Accounting Chapter 7 Homework Peachville Has Only One Bank The Bank

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Annals of Improbable Research (AIR), they are presented by a group that includes

genuine Nobel laureates at a ceremony at Harvard University’s Sanders Theater.

▪ Internal controls are a system of checks and balances designed to prevent and detect

fraud and errors. While most companies have these systems in place, many have never

completely documented them, nor had an independent auditor attest to their

effectiveness. Both of these actions are required under SOX.

▪ IFRS defines cash and cash equivalents as follows.

 Cash is comprised of cash on hand and demand deposits.

 LOOKING TO THE FUTURE

Ethics has become a very important aspect of reporting. Different cultures have different

perspectives on bribery and other questionable activities, and consequently penalties for

engaging in such activities vary considerably across countries.

High-quality international accounting requires both high-quality accounting standards and high–

quality auditing. Similar to the convergence of GAAP and IFRS, there is movement to improve

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Chapter 7 Review

✓ What are the three factors of the fraud triangle that contribute to fraudulent activity by

employees?

✓ Identify the six principles of internal control. Give examples of each principle. Discuss the

limitations of internal control.

✓ List six internal controls over cash receipts. Explain the application of each.

✓ List six internal controls over cash disbursements. Explain the application of each.

✓ List the steps in preparing a bank reconciliation. Prepare a bank reconciliation. Prepare the

journal entries that result from a bank reconciliation.

✓ In which financial statement(s) is cash reported? Discuss restricted cash and negative cash

balances.

✓ Discuss the five basic principles of cash management.

✓ What are the primary elements of a cash budget and what types of items would one find in

each of the elements? Be specific in your answer.

✓ Explain the operation of a petty cash fund. Make journal entries for a petty cash fund.

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Vocabulary Quiz Name ______________________ Date ______________

Chapter 7

1. The plan of organization and all the related methods adopted within a

business to safeguard its assets and enhance the accuracy and

reliability of its accounting records.

2. Resources that consist of coins, currency, checks, money orders, and

money on hand or on deposit in a bank or similar depository.

3. A cash fund used to pay relatively small amounts.

4. Deposits recorded by the depositor that have not been recorded by the

bank.

5. Short-term, highly liquid investments that can be converted to a

specific amount of cash.

6. A projection of anticipated cash flows, usually over a one– to two-year

period.

7. Company employees who evaluate on a continuous basis the

effectiveness of the company’s system of internal control.

8. A check that is not paid by a bank because of insufficient funds in a

customer’s bank account.

9. Checks issued and recorded by a company that have not been paid by

the bank.

10. Cash that is not available for general use, but instead is restricted for a

particular purpose.

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Solutions to Vocabulary Quiz

Chapter 7

1. Internal control

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Multiple Choice Quiz Name __________________ Date _________________

Chapter 7

1. The principles of internal control consist of all of the following except:

a. establishment of responsibility.

b. segregation of duties.

c. generally accepted accounting principles.

d. documentation procedures.

2. The following measure is recommended to obtain maximum benefit from independent

internal verification:

a. The verification should be made periodically or on a surprise basis.

b. The verification should be done by an employee who is independent of the

personnel responsible for the information.

c. Discrepancies and exceptions should be reported to a management level that

can take appropriate corrective action.

d. all of these answers are correct.

3. The concept of reasonable assurance rests on the premise that:

a. employees duties should be rotated.

b. employees should be required to take vacations.

c. the cost of establishing control procedures should not exceed their expected

benefit.

d. physical, controls should be in place.

4. Cash consists of:

a. coin, currency, and postage stamps.

b. coins, currency, checks, money orders, money on hand or on deposit in a bank

or similar depository.

c. coins, currency, postage stamps, money on deposit in a bank.

d. all of the above.

5. Internal control over cash disbursements is more effective when payments are made by:

a. check.

b. cash.

c. both a and b above.

d. petty cash.

6. The bank would debit the customer’s account for all of the following items except:

a. checks drawn on the account.

b. monthly service charge.

c. collection of a note receivable.

d. NSF check deposited by customer.

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7. Examples of cash equivalents include:

a. Treasury bills, commercial paper, money market funds, and bonds.

b. Treasury bills, stocks, bonds, and money market funds.

c. Currency, treasury bills, commercial paper, and money market funds.

d. Treasury bills, commercial paper, and money market funds.

8. A cash budget contains three sections:

a. financing, investing, and operating.

b. cash receipts, cash disbursements, and financing.

c. cash receipts, investing, and financing.

d. cash receipts, cash disbursements, and operating.

9. The cash receipts section of the cash budget contains:

a. expected receipts from the company’s principal source(s) of revenue.

b. anticipated receipts of interest.

c. anticipated receipts of dividends.

d. all of these answers are correct.

10. The cash disbursements section of the cash budget contains:

a. expected payments for inventory labor, overhead.

b. expected payments for selling and administrative expenses.

c. expected payments for income taxes, dividends, investments, and plant assets.

d. all of these answers are correct.

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Solutions to Multiple Choice Quiz

Chapter 7

1. c

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Exercise 1 – Internal Control Activity

Chapter 7

Peachville is a small rural town in the southeastern part of the United States. Peachville has

only one bank. The Bank of Peachville closes its doors to the public at 2:00 p.m. every

afternoon. After closing, the two tellers go into the back room where they perform the

bookkeeping functions.

1. Does the practice followed in The Bank of Peachville provide an adequate system of

internal control? Why or why not?

2. Why would the management of The Bank of Peachville tolerate the inadequate system

of internal control?

3. List internal control procedures that can improve this situation.

Solutions:

1. No. The internal control system is clearly inadequate. The tellers are responsible

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Exercise 2 – World Wide Web Research and Internal Control Activity

Chapter 7

Chapter 3 of the Departmental Accounting Manual contains the internal control policy for the U.

S. Department of the Interior. Go to http://www.doi.gov/pfm/am_ch3.html to find the information

necessary to answer the following questions:

1. List the four internal control objectives found in the Department of the Interior (DOI)

policy.

2. The internal control standards of the DOI presented in two groups: General standards

and Accounting standards. List standards found in each group.

3. How do the standards listed in part 2 compare with the principles of internal control

found in Chapter 7 of your text?

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Exercise 3 – World Wide Web Research and Internal Auditor Activity

Chapter 7

The Institute of Internal Auditors (IIA) was established in 1941. The organization serves over

80,000 members in internal auditing, governance and internal control, IT audit, education, and

security from more than 120 countries. The world’s leader in certification, education, research,

and technological guidance for the profession, the institute serves as the profession’s

watchdog and resource on significant auditing issues around the globe. Go to

http://www.theiia.org/ to obtain information about the organization and answer the following

questions.

1. Summarize The Institute’s mission. What are the current objectives?

2. Read one article from the site and prepare a summary to share with the class. Include

the reason why you found the article to be interesting.

3. What is a CIA and how many internal auditors hold the CIA designation?

4. What other professional certifications are available through the IIA?

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Exercise 4 – Internal Control Activity

Chapter 7

Take an independent field trip to a fast food restaurant and observe the internal control

features. If possible you may want to talk to the manager about the company’s internal control

policies and whether the policies are strictly enforced.

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Exercise 5 – World Wide Web Research and Business Insight Activity

Chapter 7

John Patterson and his brother Frank bought a tiny cash register company for $6,500 and

transformed it into the corporate giant known as NCR. To learn more about John Patterson

and NCR visit NCR at http://www.ncr.com/

1. What does the NCR logo represent?

2. When was the first NCR Tower super-microcomputer system launched?

3. Look at career information. List some of the attributes that NCR seeks in its employees.

4. Could business, as we know it today, exist if the cash register had never been

invented?

5. Why do you suppose the name was changed from National Cash Register?

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Exercise 6 – World Wide Web Bank Reconciliation Activity

Chapter 7

Reconciling a bank account is an internal control measure. A company’s cash account and its

bank balance are seldom the same at any given time. Answer the following questions

regarding reconciling the bank account.

1. What are two reasons that account for the lack of agreement between the balance in a

company’s cash account and its bank account?

2. What are the steps involved in revealing all the reconciling items that cause the

difference between the balances?

Solutions:

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Exercise 7 – World Wide Web Accounting Careers and Communication Activity

Chapter 7

Your cousin, who has a degree in accounting, has written you saying that she has applied for a

job as an internal auditor. She asked you for advice on the duties she would have as an

internal auditor. Write a letter to your cousin explaining some of the responsibilities of an

internal auditor.

Solution:

Dear Cousin:

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Exercise 8 – World Wide Web Research, Cash Equivalents, and Internal Control

Activity

Chapter 7

Locate the annual report for a U.S. public company.

1. Read the Notes to the Financial Statements to determine the criteria for cash

equivalents. List the criteria.

2. Find information about the internal control policy of the company. Summarize this policy.

3. Which CPA firm conducted the external audit of the company you selected?

4. What are some references to SOX?