Fundamental Financial Accounting Concepts 9th Edition Edmonds Test Bank Download

Chapter 06 - Internal Control and Accounting for Cash
Solution Manual for Fundamental Financial Accounting

Concepts 9th Edition by Thomas Edmonds Edmonds
ISBN 0078025907 9780078025907
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Chapter 06 Internal Control and Accounting for Cash Answer Key
Short Answer Questions
Use the following to answer questions 1 ‒ 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. You do not need to enter
amounts. Enter only one letter for each element.
1. In preparing the bank reconciliation for Heath Company, an employee found that the bank
statement reported a bank service charge of $50.
Answer: (D) (N) (D) (N) (I) (D) (D)
Learning Objective: 06-03

Topic Area: Adjustments to the Book Balance
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
6-1
Level of Difficulty: 1 Easy

Feedback: A bank service charge will create an adjustment to the book balance that will decrease assets (cash) and increase miscellaneous
expenses, which in turn decreases net income and equity. It will be reported as a cash outflow for operating activities on the statement of
cash flows.
6-2
2. In 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.
Answer: (N) (N) (N) (N) (N) (N) (I)

Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: When the company records receipt of the collection on a note receivable, it will increase one asset (cash) and decrease another
asset (notes receivable). This results in no overall effect on total assets, and it does not affect the income statement. It is reported as a cash
inflow from investing activities on the statement of cash flows.
3. In 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.
Answer: (N) (N) (N) (N) (N) (N) (I)

Topic Area: Correction of Errors
Blooms: Analyze
Level of Difficulty: 3 Hard
Feedback: When the company corrects the error in recording the cash receipt, it will result in an increase in one asset (cash) and a decrease in
another asset (accounts receivable). This results in no overall effect on total assets, and it does not affect the income statement. It is reported
as a cash inflow from operating activities on the statement of cash flows.
6-3
4. In preparing the bank reconciliation for Heath Company, a company employee found that
the bank statement included an NFS check that the company had received from a customer
paying its account at Heath Company.
Answer: (N (N) (N) (N) (N) (N) (D)

Blooms: Analyze
Feedback: Recording the NSF check increases one asset (accounts receivable) and decreases another asset (cash). It does not affect the
income statement, but is reported as a cash outflow for operating activities on the statement of cash flows.
5. At June 30, 2016, 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.
Answer: (N) (N) (N) (N) (N) (N) (N)

Topic Area: Adjustments to the Bank Balance
Blooms: Analyze
Feedback: Outstanding checks are deducted from the bank balance on the bank reconciliation. Adjustments to the bank balance have no
effect on the company’s financial statements.
6-4
6. In preparing the bank reconciliation of Heath Company, an employee found that the
company had deposits in transit of $2,200.
Answer: (N) (N) (N) (N) (N) (N) (N)

Blooms: Analyze
Feedback: Deposits in transit are added to the bank balance on the bank reconciliation. Adjustments to the bank balance have no affect on
the company’s financial statements.
7. In 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.
Answer: (N) (N) (N) (N) (N) (N) (N)

Blooms: Analyze
Feedback: Certified checks are deducted by both the bank and the company at the time the check is issued. Therefore, there is no adjustment
necessary for outstanding certified checks.
6-5
8. During 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).
Answer: (N) (N) (N) (N) (N) (N) (N)

Blooms: Analyze
Feedback: The bank error will be added back to the bank balance, and Heath Company will make sure that the bank corrects the error.
Adjustments to the bank balance have no effect on the company’s financial statements.
9. During the process of preparing the bank reconciliation, an employee for Heath Company
discovered that Check #4261 for $65, used to pay an account payable, was recorded in the
company books as $56.
Answer: (D) (D) (N) (N) (N) (N) (D)

Blooms: Analyze
Feedback: When the company corrects the error in paying the account payable, it will result in a decrease in assets (cash) and a decrease in
liabilities (accounts payable). It does not affect the income statement, but is reported as a cash outflow for operating activities on the
statement of cash flows.
6-6
Use the following to answer questions 10 ‒ 12:
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. You do not need to enter
amounts. Enter only one letter for each element.
6-7
10. Landau Company established a petty cash fund by issuing a check in the amount of $500
to the petty cash custodian.
Answer: (N) (N) (N) (N) (N) (N) (N)

Topic Area: Using Petty Cash Funds
Blooms: Analyze
Feedback: Establishing a petty cash fund increases one asset (petty cash) and decreases another asset (cash). It does not affect the income
statement or the statement of cash flows.
11. At Landau Company, the petty cash custodian used petty cash to pay for postage charges.
Answer: (N) (N) (N) (N) (N) (N) (N)

Blooms: Analyze
Feedback: No transaction is recorded when petty cash is used to pay expenses. The transactions will be recorded when the petty cash fund is
replenished.
6-8
12. Landau Company replenished its petty cash fund. The expenditures of the fund included
postage, office supplies, and other miscellaneous items. Indicate the effects of recognizing the
expenditures on financial statements and the replenishment of the petty cash fund.
Answer: (D) (N) (D) (N) (I) (D) (D)

Blooms: Analyze
Feedback: Expenses are recorded when the petty cash fund is replenished, and cash is reduced. The petty cash account itself is not affected.
This increases expenses, which in turn decreases net income and equity, and decreases assets (cash). It is reported as a cash outflow for
operating activities on the statement of cash flows.
13. List three measures that a business can use to achieve strong internal controls.
Any three of the following:
Answer: Separation of duties, bonding of employees, use of prenumbered documents, use of a

procedures manual, requiring employees to take regular vacations, performance evaluations,
hiring quality employees.

Topic Area: Key Features of Internal Control Systems
AACSB: Ethics
AACSB: Reflective Thinking
AICPA: BB Resource Management
AICPA: FN Risk Analysis
Blooms: Remember
6-9
14. For internal control purposes, what is meant by "separation of duties?"
Answer: The functions of authorization, recording, and custody of assets are exercised by
different individuals.

AACSB: Ethics
Blooms: Understand
Feedback: Separation of duties reduces the likeliness fraud because the work of one employee acts as a check on the work of another
employee.
15. List three of the five interrelated components of the internal control framework
established by The Committee of Sponsoring Organizations of the Treadway Commission
(COS0) that serve as the standards for Sarbanes-Oxley compliance.
Answer: Any three of the following: Control environment, risk assessment, control activities,
information and communication, and monitoring.

AACSB: Ethics
Blooms: Remember
16. Explain the meaning of "internal control" and distinguish between administrative controls
and accounting controls.
Answer: Internal control refers to the policies and procedures used to provide reasonable
assurance that the objectives of an enterprise will be accomplished. Administrative controls
concern the evaluation of performance and the degree of compliance with company policies
and public laws. Accounting controls are composed of procedures designed to safeguard
assets and ensure that the accounting records contain reliable information.

AACSB: Communication
AACSB: Ethics
6-10

Blooms: Understand
17. List five internal control procedures that should be followed to safeguard cash and reduce
the likelihood of theft.
Answer: Any five of the following:

1) Separation of duties
2) Bonding of employees
3) Use of prenumbered documents
4) Making daily bank deposits
5) Recording cash receipts immediately
6) Giving customers receipts for cash
7) Requiring supporting documentation for cash disbursements
8) Using adequate physical safeguards for assets

Topic Area: Controlling Cash
AACSB: Ethics
Blooms: Understand
18. What is a fidelity bond and what is its purpose?
Answer: A fidelity bond is an insurance policy that protects a company from loss because of
employee dishonesty.

Blooms: Understand
6-11
19. How do accounting controls differ from administrative controls?
Answer: Accounting controls are designed to safeguard company assets and ensure reliable
accounting records. Administrative controls, on the other hand, are concerned with evaluating
performance and assessing compliance with laws and company policies.

Blooms: Understand
20. What asset is generally most susceptible to theft?
Answer: Cash

AACSB: Ethics
Blooms: Understand
Feedback: Cash has universal value, and a small physical quantity can have considerable value. Because of this, cash is the asset most
susceptible to theft.
21. When a "debit memo" is included in a bank statement, what effect does that have on the
cash balance?
Answer: A debit memo included in the bank statement represents a transaction that reduces
the cash balance.

Blooms: Understand
6-12
22. What is a deposit in transit?
Answer: A deposit in transit is a deposit that has been recorded on the books of the company,
but has not been recorded by the bank. Deposits in transit are caused by timing differences in
the recording process of the company and the bank.

Blooms: Understand
Feedback: Deposits in transit are added to the unadjusted bank balance on a bank reconciliation.
23. 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?
Answer: Non-sufficient-funds (NSF) check

Blooms: Remember
Feedback: The amount of an NSF check is deducted from the unadjusted book balance on a bank reconciliation. The NSF check becomes
an account receivable that the company must then attempt to collect from the customer who issued the check.
24. Are outstanding checks an adjustment to the book balance, the bank balance, or not used
in a bank reconciliation?
Answer: An adjustment to the bank balance

Blooms: Understand
Feedback: Outstanding checks have not yet been presented to the bank, but have already been recorded in the company’s accounting system.
6-13
25. Is the establishment of a petty cash fund an asset source, asset use, asset exchange, or
claims exchange transaction?
Answer: Asset exchange

Blooms: Understand
Feedback: Establishing a petty cash fund increases one asset (petty cash) and decreases another asset (cash).
26. What is the purpose of establishing a petty cash fund?
Answer: The purpose of a petty cash fund is to provide a source from which to pay small
insignificant amounts where issuing a check would be inefficient. However, a properly
managed petty cash fund still allows for control over cash disbursements.

Blooms: Understand
27. Petty cash funds are maintained on an imprest basis. Explain the advantage of using the
imprest basis in accounting for petty cash.
Answer: A petty cash fund maintained on an imprest basis does not require journal entries at
the time of each cash payment from the fund. Time is saved because journal entries are made
only when the fund is replenished.

AICPA: FN Decision Making
Blooms: Understand
6-14
28. What are the primary roles of the independent auditor? What professional license is
required of an independent auditor?
Answer: The independent auditor conducts the financial statement audit, reviewing and
evaluating the financial statements so that the users of the financial statements can have
reasonable assurance that the statements are prepared in accordance with generally accepted
accounting principles. The auditor is legally and professionally responsible to the public but is
paid by and maintains confidentiality with the client. The independent auditor must be a
Certified Public Accountant (CPA).

Topic Area: Role of the Independent Auditor
AACSB: Ethics
AICPA: FN Reporting
Blooms: Understand
29. What is meant by the term "materiality?"
Answer: While the exact answer to the materiality question is subjective, the term
specifically, means "importance." If something is important, then it is "material." If it is
unimportant, then it is "immaterial." A material error, for instance, is one that is of enough
significance to influence the decision of the average prudent investor. In accounting, an item
is material if it is large enough in amount to make a difference to most financial statement
users.

Topic Area: Materiality and Financial Statement Audits
AICPA: FN Decision Making
Blooms: Understand
6-15
30. List three of the five primary roles of the independent auditor (CPA).
Answer: Any three of the following:

1) Conducts a financial statement audit
2) Assumes both legal and professional responsibilities to the public, as well as to the
company paying for the audit
3) Determines if financial statements are materially correct
4) Issues an opinion as to whether the financial statements are prepared in accordance with
GAAP
5) Maintains confidentiality of client records

AICPA: FN Reporting
Blooms: Understand
31. What are the three types of audit opinion, and what is the meaning of each? Which type of
opinion is considered the best?
Answer: The first type is an unqualified opinion, which means that the auditor believes the
financial statements are, without exception, in compliance with GAAP. This is considered the
best type of opinion to receive. The second is an adverse opinion, which means that the
auditor believes that something(s) in the financial statement is (are) not in compliance with
GAAP, to the extent that the statements are materially misstated. The third is a qualified
opinion, which falls somewhere between the other two.

AICPA: FN Reporting
Blooms: Understand
6-16
32. What is a disclaimer of audit opinion?
Answer: A disclaimer of audit opinion is made when the auditor is unable to perform the audit
procedures necessary to determine whether the statements are prepared in accordance with
GAAP, and the auditor cannot issue an opinion on the financial statements.

AICPA: FN Reporting
Blooms: Understand
Multiple Choice Questions
33. In establishing a strong internal control system at Banks Company, management is

concerned with administrative controls. Administrative controls include:
A. performance evaluation
B. accuracy of the recording procedures.
C. keeping cash in a safe.
D. maintenance of accurate inventory records.
Answer: A
AACSB: Ethics
Blooms: Understand
Feedback: Administrative controls are concerned with evaluating performance and addressing the degree of compliance with company
policies and public laws.
6-17
34. 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. Strong internal controls provide reasonable assurance that the objectives of a company will
be accomplished.
C. Internal accounting controls are limited to the policies and procedures used to protect the
company from embezzlement.
D. The control procedure, separation of duties, prohibits the employment of a husband and
wife or other closely related parties within the same company.
Answer: B
Blooms: Understand
Feedback: Strong internal controls provide reasonable, but not absolute, assurance that the objectives of a company will be accomplished.
35. Chester Company has established internal control policies and procedures in order to
achieve the following objectives:
1) Effective evaluation of management performance.
2) Assure that the accounting records contain reliable information.
3) Safeguard the company's assets.
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
Answer: B
Blooms: Understand
Feedback: Accounting controls are designed to safeguard company assets and ensure reliable accounting records. Objectives 1 and 4 relate
to administrative controls.
6-18
36. Which of the following is not a generally recognized internal control procedure?
A. Establishment of clear lines of authority.
B. Having employees covered by a fidelity bond.
C. Requiring regular vacations for certain employees.
D. Customer service comment cards.
Answer: D
Blooms: Understand
Feedback: While customer service comment cards are helpful in monitoring company performance, they are not a generally recognized
internal control procedure.
37. Which of the following statements accurately describes a fidelity bond?

A. Procedures to provide reasonable assurance that the objectives of a company are
accomplished.
B. Proper procedures for processing transactions.
C. Insurance that the company buys to protect itself from loss due to employee dishonesty.
D. Guidelines or policies that limit the actions of different levels of management.
Answer: C
AACSB: Ethics
Blooms: Understand
Feedback: Employees in a position of trust should be bonded.
38. Which of the following is not one of the purposes of an internal control system?
A. Safeguarding the company's assets.
B. The evaluation of performance.
C. The assessment of the degree of compliance with company policies and public laws.
D. Ensuring that the company is using the most effective marketing plan.
Answer: D
AACSB: Ethics
Blooms: Understand
6-19
Feedback: Internal controls do not relate to effective marketing plans. They do relate to safeguarding assets, evaluating performance, and
assessing compliance with company policies and public laws.
39. Which of the following is not considered an accounting control?

A. Requiring employees to take vacations.
B. Performance evaluations.
C. Bonding of employees.
D. Use of prenumbered documents.
Answer: B
Blooms: Understand
Feedback: Performance evaluations is considered an administrative control. Requiring vacations, bonding employees, and using
prenumbered documents help to safeguard assets and ensure reliable accounting records.
40. 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. Separation of duties.
B. Physical controls.
C. Fidelity bonding.
D. Use of prenumbered documents.
Answer: A
AACSB: Ethics
Blooms: Understand
Feedback: Separation of duties reduces the ability of a single employee to commit fraud without the assistance of other employees.
6-20
41. The accountant for Ye Olde 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.
B.
C.
D.
Answer: C
Topic Area: Cash Short and Over
Blooms: Analyze
Feedback: $1,150.25 - $125.00 = $1,025.25 increase in cash. Revenue $1,031.50 - $6.25 Cash Short = $1,025.25 increase in net income and
equity.
42. 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. All cash should be deposited frequently.
D. Use of prenumbered checks.
Answer: D
Blooms: Understand
Feedback: Use of prenumbered checks is a control procedure for the control of cash disbursements, not cash receipts.
6-21
43. 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 answer choices are correct.
Answer: D
Blooms: Understand
Feedback: All of these are accounting controls that help safeguard a company’s assets, including cash.
44. Which of the following is not a motive for the embezzlement of cash by employees?
A. Cash is the common unit of measurement.
B. Ownership of cash is difficult to prove.
C. Cash has universal appeal.
D. Small quantities of high denomination can represent significant amounts of value.
Answer: A
AACSB: Ethics
Blooms: Understand
Feedback: The fact that cash is the common unit of measurement is not a motive for embezzlement.
6-22
45. Which of the following is not a typical form associated with a bank checking account?
A. Signature card
B. Bank statement
C. Debit memo
D. Deposit ticket
Answer: C
Blooms: Remember
Feedback: A debit memo is not a separate document. It is a notation on a bank statement indicating that the bank took cash out of a
company’s checking account, often for bank service charges.
46. 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 answer choices are correct.
Answer: D
Blooms: Understand
6-23
Use the following to answer questions 47 and 48:
A review of the bank statement and accounting records of the Blake Company revealed the
following items:
Item No. Description

1) Three outstanding checks
2) A debit memo showing a bank service charge
3) A deposit in transit
4) An NSF check written by one of Blake's customers
5) A certified check written by Blake
6) A credit memo reflecting interest revenue earned by Blake
47. Which of the item(s) would be subtracted from the company's unadjusted book balance to
determine the true cash balance?
A. Item numbers 2 and 4.
B. Item numbers 2, 4, and 5.
C. Item numbers 1 and 4.
D. Item numbers 1, 2, 4, and 5.
Answer: A
AICPA: FN Measurement, Measurement
Blooms: Understand
Feedback: The NSF check and the debit memo both reduce Blake’s cash balance, but have not yet been recorded, so they should be
subtracted from the unadjusted book balance. The outstanding checks and the certified checks were recorded when they were written, so
they would not be subtracted again.
48. Which of the item(s) would be added to the unadjusted bank balance to determine the true
cash balance?
A. Item numbers 3 and 3.
B. Item number 2.
C. Item numbers 3, 4, and 6.
D. Item number 3.
Answer: D
6-24

Blooms: Understand
Feedback: Deposits in transit increase a company’s cash balance, and have already been recorded by Blake, so they should be added to the
unadjusted bank balance.
6-25
49. What documentation issued by a bank increases a company's checking account balance at
the bank?
A. Credit memo
B. Debit memo
C. Balance sheet
D. Certified check
Answer: A
AICPA: BB Industry
Blooms: Understand
Feedback: Credit memos include things such as interest earned.
50. The April 30, 2016 bank statement for Trimble Corporation shows an ending balance of
$34,351. The unadjusted cash account balance was $28,250. The accountant for Trimble
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 $650 NSF check deposited in April
What is the true cash balance as of April 30, 2016?
A. $27,656
B. $27,006
C. $31,801
D. $31,896
Answer: A
AACSB: Knowledge Application
Blooms: Apply
Feedback: $34,351 unadjusted bank balance + $4,240 deposit in transit - $10,935 outstanding checks = $27,656 true cash balance.
Akternatively, $28,250 unadjusted book balance ‒ $39 service charge + $95 interest revenue ‒ $650 NSF check =
$27,156.
6-26
51. At March 31, Cummins Co. had a balance in its cash account of $10,400. 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. $10,100
B. $10,180
C. $10,380
D. $9,880
Answer: B
Blooms: Apply
Feedback: $10,400 unadjusted book balance - $20 service charge - $200 NSF check = $10,180 true cash balance
52. 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. A check for $37 deposited during the month, but returned for non-sufficient funds.
C. An error in which the bank charged the company $83 for a check that had been written by
another account holder.
D. All of these answer choices would require adjusting journal entries.
Answer: C
Blooms: Analyze
Feedback: A bank error would cause an adjustment to the unadjusted bank balance, not the book balance. Only adjustments to the book
balance require adjusting entries.
6-27
53. Following the February bank reconciliation, the accountant made the following entry in
the journal of Kincaid Company:
Accounts receivable 150

Cash 150
This journal entry may have been used to record:
A. an NSF check received by Kincaid from a customer.
B. the collection of an account receivable by Kincaid that is part of a deposit in transit.
C. bank charges owed by Kincaid to the bank.
D. the collection of an account receivable by the bank that has been deposited in Kincaid's
account.
Answer: A
Blooms: Analyze
Feedback: When a company discovers an NSF check, it reduces its cash account (a credit) and increases accounts receivable (a debit) while it
attempts to collect on the check.
54. 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
Delivery expense 45
A. Cash 45
Cash 9
B. Delivery expense 9
Delivery expense 9
C. Cash 9
Cash 54
D. Delivery expense 54
Answer: B
Blooms: Apply
Feedback: In order to correct the error, which caused delivery expense to be overstated and cash to be understated, the company must
increase cash (a debit) and decrease delivery expense (a credit) by $9, the difference between $45 and $54.
6-28
55. Which of the following is not a procedure to maintain internal controls over cash
payments?
A. A receipt should be provided to each cash customer.
B. Checks should be properly authorized with approval signatures.
C. All checks should be prenumbered.
D. Voided checks should be defaced and retained.
Answer: A
Blooms: Understand
Feedback: Providing receipts to each cash customer is a procedure to maintain internal controls over cash receipts, not cash payments.
56. While preparing its bank reconciliation, Maynard Company determined that its bank had
collected a $650 account receivable for the company and deducted a $25 collection fee.
Which of the following shows the effect of this transaction on the financial statements?
Assets = Liab. + Equity Rev. - Expenses = Net Inc. Cash
A. (25) NA (25) NA 25 (25) 625 OA
B. 625 NA 625 650 25 625 650 OA
C. (25) NA (25) NA 25 (25) 650 OA
D. 625 NA 625 650 25 625 625 OA
Answer: A
Blooms: Analyze
Feedback: The entry to record receipt of the receivable, less the bank’s collection fee, increases cash (an asset) by $625, decreases accounts
receivable (an asset) by $650,and increases miscellaneous expenses by $25, which decreases net income and equity. It is reported as a cash
inflow for operating activities.
6-29
57. While performing its monthly bank reconciliation, the bookkeeper for the Mosaic
Company discovered that a check written for $421 for advertising expense was recorded in
the firm's books as $241. Which of the following shows the effect of the correcting entry on
the financial statements?

A. 180 NA 180 NA (180) 180 180 OA
B. (180) NA (180) NA 180 (180) (180) OA
C. (421) NA (421) NA 421 (421) (421) OA
D. (180) NA (180) NA 180 (180) (421) OA
Answer: B
Blooms: Analyze
Feedback: The error that recorded the check for less than it should have been understated advertising expense and overstated cash by the
difference, $180. The correcting entry will decrease cash and increase expense, which increases net income and equity. It is reported on the
statement of cash flows as a cash outflow for operating activities.
58. While performing its monthly bank reconciliation, the bookkeeper for the Grace
Corporation noted that a deposit of $990 (received from a customer on account) was recorded
in the company books as $900. Which of the following shows the effect of the correcting
entry on the financial statements?
A. 90 NA 90 90 NA 90 90 OA
B. 990 NA 990 990 NA 90 990 OA
C. NA NA NA NA NA NA 90 OA
D. NA NA NA NA NA NA (90) OA
Answer: C
Blooms: Analyze
Feedback: The error understated cash and overstated accounts receivable. Therefore, the entry to correct the error will increase cash (an
asset) and decrease accounts receivable (an asset). It will also be reported as a cash inflow for operating activities.
6-30
59. While performing the monthly bank reconciliation, the bookkeeper for Avon Company
made the journal entry for a bank service charge of $20. Which of the following correctly
shows the effect of the entry on the financial statements?

A. NA NA NA NA NA NA (20) OA
B. (20) (20) NA NA NA NA (20) OA
C. (20) NA (20) (20) NA (20) (20) OA
D. (20) NA (20) NA 20 (20) (20) OA
Answer: D
Blooms: Analyze
Feedback: The entry to record the service charge will increase expenses, which decreases net income and equity, and decreases cash. It is
reported as a cash outflow for operating activities on the statement of cash flows.
60. Which document issued by a bank reflects a transaction that decreases a company's
checking account balance?
A. A debit entry.
B. A debit memo.
C. A credit memo.
D. A reconciling entry.
Answer: B
Blooms: Understand
Feedback: A debit memo issued by a bank for such things as bank service charges reduces a company’s account, and a credit memo increases
it.
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61. In a bank reconciliation, a customer's NSF check included with the bank statement is:
A. deducted from the company'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 bank's cash balance to get the true cash balance.
D. added to the company's cash balance to get the true cash balance.
Answer: A
Blooms: Understand
Feedback: The NSF check was unknown to the company prior to receiving the bank statement, so it should be deducted from the company’s
cash balance to arrive at the true cash balance.
62. 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. There is no adjustment when preparing the bank reconciliation.
Answer: D
Blooms: Understand
Feedback: Because the certified check was deducted by both the bank and by the company when it was issued, there is no adjustment on the
bank reconciliation related to the certified check.
63. 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 book balance.
C. subtracted from the unadjusted bank balance.
D. added to the unadjusted bank balance.
Answer: D
Blooms: Understand
6-32
Feedback: Deposits in transit are added to the unadjusted bank balance because the bank has not yet received those deposits, but the company
has already recorded them in its books.
64. In a company's bank reconciliation, an outstanding check is a check that:

A. has been issued by the company but has not been presented to the bank for payment.
B. is guaranteed for payment by the bank.
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.
Answer: A
Blooms: Remember
Feedback: Outstanding checks are deducted from the unadjusted bank balance.
65. Jasper Company accepted a check from Harp Company as payment for services rendered.
Jasper's bank statement revealed that the Harp check was an NSF check. What effect will the
entry to record the NSF check have on the accounting equation of Jasper Company?
Total Assets Total Equity
A. Decrease Decrease
B. No effect No effect
C. Decrease No effect
D. No effect No effect
Answer: D
Blooms: Analyze
Feedback: The adjusting entry will increase one asset (accounts receivable) and decrease another asset (cash).
6-33
66. Owen Company's unadjusted book balance at June 30, 2016 is $9,700. 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 Owen, and
one for $50, which represents the amount of interest that Owen had earned on its interest-
bearing account in June. Based on this information, Owen's true cash balance is:
A. $9,700.
B. $10,695.
C. $10,550.
D. $10,605.
Answer: D
Blooms: Apply
Feedback: $9,700 unadjusted book balance - $45 service charge + $900 collection + $50 interest = $10,605 true cash balance
67. Duke Company's unadjusted bank balance at March 31, 2016 is $2,300. The bank
reconciliation revealed outstanding checks amounting to $500 and deposits in transit of $400.
Based on this information, Duke's true cash balance is:
A. $2,200.
B. $2,000.
C. $2,700.
D. $2,400.
Answer: A
Blooms: Apply
Feedback: $2,300 unadjusted bank balance - $500 outstanding checks + $400 deposits in transit = $2,200
6-34
68. Rainey Company's true cash balance at October 31, 2016 is $5,710. 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 Rainey Company, $1,000
The bank statement included an NSF check written by one of Ramsey's customers for $600.
Based on this information Rainey's unadjusted book balance at October 31 is:
A. $5,870.
B. $5,400.
C. $6,400.
D. $5,490.
Answer: B
Blooms: Apply
Feedback: X unadjusted book balance - $90 bank service charges + $1,000 collection of account receivable - $600 NSF check = $5,710 true
cash balance; x = $5,710 + $90 - $1,000 + $600; X = $5,400
Use the following to answer questions 69 and 70:
The bank statement for Tetra Company contained the following items: a bank service charge
of $10; a credit memo for interest earned, $15; and a $50 NSF check from a customer. The
company had outstanding checks of $100 and a deposit in transit of $300.
69. Assuming that the unadjusted bank balance was $500, determine the unadjusted book
balance.
A. $745.
B. $455.
C. $700.
D. $800.
Answer: A
Blooms: Apply
6-35
Feedback: $500 unadjusted bank balance - $100 outstanding checks + $300 deposit in transit = $700 true cash balance; X unadjusted book
balance - $10 bank service charge + $15 credit memo - $50 NSF check = $700 true cash balance; X unadjusted book balance = $700+ $10-
$15 + $50 = $745
70. The entry to record the customer's NSF check will:

A. increase the Accounts Receivable balance.
B. decrease the Cash account.
C. decrease equity.
D. increase the Accounts Receivable balance and decrease the Cash account balance.
Answer: D
Blooms: Analyze
Feedback: The entry will increase the accounts receivable balance and decrease cash.
71. Keatts 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.
B.
C.
D.
Answer: B
Blooms: Analyze
Feedback: The entry will increase accounts receivable and decrease cash. It is reported as a cash outflow for operating activities.
6-36
72. On September 30, 2016, the bank statement of Fine Company showed a balance of
$7,800. The following information was revealed by comparing the bank statement to the cash
balance in Fine’s accounting records:
(1) deposits in transit amounted to $3,150
(2) outstanding checks amounted to $6,200
(3) a $550 check was incorrectly drawn on Fine'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. $5,346.
B. $5,300.
C. $4,596.
D. $7,096.
Answer: B
Blooms: Apply
Feedback: $7,800 unadjusted bank balance + $3,150 deposits in transit - $6,200 outstanding checks + $550 error correction = $5,300
73. The owner of the Barnes Company established a petty cash fund amounting to $400. What
is the effect on the financial statements of the entry to record this transaction?
A. NA NA NA NA NA NA (400) OA
B. (400) NA (400) NA 400 (400) (400) OA
C. NA NA NA NA NA NA NA
D. (400) (400) NA NA NA NA (400) OA
Answer: C
Blooms: Analyze
Feedback: Establishing a petty cash fund increases one asset (petty cash) and decreases another asset (cash), so it has no overall effect on
assets. Because both of those accounts are considered cash on the statement of cash flows, it is not reported as a cash outflow.
6-37
74. What account is used to record the amount of cash shortages or overages relative to a
petty cash system?
A. Petty Cash Payable
B. Gain or Loss on Petty Cash
C. Petty Cash Expense
D. Cash Short and Over
Answer: D
Blooms: Understand
75. The entry to replenish a petty cash fund includes:

A. A credit to Cash.
B. A credit to Petty Cash.
C. Credits to expenses.
D. A debit to Cash.
Answer: A
Blooms: Understand
Feedback: The entry includes debits to expense accounts and a credit to cash.
76. 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 answer choices apply to the management of a petty cash fund.
Answer: D
Blooms: Understand
Feedback: All of these procedures are important controls in order to protect petty cash.
6-38
77. On April 30, 2016, Midwest Company established a petty cash fund of $1,000. On May 1,
2016, a disbursement of $355 was made from the fund for payment of delivery expense. What
entry should be made on May 1, 2016 to record this disbursement?
A. Debit delivery expense, $355; credit cash, $355.
B. Debit petty cash, $355; credit cash, $355.
C. Debit delivery expense, $355; credit petty cash $355.
D. No entry is necessary on May 1.
Answer: D
Blooms: Apply
Feedback: When petty cash is used to pay an expense, no entry is made. The expense will be recorded when the petty cash account is
replenished.
78. Peterson Company's petty cash fund was established on January 1, 2016 with $500. On
January 31, 2016 a count of the fund revealed: $105 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. (400) NA (400) NA 400 (400) (395) OA
B. (400) NA (400) NA 400 (400) (400) OA
C. (500) NA (500) NA 500 (500) (500) FA
D. (395) NA (395) NA 395 (395) (395) OA
Answer: D
Blooms: Analyze
Feedback: It will take $395 in order to replenish the petty cash account to $500. Miscellaneous expenses will be increased by $400, offset by
$5 cash over, and cash will be reduced by $395. It is reported as a cash outflow for operating activities.
6-39
79. Gross Company established a $250 petty cash fund on January 1, 2016. On March 1, 2016
the fund contained $160 in receipts for miscellaneous expenses and $85 in cash. The entries
necessary to replenish the petty cash fund will
A. have no effect on total assets.
B. decrease equity by $160.
C. increase equity by $165.
D. decrease assets by $165.
Answer: D
Blooms: Analyze
Feedback: The entry to replenish the petty cash account will decrease assets (cash) by $165, increase miscellaneous expenses by $160 and
increase cash short by $5. Total equity will decrease by $165.
80. Blake Company established a petty cash fund in the amount of $400. At the end of the
accounting period, the petty cash box contained receipts for expenditures amounting to $180
and $215 in cash. What effect will the entries to replenish the fund have on assets and
expenses?
A.
B.
C.
D.
Answer: B
Blooms: Analyze
Feedback: The entry will decrease assets (cash) by $185, increase miscellaneous expenses by $180 and increase cash short (also an expense)
by $5.
6-40
81. Which of the following entries would be required to establish a $500 petty cash fund?
Petty Cash 500

A. Cash 500
Petty Cash 500
B. Miscellaneous expense 500
Miscellaneous expense 500
C. Petty Cash 500
Cash 500
D. Petty Cash 500
Answer: A
Blooms: Apply
Feedback: Establishing the petty cash fund will decrease cash (a credit) and increase petty cash (a debit) by $500.
82. 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 these answer choices are correct.
Answer: B
AICPA: BB Industry
AICPA: FN Reporting
Blooms: Understand
Feedback: The independent auditor is not responsible for advising clients on tax strategies, although that is something that some other
accountants do.
6-41
83. 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 is a private professional organization.
D. The SEC’s influence has increased following passage of the Sarbanes-Oxley Act.
Answer: C
Topic Area: The Securities and Exchange Commission
AICPA: BB Legal
Blooms: Understand
Feedback: The SEC is not a private professional organization. It is a branch of the U.S. Government.
84. The most favorable audit opinion that a company can receive is a(n):
A. adverse opinion
B. unqualified opinion
C. disclaimer of opinion
D. qualified opinion
Answer: B
AICPA: FN Reporting
Blooms: Remember
Feedback: An unqualified opinion indicates that the independent auditor has found the financial statements to be materially correct and in
compliance with GAAP.
85. 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 statement audit.
D. Material misstatements should not exist in order for a company to receive an unqualified
audit opinion.
Answer: C
AICPA: FN Reporting
Blooms: Understand
Feedback: Materiality is different for each company. $5,000 is not necessarily a threshold for materiality.
6-42
86. 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. Qualified opinion.
B. Disclaimer.
C. Adverse opinion.
D. Unqualified opinion.
Answer: C
AACSB: Ethics
AICPA: FN Reporting
Blooms: Understand
Feedback: An adverse opinion indicates that the independent auditor found one or more material departures from GAAP.
87. 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.
D. Assures users that confidentiality is maintained.
Answer: C
AICPA: FN Reporting
Blooms: Understand
Feedback: The financial statement audit does not guarantee complete accuracy or the absence of fraud. It does provide reasonable assurance
that there are no material misstatements and there is compliance with GAAP.
6-43
Essay Questions
88. Indicate whether each of the following statements regarding internal controls is true or
false.
_____ a) Internal controls are used to provide reasonable assurance that the objectives of an
enterprise will be accomplished.
_____ b) Internal controls can be divided into accounting controls and administrative controls.
_____ c) The mechanics of internal control systems do not vary from company to company.
_____ d) Accounting controls are concerned with the evaluation of performance and the
assessment of the degree of compliance with company policies and public laws.
_____ e) Administrative controls are composed of policies and procedures that are designed
to safeguard the assets and to assure that accounting records contain reliable information.
Answer: a) T b) T c) F d) F e) F

Blooms: Understand
Feedback:
a) This is true. Internal controls provide reasonable, but not, absolute assurance.
b) This is true. Accounting and administrative controls are the two categories of controls.
c) This is false. Each company’s internal control system is different.
d) This is false. This describes administrative controls.
e) This is false. This describes accounting controls.
6-44
false.
_____ a) Separation of duties is an internal control feature that requires different individuals
to perform the following functions: authorization, recording, and custody of assets.
_____ b) Under proper internal controls, the person who collects customer payments should
also maintain the records of cash receipts.
_____ c) Under proper internal controls, those who are given authority should bear the
corresponding responsibility.
_____ d) One of the basic rules of internal control is to require some employees to take
regular vacations.
_____ e) A fidelity bond is a form of insurance that companies ask employees to buy to
protect the company from loss due to employee dishonesty.
Answer: a) T b) F c) T d) T (e) F

Blooms: Understand
Feedback:
a) This is true. The functions of authorization, recording, and custody of assets should be performed by separate employees to deter fraud.
b) This is false. Collecting customer payments and recording cash receipts should be performed by separate employees.
c) This is true. Employees who are given authority should bear the corresponding responsibility.
d) This is true. Requiring employee vacations helps to prevent employees from covering up fraudulent behavior.
e) This is false. A company is protected financially from financial loss due to fraudulent behavior of bonded employees, but it is the
company that purchases the fidelity bond, not the employee.
false.
_____ a) The Sarbanes-Oxley Act of 2002 requires public companies to evaluate their internal
controls and report those findings with SEC filings.
_____ b) The Sarbanes-Oxley Act applies to all companies, while the Enterprise Risk
Management (ERM) framework is used by public companies only.
_____ c) Enterprise Risk Management (ERM) is an expansion of the earlier framework of the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
_____ d) The COSO framework includes five interrelated components: separation of duties,
quality employees, prenumbered documents, physical controls, and performance evaluations.
_____ e) Congress passed the Sarbanes-Oxley Act in 2002 in response to high profile fraud
cases such as Enron and WorldCom.
Answer: a) T b) F c) T d) F (e) T
6-45

Blooms: Understand
Feedback:
a) This is true. SOX requires public companies to evaluate internal controls.
b) This is false. SOX applies to public companies, while the ERM framework is used by public and private companies alike.
c) This is true. ERM was developed in 2004, and expands the COSO framework of 1992.
d) This is false. The five components of the COSO framework include control environment, risk assessment, control activities, information
and communication, and monitoring.
e) This is true. The frauds of Enron and WorldCom led congress to pass SOX in 2002.
false.
_____ a) Cash receipts should be deposited in a bank when they reach a predetermined level
of materiality.
_____ b) To improve operating efficiency, a company should make most of its disbursements
in currency instead of checks.
_____ c) Supporting documents are required when checks are presented to the check signer.
_____ d) Supporting documents should not be marked "paid" until the check clears the bank.
_____ e) All spoiled and voided checks should be shredded.
Answer: a) F b) F c) T d) F e) F

Blooms: Understand
Feedback:
a) This is false. Cash receipts should be deposited daily.
b) This is false. Disbursements should be made by check, not by currency.
c) This is true. The check signer should examine supporting documents prior to signing.
d) This is false. The supporting documents should be marked “paid” when the check is signed.
e) This is false. Spoiled and voided checks should be defaced to prevent reuse of the checks, but should be retained to provide continuity of
prenumbered documents.
6-46
92. Indicate whether each of the following statements is true or false.

_____ a) Debit memos in a bank statement describe transactions that increase the depositor's
assets.
_____ b) Credit memos in a bank statement describe transactions that act to increase the
bank's liabilities.
_____ c) Service fees charged by a bank appear on bank statements as credit memos.
_____ d) Deposits in transit appear on the bank statement as credit memos.
_____ e) Outstanding checks do not appear on the bank statement.
Answer: a) F b) T c) F d) F e) T

Blooms: Understand
Feedback:
a) This is false. Debit memos decrease the depositor’s assets.
b) This is true. Credit memos increase the bank’s liabilities.
c) This is false. Because service fees decrease the depositor’s assets, they appear as debit, not credit, memos.
d) This is false. Deposits in transit do not appear on the bank statement because the bank is unaware of those deposits.
e) This is true. Outstanding checks do not appear on the bank statement because the bank is unaware of those checks.
93. Indicate whether each of the following items regarding internal control is true or false.
_____ a) Accounting controls are composed of procedures designed to safeguard assets and
ensure accounting records contain reliable information.
_____ b) Administrative controls concern the reliability of the financial statements and the
accuracy of the general ledger.
_____ c) Whenever possible, the functions of authorization, recording and custody should be
exercised by the same dependable employee.
_____ d) Cash is most susceptible to embezzlement at the points of receipt and disbursement.
_____ e) Even a well-designed internal control system cannot prevent collusion by
employees.
Answer: a) T b) F c) F d) T e) T

AACSB: Ethics
Blooms: Understand
Feedback:
a) This is true. Accounting controls involve safeguarding assets and ensuring reliable accounting records.
b) This is false. Administrative controls relate to ensuring compliance with company policies and public laws.
6-47
c) This is false. Authorization, custody of assets, and recording should be performed by separate employees.
d) This is true. Receipt and disbursement points are the points where cash is most susceptible to theft.
e) This is true. Even a well-designed internal control system can be overridden by employee collusion.
94. Indicate whether each of the following items regarding petty cash is true or false.
_____ a) The establishment of a petty cash fund is an asset use transaction.
_____ b) The replenishment of a petty cash fund is an asset source transaction.
_____ c) At any time, the total of the petty cash vouchers plus the remaining coins and
currency should equal the balance of the Petty Cash ledger account.
_____ d) If a shortage occurs, a credit is entered to the Cash Short and Over account.
_____ e) There is no journal entry made in the accounting records at the time when petty cash
funds are disbursed.
Answer: a) F b) F c) T d) F e) T

Blooms: Understand
Feedback:
a) This is false. Establishment of a petty cash fund increases one asset (petty cash) and decreases another asset (cash), so it is an asset
exchange transaction.
b) This is false. Replenishment of a petty cash fund is an asset use transaction that increases expenses and decreases cash.
c) This is true. The total of the petty cash vouchers plus the cash on hand should equal the balance in the petty cash account.
d) This is false. A shortage of cash results in a debit entry to the Cash Short and Over account.
e) This is true. A journal entry is made when the petty cash account is replenished, not when funds are disbursed.
95. Indicate whether each of the following statements about the auditor's role in financial
accounting is true or false.
_____ a) The proper conduct of an audit guarantees the accuracy of all figures on the financial
statements.
_____ b) The financial statement audit is a detailed review of a company's financial
statements and documents.
_____ c) The primary responsibility of the independent accounting firm is to the public.
_____ d) The most favorable type of audit report is called a qualified opinion.
_____ e) The ultimate responsibility for the financial statements lies with management of the
company rather than the independent accounting firm.
Answer: a) F b) T c) T d) F e) T

6-48

AICPA: FN Reporting
Blooms: Understand
Feedback:
a) This is false. Audits are designed to provide reasonable assurance that financial statements are materially correct.
b) This is true. Financial statement audits are detailed reviews of financial statements and documents.
c) This is true. The primary responsibility of the independent auditor is the public.
d) This is false. The most favorable type of audit opinion is an unqualified opinion.
e) This is true. Management bears ultimate responsibility for the company’s financial statements.
True / False Questions
96. A well-designed system of internal controls will eliminate employee theft and fraud in a
company.
Answer: False
AICPA: BB Ethics
Blooms: Understand
Feedback: Even a well-designed system cannot eliminate employee theft and fraud.
97. Internal controls that assess degree of compliance with company policies are classified as
administrative controls.
Answer: True
Blooms: Understand
Feedback: This describes administrative controls.
98. Separation of duties in an organization should be required to reduce the likelihood of

theft.
Answer: True
6-49

Blooms: Understand
Feedback: Separation of duties helps to prevent theft by having the work of one employee serve as a check of the work of others.
99. Requiring separation of duties in a business eliminates the need for the work of one
employee to serve as a check on the work of other employees.
Answer: False
Blooms: Understand
Feedback: Separation of duties allows for the work of one employee to serve as a check on the work of other employees. It does not
eliminate the need for it.
100. Even a good system of internal controls can be overridden by collusion among
employees.
Answer: True
AACSB: Ethics
Blooms: Understand
Feedback: Collusion is cooperation among two or more employees to commit fraud, a practice that can override internal controls such as
separation of duties.
101. A savings account or certificate of deposit that imposes a substantial penalty for early
withdrawals should not be classified as Cash on the balance sheet.
Answer: True
Topic Area: Accounting for Cash
Blooms: Understand
Feedback: If a savings account or certificate of deposit imposes a substantial penalty for early withdrawal, it should be classified as in
investment.
6-50
102. For a business, Cash generally includes currency, customers' checks, and some savings
accounts.
Answer: True
Topic Area: Accounting for Cash
Blooms: Understand
Feedback: Cash includes currency, customers’ checks that have not yet been deposited, and savings accounts, as long as those accounts to
not impose substantial penalty for withdrawal.
103. After the check is signed, the third employee is the one who records the check in the
ledger and examines the appropriate supporting documents.
Answer: False
Blooms: Understand
Feedback: By examining supporting documents, it is the signer who is checking the work of the employee who prepared the check. A third
employee should then enter the check into the ledger.
104. A bank statement debit memo describes a transaction that increases a customer's account
balance.
Answer: False
Blooms: Understand
Feedback: A debit memo decreases a customer’s account balance,
6-51
105. 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.
Answer: False
Blooms: Understand
Feedback: A bank reconciliation begins with both the ending bank balance and the ending book balance, and reconciles each to the true cash
balance.
106. In preparing a bank reconciliation, typical adjustments to the bank balance are deposits
in transit and outstanding checks.
Answer: True
Blooms: Remember
Feedback: These are typical adjustments to the bank balance.
107. In preparing a bank reconciliation, typical adjustments to the book balance include bank
service charges, customer NSF checks, and certified checks.
Answer: False
Blooms: Understand
Feedback: Service charges and NSF checks are typical adjustments to the book balance, but certified checks have already been recorded by
both the company and the bank and are not adjusted on the bank reconciliation.
108. All journal entries made related to bank reconciliations include an expense or revenue
account.
Answer: False
6-52

Blooms: Understand
Feedback: While some journal entries related to bank reconciliations include expenses or revenue (service charges, interest), entries to
recognize NSF checks involve a debit to Accounts Receivable and a credit to Cash.
109. All adjustments to the unadjusted cash balance on a bank reconciliation require journal
entries, but no adjustments to the bank statement balance require journal entries.
Answer: True
Blooms: Understand
Feedback: Only adjustments to the unadjusted cash (book) balance require journal entries. Adjustments to the unadjusted bank balance, such
as deposits in transit and outstanding checks, are items that have already been recorded in the company’s ledger.
110. Preparing a bank reconciliation is a requirement to obtain an unqualified audit opinion,

but is not an important internal control for a business.
Answer: False
Topic Area: Reconciling the Bank Account
Blooms: Understand
Feedback: A bank reconciliation can help to uncover fraudulent activity.
111. After journal entries have been made related to a bank reconciliation, the book balance
will be equal to the true cash balance.
Answer: True
Topic Area: Reconciling the Bank Account
Blooms: Understand
Feedback: The adjusting entries will result in bringing the book balance in agreement with the true cash balance.
6-53
112. The true cash balance can only be determined if both the unadjusted bank balance and
the unadjusted cash balance are known.
Answer: False
Blooms: Analyze
Feedback: The true cash balance can be determined if either the unadjusted bank balance or the unadjusted cash balance are known.
113. A business learns about customers' NSF checks through debit memos that are included
with the bank statement.
Answer: True
AICPA: BB Industry
Blooms: Understand
Feedback: Debit memos are issued for NSF checks.
114. A credit balance in Cash Short and Over represents a shortage of cash and would be
treated as an expense.
Answer: False
Topic Area: Cash Short and Over
Blooms: Analyze
Feedback: Just as revenues are recorded as credits, a credit balance in the cash short and over account indicates that cash is over, and is
treated as revenue.
115. The purpose of a petty cash fund is to eliminate the need for control over a business's
small cash disbursements.
Answer: False
6-54

Blooms: Understand
Feedback: Using a petty cash fund allows a company to use currency to pay for small disbursements in a more, not less, controlled
environment.
116. Establishment of a petty cash fund is an asset exchange transaction.
Answer: True
Blooms: Understand
Feedback: Establishing a petty cash fund increases one asset, petty cash, and decreases another asset, cash.
117. At the time petty cash funds are disbursed, a journal entry should be made, debiting the
appropriate asset or expense account.
Answer: False
Blooms: Understand
Feedback: No journal entries are made when petty cash funds are disbursed; only when the petty cash fund is replenished.
118. For a petty cash fund to be most useful to a business, one of the employees of the
business should be designated as responsible for the fund.
Answer: True
Blooms: Understand
Feedback: Only one employee should serve as custodian of the petty cash fund.
6-55
119. Most companies strive to receive an unqualified audit opinion.
Answer: True
AICPA: FN Reporting
Blooms: Understand
Feedback: Most companies strive for an unqualified audit opinion.
120. An error is considered material if it would trigger an IRS audit.
Answer: False
AICPA: FN Reporting
Blooms: Understand
Feedback: An error is considered material if it would influence the opinion of the average prudent investor.
121. The Securities and Exchange Commission regulates financial reporting of all publicly
traded U.S. companies.
Answer: True
Topic Area: The Securities and Exchange Commisssion
AICPA: BB Legal
Blooms: Understand
Feedback: The SEC regulates only publicly traded companies.
122. The primary focus of financial statement audits is the discovery of fraud.
Answer: False
Topic Area: The Financial Audit
AICPA: BB Ethics
AICPA: FN Reporting
Blooms: Understand
Feedback: The primary focus of financial statement audits is to determine whether financial statements are prepared in accordance with
GAAP.
6-56
6-57
Essay Questions
123. Why would a merchandising company need good internal controls related to its
inventory? List three of the key elements of an internal control system that would apply to
inventory, and explain how each of them does relate to inventory.
Answer:
A merchandising company needs good internal controls related to its inventory for several
reasons: 1) inventory may be the largest asset on the balance sheet in dollar amount and thus a
tempting target for theft; 2) some inventory is small in size and valuable and thus subject to
theft or shoplifting; 3) Cost of Goods Sold may be the largest expense on the income
statement. As a result, theft or fraud related to inventory can have a significant impact on the
company's reported performance.
Most of the key features of internal control systems apply to inventory. For example:
1) Separation of duties - employees who sell inventory should not count it when a physical
count of the inventory is needed. Also, employees who handle inventory should not make
journal entries related to inventory.
2) Quality of employees - a company should hire motivated employees with good educational
background and work experience. The company should also provide training to employees so
that they understand policies related to inventory.
3) Authority and responsibility - employees who sell inventory (or who handle inventory in a
warehouse) should understand their responsibility and the limits of their authority.
4) Physical controls - physical controls (such as locked storerooms) should be used as
appropriate to protect the company's inventory.

Blooms: Analyze
6-58
124. 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?
Answer:
This situation is risky because it violates the internal control feature, separation of duties. An
employee who has access to assets should not make journal entries in the accounting system.
Kristen could steal merchandise or give items to her family or friends and cover up by making
entries into the accounting system. Also, an employee who deposits cash should not make
entries to record the deposit. The situation as described would allow Kristen to engage in
systematic, long-term theft from the business, reducing its profitability.

Blooms: Analyze
6-59
125. 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.
Answer:
Separation of duties is intended to reduce employees' opportunity and temptation to commit
theft or fraud. For a business with effective separation of duties, theft or fraud by one
employee would probably be noticed by other employees doing their jobs. Separation of
duties may not prevent theft or fraud when there is collusion among employees. The duties
that should be separated are authorization of transactions, recording in the accounting records,
and custody of assets. These duties should be divided among employees; no one employee
should have two or more of these responsibilities. For example, an employee who has control
over a business's assets and who makes journal entries in the accounting system would be able
to steal from the company and cover the traces through making an appropriate journal entry.

Blooms: Understand
6-60
Problems:
126. 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:
Deposits in transit 1,200

NSF check 175
Bank service charge 50
Outstanding checks 1,060
Credit memo for interest 80
Required:
Prepare journal entries for any of the above adjustments that require one.
Answer:

Cash 175
Bank service charge expense 50
Cash 50
Cash 80
Interest revenue 80

Blooms: Apply
6-61
127. The unadjusted cash account balance for Carson Company at December 31, 2016 is
$12,615. The bank statement showed an ending balance of $18,250 at December 31, 2016.
The following information is available from an examination of the bank statement and the
company's accounting records:
Bank service charge $ 20

Outstanding checks 7,500
NSF check from a customer 425
Deposits in transit 1,222
Check #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:
1) Prepare a bank reconciliation for December, 2016.
2) Prepare the necessary journal entries at December 31, 2016.
Answer:
1)
Balance per bank $ 18,250

Add: Deposits in transit 1,222
Less: Outstanding checks (7,500)
True cash balance $ 11,972
Balance per books $ 12,615

Less: Error (inventory) (198)
Less: Bank service charge (20)
Less: NSF check (425)
2)
Inventory 198
Cash 198
Cash 20
Cash 425

6-62

Topic Area: Prepare a Bank Reconciliation
Blooms: Apply
6-63
128. As of May 31, 2016, the bank statement of Xi Company showed an ending balance of
$8,632.52. The following information was available:
Bank service charge $ 35.00

Outstanding checks 2,480.36
NSF check from a customer 127.50
Deposit in transit 799.55
Deposit erroneously recorded in Flores's account that should
have been recorded in Flowers's account 229.00
Required: Compute Xi's true cash balance at May 31, 2016.
Answer:
Balance per bank $ 8,632.52

Add: Deposit in transit 799.55
Less: Outstanding checks (2,480.36)
Less: Error correction (229.00)
True cash balance $ 6,722.71

Blooms: Apply
Feedback: The bank service charge and NSF check are adjustments to the unadjusted book balance, not the unadjusted bank balance.
Because the bank had erroneously added $229.00 to Flores’ account, it is subtracted from the unadjusted bank balance.
6-64
129. For each of the following items, indicate whether it is an adjustment to the bank side, the
book side, or not applicable when preparing a bank reconciliation. Use + for addition, - for
subtraction, and NA for no adjustment. If an item should be adjusted, indicate whether the
balance would be increased or decreased.
Answer:

6-65

Blooms: Apply
6-66
130. The May 31, 2016, 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: a) Prepare a bank reconciliation to determine the true cash balance at May 31,
2016.
b) Prepare any necessary journal entries.
Answer:
a)
Balance per bank $ 12,400

Add: Deposits in transit 4,800
Less: Outstanding checks (1,700)
Balance per books $ 17,000

Less: NSF check (1,100)
Less: Bank service charge (50)
Less: Debit memo (350)
b)
Account Titles Debit Credit

Accounts receivable 1,100
Telephone expense 350
Cash 1,500

Topic Area: Prepare a bank reconciliation
Blooms: Apply
Feedback: Only adjustments to the unadjusted book balance require a journal entry.
6-67
131. The following information pertains to the bank reconciliation of January 31, 2016 for the
Greis Company:
Unadjusted bank balance: $ 18,900

Bank collection of a note receivable (no interest): 2,000
Bank service charge: 60
Deposit in transit: 4,000
NSF check returned by the bank: 1,800
Outstanding checks: 6,000
In addition, the reconciliation revealed one error: Check #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.
Answer:
$16,787*
$18,900 unadjusted bank balance + $4,000 deposit in transit - $6,000 outstanding checks =
$16,900 true cash balance
Therefore compute the unadjusted balance per books as follows:

Unadjusted book balance + $2,000 collection of note receivable - $60 service charge - $1,800
NSF check - $27 error correction = $16,900
Unadjusted book balance = $16,900 – $2,000 + $60 + $1,800 + $27 = $16,787

Blooms: Analyze
6-68
132. Merrifield Lawn Care’s bank statement at August 31, 2016 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: $7,128.71
NSF check from customer: $71.82
Debit memo related to the returned deposit: $8.00
Credit memo related to interest earned: $10.00
Deposits in transit: $3,625.00
Required: 1) Prepare a bank reconciliation for Merrifield Lawn Care at August 31, 2016.
2) Prepare the required journal entries for Cash at August 31, 2016.
Answer:
(1) Bank Reconciliation

Add: Deposit in transit 3,625.00
True cash balance 20,213.16
Balance per books $ 20,237.98

Less: NSF check (71.82)
Debit memo for service charge (8.00)
Add: Credit memo 10.00
Error correction 45.00
(2) Journal Entries:
Accounts receivable 71.82
Bank service charge expense 8.00
Cash 79.82
Cash 55.00
Utilities expense 45.00
Interest revenue 10.00
6-69

Blooms: Apply
133. The bank statement for Raymond Company included a debit memo for a bank service
charge of $50.
Required: a) 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.

b) Is the recognition of the bank service charge an asset source, use, or exchange transaction?
c) Prepare the journal entry that Raymond should make to recognize the effects of the service
charge.
Answer:
a) (50) NA (50) NA 50 (50) (50) OA
b) The bank service charge is an asset use transaction.
c) Cash 50

Blooms: Analyze
Blooms: Apply
6-70
134. On November 30, 2016, Hernandez Company's bank statement showed an ending
balance of $37,341. The following information is available about Hernandez's account:
1. Debit memo in bank statement for bank service charge, $39
2. Deposit in transit, $2,988
3. Outstanding checks, $3,156
4. Customer's NSF check for $723 was returned with the bank statement
Required:
a) Determine the true cash balance as of November 30, 2016.
b) Determine the unadjusted balance of the company's Cash account as of November 30,
2016.
Answer:
a) True cash balance = $37,341 unadjusted bank balance + $2,988 deposit in transit - $3,156
outstanding checks = $37,173
b) $37,173 true cash balance = Unadjusted book balance - $39 debit memo - $723 NSF check
Unadjusted book balance = $37,173 + $39 + $723 = $37,935

Blooms: Apply
6-71
135. Woods Company made the following journal entries related to its bank reconciliation for
October 31, 2016:

Cash 450.74
Cash 26.20
Cash 129.68
Cash 15.00
Required: a) 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?
b) Prepare the portion of the bank reconciliation that begins with the unadjusted book balance
and ends with the true cash balance.
Answer:
a) True cash balance = $8,354.28 + $450.74 + $26.20 - $129.68 - $15.00 = $8,686.54

b)
Add: Account receivable collected by bank 450.74
Interest 26.20

Blooms: Apply
6-72
136. Rexrode Company’s bank statement at January 31, 2016 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: $4,895.44
NSF check from customer: $183.62
Debit memo related to the returned deposit: $20.00
Credit memo for interest earned: $12.00
Deposits in transit: $1,236.77
Required: 1) Prepare a bank reconciliation for Rexrode Company at January 31, 2016.
2) Prepare the required journal entries for Cash at January 31, 2016.
Answer:
(1) Bank Reconciliation

Add: Deposit in transit 1,236.77

Add: Credit memo for interest 12.00
(2) Journal Entries

Cash 191.62

Blooms: Apply
6-73
137. Boothe Company established a petty cash fund of $200 on January 3. At January 28, the
fund contained cash of $112 and receipts for the following payments.
Office supplies $ 29
Postage 33
Freight-out payments 24
On January 28, the petty cash fund was replenished.
Required: Record the above events in general journal form to (1) establish the fund, (2)
recognize the expenditures.
No. Account Titles Debit Credit
1.
2.
Answer:

1. Petty cash 200
Cash 200
2. Office supplies 29
Postage expense 33
Freight out 24
Cash short and over 2
Cash 88

Blooms: Apply
6-74
138. On May 1, 2016, Campbell Company established a petty cash fund in the amount of
$400.
a) Is the establishment of the fund an asset source, asset use, or asset exchange transaction?
b) Record the establishment of the petty cash fund in the horizontal financial statements
model, below. Show dollar amounts of increases and decreases; for accounts that are not
affected, indicate NA. If the event affects cash flow, classify the cash flow as operating,
investing, or financing.

Cash + Petty Cash
Answer:
a) Establishment of the fund is an asset exchange transaction; total assets do not change.
b)
Cash + Petty Cash
(400) 400 NA NA NA NA NA NA
A Learning Objective: 06-04

ACSB: Analytical Thinking
Blooms: Analyze
6-75
139. Towle Company established a petty cash fund for $500 on January 1, 2016. At the end of
the month, the petty cash fund contained cash of $238.60 and vouchers for the following cash
payments: freight on goods shipped to customers, $67.00; postage, $75.00; miscellaneous
expense, $79.22; entertainment expense, $36.00.
Three distinct events affected the petty cash fund during January:
1. establishment of the fund;
2. making payments for various items from the fund; and
3. recognizing expenses and replenishing the fund at the end of the month
Required:
a) Record each of the events in the horizontal statements model below. Indicate with the
dollar amount of the increase or decrease, or NA if the element is not affected.
Cash + Petty Cash
b) Prepare journal entries for these events.
Answer:
a)
Cash + Petty Cash
(500.00) 500.00 NA NA NA NA NA NA
NA NA NA NA NA NA NA NA
(261.40) NA NA (261.40) NA 261.40 (261.40) (261.40) OA
b)

1. Petty Cash 500.00
Cash 500.00
2. Freight expense 67.00
Postage expense 75.00
Miscellaneous expense 79.22
Entertainment expense 36.00
Cash short and over 4.18
Cash 261.40

6-76
Blooms: Apply
Blooms: Analyze
6-77
140. Fern’s Flowers established a $400 petty cash fund. The following expenditures were
made from the fund:
Office supplies $ 129.00

Shipping expense 86.50
Maintenance expense 48.68
Miscellaneous expenses 44.35
A count of the cash in the fund revealed a balance of $89.00.
Required: a) Show the effect of establishing the fund on the accounting equation.
b) For what amount must the check be written to replenish the fund?
c) Prepare the journal entry to record the recognition of expenditures paid from the fund and
replenishment of the fund.
Answer:
a)
Assets = Liab. + Equity

Petty
Cash Cash
(400.00) 400.00 NA NA
b) A check for $311 must be written to replenish the fund ($400 - $89 remaining cash)
c)
Office supplies 129.00

Shipping expense 86.50
Maintenance expense 48.68
Miscellaneous expenses 44.35
Cash 311.00

Blooms: Apply
Blooms: Analyze
6-78
141. On January 1, 2016, Whitecastle Company established a petty cash fund for $250. On
January 31, 2016, when the petty cash fund was replenished, it contained $70.40 in cash and
petty cash receipts for: postage expense, $49.60; office supplies, $62; entertainment expense,
$64.21
Required: a) Prepare the journal entry to establish the petty cash fund.
b) Assuming that Warren treats all disbursements from petty cash as miscellaneous expenses,
prepare the journal entry to replenish the fund on January 31.
Answer:
a)
Petty Cash 250.00

Cash 250.00
b)
Postage expense 49.60

Entertainment expense 64.21
Cash 179.60

Blooms: Apply
6-79
142. Howard Corporation uses a petty cash system to pay for miscellaneous expenses.
Howard established the petty cash fund with $600 on March 1, 2016. On March 31, 2016, the
petty cash fund contained $12.98. The custodian of the fund saved the following vouchers for
cash payments during March 2016:
Postage and delivery expense $ 242.76

Tolls and parking expense 51.80
Business meals expense 167.44
The three events related to petty cash were the following: (1) establishment of the fund, (2)
cash payments for petty cash expenses, and (3) recognition of expenses and replenishment of
the fund.
Required: Prepare the journal entries for above events.
Answer:

1. Petty Cash 600.00
Cash 600.00
2. No entry
3. Office supplies 242.73
Postage and delivery expense 129.00
Tolls and parking expense 51.80
Business meals expense 167.44
Cash 587.02

Blooms: Apply
6-80

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Chapter 06 - Internal Control and Accounting for Cash

Solution Manual for Fundamental Financial Accounting

Chapter 06 Internal Control and Accounting for Cash Answer Key

Short Answer Questions

Use the following to answer questions 1 ‒ 9:

Answer: (D) (N) (D) (N) (I) (D) (D)

Learning Objective: 06-03

Level of Difficulty: 1 Easy

Answer: (N) (N) (N) (N) (N) (N) (I)

Learning Objective: 06-03

Answer: (N) (N) (N) (N) (N) (N) (I)

Learning Objective: 06-03

Answer: (N (N) (N) (N) (N) (N) (D)

Learning Objective: 06-03

Answer: (N) (N) (N) (N) (N) (N) (N)

Learning Objective: 06-03

Answer: (N) (N) (N) (N) (N) (N) (N)

Learning Objective: 06-03

Answer: (N) (N) (N) (N) (N) (N) (N)

Learning Objective: 06-03

Answer: (N) (N) (N) (N) (N) (N) (N)

Learning Objective: 06-03

Answer: (D) (D) (N) (N) (N) (N) (D)

Learning Objective: 06-03

Use the following to answer questions 10 ‒ 12:

Answer: (N) (N) (N) (N) (N) (N) (N)

Learning Objective: 06-04

Answer: (N) (N) (N) (N) (N) (N) (N)

Learning Objective: 06-04

Answer: (D) (N) (D) (N) (I) (D) (D)

Learning Objective: 06-04

Any three of the following:

Answer: Separation of duties, bonding of employees, use of prenumbered documents, use of a

Learning Objective: 06-01

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

Learning Objective: 06-01

Learning Objective: 06-01

Learning Objective: 06-01

AICPA: BB Critical Thinking

Answer: Any five of the following:

Learning Objective: 06-02

18. What is a fidelity bond and what is its purpose?

Learning Objective: 06-01

19. How do accounting controls differ from administrative controls?

Learning Objective: 06-01

20. What asset is generally most susceptible to theft?

Learning Objective: 06-02

Learning Objective: 06-03

22. What is a deposit in transit?

Learning Objective: 06-03

Answer: Non-sufficient-funds (NSF) check

Learning Objective: 06-03

Answer: An adjustment to the bank balance

Learning Objective: 06-03

Answer: Asset exchange

Learning Objective: 06-04

26. What is the purpose of establishing a petty cash fund?

Learning Objective: 06-04

Learning Objective: 06-04

Learning Objective: 06-05

29. What is meant by the term "materiality?"

Learning Objective: 06-05

Answer: Any three of the following:

Learning Objective: 06-05