Chapter 7 Internal Control and Cash 1) A properly designed internal control system is a key part of systems design, analysis, and performance. Answer: TRUE Diff: 1 Type: TF Topic: 07-02 Purpose of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 2) When preparing a bank reconciliation, if the adjusted book balance and the adjusted bank balance are equal, then there is no need to have an external auditor test internal controls for the "cash" account. Answer: FALSE Diff: 1 Type: TF Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 3) When preparing a bank reconciliation, adjustment are made to the bank side and not the ledger (book) side. Answer: FALSE Diff: 1 Type: TF Topic: 07-08 Control of Cash Learning Objective: 07-03 Apply internal control to cash. 4) The use of internal controls provides guaranteed protection against losses due to operating activities. Answer: FALSE Diff: 1 Type: TF Topic: 07-02 Purpose of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. Page 1
5) An internal control system is comprised of the policies and procedures companies use to protect assets, ensure reliable accounting, and promote efficient operations. Answer: TRUE Diff: 2 Type: TF Topic: 07-02 Purpose of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 6) When used to monitor and control operations, internal control systems are a low priority for managers. Answer: FALSE Diff: 2 Type: TF Topic: 07-02 Purpose of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 7) Preventing unauthorized access to company resources is one of the most difficult and time-consuming tasks for internal control experts. Answer: TRUE Diff: 3 Type: TF Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 8) Internal control policies and procedures are standard across companies. Answer: FALSE Diff: 1 Type: TF Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 9) Maintaining accurate records is an important internal control principle. Answer: TRUE Diff: 1 Type: TF Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. Page 2
10) The principles of internal control include: ensure transactions and activities are authorized, maintain records, insure assets, separate recordkeeping and custody of assets, and perform internal and external audits. Answer: TRUE Diff: 2 Type: TF Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 11) Bonding does not discourage loss from theft because employees know that bonding is an insurance policy against loss from theft. Answer: FALSE Diff: 2 Type: TF Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 12) Collusion occurs when a person embezzles money from a company and tries to hide the evidence. Answer: FALSE Diff: 3 Type: TF Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 13) Risks involved in e-commerce include: credit card theft, computer viruses and impersonation. Answer: TRUE Diff: 1 Type: TF Topic: 07-04 Three Drivers of Fraud Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. Page 3
14) Firewalls and encryption can be used as methods to eliminate some of the risks involved in e-commerce. Answer: TRUE Diff: 1 Type: TF Topic: 07-04 Three Drivers of Fraud Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 15) Separation of duties divides responsibility for a series of transactions between two or more employees or departments. Despite the increased complexity, separation of duties reduces the risk of error and fraud. Answer: TRUE Diff: 3 Type: TF Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 16) Cash consists of cash on hand and demand deposits. This includes coins, currency, and amounts on deposits in bank accounts, chequing accounts and some savings accounts. Answer: TRUE Diff: 1 Type: TF Topic: 07-07 Cash Defined Learning Objective: 07-02 Define cash and explain how it is reported. 17) Cash equivalents are short-term investments that a company invests in to increase earnings. Answer: TRUE Diff: 1 Type: TF Topic: 07-07 Cash Defined Learning Objective: 07-02 Define cash and explain how it is reported. Page 4
18) Liquidity measures how easily assets can be converted to another asset or be used to pay for services or obligations. Answer: TRUE Diff: 2 Type: TF Topic: 07-07 Cash Defined Learning Objective: 07-02 Define cash and explain how it is reported. 19) Money orders, cashier's cheques, and certified cheques are examples of cash equivalents. Answer: FALSE Diff: 2 Type: TF Topic: 07-07 Cash Defined Learning Objective: 07-02 Define cash and explain how it is reported. 20) Chequing accounts are sometimes called savings accounts. Answer: FALSE Diff: 2 Type: TF Topic: 07-07 Cash Defined Learning Objective: 07-02 Define cash and explain how it is reported. 21) Good internal control procedures for cash receipts imply that cash receipts by mail should be opened by an accounting employee who is responsible for recording and depositing receipts. Answer: FALSE Diff: 2 Type: TF Topic: 07-09 Control of Cash Receipts Learning Objective: 07-03 Apply internal control to cash. 22) Small differences between cash sales and the amounts on the cash register are directly debited or credited to the cash account. Answer: FALSE Diff: 1 Type: TF Topic: 07-09 Control of Cash Receipts Learning Objective: 07-03 Apply internal control to cash. Page 5
23) Internal control over cash receipts ensures that all cash received is properly recorded and deposited. Answer: TRUE Diff: 1 Type: TF Topic: 07-09 Control of Cash Receipts Learning Objective: 07-03 Apply internal control to cash. 24) If Cash Over and Short has a debit at the end of the period, the dollar amount represents miscellaneous revenue. Answer: FALSE Diff: 2 Type: TF Topic: 07-09 Control of Cash Receipts; 07-12 Basic Bank Services Learning Objective: 07-03 Apply internal control to cash.; 07-04 Explain and record petty cash fund transactions. 25) The clerk who has access to the cash in the cash register should not have access to the register tape or file. Answer: TRUE Diff: 2 Type: TF Topic: 07-09 Control of Cash Receipts Learning Objective: 07-03 Apply internal control to cash. 26) At the end of the day, the cash register shows a balance of $635. The cash drawer has a balance of $650. The difference of $15 should be debited to miscellaneous expense. Answer: FALSE Diff: 3 Type: TF Topic: 07-09 Control of Cash Receipts; 07-12 Basic Bank Services Learning Objective: 07-03 Apply internal control to cash.; 07-04 Explain and record petty cash fund transactions. Page 6
27) Cash sales total $705 and the amount of cash in the register is $685. The shortage of $20 represents an expense. Answer: TRUE Diff: 3 Type: TF Topic: 07-09 Control of Cash Receipts; 07-12 Basic Bank Services Learning Objective: 07-03 Apply internal control to cash.; 07-04 Explain and record petty cash fund transactions. 28) The Petty Cash account is a separate chequing account used for small amounts. Answer: FALSE Diff: 1 Type: TF Topic: 07-11 Banking Activities as Controls Learning Objective: 07-04 Explain and record petty cash fund transactions. 29) All monies disbursed from petty cash should be documented by a petty cash receipt. Answer: TRUE Diff: 2 Type: TF Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. 30) The journal entry for petty cash reimbursement is a debit to various expenses and a credit to Petty Cash. Answer: FALSE Diff: 2 Type: TF Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. 31) The petty cash fund should be reimbursed at the end of the period even if the fund is not low on money. Answer: TRUE Diff: 3 Type: TF Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. Page 7
32) The entry to increase the balance in petty cash from $50 to $75 would include a credit to Petty Cash of $25. Answer: FALSE Diff: 3 Type: TF Topic: 07-13 Bank Statement Learning Objective: 07-04 Explain and record petty cash fund transactions. 33) Maintaining a petty cash fund makes it possible to determine human fraud. Answer: FALSE Diff: 1 Type: TF Topic: 07-11 Banking Activities as Controls Learning Objective: 07-04 Explain and record petty cash fund transactions. 34) Basic services provided by banks such as bank accounts, deposit slips and cheques contribute to the control and safeguarding of cash. Answer: TRUE Diff: 1 Type: TF Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. 35) Firms have the option of recording credit card expense as a discount from sales or as a selling expense. Answer: TRUE Diff: 3 Type: TF Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. 36) The payee is the person who signs a cheque. Answer: FALSE Diff: 1 Type: TF Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. Page 8
37) It is not necessary for businesses to reconcile their chequing accounts since banks keep accurate records and provide internal control support for cash. Answer: FALSE Diff: 2 Type: TF Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. 38) Outstanding cheques are cheques the bank has paid and deducted from the customer's account during the month. Answer: FALSE Diff: 1 Type: TF Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. 39) EFT is the use of electronic communication to transfer cash from one party to another. Answer: TRUE Diff: 1 Type: TF Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. 40) A cheque involves three parties: the maker, who signs the cheque, the payee, who is the recipient, and the bank, on which the cheque is drawn. Answer: TRUE Diff: 2 Type: TF Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. Page 9
41) Internal control devices for banking activities include signature cards, deposit slips, cheques, and bank statements. Answer: TRUE Diff: 2 Type: TF Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. 42) Credit cards are seen as an advantage by businesses because the cash is normally received quicker than with other forms of extended credit. Answer: TRUE Diff: 1 Type: TF Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. 43) Credit cards do not remove the risk of bad debts to the business accepting payment by credit card. Answer: FALSE Diff: 1 Type: TF Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. 44) Banks normally use a flat rate fee for the processing of debit card transactions and a percentage fee for the processing of credit card transactions. Answer: TRUE Diff: 2 Type: TF Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. Page 10
45) An error made by the bank should result in a reconciling item on the book side of a bank reconciliation. Answer: FALSE Diff: 2 Type: TF Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). 46) Bank service charges are treated as a reconciling item on the book side of a bank reconciliation. Answer: TRUE Diff: 3 Type: TF Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). 47) A bank reconciliation explains the difference between the balance of a chequing account on the customer's books and the balance on the bank statement. Answer: TRUE Diff: 1 Type: TF Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). 48) A bank reconciliation results in creating an adjusted bank balance as well as an adjusted book balance. Answer: TRUE Diff: 2 Type: TF Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). Page 11
49) An NSF cheque for $17.50 would be recorded as a debit to Cash and a credit to Accounts Receivable. Answer: FALSE Diff: 3 Type: TF Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). 50) Factors that cause the bank statement balance of a chequing account to be different from the business chequing account balance include: outstanding cheques, deposits in transit, deductions for bank fees, additions for interest, and errors. Answer: TRUE Diff: 3 Type: TF Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). 51) The steps to reconcile the balance of the bank statement to the adjusted balance include adding outstanding cheques, deposits, and bank service charges to the bank balance. Answer: FALSE Diff: 3 Type: TF Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). 52) The acid-test ratio is also called the quick ratio. Answer: TRUE Diff: 1 Type: TF Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. Page 12
53) Quick assets include cash, inventory, and receivables. Answer: FALSE Diff: 1 Type: TF Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. 54) The quick ratio is current assets divided by current liabilities. Answer: FALSE Diff: 2 Type: TF Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. 55) The quick ratio is a more accurate measure of a company's liquidity than the current ratio. Answer: TRUE Diff: 2 Type: TF Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. 56) The common rule of thumb is that a company's quick ratio should be at least 1.5 to 1. Answer: FALSE Diff: 2 Type: TF Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. 57) Z-Mart's quick assets are $147,000. With current liabilities of $143,000, Z-Mart's quick ratio is 1.03 to 1. Answer: TRUE Diff: 3 Type: TF Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. Page 13
58) Omega Supply's current ratio is 2 to 1. Its quick ratio is.75 to 1. Omega Supply has a good credit risk because the ratios reveal no liquidity problem. Answer: FALSE Diff: 3 Type: TF Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. 59) Cash, short-term investments, inventory, and receivables, are called quick assets. Answer: FALSE Diff: 1 Type: TF Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. 60) An internal control system is the policies and procedures that managers use to: A) Protect assets. Ensure reliable accounting. Promote efficient operations. Encourage adherence to company policies. All of these answers are correct. Answer: E A) Diff: 1 Type: MC Topic: 07-02 Purpose of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. Page 14
61) Managers place a high priority on internal control systems because the systems assist managers in the: A) Prevention of avoidable losses. Planning of operations. Monitoring of company performance. Monitoring of employee performance. All of these answers are correct. Answer: E A) Diff: 1 Type: MC Topic: 07-02 Purpose of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 62) A good system of internal control: A) Encourages adherence to prescribed managerial policies. Promotes operational efficiencies. Eliminates the need for an audit. Both encourages adherence to prescribed managerial policies and promotes operational efficiencies. All of these answers are correct. Answer: D A) Diff: 2 Type: MC Topic: 07-02 Purpose of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. Page 15
63) Internal control procedures: A) Eliminate the risk of loss. Include policies and procedures to safeguard assets. Prevent unavoidable losses. Both eliminate the risk of loss and include policies and procedures to safeguard assets. All of these answers are correct. Answer: B A) Diff: 2 Type: MC Topic: 07-02 Purpose of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 64) Principles of internal control include: A) Establish responsibilities. Maintain adequate records. Insure assets. Bond key employees. All of these answers are correct. Answer: E A) Diff: 1 Type: MC Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. Page 16
65) Principles of internal control include: A) Record purchases using the gross method. Divide responsibilities for related transactions. Perform regular and independent reviews. Divide responsibilities for related transactions and perform regular and independent reviews. All of these answers are correct. Answer: D A) Diff: 1 Type: MC Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 66) Two clerks sharing the same cash register is a violation of which internal control principle? A) Establish responsibilities. Maintain adequate records. Insure assets. Bond key employees. Apply technological controls. Answer: A A) Diff: 2 Type: MC Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. Page 17
67) Prenumbered printed cheques are an example of which internal control principle? A) Technological controls. Maintain adequate records. Perform regular and independent reviews. Technological controls and maintain adequate records. All of these answers are correct. Answer: B A) Diff: 2 Type: MC Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 68) The impact of technology on internal controls includes: A) Reduced processing errors. Elimination of the need for regular audits. Fewer hard copies of source documents. More efficient separation of duties. Reduced processing errors and fewer hard copies of source documents. Answer: E A) Diff: 3 Type: MC Topic: 07-04 Three Drivers of Fraud Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. Page 18
69) Limitations of internal control include: A) Human error. Human fraud. Cost-benefit standard. Human error and fraud. All of these answers are correct. Answer: E A) Diff: 3 Type: MC Topic: 07-05 Limitations of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 70) Risks involved in e-commerce include: A) Firewalls. Encryption. Missing documents. Computer viruses. All of these answers are correct. Answer: D A) Diff: 3 Type: MC Topic: 07-04 Three Drivers of Fraud Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. Page 19
71) Policies and procedures used to promote efficient company operations are known as: A) Asset controls. Internal controls. Management controls. Cash controls. Inventory control. Answer: B A) Diff: 1 Type: MC Topic: 07-01 Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 72) The owner of Zeke's Landscaping Designs just hired an office manager to handle all the office functions for him. Among other responsibilities, the office manager will handle key accounting functions such as processing customer payments, writing cheques to employees to pay the payroll, handle daily bank deposits at the bank, pay suppliers, and reconcile the company bank account bank reconciliations. What internal cash control practice is being overlooked by the owner? A) Making daily cash deposits. Frequent preparation of bank reconciliations. Separation of cash payment from cash disbursement function. Ensuring all cash disbursements are tracked by making payments by cheque. Performing external audit. Answer: C A) Diff: 1 Type: MC Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. Page 20
73) Cash consists of: A) Postage stamps. Coins, currency, and chequing accounts. IOUs. Certificates of deposit. Coins, currency, chequing accounts, and certificates of deposit. Answer: B A) Diff: 1 Type: MC Topic: 07-07 Cash Defined Learning Objective: 07-02 Define cash and explain how it is reported. 74) Cash equivalents: A) Are short-term, highly liquid investments. Include 6-month certificates of deposit. Include chequing accounts. Are recorded in petty cash. Are short-term, highly liquid investments and include chequing accounts. Answer: A A) Diff: 1 Type: MC Topic: 07-07 Cash Defined Learning Objective: 07-02 Define cash and explain how it is reported. Page 21
75) Cash equivalents: A) Include savings accounts. Include chequing accounts. Are short-term investments that a company invests their cash in to increase their earnings. Include savings and chequing accounts. All of these answers are correct. Answer: C A) Diff: 2 Type: MC Topic: 07-07 Cash Defined Learning Objective: 07-02 Define cash and explain how it is reported. 76) Cash equivalents: A) Are readily convertible to a known cash amount. Include short-term investments purchased to increase earnings. Are often combined with cash as a single balance sheet item. Are readily convertible to a known cash amount and include short-term investments purchased to increase earnings. All of these answers are correct. Answer: E A) Diff: 2 Type: MC Topic: 07-07 Cash Defined Learning Objective: 07-02 Define cash and explain how it is reported. Page 22
77) An income statement account used to record cash overages and cash shortages arising from omitted petty cash receipts and from errors in making change is the: A) Cash Lost account. Bank Reconciliation account. Petty Cash account. Cash Over and Short account. Cash Receivable account. Answer: D A) Diff: 1 Type: MC Topic: 07-09 Control of Cash Receipts; 07-12 Basic Bank Services Learning Objective: 07-03 Apply internal control to cash.; 07-04 Explain and record petty cash fund transactions. 78) Which of the following is NOT a principle of internal control? A) Responsibilities should be clearly established. Adequate records should be maintained. Responsibility for related transactions should be divided. Assets should be insured and employees bonded. Audits should always be conducted by employees internal to the organization. Answer: E A) Diff: 2 Type: MC Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. Page 23
79) Cash receipts are the result of: A) Cash sales. Cash disbursements. Collection of accounts receivable. Collection of accounts payable. Cash sales and collection of accounts receivable. Answer: E A) Diff: 1 Type: MC Topic: 07-09 Control of Cash Receipts Learning Objective: 07-03 Apply internal control to cash. 80) Internal control procedures for cash receipts require: A) Separation of custody of cash receipts from their recordkeeping. In-store cash sales be recorded on a cash register at the time of each sale. All cheques to be numbered in sequence. Separation of custody of cash receipts from its recordkeeping and in-store cash sales be recorded on a cash register at the time of each sale. All of these answers are correct. Answer: D A) Diff: 2 Type: MC Topic: 07-09 Control of Cash Receipts Learning Objective: 07-03 Apply internal control to cash. Page 24
81) Video Buster had $62 in extra cash in the petty cash box at the end of the day. The correct procedure is: A) Credit Cash for $62. Debit Cash for $62. Credit Cash Over and Short for $62. Debit Cash Over and Short for $62. Debit Petty Cash for $62. Answer: C A) Diff: 3 Type: MC Topic: 07-09 Control of Cash Receipts; 07-12 Basic Bank Services Learning Objective: 07-03 Apply internal control to cash.; 07-04 Explain and record petty cash fund transactions. 82) The Cash Over and Short account: A) Is used to record a credit balance in the cash account. Is an income statement account used for recording the income effects of cash overages and cash shortages from errors in making change and missing petty cash receipts. Is not necessary in a computerized accounting system. Is an income statement account used for recording the income effects of cash overages and cash shortages from errors in making change and missing petty cash receipts and is not necessary in a computerized accounting system. None of these answers is correct. Answer: B A) Diff: 2 Type: MC Topic: 07-09 Control of Cash Receipts; 07-12 Basic Bank Services Learning Objective: 07-03 Apply internal control to cash.; 07-04 Explain and record petty cash fund transactions. Page 25
83) Z-Mart had $43 in missing petty cash receipts. The correct procedure is to: A) Debit Cash Over and Short for $43. Credit Cash Over and Short for $43. Debit Petty Cash for $43. Credit Petty Cash for $43. Credit Cash for $43. Answer: A A) Diff: 3 Type: MC Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. 84) The entry necessary to establish a petty cash fund should include: A) A debit to Cash. A credit to Cash. A debit to Petty Cash. A credit to Petty Cash. A credit to Cash and a debit to Petty Cash. Answer: E A) Diff: 1 Type: MC Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. Page 26
85) The entry to record reimbursement of the petty cash fund for postage expense should include: A) A debit to Postage Expense. A debit to Petty Cash. A debit to Cash. A debit to Cash Short and Over. A debit to Supplies. Answer: A A) Diff: 1 Type: MC Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. 86) When a petty cash fund is in use: A) Expenses paid with petty cash are recorded when the fund is replenished. Petty Cash is debited when funds are replenished. Petty Cash is credited when funds are replenished. Expenses paid with petty cash are recorded when the fund is replenished and petty cash is debited when funds are replenished. Expenses paid with petty cash are recorded when the fund is replenished and petty cash is credited when funds are replenished. Answer: A A) Diff: 2 Type: MC Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. Page 27
87) In reimbursing the petty cash fund: A) Cash is debited. Petty Cash is credited. Petty Cash is debited. Expense accounts are debited. Petty Cash is credited and expense accounts are debited. Answer: D A) Diff: 2 Type: MC Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. 88) The custodian of a $450 petty cash fund has $62.50 in coins and currency plus $382.50 in receipts at the end of the month. The entry to replenish the petty cash fund will include: A) A debit to Miscellaneous Expenses for $377.50. A credit to Cash Over and Short for $5.00. A debit to Petty Cash for $382.50. A credit to Cash for $387.50. A debit to Cash for $387.50. Answer: D A) Diff: 3 Type: MC Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. Page 28
89) Z-Mart plans to eliminate a $200 petty cash fund. The current balance in the account includes $45 in receipts and $165 in currency. The entry to eliminate the fund will include a: A) Debit to Cash Short and Over for $10. Debit to Cash for $165. Debit to Miscellaneous Expenses for $35. Credit to Petty Cash for $165. Credit to Cash for $165. Answer: B A) Diff: 3 Type: MC Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. 90) MainCo Company's accounting policies require the company to maintain a petty cash balance of $235. MainCo's junior accountant reviews the content of the petty cash box at June 30 to find receipts for purchases of office supplies of $40, shipping supplies of $30 and a left over balance in cash of $7.50. What entry would you make to replenish the petty cash fund at June 30? A) Office Supplies Expense 40 Shipping Supplies Expense 30 Petty Cash 70 Cash 158 Petty Cash 158 Office Supplies Expense 40 Shipping Supplies Expense 30 Cash over and short 157.5 Cash 227.5 Office Supplies Expense 40 Shipping Supplies Expense 30 Cash over and short 88 Cash 158 Page 29
Petty Cash 220 Cash 220 Fundamental Accounting Principles, Volume 1, Fifteenth Canadian Edition Answer: C A) Diff: 2 Type: MC Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. 91) Banking activities include: A) Bank accounts. Bank deposits. Chequing. Electronic funds transfer. All of these answers are correct. Answer: E A) Diff: 1 Type: MC Topic: 07-14 Bank Reconciliation Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. Page 30
92) A cheque: A) Involves the writer, the signers, the casher, and the bank. Involves the maker, the payee, and the bank. Involves the maker and the payee. Involves the bookkeeper, the payee, and the bank. Involves the signer, the casher, and the company. Answer: B A) Diff: 1 Type: MC Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. 93) Credit card expense may be classified as: A) A discount deducted from sales to get net sales. A selling expense. An administrative expense. All of these answers are correct. A selling expense and an administrative expense. Answer: D A) Diff: 3 Type: MC Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. Page 31
94) A credit memorandum from the bank may be used as: A) An explanation for a payment by cheque. A bank statement. A voucher. An EFT. A cancelled cheque. Answer: D A) Diff: 2 Type: MC Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. 95) A bank statement includes: A) A list of outstanding cheques. A list of petty cash amounts. The beginning and ending balance of the depositor's chequing account. A list of outstanding cheques and a list of petty cash amounts. All of these answers are correct. Answer: C A) Diff: 2 Type: MC Topic: 07-16 Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. Page 32
96) A bank issues a debit memorandum: A) To notify a depositor of all increases to the depositor's account. To notify a depositor of a deduction from a depositor's account. To notify a depositor of an NSF cheque. To notify a depositor of an EFT. To notify a depositor of a deduction from a depositor's account and to notify a depositor of an NSF cheque. Answer: E A) Diff: 3 Type: MC Topic: 07-16 Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. 97) The fees charged businesses by banks on credit card transactions can be shown on the income statement as: A) A discount from revenue used in determining net sales. A selling expense. An administrative expense All of these answers are correct. None of these answers is correct. Answer: D A) Diff: 2 Type: MC Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. Page 33
98) Bank debit cards get their name from: A) The fact that a debit is made to Cash by the business receiving the money. Banks debit your account when they take the money out of it. It is the opposite of a credit card. The fact that a debit is made to Cash by the business receiving the money and banks debit your account when they take the money out of it. None of these answers is correct. Answer: B A) Diff: 3 Type: MC Topic: 07-15 Quick Ratio Learning Objective: 07-05 Explain and identify banking activities and the control features they provide. 99) An analysis that explains the difference between the balance of a chequing account shown in the depositor's records and the balance shown on the bank statement is a(n): A) Internal audit. Bank reconciliation. Bank audit. Trial reconciliation. Analysis of debits and credits. Answer: B A) Diff: 1 Type: MC Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). Page 34
100) In reconciling the bank balance, an unrecorded debit memorandum for printing cheques should be: A) Noted as a memo. Added to the book balance of cash. Deducted from the book balance of cash. Added to the bank balance of cash. Deducted from the bank balance of cash. Answer: C A) Diff: 2 Type: MC Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). 101) Outstanding cheques are cheques that: A) Have been written, recorded, sent to the payees, received, and paid by the bank. Have been written and not yet recorded in the company books. Are blank cheques. Have been written, recorded on the company books, and sent to the payees, but have not yet been paid by the bank. Have been issued by the bank. Answer: D A) Diff: 2 Type: MC Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). Page 35
102) In reconciling the bank balance, the amount of an unrecorded bank service charge should be: A) Added to the book balance of cash. Deducted from the book balance of cash. Added to the bank balance of cash. Deducted from the bank balance of cash. Noted as a memo. Answer: B A) Diff: 2 Type: MC Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). 103) A cheque that was outstanding on last month's bank reconciliation was not among the cancelled cheques returned by the bank this month. As a result, in preparing this month's reconciliation, the amount of this cheque should be: A) Added to the book balance of cash. Deducted from the book balance of cash. Added to the bank balance of cash. Deducted from the bank balance of cash. Noted as a memo. Answer: D A) Diff: 2 Type: MC Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). Page 36
104) Z-Mart made a bank deposit on September 30 that did not appear on September's bank statement. In preparing September's bank reconciliation, the company should: A) Deduct the deposit from the bank statement balance. Send the bank a debit memorandum. Deduct the deposit from September's book balance and add it to October's book balance. Add the deposit to the book balance of cash. Add the deposit to the bank statement balance. Answer: E A) Diff: 3 Type: MC Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). Page 37
Page 38 Fundamental Accounting Principles, Volume 1, Fifteenth Canadian Edition 105) You just joined XYZ Company as their junior accountant. Your first task is to prepare a bank reconciliation in good form at June 30. Your boss provides you with the bank statement and the following information from the accounting records at June 30 Non-sufficient funds (NSF) cheque returned by bank $350 Deposit in transit on June 30 $1,015 Outstanding cheques at June 30 $2,660 Balance per bank statement on June 30 $16,280 Bank service charges $35 Your review the bank statement at June 30 shows that a cheque incorrectly recorded by company as $2,500 was correctly recorded by the bank at $2,050. What is the unadjusted (opening) balance of cash in XYZ's general ledger on June 30? A) $15,470. $14,285. $14,570. $16,703. $16,470. Answer: C A) $16,280 - $2,660 + $1,015 + $35 + $350 + ($2,050 - $2,500) = $14,570 $16,280 - $2,660 + $1,015 + $35 + $350 + ($2,050 - $2,500) = $14,570 $16,280 - $2,660 + $1,015 + $35 + $350 + ($2,050 - $2,500) = $14,570 $16,280 - $2,660 + $1,015 + $35 + $350 + ($2,050 - $2,500) = $14,570 $16,280 - $2,660 + $1,015 + $35 + $350 + ($2,050 - $2,500) = $14,570 Diff: 3 Type: MC Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). 106) The acid-test ratio: A) Is also called the quick ratio. Measures profitability. Measures liquidity. Is also called the quick ratio and measures liquidity. All of these answers are correct. Answer: D A) Diff: 1 Type: MC Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity.
107) The quick assets are: A) Cash, short-term investments, prepaid expenses. Cash, short-term investments, accounts receivable. Cash, inventory, accounts receivable. Cash, accounts receivable, prepaid expenses. Accounts receivable, inventory, prepaid expenses. Answer: B A) Diff: 1 Type: MC Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. 108) J.C. Penney's total quick assets were $5,888 million. Its current assets were $11,700. Its current liabilities were $8,000. The quick ratio is: A).74..50. 1.5..68. 2.2. Answer: A A) Diff: 2 Type: MC Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. Page 39
109) Z-Mart's current assets were $17,980. Its quick assets were $11,420. Its current liabilities were $12,190. Its quick ratio is: A) 1.48. 1.57..94. 2.40. 1.07. Answer: C A) Diff: 2 Type: MC Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. 110) Liquidity problems exist for a company when its quick ratio: A) Is less than the industry average. Is 1 to 1. Is higher than 1 to 1. Is lower than 1 to 1. Is less than the industry average and is lower than 1 to 1. Answer: D A) Diff: 3 Type: MC Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. Page 40
111) The quick ratio differs from the current ratio: A) Because liabilities are divided by current assets. Because prepaid expenses and inventory are excluded. Because it measures profitability. Because it excludes short-term investments. Because prepaid expenses and inventory are excluded and because it measures profitability. Answer: B A) Diff: 3 Type: MC Topic: 07-18 Learning Objective: 07-07 Calculate the quick ratio and explain its use as an indicator of a company's liquidity. 112) Match each of the following items with the appropriate internal control principle(s). (a) Establish responsibility. (b) Maintain adequate records. (c) Insure assets and bond employees. (d) Separate recordkeeping from custody of assets. (e) Divide responsibility for related transactions. (f) Apply technological controls. (g) Perform regular and independent reviews. (1) The cashier does not have access to the cash register record tape and file.: (2) Z-Mart uses a voucher system. (3) Two clerks share the same cash drawer. (4) The bookkeeper prepares and signs cheques. (5) Z-Mart uses a computerized point of sale system. (6) Z-Mart hires Nelson and McGuire, CAs, to perform an audit. (7) Z-Mart buys an insurance policy to protect against employee theft. (8) Z-Mart has separate departments for purchasing, receiving, and accounts payable. (9) Z-Mart has an internal auditor on staff. (10) Z-Mart uses a cheque protector. Answer: (1) a, d (2) e, b (3) a (4) d (5) f (6) g (7) c (8) e, d (9) g (10) f Diff: 3 Type: SA Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. Page 41
113) Identify each of the following items as either (a) cash or (b) cash equivalent. 1. Coins 2. Petty cash 3. Three-month certificate of deposit 4. Currency 5. Certified cheque 6. Cashier's cheque 7. Loose change in a coffee tin 8. Money orders Answer: (1) a (2) a (3) b (4) a (5) a (6) a (7) b (8) a Diff: 2 Type: SA Topic: 07-07 Cash Defined Learning Objective: 07-02 Define cash and explain how it is reported. 114) Identify whether each of the following items affects the bank side or the book side of a bank statement reconciliation. (1) Bank service charges (2) Outstanding cheques (3) Deposits in transit (4) NSF cheque (5) Interest on a chequing account (6) The bank recorded a cheque for $958. The company wrote the cheque for $9,580 (7) The bank printed cheques for the depositor. (8) Debit memo (9) Credit memo (10) The bank collected a $1,000 note for the depositor. Answer: (1) Book (2) Bank (3) Bank (4) Book (5) Book (6) Bank (7) Book (8) Book (9) Book (10) Book Diff: 3 Type: SA Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). 115) Identify how each of the following items would be treated on a bank reconciliation by entering one of the following codes in the space provided. B+ Bank balance increased B- Bank balance decreased G+ General ledger (book) balance increased G- General ledger (book) balance decreased NE No effect on the bank reconciliation Page 42
1. Outstanding cheques. 2. Deposits in transit. 3. Cheque #32, subtracted from the bank balance on last month's bank reconciliation, was returned with this month's statement. 4. Included with the bank statement was a debit memo for bank service charges. 5. Cash receipts placed in the bank's night depository after banking hours were not included on the bank statement prepared on the same date. 6. Cheque #47 was written and recorded by the bank as $753. The business recorded the cheque as $735. 7. A cheque listed as outstanding on last month's bank reconciliation was not returned with the current month's cancelled cheques. 8. A deposit listed as outstanding on last month's bank reconciliation appeared as a deposit on the current month's bank statement. 9. A credit memo enclosed with the bank statement shows that the bank collected a note on behalf of the account holder. 10. A debit memo enclosed with the bank statement shows that the bank paid a note on behalf of the account holder. Answer: 1. B- Outstanding cheques. 2. B+ Deposits in transit. 3. NE Cheque #32, subtracted from the bank balance on last month's bank reconciliation, was returned with this month's statement. 4. G- Included with the bank statement was a debit memo for bank service charges. 5. B+ Cash receipts placed in the bank's night depository after banking hours were not included on the bank statement prepared on the same date. 6. G- Cheque #47 was written and recorded by the bank as $753. The business recorded the cheque as $735. 7. B- A cheque listed as outstanding on last month's bank reconciliation was not returned with the current month's cancelled cheques. 8. NE A deposit listed as outstanding on last month's bank reconciliation appeared as a deposit on the current month's bank statement. 9. G+ A credit memo enclosed with the bank statement shows that the bank collected a note on behalf of the account holder. 10. G- A debit memo enclosed with the bank statement shows that the bank paid a note on behalf of the account holder. Diff: 3 Type: SA Topic: 07-17 Learning Objective: 07-06 Prepare a bank reconciliation and journalize any resulting adjustment(s). Page 43
116) Discuss the purpose of an internal control system. Answer: An internal control system is the set of policies and procedures designed to protect the firm's assets and to ensure reliable accounting. It also should promote efficient operations and encourage employees to comply with company policies. Diff: 2 Type: SA Topic: 07-02 Purpose of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 117) Identify the principles of internal control. Answer: Principles of internal control include the following: establishing responsibilities, maintaining adequate records, insuring assets and bonding employees, separating recordkeeping from custody of assets, dividing responsibilities for related transactions, applying technological controls, and performing regular independent reviews. Diff: 2 Type: SA Topic: 07-03 Principles of Internal Control Learning Objective: 07-01 Define, explain the purpose of, and identify the principles of internal control. 118) Explain the difference between cash and cash equivalents. Answer: Cash consists of cash on hand and demand deposits. For example, this would include coins, currency, and amounts on deposits in bank accounts, chequing accounts and some savings accounts. Cash equivalents are short-term, highly liquid investments made to increase earnings. However, they are similar to cash and many companies combine them with cash in a single balance sheet amount. Diff: 3 Type: SA Topic: 07-07 Cash Defined Learning Objective: 07-02 Define cash and explain how it is reported. Page 44
119) Discuss how the principles of internal control apply to cash receipts. Answer: Internal control principles as applied to cash should ensure that all cash received is properly recorded and deposited. Cash receipts are usually generated via over-the-counter sales and through the mail as cheques received as payments on account. Employees who receive cash should not be allowed to record the amounts of the cash received into the accounting system. Technological devices such as cash registers enforce this principle of separation of recordkeeping from custody of cash. Responsibilities for receipt of cash should include at least two people assigned to open mail and prepare a list that includes the sender's name, amount, and explanation for the payment. This meets the internal control principles of establishing responsibilities and dividing responsibility for related transactions. Diff: 3 Type: SA Topic: 07-09 Control of Cash Receipts Learning Objective: 07-03 Apply internal control to cash. 120) What is the purpose of the petty cash account? Answer: The petty cash account is used to serve as a controlling account for small amounts of cash disbursements. Diff: 1 Type: SA Topic: 07-11 Banking Activities as Controls Learning Objective: 07-04 Explain and record petty cash fund transactions. Page 45
121) On September 1, Bartoletti Company established a petty cash fund for $100. On September 10, the petty cash fund was replenished when there was $16.50 on hand and there were petty cash receipts for office supplies, $27; transportation-in, $32; and postage, $21.50. On September 15, the petty cash fund was increased to $125. Record these transactions in general journal format. Answer: Diff: 2 Type: SA Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. 122) A petty cash fund was originally established with a cheque for $150. On December 31, you find the following items in the petty cash fund: Postage $43.50 Office supplies 51.85 Office equipment repair 49.00 Cash 4.25 Prepare the general journal entry to record the replenishment of the petty cash fund on December 31. Answer: Page 46 Diff: 2 Type: SA Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions.
123) The Crown Company established a $1,000 petty cash fund by issuing a cheque to the custodian on October 1. On October 15, the petty cash fund was replenished and increased to $1,500. The contents of the petty cash fund prior to the October 15 replenishment were: Prepare the general journal entry to record the reimbursement and increasing of the fund on October 15. Answer: Diff: 2 Type: SA Topic: 07-12 Basic Bank Services Learning Objective: 07-04 Explain and record petty cash fund transactions. Page 47