Chapter 7 – Internal Control and Cash
LEARNING OBJECTIVES:
72. A bank statement
a.
is a credit reference letter written by the company’s bank
b.
shows a company the financial position of the bank as of a certain date
c.
is a bill from the bank for services rendered
d.
shows the activity that increased or decreased the company’s account balance
LEARNING OBJECTIVES:
BUSPROG: Analytic
73. A debit or credit memo describing entries in the company’s bank account may be enclosed with the bank
statement. An example of a credit memo is
a.
deposited checks returned for insufficient funds
b.
a promissory note left for collection
c.
a service charge
d.
notification that a customer’s check for $375 was recorded by the company as $735 on the deposit ticket
Bloom’s: Remembering
LEARNING OBJECTIVES:
74. A check drawn by a company for $340 in payment of a liability was recorded in the journal as $430. This item would
be included on the bank reconciliation as a(n)
a.
b.
c.
d.
Chapter 7 – Internal Control and Cash
75. A check drawn by a company for $340 in payment of a liability was recorded in the journal as $430. What entry is
required in the company’s accounts?
a.
debit Accounts Payable; credit Cash
b.
debit Cash; credit Accounts Receivable
c.
debit Cash; credit Accounts Payable
d.
debit Accounts Receivable; credit Cash
76. A bank reconciliation should be prepared periodically because
a.
the company’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 company’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
77. The bank reconciliation
a.
should be prepared by an employee who records cash transactions
b.
is part of the internal control system
c.
is for information purposes only
d.
is sent to the bank for verification
Chapter 7 – Internal Control and Cash
78. Journal entries based on the bank reconciliation are required in the company’s accounts for
a.
outstanding checks
b.
deposits in transit
c.
bank errors
d.
book errors
79. Accompanying the bank statement was a debit memo for bank service charges. On the bank reconciliation, the item is
a.
a deduction from the balance per company’s records
b.
an addition to the balance per bank statement
c.
a deduction from the balance per bank statement
d.
an addition to the balance per company’s records
80. Accompanying the bank statement was a debit memo for bank service charges. What entry is required in the
company’s accounts?
a.
debit Miscellaneous Expense; credit Cash
b.
debit Cash; credit Other Income
c.
debit Cash; credit Accounts Payable
d.
debit Accounts Payable; credit Cash
Chapter 7 – Internal Control and Cash
81. A check drawn by a company in payment of a voucher for $965 was recorded in the journal as $695. This item would
be included in the bank reconciliation as a(n)
a.
b.
c.
d.
82. A check drawn by a company in payment of a voucher for $965 was recorded in the journal as $695. What entry is
required in the company’s accounts?
a.
debit Accounts Payable; credit Cash
b.
debit Cash; credit Accounts Receivable
c.
debit Cash; credit Accounts Payable
d.
debit Accounts Receivable; credit Cash
83. Receipts from cash sales of $3,200 were recorded incorrectly in the cash receipts journal as $2,300. This item would
be included on the bank reconciliation as a(n)
a.
deduction from the balance per company’s records
b.
addition to the balance per bank statement
c.
deduction from the balance per bank statement
d.
addition to the balance per company’s records
Chapter 7 – Internal Control and Cash
84. Accompanying the bank statement was a credit memo for a short-term note collected by the bank for the
company. This item is a(n)
a.
deduction from the balance per company’s records
b.
addition to the balance per bank statement
c.
deduction from the balance per bank statement
d.
addition to the balance per company’s records
85. Accompanying the bank statement was a credit memo for a short-term note collected by the bank for the
customer. What entry is required in the company’s accounts?
a.
debit Notes Receivable; credit Cash
b.
debit Cash; credit Miscellaneous Income
c.
debit Cash; credit Notes Receivable and Interest Revenue
d.
debit Accounts Receivable; credit Cash
86. The amount of deposits in transit is included on the bank reconciliation as a(n)
a.
deduction from the balance per the company’s books
b.
deduction from the balance per bank statement
c.
addition to the balance per bank statement
d.
addition to the balance per company books
Chapter 7 – Internal Control and Cash
87. The amount of the outstanding checks is included on the bank reconciliation as a(n)
a.
deduction from the balance per company’s records
b.
addition to the balance per bank statement
c.
deduction from the balance per bank statement
d.
addition to the balance per company’s records
88. Which of the following items that appeared on the bank reconciliation did not require a journal entry?
a.
bank service charges
b.
deposits in transit
c.
NSF checks
d.
a check for $630, recorded in the check register for $360
89. What entry is required in the company’s accounts to record outstanding checks?
a.
debit Accounts Receivable; credit Cash
b.
debit Cash; credit Accounts Receivable
c.
debit Cash; credit Accounts Payable
d.
no entry is required
Chapter 7 – Internal Control and Cash
90. Accompanying the bank statement was a debit memo for an NSF check received from a customer. This item would be
included on the bank reconciliation as a(n)
a.
deduction from the balance per company’s records
b.
addition to the balance per bank statement
c.
deduction from the balance per bank statement
d.
addition to the balance per company’s records
91. Accompanying the bank statement was a debit memo for an NSF check received from a customer. What entry is
required in the company’s accounts?
a.
debit Other Income; credit Cash
b.
debit Cash; credit Other Income
c.
debit Cash; credit Accounts Receivable
d.
debit Accounts Receivable; credit Cash
92. The amount of cash to be reported on the balance sheet at June 30 is the
a.
total of the cash column in the cash receipts journal as of June 30
b.
adjusted balance appearing in the bank reconciliation for June 30
c.
total of the cash column in the cash payments journal as of June 30
d.
balance as of June 30 on the bank statement
Chapter 7 – Internal Control and Cash
93. Which of the following would be deducted from the balance per books on a bank reconciliation?
a.
service charges
b.
outstanding checks
c.
deposits in transit
d.
notes collected by the bank
94. Which of the following would be added to the balance per books on a bank reconciliation?
a.
service charges
b.
outstanding checks
c.
deposits in transit
d.
notes collected by the bank
95. Which of the following would be subtracted from the balance per books on a bank reconciliation?
a.
outstanding checks
b.
deposits in transit
c.
notes collected by the bank
d.
error by the company in recording a check for $732 as $723
Chapter 7 – Internal Control and Cash
96. Which of the following would be subtracted from the balance per bank on a bank reconciliation?
a.
outstanding checks
b.
deposits in transit
c.
notes collected by the bank
d.
service charges
97. A bank reconciliation should be prepared
a.
whenever the bank refuses to lend the company money
b.
to explain any difference between the company’s balance per books with the balance per bank
c.
by the company’s bank
d.
by the person who is authorized to sign checks
98. Minor Company had checks outstanding totaling $19,200 on its April bank reconciliation. In May, Minor Company
issued checks totaling $64,900. The May bank statement shows that $47,600 in checks cleared the bank in May. A check
from one of Minor Company’s customers of $300 was also returned marked “NSF.” The amount of outstanding checks on
Minor Company’s May bank reconciliation should be
a.
$28,400
b.
$36,800
c.
$17,300
d.
$36,500
Chapter 7 – Internal Control and Cash
99. Rodgers Company gathered the following reconciling information in preparing its May bank reconciliation. Calculate
the adjusted cash balance per books on May 31.
Cash balance per books, 5/31
$5,400
Deposits in transit
375
Notes receivable and interest collected by bank
650
Bank charge for check printing
40
Outstanding checks
2,400
NSF check
140
a.
$5,870
b.
$6,245
c.
$4,930
d.
$3,845
NSF check = $5,400 + $650 – $40 – $140 = $5,870
100. Gunnar Company gathered the following reconciling information in preparing its September bank reconciliation.
Calculate the adjusted cash balance per books on September 30.
Cash balance per books, 9/30
$2,750
Deposits in transit
200
Notes receivable and interest collected by bank
630
Bank charge for check printing
50
Outstanding checks
1,250
NSF check
290
a.
$5,130
b.
$3,690
c.
$3,040
d.
$1,590
Chapter 7 – Internal Control and Cash
101. Jamison Company gathered the following reconciling information in preparing its June bank reconciliation:
Cash balance per bank, 6/30
$13,000
Note receivable collected by bank
4,000
Outstanding checks
7,000
Deposits in transit
2,500
Bank service charge
35
NSF check
1,900
Using the above information, determine the cash balance per books (before adjustments) for Jamison Company.
a.
$8,065
b.
$10,565
c.
$15,065
d.
$6,435
102. Thompson Corporation gathered the following reconciling information in preparing its October bank reconciliation:
Cash balance per bank, 10/31
$17,000
Note receivable collected by bank
4,800
Outstanding checks
6,500
Deposits in transit
3,000
Bank service charge
50
NSF check
2,300
Using the above information, determine the cash balance per books (before adjustments) for Thompson Corporation.
a.
$11,050
b.
$19,450
c.
$15,950
d.
$11,150
Chapter 7 – Internal Control and Cash
103. During a bank reconciliation process,
a.
outstanding checks and deposits in transit are added to the bank statement balance
b.
outstanding checks are subtracted and deposits in transit are added to the bank statement balance
c.
outstanding checks and deposits in transit are subtracted from the bank statement balance
d.
outstanding checks are added and deposits in transit are subtracted from the bank statement balance
104. The following data were gathered to use in reconciling the bank account of Savannah Company:
Balance per bank
$16,750
Balance per company records
16,125
Bank service charges
80
Deposit in transit
2,195
NSF check
950
Outstanding checks
3,850
What is the adjusted balance on the bank reconciliation?
a.
$14,470
b.
$10,705
c.
$15,095
d.
$15,720
Chapter 7 – Internal Control and Cash
105. In the normal operation of business, you receive a check from a customer and deposit it into your checking account.
With your bank statement you are advised that this check for $775 is “NSF.” The bank also informs you that due to the
amount of activity on your business account the monthly service charge is $75. During a bank reconciliation, you will
a.
subtract both values from balance according to bank
b.
add both values to balance according to books
c.
add both values to balance according to bank
d.
subtract both values from balance according to books
106. A $150 petty cash fund has cash of $54 and receipts of $83. The journal entry to replenish the account would include
a
a.
credit to Petty Cash for $29
b.
debit to Cash for $83
c.
debit to Cash Short and Over for $13
d.
credit to Cash for $54
107. A $135 petty cash fund has cash of $18 and receipts of $120. The journal entry to replenish the account would
include a
a.
credit to Petty Cash for $120
b.
debit to Cash for $120
c.
credit to Cash Short and Over for $3
d.
credit to Cash for $102
Chapter 7 – Internal Control and Cash
108. Entries are made to the petty cash account when
a.
making payments out of the fund
b.
recording shortages in the fund
c.
replenishing the petty cash fund
d.
establishing the fund
109. The type of account and normal balance of Petty Cash is a(n)
a.
revenue, credit
b.
asset, debit
c.
liability, credit
d.
expense, debit
110. The debit recorded in the journal to reimburse the petty cash fund is to
a.
Petty Cash
b.
Accounts Receivable
c.
Cash
d.
various accounts for which the petty cash was disbursed
Chapter 7 – Internal Control and Cash
111. A $200 petty cash fund has cash of $20 and receipts of $177. The journal entry to replenish the account would
include a credit to
a.
Cash for $20
b.
Cash Short and Over for $3
c.
Petty Cash for $190
d.
Cash for $180
The journal entry to replenish the account would include a credit to Cash for $180.
112. Cash equivalents include
a.
checks
b.
coins and currency
c.
money market accounts and commercial paper
d.
stocks and short-term bonds
113. Cash equivalents
a.
are illegal in some states
b.
will be converted to cash within two years
c.
will be converted to cash within three months
d.
will be converted to cash within four months
Chapter 7 – Internal Control and Cash
114. A minimum cash balance required by a bank is called
a.
cash in bank
b.
a cash equivalent
c.
a compensating balance
d.
an EFT
115. Which of the following would not be included with the cash and cash equivalents on the balance sheet?
a.
commercial paper
b.
short-term receivables
c.
cash short and over
d.
money market mutual funds
116. A company’s days’ cash on hand is computed by dividing:
a.
cash and short-term investments by daily cash operating expenses.
b.
cash by total cash operating expenses.
c.
cash, short-term investments, and accounts receivable by daily cash operating expenses.
d.
average cash over the period by daily cash operating expenses.
Chapter 7 – Internal Control and Cash
117. Which is the better choice for evaluating across companies: days’ cash on hand or the amount in the company’s cash
account?
a.
The amount in the cash account, because the company with the largest amount of cash is the most liquid
b.
Days’ cash on hand, because it is calculated as a ratio, which expresses cash relative to the cash requirements
of the business
c.
Days’ cash on hand, because a daily cash amount is more accurate
d.
The amount in the cash account, because companies with a lower cash balance are considered a greater credit
risk
118. Which of the following statements is true about the days’ cash on hand ratio?
a.
It is not useful in comparing different businesses to one another.
b.
It uses all current assets in the numerator of the ratio.
c.
The only operating expense used in the denominator of the ratio is depreciation expense.
d.
It may be useful in determining whether a business is able to meet its cash commitments.
119. Identify each of the following as relating to (a) the control environment, (b) risk assessment, or (c) control
procedures.
1. Mandatory vacations
2. Personnel policies
3. Report of outside consultants on future market changes
3. (b) risk assessment
Chapter 7 – Internal Control and Cash
120. List the objectives of internal control and give an example of how each is implemented.
assets are safeguarded and used for business purposes
business information is accurate
employees and managers comply with laws and regulations
duties are separated
duties are rotated
reports are submitted to management
There are many other examples that would be correct.
LEARNING OBJECTIVES:
121. You began your new job as the accountant at Bolivar Industries during the month of December. During your first
month, you found several interesting issues.
1) While looking through the invoices, you found Invoices 213–242, 245–271, and 275–290. It appears that invoices
243, 244, 272, 273, and 274 are missing.
2) During the month, Clerk # 3 issued $250 in refunds as compared to Clerks #1, #2, and #4 who issued less than
$50 each.
3) The daily cash receipts and bank deposits reconcile, except on Tuesdays during the month.
4) Business is generally brisk during the holiday season, but two weeks before Christmas there was a sudden
increase in slow payments.
Part A: What kind of warning signs could be associated with these issues?
Part B: What control could you put in place regarding cash refunds mentioned in Part A (2)?
Chapter 7 – Internal Control and Cash
122. Two features of internal control are presented in the following sections. Each is followed by a list of four
irregularities that occurred in processing data. Identify the one irregularity from each list that would be discovered or
prevented by the feature of internal control described.
(a)
The sum of the balances of the accounts in the customer’s ledger is compared at the end of
each month with the balance of the accounts receivable account in the general ledger by a
person who has no responsibility for maintaining either the general ledger or the customers
ledger.
(1)
Five hours of services were rendered but the customer was only billed for four hours.
(2)
A cash receipt of $750 was recorded correctly in the accounts receivable controlling
account but was posted to the customer’s ledger as $75.
(3)
A bill for services rendered to Cole Co. was erroneously posted to the account of
Coleman Co. in the customer’s ledger.
(4)
No entry was made in the accounting records for services rendered to a customer.
(b)
Both cash and credit charges for services rendered are recorded on prenumbered invoices.
At the end of the day, all invoices are accounted for before the duplicate copies of the
invoices are routed to the accounting department for entry into the accounts and the cash is
sent to the cashier’s department for deposit.
(1)
Some charge customers complained that the monthly statements of account did not
add all amounts correctly.
(2)
Some clerks used incorrect hourly rates in preparing invoices.
(3)
Some clerks destroyed duplicate copies of cash invoices and misappropriated the
cash.
(4)
Some charge customers complained that the monthly statement of account did not
indicate credits for payments made.
(a)
(2)
(b)
(3)
Chapter 7 – Internal Control and Cash
123. List and define each of the five elements of internal control.
124. The following procedures were recently implemented at the Health Station, Inc. For each procedure, indicate
whether the internal control over cash represents (1) a strength or (2) a weakness. If it is a weakness, please explain why.
(a) All mail is opened by the mail clerk, who forwards all cash remittances to the cashier. The cashier prepares a
listing of the cash receipts and forwards a copy of the list to the accounts receivable clerk for
recording in the accounts.
(b) The accounts payable clerk prepares a voucher for each disbursement. The voucher along with the supporting
documentation is forwarded to the treasurer’s office for approval.
(c) At the end of each day, all cash receipts are placed in the bank’s night depository.
(d) The bank reconciliation is prepared by the cashier, who works under the supervision of the treasurer.