Financial Accounting Tools For Business Decision Making Canadian 5th Edition Kimmel Test Bank

Financial Accounting Tools for
Business Decision Making Canadian

5th Edition Kimmel Test Bank
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CHAPTER 7
INTERNAL CONTROL AND CASH
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES
Item SO Item SO Item SO Item SO Item SO Item SO Item SO

True-False Statements
1. 1 8. 1 15. 1 22. 1 29. 2 36. 3 43. 4
2. 1 9. 1 16. 1 23. 1 30. 3 37. 3 44. 4
3. 1 10. 1 17. 1 24. 2 31. 3 38. 4 45. 4
4. 1 11. 1 18. 1 25. 2 32. 3 39. 4 46. 4
5. 1 12. 1 19. 1 26. 2 33. 3 40. 4 47. 4
6. 1 13. 1 20. 1 27. 2 34. 3 41. 4
7. 1 14. 1 21. 1 28. 2 35. 3 42. 4
Multiple Choice Questions
48. 1 58. 1 68. 1 78. 2 88. 3 98. 3 108. 3
49. 1 59. 1 69. 1 79. 2 89. 3 99. 3 109. 3
50. 1 60. 1 70. 1 80. 2 90. 3 100. 3 110. 4
51. 1 61. 1 71. 2 81. 2 91. 3 101. 3 111. 4
52. 1 62. 1 72. 2 82. 2 92. 3 102. 3 112. 4
53. 1 63. 1 73. 2 83. 2 93. 3 103. 3 113. 4
54. 1 64. 1 74. 2 84. 3 94. 3 104. 3 114. 4
55. 1 65. 1 75. 2 85. 3 95. 3 105. 3
56. 1 66. 1 76. 2 86. 3 96. 3 106. 3
57. 1 67. 1 77. 2 87. 3 97. 3 107. 3
Exercises
115. 1 118. 1,2 121. 3 124. 3 127. 3 130. 3 133. 3
116. 1 119. 1,2 122. 3 125. 3 128. 3 131. 3 134. 4
117. 1 120. 2 123. 3 126. 3 129. 3 132. 3
Matching
135. 1 to 4
Short Answer Essay
136. 1 137. 1 138. 1 139. 2 140. 3 141. 3 142. 4
143. 4
7-2 Test Bank for Financial Accounting: Tools for Business Decision-Making, 5th Canadian Edition
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Study Objective 1
1. TF 9. TF 17. TF 49. MC 57. MC 65. MC 117. EX
2. TF 10. TF 18. TF 50. MC 58. MC 66. MC 118. EX
3. TF 11. TF 19. TF 51. MC 59. MC 67. MC 119. EX
4. TF 12. TF 20. TF 52. MC 60. MC 68. MC 135. M
5. TF 13. TF 21. TF 53. MC 61. MC 69. MC 1356 SAE
6. TF 14. TF 22. TF 54. MC 62. MC 70. MC 137. SAE
7. TF 15. TF 23. TF 55. MC 63. MC 115. EX 138. SAE
8. TF 16. TF 48. MC 56. MC 64. MC 116. EX
Study Objective 2
24. TF 29. TF 75. MC 80. MC 119. EX
25. TF 71. MC 76. MC 81. MC 120. EX
26. TF 72. MC 77. MC 82. MC 135. M
27. TF 73. MC 78. MC 83. MC 139. SAE
28. TF 74. MC 79. MC 118. EX
Study Objective 3
30. TF 84. MC 92. MC 100. MC 108. MC 127. EX 140. SAE
31. TF 85. MC 93. MC 101. MC 109. MC 128. EX 141. SAE
32. TF 86. MC 94. MC 102. MC 121. EX 129. EX
33. TF 87. MC 95. MC 103. MC 122. EX 130. EX
34. TF 88. MC 96. MC 104. MC 123. EX 131. EX
35. TF 89. MC 97. MC 105. MC 124. EX 132. EX
36. TF 90. MC 98. MC 106. MC 125. EX 133. EX
37. TF 91. MC 99. MC 107. MC 126. EX 135. M
Study Objective 4
38. TF 41. TF 44. TF 47. TF 112. MC 134. EX 143. SAE
39. TF 42. TF 45. TF 110. MC 113. MC 135. M
40. TF 43. TF 46. TF 111. MC 114. MC 142. SAE
Note: TF = True-False M = Matching

MC = Multiple Choice EX = Exercise SAE = Short-Answer Essay
Internal Control and Cash 7-3
CHAPTER STUDY OBJECTIVES
1. Explain the activities that help achieve internal control and prevent fraud. Fraud is an
intentional act to misappropriate assets or misstate financial statements that can be prevented
through the use of internal controls. Internal control systems have the following components: the
control environment, risk assessment, control activities, information and communication, and
monitoring. Control activities include the authorization of transactions and activities, segregation
of duties, documentation, physical controls, independent performance checks of performance,
and human resource controls.
2. Apply control activities to cash receipts and payments. Control activities over cash receipts
include (a) designating only personnel such as cashiers to handle cash; (b) assigning the duties
of receiving cash, recording cash, and having custody of cash to different individuals; (c)
obtaining remitter confirmations for bank deposits; (d) using company safes and bank vaults to
store cash, with access limited to authorized personnel, and using cash registers in executing
over-the-counter receipts; (e) depositing all cash intact daily in the bank account or using EFT;
(f) making independent daily counts of register receipts and daily comparisons of total receipts
with total deposits; and (g) conducting background checks, bonding personnel who handle cash,
and requiring employees to take vacations.
Control activities over cash payments include (a) making all payments by cheque or by EFT; (b)
having only specified individuals authorized to sign cheques; (c) assigning to different
individuals the duties of approving items for payment, paying the items, and recording the
payments; (d) using prenumbered cheques and accounting for all cheques; (e) storing each
cheque in a safe or vault with access restricted to authorized personnel, and using electronic
methods to print amounts on cheques; (f) comparing each cheque with the approved invoice
before issuing the cheque, and making monthly reconciliations of bank and book balances; and
(g) conducting background checks, bonding personnel who handle cash, and requiring
employees to take vacations.
3. Prepare a bank reconciliation. In reconciling the bank account, it is customary to reconcile the
balance per books and the balance per bank to their adjusted balances. Reconciling items for
the bank include deposits in transit, outstanding cheques, and any errors made by the bank.
Reconciling items for the books include unrecorded amounts added to or deducted from the
bank account and any errors made by the company. Adjusting entries must be made for all
items required to reconcile the balance per books to the adjusted cash balance.
4. Explain the reporting and management of cash. Cash is usually listed first in the current
assets section of the statement of financial position. Cash restricted for a special purpose is
reported separately as a current asset or as a non-current asset, depending on when the cash
is expected to be used. Compensating balances are a form of restriction on the use of cash and
are reported as a non-current asset.
The six principles of cash management are to (a) accelerate the collection of receivables, (b)
keep inventory levels low, (c) delay the payment of liabilities, (d) plan the timing of major
expenditures, (e) invest idle cash, and (f) prepare a cash budget.
TRUE-FALSE STATEMENTS
1. Fraud is an unintentional act to misappropriate (steal) assets or misstate financial statements.
2. A good system of internal control does not require monitoring.
3. The Canada Business Corporations Act did not require corporations to maintain an adequate
system of internal control until the United States passed the Sarbanes-Oxley Act.
4. Errors give rise to unintentional misstatements in the financial statements.
5. Risk assessment is one component of a good system of internal control.
6. When one individual is responsible for all related activities, the potential for errors and
irregularities is decreased.
7. Control activities are most effective when several people are responsible for a given task.
8. The responsibility for keeping the records for an asset should be separate from the physical
custody of that asset.
9. Requiring employees to take vacations is a weakness in a control activity because it does not
promote operational efficiency.
10. The person responsible for making credit sales should be the vice-president of finance.
11. External auditors may examine internal controls as part of their evaluation of the financial
statements.
12. External auditors are usually employees of the company.
13. Bonding means insuring a company against misappropriation of assets by employees.
14. It is unlikely that a company would want to bond its employees who handle cash or inventory.
15. An effective control activity results when at least two individuals are assigned to one cash
drawer so that each can serve as check on the other.
16. A good internal control system will help a company achieve reliable financial reporting, effective
and efficient operations, and compliance with laws and regulations.
17. An internal control system cannot be considered effective until the possibility of human error has
been completely eliminated.
18. Only large companies need to be concerned with a system of internal control.
19. The responsibility for ordering, receiving, and paying for merchandise should be assigned to
different individuals.
20. Background checks of prospective employees are not necessary when a company has an
effective system of internal control.
21. The extent of internal control activities adopted by a company must be evaluated in terms of
cost-benefit.
22. Segregation of duties among employees eliminates the possibility of collusion.
23. All documents should be prenumbered.
24. Debit card and bank credit card transactions are considered cash.
25. The use of a bank account makes internal control over cash more difficult.
26. The use of electronic funds transfers normally results in better control over cash.
27. Control over cash disbursements is improved if all expenditures are paid by cheque or through
use of electronic funds transfers.
28. An example of segregation of duties is having a cheque signer record cash disbursements.
29. An authorized signing officer should sign a cheque only after reviewing the appropriate
supporting documentation.
30. To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by
the person authorized to sign cheques.
31. Electronic funds transfers never have to be recorded.
32. All reconciling items in determining the adjusted cash balance per books require the depositor to
make adjusting journal entries to the Cash account.
33. NSF cheques received from customers are debited by the bank to the depositor’s account.
34. A bank reconciliation is generally prepared by the bank and sent to the depositor along with
cancelled cheques.
35. An NSF cheque that was received is recorded as an account receivable.
36. NSF cheques received are accounted for by adding them to the cash balance per books.
37. Deposits in transit require an adjustment to the cash balance per books.
38. Management only needs to know how much cash is available at the end of the month (when the
bank reconciliation is prepared).
39. Generally, only debt investments due within three months qualify as cash equivalents.
40. A compensating balance is reported as a non-current asset.
41. Cash restricted in use should be reported separately on the statement of financial position.
42. When the cash account has a credit balance in the general ledger, it is reported as a non-
current liability.
43. A basic principle of cash management is to increase the speed of paying liabilities.
44. A company should plan the timing of major expenditures in light of its operating cycle.
45. A cash budget will help determine if additional financing will be necessary.
46. Idle cash should be reported as restricted cash.
47. A key principle of cash management is to increase the speed of collection on receivables.
ANSWERS TO TRUE-FALSE STATEMENTS

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 9. F 17. F 25. F 33. T 41. T
2. F 10. F 18. F 26. T 34. F 42. F
3. F 11. T 19. T 27. T 35. T 43. F
4. T 12. F 20. F 28. F 36. F 44. T
5. T 13. T 21. T 29. T 37. F 45. T
6. F 14. F 22. F 30. F 38. F 46. F
7. F 15. F 23. F 31. F 39. T 47. T
8. T 16. T 24. T 32. T 40. T
MULTIPLE CHOICE QUESTIONS
48. Internal controls may be limited by each of the following except

(a) the size of the business.
(b) the human element.
(c) bonding of employees.
(d) collusion.
49. Which one of the following is not a primary component of an internal control system?
(a) Control activities
(b) Delay payment of liabilities
(c) Risk assessment
(d) Control environment
50. Independent internal reviews should be done

(a) at the end of each accounting period.
(b) at the end of each month.
(c) periodically on a surprise basis.
(d) by the external auditor.
51. All of the following are examples of a control activity except

(a) using prenumbered documents.
(b) reconciling the bank statement.
(c) insistence that employees work overtime.
(d) insistence that employees take vacations.

(a) an extensive marketing plan.
(b) bonding of employees.
(c) segregation of duties.
(d) recording of all transactions.

(a) limit access to assets.
(b) independent internal reviews.
(c) authorization of transactions.
(d) increasing the speed of collection on receivables.
54. Which of the following is not a limitation of internal control?

(a) Cost of establishing control procedures
(b) The human element
(c) Use of a bank account
(d) The size of the company
7 - 10 Test Bank for Financial Accounting: Tools for Business Decision-Making, 5th Canadian Edition
55. Internal controls are concerned with all of the following except
(a) computerized systems of accounting.
(b) effective and efficient operations.
(c) ensuring reliable financial reporting.
(d) compliance with relevant laws and regulations.
56. An employee who makes a sale, ships the goods and bills the customer violates which control
activity?
(a) Authorization of transactions and activities
(b) Documentation
(c) Segregation of duties
(d) Human resource controls
57. Physical controls are not designed to safeguard assets from

(a) natural disasters.
(b) employee theft.
(c) robbery.
(d) unauthorized use.
58. Having one person responsible for the related activities of ordering merchandise, receiving
goods, and paying for them
(a) increases the potential for errors and fraud.
(b) decreases the potential for errors and fraud.
(c) is an example of a control activity.
(d) reduces cost and maximizes benefit.
59. The custodian of a company asset should

(a) not be bonded.
(b) be someone outside the company.
(c) not have access to the accounting records for that asset.
(d) be an accountant.
60. Internal auditors

(a) are hired by independent accounting firms to audit companies.
(b) are employees of the government who evaluate the internal controls of companies
filing tax returns.
(c) evaluate the system of internal controls for the companies that employ them.
(d) cannot evaluate the system of internal controls of the companies that employ them
because they are not independent.
61. When two or more people get together for the purpose of circumventing prescribed controls, it is
called
(a) fraud prevention.
(b) collusion.
(c) a division of duties.
Internal Control and Cash 7 - 11
(d) bonding of employees.
62. From an internal control standpoint, what type of controls are thorough background checks and
bonding of employees?
(a) Physical controls
(b) Human resource controls
(c) Independent checks of performance
(d) Documentation
63. The control activity related to not having the same person authorize and pay for goods is known
as
(a) authorization of transactions and activities.
(b) independent checks of performance.
(c) segregation of duties.
(d) human resource controls.
64. Joe is warehouse custodian and also maintains the accounting records of the inventory held at
the warehouse. Which control procedure is violated?
(a) documentation
(b) independent checks of performance
(c) segregation of duties
(d) authorization of transactions and activities
65. Physical controls to safeguard assets do not include

(a) cashier department supervisors.
(b) vaults.
(c) safety deposit boxes.
(d) locked warehouses.
66. In large companies, independent checks of performance are often assigned to

(a) shift supervisors.
(b) management.
(c) internal auditors.
(d) external auditors.
67. Maximum benefit from independent checks of performance is obtained when

(a) it is made on a pre-announced basis.
(b) it is done by the employee possessing custody of the asset.
(c) discrepancies are reported to management.
(d) it is done at the time of the external audit.
68. If employees are bonded, it means that

(a) they are not allowed to handle cash.
(b) they have worked for the company for at least 10 years.
(c) they have been insured against misappropriation of assets.
(d) they are not allowed to take vacations.
69. Ms. Greene has worked for Ambleside Inc. for 20 years without taking a vacation. An internal
control activity that would address this situation would be
(a) human resource controls.
(b) authorization of transactions and activities.
(c) physical controls.
(d) documentation.
70. A system of internal control can only provide reasonable assurance, which is based on the
belief that
(a) the system is infallible.
(b) the system can always detect errors and irregularities.
(c) the costs of establishing control activities should not be greater than their expected
benefit.
(d) the human element is not important.
71. Two employees at a retail store work the same cash register. You evaluate this situation as
(a) a violation of authorization of transactions and activities.
(b) a violation of segregation of duties.
(c) supporting the authorization of transactions and activities.
(d) supporting independent checks of performance.
72. An accounts payable clerk also has cheque signing authority. Which control procedure is
violated?
(a) authorization of transactions and activities
(b) independent checks of performance
(c) documentation
(d) segregation of duties
73. The use of electronic funds transfers

(a) normally results in better internal controls.
(b) does not require segregation of duties.
(c) eliminates opportunities for fraud.
(d) does not require proper authorization.
74. Which one of the following items would not be considered cash?
(a) Foreign currency
(b) Money orders
(c) Coins
(d) Post-dated cheques
75. Which of the following is(are) considered cash?

(a) Debit cards only
(b) Debit cards and bank credit cards
(c) Bank credit cards only

(d) Debit cards and all types of credit cards
76. Which of the following is not a good control activity over cash?
(a) Payments to creditors should be made in cash.
(b) There should be limited access to cash.
(c) The amount of cash on hand should be kept at a minimum.
(d) Cash should be deposited daily.
77. Control over cash disbursements is generally more effective when

(a) all bills are paid in cash.
(b) disbursements are made by the accounts payable subsidiary clerk.
(c) payments are made by cheque or electronic funds transfer.
(d) all purchases are made on credit.
78. Which of the following is not a suggested procedure to establish a good control activity over
cash disbursements?
(a) Pre-signed blank cheques
(b) Different individuals approve and make payments
(c) Blank cheques are stored with limited access
(d) The bank statement is reconciled monthly
79. Which of the following is not a control activity over cash?

(a) Only designated personnel are authorized to handle cash.
(b) The same individual receives the cash and pays the bills.
(c) Surprise audits of cash on hand should be made occasionally.
(d) Access to cash is limited.
80. The use of prenumbered cheques is an example of

(a) documentation.
(b) independent checks of performance.
(c) authorization of transactions and activities.
(d) segregation of duties.
81. Allowing only the treasurer to sign cheques is an example of which control activity?
(a) Documentation
(b) Segregation of duties
(c) Human resource controls
(d) Authorization of transactions and activities
82. Blank cheques

(a) should be safeguarded.
(b) should be pre-signed.
(c) do not need to be safeguarded since they must be signed to be valid.
(d) should not be prenumbered.
83. An employee authorized to sign cheques should not record

(a) shipping documents.
(b) mail receipts.
(c) cash disbursement transactions.
(d) sales transactions.
84. A bank statement

(a) lets a depositor know the financial position of the bank as of a certain date.
(b) is a credit reference letter written by the depositor's bank.
(c) is a bill from the bank for services provided.
(d) shows the activity that increased or decreased the depositor's account balance.
85. Which one of the following would not cause a bank to debit a depositor's account?
(a) Bank service charge
(b) Collection of a note receivable
(c) Payment of a note payable
(d) Cheques marked NSF
86. A company maintains the asset account, Cash in Bank, on its books, while the bank maintains a
reciprocal account that is recorded, on the bank’s books, as
(a) a contra-asset account.
(b) a liability account.
(c) an asset account.
(d) a shareholders’ equity account.
87. On the April 30 bank reconciliation, a deposit made by a company to its bank account on April
18 will likely appear as a(n)
(a) addition to the balance per books.
(b) deduction from the balance per books.
(c) deduction from the balance per bank.
(d) This will not affect the current period’s bank reconciliation.
88. An NSF cheque received from a customer should appear in which section of the bank
reconciliation?
(a) Addition to the balance per books
(b) Deduction from the balance per books
(c) Addition to the balance per bank
(d) Deduction from the balance per bank
89. On a bank reconciliation, which of the following would be deducted from the balance per books?
(a) Outstanding cheques
(b) Deposits in transit
(c) Electronic payment by a customer on account
(d) Service charges
90. On a bank reconciliation, which of the following would be added to the balance per books?
(d) Bank service charges
91. On a bank reconciliation, which of the following would be deducted from the balance per bank?
92. On a bank reconciliation, which of the following would be added to the balance per bank?
93. A cheque returned by the bank marked "NSF" means

(a) no service fee.
(b) no signature found.
(c) not satisfactorily filled out.
(d) not sufficient funds.
94. Outstanding cheques from the prior period which clear the bank in the current period
(a) should be added to the balance per books.
(b) should be deducted from the balance per books.
(c) should be deducted from the balance per bank.
(d) do not affect the current period’s bank reconciliation.
95. A bank reconciliation should be prepared

(a) whenever the bank refuses to lend the depositor money.
(b) when an employee is suspected of fraud.
(c) to explain any difference between the depositor's balance per books and the balance
per bank.
(d) by the person who is authorized to sign cheques.
96. Deposits in transit

(a) have been recorded on the depositor's books but not yet by the bank.
(b) have been recorded by the bank but not yet by the depositor.
(c) when the month’s bank statement is received in order have not been recorded by
either the bank or the depositor.
(d) are customers’ cheques that are in the mail but have not yet been received by the
depositor.
97. In preparing a bank reconciliation, outstanding cheques are

(a) added to the balance per bank.
(b) deducted from the balance per books.
(c) added to the balance per books.
(d) deducted from the balance per bank.
98. If a cheque correctly written and paid by the bank for $521 is incorrectly recorded on the
company's books for $251, the appropriate treatment on the bank reconciliation would be to
(a) add $270 to the balance per bank.
(b) add $270 to the balance per books.
(c) deduct $270 from the balance per books.
(d) deduct $270 from the balance per bank.
99. A cheque written by the company for $157 is incorrectly recorded as $175. On the bank
reconciliation, the $18 error should be
(a) added to the balance per books.
(b) deducted from the balance per books.
(c) added to the balance per bank.
(d) deducted from the balance per bank.
100. For which of the following errors should the appropriate amount be added to the balance per
bank on a bank reconciliation?
(a) Cheque for $43 recorded as $34 by the depositor
(b) Deposit of $500 recorded by the bank as $50
(c) A paid cheque for $200 recorded by the bank as $20
(d) Cheque for $35 recorded as $53 by the depositor
101. Which of the following bank reconciliation items would not require an adjusting entry on the
depositor’s books?
(a) Bank service charge
(b) Outstanding cheques
(c) A customer’s NSF cheque
(d) Electronic payment on account
102. Which of the following bank reconciliation items would require an adjusting entry on the
depositor’s books?
(a) Error by the bank
(b) Outstanding cheques
(c) Bank service charge
(d) Deposit in transit
103. All of the following bank reconciliation items would require an adjusting entry on the depositor’s
books except
(a) interest earned.
(b) deposits in transit.

(c) a bank service charge.
(d) a customer’s NSF cheque.
104. Notification by the bank that a customer’s deposited cheque was returned NSF requires that the
depositor make the following adjusting entry:
(a) Accounts Receivable
Cash
(b) Cash
Accounts Receivable
(c) Bank Charges Expense
Accounts Receivable
(d) No adjusting entry is necessary.
105. On Davinder Corp’s June bank reconciliation, cheques outstanding totalled $5,400. In July, the
corporation issued cheques totalling $38,900. The July bank statement shows that $26,300 in
cheques cleared the bank in July. A cheque from one of Davis Corp's customers in the amount
of $300 was also returned marked "NSF." The amount of outstanding cheques on Davis' July
bank reconciliation should be
(a) $ 7,200.
(b) $12,600.
(c) $17,700.
(d) $18,000.
106. Great Scott Corporation gathered the following reconciling information in preparing its July bank
reconciliation:
Cash balance per books, July 31 $3,500
Deposits in transit 150
Electronic collection of account receivable 850
Bank charge for cheque printing 20
Outstanding cheques 2,000
NSF cheque 170
The adjusted cash balance per books at July 31 is
(a) $4,160.
(b) $4,010.
(c) $2,460.
(d) $2,310.
107. Royal Machines Limited gathered the following reconciling information in preparing its June
bank reconciliation:
Cash balance per books, June 30 $12,000
Electronic collection of account 6,000
Deposits in transit 4,500
Bank service charge 75
NSF cheque 1,200
The adjusted cash balance per books at June 30 is

(a) $ 8,775.
(b) $12,000.
(c) $16,500.
(d) $16,725.
108. Island Corporation gathered the following reconciling information in preparing its September
bank reconciliation:
Cash balance per bank, September 30 $11,000

Note receivable collected by bank 6,000
Deposit in transit 4,500
Bank service charge 75
NSF cheque 1,200
The adjusted cash balance per bank at September 30 is

(a) $ 1,775.
(b) $ 6,500.
(c) $ 9,725.
(d) $15,725.
109. Bank errors

(a) occur because of time lags.
(b) must be corrected by debits.
(c) are infrequent in occurrence.
(d) are corrected by making an adjusting entry on the depositor's books.
110. Cash equivalents are

(a) often combined with cash and reported as a current asset.
(b) usually reported as a non-current asset.
(c) reported as a current liability.
(d) included as a compensating balance.
111. Which of the following is not true with respect to the reporting of cash?
(a) Standard setters are considering whether cash equivalents should be reported
separately as short-term investments in the future, rather than combined with cash.
(b) Compensating balances are minimum cash balances required by the bank.
(c) Restricted cash can be either a current or a non-current asset, depending on when it is
expected to be used.
(d) Cash overdrafts are reported as contra-assets.
112. Cash equivalents are

(a) generally short term investments in shares.
(b)short-term, highly liquid investments that are subject to significant risk of changes in
value.
(c) short-term, highly liquid investments that are subject to insignificant risk of changes in
value.
(d) reported as non-current assets.
113. Which of the following is not a basic principle of cash management?

(a) Increase collection of receivables
(b) Keep inventory levels high
(c) Delay payment of liabilities
(d) Invest idle cash
114. It is a good idea to invest idle cash because

(a) it will increase the speed of collection on receivables.
(b) it will keep inventory levels low.
(c) cash on hand earns nothing.
(d) it will delay the payment of liabilities.
ANSWERS TO MULTIPLE CHOICE QUESTIONS

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
48. c 61. b 74. d 87. d 100. b 113. b
49. b 62. b 75. b 88. b 101. b 114. c
50. c 63. c 76. a 89. d 102. c
51. c 64. c 77. c 90. c 103. b
52. a 65. a 78. a 91. a 104. a
53. d 66. c 79. b 92. b 105. d
54. c 67. c 80. a 93. d 106. a
55. a 68. c 81. d 94. d 107. d
56. c 69. a 82. a 95. c 108. b
57. a 70. c 83. c 96. a 109. c
58. a 71. a 84. d 97. d 110. a
59. c 72. d 85. b 98. c 111. d
60. c 73. a 86. b 99. a 112. c
EXERCISES
Ex. 115
Below are descriptions of internal control problems. In the space to the left of each item, enter the code
letter of the one best control activity that is related to the problem described.
Control Activity
A. Authorization of transactions and activities
B. Segregation of duties
C. Physical controls
D. Documentation
E. Independent internal reviews
F. Independent external reviews
G. Human resource controls
____ 1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger.
____ 2. Three people handle cash sales from the same cash register drawer.
____ 3. A clothing store is experiencing a high level of inventory shortages because people try on
clothing and walk out of the store without paying for the merchandise.
____ 4. The person who is authorized to sign cheques approves purchase orders for payment.
____ 5. Some cash payments are not recorded because cheques are not prenumbered.
____ 6. Cash shortages are not discovered because there are no daily cash counts by supervisors.
____ 7. The treasurer of the company has not taken a vacation for over 5 years.
____ 8. The external audit firm reports on the financial statements each year.
Solution 115 (5 min.)

1. B 5. D
2. A 6. E
3. C 7. G
4. B 8. F
Ex. 116
Indicate whether each of the business practices listed below strengthens (S) or weakens (W) a
company’s system of control activities.
____ (a) Cashiers are not bonded.
____ (b) All payments are made with cheques instead of cash.
____ (c) Employees are encouraged to take paid vacations.
____ (d) Two people handle cash sales from the same cash register drawer.
____ (e) The company uses prenumbered sales invoices.
____ (f) Audited financial statements are provided to the creditors each fiscal year.

(a) W (d) W
(b) S (e) S
(c) S (f) S
Ex. 117
Ming Park has worked for Dr. Chang Li, a dentist, for several years. Ming demonstrates a loyalty that is
rare among employees. He hasn't taken a vacation in the last three years. One of Ming's primary duties
is to open the mail and list the cheques received. He also takes cash from patients as they leave. At
times it is so hectic that Ming doesn't bother with giving patients a receipt for the cash paid on their
accounts. He assures them he will see to it that they receive the proper credit and a receipt later. When
it is slow in the office, Ming offers to help Julia post payments to the patients' accounts receivable. She
is always happy to receive his help, because Ming is such a conscientious worker.
Instructions
Identify any internal control activities that may be violated in this situation.

Violations:
1. It is Julia's responsibility to post payments to patient accounts. In allowing Ming to assist her, the
control activity of authorization of transactions and activities is violated.
2. Although it appears to be a small office, it is not appropriate that Ming both opens the mail and
receives and records cash receipts from patients. He also appears to have custody of cash. This
situation violates the segregation of duties control activity. By posting to patients' accounts, it would
be possible to post credits to patient accounts and pocket the cash.
3. The documentation control is violated when patients are not given cash receipts. Although many
professional offices do not have cash registers, computerized or manual receipts are customary
and necessary.
4. Independent internal review (independent checks of performance) is also being violated. There is
no independent counting of the cash and comparison to total receipts.
5. Human resource controls are being violated. Is Ming bonded? As well, he should be required to
take regular vacations.
Ex. 118
Sally Small is the sole shareholder of a corner store, The Small Store Inc. She hasn't taken a vacation
in two years and is planning to take one next month. She would like to know things are being properly
handled in the store before she leaves. She has asked you to observe her operations for a day and tell
her if there are any problems you see or improvements you can suggest to the way the company
operates with respect to internal controls. She would also like to know if there are things she is doing
correctly so that she can continue to do them.
You note the following activities during the day. Sally opens the store at 9 a.m. She balances the cash
from the previous day before opening. Sarah, a long time employee, starts work at 10 a.m. and works
until 5 p.m. Peter, another part time employee, works from 4 p.m. until 11 p.m. and closes the store. He
locks the cash register when he leaves. Sally, Sarah and Peter all serve customers during the day.
There is only one cash register. Sally leaves the store for lunch and finishes for the day around 6 p.m.
She tells you she sometimes drops back in at night to see how things are going.
Bread and milk are delivered to the store during the day and whoever is at the cash register at the time
takes money from the register to pay for the products.
There is a camera that records customers at the cash register and a mirror so the person serving at the
cash register can see most of the store.
Instructions
a) Prepare a list of control activity weaknesses over cash, explaining why each is a weakness and a
suggestion as to how to improve. Use point form.
b) Prepare a list of items that are being done correctly and why they provide good control. Use point
form.

a) Weaknesses
• The cash is left in the store in the cash register overnight. This increases the risk of it being
stolen. It should be locked in the safe or taken to the night deposit.
• There is only one cash register but three people work the cash. This means it is not possible to
establish who is responsible for any shortages. Each person should have his or her own cash
drawer and user numbers for the cash register.
• Cash is not deposited intact—payments are made in cash for purchases. This may result in
inadequate documentation and will make errors harder to find. Purchases should be paid for
with a cheque.
• The fact that Sally has not taken a vacation in two years is not a concern, as she is the owner.
But normally, employees not taking a vacation may indicate they are concerned with covering
something up. Everyone should be encouraged/required to take vacation on a regular basis.
b) Strengths
• The camera is a good control because it records events.
• Sally dropping in unexpectedly at night is a good control as she can do spot checks.
Ex. 119
Listed below are seven errors or problems that might occur in the processing of cash transactions. Also
shown is a list of control activities. Evaluate each possible error and cite a control activity given that
would reduce the probability of the error occurring. If none of the control activities given will correct the
problem, write "None." If you think more than one control is appropriate, list all that apply.
Possible Errors or Problems
____ 1. An employee steals the cash collected from a customer for an account receivable and
conceals this theft by issuing a credit memorandum indicating that the customer returned
the merchandise.
____ 2. A small fire destroys 3 days of cash receipts.
____ 3. The official designated to sign cheques is able to steal blank cheques and issue them to
herself without fear of detection.
____ 4. A salesclerk in serving customers often rings up a sale for less than the actual amount and
then keeps the additional cash collected from the customer.
____ 5. Three cashiers use one cash register drawer and the cash in the drawer is often short.
____ 6. Each cashier counts his/her own register drawer each day and verbally reports the results to
the supervisor.
____ 7. Cashiers with over 5 years’ experience are not bonded.
Internal Control Activities
(a) Authorization of transactions and (d) Documentation

activities (e) Independent checks of performance
(b) Segregation of duties (f) Human resource controls
(c) Physical controls
1. (b) 5. (a) and (e)
2. (c) 6. (d) and (e)
3. (c) and (a) 7. (f)
4. (e)
Ex. 120
During the first week of September, The Olde Cookie Shop recorded 75 sales transactions. These
sales consisted of the following:
1. 27 sales totalling $1,790 were made to customers using debit cards;
2. 32 sales totalling $3,400 were made to customers using credit cards (VISA and MasterCard); and
3. The balance of the sales were received in cash, totalling $124.
The Olde Cookie Shop’s bank charges a fee of $0.20 to process each debit card transaction, and a fee
of 2.5% of credit card sales.
Instructions
Prepare the journal entries required to record the above transactions.
Solution 120
Debit card sales
Cash 1,432
Debit Card Expense (1,790 x .20) 358
Sales 1,790
Credit card sales

Cash 3,315
Credit Card Expense (3,400 x 2.5%) 85
Sales 3,400
Cash sales
Cash 124
Sales 124
Ex. 121
Using the following information, prepare a bank reconciliation for Gloss Corporation at July 31, 2012.
(a) The bank statement balance is $6,612.
(b) The cash account balance in the general ledger is $9,869.
(c) Outstanding cheques totalled $1,170.
(d) Deposits in transit are $4,350.
(e) The bank service charge is $50.
(f) A cheque for $196 for supplies was recorded as $169 in the ledger.

GLOSS CORPORATION
Bank Reconciliation
July 31, 2012
Cash balance per bank $6,612

Add: (d) Deposit in transit 4,350

10,962
Less: (c) Outstanding cheques 1,170
Adjusted cash balance per books $9,792
Cash balance per books $9,869

Less: (f) Cheque amount error (196 – 169) $ 27
(e) Bank service charge 50 77
Ex. 122
Using the following information, prepare a bank reconciliation for Xanadu Inc. at May 31, 2012.
(a) The bank statement balance is $7,200.
(b) The cash account balance is $6,024.
(c) Outstanding cheques totalled $1,600.
(d) Deposits in transit are $800.
(e) The bank service charge is $24.
(f) Electronic collections on account totalled $400.

XANADU INC.
Bank Reconciliation
May 31, 2012

Add: (d) Deposit in transit 800
8,000
Less: (c) Outstanding cheques 1,600
Adjusted cash balance $6,400

Add: (f) Electronic collections 400
6,424
Less (e) Bank service charge 24
Adjusted cash balance $6,400
Ex. 123
Given the following information, determine the adjusted cash balance per books.
1. Balance per books at November 30, $3,800.
2. Outstanding cheques, $600.
3. NSF cheque returned with bank statement, $60.
4. Deposit placed in night deposit the evening of November 30 (not on bank statement), $300.
5. Cheque printing charges $20.
6. Interest earned on chequing account, $35.

$3,755 ($3,800 – $60 – $20 + $35)
Ex. 124
Seattle Coffee Limited's bank statement for the month of November 2012 showed a balance per bank
of $7,000. The company's general ledger Cash account showed a balance of $5,659 at November 30.
Other information is as follows:
1. Cash receipts for November 30 recorded on the company's books were $5,200, but this amount
does not appear on the bank statement.
2. The bank statement shows a debit memorandum for $40 for cheque printing charges.
3. Cheque #119 payable to Holt Company was recorded in the general journal and cleared the
bank for $248. A review of the accounts payable records shows a $36 credit balance in Holt
Company’s account and that the payment should have been for $284.
4. The total amount of cheques outstanding at November 30 was $5,800.
5. Cheque #138 was correctly written and paid by the bank for $409. The cash payment journal
reflects an entry for Cheque #138 as a debit to Accounts Payable and a credit to Cash for $490.
6. The bank returned an NSF cheque from a customer for $560.
7. The bank included a credit memorandum for $1,260, which represents the electronic collection
of customer accounts.
Instructions
(a) Prepare a bank reconciliation for Seattle Coffee Limited at November 30, 2012.
(b) Prepare any adjusting entries necessary as a result of the bank reconciliation.

(a) SEATTLE COFFEE LIMITED
Bank Reconciliation
November 30, 2012
Cash balance per bank $ 7,000

Add: (1) Deposit in transit 5,200
12,200
Less: (4) Outstanding cheques 5,800
Adjusted cash balance per bank $ 6,400
Cash balance per books $ 5,659

Add: (5) Accounts payable error (490 – 409) $ 81
(7) Electronic collections 1,260 1,341
7,000
Less: (2) Cheque printing $ 40
(6) NSF cheque 560 600
Adjusted cash balance per books $ 6,400
Note: Item (3) is not relevant.
(b)
Nov. 30 Cash .............................................................................. 81
Accounts Payable .................................................. 81
(To correct error in recording Cheque #138)
30 Cash ............................................................................... 1,260

Accounts Receivable .............................................. 1,260
(To record collection of accounts receivable)
30 Bank Charges Expense ................................................... 40

Cash ....................................................................... 40
(To record cheque printing charges)
30 Accounts Receivable ....................................................... 560

Cash ....................................................................... 560
(To record NSF cheque)
Ex. 125
The bank statement for Indiana Inc. shows a balance of $2,330 at June 30, 2012, while the cash
balance per books was $599. The following information pertains to the bank transactions for the
company.
1. Deposits of $160, representing cash receipts of June 30, did not appear on the bank statement.
2. Outstanding cheques totalled $240.
3. Bank service charges for June were $9.
4. Electronic collections on account totalled $1,740.
5. An NSF cheque for $80 from a customer was returned with the statement.
Instructions
(a) Prepare a bank reconciliation at June 30.

(a) INDIANA INC.
Bank Reconciliation
June 30, 2012

Add: (1) Deposit in transit 160
2,490
Less: (2) Outstanding cheques 240
Adjusted cash balance per bank $2,250
Cash balance per books $ 599

Add: (4) Electronic collections on account 1,740
2,339
Less: (3) Bank service charge $ 9
(5) NSF cheque 80 89
(b)
June 30 Cash ............................................................................... 1,740
Accounts Receivable .............................................. 1,740
30 Accounts Receivable ....................................................... 80

Cash ....................................................................... 80
30 Bank Charges Expense ................................................... 9

Cash ....................................................................... 9
(To record bank service charges)
Ex. 126
Houston Cafe Ltd. had the following information regarding its bank transactions for the month of April
2013.
Balance per books April 30 $ 2,805
Balance per bank statement April 30 11,400
1. Cheques written in April but still outstanding, $6,000.
2. Cheques written in March but still outstanding, $2,800.
3. Deposits of April 30 not yet recorded by bank, $6,100.
4. A customer’s cheque for $700 was returned by the bank as NSF.
5. Cheque #210 for $594 was correctly issued and paid by bank but incorrectly entered in the cash
payments journal as payment on account for $549.
6. Bank service charge for April was $50.
7. A payment on account (Cheque #318) was incorrectly entered in the general journal and posted
to the general ledger as $824. However it had been correctly prepared for $284. The cheque
cleared the bank in April.
8. Electronic collections on account totalled $6,150.
Instructions
Prepare a bank reconciliation for Houston Cafe Ltd. at April 30.

HOUSTON CAFE LTD.
Bank Reconciliation
April 30, 2013

Add:
(3) Deposit in transit 6,100
17,500
Less:
(1) April outstanding cheques $6,000
(2) March outstanding cheques 2,800 8,800
Adjusted cash balance per bank $ 8,700

Add:
(7) Error on Cheque #318 (824 – 284) $ 540
(8) Electronic collections on account 6,150 6,690
9,495
Less:
(4) NSF Cheque $700
(5) Error on Cheque #210 (594 – 549) 45
(6) Bank service charge 50 795
Ex. 127
Using the code letters below, indicate how each of the items listed would be handled in preparing a
bank reconciliation. Enter the appropriate code letter in the space to the left of each item.
Code
A Add to cash balance per books
B Deduct from cash balance per books
C Add to cash balance per bank
D Deduct from cash balance per bank
E Does not affect the bank reconciliation
Items
____ 1. Outstanding cheques.
____ 2. Bank service charge.
____ 3. Cheque for $320 correctly written and paid by the bank but incorrectly entered in the
general journal for $230.
____ 4. Deposit in transit.
____ 5. Bank returned a customer’s deposited cheque marked NSF.
____ 6. Interest earned on bank account.
____ 7. Bank debit memorandum for cheque printing fees.
____ 8. Bank charged a cheque against the company, which should have been charged to another
company.
____ 9. A cheque for $236 was correctly paid by the bank but was incorrectly entered in the general
journal for $263.

1. D 6. A
2. B 7. B
3. B 8. C
4. C 9. A
5. B
Ex. 128
The cash balance per books for Murdoch Ltd. at November 30, 2012 is $10,740.93. The following
cheques and receipts were recorded for the month of December, 2012:
Cheques Receipts
No. Amount No. Amount Amount Date
17 $372.96 22 $ 578.84 $ 843.86 Dec. 5
18 780.62 23 1,687.50 941.54 21
19 157.00 24 921.30 808.58 27
20 587.50 25 246.03 1,067.00 31
21 234.15
In addition, the bank statement for the month of December is presented below:
Balance Amounts Deducted (Debits) Amounts Added (Credits) Balance

Last Statement No. Total Amount No. Total Amount This Statement
$5,404.84 10 $3,632.19 5 $9,278.36 $11,051.01

———————————————————————————————————————
Cheques and other debits Deposits Date Balance
———————————————————————
No. Amount No. Amount No. Amount
————————————————————————————————————————
14 148.29 17 372.96 22 578.84 5,484.38 Dec. 1 $9,789.13
18 708.62 24 921.30 843.86 8 $9,003.07
19 157.00 25 246.03 941.54 23 $9,541.58
21 234.15 15.00 SC 808.58 29 $10,101.01
250.00 NSF 1,200.00 CM 31 $11,051.01
————————————————————————————————————————
Symbols: NSF (Not sufficient funds) SC (Service charge) CM (Credit Memo)
————————————————————————————————————————
Cheque #18 was correctly written for $708.62 for a payment on account. The NSF cheque was from
Mr. S. Horn, a customer, in settlement of an account receivable. An entry had not been made for this.
The credit memo is for the electronic collection of accounts receivable. The bank service charge is $15.
Instructions
(a) Prepare a bank reconciliation at December 31, 2012.
Solution 128 (30-35 min.)

(a) MURDOCH LTD.
Bank Reconciliation
December 31, 2012
Cash balance per bank statement .......................................... $11,051.01
Add: Deposits in transit ........................................................ 1,067.00
12,118.01
Less: Outstanding cheques
#20 .................................................................... $ 587.50
#23 .................................................................... 1,687.50 2,275.00
Adjusted cash balance per bank ............................................ $ 9,843.01
Cash balance per books......................................................... $ 8,836.01*

Add: Error in recording cheque #18 (780.62 – 708.62) ........ $ 72.00
Electronic collection of accounts .................................. 1,200.00 1,272.00
10,108.01
Less: Bank service charge .................................................... $ 15.00
NSF cheque ................................................................. 250.00 265.00
Adjusted cash balance per books........................................... $ 9,843.01
*Nov. 30 balance per books + receipts – cheques written = Dec. 31 balance per books
$10,740.93 + $3,660.98 – $5,565.90 = $8,836.01
(b) Dec. 31 Cash ............................................................................ 72

Accounts Payable ................................................ 72
(To correct recording error on cheque #18)
31 Cash ............................................................................ 1,200

Accounts Receivable............................................ 1,200
31 Bank Charges Expense ................................................ 15

Cash .................................................................... 15
(To record bank service charge)
31 Accounts Receivable—S. Horn ..................................... 250

Cash .................................................................... 250
Ex. 129
Yamamoto Corporation’s bank statement included two types of electronic funds transfers (EFT). One
type of EFT totalled $10,000 and was from customers paying their accounts online. Another type of
EFT totalled $16,500 and was from Yamamoto paying its accounts payable online.
Instructions
(a) How will each of these items affect Yamamoto's bank reconciliation?
(b) Prepare the required journal entries, if any, that Yamamoto will make to record the above
information on its books.

(a) Yamamoto Corporation must add the electronic collections from customers in payment of their
accounts receivable to its cash balance per books on the bank reconciliation. It must deduct the
electronic payments it made in payment of its accounts payable from its cash balance per books
on the bank reconciliation. Although both of these entries are recorded below, it is possible that
the second entry could have been recorded prior to the performance of the bank reconciliation as
a payment transaction is initiated by the company rather than by another party.
(b) Cash ........................................................................................... 10,000

Accounts Receivable ......................................................... 10,000
Accounts Payable ....................................................................... 16,500

Cash ................................................................................... 16,500
Ex. 130
The cash records of Jasper Corp show the following:
1. The June 30 bank reconciliation indicated that deposits in transit totalled $300. During July, the
general ledger account, Cash, shows deposits of $9,700, but the bank statement indicates that
only $9,540 in deposits were received during the month.
2. The June 30 bank reconciliation also reported outstanding cheques of $1,800. During July,
Jasper Corp’s books show that $11,170 of cheques were issued, yet the bank statement
showed that $11,500 of cheques cleared the bank in July.
There were no bank debit or credit memoranda and no errors were made by either the bank or Jasper
Corp.
Instructions
(a) Calculate the dollar amount of the deposits in transit at July 31.
(b) Calculate the dollar amount of the outstanding cheques at July 31.

(a) Deposits in transit:
Deposits per books in July ............................................ $9,700
Deposits per the bank in July ....................................... $9,540
Less: June 30 deposits in transit .................................. 300
July receipts deposited in July ...................................... 9,240
Deposits in transit, July 31 ............................................ $ 460
(b) Outstanding cheques:

Cheques per books in July ........................................... $11,170
Cheques clearing the bank in July ................................ $11,500
Less: Outstanding cheques, June 30 .......................... 1,800
July cheques clearing in July ........................................ 9,700
Outstanding cheques, July 31 ....................................... $ 1,470
Ex. 131
The records of Western Cattle Co. Ltd. show the following:
1. In February, deposits per the bank statement totalled $18,850; deposits per books $19,500; and
deposits in transit at February 28 were $1,400.
2. In February, cheques issued per books were $17,750; cheques clearing the bank were $18,400;
and outstanding cheques at February 28 were $1,250.
There were no bank debit or credit memoranda and no errors were made by either the bank or Western
Cattle Co. Ltd.
Instructions
(a) Calculate the dollar amount of the deposits in transit at January 31.
(b) Calculate the dollar amount of the outstanding cheques at January 31.

(a) Deposits in transit:
Deposits per bank statement in February ............... $18,850
Add: Deposits in transit, February 28....................... 1,400
Total deposits to be accounted for .......................... 20,250
Less: Deposits per books ....................................... 19,500
Deposits in transit, January 31 ............................... $ ,750
(b) Outstanding cheques:

Cheques clearing the bank in February .................. $18,400
Add: Outstanding cheques, February 28 ................ 1,250
Total cheques to be accounted for .......................... 19,650
Less: Cheques issued per books ............................ 17,750

Outstanding cheques, January 31 .......................... $ 1,900
Ex. 132
Listed below are items that may be useful in preparing the March 2012 bank reconciliation for Moose
Jaw Machine Works.
Using the code letters below, insert in the space before each item the letter where the amount would be
located or otherwise treated in the bank reconciliation process.
Code Located or Treated

A Add to the cash balance per books
B Deduct from the cash balance per books
C Add to the cash balance per bank
D Deduct from the cash balance per bank
E Does not affect the bank reconciliation
____ 1. Included with the bank statement materials was a cheque from Joe Terrell for $40 stamped
"account closed."
____ 2. The bank statement included a debit memorandum for $35 in payment of the annual safety
deposit box fee.
____ 3. The bank statement included a debit memorandum for $22 for four books of blank cheques
for Moose Jaw Machine Works.
____ 4. The bank statement contains a credit memorandum for $42.75 interest on the average
chequing account balance during the month.
____ 5. The deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not
included on the bank statement.
____ 6. Two cheques totalling $316.86, which were outstanding at the end of February, cleared in
March and were returned with the March statement.
____ 7. The bank statement included a credit memorandum dated March 28, 2012, for $62 for the
monthly interest on a 2-month $15,000 certificate of deposit that the company owns.
____ 8. Four cheques, #8712, #8716, #8718, #8719, totalling $5,369.65, did not clear the bank
during March.
____ 9. On March 24, 2012, $3,400 was credited by the bank to Moose Jaw Machine Works’ bank
account as an electronic funds transfer from a customer in payment of its account.
____ 10. On March 31, 2012, Moose Jaw Machine Works paid its $700 utility bill using the bank
online payment system.

1. B 6. E
2. B 7. A
3. B 8. D
4. A 9. A
5. C 10. B
Ex. 133
You have recently started a part time job in the accounting department of Home Energy Limited. The
accountant, Joe Kool, had prepared the company's bank reconciliation for June 2012. After completing
the reconciliation he made the following journal entry:
June 30 Cash ......................................................................................... 2,390

Bank Charges Expense ............................................................ 124
Accounts Receivable ($3,000 collection less $500 NSF) 2,500
Interest Earned ............................................................. 14
Joe was reviewing the bank reconciliation with you when unfortunately you spilled your coffee on it. He
asks you to rewrite the reconciliation, in good form. He remembers that the only outstanding deposit
was the last deposit for the month. You check the general ledger and the bank balance at June 30 was
$24,527 (credit). You also check the bank statement and the balance was $22,314 (debit on the bank
statement, i.e. overdrawn). You look up the last deposit for the month—it was for $21,789.
Instructions
Using the above information prepare, in good form, the bank reconciliation for Home Energy Limited for
June.
Solution 133 (25-30 min.)

HOME ENERGY LIMITED
Bank Reconciliation
June 30, 2012
Cash balance per bank $(22,314)

Add: Deposit in transit 21,789
(525)
Less: Outstanding cheques (see note below) 21,612
Adjusted cash per bank $(22,137)
Cash balance per books $(24,527)

Add: Electronic collection of account $3,000
Interest earned 14 3,014
(21,513)
Less: Bank service charge $124
NSF cheque 500 624
Adjusted cash balance per books $(22,137)
Note: To solve, you complete the bank reconciliation with the information you know—the outstanding
cheques and the adjusted cash per bank will be unknown. After you arrive at the adjusted balance per
books, you enter this as the adjusted cash per bank and solve for the outstanding cheques.
Ex. 134
About eight months ago, your friend Sydney Carton started her own bookkeeping business. She caters
to small businesses (mostly proprietorships), and has now developed a fairly large clientele.
Yesterday, she called you and asked you to come over and give her some advice. It appears that
although she has lots of business, she is having serious cash flow problems. “I can’t pay my bills!” she
exclaims, “and I want to get a bank loan to get more up-to-date office equipment, but the bank won’t
lend the business any money. Please come over and help me!”
So today you went to Sydney’s office, and asked to see her general ledger, subsidiary ledgers and her
latest financial statements. Although the records are up to date, including the receivables and payables,
Sydney admits she hasn’t had time to prepare any statements yet. You ask her about the receivables,
and she agrees they are rather high. “But the economy still isn’t very good, and most of my clients are
self-employed tradesmen, and I hate to ask them for money when they’re having a tough time.”
You create a trial balance, based on the general ledger, which follows
SYDNEY CARTON ENTERPRISES

Trial Balance
(date)
Dr Cr
Cash 2,700
Accounts receivable 45,000
Prepaid insurance 1,800
Supplies 2,800
Equipment 9,000
Vehicle 25,000
Accounts payable 14,100
GST payable 8,100
Dividends 18,000
Common shares 15,000
Bookkeeping revenue 110,000
Rent expense 32,000
Telephone expense 4,000
Utilities expense 3,000
General expenses 3,900
Totals 147,200 147,200
Notes:
The “official” terms for her receivables and payables are n30.
Instructions
Suggest ways that Sydney can improve her cash flows. Do not list generalities, but address her
specific situation.

(The following are some suggestions. Students may come up with others)
1. First of all, you must address your receivables to get more cash in. You have recorded $110,000 in
revenue, and at this point, approximately 40% of them are still uncollected. I would suggest that you
prepare an aged trial balance of the receivables to find out which are the oldest, and you must pressure
them to pay. You could suggest that you will not do any more work for them until they pay up.
2. Consider offering a cash discount for early payment and shorten your credit terms, e.g. 2/10. n/20.
Although you will lose a little bit, this will encourage more clients to pay sooner.
3. For any new clients, you should require a deposit up front especially if this is standard industry
practice. If they are not willing to do this, you probably don’t want them as a client anyway.
4. Your rent seems very high in comparison to your revenue (approximately 30%). Can you negotiate a
lower rent with the landlord? Failing this, perhaps you should consider looking for cheaper premises.
5. As far as your “regular” payables are concerned, can you negotiate longer terms with any of them (to
delay payment as long as possible). It’s worth a try.
6. I would suggest that you prepare a cash budget. This will show you when you will be short of cash
and when you will have excess cash available. This won’t happen for a while, but if you follow my
suggestions, it will.
7. If all else fails, you may have to approach the bank and offer personal assets as security to secure a
loan.
MATCHING
135. Match the items below by entering the appropriate code letter in the space provided.
A. Prenumbered documents
B. Custody of an asset should be kept separate from the record-keeping for that asset
C. Television monitors, garment sensors and burglar alarms are examples
D. Bonding employees
E. Collusion
F. Cash
G. Invest idle cash
H. Cancelled cheques
I. NSF cheques
J. Outstanding cheques
____ 1. Segregation of duties.
____ 2. Two or more employees circumventing prescribed procedures.
____ 3. Prevent a transaction from being recorded more than once.
____ 4. Cheques that have been returned by the issuer's bank for lack of funds.
____ 5. Cheques that have been paid by the depositor's bank.
____ 6. A bank will almost always accept this for deposit.
____ 7. Physical controls.
____ 8. A basic principle of cash management.
____ 9. Insurance protection against misappropriation of assets.
____ 10. Issued cheques that have not been paid by the bank.
ANSWERS TO MATCHING
1. B 6. F
2. E 7. C
3. A 8. G
4. I 9. D
5. H 10. J
SHORT-ANSWER ESSAY QUESTIONS
S-A E 136
Important objectives of a system of internal controls are to achieve reliable financial reporting, effective
and efficient operations, and compliance with relevant laws and regulations. Briefly discuss how (1)
cost-benefit considerations, (2) the human element, and (3) the size of the business affect the
implementation of a system of internal controls.
Solution 136
The implementation of an internal control system is affected by cost-benefit considerations, the human
element, and the size of the business. A company's internal control system can provide reasonable
assurance, but not absolute assurance, that assets are properly safeguarded and that the accounting
records are reliable. The concept of reasonable assurance rests on the premise that the costs of
establishing control activities should not exceed their expected benefit. A very costly set of safeguards
may produce something approaching absolute assurance, but the value of the benefits received would
not come close to outweighing the costs.
The human element can cause a good internal control system to become ineffective due to employee
fatigue, carelessness, or indifference. Additionally, collusion between two or more employees to
circumvent prescribed controls may significantly impair the effectiveness of the system.
The size of the business impacts internal controls because a smaller business may not have the
necessary resources available to effect the implementation of desirable controls.
S-A E 137
Clinix is a medical office management franchise. There are currently twenty-five medical offices
managed by a Clinix franchisee. One of the services provided to franchisees is assistance in training
various staff members.
Clinix is preparing a manual for the front office staff to use as a reference guide. It will be used in
training new employees as well. One of the reasons the manual is being prepared is to stress the
importance of strong internal controls.
Instructions
Prepare a short paragraph, to be included in the training materials, describing the benefits of sound
internal control activities, from the viewpoint of the employee.
Solution 137
All the controls discussed in this manual may seem unnecessary to you. It may also seem that
management trusts no one. However, these practices and procedures actually benefit you, the
employee. First, control activities clearly outline who is to be responsible for various activities, such as
making the daily deposit of cash in the bank. If a problem arises regarding a deposit, it is very clear to
whom the company should turn to resolve the problem. If correct procedures were not followed, blame
is not placed on all employees. Only those who did not follow correct procedures are held accountable
for their actions. Also, strong control activities will discourage dishonest employees looking for
opportunities to steal from the company. They will find such opportunities extremely limited. Finally, all
these systems, practices, and procedures result in a well-managed company that is less likely to suffer
unnecessary losses, and a much better place for you to work and build a career.
S-A E 138
Taylor Instruments Inc. is a rapidly growing manufacturer of engineering equipment. As a result of its
growth, the company's management recently modified several of its procedures and practices to
improve internal control. Some employees are upset with the changes. They have complained that all
these changes just show that the company no longer trusts them.
Instructions
"Internal controls exist because most people can't be trusted." Is this true? Explain.
Solution 138
Internal controls exist, not because most people can't be trusted, but to protect the company's assets
from those few who cannot be trusted. If it was a perfect world, and everyone could be trusted, internal
controls would not be needed. However, it does not follow that internal controls indicate the opposite.
It is true that anyone is capable of practically any action, if motivation and opportunity are both present.
Since it is extremely difficult to measure motivation to directly or indirectly harm the company, let alone
to monitor changes in motivation, a company's best recourse is to prevent opportunity.
Rather than feel threatened by internal control measures, honest employees should feel grateful.
When responsibility for all activities is clearly defined and when access to company assets is carefully
controlled, the honest employees can demonstrate their honesty. When all employees are considered
to be honest, on the other hand, and no controls exist, all employees are unfairly tainted when one
among them proves to be dishonest.
S-A E 139
In business, electronic funds transfers (EFT) is very popular, with some companies, such as Sears,
paying all their bills by EFT. Most companies now also pay their employees by EFT, with the net pay
being deposited directly to the employee’s bank account. Individuals also are using EFT to pay their
bills through on-line banking.
Instructions
Explain the implications of EFT payments from an internal control standpoint. Does EFT guarantee that
fraud will be eliminated?
Solution 139
EFT is a way of transferring money electronically from one bank account to another. Using EFT
eliminates the need for cheques. This generally results in better internal control, since no cash or
cheques are handled by company employees, thereby minimizing the possibility of having cheques
stolen. However, they still have to be properly recorded, and this should be done by an employee who
has no access to the EFT records (e.g. the bank account numbers of the payees). Without proper
authorization and segregation of duties, it is possible an employee could redirect electronic transfers to
his/her personal bank account. So, no, the use of EFT does not guarantee that fraud will be eliminated.
However, fraud is far less likely to occur than when cheques and cash are used to make payments.
S-A E 140
The preparation of a bank reconciliation is an important cash control procedure. If a company deposits
cash receipts daily and makes all cash disbursements by cheque, explain why the cash balance per
books might not agree with the cash balance shown on the bank statement. Identify specific examples
that may cause differences between the cash balance per books and the cash balance per bank.
Solution 140
The cash balance per books may not agree with the cash balance shown on the bank statement due to
time lags and errors by either party. A time lag could mean the bank records a transaction in a period
later than the company records it (outstanding cheques, deposits in transit) or the company records a
transaction in a period later than the bank records it (interest earned, NSF cheque, electronic funds
transfers, etc.).
S-A E 141
You are busily working away at your new job in the accounting department of Humongous Enterprises
Ltd. Your friend from the marketing department stops by to pick you up for lunch and asks what you are
doing. You tell her you are preparing the bank reconciliation. She says she remembers doing that in an
accounting course she took once but didn't think it would be necessary any more—given that most
things were done by computers now and the banks and a big company like ours are both required to
have internal control systems in place to prevent errors. Surely there can't be any reconciling things left.
You sigh and start to explain it to her on your way to lunch.
Instructions
Prepare, in point form, the explanation you would give your friend.
Solution 141
• The reconciliation is part of the company's control system.
• It will identify any errors made by the bank or the company.
• Most of the processing is done by computers but mistakes can still be made.
• There will always be reconciling items because of the time lags.
• Some items are recorded earlier in the books and take time to clear the bank (e.g., cheques,
deposits).
• Some items are received first by the bank and are recorded in the books from the bank
reconciliation - e.g., NSF cheques, and bank charges.
S-AE 142
You and your friend Pete are reviewing the latest financial reports from a large Canadian corporation.
Although you are studying accounting at school, he is not. On the statement of financial position, Pete
notices a line item called “Cash and Cash Equivalents.” “That doesn’t make sense!” he exclaims.
“How can you have an equivalent to cash? Cash is cash! There is no equivalent!”
Instructions
Explain to Pete what “cash equivalents” are and why they are included with cash on the statement of
financial position.
Solution 142
In accounting, cash equivalents are short-term investments subject to insignificant risk of changes in
value, and that are highly liquid. This means they can be converted to cash very quickly. There are
limited items that fit this requirement; they are usually short term investments in debt instruments, e.g.
short term notes payable, guaranteed investment certificates, etc. I know they are not “cash” in the
traditional sense of coins and bills in your wallet, Pete, but for accounting purposes, these “cash
equivalents” are considered cash for financial statement presentation, so that’s why they show on the
same line as cash.
S-A E 143
Managing cash is one of the most important things a company has to do.
Instructions
(a) Identify some reasons why a company can have difficulty in managing its cash.
(b) What can be done by management to manage its cash?
Solution 143
(a) Reasons why a company can have difficulty in managing its cash:
• Too many receivables that are slow in collection
• Too much inventory that is not selling fast enough
• Significant capital expenditures required
• Too many expenses, or lack of profitability
• Insufficient access to debt or equity financing
(b) Cash management techniques:

• Establish credit and collection policies
• Reduce inventory
• Defer capital expenditures or time them to match cash flow
• Review gross margins and profit margins
• Prepare and review budgets
• Obtain additional debt or equity financing

Financial Accounting Tools For Business Decision Making Canadian 5th Edition Kimmel Test Bank

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SUMMARY OF QUESTIONS BY STUDY OBJECTIVES

Item SO Item SO Item SO Item SO Item SO Item SO Item SO

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Note: TF = True-False M = Matching

CHAPTER STUDY OBJECTIVES

1. Fraud is an unintentional act to misappropriate (steal) assets or misstate financial statements.

2. A good system of internal control does not require monitoring.

4. Errors give rise to unintentional misstatements in the financial statements.

5. Risk assessment is one component of a good system of internal control.

12. External auditors are usually employees of the company.

13. Bonding means insuring a company against misappropriation of assets by employees.

22. Segregation of duties among employees eliminates the possibility of collusion.

23. All documents should be prenumbered.

31. Electronic funds transfers never have to be recorded.

35. An NSF cheque that was received is recorded as an account receivable.

40. A compensating balance is reported as a non-current asset.

46. Idle cash should be reported as restricted cash.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

48. Internal controls may be limited by each of the following except

50. Independent internal reviews should be done

51. All of the following are examples of a control activity except

52. All of the following are examples of a control activity except

53. All of the following are examples of a control activity except

54. Which of the following is not a limitation of internal control?

57. Physical controls are not designed to safeguard assets from

59. The custodian of a company asset should

60. Internal auditors

(d) bonding of employees.

65. Physical controls to safeguard assets do not include

66. In large companies, independent checks of performance are often assigned to

67. Maximum benefit from independent checks of performance is obtained when

68. If employees are bonded, it means that

(d) they are not allowed to take vacations.

73. The use of electronic funds transfers

75. Which of the following is(are) considered cash?

(c) Bank credit cards only

77. Control over cash disbursements is generally more effective when

79. Which of the following is not a control activity over cash?

80. The use of prenumbered cheques is an example of

82. Blank cheques

83. An employee authorized to sign cheques should not record

84. A bank statement

93. A cheque returned by the bank marked "NSF" means

95. A bank reconciliation should be prepared

96. Deposits in transit

97. In preparing a bank reconciliation, outstanding cheques are

(b) deposits in transit.

The adjusted cash balance per books at June 30 is

Cash balance per bank, September 30 $11,000

The adjusted cash balance per bank at September 30 is

109. Bank errors

110. Cash equivalents are

112. Cash equivalents are

113. Which of the following is not a basic principle of cash management?

114. It is a good idea to invest idle cash because

ANSWERS TO MULTIPLE CHOICE QUESTIONS

Solution 115 (5 min.)

Solution 116 (5 min.)

Solution 117 (10 min.)

Solution 118 (10 min.)