Chapter 7

Question 1

List 5 components of internal control:

Answer 1

• Control Procedures (designed to ensure the business’s goals are achieved)
• Risk Assessment (a company must identify its risks)
• Information System (ensure that only authorized users have access to various parts of the accounting information system)
• Monitoring of Controls (companies hire auditors to monitor their controls; internal auditors ensure that employees are following company policies and that the company meets all legal requirements, and that operations are running efficiently)
• Environment (the tone or culture of the business, starts with CEO’s or top managers who set the example for the other company employees)

Question 2

Briefly describe the Sarbanes-Oxley Act and its purpose.

Answer 2

-Requires companies to review internal control and take responsibility for the accuracy and completeness of their financial reports

Question 3

What is a remittance advice?

Answer 3

-An optional attachment to a check that tells the business for the reason of payment

Question 4

What is a lock-box and briefly describe a lock-box system?

Answer 4

-A system in which customers send their checks to a post office box that belongs to a bank. A bank employee empties the box daily and records the deposits into the company’s bank account

Question 5

List the 4 steps for the purchasing and payments process:

Answer 5

• Send a purchase order
• Ship the inventory and send an invoice to buyer
• Receive inventory and prepare a receiving report
• Approve documents, send a check to manufacturer

Question 6

Record the journal entry to create a petty cash fund of $150

Answer 6

-Debit Petty Cash $150 and Credit Cash $150

Question 7

Record the journal entry to replenish the petty cash fund for $60 to keep the $150 balance. Assume Petty cash was used for the following this period: Office Supplies $25; Delivery Expense $30.

Answer 7

Debit Supplies Expense $25, Delivery Expense $30 and Cash and Short Over $5. Credit Cash $60

Question 8

What is the formula for calculating cash ratio?

Answer 8

-Cash Ratio= (Cash+Cash Equivalents)/Total Liabilities

Question 9

If cash balance is $10,000, cash equivalents balance is $20,000, and current liabilities is $5,000, what is the cash ratio? Show your work.

Answer 9

-CR= (Cash+Cash Equivalents)/Total Liabilities

(10,000+20,000)/5000= 6