Accounting Chapter 6

Blair company had an unadjusted book balance of $1,200. Blair determined that there were $200 of outstanding checks and $200 earned interest. Bank service charges amounted to $100. Based on this information, the company's true cash balance is..

$1,300. {1,200 unadjusted book balance + $200 earned interest - $100 bank service charge = $1,300

Kelly Company's unadjusted bank balance on May 31 is $9,500. An analysis of the bank statement revealed $1,400 of deposits in transit and $900 of outstanding checks. In addition, the bank statement showed a $200 NSF check. Based on this information, Kelly's true cash balance is

$10,000

The bank statement for Boston Company shows a beginning balance of $1,300 and an ending balance of $1600. During the month $400 of accounts receivables were collected and an NSF check of $200 was returned. Boston has $100 of deposits in transit and $300 in outstanding checks. The company's true cash balance is

$1400 Reason: $1,600 unadjusted bank balance + $100 deposits in transit - $300 outstanding checks = $1,400 true cash balance. The accounts receivable collection and the NSF check are already included in the unadjusted bank balance.

Which of the following items are added to the unadjusted book balance to determine the true cash balance?

-Accounts receivable collections -Earned interest

To calculate true cash balance, (add/subtract) deposits in transit and (add/subtract outstanding checks to or from the unadjusted bank balance.

-Add -Subtract

Financial statements affected by the recognition of a non-sufficient-funds check are

-Balance sheet -Statement of cash flows

When a company replenishes a petty cash account,

-Cash flow from operating activities decreases -Total assets decrease

What is the effect on the financial statements when the bank collected a $100 account receivable for Company ING?

-Cash inflow of $100 -Total assets will not be affected

The journal entry to recognize a non-sufficient funds(NSF) check includes a ______ to the cash account and a ______ to the accounts receivable account

-Credit -Debit

The journal entry to replenish a petty cash fund includes a ______ to the cash account and a ______ to the miscellaneous expense account

-Credit -Debit

The journal entry to establish a petty cash fund includes a ____ to the petty cash account and a _____ to the cash account

-Debit -Credit

What is the journal entry for cash short and over?

-Debit to Cash -Debit to cash short and over -Credit to sales revenue

What is the journal entry for petty cash replenishment?

-Debit to expenses -Credit to cash

What is the journal entry for petty cash?

-Debit to petty cash -Credit to Cash

Which of the following entries would be required to establish a $500 petty cash fund?

-Debit to petty cash fund -Credit to cash

Which of the following are among the normal responsibilities of an independent auditor?

-Determines if financial statements are materially correct, rather than absolutely correct -Presents conclusions in an audit report that include an opinion as to whether the statements are prepared in conformity with GAAP -Assumes both legal and professional responsibilities to the public as well as to the company paying the auditor

Examples of physical control include

-Keeping accounting records in a fireproof vault -Unannounced physical equipment counts

Internal control procedures specifically designed for the safekeeping of cash payments include

-Making cash payments by check -Using renumbered checks -Keeping unused checks

A checking account deposit ticket normally includes the

-Name of the account -Account number -Amount of currency being deposited

When determining the true cash balance, ______ the unadjusted bank balance

-Outstanding checks are subtracted from -Deposits in transit are added to

The parties directly affected by a written check are the

-Payee -Payor -Bank on which the check is drawn

To promote the hiring of employees with high levels of personal integrity, employers should

-Perform background checks on job applicants. -screen job applicant using feedback from job interviews. -seek recommendations from prior employers and educators.

Prenumbered forms are used for

-Purchase orders -Invoices -Checks

Which of the following is an internal control procedure designed to protect cash receipts?

-Record cash immediately -Provide customers with receipts -Deposit cash immediately

Features of a strong internal control system include

-Reliable financial reporting -Safeguarding assets -Compliance with applicable laws and regulations

Items that normally appear on a written check are

-Signature of the payor -Amount of the check

Financial statements affected by the recognition of a non-sufficient-funds check are the

-Statement of cash flows -Balance sheet

A financial audit includes

-Tests of the reliability of the accounting system used to produce the financial reports -A detailed examination of a company's financial statements and the documents that support those statements

What are the differences the bank reconciliation reports on?

-Unadjusted cash balance on the bank statement -Unadjusted book balance in the general ledger cash account

How does a business control cash?

-Up to date signature card should be maintained -Cash receipts should be recorded immediately and deposited daily -Cash Payments should be made by pre-numbered check -A deposit ticket should be used for all deposits

What does an impress basis mean?

-When the fund gets low on cash it is replenished

Which of the following opinions is the least favorable opinion issued by an external auditor?

Adverse Opinion

Which of the following procedures are typically used when a petty cash fund is established?

All of these procedures are used when a petty cash fund is established.

Checking accounts are ______ accounts to a bank depositor

Asset

Which of the following assets is the most important in terms of being subject to strict internal controls?

Cash

What account is used to record the amount of cash shortages or overages relative to a petty cash system?

Cash short or over

What are NSF checks?

Checks we have deposited into our account then they bounce

Two or more employees working together to thwart internal controls by covering for each other is called

Collusion

Transactions that increase the customer's checking account balance are described on bank statement ______ memos

Credit

Which of the following is not one of the nine features of an internal control system?

Customer Service Comment Cards

What is a deposit in transit?

Deposited money that hasn't cleared into bank account

What does cash short mean?

Expense(debit)

T or F: An error is considered material if it would trigger an IRS audit.

False

T or F: An unqualified audit opinion suggests that all aspects of financial statements are in compliance with generally accepted accounting principles (GAAP). This statement is

False

T or F: Certified checks are included in the bank reconciliation

False

T or F: The Erm framework replaces the internal control framework

False

T or F: The implementation of an effective internal control system eliminates the possibility of fraud. This statement is

False

T or F: The primary focus of financial statement audits is the discovery of fraud.

False

What are internal controls?

Help to prevent errors and mistakes in this process, as well as prevent(or deter) theft/fraud

Which of the following is not a commonly accepted internal control activity?

Hiring only college graduates

Internal control is a process designed to ensure

Internal control is designed to ensure all of the items described in the answers.

Which of the following is not an internal control procedure commonly used to safeguarding cash?

Keep all cash in one central location

Which of the following is not an internal control procedure designed to safeguard cash?

Keep cash in locations that are accessible by multiple employees

How often should a bank reconciliation be performed?

Monthly

Which of the following is an administrative control?

Performance Evaluation

Employing a public accounting firm to conduct an audit is an example of

Performance evaluation

Businesses frequently establish a _____ _____ fund to maintain effective control over small cash disbursements

Petty Cash

Keeping a record of the serial number on a computer and the name of the individual who is responsible for the equipment is an example of a ______ control

Physical

What does cash over mean?

Revenue(credit)

Those who are authorized to sign checks on an account also sign a bank _____ card which is retained in the bank's file for verification if needed

Signature

What is the result of a bank reconciliation?

The true cash balance that goes on the balance sheet

What is a petty cash fund used for?

To make small expenditures that cannot wait for the formal check-writing process

When a company establishes a petty cash fund, the amount of

Total assets is not affected

T or F: Cash is difficult to protect because it is easy to transfer and its ownership difficult to prove. These statements are

True

T or F: Establishment of a petty cash fund is an asset exchange transaction.

True

T or F: Holding too much cash can reduce profitability

True

T or F: Ongoing training programs are essential to the maintenance of high quality personnel

True

T or F: Periodic reviews should be conducted to ensure that employees are following procedures outlined in the manual

True

T or F: Petty cash is an asset exchange transaction

True

T or F: We can use the bank statement to verify that the balance in our cash account is up to date and accurate

True

True or False: Management's discussion of past performance and future expectations are normally discussed in a section of an annual report that is titled "Management Discussion and Analysis"

True

True or False: Requiring employees to take a two week vacation is an effective internal control procedure because it is more difficult to hide fraud or deceptive activities if an employee is absent from work for an extended period of time.

True

A bank reconciliation normally begins with the _______ bank balance

Unadjusted

How do you find the true cash balance on the bank side?

Unadjusted bank balance +Deposits in transit-Outstanding checks

How do you find the true cash balance on the book balance side?

Unadjusted book balance + accts receivable + interest earned - bank service charges - NSF checks

Which of the following opinions is the most favorable opinion issued by an external auditor?

Unqualified Opinion

Examples of separation of duties include

Using one person to approve a sales return and a different person to issue credit to the customer

What are outstanding checks?

Written a check that has already been deducted out of cash account but hasn't cleared the bank

Materiality is

a subjective measure that may fluctuate in the amount go dollars and/or the size of percentages

A _____ check is guaranteed for payment by a bank.

certified

An error, or other reporting problem, is material if knowing about it would

influence the decisions of an average prudent investor.

Savings accounts with substantial withdrawal penalties should be classified as

investments

Expenses are recognized when a petty cash fund

is replenished

The goal of a financial audit is to determine if financial statements are ______ correct

materially

A policy that states "investment decisions are authorized at the division level, while hiring decisions are authorized at the departmental level" is an example of _____ authority

specific