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Chapter 6: Cash and Internal Control Answers Key

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Sandra Watson
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1. Among the assets listed below, which one is considered the most liquid?
A. Cash
B. Accounts
receivable
C. Merchandise
inventory
D. Prepaid expenses
2. Which one of the following items is not included in cash?
A. A bank certificate of deposit for one
year
B. A savings account at the bank
C. A checking account at the bank
D. All of the above are included in cash
3. Which one of the following is not considered to be a cash equivalent?
A. Corporate commercial paper due in 90 days after purchase
B. U.S. Treasury bills with an original maturity of six months
C. A money market account with a stock brokerage firm
D. A certificate of deposit with a term of 75 days when acquired
4. How are cash equivalents reported or disclosed in the financial statements?
A. They appear only on the statement of cash flows
B.They are included with short-term investments under
current assets on the balance sheet.
C. They are included with cash under current assets on the
balance sheet.
D. They are disclosed only in a footnote to the balance sheet.
5. Which one of the following could never be considered to be cash equivalents?
A.
Common stock
issued by a
corporation
B. Money market
funds
C.Corporate
commercial paper
D. U. S. Treasury bills
6. Which one of the following is not a cash equivalent?
A. 30-day certificate of deposit
B. 60-day commercial paper
C. 90-day U. S. treasury bill
D. 180-day note issued by a local or state government
7.
8. Checks presented for payment and paid by the bank are known as
A. Canceled checks
B. Certified checks
C. NSF checks
D. Outstanding checks
9. Deposits made by a company but not yet reflected in a bank statement are called
A. Debit memoranda
B. Deposits in transit
C. Credit memoranda
D. None of the above
10. Which one of the following statements is true?
A. Good cash management practices dictate that a company should maintain as large a balance as
possible in its cash account.
B. Sound internal control practice dictates that disbursements should be made by check.
C. The person handling the cash should also prepare the bank reconciliation.
D. Petty cash can be substituted for a checking account to expedite the payment of all disbursements.
11. Checks returned by a bank because customers did not have sufficient funds in their account are called
A. Canceled checks
B. Certified checks
C. NSF checks
D. Outstanding checks
12. Which one of the following would not appear on a bank statement for a checking account?
A.
Service
charges
B.Interest
earned
C.
Outstandi
ng checks
D. Deposits
13. Which one of the following procedures is not part of preparing a bank reconciliation of a checking
account
A. Tracing deposits listed on the bank statement to the books to identify deposits in transit
B. Arranging canceled checks in numerical order and tracing them to the books to identify
outstanding checks
C. Identifying items added on the bank statement which have not been recorded as cash receipts
by the company
D. Preparing adjustments to reverse the transactions recorded for checks that are still outstanding
14. Which of the following items would not be a reconciling item?
A. Canceled checks
B. NSF checks
C. Outstanding
checks
D. Deposits in transit
15. Which one of the following items would be added to the balance per books in a bank reconciliation?
A. Outstanding checks
B. Deposit in transit
C. Service charges
D. Interest on customer note
16. Which one of the following items would be added to the balance per bank statement in a bank
reconciliation?
A. Outstanding checks
B. Deposits in transit
C. Service charge
D. Interest on customer note
17. Which one of the following items would be subtracted from the balance per books in a bank
reconciliation
A. Outstanding checks
B. Deposit in transit
C. Service charges
D. Interest on customer note
18. Which one of the following items would be subtracted from the balance per bank statement in a bank
reconciliation?
A. Outstanding checks
B. Deposit in transit
C. Service charges
D. Interest on customer note
19. Which one of the following statements best describes the term “outstanding check?”
A. A check written by the company and presented to the bank for payment.
B. A check written by the company but not yet presented to the bank for payment.
C. A check written by a customer that has been presented to the bank for payment.
D. A check written by a customer that has not yet been presented to the bank for payment.
20. The accountant for Darden Corp. was preparing a bank reconciliation as of April 30, 2014. The following
items were identified:
Allan’s book balance $46,200
Outstanding checks 1,100
Interest earned on checking account 50
Customer’s NSF check returned by the bank 500
In addition, Darden made an error in recording a customer’s check; the amount was recorded in cash
receipts as $150; the bank recorded the amount correctly as $510. What amount will Darden report as its
adjusted cash balance at April 30, 2014?
A. $44,650
B. $45,890
C. $46,110
D. $46,250
21. The accountant for Rogan Corp. was preparing a bank reconciliation as of February 28, 2014. The
following items were identified:
Rogan’s book balance $15,000
Outstanding checks 2,500
Service charge 15
Customer’s NSF check returned by the bank 100
What amount will Rogan report as its adjusted cash balance at February 28, 2014?
A. $12,385
B. $12,500
C. $14,885
D. $17,385
22. How would deposits in transit be dealt with in a bank reconciliation?
A. added to company’s book balance
B. deducted from company’s book
balance
C. added to bank statement balance
D. deducted from bank statement balance
23. How would customer’s NSF checks be dealt with in a bank reconciliation?
A. added to company’s book balance
B. deducted from company’s book
balance
C. added to bank statement balance
D. deducted from bank statement balance
24. How would interest earned on a checking account be dealt with in a bank reconciliation?
A. added to company’s book balance
B. deducted from company’s book
balance
C. added to bank statement balance
D. deducted from bank statement balance
25. How would outstanding checks be dealt with in a bank reconciliation?
A. added to company’s book balance
B. deducted from company’s book
balance
C. added to bank statement balance
D. deducted from bank statement balance
26. How would bank service charges be dealt with in a bank reconciliation?
A. added to company’s book balance
B. deducted from company’s book
balance
C. added to bank statement balance
D. deducted from bank statement balance
27. The set of items below was identified in preparing a bank reconciliation for Heath Corp. as of August 31,
2014.
Bank statement balance $18,500
Heath’s book balance (before adjustments) ?
Outstanding checks 2,700
Customer’s NSF checks 350
Service Charges 100
Deposits in transit 1,000
Interest earned on checking account 60
Heath Corp.’s balance per books before the reconciliation is
A. $16,410
B. $16,900
C. $17,190
D. $17,310
28. While reconciling the checking account, an accountant with Sonic Corporation noticed that an error had
been made in recording a check received by the company. Sonic recorded the receipt as $729 and the
correct amount of the check was $279. What reconciling adjustment is required?
A. Add $450 to the company’s book balance
B. Deduct $450 from the company’s book
balance
C. Add $450 to the bank statement balance
D. Deduct $450 from the bank statement balance
29. A debit memorandum appeared on Cinco Inc.’s May bank statement. How will Cinco treat this amount
on its May bank reconciliation?
A. Add it to the bank balance
B. Add it the book balance
C. Deduct from the bank balance
D. Deduct from the book balance
30. A credit memorandum appeared on Central Company’s bank statement. How will Central treat this
amount on its bank reconciliation?
A. Add it to the bank balance
B. Add it to the book balance
C. Deduct from the bank balance
D. Deduct from the book balance
31. Which of the following is an example of a debit memorandum?
A. Service charge notice
B. Interest earned on the account balance
C. Outstanding check
D. Company error in recording a $500 deposit as $600
32. Which of the following is an example of a credit memorandum?
A. Service charge notice
B. Collection of a note receivable by the bank
C. Outstanding check
D. Company error in recording a $600 deposit as $500
33. Which one of the following procedures is incorrect for setting up and maintaining a petty cash fund?
A. A check is prepared for a fixed amount; when the check is cashed, the money is entrusted to a petty
cash custodian.
B. An entry is recorded to establish the fund and obtain the cash.
C. When appropriate documentation is presented, cash payments are made from the fund; the petty cash
custodian retains the documentation.
D. When the petty cash fund is replenished, an entry is recorded to recognize an increase in the petty
cash account.
34. Which of the following statements is trueregarding a credit memorandum?
A. A credit memorandum is subtracted from the balance per the company’s
books.
B. A credit memorandum could be issued for bank service charges.
C. A credit memorandum is issued when a customer gives the company an
NSF check.
D. A credit memorandum is added to the balance per the company’s books.
35. Which of the following statements is false regarding a credit memorandum?
A. A credit memorandum is added to the balance per the company’s books
B. A credit memorandum could be issued for interest earned on checking balances
C. A credit memorandum is issued when the bank collects a note for the customer.
D. A credit memorandum is subtracted from the balance per the company’s books.
36 If a company erroneously records a $500 deposit as $400 in its books, which of the following must occur
when reconciling the bank statement?
A.
The company will
have to increase the
balance per the bank
statement by $100.
BT.
he company will
have to increase the
balance per the
books by $100.
C.
The company will
have to decrease the
balance per bank
statement by $100.
D. None of the above
37 Realistic Sound’s unadjusted bank balance amounted to $3,000. Outstanding checks amounted to $500
and deposits in transit totaled $300. Based on this information alone, Realistic’s adjusted cash balance is:
A. $3,200
B. $3,300
C. $2,800
D. $2,700
38 Flake Company accepted a check from Ramos Company as payment for services rendered by Flake
Company. Later Flake’s bank statement revealed that Ramos’ check was an NSF check. Recognizing the
NSF check on Flake’s books would act to:
A. Decrease total assets
B. Decrease total owners’ equity
C. Both a. and b.
D. Have no effect on Total Assets
39 If the balance on the bank statement does not equal the balance in the cash account, then it can be
assumed that:
A.
The company has no errors in its records
concerning the cash account
B. The bank has made errors in preparing the
statement
C.The company has made errors in is records
concerning the cash account
D. There will be items reconciling the difference
40 Which one of the following items is a reconciling item on the bank side of a bank reconciliation?
A. Canceled
checks
B. Outstanding
checks
C. NSF checks
D. Service charge
41 In the reconciliation of a bank statement, “deposits in transit” should be:
A. added to the unadjusted book balance
B. subtracted from the unadjusted bank balance
C. added to the unadjusted bank balance
D. subtracted from the unadjusted bank balance
42 An outstanding check is a check that:
A. Has been presented to the bank for payment but has not been reported on the bank statement
B. Has been written by the account holder but has not been presented to the bank for payment
C. Is guaranteed for payment by the bank
D. Has been written for an amount that is greater than the balance in the account holder’s bank account
43 The treasurer for Rahm Corp. was preparing a bank reconciliation as of September 30, 2014. The
following items were identified:
Rahm’s book balance $32,800
Deposits in transit 4,300
Outstanding checks 2,200
Interest earned on checking account 100
Customer’s NSF check returned by the bank 400
Rahm Corp.’s adjusted cash balance at September 30, 2014 is
A. $34,600
B. $34,900
C. $32,500
D. $32,800
44 Border Company’s cash account had a balance of $962 on August 31. This included a bank deposit of
$87 that was in transit on the 31st. The August 31 bank statement contained the following information:
Bank Statement Balance $1,089
NSF check 16
Bank Service Charge 7
Collection of notes receivable 68
Border also had checks outstanding of $169. What is Border’s adjusted cash balance at August 31?
A. $ 920
B. $ 940
C. $1,007
D. $1,089
45 The accountant for Casa Corp. was preparing a bank reconciliation as of February 28, 2014. The
following items were identified:
Casa’s book balance $35,900
Outstanding checks 12,050
Interest earned on checking accounts 75
Customer’s NSF check returned by the bank 325
There was an error in recording a customer’s check as the check was recorded by Casa as $110, but the
correct amount of $101 was recorded by the bank.
Casa’s adjusted cash balance at February 28, 2014 is
A. $23,591
B. $35,641
C. $35,659
D. $47,691
46 Gentech Corp. prepared a bank reconciliation as of June 30, 2014. The following items were identified:
Gentech’s bank balance $14,300
Deposits in transit $1,000
Outstanding checks 1,300
Bank service charges 50
Customer’s NSF check returned by the bank 150
Gentech’s adjusted cash balance at June 30, 2014 is
A. $13,800
B. $14,100
C. $14,000
D. $14,300
47 Pierce Corp. identified the following data in preparing a bank reconciliation on October 31, 2014.
Bank statement balance $29,600
Pierce’s book balance (before adjustments) ?
Outstanding checks 3,100
NSF checks 300
Service charges 200
Deposits in transit 2,200
Interest earned on checking account 100
How much is Pierce’s adjusted cash balance on October 31, 2014?
A. $28,700
B. $29,100
C. $28,300
D. $29,600
48 Pierce Corp. identified the following data in preparing a bank reconciliation on October 31, 2014.
Bank statement balance $29,600
Pierce’s book balance (before adjustments) ?
Outstanding checks 3,100
NSF checks 300
Service charges 200
Deposits in transit 2,200
Interest earned on checking account 100
What is the net amount of the adjustments to Pierce’s cash balance as a result of the bank reconciliation?
A.
No amounts
need to be
recorded
B. $400 increase
C. $400 decrease
D. $900 decrease
49 The Dinho Corporation identified the following data when preparing their April bank reconciliation:
Bank statement balance $45,000
Dinho’s book balance (before adjustments) ?
Outstanding checks 4,500
NSF checks 1,400
Service charges 300
Deposits in transit 5,000
Interest earned on checking account 25
In addition, Dinho incorrectly recorded a deposit in its books in the amount of $1,000. The correct
amount was recorded by the bank as $1,200.
What is the adjusted cash balance at the end of April?
A. $44,300
B. $45,500
C. $45,000
D. $45,700
50 The Dinho Corporation identified the following data when preparing their April bank reconciliation:
Bank statement balance $45,000
Dinho’s book balance (before adjustments) ?
Outstanding checks 4,500
NSF checks 1,400
Service charges 300
Deposits in transit 5,000
Interest earned on checking account 25
In addition, Dinho incorrectly recorded a deposit in its books in the amount of $1,000. The correct
amount was recorded by the bank as $1,200.
What is the net amount of the adjustment to Dinho’s cash balance as a result of the bank reconciliation?
A. $1,675 increase
B. $1,700 increase
C. $1,675 decrease
D. $1,475 decrease
51 Use the data presented below which Raines Corp. identified in preparing a bank reconciliation on
October 31, 2014, to answer the questions that follow.
Bank statement balance $30,700
Raines’ book balance (before adjustments) ?
Outstanding checks 4,200
NSF checks 400
Service charges 300
Deposits in transit 3,100
Interest earned on checking account 100
What is the adjusted cash balance on October 31, 2014?
A. $29,600
B. $30,100
C. $30,200
D. $30,700
52 Use the data presented below which Raines Corp. identified in preparing a bank reconciliation on
October 31, 2014, to answer the questions that follow.
Bank statement balance $30,700
Raines’ book balance (before adjustments) ?
Outstanding checks 4,200
NSF checks 400
Service charges 300
Deposits in transit 3,100
Interest earned on checking account 100
What is the net amount of the increase or decrease in Raines’ cash balance which must be recorded as a
result of the adjustments identified by the bank reconciliation?
A. $100 decrease
B. $300 decrease
C. $400 decrease
D. $600 decrease
53 The debit balance in Cash Short and Over at the end of an accounting period is reported as
A. an expense on the income
statement
B. income on the income
statement
C. an asset on the balance sheet
D. a liability on the balance sheet
54 If a credit memo appears on a bank reconciliation, this could be an indication that:
A. there has been a decrease the company’s bank account
B. there has been a bank service charge
C. there has been a deposit of a customer’s NSF check
D. there has been a note receivable for the company that was collected by the bank.
55 A check drawn by a company for $360 in payment of a liability was recorded in the journal as $630.
This item would be included on the bank reconciliation as a(n)
A. addition to the balance per the company’s records
B. addition to the balance per the bank statement
C. deduction from the balance per the bank statement
D. deduction from the balance per the company’s records
56 A check drawn by a company for $360 in payment of a liability was recorded in the journal as $630.
What entry is required in the company’s accounts?
A. debit Accounts Payable; credit Cash
B. debit Cash; credit Accounts Receivable
C. debit Cash; credit Accounts Payable
D. debit Accounts Receivable; credit Cash
57 The documentation with the bank statement shows a debit memo for bank service charges. Based on
this, what possible entry would be made in the company’s accounts?
A.
debit Miscellaneous Administrative
Expense; credit Cash
B. debit Cash; credit Other Income
C. debit Cash; credit Accounts Payable
D. debit Accounts Payable; credit Cash
58 If receipts from cash sales of $7,500 were recorded incorrectly as $5,700 in the company’s books, then
this item would be included on the bank reconciliation as a(n)
A. deduction from the balance per company’s
records
B. addition to the balance per bank statement
C. deduction from the balance per bank
statement
D. addition to the balance per company’s records
59 Most annual reports now include a report of management to the stockholders. In this report, which group
has the primary responsibility for the preparation and integrity of the financial statements
A. Management
B. The company’s CPAs
C. The company’s internal audit staff
D. The audit committee of the company’s board of directors
60 Which of the following is not a requirement of Sarbanes-Oxley?
A. Annual report must include an internal control report
B. External auditors can no longer provide human resource services
C. External auditors can no longer provide brokerage services
D. Must establish an internal control system that guarantees financial accuracy
61 Which of the following is not a requirement of a company’s external auditors under Sarbanes-Oxley?
A.
They must give an opinion that management’s assessment that
the internal control system over financial reporting is fairly
stated
B.
They must give an opinion that the company maintained an
effective internal control system over financial reporting
C. They must design and implement an effective information
system design
D. They can not perform any brokerage services for the company
62 Which of the following represents the board of directors subset that acts as a direct contact between
stockholders and the independent accounting firm?
A. Audit committee
B. Internal audit staff
C. External auditors
D. Stockholders’ representative
63 Sarbanes-Oxley requires that the audit committee be composed of
A. At least 50% of key officers who are on the board of
directors
B. A majority of all of the members of the board of
directors
C. The outside members of the board of directors and the
external auditor
D. Entirely of outside members of the board of directors
64 Which of the following represents a group composed of key officers of a corporation and outside
members responsible for the general oversight of the affairs of the company?
A. Board of
Directors
B. Internal Audit
Staff
C. External Auditors
D. Audit Committee
65 Which one of the following statements is true?
A.
The audit committee provides contact between the board of
directors and the key officers of the company.
B.The audit committee has become less involved in the financial
accounting system as a result of the Foreign Corrupt Practices Act.
C.The audit committee is a board of directors subset that acts as a
direct contact between the stockholders and the independent
accounting firm.
D. The board of directors consists of the company’s external auditors.
66 What five-member body created by the Sarbanes-Oxley Act was given authority to set U.S. auditing
standards?
A. FASB
B. SEC
C. IAS
D. PCAOB
67 Which one of the following is a sound internal control procedure for cash disbursements?
A.Making copies of purchase orders for the receiving department so they
know how many items to be expected upon delivery
B. Using presigned checks to facilitate payment within the cash discount
period
C. Comparing purchase requisitions, purchase orders, receiving reports, and
invoices
D. Requiring the signature of the purchasing department supervisor on checks
68 An internal control system consists of all the following policies and procedures necessary to ensure
except:
A. Those necessary to ensure the safeguarding of an entity’s assets.
B.Those necessary to ensure that cash on hand and on deposit in checking
accounts is beyond the minimal amount for ongoing operations.
C. Those necessary to ensure the reliability of its accounting records.
D. Those necessary to ensure the accomplishment of its overall objectives.
69 Which one of the following situations reflects a weak internal control system?
A. all employees are well supervised
B. a single employee is responsible for comparing a receiving report to
an invoice
C. all employees must take their vacations
D. a single employee is responsible for collecting and recording of cash
70 The group within an organization that is responsible for monitoring and evaluating the internal control
system is called:
A. the audit committee.
B. the internal audit
staff.
C. the board of
directors.
D. the accounting staff.
71 Which of the following statements does not describe the responsibilities of a company’s internal audit
staff?
A. Internal auditors ensure that the company’s financial statements have been
presented fairly.
B. Internal auditors focus on the efficiency with which the organization is run.
C. Internal auditors help ensure that the company’s policies and procedures are
followed.
D. Internal auditors prepare the report of management to the company’s stockholders
72 Which one of the following is considered one of the six most important categories of internal control
procedures?
A. Computerized accounting systems
B. The board of directors
C. Proper authorizations
D. Verification by government agencies
73 Which of the following is not a generally recognized internal control procedure?
A. Establishing of clear lines of authority to carry out
specific tasks
B. Physically counting inventory in a perpetual
inventory system
C. Reducing the cost of hiring seasonal employees
D. Limiting access to computerized accounting records
74 Which one of the following is not a generally recognized internal control procedure?
A.
Internal review by the
audit committee of the
board of directors
B.
Independent
verification of the work
of one employee by
another employee
C.
Independent review
and appraisal by
internal auditors
D. Segregation of duties
75 Allowing only certain employees to order goods and services for the company is an example of what
internal control procedure?
A. Segregation of duties
B.Safeguarding of assets
and records
C. Independent
verifications
D. Proper authorizations
76 Which internal control procedure is followed when management authorizes the purchasing department to
order goods and services for the company?
A. Segregation of duties
B.Safeguarding of assets
and records
C. Independent
verifications
D. Proper authorizations
77 Which internal control procedure is followed when the work of one department acts as a check on the
work of another?
A. Segregation of duties
B.Safeguarding assets
and records
C. Independent
verifications
D. Proper authorizations
78 Which internal control procedure is followed when storage areas are secured with limited access?
A. Segregation duties
B.Safeguarding assets
and records
C. Independent
verifications
D. Proper authorizations
79 Which internal control procedure is followed when a physical count of inventory is performed in a
perpetual inventory system?
A. Segregation of duties
B.Safeguarding assets
and records
C. Independent
verifications
D. Proper authorizations
80 Which of the following is not considered a business (source) document?
A. Time card
B. Purchase order
C. Sales invoice
D. Schedule listing all the insurance policies in force
81 Having only one person authorized to both prepare and sign checks is a violation of what internal control
procedure?
A. Segregation of duties
B.Independent review
and appraisal
C. Independent
verifications
D. Proper authorizations
82 Which one of the following statements regarding internal control is true?
A. Companies can design a system of internal control that is foolproof.
B. A well-designed internal control system is a luxury that few companies can afford.
C. It is easier to implement an effective internal control system in a small company because of the
limited number of employees.
D. Large companies are able to devote a substantial amount of resources to internal control systems
because these companies have the assets to justify the cost.
83 Administrative controls
A.
Are concerned with efficient operations and
adherence to managerial policies
B. Are concerned with the reliability of the financial
statements
C. Are the responsibility of the company’s auditors
D. Are concerned primarily with safeguarding assets
84 Segregation and rotation of duties is most effective in
A. Increasing cost of goods sold
B. Assisting management in
overriding controls
C. Preventing collusion
D. Misappropriating company assets
85 Which internal control procedure is violated when the cashier at the checkout stand also records the daily
receipts in the journal?
A. Segregation of duties
B.Independent review
and appraisal
C. Independent
verifications
D. Proper authorizations
86 Which one of the following documents is used in the control of cash receipts?
A. Purchase
requisitions
B. Receiving reports
C.
Canceled checks
from customers
D. Bank deposit slips
87 Each of the following documents is used in the control of cash receipts except:
A. Cash register tapes
B. Check lists or
prelists
C.
Canceled checks
from customers
D. Bank deposit slips
88 Each of the following documents is used in the control of cash disbursements except:
A. Purchase
requisitions
B. Purchase orders
C. Receiving reports
D. Cash register tapes
89 Which one of the following documents is used in the control of cash disbursements?
A. Income Statement
B. Bank deposit slips
C. Receiving reports
D. Cash register tapes
90 The following set of items describes activities completed by a company in purchasing and paying for
merchandise. For each activity, identify whether or not the activity adheres to or violates sound internal
control procedures.
Although the department supervisor can indicate a preferred supplier or vendor on purchase requisitions,
the purchasing department has the responsibility for making the final decision on a vendor.
A. Adheres to sound internal control procedures
B. Violates sound internal control procedures
C. Neither strengthens nor violates internal control
91 The following set of items describes activities completed by a company in purchasing and paying for
merchandise. For each activity, identify whether or not the activity adheres to or violates sound internal
control procedures.
The receiving department compares the quantity received with the quantity printed on the receiving
report when the purchase order was prepared.
A. Adheres to sound internal control procedures
B. Violates sound internal control procedures
C. Neither strengthens nor violates internal control
92 The following set of items describes activities completed by a company in purchasing and paying for
merchandise. For each activity, identify whether or not the activity adheres to or violates sound internal
control procedures.
Extensions and footings on purchase invoices are verified before the invoices are approved for payment
A. Adheres to sound internal control procedures
B. Violates sound internal control procedures
C. Neither strengthens nor violates internal control
93 The following set of items describes activities completed by a company in purchasing and paying for
merchandise. For each activity, identify whether or not the activity adheres to or violates sound internal
control procedures.
All documents attached to an invoice approval form are canceled before a check is signed.
A. Adheres to sound internal control procedures
B. Violates sound internal control procedures
C. Neither strengthens nor violates internal control
94 The following set of items describes activities completed by a company in purchasing and paying for
merchandise. For each activity, identify whether or not the activity adheres to or violates sound internal
control procedures.
The clerk in the accounting department records both purchases and payments of invoices.
A. Adheres to sound internal control procedures
B. Violates sound internal control procedures
C. Neither strengthens nor violates internal control
95 The following set of items describes activities completed by a company in purchasing and paying for
merchandise. For each activity, identify whether or not the activity adheres to or violates sound internal
control procedures.
Checks are signed by designated officers in the finance department.
A. Adheres to sound internal control procedures
B. Violates sound internal control procedures
C. Neither strengthens nor violates internal control
96 The following set of items describes activities completed by a company in collecting cash for
merchandise sales. For each activity, identify whether or not the activity adheres to or violates sound
internal control procedures.
A single employee in the mailroom opens the mail, counts the money received, and prepares a control list
of the amount received.
A. Adheres to sound internal control procedures
B. Violates sound internal control procedures
C. Neither strengthens nor violates internal control
97 The following set of items describes activities completed by a company in collecting cash for
merchandise sales. For each activity, identify whether or not the activity adheres to or violates sound
internal control procedures.
An employee in the accounting department records cash receipts from customers and prepares a bank
deposit slip.
A. Adheres to sound internal control procedures
B. Violates sound internal control procedures
C. Neither strengthens nor violates internal control
98 The following set of items describes activities completed by a company in collecting cash for
merchandise sales. For each activity, identify whether or not the activity adheres to or violates sound
internal control procedures.
Cash register tapes are picked up daily by an employee from the accounting department.
A. Adheres to sound internal control procedures
B. Violates sound internal control procedures
C. Neither strengthens nor violates internal control
99 The following set of items describes activities completed by a company in collecting cash for
merchandise sales. For each activity, identify whether or not the activity adheres to or violates sound
internal control procedures.
An employee from the accounting department compares the control list and the cash register tapes with
the bank deposit slip.
A. Adheres to sound internal control procedures
B. Violates sound internal control procedures
C. Neither strengthens nor violates internal control
100 The following set of items describes activities completed by a company in collecting cash for
merchandise sales. For each activity, identify whether or not the activity adheres to or violates sound
internal control procedures.
Monthly statements, indicating the current balance due, are mailed to customers.
A. Adheres to sound internal control procedures
B. Violates sound internal control procedures
C. Neither strengthens nor violates internal control
101 Which one of the following is not a procedure in the approval of a specific invoice for payment?
A. The purchase requisition, purchase order, receiving report, and
invoice are compared.
B. The extensions and footings on the invoice are verified.
C.An employee verifies that all of the approval activities have been
completed before a check is prepared.
D. The purchasing department prepares a voucher to request payment.
102 What is the form sent by the seller to the buyer as evidence of a sale?
A.
an invoice
approval
form.
B.a purchase
order.
C.a receiving
report.
D. an invoice.
103 The department in an organization that is responsible for preparing the invoice approval form to
document all of the information about a particular purchase is:
A. the human resources
department.
B. the purchasing department.
C. the receiving department.
D. the accounting department.
104 Which of the following is another term for the invoice approval form?
A. a receiving report.
B. an invoice.
C. a voucher.
D. a remittance advice.
105 A voucher is usually supported by
A. a supplier’s
invoice
B. a purchase
order
C. a receiving
report
D. all of the above
106 The notification accompanying a check that indicates the specific invoice being paid is called a
A.remittance
advice
B. voucher
C. debit memo
D. credit memo
1 A six-month certificate of deposit would be considered to be a cash equivalent.
True False
2 Petty cash typically is composed of coins and currency kept on hand in a business to make minor
disbursements.
True False
3 The key to the classification of an amount as cash is that it be available to pay debts within a three-month
period of time.
True False
Some cash equivalents appear in the long term investment section of a balance sheet.
True False
If collection of accounts receivable is assured, then accounts receivable are considered to be cash
equivalents.
True False
Treasury notes with a maturity of three months or less that are issued by the Federal Government are
cash equivalents.
True False
A check written by a company but not yet presented to the bank for payment is called a check in transit.
True False
When reconciling a bank account, the company does not have to prepare an adjusting entry for
outstanding checks.
True False
When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.
True False
In a sound internal control system, all cash receipts should be deposited daily intact.
True False
Checks received from customers are considered to be cash in the company’s books.
True False
The bank informs a customer that a service charge has been assessed on their account by including a
credit memorandum in the monthly bank statement
True False
On a bank reconciliation, outstanding checks are added to the cash balance per the bank statement.
True False
When a bank pays interest or collects an amount owed to a company by one of the bank’s customers, the
bank issues a debit memorandum.
True False
When a bank pays interest or collects an amount owed to a company by one of the bank’s customers, the
bank issues a credit memorandum.
True False
On a bank reconciliation, bank charges for the month are added to the cash balance per the books.
True False
On a bank reconciliation, interest earned for the month is added to the cash balance per the books.
True False
A company prepares adjusting entries for debit memorandums but not for credit memorandums
True False
The establishment of a petty cash fund has no effect on the company’s total cash balance.
True False
No special internal control procedures are necessary with a petty cash account because the amount is
usually so small.
True False
An advantage of a strong system of internal control is that less testing of the accounting system is done
by the outside auditors.
True False
A good system of internal control is important to make a company’s accounting records completely
foolproof.
True False
An accounting system must be computerized in order to ensure the company has proper internal control.
True False
Audit committees are required to consist of only directors who are key officers of the company.
True False
According to the Sarbanes-Oxley Act of 2002, only external auditors can provide bookkeeping services
for the clients they audit.
True False
One concern of the internal auditor is the efficiency with which the organization is run.
True False
If a company has internal auditors, it does not need to have external auditors.
True False
Accounting controls primarily concern safeguarding of assets and ensuring the reliability of the financial
statements.
True False
A company’s internal control system is designed by its external auditors.
True False
The only reason a company needs to create an internal control system is to deter intentional fraudulent
acts.
True False
A good system of internal controls requires that the physical custody of assets be separated from the
accounting for those assets. This concept is known as safeguarding assets and records.
True False
If a company hires honest employees, no internal control procedures are necessary.
True False
As part of good internal control, disbursements can be made either by check or cash.
True False
Most merchandisers receive checks and currency from customers in two ways: (1) cash
received over the counter from cash sales and (2) cash received in the mail from credit
sales.
True False
Only one copy of the prelist should be prepared when an employee opens mail with customer payments
to avoid complexity in the accounting system and maintain control.
True False
The use of customer statements as a control device will be effective only if the employees responsible for
the custody of cash received through the mail, for record keeping, and for authorization of adjustments to
customers’ accounts are not allowed to prepare and mail statements to customers.
True False
A purchase order is not the basis for recording a purchase and a liability.
True False

French Corp. began the year with $18,000 in cash and another $6,500 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.

Houston Corp. prepares monthly bank reconciliations of its checking account balance. The bank
statement for July 2014 indicated the following:


The correct amount of check #205 is $540, but it was recorded as a cash disbursement of $450. TheAn analysis of canceled checks and deposits and the records of Houston revealed the following items:
Checking account balance per Houston’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 Houston 90

check was issued to pay for merchandise purchases. The check appeared on the bank statement correctly.

Winslet Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement
for May, 2014, indicated the following:

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.

Sarcon Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement
for October, 2014, indicated the following:

On January 2, 2014, 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:

Marathon Street Bank sent Flank Industries their end of month bank statement for October. The end of
month balance by the bank is $11,229. From the statement, it can be determined that a deposit for $4,250
is in transit at the end of the statement period. Also the statement reveals that checks for $86, $106, and
$95 are outstanding. Marathon Street collected a 90 day, 12% interest $4,000 note receivable charging
$20 for the service. No interest has been accrued on the note. The bank charges a monthly account fee of
$35. The end of month balance per company books is $11,127.

Your uncle has just started a business and comes to you with a question. “I’m confused. I have a memo
included with my bank statement indicating a $45 service charge for printing new checks. Since you’re
an accounting major, maybe you can explain to me why they call it a ‘debit memorandum,’ even though
they are deducting this amount from my account. When I took Accounting in school, I could have sworn
that a decrease in the Cash account would be a credit and not a debit.

 

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Chapter 6: Cash and Internal Control Answers Key

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