CHAPTER 7 FRAUD, INTERNAL CONTROL, AND CASH: Test Bank for Accounting Principles, Eleventh Edition. This document/TEST BANK Contains 235 Questions With Answers, Worked Solutions and Essay Explanations

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CHAPTER 7 FRAUD, INTERNAL CONTROL, AND CASH SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY sg This question also appears in the Study Guide. st This question also appears i... n a self-test at the student companion website. SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE Note: TF = True-False BE = Brief Exercise C = Completion MC = Multiple Choice Ex = Exercise MA = Matching SA = Short-answer Essay CHAPTER LEARNING OBJECTIVES 1. Define fraud and internal control. 2. Identify the principles of internal control. 3. Explain the applications of internal control principles to cash receipts.. 4. Explain the applications of internal control principles to cash disbursements. 5. Describe the operation of a petty cash fund. 6. Indicate the control features of a bank account. 7. Prepare a bank reconciliation. 8. Explain the reporting of cash. TRUE-FALSE STATEMENTS 1. Internal control is mainly concerned with the amount of authority a supervisor exercises over a subordinate. , LO: 1, Bloom: K, Difficulty: Easy, 2. A highly automated computerized system of accounting eliminates the need for internal control. , LO: 1, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Resource 3. The safeguarding of assets is an objective of a company's system of internal control. , LO: 1, Bloom: K, Difficulty: Easy, 4. Management is responsible for establishing a system of internal control. , LO: 1, Bloom: K, Difficulty: Easy, 5. Internal control is most effective when several people are responsible for a given task. , LO: 2, Bloom: C, Difficulty: Easy, 6. The responsibility for keeping the records for an asset should be separate from the physical custody of that asset. , LO: 2, Bloom: K, Difficulty: Easy, 7. Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency. , LO: 2, Bloom: K, Difficulty: Easy, 8. The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit. , LO: 2, Bloom: K, Difficulty: Easy, 9. An effective system of internal control requires that at least two individuals be assigned to one cash drawer so that each can serve as check on the other. , LO: 2, Bloom: C, Difficulty: Easy, 10. Only large companies need to be concerned with a system of internal control. , LO: 2, Bloom: C, Difficulty: Easy, 11. The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals. , LO: 2, Bloom: C, Difficulty: Easy, 12. In order to prevent a transaction from being recorded more than once, a company should maintain only one book of original entry. , LO: 2, Bloom: C, Difficulty: Easy, 13. Firms use physical controls primarily to safeguard their assets. , LO: 2, Bloom: K, Difficulty: Easy, 14. A segregation of duties among employees eliminates the possibility of collusion. , LO: 2, Bloom: C, Difficulty: Easy, 15. For efficiency of operations and better control over cash, a company should maintain only one bank account. , LO: 3, Bloom: C, Difficulty: Easy, 16. Cash registers are an important internal control device used in controlling over-the- counter receipts. , LO: 3, Bloom: K, Difficulty: Easy, 17. Checks received in the mail should be immediately stamped "NSF" to prevent unauthorized cashing of the check. , LO: 3, Bloom: C, Difficulty: Easy, 18. Control over cash disbursements is improved if major expenditures are paid by check. , LO: 4, Bloom: K, Difficulty: Easy, 19. In a voucher system, vouchers are prepared in the accounts receivable department. , LO: 4, Bloom: C, Difficulty: Easy, 20. Electronic Funds Transfer (EFT) is a disbursement system that uses telephone or computer to transfer cash from one location to another. , LO: 4, Bloom: AP, Difficulty: Easy, Min: 1, AACSB: Technology, AICPA BB: Resource Management, AICPA FN: None, AICPA PC: Project Management, IMA: Business Economics 21. A voucher system is used by many large companies as a means of controlling cash receipts. , LO: 4, Bloom: K, Difficulty: Easy, 22. The petty cash fund eliminates the need for a bank checking account. , LO: 5, Bloom: C, Difficulty: Easy, Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 23. Cash register overages are deposited in the petty cash fund and cash shortages are made-up from the petty cash fund. , LO: 5, Bloom: C, Difficulty: Easy, Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 24. A deposit ticket is a negotiable instrument that can be transferred to another party by endorsement. , LO: 6, Bloom: K, Difficulty: Easy, Management, AICPA FN: None, AICPA PC: None, IMA: Business Economics 25. If a company deposits all its receipts in the bank and pays all its bills by check, then the monthly bank statement balance will always agree with the company's record of its checking account balance. , LO: 6, Bloom: C, Difficulty: Easy, Management, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 26. Checks from customers who pay their accounts promptly are called outstanding checks. , LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: Communications, IMA: Business Economics 27. All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the Cash account. , LO: 7, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 28. A bank reconciliation is generally prepared by the bank and sent to the depositor along with cancelled checks. , LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 29. Cash equivalents are highly liquid investments that can be converted into a specific amount of cash. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 30. Cash which is restricted for a specific use should be separately reported. , LO: 8, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 31. Internal control consists of the plan of organization and all of the related methods and measures adopted within a business to (a) safeguard its assets, and (b) enhance the accuracy and reliability of its accounting records. , LO: 1, Bloom: K, Difficulty: Easy, 32. In general, documents should be prenumbered and all documents should be accounted for. , LO: 2, Bloom: K, Difficulty: Easy, Management, AICPA FN: Risk Analysis, AICPA PC: Project Management, IMA: Internal Controls 33. Collusion may result when one individual circumvents prescribed controls and may significantly impair the effectiveness of a system. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, , IMA: Internal Controls 34. Personnel who handle cash receipts should have the option of taking a vacation or not. , LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls 35. The duties of approving an item for payment and paying the item should be done by different departments or individuals. , LO: 4, Bloom: K, Difficulty: Easy, 36. The custodian of the petty cash fund has the responsibility of recording a journal entry every time cash is used from the fund. , LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Internal Controls 37. A debit memorandum could show the collection of a note receivable by the bank. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 38. To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash. , LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls Answers to True-False Statements MULTIPLE CHOICE QUESTIONS 39. Which one of the following is not an objective of a system of internal controls? a. Safeguard company assets b. Overstate liabilities in order to be conservative c. Enhance the accuracy and reliability of accounting records d. Reduce the risks of errors , LO: 1, Bloom: K, Difficulty: Easy, 40. Internal controls are concerned with a. only manual systems of accounting. b. the extent of government regulations. c. safeguarding assets. d. preparing income tax returns. , LO: 1, Bloom: K, Difficulty: Easy, 41. Which of the following is not one of the main factors that contribute to fraudulent activity? a. Opportunity. b. Incompatible duties. c. Financial Pressure. d. Rationalization. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Global Business 42. Internal control is defined, in part, as a plan that safeguards a. all balance sheet accounts. b. assets. c. liabilities. d. capital stock. , LO: 1, Bloom: K, Difficulty: Easy, 43. The most important element of the fraud triangle is a. financial pressure. b. incompatible duties. c. opportunity. d. rationalization. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, , IMA: Global Business 44. Companies that are subject to, but fail to comply with, the Foreign Corrupt Practices Act of 1977 a. may do so legally by obtaining an exemption. b. will be automatically dissolved. c. may be subject to fines and officer imprisonment. d. may be forced to sell their foreign subsidiaries. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, , IMA: Global Business 45. Internal controls are not designed to safeguard assets from a. natural disasters. b. employee theft. c. robbery. d. unauthorized use. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, , IMA: Internal Controls 46. Having one person post entries to accounts receivable subsidiary ledger and a different person post to the Accounts Receivable Control account in the general ledger is an example of a. inadequate internal control. b. duplication of effort. c. external verification. d. segregation of duties. , LO: 1, Bloom: C, Difficulty: Easy, 47. Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them a. increases the potential for errors and fraud. b. decreases the potential for errors and fraud. c. is an example of good internal control. d. is a good example of safeguarding the company's assets. , LO: 1, Bloom: C, Difficulty: Easy, 48. The custodian of a company asset should a. have access to the accounting records for that asset. b. be someone outside the company. c. not have access to the accounting records for that asset. d. be an accountant. , LO: 1, Bloom: C, Difficulty: Easy, 49. Internal auditors a. are hired by CPA firms to audit business firms. b. are employees of the IRS who evaluate the internal controls of companies filing tax returns. c. evaluate the system of internal controls for the companies that employ them. d. cannot evaluate the system of internal controls of the company that employs them because they are not independent. , LO: 1, Bloom: K, Difficulty: Easy, 50. When two or more people get together for the purpose of circumventing prescribed controls, it is called a. a fraud committee. b. collusion. c. a division of duties. d. bonding of employees. , LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, , IMA: Internal Controls 51. From an internal control standpoint, the asset most susceptible to improper diversion and use is a. prepaid insurance. b. cash. c. buildings. d. land. , LO: 1, Bloom: C, Difficulty: Easy, 52. The principle of establishing responsibility does not include a. one person being responsible for one task. b. authorization of transactions. c. independent internal verification. d. approval of transactions. , LO: 1, Bloom: K, Difficulty: Easy, 53. The control principle related to not having the same person authorize and pay for goods is known as a. establishment of responsibility. b. independent internal verification. c. segregation of duties. d. rotation of duties. , LO: 1, Bloom: K, Difficulty: Easy, 54. Two individuals at a retail store work the same cash register. You evaluate this situation as a. a violation of establishment of responsibility. b. a violation of segregation of duties. c. supporting the establishment of responsibility. d. supporting internal independent verification. , LO: 1, Bloom: C, Difficulty: Easy, 55. An accounts payable clerk also has access to the approved supplier master file for purchases. The control principle of a. establishment of responsibility is violated. b. independent internal verification is violated. c. documentation procedures is violated. d. segregation of duties is violated. , LO: 1, Bloom: C, Difficulty: Easy, 56. Controls that enhance the accuracy and reliability of the accounting records are a. automated controls. b. external controls. c. mechanical and electronic controls. d. physical controls. , LO: 2, Bloom: K, Difficulty: Easy, 57. Related selling activities do not include a. ordering the merchandise. b. making a sale. c. shipping the goods. d. billing the customer. , LO: 2, Bloom: C, Difficulty: Easy, 58. The independent internal verification principle involves each of the following except the ______________ of data prepared by other employees. a. comparison b. reconciliation c. review d. segregation , LO: 2, Bloom: C, Difficulty: Easy, 59. Related buying activities include a. ordering, receiving, paying. b. ordering, selling, paying. c. ordering, shipping, billing. d. selling, shipping, paying. , LO: 2, Bloom: C, Difficulty: Easy, 60. Jolene is warehouse custodian and also maintains the accounting record of the inventory held at the warehouse. An assessment of this situation indicates a. documentation procedures are violated. b. independent internal verification is violated. c. segregation of duties is violated. d. establishment of responsibility is violated. , LO: 2, Bloom: C, Difficulty: Easy, 61. Physical controls to safeguard assets do not include a. cashier department supervisors. b. vaults. c. employee identification badges. d. security guards. , LO: 2, Bloom: K, Difficulty: Easy, 62. In large companies, the independent internal verification procedure is often assigned to a. computer operators. b. management. c. internal auditors. d. outside CPAs. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls 63. Maximum benefit from independent internal verification is obtained when a. it is made on a pre-announced basis. b. it is done by the employee possessing custody of the asset. c. discrepancies are reported to management. d. it is done at the time of the audit. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Internal Controls 64. If employees are bonded a. it means that they are not allowed to handle cash. b. they have worked for the company for at least 10 years. c. they have been insured against misappropriation of assets. d. it is impossible for them to steal from the company. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, , IMA: Business Economics 65. Rebekah Grace has worked for Specoly Inc., for 20 years without taking a vacation. An internal control feature that would address this situation would be a. other controls. b. establishment of responsibility. c. physical controls. d. documentation procedures. , LO: 2, Bloom: C, Difficulty: Easy, 66. A system of internal control a. is infallible. b. can be rendered ineffective by employee collusion. c. invariably will have costs exceeding benefits. d. is premised on the concept of absolute assurance. , LO: 2, Bloom: C, Difficulty: Easy, 67. For accounting purposes, postdated checks (checks payable in the future) are considered to be a. money orders. b. cash. c. petty cash. d. accounts receivable. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 68. Postage stamps on hand are considered to be a. cash. b. petty cash. c. cash equivalents. d. a prepaid expense. , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 69. Which one of the following items would not be considered cash? a. Coins b. Money orders c. Currency d. Postdated checks , LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 70. Checks received through the mail should a. immediately be endorsed "For Deposit Only." b. be sent to the accounts receivable subsidiary ledger clerk for immediate posting to the customer's account. c. be cashed at the bank as soon as possible. d. be "rung up" on a cash register immediately. , LO: 2, Bloom: C, Difficulty: Easy, Management, AICPA FN: Risk Analysis, AICPA PC: None, IMA: Business Economics 71. Proper control for over-the-counter cash receipts includes a. a cash register with totals visible to the customer. b. using electronic cash registers with no tapes. c. cash count sheets requiring only the supervisor's signature. d. cash count sheets requiring only the cashier's signature. , LO: 2, Bloom: C, Difficulty: Easy, 72. A company stamps checks received in the mail with the words "For Deposit Only". This endorsement is called a(n) a. blank endorsement. b. rubber stamp. c. restrictive endorsement. d. operational endorsement. , LO: 2, Bloom: K, Difficulty: Easy, 73. The daily cash count of cash register receipts made by department supervisors is an example of a. other controls. b. independent internal verification. c. establishment of responsibility. d. segregation of duties. , LO: 2, Bloom: C, Difficulty: Easy, 74. The use of remittance advices for mail receipts is an example of a. documentation procedures. b. other controls. c. physical controls. d. independent internal verification. , LO: 2, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Industry/Sector Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics 75. Allowing only designated personnel to handle cash receipts is an example of a. establishment of responsibility. b. segregation of duties. c. documentation procedures. d. independent internal verification. , LO: 3, Bloom: C, Difficulty: Easy, 76. Control over cash disbursements is generally more effective when a. all bills are paid in cash. b. disbursements are made by the accounts payable subsidiary clerk. c. payments are made by check. d. all purchases are made on credit. , LO: 4, Bloom: C, Difficulty: Easy, 77. Reconciling the bank statement monthly is an example of a. segregation of duties. b. independent internal verification. c. establishment of responsibility. d. documentation procedures. , LO: 4, Bloom: C, Difficulty: Easy, 78. An exception to disbursements being made by check is acceptable when cash is paid a. to an owner. b. to employees as wages. c. from petty cash. d. to employees as loans. , LO: 4, Bloom: C, Difficulty: Easy, 79. Allowing only the treasurer to sign checks is an example of a. documentation procedures. b. segregation of duties. c. other controls. d. establishment of responsibility. , LO: 4, Bloom: C, Difficulty: Easy, 80. Blank checks a. should be safeguarded. b. should be pre-signed. c. do not need to be safeguarded since they must be signed to be valid. d. should not be prenumbered. , LO: 4, Bloom: K, Difficulty: Easy, 81. An employee authorized to sign checks should not record a. owner cash contributions. b. mail receipts. c. cash disbursement transactions. d. sales transactions. , LO: 4, Bloom: C, Difficulty: Easy, 82. A voucher system is a series of prescribed control procedures a. to check the credit worthiness of customers. b. designed to assure that disbursements by check are proper. c. which eliminates the need for a sales journal. d. specifically designed for small firms who may not have checking accounts. , LO: 4, Bloom: K, Difficulty: Easy, 83. Under a voucher system, a prenumbered voucher is prepared for every a. cash receipt, regardless of source. b. transaction entered into by the business. c. expenditure except those made from petty cash. d. journal entry. , LO: 4, Bloom: C, Difficulty: Easy, 84. A credit balance in Cash Over and Short is reported as a(n) a. asset. b. liability. c. miscellaneous expense. d. miscellaneous revenue. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 85. The entry to replenish a petty cash fund includes a credit to a. Petty Cash. b. Cash. c. Freight-in. d. Postage Expense. , LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 86. A debit balance in Cash Over and Short is reported as a a. contra asset. b. miscellaneous asset. c. miscellaneous expense. d. miscellaneous revenue. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 87. A petty cash fund of $100 is replenished when the fund contains $4 in cash and receipts for $93. The entry to replenish the fund would a. credit Cash Over and Short for $3. b. credit Miscellaneous Revenue for $3. c. debit Cash Over and Short for $3. d. debit Miscellaneous Expense for $3. , LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA 88. A petty cash fund is generally established in order to a. pay for all merchandise purchased on account. b. pay employees’ wages. c. make loans internally to employees. d. pay relatively small expenditures. , LO: 5, Bloom: K, Difficulty: Easy, 89. 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. , LO: 5, Bloom: K, Difficulty: Easy, 90. A petty cash fund should not be used for a. postage due. b. loans to the petty cash custodian. c. taxi fares. d. customer lunches. , LO: 5, Bloom: C, Difficulty: Easy, 91. The size of the petty cash fund is dependent on a. the wishes of the custodian of the fund. b. anticipated disbursements for the year. c. anticipated disbursements for a three- to four-week period. d. the size of the regular cash account. , LO: 5, Bloom: K, Difficulty: Easy, 92. Replenishing the petty cash fund requires a. a debit to Cash. b. a credit to Petty Cash. c. a debit to various expense accounts. d. no accounting entry. , LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 93. 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. , LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 94. A $100 petty cash fund has cash of $12 and receipts of $85. The journal entry to replenish the account would include a credit to a. Cash for $88. b. Petty Cash for $88. c. Cash Over and Short for $2. d. Cash for $85. , LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $100 – $12 = $88 95. A $100 petty cash fund has cash of $16 and receipts of $82. The journal entry to replenish the account would include a a. debit to Cash for $82. b. credit to Petty Cash for $84. c. debit to Cash Over and Short for $2. d. credit to Cash for $82. , LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($100 – $16) – $82 = $2 96. A $100 petty cash fund has cash of $17 and receipts of $86. The journal entry to replenish the account would include a a. debit to Cash for $86. b. credit to Petty Cash for $86. c. credit to Cash Over and Short for $3. d. credit to Cash for $86. , LO: 5, Bloom: C, Difficulty: Medium, Min: 2, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($17 + $86) – $100 = $3 97. If a petty cash fund is established in the amount of $200, and contains $119 in cash and $84 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to the following accounts a. Petty Cash, $84. b. Petty Cash, $81. c. Cash, $81; Cash Over and Short, $3. d. Cash, $84. , LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: ($119 + $84) – $200 = $3 98. If a petty cash fund is established in the amount of $250, and contains $153 in cash and $94 in receipts for disbursements when it is replenished, the journal entry to record replenishment should include credits to the following accounts a. Petty Cash, $94. b. Petty Cash, $97. c. Cash, $94; Cash Over and Short, $3. d. Cash, $97. , LO: 5, Bloom: C, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Solution: $250 – $153 = $97 99. All of the following are parties to a check except the a. bank. b. Federal Reserve. c. maker. d. payee. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics 100. When opening a bank checking account, a signature card a. indicates to whom money is to be paid. b. indicates each person authorized to sign checks on the account. c. is attached to all pre-printed checks. d. is required only when dealing with an out-of-state bank. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, , IMA: Business Economics 101. Which one of the following is not necessarily a party to a check? a. Maker b. Buyer c. Payee d. Payer , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics 102. A bank statement a. lets a depositor know the financial position of the bank as of a certain date. b. is a credit reference letter written by the depositor's bank. c. is a bill from the bank for services rendered. d. shows the activity which increased or decreased the depositor's account balance. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 103. Which one of the following would not cause a bank to debit a depositor's account? a. Bank service charge b. Collection of a note receivable c. Wiring of funds to other locations d. Checks marked NSF , LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 104. A company maintains the asset account, Cash in Bank, on its books, while the bank maintains a reciprocal account which is a. a contra-asset account. b. a liability account. c. also an asset account. d. a stockholders’ equity account. , LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 105. A remittance advice attached to a company check provides a. details about the running cash balance in the checking account. b. the magnetic bank routing numbers. c. the explanation of the purpose of the check. d. the signature space for the maker. 106. A deposit made by a company will appear on the bank statement as a a. debit. b. credit. c. debit memorandum. d. credit memorandum. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: FSA 107. A check returned by the bank marked "NSF" means a. no service fee. b. no signature found. c. not satisfactorily filled-out. d. not sufficient funds. 108. A debit memorandum would not be issued by the bank for a. a bank service charge. b. the issuance of traveler's checks. c. the wiring of funds. d. the collection of a notes receivable. , LO: 6, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: None, IMA: Business Economics 109. If the month-end bank statement shows a balance of $54,000, outstanding checks are $15,000, a deposit of $6,000 was in transit at month end, and a check for $900 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is a. $44,100. b. $45,000. c. $45,900. d. $62,100. 110. In preparing its bank reconciliation for the month of April 2015, Delano, Inc. has available the following information. Balance per bank statement, 4/30/15 $78,600 NSF check returned with 4/30/15 bank statement 940 Deposits in transit, 4/30/15 10,000 Outstanding checks, 4/30/15 10,400 Bank service charges for April 60 What should be the adjusted cash balance at April 30, 2015? a. $77,260. b. $77,600. c. $78,020. d. $78,200. 111. The cash account shows a balance of $90,000 before reconciliation. The bank statement does not include a deposit of $5,000 made on the last day of the month. The bank statement shows a collection by the bank of $2,400 and a customer’s check for $640 was returned because it was NSF. A customer’s check for $900 was recorded on the books as $1,080, and a check written for $138 was recorded as $192. The correct balance in the cash account was a. $91,580. b. $91,634. c. $92,400. d. $96,634. 112. The cash account shows a balance of $40,000 before reconciliation. The bank statement does not include a deposit of $9,200 made on the last day of the month. The bank statement shows a collection by the bank of $3,960 and a customer’s check for $1,300 was returned because it was NSF. A customer’s check for $1,380 was recorded on the books as $1,920, and a check written for $318 was recorded as $390. The correct balance in the cash account was a. $42,048. b. $42,192. c. $43,128. d. $51,392. 113. If the month-end bank statement shows a balance of $72,000, outstanding checks are $54,000, a deposit of $15,000 was in transit at month end, and a check for $3,000 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is a. $33,000. b. $36,000. c. $72,000. d. $114,000. 114. In preparing its bank reconciliation for the month of April 2015, Haskins, Inc. has available the following information. Balance per bank statement, 4/30/15 $40,920 NSF check returned with 4/30/15 bank statement 1,350 Deposits in transit, 4/30/15 10,500 Outstanding checks, 4/30/15 15,600 Bank service charges for April 60 What should be the adjusted cash balance at April 30, 2015? a. $34,410. b. $34,470. c. $35,760. d. $35,820. 115. In preparing its August 31, 2015 bank reconciliation, Annie Corp. has available the following information: Balance per bank statement, 8/31/15 $64,950 Deposit in transit, 8/31/15 11,700 Return of customer’s check not sufficient funds, 8/30/15 1,800 Outstanding checks, 8/31/15 8,250 Bank service charges for August 300 At August 31, 2015, Annie’s adjusted cash balance is a. $56,700. b. $56,400. c. $68,400. d. $61,500. 116. Trudy, Inc. had the following bank reconciliation at March 31, 2015: Balance per bank statement, 3/31/15 $37,200 Add: Deposit in transit 6,300 43,500 Less: Outstanding checks 8,600 Balance per books, 3/31/15 $34,900 Data per bank for the month of April 2015 follow: Deposits $46,700 Disbursements 49,700 All reconciling items at March 31, 2015 cleared the bank in April. Outstanding checks at April 30, 2015 totaled $6,000. There were no deposits in transit at April 30, 2015. What is the cash balance per books at April 30, 2015? a. $25,900 b. $31,900 c. $34,200 d. $38,500 117. On a bank reconciliation, deposits in transit are a. added to the bank balance. b. deducted from the bank balance. c. added to the book balance. d. deducted from the book balance. A bank reconciliation should be prepared e. whenever the bank refuses to lend the company money. f. when an employee is suspected of fraud. g. to explain any difference between the depositor's balance per books and the balance per bank. h. by the person who is authorized to sign checks. 118. Deposits in transit a. have been recorded on the company's books but not yet by the bank. b. have been recorded by the bank but not yet by the company. c. have not been recorded by the bank or the company. d. are checks from customers which have not yet been received by the company. 119. In preparing a bank reconciliation, outstanding checks are a. added to the balance per bank. b. deducted from the balance per books. c. added to the balance per books. d. deducted from the balance per bank. 120. If a check correctly written and paid by the bank for $427 is incorrectly recorded on the company's books for $472, the appropriate treatment on the bank reconciliation would be to a. add $45 to the bank's balance. b. add $45 to the book's balance. c. deduct $45 from the bank's balance. d. deduct $427 from the book's balance. 121. Notification by the bank that a deposited customer check was returned NSF requires that the company make the following adjusting entry: a. Accounts Receivable Cash b. Cash Accounts Receivable c. Miscellaneous Expense Accounts Receivable d. No adjusting entry is necessary. 122. Jukebox Company had checks outstanding totaling $10,800 on its June bank reconciliation. In July, Jukebox Company issued checks totaling $77,800. The July bank statement shows that $76,600 in checks cleared the bank in July. A check from one of Jukebox Company's customers in the amount of $1,000 was also returned marked "NSF." The amount of outstanding checks on Jukebox Company's July bank reconciliation should be a. $1,200. b. $11,000. c. $12,000. d. $13,000. 123. Each of the following items affect the cash balance per books except a. bank service charges. b. notes collected by the bank. c. NSF checks. d. outstanding checks. 124. Electric Sunset Company gathered the following reconciling information in preparing its July bank reconciliation: Cash balance per books, 7/31 $22,000 Deposits in transit 1,200 Notes receivable and interest collected by bank 4,400 Bank charge for check printing 80 Outstanding checks 8,000 NSF check 680 The adjusted cash balance per books on July 31 is a. $17,640. b. $18,840. c. $25,640. d. $26,840. 126. Unicycle Company developed the following September bank reconciliation: reconciling information in preparing its Cash balance per bank, 9/30 $24,000 Note receivable collected by bank 12,000 Outstanding checks 14,000 Deposits in transit 7,000 Bank service charge 150 NSF check 2,400 Determine the cash balance per books (before adjustments) for Unicycle Company. a. $2,450. b. $7,550. c. $9,550. d. $17,000. 127. Bank errors a. occur because of time lags. b. must be corrected by debits. c. are infrequent in occurrence. d. are corrected by making an adjusting entry on the depositor's books. 128. An adjusting entry is not required for a. outstanding checks. b. collection of a note by the bank. c. NSF checks. d. bank service charges. 129. Winter Gloves Company had checks outstanding totaling $12,800 on its May bank reconciliation. In June, Winter Gloves Company issued checks totaling $79,800. The July bank statement shows that $71,400 in checks cleared the bank in July. A check from one of Winter Gloves Company's customers in the amount of $2,000 was also returned marked "NSF." The amount of outstanding checks on Winter Gloves Company's July bank reconciliation should be a. $8,400. b. $19,200. c. $21,200. d. $23,200. 130. Candy Claws Company gathered the following reconciling information in preparing its August bank reconciliation: Cash balance per books, 8/31 $19,500 Deposits in transit 900 Notes receivable and interest collected by bank 4,800 Bank charge for check printing 120 Outstanding checks 12,000 NSF check 1,020 The adjusted cash balance per books on August 31 is a. $11,160. b. $12,060. MC. 130 (Cont.) c. $23,160. d. $24,060. 131. Shane Company gathered the following reconciling information in preparing its April bank reconciliation: Cash balance per books, 4/30 $19,800 Deposits in transit 2,700 Notes receivable and interest collected by bank 6,600 Bank charge for check printing 150 Outstanding checks 13,500 NSF check 1,260 The adjusted cash balance per books on April 30 is a. $12,930. b. $14,190. c. $23,730. d. $24,990. 132. Bacher Company developed the following reconciling information in preparing its September bank reconciliation: Cash balance per bank, 9/30 $6,160 Note receivable collected by bank 3,360 Outstanding checks 3,200 Deposits in transit 2,520 Bank service charge 42 NSF check 672 Using the above information, determine the cash balance per books (before adjustments) for the Bacher Company. a. $2,834 b. $5,480 c. $8,148 d. $8,828 In the month of November, Kinsey Company Inc. wrote checks in the amount of $18,500. In December, checks in the amount of $25,316 were written. In November, $16,936 of these checks were presented to the bank for payment, and $21,766 were presented in December. What is the amount of outstanding checks at the end of November? a. $1,564 b. $4,830 c. $5,114 d. $6,816 133. In the month of November, Kinsey Company Inc. wrote checks in the amount of $27,750. In December, checks in the amount of $37,974 were written. In November, $25,404 of these checks were presented to the bank for payment, and $32,649 were presented in December. What is the amount of outstanding checks at the end of December? a. $2,346 b. $7,245 c. $7,671 d. $10,224 134. At April 30, Yaddof Company has the following bank information: cash balance per bank $2,300; outstanding checks $390; deposits in transit $275; credit memo for interest $50; bank service charge $10. What is Mareska’s adjusted cash balance on April 30? a. $2,185 b. $2,245 c. $2,300 d. $2,340 135. At June 30, Yaddof Company has the following bank information: cash balance per bank $1,800; outstanding checks $340; deposits in transit $275; credit memo for interest $75; bank service charge $10. What is Mareska’s adjusted cash balance on June 30? a. $1,735 b. $1,800 c. $1,810 d. $1,865 136. Hoppmann Company wrote checks totaling $25,620 during October and $27,975 during November. $24,360 of these checks cleared the bank in October, and $27,330 cleared the bank in November. What was the amount of outstanding checks on November 30? a. $645 b. $1,260 c. $1,905 d. $2,355 137. Fitzgerald Company wrote checks totaling $34,160 during October and $37,300 during November. $32,480 of these checks cleared the bank in October, and $36,440 cleared the bank in November. What was the amount of outstanding checks on November 30? a. $2,860 b. $1,680 c. $2,540 d. $3,140 138. Carothers Company assembled the following information in completing its March bank reconciliation: balance per bank $7,640; outstanding checks $1,550; deposits in transit $2,500; NSF check $160; bank service charge $50; cash balance per books $8,800. As a result of this reconciliation, Carothers will a. reduce its cash account by $50. b. reduce its cash account by $210. c. reduce its cash account by $950. d. increase its cash account by $110. 139. Macrinez Company assembled the following information in completing its July bank reconciliation: balance per bank $22,920; outstanding checks $4,650; deposits in transit $7,500; NSF check $480; bank service charge $150; cash balance per books $26,400. As a result of this reconciliation, Macrinez will a. reduce its cash account by $150. b. reduce its cash account by $630. c. reduce its cash account by $2,850. d. increase its cash account by $330. 140. If a check correctly written and paid by the bank for $584 is incorrectly recorded on the company’s books for $548, the appropriate treatment on the bank reconciliation would be to a. deduct $36 from the book’s balance. b. add $36 to the book’s balance. c. deduct $36 from the bank’s balance. d. deduct $584 from the book’s balance. 141. In the month of May, Kijak Company Inc. wrote checks in the amount of $84,000. In June, checks in the amount of $114,000 were written. In May, $75,000 of these checks were presented to the bank for payment, and $99,000 in June. What is the amount of outstanding checks at the end of May? a. $9,000 b. $15,000 c. $24,000 d. $30,000 142. In the month of May, Kijak Company Inc. wrote checks in the amount of $56,000. In June, checks in the amount of $76,000 were written. In May, $50,000 of these checks were presented to the bank for payment, and $66,000 in June. What is the amount of outstanding checks at the end of June? a. $6,000 b. $10,000 c. $16,000 d. $20,000 143. Cash equivalents could include each of the following except a. bank certificates of deposit. b. money market funds. c. petty cash. d. U.S. Treasury bills. 144. Which of the following would not be reported on the balance sheet as a cash equivalent? a. Money market fund b. Sixty-day certificate of deposit c. Six-month Treasury bill d. Money market savings certificate 145. Compensating balances are a restriction on the use of a company's cash and should be a. reported as a current asset. b. reported as a noncurrent asset. c. disclosed in the financial statements. d. reported as a reduction of cash. , LO: 8, Bloom: C, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 146. The principles of internal control include all of the following except a. establishment of responsibility. b. combining of duties. c. physical, mechanical, and electronic controls. d. independent internal verification. , LO: 2, Bloom: K, Difficulty: Easy, 147. An example of poor internal control is a. The accountant should not have physical custody of the asset nor access to it. b. The custodian of an asset should not maintain or have access to the accounting records. c. One person should be responsible for handling related transactions. d. A salesperson makes the sale, and a different person ships the goods. , LO: 2, Bloom: C, Difficulty: Easy, 148. Having different individuals receive cash, record cash receipts, and hold the cash is an example of a. establishment of responsibility. b. segregation of duties. c. documentation procedures. d. independent internal verification. , LO: 3, Bloom: K, Difficulty: Easy, 149. Storing cash in a company safe is an application of which internal control principle? a. Segregation of duties b. Documentation procedures c. Physical controls d. Establishment of responsibility , LO: 3, Bloom: K, Difficulty: Easy, 150. Using prenumbered checks and having an approved invoice for each check is an example of a. establishment of responsibility. b. segregation of duties. c. documentation procedures. d. independent internal verification. 151. An application of good internal control over cash disbursements is a. following payment, the approved invoice should be stamped PAID. b. blank checks should be stored in the treasurer's desk. c. each check should be compared with the approved invoice after the check is issued. d. check signers should record the cash disbursements. , LO: 4, Bloom: C, Difficulty: Easy, 152. When making a payment from the petty cash fund for postage stamps, the following journal entry is made. a. Supplies ................................... XXXX Petty Cash ........................ XXXX b. Postage Expense ..................... XXXX Petty Cash ........................ XXXX c. Miscellaneous Expense ........... XXXX Petty Cash ........................ XXXX d. No entry is made. 153. All of the following would involve a debit memorandum except a. a bank service charge. b. an NSF check. c. the cost of printing checks. d. interest earned. 154. A bank may issue a credit memorandum for a. a bank service charge. b. an NSF (not sufficient funds) check from a customer. c. the collection of a note receivable for the depositor by the bank. d. the cost of printing checks. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 155. Journal entries are required by the depositor for all of the following except a. collection of a note receivable. b. bank errors. c. bank service charges. d. an NSF check. 156. Cash equivalents are highly liquid investments that can be converted into a specific amount of cash with maturities of a. 1 month or less when purchased. b. 3 months or less when purchased. c. 6 months or less when purchased. d. 1 year or less when purchased. 157. The principles of internal control activities are used in the a. U.S. but not globally. b. internationally but not in the U.S. c. in the U.S. and Canada but not globally. d. globally. 158. Sarbanes Oxley applies to a. U.S companies but not international companies. b. international companies but not U.S. companies. c. U.S. and Canadian companies but not other international companies. d. U.S and international companies. 159. The fraud triangle applies to a. U.S companies but not international companies. b. international companies but not U.S. companies. c. U.S. and Canadian companies but not other international companies. d. U.S and international companies. 160. What percentage of companies worldwide have experienced fraud in a recent two-year period? a. 1% b. 10% c. 50% d. 100% 161. Tangible frauds include a. asset misappropriation. b. false pretenses. c. counterfeiting. d. all of the above. IFRS , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 162. IFRS, compared to GAAP, tends to be more a. detailed. b. rules-based. c. principles-based. d. full of disclosures requirements. 163. GAAP, compared to IFRS, tends to be more a. simple in accounting requirements. b. rules-based. c. principles-based. d. simple in disclosures requirements. IFRS , LO: 9, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Reporting 164. GAAP's accounting and internal control procedures related to cash and the definition of cash equivalents, as compared to IFRS are: Accounting and internal control procedures Definition of cash equivalents a. essentially similar essentially similar b. essentially different essentially similar c. essentially similar essentially different d. essentially different essentially different 165. Cash is defined by IFRS as a. cash on hand. b. demand deposits. c. cash on hand and demand deposits. d. cash on hand, demand deposits, and highly liquid investments. 166. Cash equivalents are defined by IFRS as a. cash on hand. b. demand deposits. c. cash on hand and demand deposits. d. short-term, highly liquid investments that are readily convertible into known amounts of cash. Answers to Multiple Choice Questions BRIEF EXERCISES BE 168 Match the principle of internal control to each of the following cases. a) Establishment of responsibility b) Segregation of duties c) Accountability for assets d) Documentation procedures e) Physical controls _____ 1. Cash is locked in a safe overnight. _____ 2. Employees who receive shipments of goods do not have access to the accounting records for merchandise. _____ 3. Shipping documents are prenumbered. _____ 4. The bookkeeper does not have physical custody of assets. _____ 5. Only the treasurer of the company can sign checks. BE 169 Identify which principle of internal control is being followed in each of the following cases. 1. Warehouse employees do not have access to the accounting records. 2. Prenumbered shipping documents are prepared for each shipment of goods. 3. The locked warehouse is accessible only by warehouse employees with keys. Identify the internal control procedures applicable to cash receipts for Ferguson Company in each of the following cases. 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 171 Identify the internal control procedures applicable to cash disbursements followed by Downey Company in each of the following cases. 1. Company checks are prenumbered. 2. Only the treasurer is authorized to sign checks. 3. All employees are required to take vacations. 4. Blank checks are stored in a locked safe. 5. The bookkeeper, not the treasurer, records cash disbursements. 1. Segregation of duties BE 172 On October 1, Head and Heart Company’s petty cash fund of $150 is replenished. The fund contains cash of $30, and receipts for supplies of $75 and postage of $45. Prepare the journal entry to record the replenishment of the petty cash fund. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA BE 173 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 $450 but recorded for $540 5. Collection of note and interest by bank on company’s behalf BE 174 Identify whether each of the following items would be (a) added to the book balance, (b) deducted from the book balance in a bank reconciliation, (c) added to the bank balance, or (d) deducted from the bank balance. 1. Deposits in transit 2. Bank service charge 3. Collection of note and interest by bank on company’s behalf 4. NSF check 5. Outstanding checks BE 175 Identify which of the following reconciling items would require an adjusting entry to be made by Danielle Doyle Company. 1. Deposits in transit totaled $2,000. 2. A check written to the company for $415 by Cartography Company was returned NSF. 3. The bank charged the company $25 for printing checks. 4. Outstanding checks totaled $3,300 5. A debit memorandum reported an EFT of $178 to Salome Utilities Adjusting entries would be required for: 2, 3, and 5 because they are reconciling items for the books. BE 176 Harnish 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 $127 written to the company by J. Chandler was returned NSF. 2. The monthly service charge by the bank was $20. 3. The bank collected a $1,000 note plus interest of $100 on the company’s behalf. The company had not accrued the interest. BE 177 The following reconciling items are applicable to the bank reconciliation for the Spahn 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. a. . BE 178 At August 31, Coffman Company has this bank information: cash balance per bank $6,450; outstanding checks $2,762; deposits in transit $1,700; and a bank service charge $20. Determine the adjusted cash balance per bank at August 31, 2015. Coffman Company Partial Bank Reconciliation August 31, 2015 Cash balance per bank $6,450 Add: Deposit in transit 1,700 8,150 Less: Outstanding checks 2,762 Adjusted cash balance per bank $5,388 BE 179 Given the following information, determine the adjusted cash balance per books from the following information: a. Balance per books as of June 30, $8,600. b. Outstanding checks, $820. c. NSF check returned with bank statement, $130. d. Deposit mailed the afternoon of June 30, $300. e. Check printing charges, $30. f. Interest earned on checking account, $12. Ex. 180 EXERCISES Match each of the following principles of internal control with the appropriate description below. A. Establishment of responsibility B. Segregation of duties C. Documentation procedures D. Physical controls E. Independent internal verification F. Human resource controls _____ 1. Involves the review, comparison, and reconciliation of data prepared by other employees. _____ 2. Provide evidence that transactions and events have occurred. _____ 3. Includes the authorization and approval of transactions. _____ 4. Rotating employees' duties and requiring employees to take vacations. _____ 5. Related activities should be assigned to different individuals. _____ 6. Using garment sensors to deter theft. , LO: 2, Bloom: C, Difficulty: Easy, Min: 5, AACSB: None, AICPA BB: Resource Ex. 181 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 controls 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. Ex. 182 Joe Foss has worked for Dr. Sam Milton for several years. Joe demonstrates a loyalty that is rare among employees. He hasn't taken a vacation in the last three years. One of Joe'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 Joe doesn't bother with giving each patient 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, Joe offers to help Ann 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. , LO: 2, Bloom: C, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Resource Ex. 183 Listed below are seven errors or problems which 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 controls d. Documentation procedures e. Independent internal verification f. Human resource controls , LO: 2, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Resource Ex. 184 Match the internal control principle below with the appropriate cash receipts procedure described. a. Documentation procedures b. Establishment of responsibility c. Independent internal verification d. Human resource controls e. Physical controls f. Segregation of duties _____ 1. Only designated personnel are authorized to handle cash receipts. _____ 2. Different individuals receive cash and record cash receipts. _____ 3. Use remittance advice and cash register tapes. _____ 4. Store cash in safes and bank vaults. _____ 5. Treasurer compares total receipts to bank deposits daily. _____ 6. Bonding of employees that handle cash. , LO: 3, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Resource Ex. 185 Match the internal control principle below with the appropriate cash disbursements procedure described. a. Establishment of responsibility b. Segregation of duties c. Documentation procedures d. Physical controls e. Independent internal verification f. Human resource controls _____ 1. Compare checks to invoices. _____ 2. Different individuals approve and make payments. _____ 3. Print check amounts by machine with indelible ink. _____ 4. Only designated personnel are authorized to sign checks. _____ 5. Each check must have approved invoice. _____ 6. Requiring employees to take vacations. , LO: 4, Bloom: C, Difficulty: Easy, Min: 5, AACSB: Analytic, AICPA BB: Resource Ex. 186 The petty cash fund of $200 for Ginther Company appeared as follows on December 31, 2015: Cash Petty cash vouchers $61.60 Freight in $27.40 Postage 45.00 Balloons for a special occasion 63.00 Instructions 1. Briefly describe when the petty cash fund should be replenished. Because there is cash on hand, is there a need to replenish the fund at year end on December 31? Explain. 2. Prepare in general journal form the entry to replenish the fund. 3. On December 31, the office manager gives instructions to increase the petty cash fund by $50. Make the appropriate journal entry. , LO: 5, Bloom: AP, Difficulty: Easy, Min: 10, AACSB: None, AICPA BB: Resource 1. Petty cash should be replenished on a periodic basis or when the cash is low. It must be replenished on the balance sheet date so that the expenses represented by the petty cash vouchers can be recorded in the proper accounting period. 2. Freight-In.......................................................................................... 27.40 Postage Expense............................................................................. 45.00 Miscellaneous Expense ................................................................... 63.00 Cash Over and Short ....................................................................... 3.00 Cash........................................................................................ 138.40 3. Petty Cash ....................................................................................... 50.00 Cash........................................................................................ 50.00 Ex. 187 Prepare the entry to replenish the $200 petty cash fund of Erin Company, assuming the fund has receipts for: freight-out $60, postage $105, and miscellaneous expense $25. The fund contains $8 in cash. , LO: 5, Bloom: AP, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 188 On October 1, 2015, Ellington Company establishes an imprest petty cash fund by issuing a check for $200 to Erin Angelo, the custodian of the petty cash fund. On October 31, 2015, Erin Angelo submitted the following paid petty cash receipts for replenishment of the petty cash fund when there is $32 cash in the fund: Freight-In $28 Supplies Expense 42 Entertainment of Clients 65 Postage Expense 30 Instructions Prepare the journal entries required to establish the petty cash fund on October 1 and the replenishment of the fund on October 31. Ex. 189 Ernest Company uses an imprest petty cash system. The fund was established on March 1 with a balance of $200. During March the following petty cash receipts were found in the petty cash box. Date Receipt No. For Amount 3/5 1 Stamp Inventory $74 7 2 Freight-Out 42 9 3 Miscellaneous Expense 22 11 4 Travel Expense 49 The fund was replenished on March 15 when the fund contained $9 in cash. On March 20, the amount in the fund was increased to $300. Instructions Journalize the entries in March that pertain to the operation of the petty cash fund. Ex. 190 Sky Company is unable to reconcile the bank balance at January 31. Sky’s reconciliation is as follows. Cash balance per bank $5,300 Add: NSF check 1,570 Less: Bank service charge 35 Adjusted balance per bank $6,835 Cash balance per books $5,705 Less: Deposits in transit 750 Add: Outstanding checks 1,950 Adjusted balance per books $6,905 Instructions (a) Prepare a correct bank reconciliation. (b) Journalize the entries required by the reconciliation. , LO: 7, Bloom: AN, Difficulty: Medium, Min: 8, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Internal Controls Ex. 191 On April 30, the bank reconciliation of Baxter Company shows three outstanding checks: no. 354, $650, no. 355, $820, and no. 357, $615. The May bank statement and the May cash payments journal show the following. Bank Statement Checks Paid C ash Payments Journal Checks Issued Date Check No. Amount Date Check No. Amount 5/4 354 650 5/2 358 159 5/2 355 820 5/5 359 275 5/17 358 159 5/10 360 890 5/12 359 275 5/15 361 850 5/20 360 890 5/22 362 750 5/29 363 480 5/24 363 480 5/30 362 750 5/29 364 870 Ex. 191 (Cont.) Instructions Using step 2 in the reconciliation procedure, list the outstanding checks at May 31. , LO: 7, Bloom: AP, Difficulty: Medium, Min: 3, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Ex. 192 The information below relates to the Cash account in the ledger of Lee Company. Balance September 1—$25,725; Cash deposited—$96,000. Balance September 30—$22,225; Checks written—$99,500. The September bank statement shows a balance of $24,635 on September 30 and the following memoranda. Credits Debits Collection of $4,250 note plus interest $50 $4,300 NSF check: J. E. Hoover $735 Interest earned on checking account $40 Safety deposit box rent $75 At September 30, deposits in transit were $4,695, and outstanding checks totaled $3,575. Instructions Prepare the bank reconciliation at September 30. , LO: 7, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Ex. 193 The cash records of Jasmin Company show the following four situations. 1. The June 30 bank reconciliation indicated that deposits in transit total $2,110. During July the general ledger account Cash shows deposits of $23,620, but the bank statement indicates that only $23,400 in deposits were received during the month. 2. The June 30 bank reconciliation also reported outstanding checks of $1,250. During the month of July, Jasmin Company books show that $25,800 of checks were issued. The bank statement showed that $24,600 of checks cleared the bank in July. 3. In September, deposits per the bank statement totaled $40,100, deposits per books were $38,100, and deposits in transit at September 30 were $2,900. 4. In September, cash disbursements per books were $36,550, checks clearing the bank were $37,500, and outstanding checks at September 30 were $3,200. There were no bank debit or credit memoranda. No errors were made by either the bank or Jasmin Company. Instructions Answer the following questions. (a) In situation (1), what were the deposits in transit at July 31? (b) In situation (2), what were the outstanding checks at July 31? (c) In situation (3), what were the deposits in transit at August 31? (d) In situation (4), what were the outstanding checks at August 31? , LO: 7, Bloom: AN, Difficulty: Hard, Min: 12, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Ex. 194 Lyleen Boat Company's bank statement for the month of September showed a balance per bank of $7,000. The company's Cash account in the general ledger had a balance of $5,459 at September 30. Other information is as follows: (1) Cash receipts for September 30 recorded on the company's books were $5,700 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 Mann 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 Mann Company and that the payment to them should have been for $284. (4) The total amount of checks still outstanding at September 30 amounted to $5,000. (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 $360. (7) The bank included a credit memorandum for $2,560 which represents collection of a customer's note by the bank for the company; principal amount of the note was $2,500 and interest was $60. Interest has not been accrued. Instructions (a) Prepare a bank reconciliation for Lyleen Boat Company at September 30. (b) Prepare any adjusting entries necessary as a result of the bank reconciliation. , LO: 7, Bloom: AN, Difficulty: Hard, Min: 25, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Ex. 195 Bell Food Store developed the following information in recording its bank statement for the month of March. Balance per books March 31 $ 3,664 Balance per bank statement March 31 $10,900 ——————————————————————————————————————————— (1) Checks written in March but still outstanding $7,000. (2) Checks written in February but still outstanding $3,100. (3) Deposits of March 30 and 31 not yet recorded by bank $5,200. (4) NSF check of customer returned by bank $1,200. (5) Check No. 210 for $593 was correctly issued and paid by bank but incorrectly entered in the cash payments journal as payment on account for $539. Ex. 195 (Cont.) (6) Bank service charge for March was $50. (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 March. (8) The bank collected a note receivable for the company for $3,000 plus $100 interest revenue. Instructions Prepare a bank reconciliation at March 31. , LO: 7, Bloom: AP, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Ex. 196 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 $420 correctly written and paid by the bank but incorrectly entered in the cash payments journal for $240. ____ 4. Deposit in transit. ____ 5. Bank returns deposited check marked NSF. Ex. 196 (Cont.) ____ 6. Bank collects notes receivable and interest for depositor. ____ 7. Bank debit memorandum for check printing fees. ____ 8. Petty cash custodian has $91 in paid petty cash vouchers that have not been reimbursed. ____ 9. Bank charged a check against the company which should have been charged to another company. ____ 10. A check for $246 was correctly paid by the bank but was incorrectly entered in the cash payments journal for $264. Ex. 197 The following adjusting entries for Donkey Company were prepared after completing a bank reconciliation. For each of the following adjustments, prepare a probable explanation for the adjusting entry. 1. Supplies ........................................................................................... Cash........................................................................................ 180 180 2. Accounts Receivable—B. Borke ...................................................... Cash........................................................................................ 460 460 3. Cash ................................................................................................ Notes Receivable .................................................................... 2,240 2,000 Interest Revenue..................................................................... 240 4. Sales ................................................................................................ Cash........................................................................................ 72 72 5. Miscellaneous Expense ................................................................... Cash........................................................................................ 18 18 Ex. 198 The cash balance per books for Feagen Company on September 30, 2015 is $10,740.93. The following checks and receipts were recorded for the month of October, 2015: Checks Receipts No. Amount No. Amount Amount Date 17 $372.96 22 $ 578.84 $843.86 10/ 5 18 $780.62 23 $1,687.50 $941.54 10/21 19 $157.00 24 $ 921.30 $808.58 10/27 20 $587.50 25 $ 246.03 $967.00 10/30 21 $234.15 In addition, the bank statement for the month of October is presented below: 14 148.29 17 372.96 22 578.84 5,484.38 10/ 1 $9,875.31 18 708.62 24 921.30 843.86 10/ 8 $9,219.03 19 157.00 25 246.03 941.54 10/23 $9,541.58 21 234.15 25.00 SC 808.58 10/29 $10,101.01 Check No. 18 was correctly written for $708.62 for a payment on account. The NSF check was from S. Long, a customer, in settlement of an accounts receivable. An entry had not been made for the NSF check. The credit memo is for the collection of a note receivable including interest of $60 which has not been accrued. The bank service charge is $25.00. Ex. 198 (Cont.) Instructions (a) Prepare a bank reconciliation at October 31. (b) Prepare the adjusting journal entries required by the bank reconciliation. Ex. 199 Riley Company received a notice with its bank statement that the bank had collected a note receivable for $5,000 plus $150 of interest. The bank had credited these amounts to Riley 's account less a collection fee of $10. Riley Company had already accrued the interest for this note on its books. (a) How will these items affect Riley Company's bank reconciliation? (b) Prepare the journal entry that Riley Company will make to record this information on its books. , LO: 7, Bloom: AN, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 200 The cash records of Mercury Company show the following: 1. The June 30 bank reconciliation indicated that deposits in transit totaled $790. During July the general ledger account Cash shows deposits of $9,800, but the bank statement indicates that only $8,240 in deposits were received during the month. 2. The June 30 bank reconciliation also reported outstanding checks of $1,200. During the month of July, Mercury Company books show that $11,570 of checks were issued, yet the bank statement showed that $11,100 of checks cleared the bank in July. There were no bank debit or credit memoranda and no errors were made by either the bank or Mercury Company. Answer the following questions: (a) What were the deposits in transit at July 31? (b) What were the outstanding checks at July 31? , LO: 7, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Ex. 201 Indicate how each of the following items would be shown on a bank reconciliation. 1. Bank error (The bank charged our account with another company's check) 2. Check printing charge 3. Deposits in transit 4. Note collected by the bank 5. NSF checks 6. Outstanding checks , LO: 7, Bloom: AN, Difficulty: Medium, Min: 7, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics 1. Ex. 202 The cash records of Barry Company show the following: 1. In September, deposits per the bank statement totaled $38,600; deposits per books $39,000; and deposits in transit at September 30 were $4,600. 2. In September, cash disbursements per books were $36,500; checks clearing the bank were $39,800; and outstanding checks at September 30 were $3,100. There were no bank debit or credit memoranda and no errors were made by either the bank or Barry Company. Answer the following questions: (a) What were the deposits in transit at August 31? (b) What were the outstanding checks at August 31? , LO: 7, Bloom: AN, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Ex. 203 Listed below are items that may be useful in preparing the March 2015, bank reconciliation for Walker Machine Works. Using the following code, 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 Bob Simpson for $40 stamped "account closed." ____ 2. A personal deposit by Annie Walker to her personal account in the amount of $300 for dividends on her General Electric common stock was credited to the company account. ____ 3. The bank statement included a debit memorandum for $22.00 for two books of blank checks for Walker Machine Works. ____ 4. The bank statement contains a credit memorandum for $24.75 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, 2015, for $45.00 for the monthly interest on a 6-month, $15,000 certificate of deposit that the company owns. Ex. 203 (Cont.) ____ 8. Four checks, #8712, #8716, #8718, #8719, totaling $5,369.65, did not clear the bank during March. ____ 9. On March 24, 2015, Walker Machine Works delivered to the bank for collection a $2,500, 3-month note from Don Decker. A credit memorandum dated March 29, 2015, indicated the collection of the note and $90.00 of interest. ____ 10. The bank statement included a debit memorandum for $25.00 for the collection service on the above note and interest. , LO: 7, Bloom: C, Difficulty: Medium, Min: 10, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Business Economics Ex. 204 The following information was used to prepare the March 2015, bank reconciliation for Walker Machine Works. Identify the items that require adjustment to the cash balance per books and prepare the appropriate adjusting entries. 1. Included with the bank statement materials was a check from Bob Simpson for $40 stamped "NSF." 2. A personal deposit by Annie Walker to her personal account in the amount of $300 for dividends on her General Electric common stock was credited to the company account. 3. The bank statement included a debit memorandum for $22.00 for two books of blank checks for Walker Machine Works. 4. The bank statement contains a credit memorandum for $24.75 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, 2015, for $45.00 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, 2015, Walker Machine Works delivered to the bank for collection a $4,500, 3-month note from Don Decker. A credit memorandum dated March 29, 2015, indicated the collection of the note and $90.00 of interest. 10. The bank statement included a debit memorandum for $25.00 for the collection service on the above note and interest. , LO: 7, Bloom: AN, Difficulty: Hard, Min: 20, AACSB: Analytic, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA Ex. 205 Compute Whiz Company’s adjusted cash balance per books based on the following information: Ending cash balance per books $4,200 Deposit in transit 900 Check printing charge 20 Note collected by bank for Whiz 1,600 COMPLETION STATEMENTS 206. Internal control consists of the related methods and measures adopted to ____________ its assets and enhance the records. ______________ and ______________ of its accounting , LO: 1, Bloom: K, Difficulty: Easy, 207. The three main factors that contribute to fraudulent activity are depicted by the _______________. , LO: 1, Bloom: K, Difficulty: Easy, 208. The principle of internal control that prevents one individual from being responsible for all the related activities of a given task is ______________. , LO: 2, Bloom: K, Difficulty: Easy, 209. The ______________ of an asset should not have access to the accounting records of that asset. , LO: 2, Bloom: K, Difficulty: Easy, 210. Employees of a company who evaluate the effectiveness of the company's system of internal controls on a year-round basis are called ______________. , LO: 2, Bloom: K, Difficulty: Easy, 211. Using _______________ documents is a control measure which helps in accounting for all documents in a series and also prevents a document from being recorded more than once. , LO: 2, Bloom: K, Difficulty: Easy, 212. Employees who handle cash should be ______________ in order to protect against misappropriation of assets by dishonest employees. , LO: 2, Bloom: K, Difficulty: Easy, 213. Two limitations of systems of internal control are the concept of ______________ and the ______________. , LO: 2, Bloom: K, Difficulty: Easy, 214. Internal control over cash disbursements is more effective when payments are made by ______________, rather than by ______________. , LO: 4, Bloom: K, Difficulty: Easy, 215. A disbursement system that uses wire, telephone, computers, etc., to transfer cash from one location to another is referred to as ______________. , LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: None, AICPA PC: None, IMA: Business Economics 216. A voucher is recorded in the ________________ and filed according to the date on which it is to be paid. 217. A __________________ fund is used to pay relatively small expenditures. , LO: 5, Bloom: K, Difficulty: Easy, 218. A debit memorandum issued by the bank depositor's account. ______________ the cash balance in the , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 219. There are three parties to a check: (1)_______________, (2)______________, and the (3) ____________. , LO: 6, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 220. The difference between the cash in bank balance shown on the company's books and the cash balance shown on the bank statement may be caused by ______________ and by ______________ in recording transactions by either party. , LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: 221. In preparing a bank reconciliation, outstanding checks are ______________ from the cash balance per ______________. , LO: 7, Bloom: K, Difficulty: Easy, Min: 1, AACSB: None, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Reporting, AICPA PC: None, IMA: Business Economics 222. A check correctly written for $270 was incorrectly entered in the cash payments journal for $720. In preparing a bank reconciliation, $_____________ must be ______________ the cash balance per ______________. MATCHING 223. Match the items below by entering the appropriate code letter in the space provided. A. Prenumbered documents G. Bank signature card B. Custody of an asset should be kept H. Payee separate from the record-keeping I. Maker for that asset J. Canceled checks C. Cash registers, garment sensors K. NSF checks and burglar alarms are examples L. Outstanding checks D. Bonding employees M. Petty cash receipt E. Collusion N. Cash equivalents F. Cash O. Voucher system ____ 1. Segregation of duties. ____ 2. One to whom a check is payable. ____ 3. Two or more employees circumventing prescribed procedures. ____ 4. Prevent a transaction from being recorded more than once. ____ 5. Checks which have been returned by the maker's bank for lack of funds. ____ 6. Checks which have been paid by the depositor's bank. ____ 7. Indicates those people authorized to sign checks. ____ 8. Anything that a bank will accept for deposit. ____ 9. Mechanical and electronic control devices. ____ 10. One who issues a check. ____ 11. Insurance protection against misappropriation of assets. ____ 12. An extensive network of approvals by authorized individuals. ____ 13. Document indicating the purpose of a petty cash expenditure. ____ 14. Issued checks that have not been paid by the bank. ____ 15. Highly liquid investments. , LO: 2, Bloom: K, Difficulty: Easy, Min: 8, AACSB: None, AICPA BB: Resource S-A E 224 SHORT-ANSWER ESSAY QUESTIONS Fraud experts often say that there are three primary factors that contribute to employee fraud. Identify the three factors and explain what is meant by each. S-A E 225 Important objectives of a system of internal controls are to safeguard assets and to enhance the accuracy and reliability of the accounting records. Briefly discuss how (1) cost-benefit considerations, (2) the human element, and (3) the size of the business, affect the implementation of a system of internal controls. , S-A E 226 Your friend, Dean, has opened a movie theater. Dean states that he does not have time to develop and implement a system of internal controls. a. Provide Dean with the objectives of a system of internal controls. b. Explain to Dean why he should develop a system of internal controls. a. The objectives of a system of internal controls include: 1 safeguarding assets from employee theft, robbery, and unauthorized use 2. enhancing the accuracy and reliability of its accounting records by reducing the risk of errors and irregularities in the accounting process. b. Dean, here are some reasons why you must develop a system of internal controls: 1. You will not be able to oversee every function of your business. For this reason, you must establish policies and procedures for your employees to follow. By designing these policies and procedures around the principles of internal control, you have a foundation for safeguarding assets and enhancing the accuracy and reliability of the accounting records. 2. A good system of internal controls will help you attract investors and creditors because they will value the rewards of the system. 3. A good system of internal controls works to eliminate fraud. No business can assume that fraud will not take place. S-A E 227 (a) Identify the three activities that pertain to a petty cash fund, and indicate an internal control principle that is applicable to each activity. (b) When are journal entries required in the operation of a petty cash fund? S-A E 228 The preparation of a bank reconciliation is an important cash control procedure. If a company deposits cash receipts daily and makes all cash disbursements by check, explain why the cash balance per books might not agree with the cash balance shown on the bank statement. Identify specific examples that may cause differences between the cash balance per books and the cash balance per bank. , LO: 7, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Communications, AICPA BB: Legal/Regulatory Perspective, AICPA FN: Measurement, AICPA PC: Communications, IMA: Business Economics The cash balance per books will not agree with the cash balance shown on the bank statement due to time lags and errors by either party. A time lag could mean the bank records a transaction in a period later than the company records it (outstanding checks, deposits-in-transit) or the company records a transaction in a period later than the bank records it (NSF check, collection of a note, etc.). A common error is transposition of amounts in the recording process. S-A E 229 (Ethics) Moyer Instruments is a rapidly growing manufacturer of medical devices. As a result of its growth, the company's management recently modified several of its procedures and practices to improve internal control. Some employees are upset with the changes. They have complained that all these changes just show that the company no longer trusts them. Required: "Internal controls exist because most people can't be trusted." Is this true? Explain. , LO: 1, Bloom: K, Difficulty: Easy, Min: 5, AACSB: Ethics, AICPA BB: Resource Management, AICPA FN: Risk Analysis, AICPA PC: Communications, IMA: Internal Controls S-A E 230 (Communication) Medaid is a medical office management franchise. There are currently twenty-five medical offices managed by a Medaid franchisee. One of the services provided to franchisees is assistance in training various staff members. Medaid is preparing a manual for the front office staff to use as a reference guide. It will be used in training new employees as well. One of the reasons the manual is being prepared is to stress the importance of strong internal controls. Required: Prepare a short paragraph, to be included in the training materials, describing the benefits of sound internal control, from the viewpoint of the employee. CE 1 CHALLENGE EXERCISE Williams Company established a petty cash fund on May 1, cashing a check for $250. The company reimbursed the fund on June 1 with the following results. June 1: Cash in fund $64. Receipts: delivery expense $81; postage expense $39; and miscellaneous expense $62. July 1: Cash in funds $43 Receipts: delivery expense $91.00; entertainment expense $71.00; and miscellaneous expense $45 On July 10, Williams increased the fund form $250 to $400. Instructions (a) Prepare journal entries for Williams Company for May 1, June 1, July 1, and July 10. (b) What internal control features are present in the petty cash fund? CE 2 The following information pertains to Manning Video Company. 1. Cash balance per bank, July 31, $8,363. 2. July bank service charge not recorded by the depositor $22. 3. The bank erroneously charged another company's $700 check against Manning's account. 4. Cash balance per books, July 31, $9,784. 5. The bank charged Manning's account $350 for a customer's NSF check. 6. Deposits in transit, July 31, $2,700. 7. Manning recorded a cash receipt from a customer as $32. The bank correctly recorded it at $23 8. Bank collected a $1,750 note for Manning in July, plus interest $36. less fee $20.The collection has not been recorded by Manning and no interest has been accrued. 9. Outstanding check, July 31, $594. Instructions (a) Prepare a bank reconciliation at July 31. (b) Journalize the adjusting entries at July 31 on the books of Manning Video Company. CE 3 Newton Company has recorded the following items in its financial records. Cash in bank: The checking account is subject to a compensating balance of $5,000. The highly liquid investments had maturities of 3 months or less when they were purchased. The stock investment will be sold in the next 6 to 12 months. The plant expansion project will begin in 3 years. Instructions (a) What amount should Newton report as "Cash and cash equivalents" on its balance sheet? (b) Where should the items not included in part (a) be reported on the balance sheet? (a) The certificate of deposits maturing in 12 months should be reported as a current assets separate from "cash and cash equivalents". "Cash in plant expansion fund" should be reported as part of long-term investments (a noncurrent asset). "Receivable from customers" should be reported as accounts receivable in the current assets. "Stock investments" should also be reported in the current asset. [Show More]

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