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Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7-41
*199. 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.
*200. 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.
Answers to Multiple Choice Questions
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
7-42
BRIEF EXERCISES
Be. 201
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 control devices
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.
Fraud, Internal Control, and Cash
7-43
Solution 201 (5 min.)
Be. 202
Indicate whether each of the business practices listed below strengthens (S) or weakens (W) a
company’s system of internal control.
____ a. Cashiers are not bonded.
____ b. All payments are made with checks.
____ c. Discouraging employees from taking paid vacations.
____ d. Two people handle cash sales from the same cash register drawer.
____ e. Using prenumbered sales tickets.
Be. 203
Identify the internal control procedures applicable to cash receipts for Colorado Company in each
of the following situations.
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. 204
Identify the internal control procedures applicable to cash disbursements followed by Tolan
Company in each of the following cases.
1. Company checks are pre-numbered.
2. Only the treasurer is authorized to sign checks.
3. Bonding of employees that handle cash.
4. Blank checks are stored in a locked safe.
5. The bookkeeper, not the treasurer, records cash disbursements.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
7-44
Be. 205
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 $230 but recorded for $320.
5. Collection of note and interest by bank on company’s behalf.
Be. 206
Identify which of the following reconciling items would require an adjusting entry to be made by
Costello Company.
1. Deposits in transit totaled $2,000.
2. A check written to the company for $350 by Grover Company was returned NSF.
3. The bank charged the company $46 for printing checks.
4. Outstanding checks totaled $1,667.
5. A debit memorandum reported an EFT of $178 to Paco Utilities.
Be. 207
Foyle 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 $59 written to the company by J. Hammond was returned NSF.
2. The monthly service charge by the bank was $34.
3. The bank collected a $1,000 note plus interest of $60 on the company’s
behalf. The company had not accrued the interest.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7-45
Be. 208
The following reconciling items are applicable to the bank reconciliation for the Gunselman
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. 209
At August 31 Kiner Company has this bank information: cash balance per bank $9,450;
outstanding checks $762; deposits in transit $1,700; and a bank service charge $20. Determine
the adjusted cash balance per bank at August 31, 2014.
Be. 210
Given the following information, determine the adjusted cash balance per books;
Balance per books as of June 30 $8,800
Outstanding checks $600
NSF check returned with bank statement $130
Deposit mailed the afternoon of June 30 $300
Check printing charges $30
Interest earned on checking account $40
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
7-46
Be. 211
The following information is available for Nichols Company for the month of February: expected
cash receipts $40,000; expected cash disbursements $44,000; cash balance February 1,
$11,000. Management wishes to maintain a minimum cash balance of $10,000. Prepare a basic
cash budget for the month of February.
Exercises
Ex. 212
Jim Gant has worked for Dr. Ken Flood for several years. Jim demonstrates a loyalty that is rare
among employees. He hasn't taken a vacation in the last three years. One of Jim'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 Jim doesn't bother
with giving patients 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 Jim offers to help Lisa
post the payments to the patients' accounts receivable. She is always happy to receive his help,
because he is a very conscientious worker.
Instructions
Identify any principles of internal control that may be violated in this medical office situation.
Ans: N/A, LO: 2, Bloom: C, Difficulty: Easy, Min: 10, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Risk Analysis,
AICPA PC: Communication, IMA: Internal Controls
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7-47
Ex. 213
Listed below are seven errors or problems that 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.
Internal Control Principles
a. Establishment of responsibility
b. Segregation of duties
c. Physical control devices
d. Documentation procedures
e. Independent internal verification
f. Human resource controls
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
7-48
Ex. 214
Using the following information, prepare a bank reconciliation for Hintz Company for July 31,
2014.
a. The bank statement balance is $3,506.
b. The cash account balance is $3,930
c. Outstanding checks totaled $1,285.
d. Deposits in transit are $1,670.
e. The bank service charge is $30.
f. A check for $98 for supplies was recorded as $89 in the ledger.
Ex. 215
Using the following information, prepare a bank reconciliation for Munoz Company for May 31,
2014.
a. The bank statement balance is $8,300.
b. The cash account balance is $6,562
c. Outstanding checks totaled $1,950.
d. Deposits in transit are $600.
e. The bank service charge is $12.
f. Collection of note by bank, $400.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7-49
Ex. 216
Using the following information, prepare a bank reconciliation for Hammond Company for June
30, 2014.
a. The bank statement balance is $7,650.
b. The cash account balance is $6,422
c. Outstanding checks totaled $1,650.
d. Deposits in transit are $900.
e. The bank service charge is $22.
f. Collection of note by bank, $500.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
7-50
Ex. 217
The Hartman Boat Company's bank statement for the month of November showed a balance per
bank of $7,000. The company's Cash account in the general ledger had a balance of $5,659 at
November 30. Other information is as follows:
(1) Cash receipts for November 30 recorded on the company's books were $6,000 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 Maris 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 Maris Company and that the payment to them should have been for
$284.
(4) The total amount of checks still outstanding at November 30 amounted to $5,800.
(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 $560.
(7) The bank included a credit memorandum for $2,060 which represents collection of a
customer's note by the bank for the company; principal amount of the note was $2,000 and
interest was $60. Interest has not been accrued.
Instructions
(a) Prepare a bank reconciliation for the Hartman Boat Company at November 30.
(b) Prepare any adjusting entries necessary as a result of the bank reconciliation.
Fraud, Internal Control, and Cash
7-51
Solution 217 (Cont.)
Ex. 218
The bank statement for Cates Company indicates a balance of $1,730 on June 30. The cash
balance per books had a balance of $799 on this date. The following information pertains to the
bank transactions for the company.
1. Deposit of $760, representing cash receipts of June 30, did not appear on the bank
statement.
2. Outstanding checks totaled $340.
3. Bank service charges for June amounted to $25
4. The bank collected a note receivable for the company for $1,400 plus $56 interest revenue.
5. An NSF check for $80 from a customer was returned with the statement.
Instructions
a. Prepare a bank reconciliation for June 30.
b. Prepare any adjusting entries necessary as a result of the bank reconciliation.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
7-52
Ex. 219
The bank statement for Adcock Company indicates a balance of $830 on July 31. The cash
balance per books had a balance of $390 on this date. The following information pertains to the
bank transactions for the company.
1. Deposit of $840, representing cash receipts of July 31, did not appear on the bank statement.
2. Outstanding checks totaled $390.
3. Bank service charges for June amounted to $30.
4. The bank collected a note receivable for the company for $1,200 plus $48 interest revenue.
5. A NSF check for $328 from a customer was returned with the statement.
Instructions
a. Prepare a bank reconciliation for July 31.
b. Prepare any adjusting entries necessary as a result of the bank reconciliation.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7-53
Ex. 220
Grier Food Store used the following information in recording its bank reconciliation for the month
of April.
Balance per books April 30 $ 905
Balance per bank statement April 30 $11,300
___________________________________________________________________________
(1) Checks written in April but still outstanding $6,300.
(2) Checks written in March but still outstanding $2,800.
(3) Deposits of April 30 not yet recorded by bank $4,900.
(4) NSF check of customer returned by bank $500.
(5) Check No. 210 for $594 was correctly issued and paid by bank but incorrectly entered in the
cash payments journal as payment on account for $549.
(6) Bank service charge for April was $40.
(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 April.
(8) The bank collected a note receivable for the company of $6,000 plus $240 interest revenue.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
7-54
Ex. 220 (Cont.)
Instructions
Prepare a bank reconciliation at April 30.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC:
Problem Solving, IMA: Reporting
Solution 220 (20 min.)
Ex. 221
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 $320 correctly written and paid by the bank but incorrectly entered in the
cash payments journal for $230
____ 4. Deposit in transit
____ 5. Bank returns customer deposited check marked NSF
____ 6. Bank collects notes receivable and interest for depositor
____ 7. Bank debit memorandum for check printing fees
____ 8. Petty cash custodian has $86 in paid petty cash vouchers that have not been
reimbursed.
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7-55
Ex. 221 (Cont.)
____ 9. Bank charged a check against the company, which should have been charged to
another company.
____ 10. A check for $236 was correctly paid by the bank but was incorrectly entered in the
cash payments journal for $263
Ex. 222
The cash balance per books for Wellmeyer Company on November 30, 2014, is $10,740.93. The
following checks and receipts were recorded for the month of December 2014:
Checks Receipts
No. Amount No. Amount Amount Date
17 $372.96 22 $ 578.84 $ 843.86 12/5
18 780.62 23 1,687.50 941.54 12/21
19 157.00 24 921.30 808.58 12/27
20 587.50 25 246.03 1,367.00 12/31
21 234.15
In addition, the bank statement for the month of December 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 $9,578.36 10 $3,632.19 $11,351.01
________________________________________________________________________
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 12/1 $9,875.13
18 708.62 24 921.30 843.86 12/8 $9,219.03
19 157.00 25 246.03 941.54 12/23 $9,541.58
21 234.15 15.00 SC 808.58 12/29 $10,101.01
250.00 NSF 1,500.00 CM 12/31 $11,351.01
________________________________________________________________________
Symbols: NSF (Not sufficient funds) SC (Service charge) CM (Credit Memo)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
7-56
Ex. 222 (Cont.)
Check No. 18 was correctly written for $708.62 for a payment on account. The NSF check was
from S. Gill, a customer, in settlement of an account receivable. An entry has not been made for
the NSF check. The credit memo is for the collection of a note receivable including interest of $60
that has not been accrued. The bank service charge is $15.00.
Instructions
(a) Prepare a bank reconciliation at December 31.
(b) Prepare the adjusting journal entries required by the bank reconciliation.
Fraud, Internal Control, and Cash
7-57
Solution 222 (Cont.)
Ex. 223
Seaver Company received a notice with its bank statement that the bank had collected a note
receivable for $18,000 plus $600 of interest. The bank had credited these amounts to Seaver's
account less a collection fee of $30. Seaver Company had already accrued the interest for this
note on its books.
(a) How will these items affect Seaver Company's bank reconciliation?
(b) Prepare the journal entry that Seaver Company will make to record this information on its
books.
Ex. 224
The cash records of the Dillon Company show the following:
1. The July 31 bank reconciliation indicated that deposits in transit totaled $390. During August
the general ledger account, Cash shows deposits of $11,800, but the bank statement
indicates that only $9,540 in deposits were received during the month.
2. The July 31 bank reconciliation also reported outstanding checks of $850. During the month
of August, the Dillon Company books show that $11,670 of checks were issued, yet the bank
statement showed that $10,500 of checks cleared the bank in August.
There were no bank debit or credit memoranda and no errors were made by either the bank or
the Dillon Company.
Answer the following questions:
(a) What were the deposits in transit at August 31?
(b) What were the outstanding checks at August 31?
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
7-58
Solution 224 (10 min.)
Ex. 225
The cash records of Grayson Company show the following:
1. In February, deposits per the bank statement totaled $37,700; deposits per books $38,000;
and deposits in transit at February 28 were $3,550.
2. In February cash disbursements per books were $37,500; checks clearing the bank were
$37,300; and outstanding checks at February 28 were $2,500.
There were no bank debit or credit memoranda and no errors were made by either the bank or
Grayson Company.
Answer the following questions:
(a) What were the deposits in transit at January 31?
(b) What were the outstanding checks at January 31?
Fraud, Internal Control, and Cash
FOR INSTRUCTOR USE ONLY
7-59
Ex. 226
Listed below are items that may be useful in preparing the March 2014, bank reconciliation for the
Carrinton Machine Works.
Using the code letters below, 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 Joe Terrell for $40
stamped "account closed”.
____ 2. A personal deposit by Ron Carrinton to his personal account in the amount of $300 for
dividends on his General Electric common stock was credited to the company account.
____ 3. The bank statement included a debit memorandum for $22.00 for four books of blank
checks for Carrinton Machine Works.
____ 4. The bank statement contains a credit memorandum for $42.75 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, 2014, for $62.00
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, 2014, Carrinton Machine Works delivered to the bank for collection a
$3,400, 3-month note from Tom Jacobs. A credit memorandum dated March 29, 2014,
indicated the collection of the note and $102.00 of interest.
____ 10. The bank statement included a debit memorandum for $20.00 for the collection
service on the above note and interest.
Ans: N/A, LO: 5, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Solution 226 (10 min.)
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
7-60
Ex. 227
On April 30, the bank reconciliation of Baxter Company shows three outstanding checks: no. 354,
$650, no. 355, $920, and no. 357, $615. The May bank statement and the May cash payments
journal show the following.
Bank Statement
Cash Payments Journal
Checks Paid
Checks Paid
Date
Check No.
Amount
Date
Check No.
Amount
5/4
354
650
5/2
358
159
5/2
357
615
5/5
359
275
5/17
358
159
5/10
360
890
5/12
359
275
5/15
361
800
5/20
360
890
5/22
362
750
5/29
363
480
5/24
363
480
5/30
362
750
5/29
364
840
Instructions
Using step 2 in the reconciliation procedure, list the outstanding checks at May 31.
Ans: N/A, LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA
PC: Problem Solving, IMA: FSA
Ex. 228
The information below relates to the Cash account in the ledger of Remington Company.
Balance September 1—$25,720 Cash deposited—$96,000.
Balance September 30—$26,100 Checks written—$95,620.
The September bank statement shows a balance of $24,635 on September 30 and the following
memoranda.
Credits
Debits
Collection of $3,750 note plus interest $50
$3,800
NSF check: J. E. Hoover
$635
Interest earned on checking account
$65
Safety deposit box rent
$75
At September 30, deposits in transit were $7,195, and outstanding checks totaled $2,575.
Instructions
Prepare the bank reconciliation at September 30.
