Chapter 6 SmartBook LARGE

Determine which of the statements below accurately describe services provided by a bank.

- 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.

NSF check

- A check written by a customer who does not have enough money in his account to cover the check

Outstanding check

- A check written by the depositor that has not yet been received by the bank for payment

Check

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

The formula to compute days' sales uncollected is:

- Accounts receivable divided by net sales times 365

Determine which of the statements below describes a petty cash receipt.

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

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

- Cash deposits made by the account owner

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.

- Cash is credited for $96.

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

- Checks

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

- Checks written by the account owner

Determine which of the items below would appear in the Checks and Debits column of a bank statement and would cause a decline in the account's balance.

- Checks written by the account owner - A customer's NSF check - ATM withdrawals - Monthly service fees charged by the bank

Identify the bank reconciliation items that would require adjustments to the book balance.

- Collection of note by bank - Interest earned - Bank charges - NSF check

What is the purpose of internal controls?

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

Recall the preparation of a bank reconciliation

- Compute the adjusted bank balance. - Add deposits in transit to the balance per bank. - Compute the adjusted book balance. - Subtract any outstanding checks from the balance per bank.

Demonstrate the required adjusting entry needed to record a $1,000 note receivable collected by the bank

- Debit Cash $1,000 and credit Notes Receivable $1,000.

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.

Deposit in transit

- Deposit made and recorded by the depositor, but not yet recorded on the bank statement

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.

- End-of-period balance in the account - Checks and other debits decreasing the account during the period - Beginning-of-period balance in the account - Deposits and other credits increasing the account during the period

Which of the following are principles of internal control?

- Establish responsibilities. - Perform regular and independent reviews. - Divide responsibility for related transactions. - Maintain adequate records.

Remittance advice

- Explains the reason for payment

Identify the basic internal control guidelines which should be in place to protect a business's cash by selecting the correct answers.

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

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

- Interest earned

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.

- Interest paid by the bank on the bank account balance - A note collected by the bank on behalf of the account owner - Deposits made during the month

Review the following statements and select the ones which accurately describe a Petty Cash fund.

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

Which of the answers correctly describe the Cash Over and Short account?

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

Which of the statements below describe the goals and principles of cash management?

- Keep a minimum level of cash necessary to operate. - Plan cash receipts to meet cash payments when due. - Encourage quick collection of receivables. - Money should be spent only when it is available. (MORE pg. 249)

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 currency, coins and checks deposited into an account

Choose the items below that would be subtracted from the book balance on a bank reconciliation.

- Monthly bank service charge - NSF customer check - Monthly check charges assessed by the bank

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

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

- Near

Choose the items below that would be added to the book balance on a bank reconciliation.

- Note collected by the bank for the depositor - Interest earned on the depositor's account

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

- Only the items reconciling the book balance require adjustment.

Review the following statements regarding a petty cash fund used in a business.

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

Identify the principles of internal control by selecting the correct answers.

- Perform regular & independent reviews - Insure assets - Maintain adequate records. - Separate record-keeping from custody of assets. - Apply technological controls. - Establish responsibilities.

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

- 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

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

Identify which of the items below are goals of good cash management.

- Plan cash receipts to meet cash payments when due - Keep a minimum level of cash necessary to operate

The triple threat of fraud involves:

- Pressure - Rationalization - Opportunity

A bank reconciliation is a(n) ___________ (entry/charge/report) explaining any differences between the ___________ (checking/subsidiary/sales) account balance according to the depositor's records and the balance reported on the ___________ (income/financial/bank) statement.

- Report - Checking - Bank

Bank charges

- Service fees charged by the bank

Describe what a petty cash fund is by completing the following sentence. A petty cash fund is used for (large/small) payments in order to (increase/avoid) the time and cost of writing checks for (large/small) amounts.

- Small - Avoid - Small

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.

- Supplies Expense is debited for $40. - Cash is credited for $89. - Delivery Expense is debited for $49.

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.

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

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.

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

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 statements are correct if a Petty Cash account is not replenished at the end of the accounting period.

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

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

Determine which of the statements below are accurate regarding how a petty cash fund is created and used in a business.

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

True or false: The adjusted book balance and the adjusted bank balance must equal each other on a bank reconciliation; otherwise, the cash account is not reconciled.

- True

Which of the following are correct regarding why management uses internal controls?

- Uphold company policies - Ensure reliable accounting - Promote efficient operations. - Protect assets.

Bank account

- Used to deposit money for safekeeping and help control withdrawals.

Determine the statements below that are true regarding why a bank reconciliation is used.

- We must reconcile the balance of the bank's records and the - 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.

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 created - When the account is reduced

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

1. Enter the bank statement balance then add any deposits in transit & subtract any outstanding checks 2. Compute the adjusted bank balance 3. Enter the company's book balance. 4. Add any unrecorded cash receipts, interest earned, & errors understating the book balance 5. Subtract any unrecorded bank fees, NSF Checks, & errors overstating the book balance. 6. Compute the adjusted book balance & compare it to the adjusted bank balance to verify equality

Principles of internal control

1. Establish responsibilities. 2. Maintain adequate records. 3. Insure assets and bond key employees. 4. Separate recordkeeping from custody of assets. 5. Divide responsibility for related transactions. 6. Apply technological controls. 7. Perform regular and independent reviews.

Describe the internal control principle of dividing responsibility for related transactions by selecting the correct statements below

1. Examples of transactions with divided responsibility are placing inventory orders and paying vendors. 2. This principle helps to make sure that the work of one individual acts as a check on another individual's work on a related transaction. 3. This principle is often called separation of duties.

the internal control procedure of maintaining adequate records

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.

Which of the following are correct regarding why management uses internal controls?

1. Promote efficient operations 2. Uphold company policies 3. Ensure reliable accounting 4. Protect assets

How has the Sarbanes-Oxley Act (SOX) impacted the internal control of companies?

1. SOX requires that auditors verify internal controls. 2. SOX requires that the company have effective internal controls.

Identify the examples of good internal control designed to protect over-the-counter cash receipts

1. The clerk and the cashier have access to cash, but not to the accounting records. 2. Clerks should be required to give the customer a receipt for each sale.

Human error

Can occur from carelessness, misjudgment, or confusion

What is the purpose of internal controls?

Companies create internal controls to protect assets and ensure reliable accounting

Cost-benefit principle

Dictates that the costs of internal controls must not exceed their benefits

Which statement below describes the internal control procedure of insuring assets and bonding key employees?

Insuring assets against casualty and bonding employees who handle cash, reduces risk of loss.

Human fraud

Involves intent by people to defeat internal controls for personal gain

Internal control environment

Management must convey commitment to internal control policies and procedures

Good recordkeeping helps protect assets and helps managers:

Monitor company activities

Summarize the internal control procedure of maintaining adequate records by selecting the correct answers below.

Reliable records are a source of information that managers use to monitor activities. Keeping detailed records makes it unlikely that assets are lost or stolen without detection. NOT THIS BC NOT PART OF RECORD KEEPING: Dividing responsibility for related transactions reduces the occurrence of recordkeeping errors. Bonding employees reduces the risk of loss.

ID scanners is an example of

Technological control

There are several reasons why the petty cash fund would experience a shortage or an overage. Determine which of the actions below would result in a shortage or an overage in the petty cash fund.

The petty cashier failed to get a receipt for payment.

True or false: An owner of a small business usually knows if the business is receiving the assets and services the company paid for.

True

Sarbanes-Oxley Act

Violaters receive harsh penalties up to 25 years in prison with fines

A person who (identifies/controls/recommends) or has access to an asset must (always/not/) keep that asset's accounting

controls, not

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

more extensive testing of records reduced processing errors new evidence of processing separation of duties increased e-commerce

Proper internal control means that responsibility for a

task is clearly established and assigned to one person.