bank side of a bank reconciliation?
99. In the reconciliation of a bank statement, deposits in transit should be:
100. A treasurer preparing the October bank reconciliation identified the following items:
Cash balance per the company’s records
$32,800
Deposits in transit
4,300
Outstanding checks
2,200
Interest earned on the checking account
100
NSF check from customer
400
What is the company’s adjusted cash balance at October 31?
101. On June 30, a company had $1,924 in its cash account according to its general ledger. This included a
deposit of $174 that was in transit on June 30th. The June 30th bank statement contained the following
information:
Bank statement balance
$2,178
Bank service charge
14
Collection of notes receivable
136
NSF check
32
Assuming outstanding checks of $338, what is the company’s adjusted cash balance at June 30th?
102. The accountant preparing the January bank reconciliation identified the following items:
Cash balance per company records
$35,900
Outstanding checks
12,050
Interest earned on the checking account
75
Customer’s NSF check returned by the bank
325
There was also an error in the accounting records whereby a customer’s check for $101 was recorded as $110. What is the company’s adjusted cash
balance at January 31st?
103. In anticipation of preparing the July bank reconciliation, the accountant gathered the following
information:
Bank statement balance
$4,300
Deposit in transit
500
Outstanding checks
300
Bank service charges
10
Customer’s NSF check returned by the bank
50
What is the company’s adjusted cash balance at July 31st?
104. Delco Construction
The following items relate to the company’s March bank reconciliation:
Bank statement balance
$29,600
Unadjusted cash balance according to company records
?
Deposit in transit
2,200
Outstanding checks
3,100
Bank service charges
200
Interest earned on the bank account
100
Customer’s NSF check returned by the bank
300
Refer to the information provided for Delco Construction. What is the company’s adjusted cash balance at March 31st?