Chapter 6: Cash and Internal Control
153. A check that is returned or “bounces” because of insufficient funds is called a(n) ____________________.
ANSWER:
NSF check
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-02 – LO: 06-02
KEYWORDS:
Bloom’s: Remembering
154. An amount recorded as an increase in the company’s cash account at month-end, but which has not yet been reflected
on the bank statement is called a(n) _________________________.
ANSWER:
deposit in transit
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-02 – LO: 06-02
KEYWORDS:
Bloom’s: Remembering
155. Items that are included on a bank statement and decrease the bank account balance are called
_________________________.
ANSWER:
debit memoranda
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-02 – LO: 06-02
KEYWORDS:
Bloom’s: Remembering
156. If a company records a $310 receipt as $130, this type of error is called a(n) ____________________.
ANSWER:
transposition
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-02 – LO: 06-02
KEYWORDS:
Bloom’s: Remembering
157. The audit committee of the board of directors provides direct contact between the
______________________________ and the ________________________________________.
ANSWER:
stockholders, independent accounting firm
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.06-03 – LO: 06-03
KEYWORDS:
Bloom’s: Remembering
158. _________________ is the body created by the Sarbanes-Oxley Act that was given the authority to set auditing
standards in the United States.
ANSWER:
The Public Company Accounting Oversight Board (PCAOB)
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-03 – LO: 06-03
KEYWORDS:
Bloom’s: Remembering
159. The ___________________ is a subset of the board of directors that acts as a direct contact between the stockholders
and the independent accounting firm.
ANSWER:
audit committee
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-03 – LO: 06-03
KEYWORDS:
Bloom’s: Remembering
160. __________________ is a report required by section 404 of the Sarbanes-Oxley Act.
ANSWER:
An internal control report
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-03 – LO: 06-03
KEYWORDS:
Bloom’s: Remembering
161. ____________________ controls within a company are more concerned with efficient operations and the adherence
to management policies than with the accurate reporting of financial information.
ANSWER:
Administrative
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-04 – LO: 06-04
KEYWORDS:
Bloom’s: Remembering
162. ____________________ controls primarily concern safeguarding of assets and ensuring the reliability of the
financial statements.
ANSWER:
Accounting
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-04 – LO: 06-04
KEYWORDS:
Bloom’s: Remembering
163. ______________________________ are the crucial link between economic transactions entered into by an entity
and the accounting for these events.
ANSWER:
Business documents
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-04 – LO: 06-04
KEYWORDS:
Bloom’s: Remembering
164. A(n) ____________________ is a form that a department uses to initiate a request to order merchandise.
ANSWER:
purchase requisition form
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-05 – LO: 06-05
KEYWORDS:
Bloom’s: Remembering
165. A(n) ____________________ is a form sent by the purchasing department to the supplier.
ANSWER:
purchase order
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-05 – LO: 06-05
KEYWORDS:
Bloom’s: Remembering
166. A(n) _______________ is a form sent by the seller to the buyer as evidence of a sale.
ANSWER:
invoice
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-05 – LO: 06-05
KEYWORDS:
Bloom’s: Remembering
167. A(n) ___________________ is a form used by the receiving department to account for the quantity and condition of
merchandise received from a supplier.
ANSWER:
blind receiving report
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-05 – LO: 06-05
KEYWORDS:
Bloom’s: Remembering
168. A(n) _________________ is a form the accounting department uses before making payment to document the
accuracy of all information about a purchase.
ANSWER:
invoice approval form or voucher
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-05 – LO: 06-05
KEYWORDS:
Bloom’s: Remembering
Matching
Latahmer Corporation is reconciling its May bank account. For each item listed, state how it would be handled on the
bank reconciliation.
a.
Addition to bank balance
b.
Subtraction from bank balance
c.
Addition to book balance
d.
Subtraction from book balance
e.
Would not appear on the May reconciliation
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.06-02 – LO: 06-02
KEYWORDS:
Bloom’s: Applying
169. Check written on the company’s account and paid by the bank is returned with the bank statement
ANSWER:
e
170. Check written in May that does not appear on the bank statement
ANSWER:
171. Service charge on the May bank statement for new checks
ANSWER:
172. Interest earned on the checking account for May
ANSWER:
c
173. Customer’s NSF check is returned with the bank statement
ANSWER:
174. Customer’s check which was deposited on May 31 is not listed on the bank statement
ANSWER:
a
Match the term with the statement that best defines it.
a.
Accounting controls
b.
Accounting system
c.
Administrative controls
d.
Audit committee
e.
Board of directors
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-03 – LO: 06-03
FACC.PONO.13.06-04 – LO: 06-04
KEYWORDS:
Bloom’s: Remembering
175. Provides direct contact between the shareholders and the independent auditing firm.
ANSWER:
176. Consists of all methods and records used to accurately report an entity’s transactions.
ANSWER:
177. Controls that are focused more on efficient operation than with correct reporting of information.
ANSWER:
c
178. Procedures concerned with safeguarding the assets or the reliability of financial statements.
ANSWER:
a
Match the action with the category of internal control procedures
a.
One department should check on another
b.
Internal audit staff ensure all is working as intended
c.
Accounting and cash collection is properly separated
d.
Blank checks are locked at all times when not in use
e.
Origination of initial entry into accounting system
f.
Specific authority is given by management for the performance of activities.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06-04 – LO: 06-04
KEYWORDS:
Bloom’s: Remembering
179. Proper authorization
ANSWER:
f
180. Segregation of duties
ANSWER:
c
181. Independent verification
ANSWER:
a
182. Safeguarding assets
ANSWER:
183. Design and use of business documents
ANSWER:
e
Match the following terms with the best definitions for questions 212 through 219.
a.
Purchase requisition.
b.
Receiving Report.
c.
Vendor Invoice.
d.
Check.
e.
Control procedures.
f.
Inventory count.
g.
Segregation of duties.
h.
Source document control.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.06-05 – LO: 06-05
KEYWORDS:
Blooms: Application
184. The practice of not combining physical custody of assets with the function of accounting for those assets.
ANSWER:
185. Used to prepare a purchase order.
ANSWER:
a
186. Form sent by the seller to the buyer as evidence of a sale
ANSWER:
c
187. Actions that company personnel take to make sure that policies set forth by management are followed.
ANSWER:
e
188. An example of independent verification.
ANSWER:
f
189. An example of design and use of business documents control.
ANSWER:
190. Typically sent along with a remittance advice.
ANSWER:
191. A form used for verification that the items originally requested have been received.
ANSWER:
Chapter 6: Cash and Internal Control
For the following items Questions 220–227, indicate whether each should be (a) included or (b) excluded from the line
item titled Cash and cash equivalents on the balance sheet.
a.
Included
b.
Excluded
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.06.01 – LO:06-01
KEYWORDS:
Bloom’s: Application
192. Certified check
ANSWER:
a
193. Corporate bonds maturing in 30 days
ANSWER:
194. Petty cash
ANSWER:
a
195. Shares of GM stock
ANSWER:
196. Savings account
ANSWER:
a
197. Certificate of deposit maturing in six months
ANSWER:
198. Checking account
ANSWER:
a
199. Certificate of deposit maturing in 60 days
ANSWER:
a
Chapter 6: Cash and Internal Control
Subjective Short Answer
200. Euro Corp. began the year with $19,000 in cash and another $1,000 in cash equivalents. During the year, operations
generated $132,000 in cash. Net cash used in investing activities during the year was $213,000, and the company raised a
net amount of $168,000 from financing activities.
Required:
Determine the year-end balance in cash and cash equivalents.
ANSWER:
Beginning balance in cash and cash equivalents
$ 20,000*
Add: Cash provided by operating activities
$132,000
Cash used in investing activities
(213,000)
Cash provided by financing activities
168,000
Net increase in cash and cash equivalents
87,000
Ending balance in cash and cash equivalents
$107,000
*$19,000 + $1,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.06-01 – LO: 06-01
KEYWORDS:
Bloom’s: Analyzing
201. Lakeland Enterprises invested its excess cash in the following instruments during December 2016:
Certificate of deposit, due January 31, 2019
$ 85,000
Certificate of deposit, due March 30, 2017
120,000
Commercial paper, original maturity date February 28, 2017
105,000
Deposit into a money market fund
45,000
Investment in stock
55,000
90-day Treasury bills
110,000
Treasury note, due December 1, 2044
400,000
Required:
Determine the amount of cash equivalents that should be combined with cash on the company’s balance sheet at
December 31, 2016, and for purposes of preparing a statement of cash flows for the year ended December 31, 2016.
ANSWER:
Cash equivalents at December 31, 2016:
Certificate of deposit, due March 30, 2017
$120,000
Commercial paper, original maturity date February 28, 2017
105,000
Deposit into a money market fund
45,000
90-day Treasury bills
110,000
Cash equivalents
$380,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.06-01 – LO: 06-01
KEYWORDS:
Bloom’s: Analyzing
202. The following accounts are listed in a company’s general ledger:
December 31, 2017
December 31, 2016
Accounts Receivable
$ 12,300
$ 10,000
Certificates of Deposit (three months)
10,000
15,000
Marketable Securities
4,500
4,000
Petty Cash Fund
800
1,000
Money Market Fund
23,200
28,700
Cash in Checking Account
6,200
5,400
Required:
1. Which items are cash equivalents?
2. Explain where items that are not cash equivalents should be classified on the balance sheet.
3. What are the amount and the direction of change in cash and cash equivalents for 2017? Is the company as liquid at the
end of 2017 as it was at the end of 2016? Explain your answer.
ANSWER:
1. Cash in the checking account and the petty cash fund are cash. The three-month
certificates of deposit and the money market fund are both cash equivalents.
2. Accounts receivable and marketable securities should be classified on the balance sheet as
current assets and listed in the order of their liquidity (marketable securities are more liquid
than accounts receivable).
3.
Cash and Cash Equivalents
12/31/17
12/31/16
Increase (Decrease)
Certificates of Deposit
$10,000
$15,000
($ 5,000)
Petty Cash Fund
800
1,000
(200)
Money Market Fund
23,200
28,700
(5,500)
Cash in Checking Account
6,200
5,400
800
Totals
$40,200
$50,100
($9,900)
The company is not as liquid at the end of 2017 as it was at the end of 2016. Although the
decrease in liquidity is not large, it is due to the decreases in the balances in the CDs, petty
cash fund, and the money market fund.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.06-01 – LO: 06-01
Bloom’s: Analyzing
203. Blairsville Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for July
2016 indicated the following:
Balance, July 31, 2016
$63,400
Service charge for July
160
Interest earned during July
100
NSF check from Black Corp. (deposited by Blairsville)
1,150
Note ($3,000) and interest ($80) collected for Blairsville from a
customer of Blairsville’s
3,080
An analysis of canceled checks and deposits and the records of Blairsville revealed the following items:
Checking account balance per Blairsville’s books
$58,770
Outstanding checks as of July 31
4,630
Deposit in transit at July 31
1,780
Error in recording check #205 issued by Blairsville
90
The correct amount of check #205 is $540, but it was recorded as a cash disbursement of $450. The check was issued to
pay for merchandise purchases. The check appeared on the bank statement correctly.
A) Prepare a bank reconciliation schedule at July 31, 2016, in proper form.
B) What amount would Blairsville report on its balance sheet at July 31, 2016, for cash?
ANSWER:
A)
Blairsville Corp.
Bank Reconciliation
July 31, 2016
Balance per bank statement
$63,400
Add: deposit in transit
1,780
Less: outstanding checks
(4,630)
Total
$60,550
Balance per books
$58,770
Add: interest earned
100
Add: note ($3,000) and interest ($80) collected by the
bank
3,080
Less: NSF check
Less: service charges
Correction of error-check for $540 recorded as $450
Total
$60,550
Moderate
FACC.PONO.13.06-02 – LO: 06-02
Bloom’s: Analyzing
204. Delmont Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for May,
2016, indicated the following:
Balance, May 31, 2016
$29,700
Service charge for May
80
Interest earned during May
120
NSF check from Viacon Corp. (deposited by Delmont)
230
Note ($4,000) and interest ($100) collected for Delmont from a
customer of Delmont’s
4,100
An analysis of canceled checks and deposits and the records of Delmont Corp. revealed the following items:
Checking account balance per Delmont’s books
$26,040
Outstanding checks as of May 31
2,950
Deposit in transit at May 31
3,110
Error in recording check # 4456 issued by Delmont
90
The correct amount of check #4456 is $760. It was recorded as a cash disbursement of $670 by mistake. The check was
issued to pay for merchandise purchases. The check appeared on the bank statement correctly.
A) Prepare a bank reconciliation schedule at May 31, 2016 in proper form.
B) Explain how checking accounts, bank statements, and bank reconciliations are used by Delmont to control its cash.
ANSWER:
A)
Delmont Corp.
Bank Reconciliation
May 31, 2016
Balance per bank statement
$29,700
Add: deposit in transit
3,110
Less: outstanding checks
(2,950)
Total
$29,860
Balance per books
$26,040
Add: interest earned
120
Add: note ($4,000) and interest ($100) collected by the bank
4,100
Less: NSF check
Less: service charges
Correction of error-check for $760 recorded as $670
Total
$29,860
Moderate
FACC.PONO.13.06-02 – LO: 06-02
Bloom’s: Analyzing
205. Sarcon Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for
October, 2016, indicated the following:
Balance, October 31, 2016
$7,920
Service charge for October
20
Interest earned during October
30
NSF check from Grey Corp. (deposited by Sarcon)
32
Note ($1,000) and interest ($40) collected for Sarcon from a customer
1,040
An analysis of canceled checks and deposits and the records of Sarcon revealed the following items:
Checking account balance per Sarcon books
$7,170
Outstanding checks as of October 31
952
Deposit in transit at October 31
1,310
Error in recording a check issued by Sarcon. (Correct amount of the
check is $450, but was recorded as a cash disbursement of $540.
The check was issued to pay for merchandise purchases.)
90
Required:
Prepare a bank reconciliation at October 31, 2016 in proper form.
ANSWER:
Sarcon Corp.
Bank Reconciliation
October 31, 2016
Balance per bank statement, October 31
$7,920
Add: deposit in transit
1,310
Less: outstanding checks
(952)
Adjusted balance, October 31
$8,278
Balance per books, October 31
$7,170
Add: interest earned
30
Add: note ($1,000) and interest ($40) collected by the bank
1,040
Less: NSF check
(32)
Less: service charges
(20)
Correction of error-check for $450 recorded as $540
90
Adjusted balance, October 31
$8,278
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.06-02 – LO: 06-02
KEYWORDS:
Bloom’s: Analyzing
206. Sarcon Corp. prepares monthly bank reconciliations of its checking account balance.
Required:
(1) Explain how checking accounts, bank statements, and bank reconciliations are used by Sarcon to control its cash.
(2) Explain how Sarcon can control small payments that must be made in cash rather than by check.
ANSWER:
(1) Checking accounts allow entities an opportunity to make all, or almost all, cash payments
by check. Preventing direct access to cash provides better internal control. Bank statements
and bank reconciliations allow verification of the cash balance and help identify errors that
have been made.
(2) Small cash payments can be controlled by using a petty cash fund. The amount of cash to
which employees have direct access is small. The system established for petty cash provides
a convenient and sound procedure for identifying the assets and expenses that must be
recorded when small cash payments are made.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.06-02 – LO: 06-02
KEYWORDS:
Bloom’s: Analyzing
207. On January 2, 2016, Viva Stores decided to set up a petty cash fund. The treasurer established the fund by writing
and cashing a $250 check and placing the coin and currency in a locked petty cash drawer. Conrad Boswell was
designated as the custodian for the fund. During January, the following receipts were given to Boswell in exchange for
cash from the fund:
Express Delivery Service
$74.50
Vintage Print Shoppe (employee party)
55.75
U.S. Post Office (stamps)
44.00
Office Supplies Pronto (pencils, paper)
23.00
A count of the cash in the drawer on January 31 revealed a balance of $53.25. The treasurer wrote and cashed a check on
the same day to restore the fund to its original balance of $250.
Required:
Prepare the necessary journal entries, with explanations, for January. Assume that all stamps and office supplies were
used during the month.
ANSWER:
2016
Jan. 2
Petty Cash Fund
250.00
Cash
250.00
To record establishment of petty cash
fund.
Jan. 31
Postage Expense
Delivery Expense
Entertainment Expense
Office Supplies Expense
Cash
To record replenishment of petty cash fund:
$250.00 – $53.25 = $196.75.