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CHAPTER 6: CASH AND INTERNAL CONTROL
1. Among the assets listed below, which one is considered the most liquid?
a. Cash
b. Accounts receivable
c. Merchandise inventory
d. Prepaid expenses
ANSWER: a
2. Which one of the following items is not included in cash?

a. A bank certificate of deposit for one year
b. A savings account at the bank
c. A checking account at the bank
d. All of the above are included in cash
ANSWER: a
3. Which one of the following is not considered to be a cash equivalent?

a. Corporate commercial paper due in 90 days after purchase
b. U.S. Treasury bills with an original maturity of six months
c. A money market account with a stock brokerage firm
d. A certificate of deposit with a term of 75 days when acquired
ANSWER: b
4. How are cash equivalents reported or disclosed in the financial statements?

a. They appear only on the statement of cash flows.
b. They are included with short-term investments under current assets on the balance sheet.
c. They are included with cash under current assets on the balance sheet.
d. They are disclosed only in a footnote to the balance sheet.
ANSWER: c
5. Which one of the following could never be considered to be cash equivalents?

a. Common stock issued by a corporation
b. Money market funds
c. Corporate commercial paper
d. U. S. Treasury bills
ANSWER: a
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole
or in part.
Chapter 6: Cash and Internal Control
6. Which one of the following is not a cash equivalent?

a. 30-day certificate of deposit
b. 60-day commercial paper
c. 90-day U. S. treasury bill
d. 180-day note issued by a local or state government
ANSWER: d
7. Effective cash management and control includes all of the following except
a. The use of a petty cash fund
b. Bank reconciliations
c. Short-term investments of excess cash
d. Purchase of stocks and bonds
ANSWER: d
8. Checks presented for payment and paid by the bank are known as
a. Canceled checks
b. Certified checks
c. NSF checks
d. Outstanding checks
ANSWER: a
9. Deposits made by a company but not yet reflected in a bank statement are called
a. Debit memoranda
b. Deposits in transit
c. Credit memoranda
d. None of the above
ANSWER: b
10. Which one of the following statements is true?

a. Good cash management practices dictate that a company should maintain as large a balance as possible
in its cash account.
b. Sound internal control practice dictates that disbursements should be made by check.
c. The person handling the cash should also prepare the bank reconciliation.
d. Petty cash can be substituted for a checking account to expedite the payment of all disbursements.
ANSWER: b
or in part.
11. Checks returned by a bank because customers did not have sufficient funds in their account are called
a. Canceled checks
b. Certified checks
c. NSF checks
d. Outstanding checks
ANSWER: c
12. Which one of the following would not appear on a bank statement for a checking account?
a. Service charges
b. Interest earned
c. Outstanding checks
d. Deposits
ANSWER: c
13. Which one of the following procedures is not part of preparing a bank reconciliation of a checking
account
a. Tracing deposits listed on the bank statement to the books to identify deposits in transit.
b. Arranging canceled checks in numerical order and tracing them to the books to identify outstanding
checks.
c. Identifying items added on the bank statement which have not been recorded as cash receipts by the
company.
d. Preparing adjustments to reverse the transactions recorded for checks that are still outstanding.
ANSWER: d
14. Which of the following items would not be a reconciling item?

a. Canceled checks
b. NSF checks
c. Outstanding checks
d. Deposits in transit
ANSWER: a
15. Which one of the following items would be added to the balance per books in a bank reconciliation?
a. Outstanding checks
b. Deposit in transit
c. Service charges
d. Interest on customer note
ANSWER: d
or in part.
16. Which one of the following items would be added to the balance per bank statement in a bank
reconciliation?
b. Deposits in transit
c. Service charge
ANSWER: b
17. Which one of the following items would be subtracted from the balance per books in a bank reconciliation
c. Service charges
ANSWER: c
18. Which one of the following items would be subtracted from the balance per bank statement in a bank
reconciliation?
c. Service charges
ANSWER: a
19. Which one of the following statements best describes the term “outstanding check?”
a. A check written by the company and presented to the bank for payment.
b. A check written by the company but not yet presented to the bank for payment.
c. A check written by a customer that has been presented to the bank for payment.
d. A check written by a customer that has not yet been presented to the bank for payment.
ANSWER: b
or in part.
20. The accountant for Darden Corp. was preparing a bank reconciliation as of April 30, 2014. The following
items were identified:
Allan’s book balance $46,200

Outstanding checks 1,100
Interest earned on checking account 50
Customer's NSF check returned by the bank 500
In addition, Darden made an error in recording a customer's check; the amount was recorded in cash
receipts as
$150; the bank recorded the amount correctly as $510. What amount will Darden report as its adjusted
cash balance at April 30, 2014?
a. $44,650
b. $45,890
c. $46,110
d. $46,250
ANSWER: c
RATIONALE: $46,200 (Book Balance) + $50 (Interest Earned) - $500 (NSF Check) + $360
(Transposition Error) =$46,110
21. The accountant for Rogan Corp. was preparing a bank reconciliation as of February 28, 2014. The
following items were identified:
Rogan’s book balance $15,000

Service charge 15
What amount will Rogan report as its adjusted cash balance at February 28, 2014?
a. $12,385
b. $12,500
c. $14,885
d. $17,385
ANSWER: c
RATIONALE: $15,000 (Book Balance) - $100 (NSF Check) - $15 (Service Charge) = $14,885
22. How would deposits in transit be dealt with in a bank reconciliation?

a. Added to company’s book balance
b. Deducted from company’s book balance
c. Added to bank statement balance
d. Deducted from bank statement balance
ANSWER: c
or in part.
23. How would customer's NSF checks be dealt with in a bank reconciliation?
ANSWER: b
24. How would interest earned on a checking account be dealt with in a bank reconciliation?
ANSWER: a
25. How would outstanding checks be dealt with in a bank reconciliation?

ANSWER: d
26. How would bank service charges be dealt with in a bank reconciliation?
ANSWER: b
or in part.
27. The set of items below was identified in preparing a bank reconciliation for Heath Corp. as of August 31, 2014.
Bank statement balance $18,500

Heath’s book balance (before adjustments) ?
Customer's NSF checks 350
Service Charges 100
Deposits in transit 1,000
Heath Corp.’s balance per books before the reconciliation is

a. $16,410
b. $16,900
c. $17,190
d. $17,310
ANSWER: c
RATIONALE: $18,500 (Bank Statement Balance) + $1,000 (Deposits in Transit) - $2,700 (Outstanding
Checks) = $16,800 (Adjusted Bank Balance) Assuming that the Adjusted Book Balance is equal
to the Adjusted Bank Balance, there is a need to reverse the adjustments. Therefore $16,800
(Adjusted Book Balance) + $350 (NSF Check) + $100 (Bank Service Charge) - $60 (Interest
earned) = $17,190
28. While reconciling the checking account, an accountant with Sonic Corporation noticed that an error had been made
in recording a check received by the company. Sonic recorded the receipt as $729 and the correct amount of the
check was $279. What reconciling adjustment is required?
a. Add $450 to the company’s book balance
b. Deduct $450 from the company’s book balance
c. Add $450 to the bank statement balance
d. Deduct $450 from the bank statement balance
ANSWER: b
29. A debit memorandum appeared on Cinco Inc.’s May bank statement. How will Cinco treat this amount on its May
bank reconciliation?
a. Add it to the bank balance
b. Add it the book balance
c. Deduct from the bank balance
d. Deduct from the book balance
ANSWER: d
© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
30. A credit memorandum appeared on Central Company’s bank statement. How will Central treat this amount on its
bank reconciliation?
a. Add it to the bank balance
b. Add it to the book balance
c. Deduct from the bank balance
d. Deduct from the book balance
ANSWER: b
31. Which of the following is an example of a debit memorandum?

a. Service charge notice
b. Interest earned on the account balance
c. Outstanding check
d. Company error in recording a $500 deposit as $600
ANSWER: a
32. Which of the following is an example of a credit memorandum?

a. Service charge notice
b. Collection of a note receivable by the bank
c. Outstanding check
d. Company error in recording a $600 deposit as $500
ANSWER: b
33. Which one of the following procedures is incorrect for setting up and maintaining a petty cash fund?
a. A check is prepared for a fixed amount; when the check is cashed, the money is entrusted to a petty cash
custodian.
b. An entry is recorded to establish the fund and obtain the cash.
c. When appropriate documentation is presented, cash payments are made from the fund; the petty cash custodian
retains the documentation.
d. When the petty cash fund is replenished, an entry is recorded to recognize an increase in the petty cash account.
ANSWER: d
34. Which of the following statements is true regarding a credit memorandum?

a. A credit memorandum is subtracted from the balance per the company’s books.
b. A credit memorandum could be issued for bank service charges.
c. A credit memorandum is issued when a customer gives the company an NSF check.
d. A credit memorandum is added to the balance per the company’s books.
ANSWER: d
35. Which of the following statements is false regarding a credit memorandum?

a. A credit memorandum is added to the balance per the company’s books
b. A credit memorandum could be issued for interest earned on checking balances
c. A credit memorandum is issued when the bank collects a note for the customer.
d. A credit memorandum is subtracted from the balance per the company’s books.
ANSWER: d
36. If a company erroneously records a $500 deposit as $400 in its books, which of the following must occur when
reconciling the bank statement?
a. The company will have to increase the balance per the bank statement by $100.
b. The company will have to increase the balance per the books by $100.
c. The company will have to decrease the balance per bank statement by $100.
d. None of the above
ANSWER: b
37. Realistic Sound’s unadjusted bank balance amounted to $3,000. Outstanding checks amounted to $500 and deposits
in transit totaled $300. Based on this information alone, Realistic’s adjusted cash balance is:
a. $3,200
b. $3,300
c. $2,800
d. $2,700
ANSWER: c
RATIONALE: $3,000 (Unadjusted balance) - $500 (Outstanding Checks) + $300 (Deposits in Transit) =
$2,800
38. Flake Company accepted a check from Ramos Company as payment for services rendered by Flake Company.
Later Flake’s bank statement revealed that Ramos’ check was an NSF check. Recognizing the NSF check on
Flake’s books would act to:
a. Decrease total assets
b. Decrease total owners’ equity
c. Both a. and b.
d. Have no effect on Total Assets
ANSWER: d
39. If the balance on the bank statement does not equal the balance in the cash account, then it can be assumed that:
a. The company has no errors in its records concerning the cash account
b. The bank has made errors in preparing the statement
c. The company has made errors in is records concerning the cash account
d. There will be items reconciling the difference
ANSWER: d
40. Which one of the following items is a reconciling item on the bank side of a bank reconciliation?
a. Canceled checks
b. Outstanding checks
c. NSF checks
d. Service charge
ANSWER: b
41. In the reconciliation of a bank statement, "deposits in transit" should be:

a. added to the unadjusted book balance.
b. subtracted from the unadjusted bank balance.
c. added to the unadjusted bank balance.
d. subtracted from the unadjusted bank balance.
ANSWER: c
42. An outstanding check is a check that:

a. Has been presented to the bank for payment but has not been reported on the bank statement
b. Has been written by the account holder but has not been presented to the bank for payment
c. Is guaranteed for payment by the bank
d. Has been written for an amount that is greater than the balance in the account holder's bank account
ANSWER: b
43. The treasurer for Rahm Corp. was preparing a bank reconciliation as of September 30, 2014. The following items
were identified:
Rahm’s book balance $32,800

Rahm Corp.'s adjusted cash balance at September 30, 2014 is

a. $34,600
b. $34,900
c. $32,500
d. $32,800
ANSWER: c
RATIONALE: $32,800 (Book Balance) + $100 (Interest Earned) - $400 (NSF Check) = $32,500
44. Border Company’s cash account had a balance of $962 on August 31. This included a bank deposit of $87 that was
in transit on the 31st. The August 31 bank statement contained the following information:
Bank Statement Balance $1,089

NSF check 16
Bank Service Charge 7
Collection of notes receivable 68
Border also had checks outstanding of $169. What is Border’s adjusted cash balance at August 31?
a. $ 920
b. $ 940
c. $1,007
d. $1,089
ANSWER: c
RATIONALE: $1,089 (Bank Balance) + $87 (Deposit in transit) - $169 (Outstanding checks) = $1,007, or $962
(Book Balance) + $68 (Note Receivable) - $16 (NSF Check) - $7 (Service Charge) = $1,007
45. The accountant for Casa Corp. was preparing a bank reconciliation as of February 28, 2014. The following items
were identified:
Casa’s book balance $35,900

Interest earned on checking accounts 75
Customer’s NSF check returned by the bank 325
There was an error in recording a customer’s check as the check was recorded by Casa as $110, but the correct
amount of $101 was recorded by the bank. Casa’s adjusted cash balance at February 28, 2014 is
a. $23,591
b. $35,641
c. $35,659
d. $47,691
ANSWER: b
RATIONALE: $35,900 (Book balance) - $9 (Transposition error) + $75 (Interest) - $325 (NSF check) = $35,641
46. Gentech Corp. prepared a bank reconciliation as of June 30, 2014. The following items were identified:
Gentech’s bank balance $14,300

Deposits in transit $1,000
Bank service charges 50
Gentech’s adjusted cash balance at June 30, 2014 is

a. $13,800
b. $14,100
c. $14,000
d. $14,300
ANSWER: c
RATIONALE: $14,300 (Bank Balance) + $1,000 (Deposit in Transit) - $1,300 (Outstanding Checks) = $14,000
47. Pierce Corp. identified the following data in preparing a bank reconciliation on October 31, 2014.

Pierce’s book balance (before adjustments) ?
NSF checks 300
Service charges 200
How much is Pierce’s adjusted cash balance on October 31, 2014?

a. $28,700
b. $29,100
c. $28,300
d. $29,600
ANSWER: a
RATIONALE: $29,600 (Bank Statement Balance) + $2,200 (Deposits in Transit) - $3,100 (Outstanding Checks)
= $28,700
48. Pierce Corp. identified the following data in preparing a bank reconciliation on October 31, 2014.

Pierce’s book balance (before adjustments) ?
NSF checks 300
Service charges 200
What is the net amount of the adjustments to Pierce’s cash balance as a result of the bank reconciliation?
a. No amounts need to be recorded
b. $400 increase
c. $400 decrease
d. $900 decrease
ANSWER: c
RATIONALE: $100 (Interest) - $300 (NSF checks) - $200 (Service charges) = ($400)
49. The Dinho Corporation identified the following data when preparing their April bank reconciliation:

Dinho’s book balance (before adjustments) ?
NSF checks 1,400
Service charges 300
In addition, Dinho incorrectly recorded a deposit in its books in the amount of $1,000. The correct amount was
recorded by the bank as $1,200. What is the adjusted cash balance at the end of April?
a. $44,300
b. $45,500
c. $45,000
d. $45,700
ANSWER: b
RATIONALE: $45,000 (Bank Statement balance) + $5,000 (Deposits in Transit) - $4,500 (Outstanding Checks) =
$45,500
50. The Dinho Corporation identified the following data when preparing their April bank reconciliation:

Dinho’s book balance (before adjustments) ?
NSF checks 1,400
Service charges 300
In addition, Dinho incorrectly recorded a deposit in its books in the amount of $1,000. The correct amount was
recorded by the bank as $1,200. What is the net amount of the adjustment to Dinho’s cash balance as a result of
the bank reconciliation?
a. $1,675 increase
b. $1,700 increase
c. $1,675 decrease
d. $1,475 decrease
ANSWER: d
RATIONALE: $200 (Error correction) + $25 (Interest) - $300 (Service charges) - $1,400 (NSF checks) =
($1,475)
51. Use the following data to answer the question presented below for Raines Corp.'s preparation of a bank
reconciliation on October 31, 2014:

Raines’ book balance (before adjustments) ?
NSF checks 400
Service charges 300
What is the adjusted cash balance on October 31, 2014?

a. $29,600
b. $30,100
c. $30,200
d. $30,700
ANSWER: a
RATIONALE: $30,700 (Bank statement balance) - $4,200 (Outstanding checks) + $3,100 (Deposits in transit) =
$29,600
52. Use the following data to answer the question presented below for Raines Corp.'s preparation of a bank
reconciliation on October 31, 2014:

Raines’ book balance (before adjustments) ?
NSF checks 400
Service charges 300
What is the net amount of the increase or decrease in Raines’ cash balance which must be recorded as a result of
the adjustments identified by the bank reconciliation?
a. $100 decrease
b. $300 decrease
c. $400 decrease
d. $600 decrease
ANSWER: d
RATIONALE: $100 (Interest earned) - $400 (NSF checks) - $300 (Service charges) = ($600)
53. The debit balance in Cash Short and Over at the end of an accounting period is reported as:
a. an expense on the income statement.
b. income on the income statement.
c. an asset on the balance sheet.
d. a liability on the balance sheet.
ANSWER: a
54. If a credit memo appears on a bank reconciliation, this could be an indication that:
a. there has been a decrease the company's bank account.
b. there has been a bank service charge.
c. there has been a deposit of a customer's NSF check.
d. there has been a note receivable for the company that was collected by the bank.
ANSWER: d
55. A check drawn by a company for $360 in payment of a liability was recorded in the journal as $630. This item
would be included on the bank reconciliation as a(n):
a. addition to the balance per the company's records.
b. addition to the balance per the bank statement.
c. deduction from the balance per the bank statement.
d. deduction from the balance per the company's records.
ANSWER: a
56. A check drawn by a company for $360 in payment of a liability was recorded in the journal as $630. Identify the
effects of the transaction in the company's accounts.
a. Decrease Accounts Payable; Decrease Cash
b. Increase Cash; decrease Accounts Receivable
c. Increase Cash; increase Accounts Payable
d. Increase Accounts Receivable; Decrease Cash
ANSWER: c
57. The documentation with the bank statement shows a debit memo for bank service charges. Identify the effects of
the transaction on the company's accounts.
a. Increase Miscellaneous Administrative Expense; Decrease Cash
b. Increase Cash; increase Other Income
c. Increase Cash; increase Accounts Payable
d. Decrease Accounts Payable; Decrease Cash
ANSWER: a
58. If receipts from cash sales of $7,500 were recorded incorrectly as $5,700 in the company’s books, then this item
would be included on the bank reconciliation as a(n):
a. deduction from the balance per company's records.
b. addition to the balance per bank statement.
c. deduction from the balance per bank statement.
d. addition to the balance per company's records.
ANSWER: d
59. Most annual reports now include a report of management to the stockholders. In this report, which group has the
primary responsibility for the preparation and integrity of the financial statements?
a. Management
b. The company’s CPAs
c. The company’s internal audit staff
d. The audit committee of the company’s board of directors
ANSWER: a
60. Which of the following is not a requirement of Sarbanes-Oxley?

a. Annual report must include an internal control report
b. External auditors can no longer provide human resource services
c. External auditors can no longer provide brokerage services
d. Must establish an internal control system that guarantees financial accuracy
ANSWER: d
61. Which of the following is not a requirement of a company’s external auditors under Sarbanes-Oxley?
a. They must give an opinion that management’s assessment that the internal control system over financial
reporting is fairly stated
b. They must give an opinion that the company maintained an effective internal control system over financial
reporting
c. They must design and implement an effective information system design
d. They cannot perform any brokerage services for the company
ANSWER: c
62. Which of the following represents the board of director’s subset that acts as a direct contact between stockholders
and the independent accounting firm?
a. Audit committee
b. Internal audit staff
c. External auditors
d. Stockholders’ representative
ANSWER: a
63. Sarbanes-Oxley requires that the audit committee be composed of

a. At least 50% of key officers who are on the board of directors
b. A majority of all of the members of the board of directors
c. The outside members of the board of directors and the external auditor
d. Entirely outside members of the board of directors
ANSWER: d
64. Which of the following represents a group composed of key officers of a corporation and outside members
responsible for the general oversight of the affairs of the company?
a. Board of Directors
b. Internal Audit Staff
c. External Auditors
d. Audit Committee
ANSWER: a
65. Which one of the following statements is true?

a. The audit committee provides contact between the board of directors and the key officers of the company.
b. The audit committee has become less involved in the financial accounting system as a result of the Foreign
Corrupt Practices Act.
c. The audit committee is a board of directors subset that acts as a direct contact between the stockholders and the
independent accounting firm.
d. The board of directors consists of the company's external auditors.
ANSWER: c
66. What five-member body created by the Sarbanes-Oxley Act was given authority to set U.S. auditing standards?
a. FASB
b. SEC
c. IAS
d. PCAOB
ANSWER: d
67. Which one of the following is a sound internal control procedure for cash disbursements?
a. Making copies of purchase orders for the receiving department so they know how many items to be expected upon
delivery
b. Using presigned checks to facilitate payment within the cash discount period
c. Comparing purchase requisitions, purchase orders, receiving reports, and invoices
d. Requiring the signature of the purchasing department supervisor on checks
ANSWER: c
68. An internal control system consists of all the following policies and procedures except:
a. Those necessary to ensure the safeguarding of an entity’s assets.
b. Those necessary to ensure that cash on hand and on deposit in checking accounts is beyond the minimal amount
for ongoing operations.
c. Those necessary to ensure the reliability of its accounting records.
d. Those necessary to ensure the accomplishment of its overall objectives.
ANSWER: b
69. Which one of the following situations reflects a weak internal control system?
a. All employees are well supervised
b. A single employee is responsible for comparing a receiving report to an invoice
c. All employees must take their vacations
d. A single employee is responsible for collecting and recording of cash
ANSWER: d
70. The group within an organization that is responsible for monitoring and evaluating the internal control system is
called:
a. the audit committee.
b. the internal audit staff.
c. the board of directors.
d. the accounting staff.
ANSWER: b
71. Which of the following statements does not describe the responsibilities of a company’s internal audit staff?
a. Internal auditors ensure that the company’s financial statements have been presented fairly.
b. Internal auditors focus on the efficiency with which the organization is run.
c. Internal auditors help ensure that the company’s policies and procedures are followed.
d. Internal auditors prepare the report of management to the company’s stockholders
ANSWER: a
72. Which one of the following is considered one of the six most important categories of internal control procedures?
a. Computerized accounting systems
b. The board of directors
c. Proper authorizations
d. Verification by government agencies
ANSWER: c
73. Which of the following is not a generally recognized internal control procedure?
a. Establishing of clear lines of authority to carry out specific tasks
b. Physically counting inventory in a perpetual inventory system
c. Reducing the cost of hiring seasonal employees
d. Limiting access to computerized accounting records
ANSWER: c
74. Which one of the following is not a generally recognized internal control procedure?
a. Internal review by the audit committee of the board of directors
b. Independent verification of the work of one employee by another employee
c. Independent review and appraisal by internal auditors
d. Segregation of duties
ANSWER: a
75. Allowing only certain employees to order goods and services for the company is an example of what internal control
procedure?
a. Segregation of duties
b. Safeguarding of assets and records
c. Independent verifications
d. Proper authorizations
ANSWER: d
76. Which internal control procedure is followed when management authorizes the purchasing department to order
goods and services for the company?
b. Safeguarding of assets and records
ANSWER: d
77. Which internal control procedure is followed when the work of one department acts as a check on the work of
another?
b. Safeguarding assets and records
ANSWER: c
78. Which internal control procedure is followed when storage areas are secured with limited access?
a. Segregation duties
ANSWER: b
79. Which internal control procedure is followed when a physical count of inventory is performed in a perpetual inventory
system?
ANSWER: c
80. Which of the following is not considered a business (source) document?

a. Time card
b. Purchase order
c. Sales invoice
d. Schedule listing all the insurance policies in force
ANSWER: d
81. Having only one person authorized to both prepare and sign checks is a violation of what internal control procedure?
b. Independent review and appraisal
ANSWER: a
82. Which one of the following statements regarding internal control is true?
a. Companies can design a system of internal control that is foolproof.
b. A well-designed internal control system is a luxury that few companies can afford.
c. It is easier to implement an effective internal control system in a small company because of the limited number of
employees.
d. Large companies are able to devote a substantial amount of resources to internal control systems because these
companies have the assets to justify the cost.
ANSWER: d
83. Administrative controls

a. Are concerned with efficient operations and adherence to managerial policies
b. Are concerned with the reliability of the financial statements
c. Are the responsibility of the company's auditors
d. Are concerned primarily with safeguarding assets
ANSWER: a
84. Segregation and rotation of duties is most effective in

a. Increasing cost of goods sold
b. Assisting management in overriding controls
c. Preventing collusion
d. Misappropriating company assets
ANSWER: c
85. Which internal control procedure is violated when the cashier at the checkout stand also records the daily receipts
in the journal?
b. Independent review and appraisal
ANSWER: a
86. Which one of the following documents is used in the control of cash receipts?
a. Purchase requisitions
b. Receiving reports
c. Canceled checks from customers
d. Bank deposit slips
ANSWER: d
87. Each of the following documents is used in the control of cash receipts except:
a. Cash register tapes
b. Check lists or prelists
c. Canceled checks from customers
d. Bank deposit slips
ANSWER: c
88. Each of the following documents is used in the control of cash disbursements except:
a. Purchase requisitions
b. Purchase orders
c. Receiving reports
d. Cash register tapes
ANSWER: d
89. Which one of the following documents is used in the control of cash disbursements?
a. Income Statement
b. Bank deposit slips
c. Receiving reports
d. Cash register tapes
ANSWER: c
90. The following set of items describes activities completed by a company in purchasing and paying for merchandise.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
Although the department supervisor can indicate a preferred supplier or vendor on purchase requisitions, the
purchasing department has the responsibility for making the final decision on a vendor.
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
ANSWER: a
The receiving department compares the quantity received with the quantity printed on the receiving report when the
purchase order was prepared.
ANSWER: b
Extensions and footings on purchase invoices are verified before the invoices are approved for payment
ANSWER: a
All documents attached to an invoice approval form are canceled before a check is signed.
ANSWER: a
The clerk in the accounting department records both purchases and payments of invoices.
ANSWER: b
Checks are signed by designated officers in the finance department.

ANSWER: a
96. The following set of items describes activities completed by a company in collecting cash for merchandise sales.
A single employee in the mailroom opens the mail, counts the money received, and prepares a control list of the
amount received.
ANSWER: b
An employee in the accounting department records cash receipts from customers and prepares a bank deposit slip.
ANSWER: b
Cash register tapes are picked up daily by an employee from the accounting department.
ANSWER: a
An employee from the accounting department compares the control list and the cash register tapes with the bank
deposit slip.
ANSWER: a
Monthly statements, indicating the current balance due, are mailed to customers.
ANSWER: a
101. Which one of the following is not a procedure in the approval of a specific invoice for payment?
a. The purchase requisition, purchase order, receiving report, and invoice are compared.
b. The extensions and footings on the invoice are verified.
c. An employee verifies that all of the approval activities have been completed before a check is prepared.
d. The purchasing department prepares a voucher to request payment.
ANSWER: d
102. What is the form sent by the seller to the buyer as evidence of a sale?
a. An invoice approval form
b. A purchase order
c. A receiving report
d. An invoice
ANSWER: d
103. The department in an organization that is responsible for preparing the invoice approval form to document all of the
information about a particular purchase is:
a. the human resources department.
b. the purchasing department.
c. the receiving department.
d. the accounting department.
ANSWER: d
104. Which of the following is another term for the invoice approval form?
a. A receiving report
b. An invoice
c. A voucher
d. A remittance advice
ANSWER: c
105. A voucher is usually supported by

a. a supplier's invoice
b. a purchase order
c. a receiving report
d. all of the above
ANSWER: d
106. The notification accompanying a check that indicates the specific invoice being paid is called a
a. remittance advice
b. voucher
c. debit memo
d. credit memo
ANSWER: a
107. A six-month certificate of deposit would be considered to be a cash equivalent.

a. True
b. False
ANSWER: False
108. Petty cash typically is composed of coins and currency kept on hand in a business to make minor disbursements.
a. True
b. False
ANSWER: True
109. The key to the classification of an amount as cash is that it be available to pay debts within a three-month period of
time.
a. True
b. False
ANSWER: False
110. Some cash equivalents appear in the long term investment section of a balance sheet.
a. True
b. False
ANSWER: False
111. If collection of accounts receivable is assured, then accounts receivable are considered to be cash equivalents.
a. True
b. False
ANSWER: False
112. Treasury notes with a maturity of three months or less that are issued by the Federal Government are cash
equivalents.
a. True
b. False
ANSWER: True
113. A check written by a company but not yet presented to the bank for payment is called a check in transit.
a. True
b. False
ANSWER: False
114. When reconciling a bank account, the company does not have to prepare an adjusting entry for outstanding
checks.
a. True
b. False
ANSWER: True
115. When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.
a. True
b. False
ANSWER: False
116. In a sound internal control system, all cash receipts should be deposited daily intact.
a. True
b. False
ANSWER: True
117. Checks received from customers are considered to be cash in the company’s books.
a. True
b. False
ANSWER: True
118. The bank informs a customer that a service charge has been assessed on their account by including a credit
memorandum in the monthly bank statement
a. True
b. False
ANSWER: False
119. On bank reconciliation, outstanding checks are added to the cash balance per the bank statement.
a. True
b. False
ANSWER: False
120. When a bank pays interest or collects an amount owed to a company by one of the bank's customers, the bank
issues a debit memorandum.
a. True
b. False
ANSWER: False
121. When a bank pays interest or collects an amount owed to a company by one of the bank's customers, the bank
issues a credit memorandum.
a. True
b. False
ANSWER: True
122. On a bank reconciliation, bank charges for the month are added to the cash balance per the books.
a. True
b. False
ANSWER: False
123. On a bank reconciliation, interest earned for the month is added to the cash balance per the books.
a. True
b. False
ANSWER: True
124. A company prepares adjusting entries for debit memorandums but not for credit memorandums
a. True
b. False
ANSWER: False
125. The establishment of a petty cash fund has no effect on the company's total cash balance.
a. True
b. False
ANSWER: True
126. No special internal control procedures are necessary with a petty cash account because the amount is usually so
small.
a. True
b. False
ANSWER: False
127. An advantage of a strong system of internal control is that less testing of the accounting system is done by the
outside auditors.
a. True
b. False
ANSWER: True
128. A good system of internal control is important to make a company's accounting records completely foolproof.
a. True
b. False
ANSWER: False
129. An accounting system must be computerized in order to ensure the company has proper internal control.
a. True
b. False
ANSWER: False
130. Audit committees are required to consist of only directors who are key officers of the company.
a. True
b. False
ANSWER: False
131. According to the Sarbanes-Oxley Act of 2002, only external auditors can provide bookkeeping services for the
clients they audit.
a. True
b. False
ANSWER: False
132. One concern of the internal auditor is the efficiency with which the organization is run.
a. True
b. False
ANSWER: True
133. If a company has internal auditors, it does not need to have external auditors.
a. True
b. False
ANSWER: False
134. Accounting controls primarily concern safeguarding of assets and ensuring the reliability of the financial
statements.
a. True
b. False
ANSWER: True
135. A company’s internal control system is designed by its external auditors.

a. True
b. False
ANSWER: False
136. The only reason a company needs to create an internal control system is to deter intentional fraudulent acts.
a. True
b. False
ANSWER: False
137. A good system of internal controls requires that the physical custody of assets be separated from the accounting
for those assets. This concept is known as safeguarding assets and records.
a. True
b. False
ANSWER: False
138. If a company hires honest employees, no internal control procedures are necessary.
a. True
b. False
ANSWER: False
139. As part of good internal control, disbursements can be made either by check or cash.
a. True
b. False
ANSWER: False
140. Most merchandisers receive checks and currency from customers in two ways: (1) cash received over the counter
from cash sales and (2) cash received in the mail from credit sales.
a. True
b. False
ANSWER: True
141. Only one copy of the prelist should be prepared when an employee opens mail with customer payments to avoid
complexity in the accounting system and maintain control.
a. True
b. False
ANSWER: False
142. The use of customer statements as a control device will be effective only if the employees responsible for the
custody of cash received through the mail, for record keeping, and for authorization of adjustments to customers’
accounts are not allowed to prepare and mail statements to customers.
a. True
b. False
ANSWER: True
143. A purchase order is not the basis for recording a purchase and a liability.
a. True
b. False
ANSWER: True
144. Typically the classification known as readily available refers to investments that are converted into cash in
_______________ months or less.
ANSWER: three
145. The IFRS definition of cash equivalents is very similar to that used by .
ANSWER: U.S. GAAP
146. are those investments that are readily convertible into known amounts of cash and that
have an original maturity to the investor of three months or less.
ANSWER: Cash equivalents
147. describes a form used by the accountant to reconcile the balance shown on the
bank statement for a particular account with the balance shown in the accounting records.
ANSWER: Bank reconciliation
148. A check written by a company but not yet presented to the bank for payment is called a(n)
_________________________.
ANSWER: outstanding check
149. Items that are included on a bank statement and increase the bank account balance are called
_________________________.
ANSWER: credit memoranda
150. A check that is returned or "bounces" because of insufficient funds is called a(n) .
ANSWER: NSF check
151. An amount recorded as an increase in the company's cash account at month-end, but which has not yet been
reflected on the bank statement is called a(n) .
ANSWER: deposit in transit
152. Items that are included on a bank statement and decrease the firm's bank account balance are called
_________________________.
ANSWER: debit memoranda
153. If a company records a $310 receipt as $130, this type of error is called a(n) .
ANSWER: transposition
154. The audit committee of the board of directors provides direct contact between the
______________________________ and the ________________________________________.
ANSWER: stockholders; independent accounting firm
155. is the body created by the Sarbanes-Oxley Act that was given the authority to set auditing
standards in the United States.
ANSWER: The Public Company Accounting Oversight Board (PCAOB)
156. The is a subset of the board of directors that acts as a direct contact between the
stockholders and the independent accounting firm.
ANSWER: audit committee
157. is a report required by section 404 of the Sarbanes-Oxley Act.
ANSWER: An internal control report
158. controls within a company are more concerned with efficient operations and the
adherence to management policies than with the accurate reporting of financial information.
ANSWER: Administrative
159. controls primarily concern safeguarding of assets and ensuring the reliability of the
financial statements.
ANSWER: Accounting
160. are the crucial link between economic transactions entered into by an
entity and the accounting for these events.
ANSWER: Business documents
161. A(n) is a form that a department uses to initiate a request to order merchandise.
ANSWER: purchase requisition form
162. A(n) is a form sent by the purchasing department to the supplier.
ANSWER: purchase order
163. A(n) is a form sent by the seller to the buyer as evidence of a sale.
ANSWER: invoice
164. A(n) is a form used by the receiving department to account for the quantity and
condition of merchandise received from a supplier.
ANSWER: blind receiving report
165. A(n) is a form the accounting department uses before making payment to document the
accuracy of all information about a purchase.
ANSWER: invoice approval form or voucher
166. Select the action that matches the category of internal control procedures. (Select all that apply.)
Independent review and appraisal

a. One department should check on another
b. Internal audit staff ensure all is working as intended
c. Accounting and cash collection is properly separated
d. Blank checks are locked at all times when not in use
e. Origination of initial entry into accounting system
f. Specific authority is given by management for the performance of activities
ANSWER: a, b
167. French Corp. began the year with $18,000 in cash and another $6,500 in cash equivalents.
During the year, operations generated $132,000 in cash. Net cash used in investing activities during the year was
$213,000, and the company raised a net amount of $168,000 from financing activities.
REQUIRED:
Determine the year-end balance in cash and cash equivalents.
ANSWER: Beginning balance in cash and cash equivalents $24,500*

Add: Cash provided by operating activities $132,000
Cash used in investing activities (213,000)
Cash provided by financing activities 168,000
Net increase in cash and cash equivalents 87,000
Ending balance in cash and cash equivalents $111,500
*$18,000 + $6,500
168. Lower Enterprises invested its excess cash in the following instruments during December 2014:
Certificate of deposit, due January 31, 2017 $85,000

Certificate of deposit, due March 30, 2015 120,000
Commercial paper, original maturity date February 28, 2015 105,000
Deposit into a money market fund 45,000
Investment in stock 55,000
90-day Treasury bills 110,000
Treasury note, due December 1, 2042 REQUIRED: 400,000
Determine the amount of cash equivalents that should be combined with cash on the company’s balance sheet at
December 31, 2014, and for purposes of preparing a statement of cash flows for the year ended December 31,
2014.
ANSWER: Cash equivalents at December 31, 2014:

Certificate of deposit, due March 30, 2015 $120,000
Commercial paper, original maturity date February 28, 2015 105,000
Deposit into a money market fund 45,000
90-day Treasury bills 110,000
Cash equivalents $380,000
169. The following accounts are listed in a company’s general ledger:
December 31, 2015 December 31, 2014

Accounts Receivable $12,300 $10,000
Certificates of Deposit (three months) 12,000 15,000
Marketable Securities 4,500 4,000
Petty Cash Fund 800 1,000
Money Market Fund 23,200 28,700
Cash in Checking Account 6,200 5,400
REQUIRED:
1. Which items are cash equivalents?
2. Explain where items that are not cash equivalents should be classified on the balance sheet.
3. What are the amount and the direction of change in cash and cash equivalents for 2015? Is the company as liquid
at the end of 2015 as it was at the end of 2014? Explain your answer.
ANSWER: 1. Cash in the checking account and the petty cash fund are cash. The three-month certificates of deposit
and the money market fund are both cash equivalents.
2. Accounts receivable and marketable securities should be classified on the balance sheet as current
assets and listed in the order of their liquidity (marketable securities are more liquid than accounts
receivable).
3.
Cash and Cash Equivalents 12/31/15 12/31/14 Increase (Decrease)

Certificates of Deposit $12,000 $15,000 ($ 3,000)
Petty Cash Fund 800 1,000 (200)
Money Market Fund 23,200 28,700 (5,500)
Cash in Checking Account 6,200 5,400 800
Totals $42,20 $50,100 $ (7,900)
The company is not as liquid at the end of 2015 as it was at the end of 2014. Although the decrease in
liquidity is not large, it is due to the decreases in the balances in the CDs, petty cash fund, and the money
market fund.
170. Houston Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for July
2014 indicated the following:
Balance, July 31, 2014 $63,400

Service charge for July 160
Interest earned during July 100
NSF check from Black Corp. (deposited by Houston) 1,150
Note ($3,000) and interest ($80) collected for Houston from a
customer of Houston’s
3,080
An analysis of canceled checks and deposits and the records of Houston revealed the following items:
Checking account balance per Houston’s books $58,770

Outstanding checks as of July 31 4,630
Deposit in transit at July 31 1,780
Error in recording check #205 issued by Houston 90
The correct amount of check #205 is $540, but it was recorded as a cash disbursement of $450. The check was
issued to pay for merchandise purchases. The check appeared on the bank statement correctly.
A) Prepare a bank reconciliation schedule at July 31, 2014, in proper form.

B) What amount would Houston report on its balance sheet at July 31, 2014, for cash?
ANSWER: A)
Houston Corp.
Bank Reconciliation
July 31, 2014
Balance per bank statement $63,400

Add: deposit in transit 1,780
Less: outstanding checks (4,630)
Total $60,550
Balance per books $58,770

Add: interest earned 100
Add: note ($3,000) and interest ($80) collected by the bank 3,080
Less: NSF check (1,150)
Less: service charges (160)
Correction of error-check for $540 recorded as $450 (90)
Total $60,550
B) $60,550
171. Winslet Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for May,
2014, indicated the following:
Checking account balance per Winslet’s books $26,040

Outstanding checks as of May 31 2,950
Deposit in transit at May 31 3,110
Error in recording check # 4456 issued by Winslet 90
An analysis of canceled checks and deposits and the records of Winslet Corp. revealed the following items:
Checking account balance per Winslet’s books $26,040

Outstanding checks as of May 31 2,950
Deposit in transit at May 31 3,110
Error in recording check # 4456 issued by Winslet 90
The correct amount of check #4456 is $760. It was recorded as a cash disbursement of $670 by mistake. The check
was issued to pay for merchandise purchases. The check appeared on the bank statement correctly.
A) Prepare a bank reconciliation schedule at May 31, 2014 in proper form.

B) Explain how checking accounts, bank statements, and bank reconciliations are used by Winslet to control its cash.
ANSWER: A)
Winslet Corp.
Bank Reconciliation
May 31, 2014
Balance per bank statement $29,700

Less: outstanding checks (2,950)
Total $29,860
Balance per books $26,040

Less: NSF check (230)
Correction of error-check for $760 recorded as $670 (90)
Total $29,860
B) Checking accounts allow entities an opportunity to make all, or almost all, cash payments by
check. Preventing direct access to cash provides better internal control. Bank statements and
bank reconciliations allow verification of the cash balance and help identify errors that have
been made.
172. Sarcon Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for
October, 2014, indicated the following:
Balance, October 31, 2014 $7,920

Service charge for October 20
Interest earned during October 30
NSF check from Grey Corp. (deposited by Sarcon) 32
Note ($1,000) and interest ($40) collected for Sarcon from a
1,040
customer
An analysis of canceled checks and deposits and the records of Sarcon revealed the following items:
Checking account balance per Sarcon books $7,170

Outstanding checks as of October 31 952
Deposit in transit at October 31 1,310
Error in recording a check issued by Sarcon. (Correct amount of
the check is $450, but was recorded as a cash disbursement of
$540. The check was issued to pay for merchandise purchases.) 90
REQUIRED:
Prepare a bank reconciliation at October 31, 2014 in proper form.
Sarcon Corp. Bank Reconciliation October 31, 2014

ANSWER:
Balance per bank statement, October 31 $7,920
Less: outstanding checks (952)
Adjusted balance, October 31 $8,278
Balance per books, October 31 $7,170

Less: NSF check (32)
Correction of error-check for $450 recorded as $540 90
Adjusted balance, October 31 $8,278
173. Sarcon Corp. prepares monthly bank reconciliations of its checking account balance.
REQUIRED:
(1) Explain how checking accounts, bank statements, and bank reconciliations are used by Sarcon to control its cash.
(2) Explain how Sarcon can control small payments that must be made in cash rather than by check.
ANSWER: (1) Checking accounts allow entities an opportunity to make all, or almost all, cash payments by check.
Preventing direct access to cash provides better internal control. Bank statements and bank
reconciliations allow verification of the cash balance and help identify errors that have been made.
(2) Small cash payments can be controlled by using a petty cash fund. The amount of cash to which
employees have direct access is small. The system established for petty cash provides a convenient and
sound procedure for identifying the assets and expenses that must be recorded when small cash
payments are made.
174. On January 2, 2014, Viva Stores decided to set up a petty cash fund. The treasurer established the fund by writing
and cashing a $250 check and placing the coin and currency in a locked petty cash drawer. Conrad Boswell was
designated as the custodian for the fund. During January, the following receipts were given to Boswell in exchange
for cash from the fund:
Express Delivery Service $74.50

Vintage Print Shoppe (employee party) 55.75
U.S. Post Office (stamps) 44.00
Office Supplies Pronto (pencils, paper) 23.00
A count of the cash in the drawer on January 31 revealed a balance of $53.25. The treasurer wrote and cashed a
check on the same day to restore the fund to its original balance of $250.
REQUIRED:
Identify and analyze the effects of the transactions that Viva should record for January 2 and January 31. Assume
that all stamps and office supplies were used during the month.
Jan 2, 2014 To record establishment of petty cash fund.

ANSWER:
Increase Petty Cash Fund for $250.00
Decrease Cash for $250.00
Balance Sheet Income Statement
Stockholders’ Net
Assets = Liabilities + Equity Revenues – Expenses = Income
Petty Cash
Fund 250
Cash (250)
Jan. 31 To record replenishment of petty cash fund: $250.00 – $53.25 = $196.75.
Increase Postage Expense 44.00

Increase Delivery Expense 74.50
Increase Entertainment Expense 55.75
Increase Office Supplies Expense 23.00
Decrease Cash Over and Short .50
Decrease Cash 196.75
Jan. 31 To record replenishment of petty cash fund: $250.00 – $53.25 = $196.75.
Stockholders’ Net
Postage
Expense 44.00
Delivery
Expense 74.50
Entertainment
Expense 55.75
Office Supplies
Cash Over and Expense 23.00
Cash (196.75) (196.75) Short 0.50 (196.75)
175. On April 1, Blake Sales decides to establish a $275.00 Petty Cash Account to relieve the burden on Accounting.
(a) Identify and analyze the effects of this transaction.
(b) On April 15th, the petty cash fund has receipts for mail and postage of $124.75, contributions and donations of
$53.25, meals and entertainment of $63.85 and $32.75 in cash. Identify and analyze the transaction for the
replenishment of the fund.
(c) On April 16th, Blake Sales decides to increase petty cash to $400.00. Identify and analyze the effects of this
transaction.
ANSWER:
(a) April 1 Petty Cash 275.00
Cash 275.00
Stockholders’ Net
Petty Cash
Fund 275
Cash (275)
(b) April 15 Mail and Postage Expense 124.75

Contributions and Donations Expense 53.25
Meals and Entertainment Expense 63.85
Cash Over and Short 0.40
Cash 242.25
Stockholders’ Net
Postage
Expense 124.75
Donation
Expense 53.25
Entertainment
Expense 63.85
Cash Over and
Short 0.40
Cash (242.25) (242.25) (242.25)
(c) April 16 Petty Cash 125.00

Cash 125.00
Stockholders’ Net
Petty Cash
Fund 125
Cash (125)
176. Marathon Street Bank sent Flank Industries their end of month bank statement for October. The end of month
balance by the bank is $11,229. From the statement, it can be determined that a deposit for $4,250 is in transit at the
end of the statement period. Also the statement reveals that checks for $86, $106, and $95 are outstanding. Marathon
Street collected a 90 day, 12% interest $4,000 note receivable charging $20 for the service. No interest has been
accrued on the note. The bank charges a monthly account fee of $35. The end of month balance per company books
is $11,127.
REQUIRED:
Complete a bank/account reconciliation and identify and analyze the relevant transactions that Flank would record for
the reconciliation.
ANSWER:
Bank balance Oct. 31: $11,229
Add deposits in transit 4,250
Less outstanding checks $ 86
106
95 (287)
Adjusted balance - bank: $15,192
Company balance Oct. 31: $11,127

Add N/R $4,000
Interest Revenue 120
Less collection fee (20) 4,100
Less bank service charge (35)
Adjusted balance - company $15,192
Oct 31 Cash 4,100

Bank Service Charge Expense 20
Notes Receivable 4,000
Interest Revenue 120
Stockholders’ Net
Cash 4,100 Bank service charge

Notes Rec. Interest Revenue Expense 20
(4,000) 100 120 100
Oct 31 Bank Service Charge Expense 35

Cash 35
Stockholders’ Net
Bank service charge

Cash (35) Expense 35
(35) (35)
177. At Forrest Industries, all sales are on account. Sienna Marcos is responsible for mailing invoices to
customers, recording the amount billed, opening mail, recording the payment, and making deposits to the
bank. Sienna is very devoted to the family business and never takes off more than one or two days for a
long weekend. The customers know Sienna and sometimes send personal notes with their payments.
Another clerk handles all aspects of accounts payable. Sienna’s brother, who is president of Forrest
Industries, has hired an accountant to help with expansion.
REQUIRED:
1. List some problems with the current accounts receivable system.
2. What suggestions would you make to improve internal control?
3. How would you explain to Sienna that she personally is not the problem?
ANSWER: 1. Unfortunately, Forrest Industries suffers from a lack of segregation of duties. Sienna
handles all tasks associated with collection of customer accounts.
2. Sienna should not handle all aspects of accounts receivable, billing, collection, and bank
deposits. Two different employees should mail invoices and record the amounts billed.
Two employees should be present when the mail is opened. Another employee should be
responsible for recording collections from customers and this employee should be separate
from the person who makes the bank deposits. Finally, all employees should be required to
take vacations, and there should be rotation of job duties among employees.
3. Someone should explain to Sienna that she personally is not the problem but that a good
system of internal control requires certain changes to be made. This could be explained to
her not in the context of fraud but rather in the context of the necessity to verify and check
the work performed by all employees.
or in part.
178. What rational is used in order to determine if an amount is 'cash'?
ANSWER: The key to the classification of an amount as cash is that it be readily available to pay debts.
179. What is meant by "cash equivalents"?
ANSWER: “Cash equivalents" refers to very short-term, highly liquid marketable securities with an
original maturity of 3 months or less at the date of purchase. Because these securities can be
converted into cash when needed very quickly and without material loss, they are considered
to be the equivalent of cash and are normally included with cash on the balance sheet and on
the cash flow statement
180. Why are adjustments often necessary after the reconciliation of a bank account?
ANSWER: Adjustments are necessary because the dollar amount in the company's cash account may
differ from the actual amount available to use. Items that cause this difference include
services charges the bank deducted from the company's account, interest the bank has added
to the company's account, NSF checks returned, and other miscellaneous transfers that may
not have been recorded in the company's accounting records.
181. Why is cash management necessary?
ANSWER: Cash management is necessary to ensure that at any point in time, a company has neither too
little nor too much cash on hand. Cash on hand is necessary for payment to suppliers,
employees, and other creditors. Since cash is essentially a non-earning asset, too much cash
means the company may not be earning the return on it that it could if it were invested
otherwise.
182. Explain how a company can control small payments that must be made in cash rather than by check.
ANSWER: Using a petty cash fund can control small cash payments. The amount of cash to which
employees have direct access is small. The system established for petty cash provides a
convenient and sound procedure for identifying the assets and expenses that must be recorded
when small cash payments are made.
183. Your uncle has just started a business and comes to you with a question. “I’m confused. I have a memo
included with my bank statement indicating a $45 service charge for printing new checks. Since you’re an
accounting major, maybe you can explain to me why they call it a ‘debit memorandum,’ even though they
are deducting this amount from my account. When I took Accounting in school, I could have sworn that a
decrease in the Cash account would be a credit and not a debit.
REQUIRED:
In a short paragraph, explain this issue to your uncle.
ANSWER: I agree that it is a bit confusing. You see the meaning of a debit or a credit depends on which
company is concerned. To the bank, a company’s checking account is a liability. Therefore,
when a bank deducts a service charge from a company’s account, it is reducing its liability to
the company. A liability is decreased with a debit. Therefore, banks refer to charges to a
company’s account as debit memoranda.
or in part.
184. What is the typical composition of a board of directors of a publicly held corporation?
ANSWER: A board of directors normally is composed of a combination of key officers of the

corporation, such as the president, and outsiders. The outsiders usually have been or are
presently key officers themselves of other corporations or have significant business
experience.
185. McDonald's Corporation is the largest food service organization in the world. The proper
handling of cash and food is important to the profitability of McDonald's. Based on your personal
knowledge of McDonald's and the internal control concepts and procedures described in the
textbook, answer the following questions.
REQUIRED:
Most corporations, including McDonald's, include a Report of Management in their annual report.
Describe, in general, the main elements that should be included in a Report of Management and give the
purpose of this report.
ANSWER: A report of management would describe management's responsibility for the preparation and
integrity of the financial statements. The report would indicate whether a staff of internal
auditors evaluates the company's internal controls and employee compliance with such
controls. Also, it would indicate that the company's independent auditors (CPAs) have
audited the financial statements and rendered an opinion on the statements, after taking into
consideration the internal controls and performing necessary tests required under generally
accepted auditing standards. Finally, if the company has an audit committee, the role of the
audit committee in carrying out the Board of Directors' oversight role would be explained.
The purpose of a Report of Management is to tell the shareholders and other readers that
management is directly responsible for both the integrity and consistency of all financial
information presented in the annual report.
186. What are some of the limitations on a company’s effective system of internal control?
ANSWER: There are a number of limitations on the efficiency of internal control. First, a system of
internal control is not cost free. For example, the segregation of duties may require a larger
staff than would otherwise be necessary. An internal audit staff may be too costly for a small
company. Second, no system of internal control can prevent collusion by two or more
employees. Third, the lack of support from upper management may weaken an otherwise
strong commitment to a system of internal control. Finally, the element of human error can
never be eliminated in any operation, regardless of how big or small.
or in part.
187. An effective system of internal control is critical to protecting a company’s investment in three of its
major assets: cash, accounts receivable, and inventory. For each asset, describe how a company might
protect that asset.
ANSWER: Cash registers, safes, and lockboxes are important safeguards for cash. Several control
mechanisms are used to handle cash receipts. Cash registers allow the customer to see the
display. Customers are an important part of a company’s control system. Monthly customer
statements act as an additional control device for customer receipts received in the mail. In
addition, a locked-in cash register tape can facilitate the detection of differences between a
cashier’s cash and the sales that have been rung up during the day. Prenumbered customer
receipts prepared in duplicate are also a useful control mechanism for cash. Storage areas
with limited access are essential for safekeeping of inventory.
188. What are at least four important internal control procedures?
ANSWER: Student answers may vary but can include:

1. Proper authorizations
2. Segregation of duties
3. Independent verification
4. Safeguarding of assets and records
5. Independent review and appraisal
6. Design and use of business documents
189. The garden club is planning a raffle. The president overheard you talking about internal controls to
another member and asked you to set up some guidelines to “make sure” that all money collected for the
upcoming raffle is accounted for by the club.
REQUIRED:
1. In general, describe some guidelines that the club should follow to achieve an acceptable level of
internal control.
2. Regarding the president’s request, is it really possible to make sure that all money is collected and
recorded?
ANSWER: 1. Students answers will vary, but may include:

a. Prenumbered tickets
b. Segregation of duties for collecting cash, counting and recording cash, and depositing
cash in a bank account
c. Payment by check of any expenses associated with the raffle
2. It may be difficult, if not impossible, to be completely make sure that this happens, due
to human errors in counting and handling the cash, as well as making change. Student
answer should focus on the fact that internal controls are the best prevention, but if two or
more individuals collude to misdirect cash, these controls can be circumvented.
or in part.
REQUIRED:
Describe procedures that you believe McDonald's may use to control cash receipts.
ANSWER: Each cashier should start with his or her own cash drawer, with the manager noting how
much cash the cashier starts with at the beginning of the shift. The cash would be counted
when the cashier ends work. The manager would take a cash register reading and reconcile
this reading with the cash in the drawer. The manager also could observe the activities of the
cashiers on a spot basis. It may not be possible to separate the duties of counting the cash and
making bank deposits since the manager likely will be responsible for both.
REQUIRED:
Describe procedures that you believe McDonald's may use to control the purchase and payment of food
products.
ANSWER: A company like McDonald's might negotiate contracts with vendors to supply food products
to arrive daily or weekly. This might suppress the need for using purchase requisitions and
purchase orders for food products. However, the typical procedures beginning with receiving
reports for invoice approval would apply. Receiving reports and contracts would be compared
with invoices. Invoice footings and extensions would be verified. Completion of all steps in the
approval process would be verified before checks are prepared. Specified employees would
sign checks, either using check signing machines or personal signatures. All documents
included in the invoice approval process would be canceled when the checks are prepared.
Employees who handle the checks would not be allowed to prepare journal entries.
or in part.
192. Herbert and Evita are planning to open a quick copy center near the local college. They will make both
cash and credit sales. They will hire college students to make copies and to operate the cash register.
Either Herbert or Evita will act as manager during most hours that the business will be open. One student
will be designated as assistant manager when they cannot be present.
Describe procedures that Herbert and Evita might use to provide adequate internal control over cash and
credit sales and bank deposits.
ANSWER: The following procedures should be considered by Herbert and Evita to control cash and
credit sales and bank deposits:
(a) All sales should be recorded on prenumbered sales slips. Separate types of forms should
be used for cash and credit sales.
(b) On the cash sales slips, the quantity, price, and amounts should be recorded.
(c) Separate cash register keys should be used for cash and credit sales.
(d) The number of employees allowed to operate the cash register should be limited. If
possible, separate cash drawers should be used for each cash register operator.
(e) The cash register tape should be reconciled with the cash, the cash sales slips, and the
credit sales slips each day.
(f) Herbert and Evita should try to be the only ones who can make bank deposits.
(g) Herbert and Evita should observe that employees follow the procedures they establish
for control over cash and credit sales.
or in part.
193. Jack’s Jungle Fun, Inc. is a manufacturer of children's outdoor play equipment. The factory foreman
determines when orders for materials are necessary. The orders are sent to the purchasing department
that places orders with the vendors recommended by the factory foreman. When the materials are
received, they are delivered directly to a central storeroom without counting what has been received.
When invoices are received for the materials purchased, they are sent to the accounting department for
payment. The accounting department compares the invoices with purchase orders. If the two documents
are in agreement, the invoice is approved for payment. The accounting department prepares the checks
that are signed by the company treasurer.
Recommend improvements in the company's procedures for purchasing and paying for purchases of
materials that will provide better internal control over purchases and payment for those purchases.
ANSWER: Recommended improvements in the company's procedures for purchasing and paying for
materials are:
(a) Vendors normally should be determined by the purchasing department rather than the
foreman.
(b) All materials should be counted as they are received, and a receiving report should be
completed. A copy of the receiving report should be sent to the accounting department.
(c) The invoices should be compared with both the purchases orders and the receiving
reports. Also, all extensions and footings on the invoices should be verified.
(d) The checks should be prepared in the treasurer's department, with the treasurer or other
designated employees assigned the responsibility of signing checks.
Latahmer Corporation is reconciling its May bank account. For each item listed, state how it
would be handled on the bank reconciliation.
a. Addition to bank balance
b. Subtraction from bank balance
c. Addition to book balance
d. Subtraction from book balance
e. Would not appear on the May reconciliation
194. Check written on the company’s account and paid by the bank is returned with the bank statement
ANSWER: e
195. Check written in May that does not appear on the bank statement
ANSWER: b
196. Service charge on the May bank statement for new checks
ANSWER: d
197. Interest earned on the checking account for May
ANSWER: c
or in part.
198. Customer’s NSF check is returned with the bank statement
ANSWER: d
199. Customer’s check which was deposited on May 31 is not listed on the bank statement
ANSWER: a
Match the term with the statement that best defines it.
a. Accounting controls
b. Accounting system
c. Administrative controls
d. Audit committee
e. Board of directors
200. Provides direct contact between the shareholders and the independent auditing firm.
ANSWER: d
201. Consists of all methods and records used to accurately report an entity's transactions.
ANSWER: b
202. Controls that are focused more on efficient operation than with correct reporting of information.
ANSWER: c
203. Procedures concerned with safeguarding the assets or the reliability of financial statements.
ANSWER: a
Match the action with the category of internal control procedures

a. One department should check on another
b. Internal audit staff ensure all is working as intended
c. Accounting and cash collection is properly separated
d. Blank checks are locked at all times when not in use
e. Origination of initial entry into accounting system
f. Specific authority is given by management for the performance of activities.
204. Proper authorization
ANSWER: f
or in part.
205. Segregation of duties
ANSWER: c
206. Independent verification
ANSWER: a
207. Safeguarding assets
ANSWER: d
208. Design and use of business documents
ANSWER: e
209. The key to the classification of an amount as cash is that it be readily available to pay debts.
a. True
b. False
ANSWER: True
210. Given the following items, what amount should be reported on the balance sheet as Cash and cash
equivalents?
Cashier's Check $ 5,000

Certificate of deposit (due in 9 months) 12,000
Checking account 5,500
Coins and currency on hand 1,225
IOU from Employee 565
Money Market Account 15,000
Postage Stamps 375
Savings Account 22,000
Undeposited customer checks 1,750
ANSWER: ($5,000 + $5,500 + $1,225 + $15,000 + $22,000 + $1,750) = $50,475
or in part.
211. Cash equivalents are investments that are readily convertible to a known amount of cash, where readily means six
months or less.
a. True
b. False
ANSWER: False
Match the following terms with the best definitions for questions 212 through 219.
a. Purchase requisition.
b. Receiving Report.
c. Vendor Invoice.
d. Check.
e. Control procedures.
f. Inventory count.
g. Segregation of duties.
h. Source document control.
212. The practice of not combining physical custody of assets with the function of accounting for those assets.
ANSWER: g
213. Used to prepare a purchase order.
ANSWER: a
214. Form sent by the seller to the buyer as evidence of a sale
ANSWER: c
215. Actions that company personnel take to make sure that policies set forth by management are followed.
ANSWER: e
216. An example of independent verification.
ANSWER: f
217. An example of design and use of business documents control.
ANSWER: h
218. Typically sent along with a remittance advice.
ANSWER: d
Test Bank for Using Financial Accounting Information The Alternative to Debits and Credits,
219. A form used for verification that the items originally requested have been received.
ANSWER: b
For the following items Questions 220-227, indicate whether each should be (a) included or (b) excluded from the
line item titled Cash and cash equivalents on the balance sheet.
a. Included
b. Excluded
220. Certified check
ANSWER: a
221. Corporate bonds maturing in 30 days
ANSWER: b
222. Petty cash
ANSWER: a
223. Shares of GM stock
ANSWER: b
224. Savings account
ANSWER: a
225. Certificate of deposit maturing in six months
ANSWER: b
226. Checking account
ANSWER: a
227. Certificate of deposit maturing in 60 days
ANSWER: a
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2. Which one of the following items is not included in cash?

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

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

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

6. Which one of the following is not a cash equivalent?

10. Which one of the following statements is true?

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

Allan’s book balance $46,200

Rogan’s book balance $15,000

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

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

Bank statement balance $18,500

Heath Corp.’s balance per books before the reconciliation is

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

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

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

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

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

42. An outstanding check is a check that:

Rahm’s book balance $32,800

Rahm Corp.'s adjusted cash balance at September 30, 2014 is

Bank Statement Balance $1,089

Casa’s book balance $35,900

Gentech’s bank balance $14,300

Gentech’s adjusted cash balance at June 30, 2014 is

Bank statement balance $29,600

How much is Pierce’s adjusted cash balance on October 31, 2014?

Bank statement balance $29,600

Bank statement balance $45,000

Bank statement balance $45,000

Bank statement balance $30,700

What is the adjusted cash balance on October 31, 2014?

Bank statement balance $30,700

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

63. Sarbanes-Oxley requires that the audit committee be composed of

65. Which one of the following statements is true?

80. Which of the following is not considered a business (source) document?

83. Administrative controls

84. Segregation and rotation of duties is most effective in

Checks are signed by designated officers in the finance department.

105. A voucher is usually supported by

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

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

ANSWER: U.S. GAAP

ANSWER: Cash equivalents

ANSWER: Bank reconciliation

ANSWER: outstanding check

ANSWER: credit memoranda

ANSWER: NSF check

ANSWER: deposit in transit

ANSWER: debit memoranda

ANSWER: stockholders; independent accounting firm

ANSWER: The Public Company Accounting Oversight Board (PCAOB)

ANSWER: audit committee

157. is a report required by section 404 of the Sarbanes-Oxley Act.

ANSWER: An internal control report

ANSWER: Business documents

ANSWER: purchase requisition form

162. A(n) is a form sent by the purchasing department to the supplier.