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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)
Managers are motivated to manipulate financial statements to maximize their compensation,
increase the company’s stock price, and preserve their job.
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, 5e
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
Question 4-8 (LO 4-2)
Detective controls are designed to detect errors or fraud that have already occurred, while
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)
Internal controls cannot prevent financial misstatement in all cases, do not necessarily prevent
collusion by two or more people to circumvent internal controls, are more susceptible to fraud by
top-level employees, and do not ensure a company’s success, or even survival.
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
employee who authorizes payment should not also be the employee who prepares the check.
Chapter 4 - Cash and Internal Controls
4-4 Financial Accounting, 5e
Answers to Review Questions (continued)
Question 4-20 (LO 4-4)
Credit card purchases are recorded as purchases on account.
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)
The two reasons are timing differences and errors. Timing differences arise when one party (the
bank or the company) records a transaction at a different time than the other party. Errors are
mistakes made by either the bank or the company.
Question 4-23 (LO 4-5)
Question 4-24 (LO 4-5)
Question 4-25 (LO 4-6)
Purchase cards are company-issued debit cards or credit cards that offer a convenient way for
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)
In addition to the change in total cash which can be calculated using two consecutive balance
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
4-6 Financial Accounting, 5e
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)
Cinemark has a higher ratio of cash to noncash assets than does Regal. The reasons include
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.
2.
d.
Brief Exercise 4-3 (LO 4-2)
1.
e.
2.
a.
Chapter 4 - Cash and Internal Controls
4-8 Financial Accounting, 5e
Brief Exercise 4-4 (LO 4-3)
1.
Yes
2.
No
Brief Exercise 4-5 (LO 4-4)
1.
$ 500,000
Brief Exercise 4-6 (LO 4-4)
1.
Debit
Credit
Salaries Expense
500
Cash
500
(Pay salaries by check)
2.
Chapter 4 - Cash and Internal Controls
Brief Exercise 4-7 (LO 4-5)
1.
d.
2.
c.
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
4-10 Financial Accounting, 5e
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
Interest Revenue
35
(Record note and interest collected by bank)
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.
Brief Exercise 4-15 (LO 4-7)
Receipts for lessons in June
$4,500
Brief Exercise 4-16 (LO 4-7)
Total investing cash flows =
$13,000
Chapter 4 - Cash and Internal Controls
4-12 Financial Accounting, 5e
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
2.
False
Exercise 4-3 (LO 4-2)
1.
True
2.
False
3.
False
Exercise 4-4 (LO 4-2)
1.
Performance reviews
Chapter 4 - Cash and Internal Controls
2.
Physical 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)
Cash should be recorded and deposited more than once per week (on Friday). The
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)
Jim should not deposit the checks and also record them.
Exercise 4-9 (LO 4-5)
Requirement 1
Spielberg Company
Bank Reconciliation
July 31, 2021
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
Cash
55
(Record bank service fee)
4-16 Financial Accounting, 5e
Exercise 4-10 (LO 4-5)
Requirement 1
The Dean Acting Academy
Bank Reconciliation
August 31, 2021
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, 2021
Bank’s Cash Balance
Company’s Cash Balance
Per bank statement
$11,727
Per general ledger
$ 8,397
Requirement 2
Debit
Credit
Cash
5,320
Notes Receivable
5,000
Exercise 4-12 (LO 4-6)
September 4
Debit
Credit
Petty Cash
200
Cash
200
(Establish the petty cash fund)
September 30
Debit
Credit
Repairs and Maintenance Expense
420
Exercise 4-13 (LO 4-6)
April 3
Debit
Credit
Petty Cash
200
Cash
200
(Establish the petty cash fund)
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
b. Purchase building and land with cash, $45,000.
− $45,000
Investing
Requirement 3
Chapter 4 - Cash and Internal Controls
4-20 Financial Accounting, 5e
Exercise 4-16 (LO 4-7)
a. Cash used for purchase of office supplies
− $2,400
b. Cash provide from consulting to customers
+ $50,600
Exercise 4-17 (LO 4-7)
c. Cash used for purchase of mining equipment
− $83,000
Exercise 4-18 (LO 4-7)
d. Cash provided from long-term borrowing
+ $70,000
