Deck 6: Internal Control and Accounting for Cash

Question 1

Preparing a bank reconciliation is an important internal control for a business.

Answer 1

True
Explanation: A bank reconciliation can help to uncover fraudulent activity.

Question 2

Internal controls that assess degree of compliance with company policies are classified as accounting controls.

Answer 2

False
Explanation: This describes administrative, not accounting, controls.

Question 3

A business learns about customers' NSF checks through credit memos that are included with the bank statement.

Answer 3

False
Explanation: Debit memos, not credit memos, are issued for NSF checks.

Question 4

The purpose of a petty cash fund is to make and maintain control over a business's small cash disbursements.

Question 5

Before a business check is signed, the check signer should examine appropriate supporting documents.

Question 6

The true cash balance can only be determined if both the unadjusted bank balance and the unadjusted cash balance are known.

Question 7

For a business, Cash generally includes currency, customers' checks, and some savings accounts.

Question 8

In preparing a bank reconciliation, typical adjustments to the book balance include bank service charges, customer NSF checks, and interest earned on the account.

Question 9

A savings account or certificate of deposit that imposes a substantial penalty for early withdrawals should be classified as Cash on the balance sheet.

Question 10

All journal entries made related to bank reconciliations include an expense or revenue account.

Question 11

A well-designed system of internal controls will eliminate employee theft and fraud in a company.

Question 12

A debit balance in Cash Short and Over represents a shortage of cash and would be treated as an expense.

Question 13

After journal entries have been made related to a bank reconciliation, the book balance will be equal to the true cash balance.

Question 14

A bank statement debit memo describes a transaction that increases a customer's account balance.

Question 15

Even a good system of internal controls can be overridden by collusion among employees.

Question 16

Separation of duties in an organization should be required to reduce the likelihood of theft.

Question 17

All adjustments to the unadjusted cash balance on a bank reconciliation require journal entries, but no adjustments to the bank statement balance require them.

Question 18

In preparing a bank reconciliation, typical adjustments to the bank balance are deposits in transit and bank service charges.

Question 19

The usual form for a bank reconciliation begins with the ending cash balance shown on the bank statement and reconciles it to the ending cash balance on the company's books.

Question 20

Requiring separation of duties in a business allows the work of one employee to serve as a check on the work of other employees.

Question 21

Which of the following is not considered an accounting control?

A)Performance evaluations.
B)Requiring employees to take vacations.
C)Bonding of employees.
D)Use of prenumbered documents.

Question 22

Which of the following is an internal control procedure used to safeguard a company's assets?

A)Timely deposits of cash receipts into a checking account.
B)Separation of duties.
C)Reconciliation of the bank statement.
D)All of these.

Question 23

The primary focus of financial audits is the discovery of fraud.

Question 24

Which internal control procedure addresses the idea that the likelihood of employee fraud or theft is reduced if collusion is required to accomplish it?

A)Use of prenumbered documents.
B)Physical controls.
C)Fidelity bonding.
D)Separation of duties.

Question 25

Which of the following statements concerning internal controls is true?

A)Internal administrative controls are designed to limit the amount of funds spent on investments.
B)The control procedure, separation of duties, prohibits the employment of a husband and wife or other closely related parties within the same company.
C)Internal accounting controls are limited to the policies and procedures used to protect the company from embezzlement.
D)Strong internal controls provide reasonable assurance that the objectives of a company will be accomplisheD.Strong internal controls provide reasonable, but not absolute, assurance that the objectives of a company will be accomplished.

Question 26

Which of the following is not one of the purposes of an internal control system?

A)Safeguarding the company's assets.
B)Ensuring that the company is using the most effective marketing plan.
C)The assessment of the degree of compliance with company policies and public laws.
D)The evaluation of performance.

Question 27

The accountant for Barb's Bookstore balanced out the cash register for the day. The register indicates $1,031.50 in sales, the change fund at the beginning of the day was $125 and the actual cash in the register is $1,150.25 (including the change fund, previously accounted for). What is the effect on the financial statements of the entry to record the day's sales and any related overage or shortage?

A)Option A
B)Option B
C)Option C
D)Option D

Question 28

At the time petty cash funds are disbursed, a journal entry should be made, debiting the appropriate asset or expense account.

Question 29

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

A)Establishment of clear lines of authority.
B)Customer service comment cards.
C)Requiring regular vacations for certain employees.
D)Having employees covered by a fidelity bonD.While customer service comment cards are helpful in monitoring company performance, they are not a generally recognized internal control procedure.

Question 30

Which of the following statements accurately describes a fidelity bond?

A)Insurance that the company buys to protect itself from loss due to employee dishonesty.
B)Proper procedures for processing transactions.
C)Procedures to provide reasonable assurance that the objectives of a company are accomplished.
D)Guidelines or policies that limit the actions of different levels of management.

Question 31

A customer paid $16.50 for merchandise with a twenty dollar bill. The sales person gave incorrect change of $4.50 to the customer. At the end of the day the cash register showed total sales receipts of $285. Based on this information, the journal entry to record sales and correct the error would be:

A)
B)
C)
D)

Question 32

Effective internal controls for cash include

A)disbursements made by prenumbered check.
B)cash deposited in the bank on a timely basis.
C)written cash receipts given to customers as evidence of payment.
D)all of these.

Question 33

Which of the following is not an internal control procedure for the control of cash receipts?

A)Immediate preparation of records of all cash receipts.
B)Customers should be given written receipts for all monies paid.
C)Use of prenumbered checks.
D)All cash should be deposited frequently.

Question 34

For a petty cash fund to be most useful to a business, several of the business's employees should be designated as responsible for the fund.

Question 35

The Securities and Exchange Commission regulates financial reporting of all U.S. companies.

Question 36

Most companies strive to receive a qualified audit opinion.

Question 37

Hanover Company has established internal control policies and procedures in order to achieve the following objectives: 1) Safeguard the company's assets.
2) Assure that the accounting records contain reliable information.
3) Effective evaluation of management performance.
4) Assure that employees comply with company policy.
Which of these objectives are achieved by accounting controls?

A)Objectives 1 and 2
B)Objectives 2 and 3
C)Objectives 3 and 4
D)All four objectives

Question 38

Establishment of a petty cash fund is an asset exchange transaction.

Question 39

An error is considered material if it would influence the opinion of the average prudent investor.

Question 40

In establishing a strong internal control system at Hook Company, management is concerned with administrative controls. Administrative controls include:

A)the reconciliation of the bank statement.
B)accuracy of the recording procedures.
C)performance evaluation.
D)maintenance of accurate inventory records.

Question 41

Harp Company accepted a check from Jasper Company as payment for services rendered. Harp's bank statement revealed that the Jasper check was an NSF check. What effect will the entry to record the NSF check have on the accounting equation of Harp Company?

A)Option A
B)Option B
C)Option C
D)Option D

Question 42

In the reconciliation of the June bank statement, a deposit made on June 30 did not appear on the June bank statement. In preparing the bank reconciliation, this deposit in transit should be

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

Question 43

Which document issued by a bank reflects a transaction that decreases a company's checking account balance?

A)A debit memo.
B)A credit entry.
C)A credit memo.
D)A reconciling entry.

Question 44

Oliver Company's unadjusted book balance at June 30, 2013 is $8,700. The company's bank statement reveals bank service charges of $45. Two credit memos are included in the bank statement: one for $900, which represents a collection that the bank made for Oliver, and one for $50, which represents the amount of interest that Oliver had earned on its interest-bearing account in June. Based on this information, Oliver's true cash balance is:

A)$8,700.
B)$9,605.
C)$9,550.
D)$9,695.

Question 45

Following the February bank reconciliation, the accountant made the following entry in the journal of King Company: This journal entry may have been used to record:

A)bank charges owed by King to the bank.
B)the collection of an account receivable by King that is part of a deposit in transit.
C)an NSF check received by King from a customer.
D)the collection of an account receivable by the bank that has been deposited in King's account.

Question 46

How will a certified check be treated in a company's bank reconciliation?

A)As a deduction to the company's unadjusted book balance.
B)As an increase to the bank's unadjusted bank balance.
C)As a deduction to the bank's unadjusted bank balance.
D)None of these.

Question 47

At March 31, Casey Co. had a balance in its cash account of $9,500. At the end of March the company determined that it had outstanding checks of $900, deposits in transit of $600, a bank service charge of $20, and an NSF check from a customer for $200. The true cash balance at March 31 is:

A)$9,200
B)$9,280
C)$9,500
D)$8,980

Question 48

What documentation issued by a bank increases a company's checking account balance at the bank?

A)Balance sheet
B)Debit memo
C)Credit memo
D)Certified check

Question 49

The April 30, 2013 bank statement for Turner Corporation shows an ending balance of $34,351. The unadjusted cash account balance was $28,350. The accountant for Turner gathered the following information: 1. There was a deposit in transit for $4,240
2) The bank statement reports a service charge of $39
3) A credit memo included in the bank statement shows interest earned of $95
4) Outstanding checks totaled $10,935
5) The bank statement included a $750 NSF check deposited in April
What is the true cash balance as of April 30, 2013?

A)$27,006
B)$27,656
C)$31,801
D)$31,896

Question 50

For which of the following bank reconciliation adjustments would an adjusting journal entry not be necessary?

A)An error in which the company's accountant recorded a check as $235 that was written correctly for $253
B)An error in which the bank charged the company $83 for a check that had been written by another account holder
C)A check for $37 deposited during the month, but returned for non-sufficient funds
D)All of the above would require adjusting journal entries

Question 51

Which of the following is not a procedure to maintain internal controls over cash payments?

A)Checks should be properly authorized with approval signatures.
B)A receipt should be provided to each cash customer.
C)All checks should be prenumbered.
D)Spoiled checks should be voided and retaineD.Providing receipts to each cash customer is a procedure to maintain internal controls over cash receipts, not cash payments.

Question 52

While preparing its bank reconciliation, Mayhew Company determined that its bank had collected a $950 account receivable for the company and deducted a $35 collection fee. Which of the following shows the effect of this transaction on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 53

In preparing the April bank reconciliation for Oscar Company, it was discovered that on April 10 a check was written to pay delivery expense of $45 but the check was erroneously recorded as $54 in the company's books. The journal entry required to correct the error is

A)
B)
C)
D)

Question 54

In a bank reconciliation, a customer's NSF check included with the bank statement is:

A)deducted from the bank's cash balance to get the true cash balance.
B)added to the bank's cash balance to get the true cash balance.
C)deducted from the company's cash balance to get the true cash balance.
D)added to the company's cash balance to get the true cash balance.

Question 55

While performing its monthly bank reconciliation, the bookkeeper for the Gee Corporation noted that a deposit of $900 (received from a customer on account) was recorded in the company books as $990. Which of the following shows the effect of the correcting entry on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 56

In a company's bank reconciliation, an outstanding check is a check that:

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

Question 57

While performing its monthly bank reconciliation, the bookkeeper for the Maynard Company discovered that a check written for $241 for advertising expense was recorded in the firm's books as $421. Which of the following shows the effect of the correcting entry on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 58

While performing the monthly bank reconciliation, the bookkeeper for Marcus Company made the journal entry for a bank service charge of $49. Which of the following correctly shows the effect of the entry on the financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 59

Which of the item(s) would be added to the unadjusted bank balance to determine the true cash balance?

A)Item numbers 3 and 6.
B)Item number 5.
C)Item numbers 5, 3, and 6.
D)Item number 6.

Question 60

Which of the item(s) would be subtracted from the company's unadjusted book balance to determine the true cash balance?

A)Item numbers 5 and 6.
B)Item numbers 2, 3, and 5.
C)Item numbers 1 and 3.
D)Item number 5.

Question 61

On September 30, 2013, the bank statement of Gomez Company showed a balance of $7,300. The following information was revealed by the bank statement: (1) deposits in transit amounted to $3,150
(2) outstanding checks amounted to $6,200
(3) a $550 check was incorrectly drawn on Gomez's account
(4) NSF checks returned by the bank were $750
(5) bank service charge was $29
(6) credit memo for $75 for the collection of one of the company's account receivable
Based on the above information the true cash balance was:

A)$4,800.
B)$4,846.
C)$4,096.
D)$6,596.

Question 62

Koger Company's bank statement included an NSF check written by one of its customers. What effect will the entry to recognize the NSF check have on the company's financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 63

Which of the following entries would be required to establish a $500 petty cash fund?

A)
B)
C)
D)

Question 64

Which of the following is not a primary role of an independent auditor?

A)Assume legal and professional responsibilities to the public
B)Advise client on tax strategies
C)Determine whether a company's financial statements are materially correct
D)All of the above are correct.

Question 65

Potter Company's petty cash fund was established on January 1, 2013 with $500. On January 31, 2013 a count of the fund revealed: $103 in cash remaining and vouchers for miscellaneous payments totaling $400. What effect will the necessary entries to replenish the fund have on the company's financial statements?

A)Option A
B)Option B
C)Option C
D)Option D

Question 66

The owner of the King Company established a petty cash fund amounting to $425. What is the effect on the financial statements of the entry to record this transaction?

A)Option A
B)Option B
C)Option C
D)Option D

Question 67

If the financial statements cannot be relied upon because they contain one or more material departures from GAAP, the auditor will issue the following type of audit opinion:

A)Adverse opinion.
B)Disclaimer.
C)Qualified opinion.
D)Unqualified opinion.

Question 68

Which of the following statements about materiality is not true?

A)Materiality is different for each company.
B)A material error would change the opinion of the average prudent investor.
C)Any error greater than $5,000 is considered material in a financial audit.
D)Material misstatements should not exist in order for a company to receive an unqualified audit opinion.

Question 69

Grimes Company established a $250 petty cash fund on January 1, 2013. On March 1, 2013 the fund contained $160 in receipts for miscellaneous expenses and $88 in cash. The entries necessary to replenish the petty cash fund will

A)have no affect on total assets.
B)decrease equity by $160.
C)increase equity by $162.
D)decrease assets by $162.

Question 70

On April 30, 2013, Southern Company established a petty cash fund of $1,000. On May 1, 2013, a disbursement of $255 was made from the fund for payment of delivery expense. What entry should be made on May 1, 2013 to record this disbursement?

A)Debit delivery expense, $255; credit cash, $255.
B)Debit petty cash, $255; credit cash, $255.
C)Debit delivery expense, $255; credit petty cash $255.
D)No entry necessary.

Question 71

Davis Company's unadjusted bank balance at March 31, 2013 is $3,300. The bank reconciliation revealed outstanding checks amounting to $500 and deposits in transit of $400. Based on this information, Davis's true cash balance is:

A)$3,400.
B)$3,000.
C)$3,700.
D)$3,200.

Question 72

Which of the following statements regarding the Securities and Exchange Commission (SEC) is not true?

A)The SEC has no jurisdiction over closely held companies.
B)The SEC regulates both audit standards and financial reporting.
C)The SEC's influence has increased following passage of the Sarbanes-Oxley Act.
D)The SEC is a private professional organization.

Question 73

What account is used to record the amount of cash shortages or overages relative to a petty cash system?

A)Petty Cash Payable
B)Petty Cash
C)Cash Short and Over
D)Petty Cash Expense

Question 74

The most favorable audit opinion that a company can receive is a(n):

A)adverse opinion
B)qualified opinion
C)disclaimer of opinion
D)unqualified opinion

Question 75

The entry to replenish a petty cash fund includes:

A)A debit to Cash.
B)A credit to Cash.
C)Credits to expenses.
D)A credit to Petty Cash.

Question 76

Blackwell Company established a petty cash fund in the amount of $200. At the end of the accounting period, the petty cash box contained receipts for expenditures amounting to $180 and $15 in cash. What effect will the entries to replenish the fund have on assets and expenses?

A)Option A
B)Option B
C)Option C
D)Option D

Question 77

Ramsey Company's true cash balance at October 31, 2013 is $3,710. The following information is available for the bank reconciliation: Outstanding checks, $600
Deposits in transit, $450
Bank service charges, $90
The bank had collected an account receivable for Ramsey Company, $1,000
The bank statement included an NSF check written by one of Ramsey's customers for $600.
Based on this information Ramsey's unadjusted book balance at October 31 is:

A)$3,870.
B)$4,400.
C)$3,400.
D)$3,490.

Question 78

Which of the following internal control procedures does not ordinarily apply to the management of the petty cash fund?

A)Use of prenumbered documents.
B)Separation of duties.
C)Use of physical controls.
D)All of these apply to the management of a petty cash funD.All of these procedures are important controls in order to protect petty cash.

Question 79

An audit is useful to financial statement users because it

A)Guarantees that the financial statements are accurate and correct.
B)Guarantees that management has not been involved in misappropriation of assets.
C)Provides reasonable assurance that the financial statements do not have material misstatements.
C)The financial audit does not guarantee complete accuracy or the absence of fraud. It does provide reasonable assurance of material accuracy and compliance with GAAP.
D) Both B and

Question 80

Assuming that the unadjusted bank balance was $600, determine the unadjusted book balance.

A)$800.
B)$555.
C)$845.
D)$900.