Chapter 8 Flashcards
The principles of internal control include:
a) Separate recordkeeping from custody of assets.
b) Maintain minimal records.
c) Use only computerized systems.
d) Bond all employees.
e) Require automated sales systems.
a) Separate recordkeeping from custody of assets.
Managers use an internal control system:
a) To monitor and control business activities.
b) To ensure profitable operations.
c) To eliminate the need for an audit.
d) To guarantee a return to investors.
e) Only if the company uses a computerized system.
To monitor and control business activities.
The impact of technology on internal controls includes:
a) Reduced processing errors.
b) Elimination of the need for regular audits.
c) Elimination of the need to bond employees.
d) Elimination of separation of duties.
e) Elimination of fraud.
a) Reduced processing errors.
Cash equivalents:
Are short-term, highly liquid investment assets.
The following information is available for Birch Company at December 31:
Cash in registers $ 2,790
Investment maturing in 9 years $ 10,000
Accounts receivable $ 1,475
Cash in bank account $ 21,430
Accounts payable $ 650
Cash in petty cash fund $ 200
Inventory of postage stamps $ 24
U.S. Treasury bill maturing in 15 days $ 5,000
Based on this information, Birch Company should report Cash and Cash Equivalents on December 31 of:
$29,420
Add $2,790 of cash in registers + $21,430 of cash in bank + $200 of cash in petty cash fund + $5,000 of U.S. Treasury bill with maturity of less than three months = $29,420.
The three parties involved with a check are:
The maker, the payee, and the bank (payer).
The number of days’ sales uncollected:
Is used to measure how quickly a company can convert its accounts receivable into cash.
A company had net sales of $21,000 and accounts receivable of $2,520 for the current period. Its days’ sales uncollected equals:
Note: Use 365 days a year.
43.8 days.
Days’ Sales Uncollected Ratio = Accounts Receivable/Net Sales × 365
Days’ Sales Uncollected Ratio = $2,520/$21,000 × 365 = 43.8 days
The following information is taken from Reagan Company’s December 31 balance sheet:
Cash and cash equivalents $ 8,419
Accounts receivable 70,422
Merchandise inventories 60,362
Prepaid expenses 4,100
Accounts payable $ 14,950
Notes payable 86,638
Other current liabilities 9,500
If net sales for the current year were $612,000, the firm’s days’ sales uncollected for the year is:
Note: Use 365 days a year.
42 days
Days’ Sales Uncollected Ratio = Accounts Receivable/Net Sales × 365
Days’ Sales Uncollected Ratio = $70,422/$612,000 × 365 = 42 days
At the end of the day, the cash register’s record shows $2,050, but the count of cash in the cash register is $2,058. The correct entry to record the cash sales is
Debit Cash $2,058; credit Cash Over and Short $8; credit Sales $2,050.
The entry to establish a petty cash fund includes:
A debit to Petty Cash and a credit to Cash.
Spencer Company has a $200 petty cash fund. At the end of the first month the accumulated receipts represent $43 for delivery expenses, $127 for merchandise inventory, and $12 for miscellaneous expenses. The fund has a balance of $18. The journal entry to record the reimbursement of the account includes a:
Credit to Cash for $182.
When reimbursing the petty cash fund:
a) cash is debited
b) Petty Cash is credited.
c) Petty Cash is debited.
d) Appropriate expense accounts are debited.
e) No expenses are recorded.
d) Appropriate expense accounts are debited.
The custodian of a $450 petty cash fund discovers that the fund has $65 in coins and currency plus $382 in receipts at the end of the month. The entry to replenish the petty cash fund will include:
A credit to Cash for $385.
$450.00 − $65 − $382 = $3.00 cash shortage (Cash Over and Short is debited)
$450 − $65 = $385 cash reimbursement needed
Childers Company, which uses a perpetual inventory system, has an established petty cash fund in the amount of $400. The fund was last reimbursed on November 30. At the end of December, the fund contained the following petty cash receipts:
December 4 Merchandise purchased $ 62
December 7 Delivery expense $ 46
December 12 Purchase of office supplies $ 30
December 18 Miscellaneous expense $ 51
If, in addition to these receipts, the petty cash fund contains $201 of cash, the journal entry to reimburse the fund on December 31 will include:
A credit to Cash of $199.
Journal entry: Debit Credit
(dr) Merchandise Inventory 62
(dr) Delivery Expense 46
(dr) Office Supplies Expense 30
(dr) Miscellaneous Expense 51
(dr) Cash Over and Short 10
(cr) Cash 199
Outstanding checks refer to checks that have been:
Written by the depositor, subtracted on the depositor’s books, and sent to the payee but not yet turned in for payment at the bank statement date.
If a check correctly written and paid by the bank for $272 is incorrectly recorded in the company’s books for $227, how should this error be treated on the bank reconciliation?
Subtract $45 from the book balance.
$272 − $227 = $45 not enough originally deducted from the company’s cash account balance that must now be subtracted from cash.
In the process of reconciling its bank statement for April, Donahue Enterprises’ accountant compiles the following information:
Cash balance per company books on April 30 $ 6,275
Deposits in transit at month-end $ 1,300
Outstanding checks at month-end $ 620
Bank charge $ 45
Note collected by bank on Donahue’s behalf $ 770
A check paid to Donahue during the month by a customer is returned by the bank as NSF $ 480
The adjusted cash balance per the books on April 30 is:
$6,520
Book balance $ 6,275
+ note collection +770
− bank charge −45
− NSF check returned by bank −480
Adjusted book balance $ 6,520
Which of the following events would cause a bank to reduce a depositor’s account?
a) The depositor orders new checks through the bank at a cost of $50.
b) The bank collects a note receivable and related interest on the depositor’s behalf.
c) The bank pays interest to the depositor on their account balance.
d) There are deposits in transit on the account at month-end.
e) The bank corrects an error from previous month by adding $75 to the depositor account.
a) The depositor orders new checks through the bank at a cost of $50.
Ryan Company deposits all cash receipts on the day they are received and makes all cash payments by check. Ryan’s June bank statement shows a $18,361 balance in the bank. Ryan’s comparison of the bank statement to its cash account revealed the following:
Deposit in transit 1,450
Outstanding checks 837
Additionally, a $29 check written and recorded by the company was incorrectly recorded by the bank as a $92 deduction.
The adjusted cash balance per the bank records should be:
$19,037
Bank balance $ 18,361
+ Deposit in transit +1,450
- Outstanding checks −837
+ Bank error +63
Adjusted bank balance $ 19,037
Clayborn Company deposits all cash receipts on the day they are received and makes all cash payments by check. At the close of business on May 31, its Cash account shows a debit balance of $17,025. Clayborn’s May bank statement shows a $15,800 balance in the bank. Determine the adjusted cash balance using the following information:
Deposit in transit $ 5,200
Outstanding checks $ 4,600
Bank service fees, not yet recorded by company $ 25
A NSF check from a customer, not yet recorded by the company $ 600
The adjusted cash balance should be:
$16,400
Bank balance $15,800
+ deposit in transit +5,200
- outstanding checks -4,600
=adjusted bank balance $16,400
Book balance $ 17,025
- Bank service fees -25
- NSF returned -600
= adjusted book balance $ 16,400
Easton Company deposits all cash receipts on the day they are received and makes all cash payments by check. At the close of business on June 30, its Cash account shows a debit balance of $60,209. Easton’s June bank statement shows a $58,349 balance in the bank. Determine the adjusted cash balance using the following information:
Deposit in transit $ 3,800
Outstanding checks $ 1,925
Check printing fee, not yet recorded by company $ 15
Interest earned, not yet recorded by the company $ 30
The adjusted cash balance should be:
$60,224
Bank balance $ 58,349
+ deposit in transit +3,800
- outstanding checks -1,925
= adjusted bank balance $ 60,224
Book blance $ 60,209
+ interest earned +30
- check printing -15
= adjusted book balance $60,224
Meng Company maintains a $300 petty cash fund. On January 31, the fund is replenished. The accumulated receipts on that date represent $80 for office supplies, $160 for merchandise inventory, and $20 for miscellaneous expenses. There is a cash shortage of $8. Based on this information, the amount of cash in the fund before the replenishment is:
$32.
$300 fund balance minus $260 in receipts = $40 theoretical cash balance. Since there was an $8 shortage, the cash on hand was less than expected. $40 − $8 = $32.
Pelcher Company maintains a $400 petty cash fund. On January 31, the fund is replenished. The accumulated receipts on that date represent $110 for office supplies, $140 for merchandise inventory, and $70 for miscellaneous expenses. There is a cash overage of $4. Based on this information, the amount of cash in the fund before the replenishment is:
$84.
$400 fund balance minus $320 in receipts = $80 theoretical cash balance. Since there was a $4 overage, the cash on hand was more than expected. $80 + $4 = $84.
Pelcher Company maintains a $400 petty cash fund. On January 31, the fund is replenished. The accumulated receipts on that date represent $110 for office supplies, $140 for merchandise inventory, and $70 for miscellaneous expenses. There is a cash overage of $4. The journal entry to replenish the fund on January 31 is:
Debit Office Supplies Expense, $110; Debit Merchandise inventory, $140; Debit Miscellaneous expenses, $70; Credit Cash over and short, $4; Credit Cash, $316.
$400 fund balance minus $320 in receipts = $80 theoretical cash balance. Since there was a $4 overage, the cash on hand was more than expected. $80 + $4 = $84. Cash replenishment is $316 ($400 Petty cash fund balance minus $84 cash on hand).
