Chapter 6: Cash, Fraud, and Internal Controls. (SmartBook)

What is the purpose of internal controls?

Companies create internal controls to protect assets and ensure reliable accounting.

Remittance advice

Explains the reason for payment

Identify the item below that would be added to the book balance.

Interest earned

Determine the statements below that are true regarding why a bank reconciliation is used. (Check all that apply.)

Timing differences between the bank statement and the depositor's records are reflected in the bank reconciliation. The bank reconciliation is useful in proving the accuracy of the Cash account in the general ledger. We must reconcile the balance of the bank's records and the Cash account in the general ledger and explain or account for any differences in the two.

Choose the statement below which is correct regarding which bank reconciliation items require adjusting journal entries.

Only the items reconciling the books balance require adjustment.

The formula to compute days' sales uncollected is:

Accounts receivable divided by net sales times 100

The triple threat of fraud involves:

Opportunity Pressure Rationalization

Bank Account

used to deposit money for safekeeping and help control withdraws.

Which of the following are correct regarding why management uses internal controls? (Check all that apply.)

1. Ensure reliable accounting 2. Urge adherence to company policies 3. protect assets 4. Promote efficient operations

Summarize the internal control principle of establishing responsibility by completing the following sentence. Proper internal control means that responsibility for a ________ is clearly ________ and assigned to one person.

task established

Describe what a petty cash fund is by completing the following sentence. A petty cash fund is used for ______________ payments in order to _______ the time and cost of writing checks for _____ amounts.

small avoid small

Determine which of the statements below accurately describe services provided by a bank. (Check all that apply.)

A bank account is a record set up by a bank for a customer. To withdraw money from an account, the depositor can use a check. Each bank deposit is supported by a deposit ticket.

Jackson Brothers established a petty cash fund of $200 at the beginning of the year, but it decides to reduce the amount in the fund to $130. Demonstrate the correct journal entry to reduce the amount in the account by choosing the correct action from those given below.

Cash is debited for $70 and Petty Cash is credited for $70

The cash in a cash register equaled $100, but the record of cash receipts/sales equaled $102. Determine which of the following entries is correct to record cash sales and the shortage.

Debit Cash $100; debit Cash Over and Short $2; and credit Sales $102.

XYZ Co. decided to create a petty cash fund. They estimated that $100 would be needed in the fund. Demonstrate the correct journal entry to create the account by choosing the correct action from those below.

Petty Cash is debited for $100.

Jackson Brothers decided to create a petty cash fund. They estimated that $200 would be needed in the fund. Demonstrate the correct journal entry to create the account by choosing the correct action from those below.

Petty Cash is debited for $200; Cash is credited for $200.

Identify the basic internal control guidelines which should be in place to protect a business's cash by selecting the correct answers below. (Check all that apply.)

Cash payments are made by check. Cash receipts are promptly deposited in a bank. Handling cash is separate from recordkeeping of cash.

Demonstrate the required adjusting entry needed to record a $1,000 note receivable collected by the bank less the expense of having the bank perform the service ($30), by choosing the correct entry below.

Debit Cash $970; debit Collection Expense $30; and credit Note Receivable $1,000.

Good recordkeeping helps protect assets and helps managers:

monitor company activities

Define what liquidity means by completing the following sentence. Liquidity refers to a company's ability to pay for its _____ -term obligations.

near

Show your understanding of what a bank reconciliation is by completing the following sentence. A bank reconciliation is a(n) __________ explaining any differences between the __________ account balance according to the depositor's records and the balance reported on the _______ statement

report checking bank

Identify the bank reconciliation items that would require adjustments to the book balance. (Check all that apply.)

1. Interest earned 2. NSF check 3. Collection of note by bank 4. Bank charges

Review the following statements and select the ones which accurately describe a Petty Cash fund. Select all answers which apply.

It is established to pay for small payments like postage, shipping fees, etc. It is used to avoid the time and cost of writing checks for small amounts. It is an asset reported on the balance sheet.

Which statement below explains why liquid assets are needed in a business?

Liquid assets must be readily available to settle near-term debt or obligations.

Deposit Ticket

Lists items such as currency, coins, and checks deposited and their corresponding dollar amounts.

Identify the item below that would be subtracted from the book balance on a bank reconciliation.

NSF check

Select the items below that would cause the bank statement balance to differ from the depositor's book balance.

NSF check, Deposit in transit, interest paid by bank

Responsibility for a task should be clearly established and assigned to:

One person

Review the following statements regarding a petty cash fund used in a business. Select the one that is correct.

Only the petty cashier is responsible for paying cash from the fund.

Summarize the document flow, or steps, in a voucher system by placing the following actions in their correct order of occurrence.

1. A purchase requisition is filled out and placed in voucher. 2. A purchase order is completed and a copy is placed in voucher. 3. A receiving report is completed when the order arrives and placed in voucher. 4. The accounting department approves payment of the invoice and approval is placed in voucher. 5. The cashier issues a check for the amount of the invoice.

Explain how depositors can check for errors by completing the following sentence. Error testing includes (a) comparing deposits on the bank statement with deposits in the _____ records and (b) comparing ____ checks on the bank statement with _______ recorded in the accounting records.

1. Accounting 2. Canceled 3. Checks

Jackson Co. needs to replenish its petty cash fund. Currently, it contains $11 in cash and receipts for supplies of $40 and delivery expenses of $49. The fund was initially established with $100. Demonstrate the journal entry to replenish the account and recognize the cash shortage by choosing the correct actions from those given below. (Check all that apply.)

1. Cash is credited for $89. 2. Delivery Expense is debited for $49. 3. Supplies is debited for $40.

Jackson Co. needs to replenish its petty cash fund. Currently, it contains $5 in cash and receipts for supplies of $40 and delivery expenses of $49. The fund was initially established with $100. Demonstrate the journal entry to replenish the account and recognize the cash shortage by choosing the correct actions from those given below. (Check all that apply.)

1. Cash is credited for $95. 2. Supplies is debited for $40. 3. Cash Over and Short is debited for $6. 4. Delivery Expense is debited for $49.

Determine which of the items below would appear in the Deposits and Credits column of a bank statement and would cause an increase in the account's balance. (Check all that apply.)

1. Interest paid by the bank on the bank account balance 2. A note collected by the bank on behalf of the account owner 3. Deposits made during the month

Which of the answers below correctly describe the Cash Over and Short account? (Check all that apply.)

1. It records the effects of cash overages and cash shortages. 2. It is an income statement account. 3. A debit balance reflects an expense.

Identify which of the items below are goals of good cash management. (Check all that apply.)

1. Keep a minimum level of cash necessary to operate. 2. Plan cash receipts to meet cash payments when due.

Summarize the internal control procedure of maintaining adequate records by selecting the correct answers below. (Check all that apply.)

1. Keeping detailed records makes it unlikely that assets are lost or stolen without detection. 2. Reliable records are a source of information that managers use to monitor activities.

Each of the following are types of technological impacts related to internal control:

1. Reduced processing errors. 2. New evidence of processing 3. Separation of duties. 4. Increases E-Commerce 5. More extensive testing of records

Identify the principles of internal control by selecting the correct answers below. (Check all that apply.)

1. Separate recordkeeping from custody of assets. 2. Apply technological controls. 3. Establish responsibilities 4. Insure assets 5. Perform regular and independent reviews 6. Maintain adequate records.

Which of the statements below explains how technology has impacted internal control systems? (Check all that apply.)

1. Technology has reduced the number of processing errors 2. Technology can be designed to require the use of password before access to the system is granted. 3. Technologically advanced systems can record who made entries, the date and time of the entry and the source of the entry. 4. Technology has encouraged the growth of e-commerce, so there is a higher risk of credit card number theft.

A good internal control to protect cash is to make cash payments using

checks

Brown Co. decides to increase the amount in its petty cash fund from 100 to $150. To show this increase in the petty cash account, you would:

Debit Petty Cash for $50.

Electronic funds transfer

Electronic transfer of cash from one party to another

Which of the statements below describe the goals and principles of cash management? (Check all that apply.)

Encourage quick collection of receivables. Plan cash receipts to meet cash payments when due. Keep a minimum level of cash necessary to operate. Money should be spent only when it is available.

Define what a voucher is by completing the following sentence. A voucher is an ____ document (or file) used to accumulate information to ____ cash disbursements and to ensure that a transaction is properly recorded.

1. internal 2. control

Contrast how a depositor's account is classified by a bank compared to how it is classified by the account owner by completing the following sentence. A depositor's account is a(n) _______ on the bank's records, but it is a(n) ______ on the books of the account owner. Because of this, every time the account owner makes a deposit, the bank _____ the account owner's account.

1.Liability 2. Asset 3. Credits

Check

A document signed by the depositor instructing the bank to pay a specified amount of money

Review the items below and determine which would cause an increase in the monthly bank statement balance.

Cash deposits made by the account owner.

Internal control policies and procedures have limitations that arise from many elements. Match the limitation on the left with its definition on the right.

1. Human error- Can occur from negligence, fatigue, misjudgment or confusion 2. Human fraud- involves intent by people to defeat internal controls for personal gain 3. Cost-benefit principle- Dictates that the costs of internal controls must not exceed their benefits 4. Internal control environment- Management must convey commitment to internal control policies and procedures

Calculate the adjusted cash balance per the books of XYZ Co. given the following information. Balance per bank statement $600 Balance per general ledger cash account 710 Deposit in transit 200 Note collected by the bank on behalf of the depositor 80 Monthly bank charges 40 Outstanding checks 50

$750

Match the banking term on the left with its definition on the right.

1) Deposit ticket- List currency, coins and checks deposited into an account 2) Check- A document signed by the depositor instructing the bank to pay a specified amount of money 3) Bank account- A record set up by a bank for a customer 4) Remittance advice- Explains the reason for payment 5) Electronic funds transfer- Electronic transfer of cash from one party to another

Determine which of the items below would show up on a monthly bank statement. (Check all that apply.)

1. Checks and other debits decreasing the account during the period 2. Beginning-of-period balance in the account 3, Deposits and other credits increasing the account during the period 4. End-of-period balance in the account

Describe the internal control principle of separating recordkeeping from custody of assets by completing the following sentence. A person who ________ or has access to an asset must ________ keep that asset's accounting records.

1. Controls 2. Not

In preparing a monthly bank reconciliation, a business follows several steps. Place the selected steps below in the order of occurrence.

1. Identify the bank statement balance then add any deposits in transit and subtract any outstanding checks. 2. Compute the adjusted bank balance 3. Identify the company's book balance. 4. Add any unrecorded memoranda from the bank, interest earned, and errors understating the book balance. 5. Identify and list any unrecorded debit memoranda from the bank, service charges, and errors overstating the book balance. 6. Compute the adjusted book balance and compare it to the adjusted bank balance to verify the equality.

Choose the items below that would be added to the book balance on a bank reconciliation. (Check all that apply.)

1. Note collected by the bank for the depositor 2. Interest earned on the depositor's account

Identify the factors that cause the bank statement balance to differ from the depositor's book balance by matching each to its definition on the right.

1. Outstanding check- a check written by the depositor that has not yet been received by the bank for payment 2. Deposit in transit- Deposit made and recorded by the depositor, but not yet recorded on the bank statement 3. NSF check- A check written by a customer who does not have enough money in his account to cover the check. 4. Bank charges- Service fees charged by the bank

A cash register tape reflected total sales equaling $100, but the cash in the cash register drawer equaled $105. Review the statements below and determine which is correct regarding this discrepancy. (Check all that apply.)

1. The Sales account will be credited for $100 2. The Cash Over and Short account will be credited for $5. 3. The Cash account will be debited for $105. 4. The extra $5 collected will be treated as a miscellaneous revenue.

Determine which of the statements below are accurate regarding how a petty cash fund is created and used in a business. (Check all that apply.)

1. The petty cashier is responsible for making payments from the petty cash fund. 2. The sum of all petty cash receipts plus the remaining cash should equal the total of the fund amount at any given time. 3. A check is drawn by the company cashier to establish the petty cash fund. 4. The petty cashier is responsible for keeping the cash in the fund safe.

Determine which of the statements below describes a petty cash receipt. (Check all that apply.)

A petty cash receipt will have a signature line for the person receiving a disbursement from the fund. Any person wishing to withdraw funds from a petty cash fund must complete a petty cash receipt. A petty cash receipt is sometimes called a petty cash ticket. The petty cashier must present all paid receipts to the company cashier in order to replenish the fund.

At the end of the month, Brown Co.'s petty cash fund contains $4 in cash and receipts for postage of $50 and delivery expenses of $46. It started out with $100 in the fund at the beginning of the month. Demonstrate the journal entry to replenish the account by choosing the correct action from those given below.

Cash is credited for $96

At the end of the month, ABC Co.'s petty cash fund contains $4 in cash and receipts for postage of $50 and delivery expenses of $46. It started out with $100 in the fund at the beginning of the month. Demonstrate the journal entry to replenish the account by choosing the correct action from those given below.

Cash is credited for $96.

After posting the required adjusting journal entries from the bank reconciliation below, show what the balance of the Cash account in ABC Co.'s general ledger will be by selecting the correct answer below.

Cash will have a balance of $1,120

Review the items below and determine which would cause a decrease in the monthly bank statement balance.

Checks written by the account owner.

Choose the list below that contains only cash or cash equivalents.

Customer checks, Money orders, Certified checks

Which of the statements below explains the internal control principle of performing regular and independent reviews?

Regular reviews of internal control systems are needed to ensure that procedures are followed

Determine which of the statements below is true regarding the adjusted bank balance and the adjusted book balance on a bank reconciliation.

The adjusted bank balance must equal the adjusted cash balance per books.

Determine which of the statement(s) are correct if a Petty Cash account is not replenished at the end of the accounting period. (Check all that apply.)

The balance sheet would show an overstated cash asset. The income statement would reflect a net income amount that was too high. Expenses would not be recorded in the period in which they were incurred.

Review the statements below to determine the correct definition of debit memorandum.

The bank notifies the depositor of each deduction to the account with a debit memorandum.

Review the statements below to determine the correct definition of a credit memorandum.

The bank notifies the depositor of each increase to the account with a credit memorandum.

Determine which of the statements below is correct regarding information reflected on a monthly bank statement.

The information on the bank statement reflects the bank's records of the depositor's account.

Identify when the Petty Cash fund is debited or credited by selecting the correct answer below

When the account is increased When the account is reduced When the account is created