Deck 5: Internal Control and Cash

Question 1

Which of the following statements best describes the act of collusion?

A) Collusion is caused by an overstatement of ending inventory.
B) Collusion is an intentional act of two or more employees to accomplish theft of company assets.
C) Collusion is one of the necessary outcomes of a system of internal control over financial reporting.
D) Collusion is enhanced by an effective system of independent reconciliations and other checks on recorded amounts.

Answer 1

B

Question 2

A component of internal control is:

A) risk assessment.
B) journals.
C) subsidiary ledgers.
D) controlling accounts.

Answer 2

A

Question 3

Which internal control activity is followed when the work of one department acts as a check on the work of another?

A) Segregation of duties
B) Physical security
C) Independent verification
D) Establishing responsibility

Answer 3

C

Question 4

Which of the following is not a requirement of a company's top managers under the Sarbanes-Oxley Act?

A) They must give an opinion about the effectiveness of the company's internal control over financial reporting.
B) They must certify that they are primarily responsible for the company's internal controls over financial reporting.
C) They must certify that the company's financial statements are fairly presented.
D) They may deny responsibility for certain financial reporting matters if they are not knowledgeable about the proper accounting procedures for those transactions.

Question 5

Internal control systems provide assurance in each of the following areas except:

A) effectiveness and efficiency of the company's operations.
B) compliance with applicable laws and regulations.
C) consolidation of departments within the accounting function.
D) reliability of financial reporting.

Question 6

According to the Sarbanes-Oxley Act of 2002, who is primarily responsible for establishing and maintaining a system of internal control over the company's financial reporting?

A) Management of the company
B) The company's auditors
C) The company's internal auditors
D) The audit committee of the company's board of directors

Question 7

Allowing only certain employees to order goods and services on behalf of the company is an example of what internal control activity?

A) Segregation of duties
B) Physical security
C) Independent verification
D) Establishing responsibility

Question 8

When a firm uses internal auditors, it is adhering to which one of the following internal control elements?

A) Risk assessment
B) Monitoring
C) Proofs and security measures
D) Separating responsibilities for related operations

Question 9

Which of the following is not a generally recognized internal control activity?

A) Separation of the custody and record keeping responsibilities for any business activity
B) Destroying all documentation as soon as possible to avoid their misuse
C) Internal review of business transactions by the internal auditors
D) Independent verification of the work of one employee by another employee

Question 10

A company's control environment is primarily influenced by the Tone at the Top. This refers to each of the following except:

A) the philosophy and operating style of management.
B) the policies and practices that are promoted within the company.
C) the experiential background of management.
D) the priority placed upon the company's internal control system.

Question 11

Which internal control activity is violated when the cashier at a cash register in a retail store also records the daily receipts in a journal?

A) Segregation of duties
B) Adequate documentation
C) Independent verification
D) Physical security

Question 12

Which internal control activity is followed when inventory storage areas are secured with limited access?

A) Segregation of duties
B) Physical security
C) Independent verification
D) Maintaining adequate documentation

Question 13

The practice of monitoring activities within the internal control system is likely to be carried out by each of the following groups except:

A) the board of directors.
B) internal auditors.
C) supervisors.
D) managers.

Question 14

Which of the following is not a requirement of the Sarbanes-Oxley Act?

A) Internal audit outsourcing can no longer be provided by a publicly-traded corporation's external auditors.
B) All publicly traded corporations must have an internal audit function.
C) All publicly traded corporations must provide internal controls over financial reporting that guarantees financial accuracy.
D) The audit committee of a publicly traded corporation must report to the company's board of directors.

Question 15

Which internal control activity is followed when a physical count of inventory is performed under a perpetual inventory system?

A) Segregation of duties
B) Physical security
C) Independent verification
D) Establishing responsibility

Question 16

Which of the following is not a generally recognized internal control activity?

A) Establishment of clear lines of authority to carry out specific tasks
B) Preparation of bank reconciliation on a monthly basis
C) Reducing the cost of hiring seasonal employees
D) Limiting access to computerized accounting records

Question 17

Which of the following is an essential element of internal control?

A) Computerized accounting systems
B) An outsourced internal audit function
C) Procedures for proper authorization of transactions
D) Verification by government agencies

Question 18

Having one employee prepare company checks and sign those checks is:

A) a violation of proper segregation of duties
B) a violation of adequate documentation
C) a good example of independent verification
D) a good example of establishing responsibility

Question 19

Segregation of duties is most effective in:

A) increasing cost of sales
B) assisting employees in performing risk assessment procedures
C) preventing collusion
D) increasing the likelihood of embezzlement

Question 20

Which internal control activity is followed when management authorizes the purchasing department to order goods and services for the company?

A) Segregation of duties
B) Physical security
C) Independent verification
D) Establishing responsibility

Question 21

Which of the following procedures is not part of the preparation of a bank reconciliation for a checking account?

A) Comparing deposits listed on the bank statement to the cash account to identify deposits in transit
B) Comparing cancelled checks returned with the bank statement to the cash account to identify outstanding checks
C) Looking for bank services charges and other items on the bank statement that have not yet been included in the cash account
D) Reversing all the transactions recorded on the company's records that do not yet appear on the bank statement

Question 22

Sparrow Corporation
The items listed below were identified while preparing a bank reconciliation for the checking account of Sparrow Corporation as of March 31, 2012.


-Refer to the information presented for Sparrow Corporation. How will the customer's bounced checks be handled within a bank reconciliation?

A) Add to the balance from the company records
B) Subtract from the balance from the company records
C) Add to the bank statement balance
D) Subtract from the bank statement balance

Question 23

Sparrow Corporation
The items listed below were identified while preparing a bank reconciliation for the checking account of Sparrow Corporation as of March 31, 2012.


- Refer to the information presented for Sparrow Corporation. Determine the amount of the balance per Sparrow's records before adjustment.

A) $16,410
B) $16,900
C) $17,190
D) $17,310

Question 24

A necessary element of internal control is:

A) database.
B) systems design.
C) systems analysis.
D) information and communication.

Question 25

Sparrow Corporation
The items listed below were identified while preparing a bank reconciliation for the checking account of Sparrow Corporation as of March 31, 2012.


-Refer to the information presented for Sparrow Corporation. How will the bank services charges be handled within a bank reconciliation?

A) Add to the balance in the company's records
B) Subtract from the balance in the company's records
C) Add to the bank statement balance
D) Subtract from the bank statement balance

Question 26

Cash collected and recorded by a company but not yet reflected in a bank statement are known as:

A) debit memos.
B) credit memos.
C) outstanding checks.
D) deposits in transit.

Question 27

While preparing a bank reconciliation, which of the following items would be subtracted from the balance per the bank statement?

A) Outstanding checks
B) Deposits in transit
C) Bank service charges
D) Interest earned on the bank account

Question 28

Sparrow Corporation
The items listed below were identified while preparing a bank reconciliation for the checking account of Sparrow Corporation as of March 31, 2012.


-Refer to the information presented for Sparrow Corporation. Determine the amount of Sparrow's actual cash balance.

A) $16,800
B) $20,200
C) $ 1,700
D) Cannot be determined

Question 29

While preparing the April 30th bank reconciliation for the checking account for Calvin Corporation, the accountant identified the following items: What amount will Calvin report as its actual cash balance at April 30th?

A) $12,385
B) $12,500
C) $14,885
D) $17,385

Question 30

Sparrow Corporation
The items listed below were identified while preparing a bank reconciliation for the checking account of Sparrow Corporation as of March 31, 2012.


- Refer to the information presented for Sparrow Corporation. How will the outstanding checks be handled within a bank reconciliation?

A) Add to the balance in the company's records
B) Subtract from the balance in the company's records
C) Add to the bank statement balance
D) Subtract from the bank statement balance

Question 31

While preparing the February 28th bank reconciliation for the checking account for Willow, Inc., the accountant identified the following items: In addition, Willow made an error in recording a customer's check; the amount was recorded in cash receipts as $150, while the bank correctly recorded the amount as $510. What amount will Willow report as its actual cash balance on February 28th?

A) $44,650
B) $45,890
C) $46,110
D) $46,250

Question 32

Sparrow Corporation
The items listed below were identified while preparing a bank reconciliation for the checking account of Sparrow Corporation as of March 31, 2012.


- Refer to the information presented for Sparrow Corporation. How will the deposits in transit be handled within a bank reconciliation?

A) Add to the balance from the company records
B) Subtract from the balance from the company records
C) Add to the bank statement balance
D) Subtract from the bank statement balance

Question 33

Which of the following statements best describes the term "outstanding check" from a company's point of view?

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 to the company, and the check has been presented to the bank for payment.
D) A check written by a customer to the company, but it has not yet been presented to the bank for payment.

Question 34

Which component of internal control relates to the policies and procedures that management establishes to address the risks that might prevent the organization from achieving its objectives?

A) Control activities
B) Monitoring
C) Risk assessment
D) Information and communication

Question 35

Which of the following would not appear on a bank statement for a checking account?

A) Service charges
B) Outstanding checks
C) Credit memos
D) Interest earned

Question 36

Sparrow Corporation
The items listed below were identified while preparing a bank reconciliation for the checking account of Sparrow Corporation as of March 31, 2012.


- Refer to the information presented for Sparrow Corporation. How will the interest earned on the checking account be handled within a bank reconciliation?

A) Add to the balance from the company records
B) Subtract from the balance from the company records
C) Add to the bank statement balance
D) Subtract from the bank statement balance

Question 37

While preparing a bank reconciliation, which of the following items would be added to the bank statement balance?

A) Outstanding checks
B) Deposits in transit
C) Bank service charges
D) Interest earned on the bank account

Question 38

A check returned by a bank because the issuer's cash account balance could not cover the check is called a(n):

A) outstanding check.
B) canceled check.
C) certified check.
D) NSF check.

Question 39

While preparing a bank reconciliation, which of the following items would be subtracted from the balance per the company records?

A) Outstanding checks
B) Deposits in transit
C) Bank service charges
D) Interest earned on the bank account

Question 40

While reconciling the checking account, an accountant with Elliter, Inc. noticed that an error had been made in recording a check received by the company. Elliter recorded the receipt as $729 and the correct amount of the check was $279. Which of the following reconciling adjustments is necessary?

A) Add $450 to the company's records.
B) Deduct $450 from the company's records.
C) Add $450 to the bank statement balance.
D) Deduct $450 from the bank statement balance.

Question 41

If a company erroneously records a $50 check received from a customer as $500 in its records, which of the following must occur when reconciling its bank statement?

A) The company must increase the balance per its records by $500.
B) The company must increase the balance per its records by $450.
C) The company must decrease the balance per its records by $500.
D) The company must decrease the balance per its records by $450.

Question 42

A credit memorandum appeared on Arthur's September bank statement. How will Arthur treat this amount on the September bank reconciliation?

A) Add it to the company's balance.
B) Add it to the bank balance.
C) Deduct it from the company's balance.
D) Deduct it from the bank balance.

Question 43

During the bank reconciliation process, an accountant identified an error. This error involved a company check written for $200 to pay a supplier for goods purchased on credit by the company. The check was erroneously recorded in the company's records for $2,000. Which of the following entries would correct this error in the company's records?

A) Cash 1,800
Accounts Payable 1,800

B) Cash 1,800
Accounts Receivable 1,800

C) Accounts Receivable 1,800
Accounts Payable 1,800

D) None of these, as the error should be corrected by the supplier's personnel.

Question 44

Which of the following statements is true regarding a credit memorandum and its relationship to a company's bank reconciliation procedures?

A) It must be added to the balance per the customer's records.
B) It is issued to notify a company of bank service charges which need to be recorded on the company's records.
C) It is issued when a customer gives the company an NSF check which needs to be recorded on the company's records.
D) It must be recorded as a debit to the balance per the company's records.

Question 45

Which of the following is an example of a credit memorandum?

A) Notice of a bank service charge
B) Notice of interest earned on a checking account
C) Outstanding checks
D) A company's transposition error in the recording of a customer's check

Question 46

A debit memorandum appeared on Mallory's bank statement for the month of May. How will Mallory treat this amount on the May bank reconciliation?

A) Add it to the company's balance.
B) Add it to the bank balance.
C) Deduct it from the company's balance.
D) Deduct it from the bank balance.

Question 47

The account which records the difference between the cash needed for replenishment and amount of receipts is called:

A) Petty Cash.
B) Cash Over and Short.
C) Cash Equivalents.
D) Discrepancy Expense.

Question 48

Which of the following procedures is incorrect for establishing and maintaining a petty cash fund?

A) A check is prepared for a small, fixed amount; when the check is cashed, the money is entrusted to a petty cash custodian.
B) The company must obtain the cash needed for the fund and record an entry for the establishment of the fund.
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 needs to be replenished, an entry is recorded to recognize an increase in the petty cash account.

Question 49

In the reconciliation of a bank statement, deposits in transit should be:

A) added to the unadjusted balance per the company's records.
B) subtracted from the unadjusted balance per the company's records.
C) added to the unadjusted bank statement balance.
D) subtracted from the unadjusted bank statement balance.

Question 50

Madrid Consulting, Inc.
Madrid Consulting, Inc. prepared a bank reconciliation as of March 31, 2011. The following items were identified.


-Refer to the information provided for Madrid Consulting, Inc. What is net amount of the adjustments to Madrid's cash balance as a result of the bank reconciliation?

A) $465 increase
B) $465 decrease
C) $2,700 decrease
D) $2,700 increase

Question 51

If the balance on the bank statement does not equal the balance per the company's records, 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 bank statement.
C) The company has made errors in its records concerning the cash account.
D) There will be items reconciling the difference.

Question 52

Which of the following is a reconciling item when reconciling the bank balance to the correct balance?

A) Canceled checks
B) Outstanding checks
C) NSF checks
D) Error in company record

Question 53

Which of the following journal entries is recorded as a result of the bank reconciliation process to record a NSF check for $250?

A) Cash 250
Accounts Receivable 250

B) Cash 250
Accounts Payable 250

C) Accounts Receivable 250
Cash 250

D) Accounts Receivable 250
Petty Cash 250

Question 54

Madrid Consulting, Inc.
Madrid Consulting, Inc. prepared a bank reconciliation as of March 31, 2011. The following items were identified.


- Refer to the information provided for Madrid Consulting, Inc. What is Madrid's adjusted cash balance at March 31st?

A) $28,700
B) $29,165
C) $28,300
D) $29,600

Question 55

The treasurer for Kent Enterprises was preparing a bank reconciliation as of October 31, 2012, when the following items were identified: Kent's adjusted cash balance at October 31, 2012, is:

A) $34,600.
B) $34,900.
C) $32,500.
D) $32,800.

Question 56

Ciao, Inc. had $962 in its cash account per the company's records as of June 30th. This included a deposit of $87 that was in transit on June 30th. The June 30th bank statement contained the following information: Ciao also had outstanding checks of $169. What is Ciao's adjusted cash balance at June 30th?

A) $920
B) $940
C) $1,007
D) $1,089

Question 57

If a company erroneously records a $500 deposit as $50 in its records, which of the following must occur when reconciling its bank statement?

A) The company must increase the balance per its records by $500.
B) The company must increase the balance per its records by $450.
C) The company must decrease the balance per its records by $500.
D) The company must decrease the balance per its records by $450.

Question 58

Which of the following is an example of a debit memorandum?

A) Notice of a bank service charge
B) Notice of interest earned on a checking account
C) Outstanding checks
D) A company's transposition error in the recording of a deposit

Question 59

Madrid Consulting, Inc.
Madrid Consulting, Inc. prepared a bank reconciliation as of March 31, 2011. The following items were identified.


- Refer to the information provided for Madrid Consulting, Inc. What is Madrid's unadjusted cash balance in its accounting records at March 31st before the reconciliation was completed?

A) $28,700
B) $29,165
C) $28,300
D) $29,600

Question 60

Honey Hut's unadjusted bank balance is $3,000. Outstanding checks amount to $500 and deposits in transit total $300. Based on this information alone, Honey Hut's adjusted cash balance is:

A) $3,200.
B) $3,300.
C) $2,800.
D) $2,700.

Question 61

Max's Tire Center Company
Selected data from the financial statements of Max's Tire Center are provided below.


- Refer to the selected data provided for Max's Tire Center. Which of the following would result from a vertical analysis of Max's cash and cash equivalent in 2012?

A) Cash and cash equivalents increased by $16,000 or 15.38% during 2012.
B) The free cash flow is $35,000 in 2012.
C) Cash and cash equivalents are 20.0% of total assets in 2012.
D) Cash and cash equivalents are 8.57% of total assets in 2012.

Question 62

Each of the following items is considered a cash equivalent except:

A) a 30-day certificate of deposit.
B) a 60-day corporate commercial paper.
C) a 75-day U.S. Treasury bill.
D) a 180-day note issued by a local government.

Question 63

Jillian Corporation has a $375 petty cash fund. At the end of each month, Jillian's petty cash custodian presents the records of the petty cash transactions. On August 31, there was $33 cash remaining in the fund and the documents supporting the following transactions were presented for reimbursement. Which of the following entries is necessary for recording the replenishment of the fund on August 31?

A)

B)

C)

D)

Question 64

Cash equivalents include:

A) treasury bills.
B) equity investments.
C) money market accounts and commercial paper.
D) certificates of deposit.

Question 65

Drucker Dynamics Inc.
The current assets section of the balance sheets of Drucker Dynamics as of December 31, 2012 and 2011, is presented below.


- Refer to the selected data provided for Bloom's Garden Center. What is Bloom's free cash flow in 2012?

A) The free cash flow is $744,000 in 2012.
B) The free cash flow is $653,800 in 2012.
C) The free cash flow is $635,800 in 2012.
D) The free cash flow is $474,000 in 2012.

Question 66

Which one of the following would never be considered a cash equivalent?

A) U.S. Treasury bills
B) Corporate commercial paper
C) Money market funds
D) Common stock issued by a corporation

Question 67

Bloom's Garden Center Company
Selected data from the financial statements of Bloom's Garden Center are provided below.


-Refer to the selected data provided for Bloom's Garden Center Company. Which of the following would result from a vertical analysis of Bloom's cash and cash equivalents?

A) Cash and cash equivalents increased by $13,000 or 20.97% during 2012.
B) The free cash flow is $653,800 in 2012.
C) Cash and cash equivalents are 11.03% of total assets in 2012.
D) Cash and cash equivalents are 20% of total assets in 2012.

Question 68

Which of the following is not included in cash and cash equivalents on a company's balance sheet?

A) A savings account at the bank
B) A checking account at the bank
C) A bank certificate of deposit for one year
D) Petty cash

Question 69

Upon review of Roepers's statement of cash flows, the following was noted: From this information, the most likely explanation is that Roeper is

A) using cash from operations and selling long-term assets to pay back debt.
B) using cash from operations and borrowing to purchase long-term assets.
C) using its profits to expand growth.
D) using cash from investors to provide for operations.

Question 70

A petty cash custodian should always:

A) maintain supporting documentation for any payment made from the petty cash fund.
B) record petty cash expenditures in the company's accounting records.
C) prepare the bank reconciliation for the petty cash account.
D) sign the checks for items paid from the petty cash fund.

Question 71

Donnay Corporation established a petty cash fund in the amount of $300. Which of the following is the correct entry for Donnay to record this event?

A) Cash 300
Petty Cash Fund 300

B) Petty Cash Fund 300
Cash 300

C) Miscellaneous Expense 300
Petty Cash Fund 300

D) None of these, as no entry is necessary to record an exchange of cash.

Question 72

Upon review of Mack's statement of cash flows, the following was noted: From this information, the most likely explanation is that Mack is:

A) using cash from operations and selling long-term assets to pay back debt.
B) using cash from operations and borrowing to purchase long-term assets.
C) using its profits to expand growth.
D) using cash from investors to provide for operations.

Question 73

Max's Tire Center Company
Selected data from the financial statements of Max's Tire Center are provided below.


- Refer to the selected data provided for Max's Tire Center. Which of the following would result from a horizontal analysis of Max's cash and cash equivalents in 2012?

A) Cash and cash equivalents increased by $16,000 or 15.80% during 2012.
B) Cash and cash equivalents increased by $16,000 or 15.38% during 2012.
C) Cash and cash equivalents are 8.57% of total assets in 2012.
D) The free cash flow is $35,000 in 2012.

Question 74

The primary purpose of the statement of cash flows is to provide information about:

A) the financial position of the company.
B) the profitability of the company.
C) the investing and financing activities of the company.
D) the cash inflows and outflows of the company.

Question 75

Bloom's Garden Center Company
Selected data from the financial statements of Bloom's Garden Center are provided below.


- Refer to the selected data provided for Bloom's Garden Center Company. Which of the following would result from a horizontal analysis of Bloom's cash and cash equivalents?

A) Cash and cash equivalents increased by $13,000 or 20.97% during 2012.
B) Cash and cash equivalents increased by $13,000 or 30.79% during 2012.
C) Cash and cash equivalents are 11.03% of total assets in 2012.
D) The free cash flow is $653,800 in 2012.

Question 76

Max's Tire Center Company
Selected data from the financial statements of Max's Tire Center are provided below.


- Refer to the selected data provided for Max's Tire Center. What is Max's Free Cash Flow in 2012?

A) The free cash flow is $35,000 in 2012.
B) The free cash flow is $40,000 in 2012.
C) The free cash flow is $27,300 in 2012.
D) The free cash flow is $33,600 in 2012.

Question 77

Which of the following is not considered to be a cash equivalent?

A) Corporate commercial paper due in 60 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

Question 78

Suppose that company noted a discrepancy whereby the amount of cash deposited in the bank account exceeded the amount included as cash sales on the cash register tapes. This overage should be recorded as a(n):

A) debit to Cash Over and Short.
B) credit to Cash Over and Short.
C) increase in Petty Cash.
D) increase in Accounts Receivable.

Question 79

How are cash equivalents reported or disclosed in the financial statements?

A) They are included with cash as a current asset on the balance sheet.
B) They are only reported on the statement of cash flows.
C) They are only disclosed in the notes to the financial statements.
D) They are included with short-term investments as a current asset on the balance sheet.

Question 80

Upon review of Bert's statement of cash flows, the following was noted: From this information, the most likely explanation is that Bert is

A) using cash from operations and selling long-term assets to pay back debt.
B) using cash from operations and borrowing to purchase long-term assets.
C) using its profits to expand growth.
D) using cash from investors to provide for operations.