Deck 4: Internal Controls, Accounting for Cash, and Ethics

Question 1

What is a deposit in transit? How are deposits in transit reflected on the bank reconciliation?

Answer 1

Companies frequently leave deposits in the bank's night depository or make them on the day following the receipt of cash. Such deposits are called deposits in transit. Because these deposits have been recorded on the books of the company, but not yet added to the depositor's account by the bank, they must be added to the unadjusted bank balance.

Question 2

What is a fidelity bond and what is its purpose?

Answer 2

A fidelity bond is an insurance policy that a company buys to insure itself against loss due to employee dishonesty.

Question 3

When a debit memo is included in a bank statement, what effect does that have on the cash balance?

Answer 3

Banks deduct such fees and penalties directly from the depositor's account and advise the depositor of the deduction through a debit memo that is included on the bank statement.

Question 4

What is meant by the term "materiality?"

Question 5

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Enter only one letter for each element.Increase = I Decrease = D Not Affected = NADuring the process of preparing the bank reconciliation, an employee for Heath Company discovered that the bank deducted a check from the Hearst Company (a different company).

Question 6

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Enter only one letter for each element.Increase = I Decrease = D Not Affected = NAIn preparing the bank reconciliation of Heath Company, an employee found that the company had deposits in transit of $2,200.

Question 7

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Enter only one letter for each element.Increase = I Decrease = D Not Affected = NAAt June 30, when Heath Company was preparing the bank reconciliation, the employee preparing the reconciliation found that the company had outstanding checks in the amount of $2,650.

Question 8

What term is used for a customer's check that is returned by the bank on which it was drawn because the customer did not have enough funds to pay the check?

Question 9

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Enter only one letter for each element.Increase = I Decrease = D Not Affected = NAIn preparing the bank reconciliation for Heath Company, an employee discovered that the bank had collected one of the company's notes receivable in the amount of $20,000 and had deposited this amount in the company's account at the bank. This amount does not include interest.

Question 10

For internal control purposes, what is meant by "separation of duties?"

Question 11

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Enter only one letter for each element.Increase = I Decrease = D Not Affected = NA
During the process of preparing the bank reconciliation, an employee for Heath Company discovered that Check number 4261 for $65, used to pay an account payable, was recorded in the company books as $56.

Question 12

List five internal control procedures that should be followed to safeguard cash and reduce the likelihood of theft.

Question 13

What are the primary roles of the independent auditor? What professional license is required of an independent auditor?

Question 14

Are outstanding checks an adjustment to the book balance, the bank balance, or not used in a bank reconciliation?

Question 15

What asset is generally most susceptible to theft?

Question 16

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Enter only one letter for each element.Increase = I Decrease = D Not Affected = NAIn preparing the bank reconciliation for Heath Company, a company employee found that the bank statement included an NSF check that the company had received from a customer paying its account at Heath Company.

Question 17

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Enter only one letter for each element.Increase = I Decrease = D Not Affected = NAIn preparing the bank reconciliation for Heath Company, an employee found that a certified check that the company had used to settle an account payable remained outstanding.

Question 18

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Enter only one letter for each element.Increase = I Decrease = D Not Affected = NAIn preparing the bank reconciliation for Heath Company, an employee discovered an error. A $654 cash receipt for the collection of an account receivable was recorded in the company's books as $645. The deposit slip was correct, and the bank deposit had been correctly prepared. The error appeared only in the company's accounting records.

Question 19

Explain the meaning of "internal control."

Question 20

List three measures that a business can use to achieve strong internal controls.

Question 21

The bank statement for Raymond Company included a debit memo for a bank service charge of $50.Required:Show the effects of recognizing the bank service charge on the financial statements by recording appropriate amounts in the financial statements model provided. Include dollar amounts of increases and decreases; for cash flow, indicate whether it is an operating activity, investing activity, or financing activity.

Question 22

What is the "fraud triangle"?

Question 23

Woods Company recorded the following entries related to its bank reconciliation for October 31:
* Increase to cash and decrease to accounts receivable** Increase to accounts receivable and decrease to cashRequired:Assuming that the unadjusted cash balance on Woods's books was $8,354.28, what was the true cash balance at the end of the month?Prepare the portion of the bank reconciliation that begins with the unadjusted book balance and ends with the true cash balance.

Question 24

Discuss the importance of ethics in the accounting profession.

Question 25

As of May 31, the bank statement of Flore Company showed an ending balance of $8,632.52. The following information was available:
$\begin{array}{lr}\text { Bank service charge }&\$35.00\\\text { Outstanding checks } & 2,480.36 \\\text { NSF check from a customer } & 127.50 \\\text { Deposit in transit } & 799.55 \\\text { Deposit exroneously recorded in Flores's account } & 229.00\\\text { that should have heen recorded in Flowers 's a account }\end{array}$

Required:Compute Flore's true cash balance at May 31.

Question 26

The following information pertains to the bank reconciliation of January 31 for the Greis Company:
$\begin{array}{llr} \text { Unadjusted bank balance } &\$18,900\\ \text { Bank collection of a note receivable (no interest)} &2,000\\ \text { Bank service charge } &60\\ \text { Deposit in transit } &4,000\\ \text {NSF check returned by the bank } &1,800\\ \text {Outstanding checks } &6,000\\\end{array}$

In addition, the reconciliation revealed one error: Check number 2146 for $152, written to pay utilities expense, was incorrectly recorded in the books for $125.Required:Using the above information, compute the unadjusted book balance for cash.

Question 27

On November 30, Hernandez Company's bank statement showed an ending balance of $37,341. The following information is available about Hernandez's account:
Debit memo in bank statement for bank service charge, $39Deposit in transit, $2,988Outstanding checks, $3,156Customer's NSF check for $723 was returned with the bank statement
Required:Determine the true cash balance as of November 30.Determine the unadjusted balance of the company's Cash account as of November 30.

Question 28

What is a disclaimer of audit opinion?

Question 29

The unadjusted cash account balance for Carson Company at December 31 is $12,615. The bank statement showed an ending balance of $18,250 at December 31. The following information is available from an examination of the bank statement and the company's accounting records:
$\begin{array}{llr} \text { Bank service charge } &\$20\\ \text {Outstanding checks } &7,500\\ \text { NSF check from a customer } &425\\ \text { Deposits in transit } &1,222\\\end{array}$
Check number 433 for the purchase of inventory was written correctly and paid by the bank correctly for $432, but was recorded on the books at $234. Carson uses the perpetual inventory system.Required:Prepare a bank reconciliation as of December 31.Indicate how each of the required adjusting entries impact the financial statements.

Question 30

One of your friends is preparing to open a store that will sell outdoor gear. When you heard that the business would have three or four employees, you told your friend that she would need to pay careful attention to separation of duties. She has asked you to explain what duties should be separated and why separation of duties is important in a business. Write a note to your friend explaining these issues.

Question 31

When preparing the monthly bank reconciliation, Mayhew Company's accountant found the following adjustments to make to either the unadjusted book balance or unadjusted bank balance:
$\begin{array}{llr} \text {Deposits in transit } &\$1,200\\ \text { NSF check} &175\\ \text { Bank service charge } &50\\ \text { Outstanding checks } &1,060\\ \text { Credit memo for interest } &80\\\end{array}$
Required:Indicate how each of the required adjusting entries impacts the company's financial statements.

Question 32

List three of the five primary roles of the independent auditor (CPA).

Question 33

Rexrode Company's bank statement at January 31 showed an ending balance of $24,712.80. The unadjusted cash account balance for Rexrode is $21,245.75. The following data were gathered by Rexrode's accountant:Outstanding checks as of January 31: $4,895.44NSF check from customer: $183.62Debit memo related to the returned deposit: $20.00Credit memo for interest earned: $12.00Deposits in transit: $1,236.77
Required:Prepare a bank reconciliation for Rexrode Company at January 31.Indicate how each of the required adjusting entries impact the financial statements.

Question 34

For each of the following items, indicate whether it is an adjustment to the bank balance or to the book balance when preparing a bank reconciliation. Use "+" for addition to the related balance, "−" for subtraction from the related balance, or "NA" for no adjustment to the related balance.

Question 35

What are the three types of audit opinion, and what is the meaning of each? Which type of opinion is considered the best? Which is considered the worst?

Question 36

Merrifield Lawn Care's bank statement at August 31 showed an ending balance of $23,716.87. The unadjusted cash account balance for Merrifield is $20,237.98. The following data were gathered by Merrifield's accountant:Check number 2143 was correctly written for $427. It was recorded in the company's books as $472 for utilities.Outstanding checks as of August 31: $7,128.71NSF check from customer: $71.82Debit memo related to the returned deposit: $8.00Credit memo related to interest earned: $10.00Deposits in transit: $3,625.00
Required:Prepare a bank reconciliation for Merrifield Lawn Care at August 31.Indicate how each of the required adjusting entries impact the financial statements.

Question 37

The May 31 balance per bank statement was $12,400. The cash balance per books was $17,000. Outstanding checks amounted to $1,700, and deposits in transit were $4,800. The bank statement contained an NSF check for $1,100, a service charge for $50, and a debit memo for direct payment of the telephone bill of $350.
Required:Prepare a bank reconciliation to determine the true cash balance at May 31.Indicate how each of the required adjusting entries impact the financial statements.

Question 38

Michelle Edwards operates a small dress shop that sells various items of apparel and accessories. She employs two clerks who make sales to customers, accept returns when a customer is dissatisfied with merchandise, and put new merchandise on display. One of the clerks, Kristen Scott, was hired recently. Michelle had always done all the accounting for the store and had made bank deposits. However, Kristen has offered to do the accounting for the store during slow periods when there are no customers in the store; she also has begun making bank deposits as she leaves for the day. Having Kristen take these responsibilities allows Michelle more time for acquiring merchandise for the store and for personal errands. What potential risks for the success of Michelle's business are present in this situation?