Ch 4: Cash and Internal Controls

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

Debit supplies; credit cash Debit rend expense; credit cash

Because cash normally is assumed to be available for spending, it is usually classified on the balance sheet as a(n) _____ _____.

current asset

Paying by check helps a business to control cash when the ______.

checks are prenumbered and written sequentially check is signed by an authorized manager

Which of the following effectively mitigate the natural risks of running any business without being capable of completely eliminating the risk?

effective internal control; ethical employees

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

internal

The statement of cash flows is useful because

it provides information on the company's ability to maintain long-term success.

The most common source of occupational fraud is:

misuse of company resources

Which of the following are components of internal control?

monitoring; control activities; risk assessment; control environment

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

statement of cash flows balance sheet

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

Independent financial statement audits are most commonly required of:

Stock exchange listed companies

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

Strong internal control systems

Who has final responsibility for internal controls?

Management

The two most common sources of occupational fraud are:

misuse of company resources financial statement manipulation

The Sarbanes-Oxley Act applies to

companies that are required to file with the SEC.

Two types of control activities are

preventative and detective controls.

Companies commonly restrict cash for which of the following reasons?

to pay off a large loan when due to finance a major purchase of equipment to have cash available for future investment opportunities

The amount of cash in the balance sheet reflects the

ending cash on the balance sheet date

A(n) _____ is a mistake in accounting, which can be intentional or unintentional.

error

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

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

fraud

The sum of net cash flows from operating, investing, and financing activities reported in the statement of cash flows represents the:

net increase or decrease in cash during the year

Rice Corp. noticed that a check written by the company for $1,000 was incorrectly recorded by the bank as $1,100. How should this error be handled in a bank reconciliation?

$100 should be added to the bank balance.

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:

$20,000-$200+$30= $19,830

The statement of cash flows classifies items as

operating, investing, and financing.

A small amount of cash on hand to pay for minor purchases is commonly referred to as a(n) _____ _____ fund.

petty cash

Internal control consists of plans to

provide accurate and reliable accounting information. safeguard company assets.

Strong internal control systems allow greater reliance by investors on:

reported financial statements

The key provisions of the Sarbanes-Oxley Act include

requiring that corporate executives certify financial statements. restricting activities of auditors to prevent conflicts of interest. requiring documentation and assessing effectiveness of internal controls.

Cash that is not available for current operations is referred to as _____ cash.

restricted

Careful consideration of internal and external factors that may cause harm to a company is called _____ assessment.

risk

A petty cash fund is used for

small amounts of cash needed for low-cost items.

While preparing the bank reconciliation for March, the accountant for ABC Company discovered that a $694 check in payment of an account payable had been entered incorrectly in the journal as $649. Which of the following is true?

An entry must be made to debit Accounts Payable and credit Cash for $45.

During the year, Bernard Company's cash balance increased by $10,000. The sum of which totals reported on Bernard Company's statement of cash flows would also be equal to $10,000?

Cash flows from Operating, Investing, and Financing Activities

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

Melon Corp. noticed that a check written by the company for $2,100 for advertising expense was incorrectly recorded in the accounting records as $1,200. What needs to be recorded to correct this error?

Debit Advertising Expense $900; credit Cash $900.

In a bank reconciliation, which of the following items does not need to be recorded to adjust the company's cash balance?

Deposit outstanding

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

Deposits outstanding

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

False

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

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

High profile accounting scandals during the early 2000s

For internal control purposes, risk assessment considers which two types of risk?

Internal and external risks

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

Internal controls

Which of the following are cash inflows from financing activities?

Issuance of common stock to investors Borrowing from another company and signing a promissory note

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

The company's auditors

The PCAOB sets standards for

audited financial reports.

Separations of duties requires that

individuals who have physical responsibility for assets should not have access to accounting records.

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.

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.

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

Sell goods to customers Sell stock to investors Purchase equipment

Operating Financing Investing

Which of the following are provisions included in the Sarbanes-Oxley Act?

Require auditors to retain work papers for 7 years. Require that audit firms are hired by the audit committee of the board of directors.

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

Sarbanes-Oxley Act

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

The balance sheet and statement of cash flows

What is the primary purpose of a bank reconciliation?

To ensure the bank balance per reconciliation is equal to the company balance per reconciliation

The individual or groups of individuals who are most able to override internal control features is (are):

Top management

In a bank reconciliation, interest revenue earned on a company's bank account is:

added to the company's cash balance

Which of the following are detective controls?

audits; reconciliation; performance reviews

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.

A check that is NSF (nonsufficient funds) is a check that

cannot be paid because the account does not contain enough funds.

The asset most susceptible to fraudulent activity is(are)

cash

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

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

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

checks outstanding

Largo Corp. discovered $2,000 for an NSF check in its bank reconciliation. When the cash account is updated for items that affect the company's cash balance, the entry will include

credit Cash, $2,000

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

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. 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. The bank made an error in recording a deposit made by the company.

Which of the following is an example of separation of duties in a good system of internal control?

The individual who receives the inventory does not have access to the accounting records.

Why is it often easy for top level management to commit fraud?

They can override the internal control system. Fewer internal controls may be in place at that level. Subordinates feel intimidated and may not report it.

Periodically, management should verify that amounts related to the company's physical assets agree with the _____ records.

accounting

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

accounts payable

In a bank reconciliation, a deposit outstanding is

added to the bank balance

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

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

preventative

Klein Company's accountant is unable to reconcile the current year bank and cash account balances. If no cause can be determined to explain this difference, the difference should be

recognized as miscellaneous expense or revenue.

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

reconciliation

Which of the following cash transactions are classified as cash inflows from investing activities?

sale of equipment sale of investments sale of building

The acronym PCAOB stands for

Public Company Accounting Oversight Board.

True or false: Internal controls prevent and detect all errors and fraud.

False

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

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

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

Melon Corp. noticed that a check written by the company for $2,100 was incorrectly recorded in the accounting records as $1,200. How should this error be handled in a bank reconciliation?

$900 should be subtracted from the cash balance in the accounting records.

True or false: All companies are required to have an independent auditor assess the adequacy of their internal control procedures.

False

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

Accounts payable will increase

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

Adjust bank's cash balance Adjust the company's cash balance Record items that reconcile the company's cash balance

List the steps for a bank reconciliation in the correct order.

Adjust the banks cash balance Adjust the company's cash balance 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

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

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

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

False

Which of the following items will require a journal entry following a bank reconciliation?

NSF checks Notes collected by the bank

If a bank reconciliation included a deposit outstanding of $670, the company's entry for this reconciling item would include:

Nothing, the deposit has already been recorded

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

A manager compares the monthly sales revenue to the amount forecasted. Which type of internal control is this?

Performance review

Which of the following are preventive controls?

Physical controls Separations of duties

Which of the following are errors in accounting for cash?

Recording a check for $168 for $186 in the cash account. The bank processing a check for $210 as $120. Recording a cash collection of $4,000 but depositing $3,000 into the bank.

When adjusting the company's cash account balance in a bank reconciliation, which items reduce the company's cash account balance?

Service charges; Charges for NSF checks

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

collection from customers receipt of interest

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

collusion

Smith Company has a discrepancy of $50 at the end of the bank reconciliation. Smith has come to the conclusion that $50 of cash went missing somewhere. The journal entry to record this discrepancy includes:

debit miscellaneous expense $50 credit cash $50

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

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

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

decrease

In a bank reconciliation, an outstanding check is ______.

deducted form the bank balance

In a bank reconciliation, the bank's charge of $10 for checking account fees is

deducted from the company's cash balance

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.