Deck 6: Cash and Internal Control

Question 1

Petty cash typically is composed of coins and currency kept on hand in a business to make minor disbursements.

Answer 1

True

Question 2

If collection of accounts receivable is assured, then accounts receivable are considered to be cash equivalents.

Answer 2

False

Question 3

The key to the classification of an amount as cash is that it be available to pay debts within a three-month period of time.

Answer 3

False

Question 4

Treasury notes with a maturity of six months or less that are issued by the Federal Government are cash equivalents.

Question 5

On a bank reconciliation, bank charges for the month are added to the cash balance per the books.

Question 6

In a sound internal control system, all cash receipts should be deposited daily intact.

Question 7

A company prepares adjusting entries for debit memorandums but not for credit memorandums.

Question 8

When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.

Question 9

A six-month certificate of deposit would be considered to be a cash equivalent.

Question 10

On a bank reconciliation, interest earned for the month is added to the cash balance per the books.

Question 11

No special internal control procedures are necessary with a petty cash account because the amount is usually so small.

Question 12

A check written by a company but not yet presented to the bank for payment is called a check in transit.

Question 13

The establishment of a petty cash fund has no effect on the company's total cash balance.

Question 14

Checks received from customers are considered to be cash in the company's books.

Question 15

On a bank reconciliation, outstanding checks are added to the cash balance per the bank statement.

Question 16

The bank informs a customer that a service charge has been assessed on their account by including a credit memorandum in the monthly bank statement.

Question 17

When reconciling a bank account, the company does not have to prepare an adjusting entry for outstanding checks.

Question 18

When a bank pays interest or collects an amount owed to a company by one of the bank's customers, the bank issues a debit memorandum.

Question 19

Some cash equivalents appear in the long term investment section of a balance sheet.

Question 20

When a bank pays interest or collects an amount owed to a company by one of the bank's customers, the bank issues a credit memorandum.

Question 21

One concern of the internal auditor is the efficiency with which the organization is run.

Question 22

According to the Sarbanes-Oxley Act of 2002, only external auditors can provide bookkeeping services for the clients they audit.

Question 23

Audit committees are required to consist of only directors who are key officers of the company.

Question 24

Accounting controls primarily concern safeguarding of assets and ensuring the reliability of the financial statements.

Question 25

The only reason a company needs to create an internal control system is to deter intentional fraudulent acts.

Question 26

The use of customer statements as a control device will be effective only if the employees responsible for the custody of cash received through the mail, for record keeping, and for authorization of adjustments to customers' accounts are not allowed to prepare and mail statements to customers.

Question 27

An advantage of a strong system of internal control is that less testing of the accounting system is done by the outside auditors.

Question 28

A purchase order is not the basis for recording a purchase and a liability.

Question 29

Among the assets listed below, which one is considered the most liquid?

A) Cash
B) Accounts receivable
C) Merchandise inventory
D) Prepaid expenses

Question 30

Most merchandisers receive checks and currency from customers in two ways: (1) cash received over the counter from cash sales and (2) cash received in the mail from credit sales.

Question 31

Only one copy of the prelist should be prepared when an employee opens mail with customer payments to avoid complexity in the accounting system and maintain control.

Question 32

A company's internal control system is designed by its external auditors.

Question 33

The key to the classification of an amount as cash is that it be readily available to pay debts.

Question 34

A good system of internal controls requires that the physical custody of assets be separated from the accounting for those assets.This concept is known as safeguarding assets and records.

Question 35

As part of good internal control, disbursements can be made either by check or cash.

Question 36

If a company has internal auditors, it does not need to have external auditors.

Question 37

If a company hires honest employees, no internal control procedures are necessary.

Question 38

An accounting system must be computerized in order to ensure the company has proper internal control.

Question 39

A good system of internal control is important to make a company's accounting records completely foolproof.

Question 40

Cash equivalents are investments that are readily convertible to a known amount of cash, where readily means six months or less.

Question 41

Effective cash management and control includes all of the following except

A) The use of a petty cash fund
B) Bank reconciliations
C) Short-term investments of excess cash
D) Purchase of stocks and bonds

Question 42

Which of the following items would not be a reconciling item?

A) Canceled checks
B) NSF checks
C) Outstanding checks
D) Deposits in transit

Question 43

Which one of the following is not a cash equivalent?

A) 30-day certificate of deposit
B) 60-day commercial paper
C) 90-day U.S.treasury bill
D) 180-day note issued by a local or state government

Question 44

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

A) Service charges
B) Interest earned
C) Outstanding checks
D) Deposits

Question 45

The accountant for Busch Corp.was preparing a bank reconciliation as of February 28, 2016.The following items were identified: $$\begin{array} { l r } \text { Busch's book balance } & \$ 15,000 \\\text { Outstanding checks } & 2,500 \\\text { Service charge } & 15 \\\text { Customer's NSF check returned by the bank } & 100\end{array}$$ ? What amount will Busch report as its adjusted cash balance at February 28, 2016?

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

Question 46

Which one of the following items would be subtracted from the balance per bank statement in a bank reconciliation?

A) Outstanding checks
B) Deposit in transit
C) Service charges
D) Interest on customer note

Question 47

Which one of the following items is not included in cash?

A) A bank certificate of deposit for one year
B) A savings account at the bank
C) A checking account at the bank
D) All of the above are included in cash

Question 48

Checks presented for payment and paid by the bank are known as

A) Canceled checks
B) Certified checks
C) NSF checks
D) Outstanding checks

Question 49

The accountant for Fazzi Corp.was preparing a bank reconciliation as of April 30, 2016.The following items were identified: $$\begin{array} { l r } \text { All an's book balance } & \$ 46,200 \\\text { Outstanding checks } & 1,100 \\\text { Interest earned on checking account } & 50 \\\text { Customer's NSF check returned by the bank } & 500\end{array}$$ ? In addition, Fazzi made an error in recording a customer's check; the amount was recorded in cash receipts as $150; the bank recorded the amount correctly as $510.What amount will Fazzi report as its adjusted cash balance at April 30, 2016?

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

Question 50

Deposits made by a company but not yet reflected in a bank statement are called

A) Debit memoranda
B) Deposits in transit
C) Credit memoranda
D) None of the above

Question 51

Which one of the following statements best describes the term "outstanding check?"

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

Question 52

Which one of the following could never be considered to be cash equivalents?

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

Question 53

Which one of the following procedures is not part of preparing a bank reconciliation of a checking account?

A) Tracing deposits listed on the bank statement to the books to identify deposits in transit
B) Arranging canceled checks in numerical order and tracing them to the books to identify outstanding checks
C) Identifying items added on the bank statement which have not been recorded as cash receipts by the company
D) Preparing adjustments to reverse the transactions recorded for checks that are still outstanding

Question 54

Which one of the following items would be subtracted from the balance per books in a bank reconciliation

A) Outstanding checks
B) Deposit in transit
C) Service charges
D) Interest on customer note

Question 55

Checks returned by a bank because customers did not have sufficient funds in their account are called

A) Canceled checks
B) Certified checks
C) NSF checks
D) Outstanding checks

Question 56

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

A) Corporate commercial paper due in 90 days after purchase
B) U.S.Treasury bills with an original maturity of six months
C) A money market account with a stock brokerage firm
D) A certificate of deposit with a term of 75 days when acquired

Question 57

Which one of the following statements is true?

A) Good cash management practices dictate that a company should maintain as large a balance as possible in its cash account.
B) Sound internal control practice dictates that disbursements should be made by check.
C) The person handling the cash should also prepare the bank reconciliation.
D) Petty cash can be substituted for a checking account to expedite the payment of all disbursements.

Question 58

Which one of the following items would be added to the balance per bank statement in a bank reconciliation?

A) Outstanding checks
B) Deposits in transit
C) Service charge
D) Interest on customer note

Question 59

Which one of the following items would be added to the balance per books in a bank reconciliation?

A) Outstanding checks
B) Deposit in transit
C) Service charges
D) Interest on customer note

Question 60

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

A) They appear only on the statement of cash flows.
B) They are included with short-term investments under current assets on the balance sheet.
C) They are included with cash under current assets on the balance sheet.
D) They are disclosed only in a footnote to the balance sheet.

Question 61

A debit memorandum appeared on Cinco Inc.'s May bank statement.How will Cinco treat this amount on its May bank reconciliation?

A) Add it to the bank balance
B) Add it the book balance
C) Deduct from the bank balance
D) Deduct from the book balance

Question 62

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

A) Service charge notice
B) Interest earned on the account balance
C) Outstanding check
D) Company error in recording a $500 deposit as $600

Question 63

Which one of the following procedures is incorrect for setting up and maintaining a petty cash fund?

A) A check is prepared for a fixed amount; when the check is cashed, the money is entrusted to a petty cash custodian.
B) An entry is recorded to establish the fund and obtain the cash.
C) When appropriate documentation is presented, cash payments are made from the fund; the petty cash custodian retains the documentation.
D) When the petty cash fund is replenished, an entry is recorded to recognize an increase in the petty cash account.

Question 64

Realistic Sound's unadjusted bank balance amounted to $3,000.Outstanding checks amounted to $500 and deposits in transit totaled $300.Based on this information alone, Realistic's adjusted cash balance is:

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

Question 65

Which of the following statements is false regarding a credit memorandum?

A) A credit memorandum is added to the balance per the company's books
B) A credit memorandum could be issued for interest earned on checking balances
C) A credit memorandum is issued when the bank collects a note for the customer.
D) A credit memorandum is subtracted from the balance per the company's books.

Question 66

An outstanding check is a check that:

A) Has been presented to the bank for payment but has not been reported on the bank statement
B) Has been written by the account holder but has not been presented to the bank for payment
C) Is guaranteed for payment by the bank
D) Has been written for an amount that is greater than the balance in the account holder's bank account

Question 67

A credit memorandum appeared on Central Company's bank statement.How will Central treat this amount on its bank reconciliation?

A) Add it to the bank balance
B) Add it to the book balance
C) Deduct from the bank balance
D) Deduct from the book balance

Question 68

How would deposits in transit be dealt with in a bank reconciliation?

A) added to bank statement balance
B) deducted from company's book balance
C) they would be ignored
D) None of these choices

Question 69

If a company erroneously records a $500 deposit as $400 in its books, which of the following must occur when reconciling the bank statement?

A) The company will have to increase the balance per the bank statement by $100.
B) The company will have to increase the balance per the books by $100.
C) The company will have to decrease the balance per bank statement by $100.
D) None of the above

Question 70

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

A) Service charge notice
B) Collection of a note receivable by the bank
C) Outstanding check
D) Company error in recording a $600 deposit as $500

Question 71

While reconciling the checking account, an accountant with Sonic Corporation noticed that an error had been made in recording a check received by the company.Sonic recorded the receipt as $729 and the correct amount of the check was $279.What reconciling adjustment is required?

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

Question 72

How would interest earned on a checking account be dealt with in a bank reconciliation?

A) added to company's book balance
B) deducted from company's book balance
C) added to bank statement balance
D) deducted from bank statement balance

Question 73

Which one of the following items is a reconciling item on the bank side of a bank reconciliation?

A) Canceled checks
B) Outstanding checks
C) NSF checks
D) Service charge

Question 74

How would outstanding checks be dealt with in a bank reconciliation?

A) deducted from bank statement balance
B) deducted from company's book balance
C) added to bank statement balance
D) added to the company's book balance

Question 75

If the balance on the bank statement does not equal the balance in the cash account, then it can be assumed that:

A) The company has no errors in its records concerning the cash account.
B) The bank has made errors in preparing the statement.
C) The company has made errors in is records concerning the cash account.
D) There will be items reconciling the difference.

Question 76

Which of the following statements is true regarding a credit memorandum?

A) A credit memorandum is subtracted from the balance per the company's books.
B) A credit memorandum could be issued for bank service charges.
C) A credit memorandum is issued when a customer gives the company an NSF check.
D) A credit memorandum is added to the balance per the company's books.

Question 77

How would bank service charges be dealt with in a bank reconciliation?

A) added to company's book balance
B) deducted from company's book balance
C) added to bank statement balance
D) deducted from bank statement balance

Question 78

The set of items below was identified in preparing a bank reconciliation for Mars Corp.as of August 31, 2016. $$\begin{array} { l r } \text { Bank statement balance } & \$ 19,500 \\\text { Mars's book balance (before adjustments) } & ? \\\text { Outstanding checks } & 2,700 \\\text { Customer's NSF checks } & 350 \\\text { Service Charges } & 100 \\\text { Deposits in transit } & 1,000 \\\text { Interest earned on checking account } & 60\end{array}$$ ? Mars Corp.'s balance per books before the reconciliation is

A) $17,410
B) $17,900
C) $18,190
D) $18,310

Question 79

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

A) added to the unadjusted book balance
B) subtracted from the unadjusted bank balance
C) added to the unadjusted bank balance
D) subtracted from the unadjusted bank balance

Question 80

How would customer's NSF checks be dealt with in a bank reconciliation?

A) added to company's book balance
B) deducted from company's book balance
C) added to bank statement balance
D) deducted from bank statement balance