CHAPTER 7
Which of the explicitly requires that all publicly traded companies must maintain adequate internal controls?
Sarbanes-Oxley Act
A very small company would have the most difficulty in implementing which of the following internal control activities?
Separation of duties
Nelson Company collected the following information to prepare its August bank reconciliation: Cash balance per books, August 31, $9,400. Deposits in transit, $1,100. Notes receivable with interest collected by bank, $2,500. Bank service charges, $50. Outstanding checks, $1,450. NSF check, $400. How much is the adjusted cash balance per books on August 31?
$11,450 Solution: The book side of the cash reconciliation begins with $9,400 to which amounts collected by the bank are added (e.g., the note receivable of $2,500) and amounts the bank deducted from the account are subtracted (e.g., the bank service charges of $50 and the NSF check of $400) to arrive at the adjusted cash balance per books of $11,450. Outstanding check and deposits in transit affect the bank side of the reconciliation. Alternatively: Balance per books on August 31, $9,400 Add: Note collected by the bank, $2,500 Less: Bank service charge, ($50) Less: customer's NSF check, ($400) Adjusted cash balance per books on August 31, $11,450
At June 30, Kingman Company has the following bank information: Cash balance per bank, $11,500 Outstanding checks, $1,375 Deposits in transit, $600 Notes receivable collected by bank, $250 Bank service charge, $50 NSF check, $125 What is the company's adjusted cash balance at the end of June?
$10,725 Solution: Cash per bank, 11,500 Add: Deposits in transit, 600 Less: Outstanding checks, (1,375) Adjusted cash balance, 10,725
At June 30, Klinger Company has the following information: Cash balance per bank, $10,500 Deposits in transit, $1,225 Notes receivable and interest collected by bank, $1,000 Bank charge for check printing, $50 Outstanding checks, $450 NSF check, $100 What is the company's adjusted cash balance at the end of June?
$11,275 Solution: Adjusted cash balance = cash per bank - outstanding checks + deposits in transit Adjusted cash balance = 10,500 - 450 + 1,225 = 11,275
Nelson Company gathered the following reconciling information in preparing its August bank reconciliation: Cash balance per books, Aug. 31, $13,200 Bank charge for check printing, $150 Outstanding checks, $9,000 Deposits in transit, $1,800 NSF check, $840 Notes receivable and interest collected by bank, $4,440 The adjusted cash balance per books on August 31 is
$16,650
A check correctly written by the company for $257 was incorrectly recorded by that same company as $275. On the bank reconciliation
$18 should be added to the cash balance per books
Barker Company collected the following information to prepare its July bank reconciliation: Cash balance per bank, July 31, $41,000. Note receivable of $8,500 plus $500 of interest collected, $9,000. Outstanding checks, $6,000. Deposits in transit, $5,400. Bank service charges, $85. NSF check, $2,100. How much is the adjusted cash balance per bank on July 31?
$40,400
Nelson Company gathered the following reconciling information in preparing its August bank reconciliation: Cash balance per books, Aug. 31, $5,400 Deposits in transit, $550 Outstanding checks, $2,500 NSF check, $320 Notes receivable and interest collected by bank, $950 Bank charge for check printing, $65 The adjusted cash balance per books on August 31 is
$5,965 Solution: Balance per books on August 31, $5,400 Add: Note collected by the bank, $950 Less: Bank service charge, ($65) Less: Customer's NSF check, ($320) Adjusted cash balance per books on August 31, $5,965
Chester Company collected the following information to prepare its April bank reconciliation: Cash balance per bank, April 30, $71,600. Note receivable of $1,900 plus $200 of interest collected, $2,100. Outstanding checks, $6,400. Deposits in transit, $1,500. Bank service charges, $10. NSF check, $500. The company erroneously recorded a $1,200 cash payment on its books as a $2,100 cash payment. Also, the bank erroneously added $1,000 to the company's checking account. The bank should have added the money to a different customer's account. How much is the adjusted cash balance per bank on April 30?
$65,700 Solution: Balance per bank on Apr. 30, $71,600 Add: Deposits in transit, $1,500 Less: Outstanding checks, ($6,400) Less: Bank error (see note below), ($1,000) Adjusted cash balance per banks, $65,700 Note: The bank added money to the company's account; the bank statement overstates the company's cash balance and the bank needs to be notified and instructed to remove the money. Even if the company does not contact to correct the error, it won't be long until the error is discovered and corrected.
Nelson Company collected the following information to prepare its August bank reconciliation: Cash balance per books, August 31, $7,000. Deposits in transit, $600. Notes receivable with interest collected by bank, $300. Bank service charges, $45. Outstanding checks, $330. NSF check, $225. How much is the adjusted cash balance per books on August 31?
$7,030 Solution: The book side of the cash reconciliation begins with $7,000 to which amounts collected by the bank are added (e.g., the note receivable of $300) and amounts the bank deducted from the account are subtracted (e.g., the bank service charges of $45 and the NSF check of $225) to arrive at the adjusted cash balance per books of $5,700. Outstanding check and deposits in transit affect the bank side of the reconciliation. Alternatively: Balance per books on August 31, $7,000 Add: Note collected by the bank, $300 Less: Bank service charge, ($45) Less: customer's NSF check, ($225) Adjusted cash balance per books on August 31, $7,030
Nelson Company gathered the following reconciling information in preparing its August bank reconciliation: Cash balance per books, August 31, $6,400 Deposits in transit, $300 Outstanding checks, $2,000 NSF check, $150 Notes receivable and interest collected by bank, $1,200 Bank charge for check printing, $75 The adjusted cash balance per books on Aug. 31 is
$7,375. Solution: Balance per books on August 31, $6,400 Add: Note collected by the bank, $1,200 Less: Bank service charge, ($75) Less: Customer's NSF check, ($150) Adjusted cash balance per books on August 31, $7,375
At June 30, Kingman Company has the following bank information: Cash balance per bank, $7,200 Outstanding checks, $560 Deposits in transit, $1,100 Credit memo for interest, $20 Bank service charge, $40 What is Kingman's adjusted cash balance on June 30?
$7,740 Solution: Cash per bank, 7,200 Add: Deposits in transit, 1,100 Less: Outstanding checks, (560) Adjusted cash balance, 7,740
Chester Company collected the following information to prepare its September bank reconciliation: Cash balance per books, September 30, $75,750. Note receivable of $4,200 plus $300 of interest collected, $4,500. Outstanding checks, $14,500. Deposits in transit, $10,250. Bank service charges, $50. NSF check, $500. The company erroneously recorded a $320 cash payment on its books as a $230 cash payment. Also, the bank erroneously subtracted $750 from the company's checking account. The bank should have subtracted the money to a different customer's account. How much is the adjusted cash balance per books on September 30?
$79,610 Solution: Balance per books on Sep. 30, $75,750 Add: Note collected by the bank including interest, $4,500 Less: Bank service charge, ($50) Less: NSF check, ($500) Less: Book error (see note below), ($90) Adjusted cash balance per books, $79,610 Note: The company paid $320 but subtracted only $230 from its books. The company needs to subtract an additional $90.
A check correctly written by West Company for $167 was incorrectly recorded on West Company's books as $176. As a result, the bank reconciliation should include
$9 added to the cash balance per books Solution: The company deducted too much from its cash balance. Correcting the error requires adding back the difference between the correct amount and the amount deducted.
A check correctly written by a company for $312 was incorrectly recorded by that same company as $321. On the bank reconciliation
$9 should be added to the cash balance per books
A check correctly written by a company for $321 was incorrectly recorded by that same company as $312. On the bank reconciliation
$9 should be deducted from the cash balance per books.
Chester Company collected the following information to prepare its September bank reconciliation: Cash balance per books, September 30, $89,300. Note receivable of $1,900 plus $200 of interest collected, $2,100. Outstanding checks, $5,100. Deposits in transit, $3,800. Bank service charges, $50. NSF check, $600. The company erroneously recorded a $200 cash payment on its books as a $2,000 cash payment. Also, the bank erroneously added $1,000 to the company's checking account. The bank should have added the money to a different customer's account. How much is the adjusted cash balance per books on September 30?
$92,550 Solution: Balance per books on Sep. 30, $89,300 Add: Note collected by the bank including interest, $2,100 Less: Bank service charge, ($50) Less: NSF check, ($600) Add: Book error (see note below), $1,800 Adjusted cash balance per books, $92,550 Note: The company paid $200 but subtracted $2,000 from its books. The company needs to add back the $1,800.
Which of the following statements is false with regards to internal controls?
-Publicly-traded companies internal control system are evaluated by internal auditors but not by independent auditors. -Publicly-traded companies must eliminate redundant internal controls -Stockholders of publicly-traded companies can be imprisoned if their companies fail to comply with internal control rules.
Which of the following is an effective internal control over cash disbursements?
-The separation of authorization of checks and the actual writing of the checks -The use of pre-numbered checks -The storage of blank checks in a secure place
Which of the following requires an adjusting entry on the company's books as the result of a bank reconciliation?
A bank service charges
For which of the following errors should the appropriate amount be added to the cash balance per books on a company's bank reconciliation?
A check written by the company for $470 was incorrectly recorded on the company's books as $740.
For which of the following errors should the appropriate amount be added to the cash balance per books on a company's bank reconciliation?
A check written by the company for $57 was incorrectly recorded on the company's books as $75. Solution: The company decreased the company's balance by $75 when it should have decreased it by $57. Correcting this error requires adding $18 to the cash balance per books.
For which of the following errors should the appropriate amount be added to the cash balance per bank statement on a company's bank reconciliation?
A check written by the company for $60 was incorrectly recorded by the bank as $600. Solution: Amounts added to the cash balance per bank statement include deposits in transit and bank errors that erroneously decreased the company's bank account balance. The bank decreased the company's balance by $600 when it should have decreased it by $60. Correcting this error requires adding $510 to the cash balance per bank statement.
For which of the following errors should the appropriate amount be subtracted from the cash balance per books on a bank reconciliation?
A check written by the company for $63 was incorrectly recorded on the company's books as $36. -A deposit of $470 was incorrectly recorded by the bank as a deposit of $740. Solution: Amounts subtracted from the cash balance per books include NSF checks, bank service charges, and company recording errors that erroneously increased the company's cash account balance. The company decreased the company's balance by $36 when it should have decreased it by $63. Correcting this error requires subtracting $27 from the cash balance per books.
For which of the following errors should the appropriate amount be added to the cash balance per books on a company's bank reconciliation?
A deposit of $1,200 was incorrectly recorded by the company as a deposit of $120.
For which of the following errors should the appropriate amount be subtracted from the cash balance per bank statement on a company's bank reconciliation?
A deposit of $470 was incorrectly recorded by the bank as a deposit of $740.
Which one of the following is a physical control?
Alarms to prevent break-ins, time clocks for recording time worked, safees and vaults to store cash
Which internal control principle is important in a control system for handling cash receipts?
All of these Solution: The system for handling cash receipts uses several important internal control principles, including (1) establishment of responsibility, (2) segregation of duties, (3) documentation procedures, (4) physical controls, (5) independent internal verification, and (5) human resource controls.
For which item below might a bank issue a credit memorandum to a depositor's account?
Collection of a note receivable, interest earned
A company's monthly bank statement shows a collection of a note receivable by the bank in the amount of $250. Which of the following is one part of the journal entry needed to record the note collection by the company?
Credit to Notes Receivable for $250
A company's monthly bank statement shows a collection of a note receivable by the bank in the amount of $500. Which of the following is one part of the journal entry needed to record the note collection by the company?
Credit to Notes Receivable for $500
A company's monthly bank statement shows a collection of a note receivable by the bank in the amount of $1,000. Which of the following is one part of the journal entry needed to record the note collection by the company?
Debit to Cash for $1,000 Solution: Cash will be debited for the $1,000 because cash is being increased (i.e., collected). Also, Notes Receivable will be credited for $1,000 because it is an asset that is being reduced. This transaction is merely an asset exchange of one asset for another.
Internal controls are methods and measures adopted to do all of the following except:
Eliminate liabilities associated with product-related lawsuits.
Principles of internal control are an important part of a company's efforts to address risks it faces, such as fraud. Which of the following is not a principle of internal control?
Exploitation of opportunities
Which of the following is an element of the fraud triangle?
Financial Pressure, opportunity
Which one of the following is not a primary component of an internal control system?
Financial pressure Opportunity Solution: The five primary components of an internal control system are (1) control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring. Opportunity is not a primary component of an internal control system; it is one of the three components of the fraud triangle.
Which of the following is not one of the main factors that contributes to fraudulent activity and is also known as part of the fraud triangle?
Incompatible duties Solution: The three components of the fraud triangle are (1) opportunity, (2) financial pressure, and (3) rationalization. When these three occur, the possibility of fraud is high.
Which of the following is the adjusting entry that Max Company would journalize when Max Company's bank statement indicates that the bank collected a $1,000 non-interest bearing note receivable from one of Max's customers on Max Company's behalf?
Increase the Cash account by $1,000 and decrease the Notes Receivable account by $1,000. Solution: The cash account increases and notes receivable decreases. This is the same transaction that would be recorded if a company directly receives a check in the mail from a customer.
Which of the following is the adjusting entry that Max Company would journalize when Max Company's bank statement indicates that the bank collected a $200 non-interest bearing note receivable from one of Max's customers on Max Company's behalf?
Increase the Cash account by $200 and decrease the Notes Receivable account by $200.
Which one of the following is not an objective of a system of internal controls?
Increase the readability of the financial statements.
Which one of the following statements is correct?
Internal auditors are company employees who evaluate the effectiveness of the company's system of internal control on a continuous basis.
Which of the following is the correct adjusting journal entry for the bank account holder when notified of a bank debit memorandum for a monthly service charge of $25?
Miscellaneous Expense 25 Cash 25
Which of the following is the correct adjusting journal entry for the bank account holder when notified of a bank debit memorandum for a monthly service charge of $50?
Miscellaneous Expense 50 Cash 50
For which of the following might a bank issue a debit memorandum to a depositor's account?
Monthly service charges, NSF check
Which of the following requires an adjusting entry on the company's books as the result of a bank reconciliation?
NSF check
Which of the following would not be subtracted from the balance per books on a bank reconciliation?
Outstanding Checks
Which one of the following is not a control procedure used for over-the-counter receipts?
Pre-numbered checks are used to buy supplies. All of these are control procedures used for over-the-counter receipts
Chester Company collected the following information to prepare its June bank reconciliation: Cash balance per bank, June 30, $67,300. Note receivable of $2,500 plus $250 of interest collected, $2,750. Outstanding checks, $17,100. Deposits in transit, $12,900. Bank service charges, $50. NSF check, $500. The company erroneously recorded a $560 cash payment on its books as a $650 cash payment. Also, the bank erroneously added $500 to the company's checking account. The bank should have added the money to a different customer's account. How much is the adjusted cash balance per bank on June 30?
Solution: Balance per bank on Jun. 30, $67,300 Add: Deposits in transit, $12,900 Less: Outstanding checks, ($17,100) Less: Bank error (see note below), ($500) Adjusted cash balance per banks, $62,600 Note: The bank added money to Double Company's account; the bank statement overstates Double's cash balance and the bank needs to be notified and instructed to remove the money.
Which of the following statements is correct regarding internal controls?
The person who has custody of assets should not perform the record keeping for the assets.
Which of the following is not a good internal control procedure for cash?
The same individual counts the amount of cash received and records the amount of cash deposited.
Internal control consists of all of the methods and measures adopted within an organization to do all of the following except
To deliver goods and services to customers more rapidly
Which of the following is not a reason why an organization establishes a system for internal control?
To prevent a corporate take-over by a competitor
Which of the following items on a bank reconciliation would require an adjusting entry on the company's books?
a bank service charge
When preparing a bank reconciliation, how are deposits in transit handled?
added to the bank balance
A deposit of $530 was incorrectly recorded by the bank as a deposit of $350. In the bank reconciliation, this $180 error would be
added to the cash balance per bank statement. Solution: Amounts added to the cash balance per bank statement include deposits in transit and bank errors that erroneously decreased the bank account balance. The bank increased the company's balance by $350 when it should have increased it by $530. Correcting this error requires adding $180 to the cash balance per bank statement.
A check written by the company for $780 was incorrectly recorded on the company's books as $870. In the bank reconciliation, this $90 error would be
added to the cash balance per books.
A company's system of internal control
can be rendered ineffective by employee collusion.
Which one of the following is a primary component of an internal control system?
control environment, monitoring
All of the following bank reconciliation items would result in an adjusting entry on the company's books except
deposits in transit
Which of the following will not require an adjusting entry on the company's books as a result of a bank reconciliation?
deposits in transit
The use of prenumbered checks is an example of
documentation procedures
Allowing only the treasurer to sign checks is an example of
establishment of responsibility
Handy Inc. permits only designated personnel such as cashiers to handle cash receipts. What principle is being applied?
establishment of responsibility
Internal auditors
evaluate the system of internal controls for the companies that employ them.
Certain computer programs are used to limit unauthorized access to certain files. This is an example of
physical controls
Russell Company assembled the following information in completing its March bank reconciliation: Cash balance per bank, $11,460 Cash balance per books, $13,200 Outstanding checks, $2,325 Deposits in transit, $3,750 NSF check, $240 Bank service charge, $75 The net effect of the adjusting entries that the company will journalize as a result of this reconciliation will
reduce its cash account by $315 Solution: Cash per books, 13,200 Less: NSF check, (240) Less: Bank service charge, (75) Adjusted cash balance, 12,885 Total reduction in cash per books = 240 + 75 = 315 FYI: Cash per bank, 11,460 Add: Deposits in transit, 3,750 Less: Outstanding checks, (2,325) Adjusted cash balance per bank, 12,885
Russell Company assembled the following information in completing its March bank reconciliation: Balance per bank, $11,460 Outstanding checks, $2,325 Deposits in transit, $3,750 NSF check, $420 Bank service charge, $75 Cash balance per books, $13,380 The adjusting entry that the company will journalize as a result of this reconciliation will
reduce its cash account's balance by $495 Solution: Cash per books, 13,380 Less: NSF check, (420) Less: Bank service charge, (75) Adjusted cash balance, 12,885 Total reduction in cash per books = 420 + 75 = 495
Ron Jones has been a trusted employee for over 10 years. He is responsible for ordering merchandise inventory, receiving the inventory items, and authorizing the payment for these items. Which internal control principle, if any, is being violated?
segregation of duties
Which of the following is not an element of the fraud triangle?
segregation of duties
If a company correctly wrote a check for $491 but it incorrectly recorded the check as $419 on its books, the appropriate treatment on the bank reconciliation would be to
subtract $72 from the cash balance per books
A deposit of $270 was incorrectly recorded by the bank as a deposit of $720. In the bank reconciliation, this $450 error would be
subtracted from the cash balance per bank statement. Solution: Amounts subtracted from the cash balance per bank statement include outstanding checks and bank errors that erroneously increased the bank account balance. The bank increased the company's balance by $720 when it should have increased it by $270. Correcting this error requires subtracting $450 from the cash balance per bank statement.
Which of the following is not a principle of internal control?
teamwork between employees
A bank reconciliation should be prepared
to explain any difference between the depositor's balance per books with the balance per bank