Chapter 4 - Cash and Internal Controls
Chapter 4
Cash and Internal Controls
REVIEW QUESTIONS
Question 4-1 (LO 4-1)
Occupational fraud is the use of one’s occupation for personal enrichment through the deliberate
Question 4-2 (LO 4-1)
Internal control is a company’s plan to (1) safeguard the company’s assets and (2) improve the
Question 4-3 (LO 4-1)
Managers are entrusted with the resources of both the company’s lenders (liabilities) and owners
Question 4-4 (LO 4-1)
Question 4-5 (LO 4-1)
Question 4-6 (LO 4-1)
The major provisions of the Sarbanes-Oxley Act include the Public Company Accounting
Chapter 4 - Cash and Internal Controls
4-2 Financial Accounting, 3e
Answers to Review Questions (continued)
Question 4-7 (LO 4-2)
1. Control Environment – The overall ethical tone of the company with respect to internal control.
2. Risk Assessment – Identification and analysis of internal and external risk factors that could
prevent a company’s objectives from being achieved.
Question 4-8 (LO 4-2)
Detective controls are designed to detect errors or fraud that have already occurred, while
preventive controls are designed to keep errors or fraud from occurring in the first place. Preventive
Question 4-9 (LO 4-2)
Authorizing transactions, recording transactions, and maintaining control of the related assets
should be separated among employees.
Question 4-10 (LO 4-2)
Everyone in a company has an impact on the operation and effectiveness of internal controls, but
Question 4-11 (LO 4-2)
Question 4-12 (LO 4-2)
Collusion occurs when two or more people act in coordination to circumvent internal controls.
Question 4-13 (LO 4-2)
Fraud is more likely to occur when it is being committed by top-level employees who have the
Chapter 4 - Cash and Internal Controls
Answers to Review Questions (continued)
Question 4-14 (LO 4-3)
Cash includes not only currency, coins, balances in checking accounts, and checks and money
Question 4-15 (LO 4-3)
A purchase with a check is recorded as an immediate cash payment.
Question 4-16 (LO 4-4)
1. Record all cash receipts as soon as possible.
2. Open mail each day, and make a list of checks received, including the amount and payor’s
Question 4-17 (LO 4-4)
Credit cards extend credit (or lend money) to the cardholder each time the cardholder uses the
Question 4-18 (LO 4-4)
Like credit cards, debit cards offer customers a way to purchase goods and services without a
Question 4-19 (LO 4-4)
1. Make all disbursements, other than very small ones, by check, debit card, or credit card.
2. Authorize all expenditures before purchase and verify the accuracy of the purchase itself. The
Chapter 4 - Cash and Internal Controls
Answers to Review Questions (continued)
Question 4-20 (LO 4-4)
Question 4-21 (LO 4-5)
A bank reconciliation matches the balance of cash in the bank account with the balance of cash
Question 4-22 (LO 4-5)
Question 4-23 (LO 4-5)
Question 4-24 (LO 4-5)
Question 4-25 (LO 4-6)
Question 4-26 (LO 4-6)
• Employees should be required to provide receipts and justification for those receipts on a
timely basis.
Question 4-27 (LO 4-7)
Chapter 4 - Cash and Internal Controls
Question 4-28 (LO 4-7)
Operating activities include cash transactions involving revenue and expense events during the
Chapter 4 - Cash and Internal Controls
Answers to Review Questions (continued)
Question 4-29 (LO 4-8)
To maintain normal operations, a company needs enough cash, or enough other assets that can
Question 4-30 (LO 4-8)
Chapter 4 - Cash and Internal Controls
BRIEF EXERCISES
Brief Exercise 4-1 (LO 4-1)
1.
c.
Brief Exercise 4-2 (LO 4-2)
1.
e.
Brief Exercise 4-3 (LO 4-2)
Chapter 4 - Cash and Internal Controls
Brief Exercise 4-4 (LO 4-3)
1.
Yes
Brief Exercise 4-5 (LO 4-4)
1.
$ 500,000
Brief Exercise 4-6 (LO 4-4)
1.
Debit
Credit
Salaries Expense
500
2.
Equipment
1,000
3.
Repairs and Maintenance Expense
400
Chapter 4 - Cash and Internal Controls
Brief Exercise 4-7 (LO 4-5)
1.
d.
Brief Exercise 4-8 (LO 4-5)
Reconciliation items
Bank balance
Company balance
1. Checks outstanding
Subtract
No entry
2. NSF checks
No entry
Subtract
Brief Exercise 4-9 (LO 4-5)
Bank balance
$2,000
Chapter 4 - Cash and Internal Controls
Brief Exercise 4-10 (LO 4-5)
Company balance
$2,620
Brief Exercise 4-11 (LO 4-5)
Debit
Credit
Cash
1,035
Notes Receivable
1,000
Brief Exercise 4-12 (LO 4-5)
Bank balance
$7,345
Company balance
$4,593
Chapter 4 - Cash and Internal Controls
Brief Exercise 4-13 (LO 4-6)
Debit
Credit
Postage Expense
60
Delivery Expense
85
Brief Exercise 4-14 (LO 4-7)
1.
c.
3.
b.
Brief Exercise 4-15 (LO 4-7)
Receipts for lessons in June
$4,500
Brief Exercise 4-16 (LO 4-7)
Chapter 4 - Cash and Internal Controls
Brief Exercise 4-17 (LO 4-7)
Issuance of stock
$11,000
Brief Exercise 4-18 (LO 4-8)
Cash
÷
Noncash Assets*
=
Ratio
Chapter 4 - Cash and Internal Controls
EXERCISES
Exercise 4-1 (LO 4-1)
1.
False
Exercise 4-2 (LO 4-1)
1.
True
Exercise 4-3 (LO 4-2)
1.
True
Exercise 4-4 (LO 4-2)
1.
Performance reviews
Chapter 4 - Cash and Internal Controls
Exercise 4-5 (LO 4-3)
Currency located at the company
$ 1,050
Short-term investments that mature within three months
1,950
Exercise 4-6 (LO 4-4)
Exercise 4-7 (LO 4-4)
The petty cash fund of $10,000 is too large. Employees should not be allowed to both
Exercise 4-8 (LO 4-4)
Exercise 4-9 (LO 4-5)
Requirement 1
Spielberg Company
Bank Reconciliation
July 31, 2018
Bank’s Cash Balance
Company’s Cash Balance
Per bank statement
$22,490
Per general ledger
$22,970
Requirement 2
Debit
Credit
Service Fee Expense
55
Exercise 4-10 (LO 4-5)
Requirement 1
The Dean Acting Academy
Bank Reconciliation
August 31, 2018
Bank’s Cash Balance
Company’s Cash Balance
Per bank statement
$6,042
Per general ledger
$7,944
Requirement 2
Debit
Credit
Cash
46
Interest Revenue
46
Chapter 4 - Cash and Internal Controls
Exercise 4-11 (LO 4-5)
Requirement 1
Damon Company
Bank Reconciliation
October 31, 2018
Bank’s Cash Balance
Company’s Cash Balance
Per bank statement
$11,727
Per general ledger
$ 8,397
Deposits outstanding
+ 3,025
Note received
+5,000
Requirement 2
Debit
Credit
Cash
5,320
Notes Receivable
5,000
Chapter 4 - Cash and Internal Controls
Exercise 4-12 (LO 4-6)
September 4
Debit
Credit
Petty Cash
200
September 30
Debit
Credit
Entertainment Expense
170
Repairs and Maintenance Expense
420
September 30
Debit
Credit
Petty Cash
170
Exercise 4-13 (LO 4-6)
April 3
Debit
Credit
Petty Cash
200
April 30
Debit
Credit
Utilities Expense
435
Entertainment Expense
44
April 30
Debit
Credit
Petty Cash
103
Chapter 4 - Cash and Internal Controls
Exercise 4-14 (LO 4-7)
Transaction
Cash
involved?
(yes or no)
If yes, is it
operating, investing,
or financing?
Inflow or
outflow?
a. Borrow cash from the bank.
Yes
Financing
Inflow
b. Purchase supplies on account.
No
N/A
N/A
Exercise 4-15 (LO 4-7)
Requirements 1 and 2
Transaction
Cash
Flows
Operating,
investing, or
financing?
a. Issue common stock for cash, $60,000.
+ $60,000
Financing
Requirement 3
