Copyright © 2007 Prentice-Hall. All rights reserved 1 Internal Control and Cash Chapter 8

Copyright © 2007 Prentice-Hall. All rights reserved 2 Internal control is the organizational plan and all the related measures designed to do all of the following except 1.Safeguard assets 2.Ensure profitable operations 3.Promote operational efficiency 4.Encourage employees to follow company policy

Copyright © 2007 Prentice-Hall. All rights reserved 3 Answer: 2 Even a strong internal control system can not ensure a company will be profitable.

Copyright © 2007 Prentice-Hall. All rights reserved 4 All of the following are elements of internal control except: 1.Separations of duties 2.Internal and external audits 3.Proper documentation 4.Assigning one person the responsibility for accounting and custody of assets

Copyright © 2007 Prentice-Hall. All rights reserved 5 Answer: 4 Assigning one person the responsibility for accounting and custody of assets is a violation of separation of duties.

Copyright © 2007 Prentice-Hall. All rights reserved 6 When preparing the bank reconciliation, which item shows on the Bank side: 1.Bank service charge 2.NSF check 3.Outstanding checks. 4.Electronic funds transfers

Copyright © 2007 Prentice-Hall. All rights reserved 7 Answer: 3 Outstanding checks are checks that have been recorded on the company books, but have not yet cleared the bank.

Copyright © 2007 Prentice-Hall. All rights reserved 8 Which of the following is added to the Book side? 1.Service charge 2.Deposits in transit 3.Bank collections 4.NSF check

Copyright © 2007 Prentice-Hall. All rights reserved 9 Answer: 3 Bank collections have been added to the cash balance in the bank, but have not been added on the books.

Copyright © 2007 Prentice-Hall. All rights reserved 10 A check written to pay a liability cleared the bank for $34, but was recorded in the journal as $43. This item would be included in the bank reconciliation as a(n) 1.Addition on the bank side 2.Addition on the books side 3.Deduction on the bank side 4.Deduction on the book side

Copyright © 2007 Prentice-Hall. All rights reserved 11 Answer: 2 The company credited cash for $43 when the check was recorded. Since the check actually cleared the bank for $34, the company took too much out of the cash balance. This amount needs to be added back.

Copyright © 2007 Prentice-Hall. All rights reserved 12 Which of the following items found on a bank reconciliation does not require a journal entry to adjust the cash balance? 1.Deposit in transit 2.NSF check 3.Collection by bank 4.Bank service charge

Copyright © 2007 Prentice-Hall. All rights reserved 13 Answer: 1 A deposit in transit means that the company has already debited cash for the amount of the deposit.

Copyright © 2007 Prentice-Hall. All rights reserved 14 The following data is available for EcoSave Company for May Book balance, May 31$500 Outstanding checks200 Deposits in transit400 Service charge30 Interest earned on checking10 NSF check50 What is the adjusted book balance on May 31?

Copyright © 2007 Prentice-Hall. All rights reserved 15 Answer: Book balance, May 31$500 Add: Interest earned on checking10 Deduct: Service charge(30) NSF check(50) Adjusted book balance$430

Copyright © 2007 Prentice-Hall. All rights reserved 16 When preparing the journal entries relating to a bank reconciliation, the entry to record an NSF check received from a customer would be: 1.Debit cash, credit accounts receivable 2.Debit accounts receivable, credit cash 3.Debit bad debts expense, credit cash 4.Debit accounts payable, credit cash

Copyright © 2007 Prentice-Hall. All rights reserved 17 Answer: 2 NSF means “nonsufficient funds”. When a company deposits a check from a customer that is returned marked NSF, the amount of the check should be returned to accounts receivable until collected in cash from the customer.

Copyright © 2007 Prentice-Hall. All rights reserved 18 When cash is received by mail, good internal controls dictates that a mailroom employee opens the mail and 1.Deposits all customer checks at the bank 2.Sends remittance advices to the treasurer 3.Sends all customer checks to the treasurer 4.Sends all customer checks to the accounting department

Copyright © 2007 Prentice-Hall. All rights reserved 19 Answer: 3 The individual receiving the cash should not be the one who has custody of it. The treasurer is responsible for the cash receipts and payments in a company.

Copyright © 2007 Prentice-Hall. All rights reserved 20 All of the following are controls over cash payments except 1.All check should be pre-signed by an authorized person 2.All checks are pre-numbered 3.All expenditures should be made by check 4.All expenditures should be accompanied by appropriate documentation

Copyright © 2007 Prentice-Hall. All rights reserved 21 Answer: 1 Checks should only be signed when they are complete as to the payee and the amount and when proper documentation is available.

Copyright © 2007 Prentice-Hall. All rights reserved 22 Which journal entry establishes a petty cash fund? 1.Debit cash, credit petty cash 2.Debit petty cash, credit cash 3.Debit expenses, credit petty cash 4.Debit expenses, credit cash

Copyright © 2007 Prentice-Hall. All rights reserved 23 Answer: 2 The petty cash fund is an asset so it is increased with a debit.

Copyright © 2007 Prentice-Hall. All rights reserved 24 Which journal entry replenishes a petty cash fund? 1.Debit cash, credit petty cash 2.Debit petty cash, credit cash 3.Debit expenses, credit petty cash 4.Debit expenses, credit cash

Copyright © 2007 Prentice-Hall. All rights reserved 25 Answer: 4 When a petty cash fund is replenished, the expenses supported by the petty cash receipts are debited. Cash is credited and a check is generated so that the money can be put back into the fund.

Copyright © 2007 Prentice-Hall. All rights reserved 26