Smartbook Ch 4

A good internal control system would require that the employee who handles cash must not be involved in

reconciling the bank statement.

A good internal control system for cash would require that those who handle cash should not be involved with

- the accounting records - reconciliation of bank balances

A journal entry that affects a company's Statement of Cash Flows will include an inflow or outflow of . (Enter only one word per blank)

Blank 1: cash

The accounting term for a situation where two or more people act in coordination to circumvent internal controls is

Blank 1: collusion or colluding

When adjusting the company's cash account balance in a bank reconciliation, which item must be added to the cash account balance?

Collections of funds by the bank

The framework for designing an internal control system is provided by the

Committee of Sponsoring Organizations (COSO) of the Treadway Commission.

Who has final responsibility for internal controls?

Management

Which of the following allows greater reliance by investors on reported financial statements?

Strong internal control systems

The ending balance in cash is reported in which financial statement(s)?

The balance sheet and statement of cash flows

Munchkin Inc. pays for promotional expenses by charging the company's credit card. Munchkin should debit an expense and credit

accounts payable

Cash disbursements that have been recorded in the company's accounting records but are not yet recorded by the bank are called

checks outstanding

When a person intentionally deceives another person or company for personal gain, this is referred to as

fraud or fraudulence

The control environment is most affected by the attitudes and actions of

management

The acronym NSF stands for

nonsufficient funds

The statement of cash flows classifies items as

operating, investing, and financing

Separation of duties and E-commerce controls are examples of ______ controls.

preventive

A petty cash fund is used for

small amounts of cash needed for low-cost items

A bank reconciliation is a procedure used to determine if the cash balance in the bank statement equals

the ending balance of cash in the accounting records.

Which of the following are components of internal control?

- Control environment - Risk assessment - Control activities - Monitoring

Which of the following are detective controls?

- Reconciliations - Audits - Performance reviews

When adjusting the company's cash account balance in a bank reconciliation, which items reduce the company's cash account balance? (Select all that apply.)

- Service charges - Charges for NSF checks

A company pays for a purchase with a credit card. What is the effect of this purchase on the accounts?

Accounts payable will increase

A company's plans to safeguard company assets and enhance the reliability and accuracy of accounting information are referred to as

internal controls.

Two types of control activities are

preventive and detective controls.

Debit and credit cards used by employees in the course of fulfilling their employment objective are commonly referred to as ______.

purchase cards

Which of the following is an internal control procedure for cash disbursements?

Disbursements should be made by check, debit, or credit card.

True or false: Employee purchases using cash or purchase cards must be recorded immediately as business expense.

False

The asset that is most susceptible to employee fraud is

cash

Internal control over cash is important because

cash can be stolen

Neumann, Inc.'s books show an ending cash balance of $20,000 before preparing the bank reconciliation. Given that the bank reconciliation shows outstanding checks of $2,000; deposits outstanding of $3,000; NSF check of $200; and interest earned on the bank account of $30, the company's up-to-date ending cash balance equals:

$19,830 Reason: $20,000-$200+$30

Arcelia Corp.'s bank statement has an end balance of $40,000. The deposits outstanding were $7,000. A note was collected by the bank for $2,000. Checks outstanding at the end of the month were $1,000. Using the bank statement, what is the corrected cash balance?

$46,000 Reason: $40,000 + 7,000 - 1,000 = $46,000. The note collected by the bank is already reflected on the bank statement.

Which of the following items will require a journal entry following a bank reconciliation? (Select all that apply.)

- NSF checks - Notes collected by the bank

Which of the following are preventive controls?

- Separation of duties - Physical controls

Margot, a prospective investor, wants to know how much cash Ziegler Inc. has on December 31. Margot can find the information in Ziegler's: (Select all that apply.)

- balance sheet - statement of cash flows

The sets the overall ethical tone of the company with respect to internal control.

Blank 1: control Blank 2: environment

Preparation of a bank helps maintain control of cash accounts.

Blank 1: reconciliation

True or false: Variability in operating cash flows is unimportant as long as the total cash flows over a three-year period is sufficiently positive.

False

True or false: The entry for a sale to customers is different depending on whether the customer pays with cash or a check.

False Reason: The entry for a sale is the same regardless whether it is made with cash or a check. A check is a treated the same as cash.

The components of internal control are

based on the ethical tone set by management

Employee purchases should be included in the accounting records

by the end of the accounting period.

The asset that is most easily stolen and susceptible to fraud is

cash

When a company finds out that an NSF check was written to the company, the company must ______ the balance in the cash account.

decrease

Cash receipts that have been recorded in the company's accounting records but are not yet recorded by the bank are

deposits outstanding.

The Committee of Sponsoring Organizations (COSO) of the Treadway Commission provided a framework for

designing an internal control system.

The amount of cash in the balance sheet reflects the

ending cash on the balance sheet date.

Internal control components are built on the foundation of the tone established by top management in its control environment.

ethical

If a company records a transaction before the bank records the same transaction, this is called a/an ______ difference.

timing

A bank reconciliation compares the company's cash records with the bank statement and discovers differences in those amounts due to

timing differences and errors.

Malik Corp.'s bank statement has an end balance of $50,000. The deposits outstanding were $6,000. NSF checks were $1,000. Checks outstanding at the end of the month were $3,000. Using the bank statement, what is the corrected cash balance?

$53,000 Reason: $50,000 + 6,000 - 3,000 = $53,000. The NSF checks are already recorded by the bank.

Which of the following steps are necessary to reconcile the bank balance and the cash account balance.

- Adjust bank's cash balance for items not in bank statement - Record items that reconcile the company's cash balance - Adjust the company's cash balance for items not in company records

The two types of control procedures are preventive and

Blank 1: detective

Which of the following items are included in cash?

- Balance in checking accounts - Checks from customers - Currency and coins

High profile accounting scandals in the early 2000s prompted the passage of the:

Sarbanes-Oxley Act

Which of the following items are not included in cash?

accounts receivable from customers

Which of the following entries affect a company's cash flows?

- Debit supplies; credit cash - Debit rent expense; credit cash

What would cause a bank statement not to agree with the cash balance in the accounting records?

- The bank paid interest that the company has not recorded. - The bank made an error in recording a deposit made by the company. - Deposits outstanding that have been recorded on the company's records, but not on the bank's. - The company made an error in recording a deposit.

Internal control procedures for cash disbursements (other than small disbursements from petty cash) should include that (Select all that apply.)

- all disbursements are made by check, debit card, or credit card. - all expenditures are authorized. - checks are signed by authorized individuals.

Which of the following items are classified as cash inflows from operating activities on the statement of cash flows? collection from customers payment of utilities borrowing from bank receipt of interest sale of a building

- collection from customers - receipt of interest

The three classifications on the statement of cash flows are cash flows from (Select all that apply.)

- operating activities - financing activities - investing activities

Which of the following items are classified as cash outflows from operating activities on the statement of cash flows? purchase of supplies with cash purchase of a building payment of employee salaries retirement of common stock interest paid on notes

- purchase of supplies with cash - payment of employee salaries - interest paid on notes

List the steps for a bank reconciliation in the correct order. (Drag the items to put them in the proper order with the first step on top.)

1. Adjust bank's cash balance for items not on bank statement 2. Adjust the company's cash balance for items not in company records 3. Update the company's Cash account by recording items identified in the previous step

In a bank reconciliation, which of the following will require a journal entry by the company?

Adjustments to the balance per books for items discovered on the bank reconciliation that were not yet recorded on the books

When two or more persons work together to circumvent internal control procedures and commit a fraud, this is called

Blank 1: collusion or colluding

A periodic performance review is an example of a(n) control

Blank 1: detective or internal

When adjusting the bank balance in a bank reconciliation, which item must be added to the bank balance?

Deposits outstanding

Which of the following led to the passage of the Sarbanes-Oxley Act of 2002?

High profile accounting scandals during the early 2000s

This month's bank statement includes a check from a customer that was marked NSF. How would this item be treated on the bank reconciliation? Is it added or subtracted from the bank balance or the company's cash (book) balance?

It would be deducted from the company balance.

When adjusting the bank balance in a bank reconciliation, which item must be subtracted from the bank balance?

Outstanding checks

Which of the following is classified as part of the control environment?

Overall ethical tone of the organization with respect to internal control

The Public Company Accounting Reform and Investor Protection Act of 2002 is known as the

Sarbanes-Oxley Act

Who is responsible for providing an opinion on management's assessment of internal control?

The company's auditors

True or false: An internal control goal for cash receipts is to ensure that the business documents the correct amount of cash received and safely deposits the cash into its bank account.

True Reason: Because cash is valuable, portable, and owned by the person who possesses it, special care must be taken to safeguard all cash receipts.

The Sarbanes-Oxley Act applies to

companies that are required to file with the SEC

Acme, Inc.'s books show an ending cash balance of $10,000 before preparing the bank reconciliation. Given that the bank reconciliation shows outstanding checks of $3,000; deposits outstanding of $2,000; NSF check of $100; and interest earned on the bank account of $10, the company's up-to-date ending cash balance equals:

$9,910 Reason: 10,000-100+10 The NSF check decreases the company's cash balance now because it was previously recorded as an increase. Outstanding checks and deposits outstanding have already been recorded by the company. $10,000 - $100 + $10

Which of the following will cause differences between the bank statement balance and the accounting balance for cash?

- Errors - Timing differences

Effective internal control over cash requires segregation of duties. Which of the following duties should be segregated?

- Opening the mail and deposit of checks in the bank - Depositing checks into the bank and recording receipts in the accounting records

Which of the following items are classified as cash inflows from operating activities on the statement of cash flows?

- collection of an accounts receivable - interest received on notes receivable - receipt of interest - collection from customers

A $250 bank deposit made on the last day of the month did not appear on this month's bank statement. How would this item be treated on the bank reconciliation?

- It would be added to the bank balance. Reason: Deposits in transit should be added to the bank, not company, balance. The deposit was already added to the books back when the deposit was made. The bank has yet to record the deposit.

Match each component of internal control with its definition. Instructions Monitoring Control activities Risk assessment Control environment

- Monitoring: Includes formal procedures for reporting control deficiencies - Control activities: Policies and procedures that help ensure management's directives are being carried out - Risk assessment: Identifies and analyzes factors that could prevent objectives from being achieved - Control environment: Formal policies related to management's philosophy, assignment of responsibilities, and organizational structure

Match each activity with its classification on the statement of cash flows. Purchasing inventory from vendors Signing a long-term promissory note Selling equipment

- Purchasing inventory from vendors: Operating Activity - Signing a long-term promissory note: Financing Activity - Selling equipment: Investing Activity

Match each activity with its classification on the statement of cash flows. Sell goods to customers Sell stock to investors Purchase equipment

- Sell goods to customers: Operating Activity - Sell stock to investors: Financing Activity - Purchase equipment: Investing Activity

Smith's operating cash flows in millions were $100, $150, $80 during the past three years; while Jones' operating cash flows in millions were $105, $115, $110 during the same period. From the perspective of operating cash flows, which company would likely be perceived as riskier?

- Smith Reason: Smith, because its operating cash flows show more variability

Company employees who make necessary expenditures during the course of their employment may utilize "purchase cards," which may be in the form of: (Select all that apply.)

- debit cards - credit cards

Which of the following are common controls over cash receipts? (Select all that apply.)

- opening mail daily and making a detailed list of checks received - having two different employees take custody of the checks and make the deposit

Which of the following items are classified as cash outflows from operating activities on the statement of cash flows?

- payment of salaries - payment of an accounts payable balance - interest paid on notes - purchase of supplies with cash - payment of employee salaries

Internal control consists of plans to (Select all that apply.)

- provide accurate and reliable accounting information. - safeguard company assets.

Because cash is assumed to be available for spending, it is typically reported on the balance sheet as a(n)

Blank 1: current, short-term, short term, or shortterm Blank 2: asset

A(n) is a mistake in accounting, which can be intentional or unintentional. (Enter one word per blank)

Blank 1: error

Differences between the bank statement balance and the cash account balance in the accounting records are primarily caused by timing differences and

Blank 1: errors, mistakes, fraud, or error

A key factor in helping safeguard cash is a well functioning ________ system.

Blank 1: internal Blank 2: control or controls

A small amount of cash on hand to pay for minor purchases is commonly referred to as a(n) fund. (Enter one word per blank.)

Blank 1: petty Blank 2: cash

One of the most important internal controls for cash is the bank

Blank 1: reconciliation or recon

A bank statement may not agree with the amount of cash recorded by the company in the cash account because of differences and errors.

Blank 1: timing or time

A(n) difference in cash occurs when a company records a transaction either before or after the bank records the same transaction.(Enter only one word.)

Blank 1: timing or time

The bank will show a customer's deposit on bank statements as a ______.

credit, because a deposit is a liability from the bank's point of view

Lindell sells $100 of goods to a customer. The customer pays with a personal check. Recording this transaction will include a

debit to Cash

The bank will show a customer's withdrawal as a ______.

debit, because a withdrawal decreases its liability from the bank's point of view

An intentional error by an employee that results in theft is referred to as a ______.

fraud

The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources is called occupational

fraud

Because most companies receive payments for the sale of products and services either in the form of cash or as a check received through the mail,

internal control over cash receipts is important.

Strong internal control systems allow greater reliance by investors on:

reported financial statements