CHAPTER 7
FRAUD, INTERNAL CONTROL, AND CASH
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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Multiple Choice Questions
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Brief Exercises
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sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Exercises
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
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Learning objective 1
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Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 3
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 5
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Learning Objective 7
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Learning Objective 8
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Learning Objective 9
158.
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Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise MA = Matching
SA = Short-answer Essay
CHAPTER LEARNING OBJECTIVES
1. Define fraud and internal control. A fraud is a dishonest act by an employee that results in
personal benefit to the employee at a cost to the employer. The fraud triangle refers to the
three factors that contribute to fraudulent activity by employees: opportunity, financial
pressure, and rationalization. Internal control consists of all the related methods and
measures adopted within an organization to safeguard its assets, enhance the reliability of its
accounting records, increase efficiency of operations, and ensure compliance with laws and
regulations.
2. Identify the principles of internal control. The principles of internal control are
establishment of responsibility; segregation of duties; documentation procedures; physical
controls; independent internal verification; and human resource controls such as bonding and
requiring employees to take vacations.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 4
3. Explain the applications of internal control principles to cash receipts. Internal controls
over cash receipts include (a) designating specific personnel to handle cash; (b) assigning
different individuals to receive cash, record cash, and maintain custody of cash; (c) using
remittance advices for mail receipts, cash register tapes for over-the-counter receipts, and
deposit slips for bank deposits; (d) using company safes and bank vaults to store cash with
access limited to authorized personnel, and using cash registers in executing over-the-
counter receipts; (e) making independent daily counts of register receipts and daily
comparison of total receipts with total deposits; and (f) bonding personnel that handle cash
and requiring them to take vacations.
4. Explain the applications of internal control principles to cash disbursements. Internal
controls over cash disbursements include (a) having specific individuals such as the treasurer
authorized to sign checks and approve invoices; (b) assigning different individuals to approve
items for payment, pay the items, and record the payment; (c) using prenumbered checks and
accounting for all checks, with each check supported by an approved invoice; (d) storing
blank checks in a safe or vault with access restricted to authorized personnel, and using a
check-writing machine to imprint amounts on checks; (e) comparing each check with the
approved invoice before issuing the check, and making monthly reconciliations of bank and
book balances; and (f) bonding personnel who handle cash, requiring employees to take
vacations, and conducting background checks.
5. Describe the operation of a petty cash fund. Companies operate a petty cash fund to pay
relatively small amounts of cash. They must establish the fund, make payments from the
fund, and replenish the fund when the cash in the fund reaches a minimum level.
6. Indicate the control features of a bank account. A bank account contributes to good
internal control by providing physical controls for the storage of cash. It minimizes the amount
of currency that a company must keep on hand, and it creates a double record of a
depositor’s bank transactions.
7. Prepare a bank reconciliation. It is customary to reconcile the balance per books and
balance per bank to their adjusted balances. The steps in the reconciling process are to
determine deposits in transit, outstanding checks, errors by the depositor or the bank, and
unrecorded bank memoranda.
8. Explain the reporting of cash. Companies list cash first in the current assets section of the
balance sheet. In some cases, they report cash together with cash equivalents. Cash
restricted for a special purpose is reported separately as a current asset or as a noncurrent
asset, depending on when the cash is expected to be used.
Fraud, Internal Control, and Cash
7 – 5
TRUE-FALSE STATEMENTS
1. Internal control is mainly concerned with the amount of authority a supervisor exercises
over a subordinate.
2. A highly automated computerized system of accounting eliminates the need for internal
control.
3. The safeguarding of assets is an objective of a company’s system of internal control.
4. Management is responsible for establishing a system of internal control.
5. Internal control is most effective when several people are responsible for a given task.
6. The responsibility for keeping the records for an asset should be separate from the
physical custody of that asset.
7. Requiring employees to take vacations is a weakness in the system of internal controls
because it does not promote operational efficiency.
8. The extent of internal control features adopted by a company must be evaluated in terms
of cost-benefit.
9. An effective system of internal control requires that at least two individuals be assigned to
one cash drawer so that each can serve as check on the other.
10. Only large companies need to be concerned with a system of internal control.
11. The responsibility for ordering, receiving, and paying for merchandise should be assigned
to different individuals.
12. In order to prevent a transaction from being recorded more than once, a company should
maintain only one book of original entry.
Test Bank for Financial Accounting, Ninth Edition
7 – 6
13. Firms use physical controls primarily to safeguard their assets.
14. A segregation of duties among employees eliminates the possibility of collusion.
15. For efficiency of operations and better control over cash, a company should maintain only
one bank account.
16. Cash registers are an important internal control device used in controlling over-the-
counter receipts.
17. Checks received in the mail should be immediately stamped “NSF” to prevent
unauthorized cashing of the check.
18. Control over cash disbursements is improved if major expenditures are paid by check.
19. In a voucher system, vouchers are prepared in the accounts receivable department.
20. Electronic Funds Transfer (EFT) is a disbursement system that uses telephone or
computer to transfer cash from one location to another.
21. A voucher system is used by many large companies as a means of controlling cash
receipts.
22. The petty cash fund eliminates the need for a bank checking account.
23. Cash register overages are deposited in the petty cash fund and cash shortages are
made-up from the petty cash fund.
24. A deposit ticket is a negotiable instrument that can be transferred to another party by
endorsement.
Fraud, Internal Control, and Cash
7 – 7
25. If a company deposits all its receipts in the bank and pays all its bills by check, then the
monthly bank statement balance will always agree with the company’s record of its
checking account balance.
26. Checks from customers who pay their accounts promptly are called outstanding checks.
27. All reconciling items in determining the adjusted cash balance per books require the
depositor to make adjusting journal entries to the Cash account.
28. A bank reconciliation is generally prepared by the bank and sent to the depositor along
with cancelled checks.
29. Cash equivalents are highly liquid investments that can be converted into a specific
amount of cash.
30. Cash which is restricted for a specific use should be separately reported.
31. Internal control consists of the plan of organization and all of the related methods and
measures adopted within a business to (a) safeguard its assets, and (b) enhance the
accuracy and reliability of its accounting records.
32. In general, documents should be prenumbered and all documents should be accounted
for.
33. Collusion may result when one individual circumvents prescribed controls and may
significantly impair the effectiveness of a system.
34. Personnel who handle cash receipts should have the option of taking a vacation or not.
35. The duties of approving an item for payment and paying the item should be done by
different departments or individuals.
Test Bank for Financial Accounting, Ninth Edition
7 – 8
36. The custodian of the petty cash fund has the responsibility of recording a journal entry
every time cash is used from the fund.
37. A debit memorandum could show the collection of a note receivable by the bank.
38. To obtain maximum benefit from a bank reconciliation, the reconciliation should be
prepared by an employee who has no other responsibilities pertaining to cash.
Answers to True-False Statements
MULTIPLE CHOICE QUESTIONS
39. Which one of the following is not an objective of a system of internal controls?
a. Safeguard company assets
b. Overstate liabilities in order to be conservative
c. Enhance the accuracy and reliability of accounting records
d. Reduce the risks of errors
40. Internal controls are concerned with
a. only manual systems of accounting.
b. the extent of government regulations.
c. safeguarding assets.
d. preparing income tax returns.
41. Which of the following is not one of the main factors that contribute to fraudulent activity?
a. Opportunity.
b. Incompatible duties.
c. Financial Pressure.
d. Rationalization.
Fraud, Internal Control, and Cash
7 – 9
42. Internal control is defined, in part, as a plan that safeguards
a. all balance sheet accounts.
b. assets.
c. liabilities.
d. capital stock.
43. The most important element of the fraud triangle is
a. financial pressure.
b. incompatible duties.
c. opportunity.
d. rationalization.
44. Companies that are subject to, but fail to comply with, the Foreign Corrupt Practices Act of 1977
a. may do so legally by obtaining an exemption.
b. will be automatically dissolved.
c. may be subject to fines and officer imprisonment.
d. may be forced to sell their foreign subsidiaries.
45. Internal controls are not designed to safeguard assets from
a. natural disasters.
b. employee theft.
c. robbery.
d. unauthorized use.
46. Having one person post entries to accounts receivable subsidiary ledger and a different
person post to the Accounts Receivable Control account in the general ledger is an
example of
a. inadequate internal control.
b. duplication of effort.
c. external verification.
d. segregation of duties.
47. Having one person responsible for the related activities of ordering merchandise,
receiving goods, and paying for them
a. increases the potential for errors and fraud.
b. decreases the potential for errors and fraud.
c. is an example of good internal control.
d. is a good example of safeguarding the company’s assets.
Test Bank for Financial Accounting, Ninth Edition
7 – 10
48. The custodian of a company asset should
a. have access to the accounting records for that asset.
b. be someone outside the company.
c. not have access to the accounting records for that asset.
d. be an accountant.
49. Internal auditors
a. are hired by CPA firms to audit business firms.
b. are employees of the IRS who evaluate the internal controls of companies filing tax
returns.
c. evaluate the system of internal controls for the companies that employ them.
d. cannot evaluate the system of internal controls of the company that employs them
because they are not independent.
50. When two or more people get together for the purpose of circumventing prescribed
controls, it is called
a. a fraud committee.
b. collusion.
c. a division of duties.
d. bonding of employees.
51. From an internal control standpoint, the asset most susceptible to improper diversion and
use is
a. prepaid insurance.
b. cash.
c. buildings.
d. land.
52. The principle of establishing responsibility does not include
a. one person being responsible for one task.
b. authorization of transactions.
c. independent internal verification.
d. approval of transactions.
53. The control principle related to not having the same person authorize and pay for goods is
known as
a. establishment of responsibility.
b. independent internal verification.
c. segregation of duties.
d. rotation of duties.
Fraud, Internal Control, and Cash
7 – 11
54. Two individuals at a retail store work the same cash register. You evaluate this situation as
a. a violation of establishment of responsibility.
b. a violation of segregation of duties.
c. supporting the establishment of responsibility.
d. supporting internal independent verification.
55. An accounts payable clerk also has access to the approved supplier master file for
purchases. The control principle of
a. establishment of responsibility is violated.
b. independent internal verification is violated.
c. documentation procedures is violated.
d. segregation of duties is violated.
56. Controls that enhance the accuracy and reliability of the accounting records are
a. automated controls.
b. external controls.
c. mechanical and electronic controls.
d. physical controls.
57. Related selling activities do not include
a. ordering the merchandise.
b. making a sale.
c. shipping the goods.
d. billing the customer.
58. The independent internal verification principle involves each of the following except the
______________ of data prepared by other employees.
a. comparison
b. reconciliation
c. review
d. segregation
59. Related buying activities include
a. ordering, receiving, paying.
b. ordering, selling, paying.
c. ordering, shipping, billing.
d. selling, shipping, paying.
Test Bank for Financial Accounting, Ninth Edition
7 – 12
60. Jolene is warehouse custodian and also maintains the accounting record of the inventory
held at the warehouse. An assessment of this situation indicates
a. documentation procedures are violated.
b. independent internal verification is violated.
c. segregation of duties is violated.
d. establishment of responsibility is violated.
61. Physical controls to safeguard assets do not include
a. cashier department supervisors.
b. vaults.
c. employee identification badges.
d. security guards.
62. In large companies, the independent internal verification procedure is often assigned to
a. computer operators.
b. management.
c. internal auditors.
d. outside CPAs.
63. Maximum benefit from independent internal verification is obtained when
a. it is made on a pre-announced basis.
b. it is done by the employee possessing custody of the asset.
c. discrepancies are reported to management.
d. it is done at the time of the audit.
64. If employees are bonded
a. it means that they are not allowed to handle cash.
b. they have worked for the company for at least 10 years.
c. they have been insured against misappropriation of assets.
d. it is impossible for them to steal from the company.
65. Rebekah Grace has worked for Specoly Inc., for 20 years without taking a vacation. An
internal control feature that would address this situation would be
a. other controls.
b. establishment of responsibility.
c. physical controls.
d. documentation procedures.
Fraud, Internal Control, and Cash
7 – 13
66. A system of internal control
a. is infallible.
b. can be rendered ineffective by employee collusion.
c. invariably will have costs exceeding benefits.
d. is premised on the concept of absolute assurance.
67. For accounting purposes, postdated checks (checks payable in the future) are considered
to be
a. money orders.
b. cash.
c. petty cash.
d. accounts receivable.
68. Postage stamps on hand are considered to be
a. cash.
b. petty cash.
c. cash equivalents.
d. a prepaid expense.
69. Which one of the following items would not be considered cash?
a. Coins
b. Money orders
c. Currency
d. Postdated checks
70. Checks received through the mail should
a. immediately be endorsed “For Deposit Only.”
b. be sent to the accounts receivable subsidiary ledger clerk for immediate posting to the
customer’s account.
c. be cashed at the bank as soon as possible.
d. be “rung up” on a cash register immediately.
71. Proper control for over-the-counter cash receipts includes
a. a cash register with totals visible to the customer.
b. using electronic cash registers with no tapes.
c. cash count sheets requiring only the supervisor’s signature.
d. cash count sheets requiring only the cashier’s signature.
Test Bank for Financial Accounting, Ninth Edition
7 – 14
72. A company stamps checks received in the mail with the words “For Deposit Only”. This
endorsement is called a(n)
a. blank endorsement.
b. rubber stamp.
c. restrictive endorsement.
d. operational endorsement.
73. The daily cash count of cash register receipts made by department supervisors is an
example of
a. other controls.
b. independent internal verification.
c. establishment of responsibility.
d. segregation of duties.
74. The use of remittance advices for mail receipts is an example of
a. documentation procedures.
b. other controls.
c. physical controls.
d. independent internal verification.
75. Allowing only designated personnel to handle cash receipts is an example of
a. establishment of responsibility.
b. segregation of duties.
c. documentation procedures.
d. independent internal verification.
76. Control over cash disbursements is generally more effective when
a. all bills are paid in cash.
b. disbursements are made by the accounts payable subsidiary clerk.
c. payments are made by check.
d. all purchases are made on credit.
77. Reconciling the bank statement monthly is an example of
a. segregation of duties.
b. independent internal verification.
c. establishment of responsibility.
d. documentation procedures.
Fraud, Internal Control, and Cash
7 – 15
78. An exception to disbursements being made by check is acceptable when cash is paid
a. to an owner.
b. to employees as wages.
c. from petty cash.
d. to employees as loans.
79. Allowing only the treasurer to sign checks is an example of
a. documentation procedures.
b. segregation of duties.
c. other controls.
d. establishment of responsibility.
80. Blank checks
a. should be safeguarded.
b. should be pre-signed.
c. do not need to be safeguarded since they must be signed to be valid.
d. should not be prenumbered.
81. An employee authorized to sign checks should not record
a. owner cash contributions.
b. mail receipts.
c. cash disbursement transactions.
d. sales transactions.
82. A voucher system is a series of prescribed control procedures
a. to check the credit worthiness of customers.
b. designed to assure that disbursements by check are proper.
c. which eliminates the need for a sales journal.
d. specifically designed for small firms who may not have checking accounts.
83. Under a voucher system, a prenumbered voucher is prepared for every
a. cash receipt, regardless of source.
b. transaction entered into by the business.
c. expenditure except those made from petty cash.
d. journal entry.
Test Bank for Financial Accounting, Ninth Edition
7 – 16
84. A credit balance in Cash Over and Short is reported as a(n)
a. asset.
b. liability.
c. miscellaneous expense.
d. miscellaneous revenue.
85. The entry to replenish a petty cash fund includes a credit to
a. Petty Cash.
b. Cash.
c. Freight-in.
d. Postage Expense.
86. A debit balance in Cash Over and Short is reported as a
a. contra asset.
b. miscellaneous asset.
c. miscellaneous expense.
d. miscellaneous revenue.
87. A petty cash fund of $100 is replenished when the fund contains $4 in cash and receipts
for $93. The entry to replenish the fund would
a. credit Cash Over and Short for $3.
b. credit Miscellaneous Revenue for $3.
c. debit Cash Over and Short for $3.
d. debit Miscellaneous Expense for $3.
88. A petty cash fund is generally established in order to
a. pay for all merchandise purchased on account.
b. pay employees’ wages.
c. make loans internally to employees.
d. pay relatively small expenditures.
89. A petty cash fund should be replenished
a. every day.
b. at the end of every accounting period.
c. once a year.
d. as soon as an expense is paid from the fund.
Fraud, Internal Control, and Cash
7 – 17
90. A petty cash fund should not be used for
a. postage due.
b. loans to the petty cash custodian.
c. taxi fares.
d. customer lunches.
91. The size of the petty cash fund is dependent on
a. the wishes of the custodian of the fund.
b. anticipated disbursements for the year.
c. anticipated disbursements for a three- to four-week period.
d. the size of the regular cash account.
92. Replenishing the petty cash fund requires
a. a debit to Cash.
b. a credit to Petty Cash.
c. a debit to various expense accounts.
d. no accounting entry.
93. Entries are made to the Petty Cash account when
a. establishing the fund.
b. making payments out of the fund.
c. recording shortages in the fund.
d. replenishing the fund.
94. A $100 petty cash fund has cash of $12 and receipts of $85. The journal entry to replenish
the account would include a credit to
a. Cash for $88.
b. Petty Cash for $88.
c. Cash Over and Short for $2.
d. Cash for $85.
95. A $100 petty cash fund has cash of $16 and receipts of $82. The journal entry to replenish
the account would include a
a. debit to Cash for $82.
b. credit to Petty Cash for $84.
c. debit to Cash Over and Short for $2.
d. credit to Cash for $82.
Test Bank for Financial Accounting, Ninth Edition
7 – 18
96. A $100 petty cash fund has cash of $17 and receipts of $86. The journal entry to replenish
the account would include a
a. debit to Cash for $86.
b. credit to Petty Cash for $86.
c. credit to Cash Over and Short for $3.
d. credit to Cash for $86.
97. If a petty cash fund is established in the amount of $200, and contains $119 in cash and
$84 in receipts for disbursements when it is replenished, the journal entry to record
replenishment should include credits to the following accounts
a. Petty Cash, $84.
b. Petty Cash, $81.
c. Cash, $81; Cash Over and Short, $3.
d. Cash, $84.
98. If a petty cash fund is established in the amount of $250, and contains $153 in cash and
$94 in receipts for disbursements when it is replenished, the journal entry to record
replenishment should include credits to the following accounts
a. Petty Cash, $94.
b. Petty Cash, $97.
c. Cash, $94; Cash Over and Short, $3.
d. Cash, $97.
99. All of the following are parties to a check except the
a. bank.
b. Federal Reserve.
c. maker.
d. payee.
100. When opening a bank checking account, a signature card
a. indicates to whom money is to be paid.
b. indicates each person authorized to sign checks on the account.
c. is attached to all pre-printed checks.
d. is required only when dealing with an out-of-state bank.
101. Which one of the following is not necessarily a party to a check?
a. Maker
b. Buyer
c. Payee
d. Payer
Fraud, Internal Control, and Cash
7 – 19
102. A bank statement
a. lets a depositor know the financial position of the bank as of a certain date.
b. is a credit reference letter written by the depositor’s bank.
c. is a bill from the bank for services rendered.
d. shows the activity which increased or decreased the depositor’s account balance.
103. Which one of the following would not cause a bank to debit a depositor’s account?
a. Bank service charge
b. Collection of a note receivable
c. Wiring of funds to other locations
d. Checks marked NSF
104. A company maintains the asset account, Cash in Bank, on its books, while the bank
maintains a reciprocal account which is
a. a contra-asset account.
b. a liability account.
c. also an asset account.
d. a stockholders’ equity account.
105. A remittance advice attached to a company check provides
a. details about the running cash balance in the checking account.
b. the magnetic bank routing numbers.
c. the explanation of the purpose of the check.
d. the signature space for the maker.
106. A deposit made by a company will appear on the bank statement as a
a. debit.
b. credit.
c. debit memorandum.
d. credit memorandum.
107. A check returned by the bank marked “NSF” means
a. no service fee.
b. no signature found.
c. not satisfactorily filled-out.
d. not sufficient funds.
Test Bank for Financial Accounting, Ninth Edition
7 – 20
108. A debit memorandum would not be issued by the bank for
a. a bank service charge.
b. the issuance of traveler’s checks.
c. the wiring of funds.
d. the collection of a notes receivable.
109. If the month-end bank statement shows a balance of $54,000, outstanding checks are
$15,000, a deposit of $6,000 was in transit at month end, and a check for $900 was
erroneously charged by the bank against the account, the correct balance in the bank
account at month end is
a. $44,100.
b. $45,000.
c. $45,900.
d. $62,100.
110. In preparing its bank reconciliation for the month of April 2015, Delano, Inc. has available
the following information.
Balance per bank statement, 4/30/15 $78,600
NSF check returned with 4/30/15 bank statement 940
Deposits in transit, 4/30/15 10,000
Outstanding checks, 4/30/15 10,400
Bank service charges for April 60
What should be the adjusted cash balance at April 30, 2015?
a. $77,260.
b. $77,600.
c. $78,020.
d. $78,200.
111. The cash account shows a balance of $90,000 before reconciliation. The bank statement
does not include a deposit of $5,000 made on the last day of the month. The bank
statement shows a collection by the bank of $2,400 and a customer’s check for $640 was
returned because it was NSF. A customer’s check for $900 was recorded on the books as
$1,080, and a check written for $138 was recorded as $192. The correct balance in the
cash account was
a. $91,580.
b. $91,634.
c. $92,400.
d. $96,634.
Fraud, Internal Control, and Cash
7 – 21
112. The cash account shows a balance of $40,000 before reconciliation. The bank statement
does not include a deposit of $9,200 made on the last day of the month. The bank
statement shows a collection by the bank of $3,960 and a customer’s check for $1,300
was returned because it was NSF. A customer’s check for $1,380 was recorded on the
books as $1,920, and a check written for $318 was recorded as $390. The correct
balance in the cash account was
a. $42,048.
b. $42,192.
c. $43,128.
d. $51,392.
113. If the month-end bank statement shows a balance of $72,000, outstanding checks are
$54,000, a deposit of $15,000 was in transit at month end, and a check for $3,000 was
erroneously charged by the bank against the account, the correct balance in the bank
account at month end is
a. $33,000.
b. $36,000.
c. $72,000.
d. $114,000.
114. In preparing its bank reconciliation for the month of April 2015, Haskins, Inc. has available
the following information.
Balance per bank statement, 4/30/15 $40,920
NSF check returned with 4/30/15 bank statement 1,350
Deposits in transit, 4/30/15 10,500
Outstanding checks, 4/30/15 15,600
Bank service charges for April 60
What should be the adjusted cash balance at April 30, 2015?
a. $34,410.
b. $34,470.
c. $35,760.
d. $35,820.
Test Bank for Financial Accounting, Ninth Edition
7 – 22
115. In preparing its August 31, 2015 bank reconciliation, Annie Corp. has available the
following information:
Balance per bank statement, 8/31/15 $64,950
Deposit in transit, 8/31/15 11,700
Return of customer’s check not sufficient funds, 8/30/15 1,800
Outstanding checks, 8/31/15 8,250
Bank service charges for August 300
At August 31, 2015, Annie’s adjusted cash balance is
a. $56,700.
b. $56,400.
c. $68,400.
d. $61,500.
116. Trudy, Inc. had the following bank reconciliation at March 31, 2015:
Balance per bank statement, 3/31/15 $37,200
Add: Deposit in transit 6,300
43,500
Less: Outstanding checks 8,600
Balance per books, 3/31/15 $34,900
Data per bank for the month of April 2015 follow:
Deposits $46,700
Disbursements 49,700
All reconciling items at March 31, 2015 cleared the bank in April. Outstanding checks at
April 30, 2015 totaled $6,000. There were no deposits in transit at April 30, 2015. What is
the cash balance per books at April 30, 2015?
a. $25,900
b. $31,900
c. $34,200
d. $38,500
117. On a bank reconciliation, deposits in transit are
a. added to the bank balance.
b. deducted from the bank balance.
c. added to the book balance.
d. deducted from the book balance.
Fraud, Internal Control, and Cash
7 – 23
118. A bank reconciliation should be prepared
a. whenever the bank refuses to lend the company money.
b. when an employee is suspected of fraud.
c. to explain any difference between the depositor‘s balance per books and the balance
per bank.
d. by the person who is authorized to sign checks.
119. Deposits in transit
a. have been recorded on the company’s books but not yet by the bank.
b. have been recorded by the bank but not yet by the company.
c. have not been recorded by the bank or the company.
d. are checks from customers which have not yet been received by the company.
120. In preparing a bank reconciliation, outstanding checks are
a. added to the balance per bank.
b. deducted from the balance per books.
c. added to the balance per books.
d. deducted from the balance per bank.
121. If a check correctly written and paid by the bank for $427 is incorrectly recorded on the
company’s books for $472, the appropriate treatment on the bank reconciliation would be to
a. add $45 to the bank’s balance.
b. add $45 to the book’s balance.
c. deduct $45 from the bank’s balance.
d. deduct $427 from the book’s balance.
122. Notification by the bank that a deposited customer check was returned NSF requires that
the company make the following adjusting entry:
a. Accounts Receivable
Cash
b. Cash
Accounts Receivable
c. Miscellaneous Expense
Accounts Receivable
d. No adjusting entry is necessary.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 24
123. Jukebox Company had checks outstanding totaling $10,800 on its June bank
reconciliation. In July, Jukebox Company issued checks totaling $77,800. The July bank
statement shows that $76,600 in checks cleared the bank in July. A check from one of
Jukebox Company’s customers in the amount of $1,000 was also returned marked “NSF.”
The amount of outstanding checks on Jukebox Company’s July bank reconciliation should
be
a. $1,200.
b. $11,000.
c. $12,000.
d. $13,000.
124. Each of the following items affect the cash balance per books except
a. bank service charges.
b. notes collected by the bank.
c. NSF checks.
d. outstanding checks.
125. Electric Sunset Company gathered the following reconciling information in preparing its
July bank reconciliation:
Cash balance per books, 7/31 $22,000
Deposits in transit 1,200
Notes receivable and interest collected by bank 4,400
Bank charge for check printing 80
Outstanding checks 8,000
NSF check 680
The adjusted cash balance per books on July 31 is
a. $17,640.
b. $18,840.
c. $25,640.
d. $26,840.
126. Unicycle Company developed the following reconciling information in preparing its
September bank reconciliation:
Cash balance per bank, 9/30 $24,000
Note receivable collected by bank 12,000
Outstanding checks 14,000
Deposits in transit 7,000
Bank service charge 150
NSF check 2,400
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 25
MC. 126 (Cont.)
Determine the cash balance per books (before adjustments) for Unicycle Company.
a. $2,450.
b. $7,550.
c. $9,550.
d. $17,000.
127. Bank errors
a. occur because of time lags.
b. must be corrected by debits.
c. are infrequent in occurrence.
d. are corrected by making an adjusting entry on the depositor’s books.
128. An adjusting entry is not required for
a. outstanding checks.
b. collection of a note by the bank.
c. NSF checks.
d. bank service charges.
129. Winter Gloves Company had checks outstanding totaling $12,800 on its May bank
reconciliation. In June, Winter Gloves Company issued checks totaling $79,800. The July
bank statement shows that $71,400 in checks cleared the bank in July. A check from one
of Winter Gloves Company’s customers in the amount of $2,000 was also returned
marked “NSF.” The amount of outstanding checks on Winter Gloves Company’s July bank
reconciliation should be
a. $8,400.
b. $19,200.
c. $21,200.
d. $23,200.
130. Candy Claws Company gathered the following reconciling information in preparing its
August bank reconciliation:
Cash balance per books, 8/31 $19,500
Deposits in transit 900
Notes receivable and interest collected by bank 4,800
Bank charge for check printing 120
Outstanding checks 12,000
NSF check 1,020
The adjusted cash balance per books on August 31 is
a. $11,160.
b. $12,060.
Test Bank for Financial Accounting, Ninth Edition
7 – 26
MC. 130 (Cont.)
c. $23,160.
d. $24,060.
131. Shane Company gathered the following reconciling information in preparing its April bank
reconciliation:
Cash balance per books, 4/30 $19,800
Deposits in transit 2,700
Notes receivable and interest collected by bank 6,600
Bank charge for check printing 150
Outstanding checks 13,500
NSF check 1,260
The adjusted cash balance per books on April 30 is
a. $12,930.
b. $14,190.
c. $23,730.
d. $24,990.
132. Bacher Company developed the following reconciling information in preparing its
September bank reconciliation:
Cash balance per bank, 9/30 $6,160
Note receivable collected by bank 3,360
Outstanding checks 3,200
Deposits in transit 2,520
Bank service charge 42
NSF check 672
Using the above information, determine the cash balance per books (before adjustments)
for the Bacher Company.
a. $2,834
b. $5,480
c. $8,148
d. $8,828
Fraud, Internal Control, and Cash
7 – 27
133. In the month of November, Kinsey Company Inc. wrote checks in the amount of $18,500.
In December, checks in the amount of $25,316 were written. In November, $16,936 of
these checks were presented to the bank for payment, and $21,766 were presented in
December. What is the amount of outstanding checks at the end of November?
a. $1,564
b. $4,830
c. $5,114
d. $6,816
134. In the month of November, Kinsey Company Inc. wrote checks in the amount of $27,750.
In December, checks in the amount of $37,974 were written. In November, $25,404 of
these checks were presented to the bank for payment, and $32,649 were presented in
December. What is the amount of outstanding checks at the end of December?
a. $2,346
b. $7,245
c. $7,671
d. $10,224
135. At April 30, Yaddof Company has the following bank information: cash balance per bank
$2,300; outstanding checks $390; deposits in transit $275; credit memo for interest $50;
bank service charge $10. What is Mareska’s adjusted cash balance on April 30?
a. $2,185
b. $2,245
c. $2,300
d. $2,340
136. At June 30, Yaddof Company has the following bank information: cash balance per bank
$1,800; outstanding checks $340; deposits in transit $275; credit memo for interest $75;
bank service charge $10. What is Mareska’s adjusted cash balance on June 30?
a. $1,735
b. $1,800
c. $1,810
d. $1,865
Test Bank for Financial Accounting, Ninth Edition
7 – 28
137. Hoppmann Company wrote checks totaling $25,620 during October and $27,975 during
November. $24,360 of these checks cleared the bank in October, and $27,330 cleared the
bank in November. What was the amount of outstanding checks on November 30?
a. $645
b. $1,260
c. $1,905
d. $2,355
138. Fitzgerald Company wrote checks totaling $34,160 during October and $37,300 during
November. $32,480 of these checks cleared the bank in October, and $36,440 cleared the
bank in November. What was the amount of outstanding checks on November 30?
a. $2,860
b. $1,680
c. $2,540
d. $3,140
139. Carothers Company assembled the following information in completing its March bank
reconciliation: balance per bank $7,640; outstanding checks $1,550; deposits in transit
$2,500; NSF check $160; bank service charge $50; cash balance per books $8,800. As a
result of this reconciliation, Carothers will
a. reduce its cash account by $50.
b. reduce its cash account by $210.
c. reduce its cash account by $950.
d. increase its cash account by $110.
140. Macrinez Company assembled the following information in completing its July bank
reconciliation: balance per bank $22,920; outstanding checks $4,650; deposits in transit
$7,500; NSF check $480; bank service charge $150; cash balance per books $26,400. As
a result of this reconciliation, Macrinez will
a. reduce its cash account by $150.
b. reduce its cash account by $630.
c. reduce its cash account by $2,850.
d. increase its cash account by $330.
Fraud, Internal Control, and Cash
7 – 29
141. If a check correctly written and paid by the bank for $584 is incorrectly recorded on the
company’s books for $548, the appropriate treatment on the bank reconciliation would be
to
a. deduct $36 from the book’s balance.
b. add $36 to the book’s balance.
c. deduct $36 from the bank’s balance.
d. deduct $584 from the book’s balance.
142. In the month of May, Kijak Company Inc. wrote checks in the amount of $84,000. In June,
checks in the amount of $114,000 were written. In May, $75,000 of these checks were
presented to the bank for payment, and $99,000 in June. What is the amount of
outstanding checks at the end of May?
a. $9,000
b. $15,000
c. $24,000
d. $30,000
143. In the month of May, Kijak Company Inc. wrote checks in the amount of $56,000. In June,
checks in the amount of $76,000 were written. In May, $50,000 of these checks were
presented to the bank for payment, and $66,000 in June. What is the amount of
outstanding checks at the end of June?
a. $6,000
b. $10,000
c. $16,000
d. $20,000
144. Cash equivalents could include each of the following except
a. bank certificates of deposit.
b. money market funds.
c. petty cash.
d. U.S. Treasury bills.
145. Which of the following would not be reported on the balance sheet as a cash equivalent?
a. Money market fund
b. Sixty-day certificate of deposit
c. Six-month Treasury bill
d. Money market savings certificate
Test Bank for Financial Accounting, Ninth Edition
7 – 30
146. Compensating balances are a restriction on the use of a company‘s cash and should be
a. reported as a current asset.
b. reported as a noncurrent asset.
c. disclosed in the financial statements.
d. reported as a reduction of cash.
147. The principles of internal control include all of the following except
a. establishment of responsibility.
b. combining of duties.
c. physical, mechanical, and electronic controls.
d. independent internal verification.
148. An example of poor internal control is
a. The accountant should not have physical custody of the asset nor access to it.
b. The custodian of an asset should not maintain or have access to the accounting
records.
c. One person should be responsible for handling related transactions.
d. A salesperson makes the sale, and a different person ships the goods.
149. Having different individuals receive cash, record cash receipts, and hold the cash is an
example of
a. establishment of responsibility.
b. segregation of duties.
c. documentation procedures.
d. independent internal verification.
150. Storing cash in a company safe is an application of which internal control principle?
a. Segregation of duties
b. Documentation procedures
c. Physical controls
d. Establishment of responsibility
151. Using prenumbered checks and having an approved invoice for each check is an example
of
a. establishment of responsibility.
b. segregation of duties.
c. documentation procedures.
d. independent internal verification.
Fraud, Internal Control, and Cash
7 – 31
152. An application of good internal control over cash disbursements is
a. following payment, the approved invoice should be stamped PAID.
b. blank checks should be stored in the treasurer’s desk.
c. each check should be compared with the approved invoice after the check is issued.
d. check signers should record the cash disbursements.
153. When making a payment from the petty cash fund for postage stamps, the following
journal entry is made.
a. Supplies …………………………….. XXXX
Petty Cash …………………… XXXX
b. Postage Expense ……………….. XXXX
Petty Cash …………………… XXXX
c. Miscellaneous Expense ……….. XXXX
Petty Cash …………………… XXXX
d. No entry is made.
154. All of the following would involve a debit memorandum except
a. a bank service charge.
b. an NSF check.
c. the cost of printing checks.
d. interest earned.
155. A bank may issue a credit memorandum for
a. a bank service charge.
b. an NSF (not sufficient funds) check from a customer.
c. the collection of a note receivable for the depositor by the bank.
d. the cost of printing checks.
156. Journal entries are required by the depositor for all of the following except
a. collection of a note receivable.
b. bank errors.
c. bank service charges.
d. an NSF check.
157. Cash equivalents are highly liquid investments that can be converted into a specific
amount of cash with maturities of
a. 1 month or less when purchased.
b. 3 months or less when purchased.
c. 6 months or less when purchased.
d. 1 year or less when purchased.
Test Bank for Financial Accounting, Ninth Edition
7 – 32
158. The principles of internal control activities are used in the
a. 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.
159. 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.
160. 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.
161. What percentage of companies worldwide have experienced fraud in a recent two-year
period?
a. 1%
b. 10%
c. 50%
d. 100%
162. Tangible frauds include
a. asset misappropriation.
b. false pretenses.
c. counterfeiting.
d. all of the above.
163. IFRS, compared to GAAP, tends to be more
a. detailed.
b. rules-based.
c. principles-based.
d. full of disclosures requirements.
164. GAAP, compared to IFRS, tends to be more
a. simple in accounting requirements.
b. rules-based.
c. principles-based.
d. simple in disclosures requirements.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 33
165. 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
166. 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.
167. 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.
Answers to Multiple Choice Questions
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 34
BRIEF EXERCISES
BE 168
Match the principle of internal control to each of the following cases.
a) Establishment of responsibility
b) Segregation of duties
c) Accountability for assets
d) Documentation procedures
e) Physical controls
_____ 1. Cash is locked in a safe overnight.
_____ 2. Employees who receive shipments of goods do not have access to the accounting
records for merchandise.
_____ 3. Shipping documents are prenumbered.
_____ 4. The bookkeeper does not have physical custody of assets.
_____ 5. Only the treasurer of the company can sign checks.
BE 169
Identify which principle of internal control is being followed in each of the following cases.
1. Warehouse employees do not have access to the accounting records.
2. Prenumbered shipping documents are prepared for each shipment of goods.
3. The locked warehouse is accessible only by warehouse employees with keys.
Fraud, Internal Control, and Cash
7 – 35
BE 170
Identify the internal control procedures applicable to cash receipts for Ferguson Company in each
of the following cases.
1. All cashiers are bonded.
2. The treasurer compares the total cash receipts to the bank deposit daily.
3. The bookkeeper records cash receipts which are held by the treasurer.
4. Only the treasurer holds cash receipts.
5. Deposit slips are completed for each deposit.
BE 171
Identify the internal control procedures applicable to cash disbursements followed by Downey
Company in each of the following cases.
1. Company checks are prenumbered.
2. Only the treasurer is authorized to sign checks.
3. All employees are required to take vacations.
4. Blank checks are stored in a locked safe.
5. The bookkeeper, not the treasurer, records cash disbursements.
BE 172
On October 1, Head and Heart Company’s petty cash fund of $150 is replenished. The fund
contains cash of $30, and receipts for supplies of $75 and postage of $45. Prepare the journal
entry to record the replenishment of the petty cash fund.
Test Bank for Financial Accounting, Ninth Edition
7 – 36
BE 173
Identify whether each of the following items would be (a) added to the book balance, or (b)
deducted from the book balance in a bank reconciliation.
1. EFT transfer to a supplier
2. Bank service charge
3. Check printing charge
4. Error recording check # 214 which was written for $450 but recorded for $540
5. Collection of note and interest by bank on company’s behalf
BE 174
Identify whether each of the following items would be (a) added to the book balance, (b) deducted
from the book balance in a bank reconciliation, (c) added to the bank balance, or (d) deducted
from the bank balance.
1. Deposits in transit
2. Bank service charge
3. Collection of note and interest by bank on company’s behalf
4. NSF check
5. Outstanding checks
BE 175
Identify which of the following reconciling items would require an adjusting entry to be made by
Danielle Doyle Company.
1. Deposits in transit totaled $2,000.
2. A check written to the company for $415 by Cartography Company was returned NSF.
3. The bank charged the company $25 for printing checks.
4. Outstanding checks totaled $3,300
5. A debit memorandum reported an EFT of $178 to Salome Utilities
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 37
Solution 175 (3 min.)
BE 176
Harnish Company needs to make adjusting entries for each of the following reconciling items.
Identify the account to be debited and the account to be credited in each case.
1. A check for $127 written to the company by J. Chandler was returned NSF.
2. The monthly service charge by the bank was $20.
3. The bank collected a $1,000 note plus interest of $100 on the company’s behalf. The
company had not accrued the interest.
BE 177
The following reconciling items are applicable to the bank reconciliation for the Spahn Company.
Indicate how each item should be shown on a bank reconciliation.
a. Outstanding checks.
b. Bank credit memorandum for collecting a note for the depositor.
c. Bank debit memorandum for service charge.
d. Deposit in transit.
BE 178
At August 31, Coffman Company has this bank information: cash balance per bank $6,450;
outstanding checks $2,762; deposits in transit $1,700; and a bank service charge $20.
Determine the adjusted cash balance per bank at August 31, 2015.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 38
BE 179
Given the following information, determine the adjusted cash balance per books from the
following information:
a. Balance per books as of June 30, $8,600.
b. Outstanding checks, $820.
c. NSF check returned with bank statement, $130.
d. Deposit mailed the afternoon of June 30, $300.
e. Check printing charges, $30.
f. Interest earned on checking account, $12.
EXERCISES
Ex. 180
Match each of the following principles of internal control with the appropriate description below.
A. Establishment of responsibility
B. Segregation of duties
C. Documentation procedures
D. Physical controls
E. Independent internal verification
F. Human resource controls
_____ 1. Involves the review, comparison, and reconciliation of data prepared by other
employees.
_____ 2. Provide evidence that transactions and events have occurred.
_____ 3. Includes the authorization and approval of transactions.
_____ 4. Rotating employees’ duties and requiring employees to take vacations.
_____ 5. Related activities should be assigned to different individuals.
_____ 6. Using garment sensors to deter theft.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 39
Ex. 181
Below are descriptions of internal control problems. In the space to the left of each item, enter the
code letter of the one best internal control principle that is related to the problem described.
Internal Control Principles
A. Establishment of responsibility
B. Segregation of duties
C. Physical controls
D. Documentation procedures
E. Independent internal verification
F. Human resource controls
____ 1. The same person opens incoming mail and posts the accounts receivable subsidiary
ledger.
____ 2. Three people handle cash sales from the same cash register drawer.
____ 3. A clothing store is experiencing a high level of inventory shortages because people try
on clothing and walk out of the store without paying for the merchandise.
____ 4. The person who is authorized to sign checks approves purchase orders for payment.
____ 5. Some cash payments are not recorded because checks are not prenumbered.
____ 6. Cash shortages are not discovered because there are no daily cash counts by
supervisors.
____ 7. The treasurer of the company has not taken a vacation for over 20 years.
Ex. 182
Joe Foss has worked for Dr. Sam Milton for several years. Joe demonstrates a loyalty that is rare
among employees. He hasn’t taken a vacation in the last three years. One of Joe’s primary duties
at the medical office is to open the mail and list the checks received. He also takes cash from
patients at the cashier window as patients leave. At times it is so hectic that Joe doesn’t bother
with giving each patient a receipt for the cash paid on their accounts. He assures them he will see
to it that they receive the proper credit. When the traffic is slow in the office, Joe offers to help
Ann post the payments to the patients‘ accounts receivable. She is always happy to receive his
help, because he is a very conscientious worker.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 40
Ex. 182 (Cont.)
Instructions
Identify any principles of internal control that may be violated in this medical office situation.
Ex. 183
Listed below are seven errors or problems which might occur in the processing of cash
transactions. Also shown is a list of internal control principles. Evaluate each possible error and
cite a principle that is listed that would reduce the probability of the error occurring. If none of the
principles given will correct the problem, write “None.” If you think more than one principle is
appropriate, list all principles that apply.
Possible Errors or Problems
1. An employee steals the cash collected from a customer for an account receivable and
conceals this theft by issuing a credit memorandum indicating that the customer returned the
merchandise.
2. A small fire destroys 3 days of cash receipts.
3. The official designated to sign checks is able to steal blank checks and issue them without
fear of detection.
4. A salesclerk in serving customers often rings up a sale for less than the actual amount and
then keeps the additional cash collected from the customer.
5. Three cashiers use one cash register drawer and the cash in the drawer is often short of the
balance kept on hand.
6. Each cashier counts his own register drawer each day and verbally reports the results to the
supervisor.
7. Cashiers with over 5 years’ experience are not bonded.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 41
Ex. 183 (Cont.)
Internal Control Principles
a. Establishment of responsibility
b. Segregation of duties
c. Physical controls
d. Documentation procedures
e. Independent internal verification
f. Human resource controls
Ex. 184
Match the internal control principle below with the appropriate cash receipts procedure described.
a. Documentation procedures
b. Establishment of responsibility
c. Independent internal verification
d. Human resource controls
e. Physical controls
f. Segregation of duties
_____ 1. Only designated personnel are authorized to handle cash receipts.
_____ 2. Different individuals receive cash and record cash receipts.
_____ 3. Use remittance advice and cash register tapes.
_____ 4. Store cash in safes and bank vaults.
_____ 5. Treasurer compares total receipts to bank deposits daily.
_____ 6. Bonding of employees that handle cash.
Test Bank for Financial Accounting, Ninth Edition
7 – 42
Ex. 185
Match the internal control principle below with the appropriate cash disbursements procedure
described. a. Establishment of responsibility
b. Segregation of duties
c. Documentation procedures
d. Physical controls
e. Independent internal verification
f. Human resource controls
_____ 1. Compare checks to invoices.
_____ 2. Different individuals approve and make payments.
_____ 3. Print check amounts by machine with indelible ink.
_____ 4. Only designated personnel are authorized to sign checks.
_____ 5. Each check must have approved invoice.
_____ 6. Requiring employees to take vacations.
Ex. 186
The petty cash fund of $200 for Ginther Company appeared as follows on December 31, 2015:
Cash $61.60
Petty cash vouchers
Freight in $27.40
Postage 45.00
Balloons for a special occasion 63.00
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 in general journal form the 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.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 43
Solution 186 (10 min.)
Ex. 187
Prepare the entry to replenish the $200 petty cash fund of Erin Company, assuming the fund has
receipts for: freight-out $60, postage $105, and miscellaneous expense $25. The fund contains
$8 in cash.
Ex. 188
On October 1, 2015, Ellington Company establishes an imprest petty cash fund by issuing a
check for $200 to Erin Angelo, the custodian of the petty cash fund. On October 31, 2015, Erin
Angelo submitted the following paid petty cash receipts for replenishment of the petty cash fund
when there is $32 cash in the fund:
Freight-In $28
Supplies Expense 42
Entertainment of Clients 65
Postage Expense 30
Instructions
Prepare the journal entries required to establish the petty cash fund on October 1 and the
replenishment of the fund on October 31.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 44
Ex. 189
Ernest Company uses an imprest petty cash system. The fund was established on March 1 with a
balance of $200. During March the following petty cash receipts were found in the petty cash box.
Receipt
Date No. For Amount
3/5 1 Stamp Inventory $74
7 2 Freight-Out 42
9 3 Miscellaneous Expense 22
11 4 Travel Expense 49
The fund was replenished on March 15 when the fund contained $9 in cash. On March 20, the
amount in the fund was increased to $300.
Instructions
Journalize the entries in March that pertain to the operation of the petty cash fund.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 45
Ex. 190
Sky Company is unable to reconcile the bank balance at January 31. Sky’s reconciliation is as
follows.
Cash balance per bank $5,300
Add: NSF check 1,570
Less: Bank service charge 35
Adjusted balance per bank $6,835
Cash balance per books $5,705
Less: Deposits in transit 750
Add: Outstanding checks 1,950
Adjusted balance per books $6,905
Instructions
(a) Prepare a correct bank reconciliation.
(b) Journalize the entries required by the reconciliation.
Ex. 191
On April 30, the bank reconciliation of Baxter Company shows three outstanding checks: no. 354,
$650, no. 355, $820, and no. 357, $615. The May bank statement and the May cash payments
journal show the following.
Test Bank for Financial Accounting, Ninth Edition
7 – 46
Bank Statement
Cash Payments Journal
Checks Paid
Checks Issued
Date
Check No.
Amount
Date
Check No.
Amount
5/4
354
650
5/2
358
159
5/2
355
820
5/5
359
275
5/17
358
159
5/10
360
890
5/12
359
275
5/15
361
850
5/20
360
890
5/22
362
750
5/29
363
480
5/24
363
480
5/30
362
750
5/29
364
870
Ex. 191 (Cont.)
Instructions
Using step 2 in the reconciliation procedure, list the outstanding checks at May 31.
Ex. 192
The information below relates to the Cash account in the ledger of Lee Company.
Balance September 1—$25,725; Cash deposited—$96,000.
Balance September 30—$22,225; Checks written—$99,500.
The September bank statement shows a balance of $24,635 on September 30 and the following
memoranda.
Credits Debits
Collection of $4,250 note plus interest $50 $4,300 NSF check: J. E. Hoover $735
Interest earned on checking account $40 Safety deposit box rent $75
At September 30, deposits in transit were $4,695, and outstanding checks totaled $3,575.
Instructions
Prepare the bank reconciliation at September 30.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 47
Cash balance per bank statement ………………………………………….. $24,635
Add: Deposits in transit ………………………………………………………… 4,695
29,330
Less: Outstanding checks …………………………………………………….. 3,575
Adjusted cash balance per bank ……………………………………………. $25,755
Cash balance per books ……………………………………………………….. $22,225
Add: Collection of note receivable ($4,250 + $50) …………………….. $4,300
Interest earned ……………………………………………………………. 40 4,340
26,565
Solution 192 (cont.)
Ex. 193
The cash records of Jasmin Company show the following four situations.
1. The June 30 bank reconciliation indicated that deposits in transit total $2,110. During July the
general ledger account Cash shows deposits of $23,620, 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 $1,250. During the
month of July, Jasmin 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 $2,900.
4. In September, cash disbursements per books were $36,550, checks clearing the bank were
$37,500, and outstanding checks at September 30 were $3,200.
There were no bank debit or credit memoranda. No errors were made by either the bank or
Jasmin 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, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 48
Ex. 194
Lyleen Boat Company’s bank statement for the month of September showed a balance per bank
of $7,000. The company’s Cash account in the general ledger had a balance of $5,459 at
September 30. Other information is as follows:
(1) Cash receipts for September 30 recorded on the company’s books were $5,700 but this
amount does not appear on the bank statement.
(2) The bank statement shows a debit memorandum for $40 for check printing charges.
(3) Check No. 119 payable to Mann Company was recorded in the cash payments journal and
cleared the bank for $248. A review of the accounts payable subsidiary ledger shows a $36
credit balance in the account of Mann Company and that the payment to them should have
been for $284.
(4) The total amount of checks still outstanding at September 30 amounted to $5,000.
(5) Check No. 138 was correctly written and paid by the bank for $409. The cash payment
journal reflects an entry for Check No. 138 as a debit to Accounts Payable and a credit to
Cash in Bank for $490.
(6) The bank returned an NSF check from a customer for $360.
(7) The bank included a credit memorandum for $2,560 which represents collection of a
customer’s note by the bank for the company; principal amount of the note was $2,500 and
interest was $60. Interest has not been accrued.
Instructions
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 49
(a) Prepare a bank reconciliation for Lyleen Boat Company at September 30.
(b) Prepare any adjusting entries necessary as a result of the bank reconciliation.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 50
Solution 194 (25 min.)
Ex. 195
Bell Food Store developed the following information in recording its bank statement for the month
of March.
Balance per books March 31 $ 3,664
Balance per bank statement March 31 $10,900
———————————————————————————————————————————
(1) Checks written in March but still outstanding $7,000.
(2) Checks written in February but still outstanding $3,100.
(3) Deposits of March 30 and 31 not yet recorded by bank $5,200.
(4) NSF check of customer returned by bank $1,200.
(5) Check No. 210 for $593 was correctly issued and paid by bank but incorrectly entered in the
cash payments journal as payment on account for $539.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 51
Ex. 195 (Cont.)
(6) Bank service charge for March was $50.
(7) A payment on account was incorrectly entered in the cash payments journal and posted to
the accounts payable subsidiary ledger for $824 when Check No. 318 was correctly
prepared for $284. The check cleared the bank in March.
(8) The bank collected a note receivable for the company for $3,000 plus $100 interest revenue.
Instructions
Prepare a bank reconciliation at March 31.
Ex. 196
Using the code letters below, indicate how each of the items listed would be handled in preparing
a bank reconciliation. Enter the appropriate code letter in the space to the left of each item.
Code
A Add to cash balance per books
B Deduct from cash balance per books
C Add to cash balance per bank
D Deduct from cash balance per bank
E Does not affect the bank reconciliation
Items:
____ 1. Outstanding checks.
____ 2. Bank service charge.
____ 3. Check for $420 correctly written and paid by the bank but incorrectly entered in the
cash payments journal for $240.
____ 4. Deposit in transit.
____ 5. Bank returns deposited check marked NSF.
Test Bank for Financial Accounting, Ninth Edition
7 – 52
Ex. 196 (Cont.)
____ 6. Bank collects notes receivable and interest for depositor.
____ 7. Bank debit memorandum for check printing fees.
____ 8. Petty cash custodian has $91 in paid petty cash vouchers that have not been reimbursed.
____ 9. Bank charged a check against the company which should have been charged to
another company.
____ 10. A check for $246 was correctly paid by the bank but was incorrectly entered in the
cash payments journal for $264.
Ex. 197
The following adjusting entries for Donkey Company were prepared after completing a bank
reconciliation. For each of the following adjustments, prepare a probable explanation for the
adjusting entry.
1. Supplies …………………………………………………………………………….. 180
Cash ………………………………………………………………………….. 180
2. Accounts Receivable—B. Borke …………………………………………….. 460
Cash ………………………………………………………………………….. 460
3. Cash …………………………………………………………………………………. 2,240
Notes Receivable …………………………………………………………. 2,000
Interest Revenue …………………………………………………………. 240
4. Sales …………………………………………………………………………………. 72
Cash ………………………………………………………………………….. 72
5. Miscellaneous Expense ………………………………………………………… 18
Cash ………………………………………………………………………….. 18
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 53
Solution 197 (10 min.)
Ex. 198
The cash balance per books for Feagen Company on September 30, 2015 is $10,740.93. The
following checks and receipts were recorded for the month of October, 2015:
Checks Receipts
No. Amount No. Amount Amount Date
17 $372.96 22 $ 578.84 $843.86 10/ 5
18 $780.62 23 $1,687.50 $941.54 10/21
19 $157.00 24 $ 921.30 $808.58 10/27
20 $587.50 25 $ 246.03 $967.00 10/30
21 $234.15
In addition, the bank statement for the month of October is presented below:
Balance Deposits and Credits Checks and Debits Balance
Last Statement No. Total Amount No. Total Amount This Statement
————————————————————————————————————————
$5,404.84 5 $9,178.36 10 $3,632.19 $10,951.01
————————————————————————————————————————
Checks and other debits Deposits Date Balance
———————————————————————
No. Amount No. Amount No. Amount
————————————————————————————————————————
14 148.29 17 372.96 22 578.84 5,484.38 10/ 1 $9,875.31
18 708.62 24 921.30 843.86 10/ 8 $9,219.03
19 157.00 25 246.03 941.54 10/23 $9,541.58
21 234.15 25.00 SC 808.58 10/29 $10,101.01
240.00 NSF 1,100.00 CM 10/31 $10,951.01
————————————————————————————————————————
Symbols: NSF (Not sufficient funds) SC (Service charge) CM (Credit Memo)
————————————————————————————————————————
Check No. 18 was correctly written for $708.62 for a payment on account. The NSF check was
from S. Long, a customer, in settlement of an accounts receivable. An entry had not been made
for the NSF check. The credit memo is for the collection of a note receivable including interest of
$60 which has not been accrued. The bank service charge is $25.00.
Test Bank for Financial Accounting, Ninth Edition
7 – 54
Ex. 198 (Cont.)
Instructions
(a) Prepare a bank reconciliation at October 31.
(b) Prepare the adjusting journal entries required by the bank reconciliation.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 55
Ex. 199
Riley Company received a notice with its bank statement that the bank had collected a note
receivable for $5,000 plus $150 of interest. The bank had credited these amounts to Riley ‘s
account less a collection fee of $10. Riley Company had already accrued the interest for this note
on its books.
(a) How will these items affect Riley Company’s bank reconciliation?
(b) Prepare the journal entry that Riley Company will make to record this information on its
books.
Ex. 200
The cash records of Mercury Company show the following:
1. The June 30 bank reconciliation indicated that deposits in transit totaled $790. During July the
general ledger account Cash shows deposits of $9,800, but the bank statement indicates that
only $8,240 in deposits were received during the month.
2. The June 30 bank reconciliation also reported outstanding checks of $1,200. During the
month of July, Mercury Company books show that $11,570 of checks were issued, yet the
bank statement showed that $11,100 of checks cleared the bank in July.
There were no bank debit or credit memoranda and no errors were made by either the bank or
Mercury Company.
Answer the following questions:
(a) What were the deposits in transit at July 31?
(b) What were the outstanding checks at July 31?
Test Bank for Financial Accounting, Ninth Edition
7 – 56
Ex. 201
Indicate how each of the following items would be shown on a bank reconciliation.
1. Bank error (The bank charged our account with another company’s check)
2. Check printing charge
3. Deposits in transit
4. Note collected by the bank
5. NSF checks
6. Outstanding checks
Ex. 202
The cash records of Barry Company show the following:
1. In September, deposits per the bank statement totaled $38,600; deposits per books $39,000;
and deposits in transit at September 30 were $4,600.
2. In September, cash disbursements per books were $36,500; checks clearing the bank were
$39,800; and outstanding checks at September 30 were $3,100.
There were no bank debit or credit memoranda and no errors were made by either the bank or
Barry Company.
Answer the following questions:
(a) What were the deposits in transit at August 31?
(b) What were the outstanding checks at August 31?
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 57
Solution 202 (10 min.)
Ex. 203
Listed below are items that may be useful in preparing the March 2015, bank reconciliation for
Walker Machine Works.
Using the following code, insert in the space before each item the letter where the amount would
be located or otherwise treated in the bank reconciliation process.
Code Located or Treated
A Add to the cash balance per books
B Deduct from the cash balance per books
C Add to the cash balance per bank
D Deduct from the cash balance per bank
E Does not affect the bank reconciliation
____ 1. Included with the bank statement materials was a check from Bob Simpson for $40
stamped “account closed.”
____ 2. A personal deposit by Annie Walker to her personal account in the amount of $300 for
dividends on her General Electric common stock was credited to the company
account.
____ 3. The bank statement included a debit memorandum for $22.00 for two books of blank
checks for Walker Machine Works.
____ 4. The bank statement contains a credit memorandum for $24.75 interest on the average
checking account balance.
____ 5. The daily deposits of March 30 and March 31, for $3,362 and $3,125 respectively,
were not included in the bank statement postings.
____ 6. Two checks totaling $316.86, which were outstanding at the end of February, cleared
in March and were returned with the March statement.
____ 7. The bank statement included a credit memorandum dated March 28, 2015, for $45.00
for the monthly interest on a 6-month, $15,000 certificate of deposit that the company
owns.
Test Bank for Financial Accounting, Ninth Edition
7 – 58
Ex. 203 (Cont.)
____ 8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank
during March.
____ 9. On March 24, 2015, Walker Machine Works delivered to the bank for collection a
$2,500, 3-month note from Don Decker. A credit memorandum dated March 29, 2015,
indicated the collection of the note and $90.00 of interest.
____ 10. The bank statement included a debit memorandum for $25.00 for the collection
service on the above note and interest.
Ex. 204
The following information was used to prepare the March 2015, bank reconciliation for Walker
Machine Works. Identify the items that require adjustment to the cash balance per books and
prepare the appropriate adjusting entries.
1. Included with the bank statement materials was a check from Bob Simpson for $40 stamped
“NSF.”
2. A personal deposit by Annie Walker to her personal account in the amount of $300 for
dividends on her General Electric common stock was credited to the company account.
3. The bank statement included a debit memorandum for $22.00 for two books of blank checks
for Walker Machine Works.
4. The bank statement contains a credit memorandum for $24.75 interest on the average
checking account balance.
5. The daily deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not
included in the bank statement postings.
6. Two checks totaling $316.86, which were outstanding at the end of February, cleared in
March and were returned with the March statement.
7. The bank statement included a credit memorandum dated March 28, 2015, for $45.00 for
the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns.
8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank during
March.
9. On March 24, 2015, Walker Machine Works delivered to the bank for collection a $4,500,
3-month note from Don Decker. A credit memorandum dated March 29, 2015, indicated the
collection of the note and $90.00 of interest.
10. The bank statement included a debit memorandum for $25.00 for the collection service on
the above note and interest.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7 – 59
Ex. 205
Compute Whiz Company’s adjusted cash balance per books based on the following information:
Ending cash balance per books $4,200
Deposit in transit 900
Check printing charge 20
Note collected by bank for Whiz 1,600
Test Bank for Financial Accounting, Ninth Edition
7 – 60
COMPLETION STATEMENTS
206. Internal control consists of the related methods and measures adopted to ____________
its assets and enhance the ______________ and ______________ of its accounting
records.
207. The three main factors that contribute to fraudulent activity are depicted by the
_______________.
208. The principle of internal control that prevents one individual from being responsible for all
the related activities of a given task is ______________.
209. The ______________ of an asset should not have access to the accounting records of
that asset.
210. Employees of a company who evaluate the effectiveness of the company’s system of
internal controls on a year-round basis are called ______________.
211. Using _______________ documents is a control measure which helps in accounting for
all documents in a series and also prevents a document from being recorded more than
once.
212. Employees who handle cash should be ______________ in order to protect against
misappropriation of assets by dishonest employees.
213. Two limitations of systems of internal control are the concept of ______________ and the
______________.
214. Internal control over cash disbursements is more effective when payments are made by
______________, rather than by ______________.
215. A disbursement system that uses wire, telephone, computers, etc., to transfer cash from
one location to another is referred to as ______________.
216. A voucher is recorded in the ________________ and filed according to the date on which
it is to be paid.
Fraud, Internal Control, and Cash
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217. A __________________ fund is used to pay relatively small expenditures.
218. A debit memorandum issued by the bank ______________ the cash balance in the
depositor’s account.
219. There are three parties to a check: (1)_______________, (2)______________, and the
(3)______________.
220. 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.
221. In preparing a bank reconciliation, outstanding checks are ______________ from the
cash balance per ______________.
222. A check correctly written for $270 was incorrectly entered in the cash payments journal for
$720. In preparing a bank reconciliation, $_____________ must be ______________ the
cash balance per ______________.
Answers to Completion Statements
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 62
MATCHING
223. Match the items below by entering the appropriate code letter in the space provided.
A. Prenumbered documents G. Bank signature card
B. Custody of an asset should be kept H. Payee
separate from the record-keeping I. Maker
for that asset J. Canceled checks
C. Cash registers, 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 O. Voucher system
____ 1. Segregation of duties.
____ 2. One to whom a check is payable.
____ 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. Indicates those people authorized to sign checks.
____ 8. Anything that a bank will accept for deposit.
____ 9. Mechanical and electronic control devices.
____ 10. One who issues a check.
____ 11. Insurance protection against misappropriation of assets.
____ 12. An extensive network of approvals by authorized individuals.
____ 13. Document indicating the purpose of a petty cash expenditure.
____ 14. Issued checks that have not been paid by the bank.
____ 15. Highly liquid investments.
Fraud, Internal Control, and Cash
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SHORT-ANSWER ESSAY QUESTIONS
S-A E 224
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 225
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 226
Your friend, Dean, has opened a movie theater. Dean states that he does not have time to
develop and implement a system of internal controls.
a. Provide Dean with the objectives of a system of internal controls.
b. Explain to Dean why he should develop a system of internal controls.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 64
Solution 226
S-A E 227
(a) Identify the three activities that pertain to a petty cash fund, and indicate an internal control
principle that is applicable to each activity. (b) When are journal entries required in the operation
of a petty cash fund?
S-A E 228
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.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
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Solution 228
S-A E 229 (Ethics)
Moyer 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.
S-A E 230 (Communication)
Medaid is a medical office management franchise. There are currently twenty-five medical offices
managed by a Medaid franchisee. One of the services provided to franchisees is assistance in
training various staff members.
Medaid 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.
Test Bank for Financial Accounting, Ninth Edition
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Solution 230
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
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CHALLENGE EXERCISE
CE 1
Williams Company established a petty cash fund on May 1, cashing a check for $250. The
company reimbursed the fund on June 1 with the following results.
June 1: Cash in fund $64. Receipts: delivery expense $81; postage expense $39; and
miscellaneous expense $62.
July 1: Cash in funds $43 Receipts: delivery expense $91.00; entertainment expense $71.00;
and miscellaneous expense $45
On July 10, Williams increased the fund form $250 to $400.
Instructions
(a) Prepare journal entries for Williams Company for May 1, June 1, July 1, and July 10.
(b) What internal control features are present in the petty cash fund?
Solution CE 1
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 68
CE 2
The following information pertains to Manning Video Company.
1. Cash balance per bank, July 31, $8,363.
2. July bank service charge not recorded by the depositor $22.
3. The bank erroneously charged another company’s $700 check against Manning’s account.
4. Cash balance per books, July 31, $9,784.
5. The bank charged Manning’s account $350 for a customer’s NSF check.
6. Deposits in transit, July 31, $2,700.
7. Manning recorded a cash receipt from a customer as $32. The bank correctly recorded it at
$23
8. Bank collected a $1,750 note for Manning in July, plus interest $36. less fee $20.The collection
has not been recorded by Manning and no interest has been accrued.
9. Outstanding check, July 31, $594.
Instructions
(a) Prepare a bank reconciliation at July 31.
(b) Journalize the adjusting entries at July 31 on the books of Manning Video Company.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
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CE 3
Newton Company has recorded the following items in its financial records.
Cash in bank:
Checking account $32,000
Money market fund 13,000
Payroll account 3,000
Certificate of deposit (matures in 2 months) 5,000
Certificate of deposit (matures in 12 months) 10,000 $ 63,000
Cash in plant expansion fund 120,000
Cash on hand 11,000
Highly liquid investments 35,000
Petty Cash 300
Receivable from customers 99,000
Stock investment 61,000
U.S. Treasury bills 20,000
The checking account is subject to a compensating balance of $5,000. The highly liquid
investments had maturities of 3 months or less when they were purchased. The stock investment
will be sold in the next 6 to 12 months. The plant expansion project will begin in 3 years.
Instructions
(a) What amount should Newton report as “Cash and cash equivalents” on its balance sheet?
(b) Where should the items not included in part (a) be reported on the balance sheet?
Solution CE 3
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
7 – 70
Solution CE 3 (Cont.)