Chapter 6: Cash and Internal Control
172. Sarcon Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement
for October, 2014, indicated the following:
Balance, October 31, 2014 $7,920
Service charge for October 20
Interest earned during October 30
NSF check from Grey Corp. (deposited by Sarcon) 32
Note ($1,000) and interest ($40) collected for Sarcon from a customer 1,040
An analysis of canceled checks and deposits and the records of Sarcon revealed the following items:
Checking account balance per Sarcon books
$7,170
Outstanding checks as of October 31
952
Deposit in transit at October 31
1,310
Error in recording a check issued by Sarcon. (Correct amount of
the check is $450, but was recorded as a cash disbursement of
$540. The check was issued to pay for merchandise purchases.)
90
REQUIRED:
Prepare a bank reconciliation at October 31, 2014 in proper form.
Balance per bank statement, October 31
Add: deposit in transit
Less: outstanding checks
Adjusted balance, October 31
Balance per books, October 31
Add: note ($1,000) and interest ($40) collected by the bank
Less: service charges
Correction of error-check for $450 recorded as $540
Chapter 6: Cash and Internal Control
173. Sarcon Corp. prepares monthly bank reconciliations of its checking account balance.
REQUIRED:
(1) Explain how checking accounts, bank statements, and bank reconciliations are used by Sarcon to control
its cash.
(2) Explain how Sarcon can control small payments that must be made in cash rather than by check.
Chapter 6: Cash and Internal Control
174. On January 2, 2014, Viva Stores decided to set up a petty cash fund. The treasurer established the fund by writing
and cashing a $250 check and placing the coin and currency in a locked petty cash drawer. Conrad Boswell was
designated as the custodian for the fund. During January, the following receipts were given to Boswell in
exchange for cash from the fund:
Express Delivery Service
$74.50
Vintage Print Shoppe (employee party)
55.75
U.S. Post Office (stamps)
44.00
Office Supplies Pronto (pencils, paper)
23.00
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:
Prepare the necessary journal entries, with explanations, for January. Assume that all stamps and office supplies
were used during the month.
Chapter 6: Cash and Internal Control
175. On April 1, Blake Sales decides to establish a $275.00 Petty Cash Account to relieve the burden on Accounting.
(a) Journalize this event.
(b) On August 15th, the petty cash fund has receipts for mail and postage of $124.75, contributions and donations of
$53.25, meals and entertainment of $63.85 and $32.75 in cash. Journalize the replenishment of the fund.
(c) On August 16th, Blake Sales decides to increase petty cash to $400.00. Journalize this event.
Chapter 6: Cash and Internal Control
176. 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. No interest
has been accrued on the note. The bank charges a monthly account fee of $35. The end of month balance per
company books is $11,127.
REQUIRED:
Complete a bank/account reconciliation and write any necessary journal entries for the reconciliation.
Chapter 6: Cash and Internal Control
177. At Forrest Industries, all sales are on account. Sienna Marcos is responsible for mailing invoices to customers,
recording the amount billed, opening mail, recording the payment, and making deposits to the bank. Sienna is very
devoted to the family business and never takes off more than one or two days for a long weekend. The
customers know Sienna and sometimes send personal notes with their payments. Another clerk handles all
aspects of accounts payable. Sienna’s brother, who is president of Forrest 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 Sienna that she personally is not the problem?
178. What rational is used in order to determine if an amount is “cash”?
179. What is meant by “cash equivalents“?
180. Why are adjustments often necessary after the reconciliation of a bank account?
181. Why is cash management necessary?
Chapter 6: Cash and Internal Control
182. Explain how a company can control small payments that must be made in cash rather than by check.
183. Your uncle 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 $45 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 uncle.
184. What is the typical composition of a board of directors of a publicly held corporation?
185. 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.
REQUIRED:
Most corporations, including McDonald’s, include a Report of Management in their annual report. Describe, in
general, the main elements that should be included in a Report of Management and give the purpose of this
report.
Chapter 6: Cash and Internal Control
186. What are some of the limitations on a company’s effective system of internal control?
187. 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.
188. What are at least four important internal control procedures?
189. 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?
misdirect cash, these controls can be circumvented.
Chapter 6: Cash and Internal Control
190. 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.
REQUIRED:
Describe procedures that you believe McDonald’s may use to control cash receipts.
191. 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.
REQUIRED:
Describe procedures that you believe McDonald’s may use to control the purchase and payment of food
products.
Chapter 6: Cash and Internal Control
192. 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.
Describe procedures that Herbert and Evita might use to provide adequate internal control over cash and credit
sales and bank deposits.
Chapter 6: Cash and Internal Control
193. 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.
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.
Latahmer Corporation is reconciling its May bank account. For each item listed, state how it would be
handled on the bank reconciliation.
a. Addition to bank balance
b. Subtraction from bank balance
c. Addition to book balance
d. Subtraction from book balance
e. Would not appear on the May reconciliation
194. Check written on the company’s account and paid by the bank is returned with the bank statement
195. Check written in May that does not appear on the bank statement
196. Service charge on the May bank statement for new checks
197. Interest earned on the checking account for May
198. Customer’s NSF check is returned with the bank statement
Chapter 6: Cash and Internal Control
199. Customer’s check which was deposited on May 31 is not listed on the bank statement
Match the term with the statement that best defines it.
a. Accounting controls
b. Accounting system
c. Administrative controls
d. Audit committee
e. Board of directors
200. Provides direct contact between the shareholders and the independent auditing firm.
201. Consists of all methods and records used to accurately report an entity’s transactions.
202. Controls that are focused more on efficient operation than with correct reporting of information.
203. Procedures concerned with safeguarding the assets or the reliability of financial statements.
Match the action with the category of internal control procedures
a. One department should check on another
b. Internal audit staff ensure all is working as intended
c. Accounting and cash collection is properly separated
d. Blank checks are locked at all times when not in use
e. Origination of initial entry into accounting system
f. Specific authority is given by management for the performance of activities.
204. Proper authorization
205. Segregation of duties
206. Independent verification
207. Safeguarding assets
208. Design and use of business documents
Chapter 6: Cash and Internal Control
209. The key to the classification of an amount as cash is that it be readily available to pay debts.
a. True
b. False
210. Given the following items, what amount should be reported on the balance sheet as Cash and
cash equivalents?
Cashier’s Check
$ 5,000
Certificate of deposit (due in 9 months)
12,000
Checking account
5,500
Coins and currency on hand
1,225
IOU from Employee
565
Money Market Account
15,000
Postage Stamps
375
Savings Account
22,000
Undeposited customer checks
1,750
211. 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
Match the following terms with the best definitions for questions 212 through 219.
a. Purchase requisition.
b. Receiving Report.
c. Vendor Invoice.
d. Check.
e. Control procedures.
f. Inventory count.
g. Segregation of duties.
h. Source document control.
212. The practice of not combining physical custody of assets with the function of accounting for those assets.
213. Used to prepare a purchase order.
214. Form sent by the seller to the buyer as evidence of a sale
215. Actions that company personnel take to make sure that policies set forth by management are followed.
Chapter 6: Cash and Internal Control
216. An example of independent verification.
217. An example of design and use of business documents control.
218. Typically sent along with a remittance advice.
219. A form used for verification that the items originally requested have been received.
For the following items Questions 220–227, indicate whether each should be (a) included or (b) excluded from the
line item titled Cash and cash equivalents on the balance sheet.
a. Included b. Excluded
220. Certified check
221. Corporate bonds maturing in 30 days
222. Petty cash
223. Shares of GM stock
224. Savings account
225. Certificate of deposit maturing in six months
226. Checking account
227. Certificate of deposit maturing in 60 days