Accounting Chapter 7

The following items could appear on a bank​ reconciliation: Outstanding checks, $670

A subtraction from the bank balance

The following items could appear on a bank​ reconciliation: NSF check from the customer

A subtraction from the book balance

The following items could appear on a bank​ reconciliation: The bank incorrectly decreased the​ business's by​ $350 for a check written by another business.

Addition to the bank balance

The following items could appear on a bank​ reconciliation: Deposits in transit, $1,500

An addition to the bank balance

The following items could appear on a bank​ reconciliation: Bank collection of note receivable

An addition to the book balance

The following items could appear on a bank​ reconciliation: Interest earned on bank balance

An addition to the book balance

Information System

Without a sufficient one of these, information cannot properly be gathered and summarized.

When an order is placed for merchandise, the purchaser sends a(n) _________ to the vendor.

purchase order When an order is placed for merchandise, the purchaser sends a purchase order to the vendor.

After approving all documents from a shipment received, the ________ sends a check to the vendor.

purchaser After all documents are approved, the purchaser sends a check to pay the vendor.

For each Petty Cash payment, the custodian of the account prepares a(n) ________.

petty cash ticket A petty cash ticket is prepared for each payment from the Petty Cash account. At the end of each month, the petty cash is replenished to its original balance.

Control Procedures

Component of internal control that helps ensure business goals are achieved.

Shady Mills Company Cash account shows an ending balance of $1,200. The bank statement shows an ending balance of $770. Additional information includes: $30 Service charge $300 Deposit in transit $50 Outstanding checks What is the adjusted bank balance?

$1,020 The adjusted bank balance takes the ending bank statement balance of $770 + deposits in transit of $300 - outstanding checks of $30 = $1,020. Service charge is part of the adjusted book balance.

Shady Mills Company Cash account shows an ending balance of $1,000. The bank statement shows an ending balance of $680. Additional information includes: $30 Service charge $300 Deposit in transit $10 Interest earned on bank balance What is the adjusted book balance?

$980 The adjusted book balance takes the ending Cash balance of $1,000 + Interest Receivable of $10 - Service Charge of $30 = $980. Deposit in transit is part of the adjusted bank balance.

Down Company Manufacturing has the following select financial data as of December 31. Cash $20,000 Cash Equivalents $4,000 Accounts Receivable $3,000 Total Current Liabilities $30,000 What is the cash ratio?

0.80 The cash ratio is calculated by Cash ratio = (Cash + Cash equivalents) / Total current liabilities Accounts Receivable is not included in this calculation. The cash ratio is (20,000 + 4,000) / 30,000 = 0.80.

Abbott Company completed the bank reconciliation and needs to record the $30 service charge from the bank. The journal entry to record this transaction would be:

Bank Expense 30 Cash 30 To record the $30 service charge from the bank, you need to debit Bank Expense and credit Cash.

Which of the following is subtracted from the book balance in a bank reconciliation?

Banks service charge Bank service charges are subtracted from the book balance for a bank reconciliation.

Cash ratio equation:

Cash / Current Liabilities

Abbott Company completed the bank reconciliation and needs to record the $10 earned in interest from the bank balance. The journal entry to record this transaction would be:

Cash 10 Interest Revenue 10 To record the interest received from our bank balance, we would debit Cash and credit Interest Revenue.

The 5 components of internal control are:

Control procedures Risk assessment Information system Monitoring of controls Environment

Which of the following is added to the bank balance in a bank reconciliation?

Deposits in transit Deposits in transit is added into the bank balance for a bank reconciliation.

Which of the following is NOT a part of the definition of internal control?

Encourage employees to change the company policies All are part of the definition of internal control except encourage employees to change the company policies.

Audits

Examination of a company's financial statements and accounting system by a trained accounting professional.

Separation of duties

Example: The person who opens the bank statement should not also be the person who is reconciling cash.

Risk Assessment

Identification of uncertainties that may arise due to a company's products, services or operations.

Which of the following would be added to the book balance in a bank reconciliation?

Interest revenue Interest revenue is added into the book balance for a bank reconciliation.

Firewalls

Limits access to a local network.

Operational Efficiency

Part of internal control that ensures resources are not wasted.

Encryption

Rearranges data by a mathematical process.

Sarbanes-Oxley Act

Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports.

Parts of the definition of internal control:

Safeguard assets. Encourage employees to follow company policy. Promote operational efficiency. Ensure accurate, reliable accounting records.

Documents

Should be prenumbered to prevent theft and inefficiency.

The following items could appear on a bank​ reconciliation: Service charge

Subtraction from the book balance

The following items could appear on a bank​ reconciliation: The business credited cash

Subtraction from the book balance

Internal control

The organizational plan and all related measures that safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting data.

Environment

To establish an effective one, a company's CEO and top managers must behave honorably to set a good example for employees.

Collusion

Two or more people working together to overcome internal controls.

The _______ uses the remittance advices to record the journal entries to Cash and customer accounts.

accounting department (or bookkeeper) The accounting department (or bookkeeper) uses the remittance advices to record the journal entries to Cash and customer accounts.

Which of the following is NOT a component of internal control?

assignment of duties Assignment of duties is not a component of internal control but it is an internal control procedure.

Which of the following is NOT a component of internal control? audits monitoring of controls environment information systems

audits Audits is not a component of internal control but it is an internal control procedure.

After approving all documents from a shipment received, the purchaser sends a(n) ________ to the vendor.

check After all documents are approved, the purchaser sends a check to pay the vendor.

The Sarbanes-Oxley Act requires companies to _________.

conduct a review of internal controls and take responsibility for the accuracy and completeness of their financial reports Sarbanes-Oxley Act requires that companies conduct a review of internal controls and take responsibility for the accuracy and completeness of their financial reports.

The adjusted book balance equation:

ending cash balance + interest receivable - service charge (NO DEPOSIT IN TRANSIT)