Chapter 7

Question 1

What is cash?

Answer 1

(1) Currency
(2) Certified checks, personal checks
(3) Demand deposits (e.g., checking account, savings account)

Question 2

Is Canadian Tire money considered cash?

Answer 2

No it is a coupon

Question 3

Is bitcoin considered cash?

Answer 3

Not from an accounting standpoint. It is considered to be an intangible asset

Question 4

Suppose you receieve postdated (for a later date) checks today. Are they cash or accounts receivable?

Answer 4

Accounts receivable. It is considered A/R until the posdated date

Question 5

If you receieve a check on a date before the current date what is the check considered as?

Answer 5

As cash

Question 6

Suppose that you receieves NSF (non-sufficient fund) checks? Are they cash or account receivables?

Answer 6

Accounts receivable

Question 7

Whar are NFS checks?

Answer 7

Also known as bounced checks. These are checks that are not paid by a bank, because there are insufficient funds in the bank account of the customer who wrote the check.

Question 8

Periodic balance account for NFS?

Answer 8

(1) Get check: (Dr) Cash (Cr) Revenue

(2) NSF: (Dr) A/R (Cr) Cash

Question 9

Are bank overdrafts assets or liabilities?

Answer 9

Liabilities since we owe money to the bank

Question 10

What are bank overdrafts?

Answer 10

Let’s say you have 2000 in debit account. If you spend more than 2000 dollars (e.g., 2500) when you only have 2000 then bank overdraft happens.

Question 11

As at the end of the fiscal year, if the use of cash is resricted for more than a year, it is a current or non-current asset?

Answer 11

Non-current

Question 12

What does bank reconciliation ensure?

Answer 12

That any differences between a company’s accounting records for cash and the bank records are identified and explained

Question 13

What are reasons for differences between a company’s accounting records for cash and the bank records

Answer 13

Time lags

errors

Question 14

Assume that end of year is December 31 and we do the bank reconciliation process on December 31 when we close the book for the year. Is the following an adjustment item from the book balance or from the bank balance? On December 30, you receieve a 100 cheque from your customer, and you plan to deposit this cheque on January 1. (Deposit in transit)

Answer 14

When credit sale happens on Dec 29 then A/R goes up and revenue goes up
On Dec 30: Cash collection: Cash increases A/R goes down
Bank is not aware that you receieved a checque so we need to add 100 dollars to bank statement. Because bank reconciliation happens at the end of the year we do not increase cash from the company’s book.

So from the bank balance

Question 15

On December 30 you wrote a 50 cheque to your supplier, but your supplier plans to deposit this cheque on January 1 (outstanding cheque). Is the following adjustment item from the book balance or from th ebank balance?

Answer 15

On Dec 30: Investment goes up and cash goes down
On Dec 31 bank reconciliation, we have already decreased cash so there is not adjustment needed. We gave the cheque to supplier so have already decreased cash. But for bak statement cash, the supplier is still holding onto the cheque and the banker does not know we gave the cheque to someone else. We need to make a -50 adjustment in the bank balance

So from the bank balance.

Question 16

When should an adjustment happen from bank statement?

Answer 16

When company knows what happens but bank does not

Question 17

On December 29, you receieve a 70 cheque from your customer, and you deposited this cheque on December 30. On December 20, your bank made a mistake of increasing cash by 10 incread of 70 for this accounting event (Bank errors). Is this adjustment item from the book balance or bank balance?

Answer 17

On Dec 29: Cash goes up and Revenue goes up
The bank made a mistake so we need to correct this from the bank balance

So from the bank balance

Question 18

On December 30, your customer wire-transferred 100 to your bank account. Your customer did not tell you about it at all. On December 31, you realize this collection of cash when you looked at the bank statement during the bank reconciliation process (Electronic fund transfer). This this an adjustment item from the book balance or from the bank balance?

Answer 18

From your point of view you are surprised since you did not knowa about this. Hence this would be an adjustment from the company’s book balance

Question 19

On December 31, you realize that your bank charged 15 hidden feed to your bank account when you looked at the bank statement during the bank reconciliation process. Is this an adjustment from the book balance or from the bank balance?

Answer 19

From the book balance.

We need to decrease cash during bank reconciliation process. Assumption is we did not know about this hidden fee and only realized when we looked at the bank statement during the bank reconciliation process.

Question 20

On December 29, you receieved a 500 cheque from your customer. On December 30, you deposited this cheque in your bank account. On December 31, you realized that this cheque was bounced (=Not valid) due to the insufficient fund from your customer because your customer just went bankrupt on December 30 (NSF). Is this an adjustment item from the book balance or from the bank balance?

Answer 20

You realize this cheque is bad during bank reconciliation process. We increased cash wrongly on December 29 but when we realized the cheque was NSF at December 31 during bank reconciliation we realize the cash needs to be decreased since journal entry was incorrect. At same time we establish A/R. So from the book balance.

Question 21

On December 29, you receieved a 10 cheque from your customer, and you deposited this cheque on December 30. On December 29 your accoutnant made a mistake of increasing cash by 70 incread of 10 for this accounting event (Company errors). Is this an adjustment item from the book balance or from the bank balance?

Answer 21

During the msitake you increaase cash and decrease A/R. During the bank reconciliation on December 31 you realize you’ve made a mistake so the adjustment is from the book balance.

Question 22

When is an adjustment made from the book balance?

Answer 22

When the company does not know but the bank knows. In this case the company needs to make adjusting and correcting entries.

Question 23

In a bank reconciliatin, deposits in transit are?

Answer 23

Added to the bank balance

Question 24

The reconciling item in a bank reconciliation that will result in an adjusting entry by the firm is?

Answer 24

Bank service and hidden fees

Question 25

Suppose that a company wrongly records 210 for 120 cheque receieved from a customer. What is the correcting journal entry?

Answer 25

(Dr) A/R by 90

(Cr) Cash by 90

Question 26

Short term highly trading liquid investment asset

Answer 26

(1) Readilt convertible to a known cash amount
(2) Market value is not sensitive to interest rate changes
(3) With original maturities of 3 months or less from the date of purchase
(4) If maturities are greater than 3 months and less than one year, then short-term investment (=temporary investment = marketable securities), not cash equivalents

Question 27

Why the sign at some fast food restaurants say “if you don’t get a recepit, your meal is free”?

Answer 27

The fast food restaurant is using you as a part of monitoring its employees.

Question 28

What are internal controls?

Answer 28

Internal controls are used to detect and prevent financial statement errors, misstatements, and stealing

Question 29

What are some forms of internal control?

Answer 29

Control activities:

(1) Physical controls (e.g., lock or alarm)
(2) Documentation (e.g., pre-numbered forms)
(3) Human resource controls (e.g., employee background checks, rotating employees’ duties, forced vacation)
(4) Authorization of transactions and activities
(5) Segregation of duties
(6) Independent checks of performance

Question 30

What is authorization transactions and activities?

Answer 30

Clear assignment of responsibilites (this will create an incentive for the person responsible to ensure that things are well controlled). Only one person is authorized to perform a specific task.