Chapter 7 4 Match The Items Below Entering The

Document Type
Test Prep
Book Title
Financial Accounting-- Binder Ready Version: Tools for Business Decision Making 8th Edition
Authors
Donald E. Kieso, Jerry J. Weygandt, Paul D. Kimmel
Fraud, Internal Control, and Cash
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Ex. 229
The cash records of Landis Company show the following four situations.
1. The June 30 bank reconciliation indicated that deposits in transit total $1,080. During July
the general ledger account Cash shows deposits of $24,820, but the bank statement indicates
that only $23,400 in deposits were received during the month.
2. The June 30 bank reconciliation also reported outstanding checks of $1,020. During the
month of July, Landis Company books show that $25,800 of checks were issued. The bank
statement showed that $24,600 of checks cleared the bank in July.
3. In September, deposits per the bank statement totaled $40,100, deposits per books were
$38,100, and deposits in transit at September 30 were $3,150.
4. In September, cash disbursements per books were $35,550, checks clearing the bank
were $37,500, and outstanding checks at September 30 were $2,150.
There were no bank debit or credit memoranda. No errors were made by either the bank or
Landis Company.
Instructions
Answer the following questions.
(a) In situation (1), what were the deposits in transit at July 31?
(b) In situation (2), what were the outstanding checks at July 31?
(c) In situation (3), what were the deposits in transit at August 31?
(d) In situation (4), what were the outstanding checks at August 31?
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
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Ex. 230
Lowe Inc.'s bank statement from Western Bank at August 31, 2017, gives the following
information.
Balance, August 1
$18,600
Bank debit memorandum:
August deposits
71,000
Safety deposit box fee
$ 25
Checks cleared in August
66,678
Service charge
30
Bank credit memorandum:
Balance, August 31
22,912
Interest earned
45
A summary of the Cash account in the ledger for August shows the following: balance, August 1,
$21,100, receipts $81,000; disbursements $73,570; and balance, August 31, $28,530. Analysis
reveals that the only reconciling items on the July 31 bank reconciliation were a deposit in transit
for $7,000 and outstanding checks of $4,500. In addition, you determine that there was an error
involving a company check drawn in August: A check for $400 to a creditor on account that
cleared the bank in August was journalized and posted for $40.
Fraud, Internal Control, and Cash
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Instructions
(a) Determine deposits in transit.
(b) Determine outstanding checks.
(c) Prepare a bank reconciliation at August 31.
Ex. 231
Holcomb Company expects to have a cash balance of $43,000 on January 1, 2017. These are
the relevant monthly budget data for the first two months of 2017.
1. Collections from customers: January $85,000, February $132,000
2. Payments to suppliers: January $40,000, February $50,000
3. Wages: January $34,000, February $40,000. Wages are paid in the month they are incurred.
4. Administrative expenses: January $24,000, February $31,000. These costs include
depreciation of $1,000 per month. All other costs are paid as incurred.
5. Selling expenses: January $15,000, February $20,000. These costs are exclusive of
depreciation. They are paid as incurred.
6. Sales of short-term investments in January are expected to realize $12,000 in cash.
Holcomb has a line of credit at a local bank that enables it to borrow up to $40,000. The
company wants to maintain a minimum monthly cash balance of $25,000.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
7-64
Ex. 231 (Cont.)
Instructions
Prepare a cash budget for January and February.
Ex. 232
Shatner Company has budgeted sales revenue as follows:
Budgeted Sales Revenues
January $55,000
February 80,000
March 90,000
April 65,000
May 50,000
June 15,000
Past experience has indicated that 80% of sales each month are on credit and that collection of
credit sales occurs as follows: 60% in the month of sale, 30% in the month following the sale, and
5% in the second month following the sale. The other 5% is uncollectible.
Instructions
Prepare a schedule which shows expected cash receipts from sales for the months of April, May,
and June.
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
7-66
Ex. 233
Palmer Company has budgeted sales revenues as follows:
June July August
Credit sales $35,000 $30,000 $28,000
Cash sales 18,000 51,000 39,000
Total sales $53,000 $81,000 $67,000
Past experience indicates that 60% of the credit sales will be collected in the month of sale and
the remaining 40% will be collected in the following month.
Purchases of inventory are all on credit and 50% is paid in the month of purchase and 50% in the
month following purchase. Budgeted inventory purchases are:
June $65,000
July 53,000
August 21,000
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
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Ex. 233 (Cont.)
Other budgeted cash disbursements: (a) selling and administrative expenses of $7,000 each
month, (b) dividends of $19,000 will be paid in July, and (c) purchase of a computer in August for
$6,000 cash.
The company wishes to maintain a minimum cash balance of $10,000 at the end of each month.
The company borrows money from the bank at 9% interest, if necessary, to maintain the
minimum cash balance. Borrowed money is repaid in months when there is an excess cash
balance. The beginning cash balance on July 1 was $10,000. Assume that borrowed money in
this case is for one month.
Instructions
Prepare a cash budget for the months of July and August. Prepare separate schedules for
expected collections from customers and expected payments for purchases of inventory.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
7-68
Ex. 234
The management of Morton Company estimates that credit sales for August, September,
October, and November will be $180,000, $200,000, $230,000, and $160,000, respectively.
Experience has shown that collections are made as follows:
In month of sale 25%
In first month after sale 60%
In second month after sale 10%
Instructions
Determine the collections from customers in October and November. Show all computations.
Ex. *235
On October 1, 2017, Finley Company establishes a petty cash fund by issuing a check for $200
to Sara Mead, the custodian of the petty cash fund. On October 31, 2017, Sara Mead submitted
the following paid petty cash vouchers for replenishment of the petty cash fund when there is $7
cash in the fund:
Freight-In $70
Supplies Expense 35
Entertainment of Clients 60
Postage Expense 23
Fraud, Internal Control, and Cash
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Ex. *235 (Cont.)
Instructions
Prepare the journal entries required to establish the petty cash fund on October 1 and the
replenishment of the fund on October 31.
Ex. *236
On September 1, 2017, Watkins Company establishes a petty cash fund by issuing a check for
$250 to Mike Martz, the custodian of the petty cash fund. On September 30, 2017, Mike Martz
submitted the following paid petty cash vouchers for replenishment of the petty cash fund when
there is $35 cash in the fund:
Freight-In $25
Supplies Expense 75
Entertainment of Clients 37
Postage Expense 80
Instructions
Prepare the journal entries required to establish the petty cash fund on September 1 and the
replenishment of the fund on September 30.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
7-70
Ex. *237
The petty cash fund of $200 for Tomkins Company appeared as follows on December 31, 2017
Cash $50.60
Petty cash vouchers
Freight-in $58.40
Postage 40.00
Balloons for a special occasion 20.00
Meals 25.00
Instructions
1. Briefly describe when the petty cash fund should be replenished. Because there is cash on
hand, is there a need to replenish the fund at year end on December 31? Explain.
2. Prepare the general journal entry to replenish the fund.
3. On December 31, the office manager gives instructions to increase the petty cash fund by
$50. Make the appropriate journal entry.
Ex. *238
During October, Guiding Light Company experiences the following transactions in establishing a
petty cash fund.
Oct. 1 A petty cash fund is established with a check for $150 issued to the petty cash
custodian.
31 A count of the petty cash fund disclosed the following items:
Currency $19.00
Coins 0.40
Expenditure receipts (vouchers):
Office supplies $28.10
Telephone, Internet, and fax 16.40
Postage 75.00
Freight-out 6.80
31 A check was written to reimburse the fund and increase the fund to $200.
Fraud, Internal Control, and Cash
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Ex. *238 (Cont.)
Instructions
Journalize the entries in October that pertain to the petty cash fund.
Cash ........................................................................ 50.00
COMPLETION STATEMENTS
239. Internal control consists of the related methods and measures adopted within a business
to ____________ its assets and enhance the ______________ and ______________ of
its accounting records.
240. The principle of internal control that prevents one individual from being responsible for all
the related activities of a given task is ______________.
241. The ______________ of an asset should not have access to the accounting records of
that asset.
242. Employees of a company who evaluate the effectiveness of the company's system of
internal controls on a year-round basis are called ______________.
243. Using _______________ documents is a control measure that helps to prevent a
transaction from being recorded more than once or to prevent the transactions from not
being recorded.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
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244. Employees who handle cash should be ______________ in order to protect against
misappropriation of assets by dishonest employees.
245. Two limitations of systems of internal control are the concept of ______________ and the
______________.
246. Internal control over cash disbursements is more effective when payments are made by
______________, rather than by ______________.
247. A disbursement system that uses wire, telephone, computers, etc., to transfer cash from
one location to another is referred to as ______________.
248. A debit memorandum issued by the bank ______________ the cash balance in the
depositor's account.
249. The difference between the cash in bank balance shown on the company's books and the
cash balance shown on the bank statement may be caused by ______________ and by
______________ in recording transactions by either party.
250. In preparing a bank reconciliation, outstanding checks are ______________ from the
cash balance per ______________.
251. A check correctly written for $370 was incorrectly entered in the cash payments journal for
$730. In preparing a bank reconciliation, $____________ must be ______________ the
cash balance per ______________.
252. A basic principle of cash management is to delay payment of _____________.
253. Three major sections of a cash budget are: (1)________________, (2)_______________,
and (3)______________.
*254. A __________________ fund is used to pay relatively small expenditures.
Fraud, Internal Control, and Cash
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*255. A debit balance in Cash Over and Short is reported in the income statement as
______________.
Answers to Completion Statements
MATCHING
256. Match the items below by entering the appropriate code letter in the space provided.
A. Prenumbered documents G. Cash budget
B. Custody of an asset should be kept H. Restricted cash
separate from the record-keeping I. Invest idle cash
for that asset J. Canceled checks
C. Television monitors, garment sensors K. NSF checks
and burglar alarms are examples L. Outstanding checks
D. Bonding employees M. Petty cash receipt
E. Collusion N. Cash equivalents
F. Cash
____ 1. Segregation of duties.
____ 2. Cash that is not available for general use, but instead is restricted for a particular
purpose.
____ 3. Two or more employees circumventing prescribed procedures.
____ 4. Prevent a transaction from being recorded more than once.
____ 5. Checks which have been returned by the maker's bank for lack of funds.
____ 6. Checks which have been paid by the depositor's bank.
____ 7. A projection of anticipated cash flows.
____ 8. Anything that a bank will accept for deposit.
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256. (Cont.)
____ 9. Physical control devices.
____ 10. A basic principle of cash management.
____ 11. Insurance protection against misappropriation of assets.
____ 12. Document indicating the purpose of a petty cash expenditure.
____ 13. Issued checks that have not been paid by the bank.
____ 14. Highly liquid investments.
SHORT-ANSWER ESSAY QUESTIONS
S-A E 257
Fraud experts often say that there are three primary factors that contribute to employee fraud.
Identify the three factors and explain what is meant by each.
S-A E 258
(a) Explain the control principle of independent internal verification?
(b) What practices are important in applying this principle?
Fraud, Internal Control, and Cash
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S-A E 259
Your friend, Jeff, has opened a movie theater. Jeff states that he does not have time to develop
and implement a system of internal controls.
a. Provide Jeff with the objectives of a system of internal control.
b. Explain to Jeff why he should develop a system of internal control.
S-A E 260
One of your accounting professors has alerted you about a job opportunity as an internal auditor.
a. What is the role of an internal auditor?
b. Is this position justified? Why or Why not?
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
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S-A E 261
Important objectives of a system of internal controls are to safeguard assets and to enhance the
accuracy and reliability of the accounting records. Briefly discuss how (1) cost-benefit
considerations, (2) the human element, and (3) the size of the business affect the implementation
of a system of internal controls.
S-A E 262
How do these principles apply to cash disbursements:
(a) Physical controls?
(b) Human resource controls?
Fraud, Internal Control, and Cash
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S-A E 263
The preparation of a bank reconciliation is an important cash control procedure. If a company
deposits cash receipts daily and makes all cash disbursements by check, explain why the cash
balance per books might not agree with the cash balance shown on the bank statement. Identify
specific examples that may cause differences between the cash balance per books and the cash
balance per bank.
S-A E 264
A basic principle of cash management involves the investment of idle cash.
a. Explain why this should be done.
b. What type of investment is appropriate for the idle cash?
S-A E 265 (Ethics)
Samson Instruments is a rapidly growing manufacturer of medical devices. As a result of its
growth, the company's management recently modified several of its procedures and practices to
improve internal control. Some employees are upset with the changes. They have complained
that all these changes just show that the company no longer trusts them.
Required:
"Internal controls exist because most people can't be trusted." Is this true? Explain.
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S-A E 266 (Communication)
Clinix is a medical office management franchise. There are currently twenty-five medical offices
managed by a Clinix franchisee. One of the services provided to franchisees is assistance in
training various staff members.
Clinix is preparing a manual for the front office staff to use as a reference guide. It will be used in
training new employees as well. One of the reasons the manual is being prepared is to stress the
importance of strong internal controls.
Required:
Prepare a short paragraph, to be included in the training materials, describing the benefits of
sound internal control, from the viewpoint of the employee.
Fraud, Internal Control, and Cash
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IFRS QUESTIONS
1. The principles of internal control activities are used
a. in the U.S. but not globally.
b. internationally but not in the U.S.
c. in the U.S. and Canada but not globally.
d. globally.
2. Sarbanes Oxley applies to
a. U.S companies but not international companies.
b. international companies but not U.S. companies.
c. U.S. and Canadian companies but not other international companies.
d. U.S and international companies.
3. The fraud triangle applies to
a. U.S companies but not international companies.
b. international companies but not U.S. companies.
c. U.S. and Canadian companies but not other international companies.
d. U.S and international companies.
4. What percentage of companies worldwide have experienced fraud in a recent 12-month
period?
a. 1%
b. 10%
c. 34%
d. 100%
5. IFRS, compared to GAAP, tends to be more
a. detailed.
b. rules-based.
c. principles-based.
d. full of disclosures requirements.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
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6. GAAP, compared to IFRS, tends to be more
a. simple in accounting requirements.
b. rules-based.
c. principles-based.
d. simple in disclosures requirements.
7. GAAP's, accounting and internal control procedures related to cash and the definition of
cash equivalents, as compared to IFRS are:
Accounting and internal
control procedures Definition of cash equivalents
a. essentially similar essentially similar
b. essentially different essentially similar
c. essentially similar essentially different
d. essentially different essentially different
8. Cash is defined by IFRS as
a. cash on hand.
b. demand deposits.
c. cash on hand and demand deposits.
d. cash on hand, demand deposits, and highly liquid investments.
9. Cash equivalents are defined by IFRS as
a. cash on hand.
b. demand deposits.
c. cash on hand and demand deposits.
d. short-term, highly liquid investments that are readily convertible into known amounts of
cash.

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