Ch07 Sarbanes-Oxley, Internal Control, & Cash

Chapter 7
Sarbanes-Oxley, Internal Control, & Cash

OBJECTIVES
Obj 1
Obj 2
Obj 3
Obj 4
Obj 5
Obj 6
Obj 7
Describe the Sarbanes-Oxley Act of 2002 and its impact on internal controls and
financial reporting.
Describe and illustrate the objectives and elements of internal control.
Describe and illustrate the application of internal controls to cash.
Describe the nature of a bank account and its use in controlling cash.
Describe and illustrate the use of a bank reconciliation in controlling cash.
Describe the accounting for special-purpose cash funds.
Describe and illustrate the reporting of cash and cash equivalents in the financial
statements.
QUESTION GRID
True/False
No Objective
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07-01
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18
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19
07-03
Difficulty
No.
Objective
Difficulty
No.
Objective
Difficulty
Easy
Easy
Easy
Easy
Moderate
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
20
21
22
23
24
25
26
27
28
29
30
31
32
33
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35
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38
07-03
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07-04
07-05
07-05
07-05
07-05
07-05
07-05
07-05
07-05
07-05
07-05
07-05
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Moderate
Easy
Easy
Easy
Easy
Easy
Easy
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
07-05
07-05
07-05
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07-05
07-06
07-06
07-06
07-06
07-06
07-06
07-06
07-07
07-07
07-07
07-07
Easy
Moderate
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
355
Chapter 7 /Sarbanes-Oxley, Internal Control, & Cash 356
Multiple Choice
No Objective
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22
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07-03
24
07-03
25
07-04
26
07-04
Difficulty
No.
Objective
Difficulty
No.
Objective
Difficulty
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Moderate
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
Easy
27
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52
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07-05
07-05
07-05
07-05
07-05
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07-05
07-05
07-05
Easy
Easy
Moderate
Easy
Easy
Easy
Moderate
Moderate
Easy
Easy
Easy
Easy
Easy
Moderate
Moderate
Moderate
Moderate
Moderate
Moderate
Easy
Easy
Easy
Easy
Easy
Easy
Easy
53
54
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07-05
07-06
07-06
07-06
07-06
07-07
07-07
07-07
07-07
07-07
07-07
07-07
Easy
Easy
Easy
Easy
Easy
Easy
Moderate
Moderate
Moderate
Moderate
Moderate
Easy
Easy
Easy
Easy
Easy
Moderate
Easy
Easy
Easy
Easy
Easy
Easy
Moderate
Moderate
Difficulty
07-04
07-04
07-04
07-05
07-05
07-05
Exercise/Other
No Objectiv
.
e
1
07-01
2
07-02
3
07-02
4
07-03
5
07-03
Easy
Easy
Easy
Easy
Easy
No
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7
8
9
10
11
Easy
12
Difficulty
No
.
07-03
Problem
No Objectiv
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e
Objective
Objective
Difficult
y
Easy
Easy
Easy
Easy
Moderat
e
Moderat
e
No
.
13
14
15
16
17
Objectiv
e
07-05
07-05
07-06
07-06
07-07
Difficult
y
Moderate
Moderate
Moderate
Moderate
Easy
Difficult
y
No
.
Objectiv
e
Difficult
y
1
2
3
07-02
07-02
07-05
Easy
Moderate
Moderate
4
5
6
07-05
07-05
07-05
Difficult
Difficult
Moderat
e
7
8
9
07-06
07-06
07-06
Moderate
Moderate
Moderate
Chapter 7Sarbanes-Oxley, Internal Control, and Cash

TRUE/FALSE
1.
The Sarbanes-Oxley Act of 2002 was passed by Congress due to the public outcry after the financial
scandals of the early 2000s.
ANS: T
DIF: Easy OBJ: 07-01
NAT: AACSB Ethics | AICPA BB-Legal
2. Sarbanes-Oxleys purpose is to improve financial reporting.
ANS: F
3.
There are two internal control objectives and they are to ensure accurate financial reports, and ensure
compliance with applicable laws.
ANS: F
4.
Sarbanes-Oxley requires companies to maintain strong and effective internal controls and thus
prevent fraud and misleading financial statements.
ANS: F
5.
The Sarbanes-Oxley Act requires that financi al statements of all public companies report on
management's conclusions about the effectiveness of the company's internal control

procedures.
ANS: T
DIF: Moderate
OBJ: 07-01
6.
The control environment in an internal control structure is the attitude and awareness of
internal control by all employees.
ANS: T
NAT: AACSB Analytic | AICPA BB-Industry
7.
Separating the responsibilities for purchasing, receiving, and paying for equipment is an
example of the control procedure: separating operations, custody of assets, and accounting.
ANS: F
358 Chapter 7 /Sarbanes-Oxley, Internal Control, & Cash
8.
Internal control is enhanced by separating the control of a transaction from the recordkeeping function.
ANS: T
9.
A backlog in recording transactions is an example of a warning sign from the accounting

system.
ANS: T
NAT: AACSB Analytic | AICPA FN-Measurement
10. Money orders are considered cash.
ANS: T
11. A customer's check received in settlement of an account receivable is considered cash.
ANS: T
12. Businesses who have several bank accounts, petty cash, and cash on hand, would maintain a
separate ledger account for each type of cash.
ANS: T
13. For strong internal control system over cash, it is important to have the duties related to cash
receipts and cash payments divided among different employees.
ANS: T
14. When a clerk enters a sale and the customer can see the amount displayed and is given a
cash receipt, this is an example of a preventive control.
ANS: T
15. If the balance in Cash Short and Over at the end of a period is a credit, it indicates that cash
shortages have exceeded cash overages for the period.
ANS: F
16. If the balance in Cash Short and Over at the end of a period is a credit, it should be reported
as an "other income" item on the income statement.
ANS: T
17. An example of good internal controls over cash payments is the taking of all cash discounts
offered.
ANS: T
18. A voucher is a form on which is recorded pertinent data about a liability and the particulars
of its payment.
ANS: T
19. When the voucher system is used, the amount due on each voucher represents the credit
balance of an account payable if the voucher is in full payment to a creditor.
ANS: T
20. A voucher system is an example of an internal control procedure over cash payments.
ANS: T
21. A voucher is a written authorization to make a cash payment.
ANS: T
22. A payment system that uses computerized electronic impulses to effect a cash transaction is
called electronic funds transfer (EFT).
ANS: T
23. A remittance advice is the notification accompanying the check issued to a creditor that
states the specific invoice being paid.
ANS: T
24. The bank often informs the depositor of bank service charges by including a credit
memorandum with the monthly bank statement.
ANS: F
25. Bank customers are considered creditors of the bank so the bank shows their accounts with
credit balances on the bank's records.
ANS: T
26. Depositing all cash, checks, etc. in a bank and paying with checks is an internal control
procedure over cash.
ANS: T
27. For efficiency of operations and better control over cash, a company should maintain only
one bank account.
ANS: F
28. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the
balance per bank statement.
ANS: F
29. In preparing a bank reconciliation, the amount of outstanding checks is added to the balance
per bank statement.
ANS: F
30. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank
service charges is added to the balance per depositor's records.
ANS: F
31. In preparing a bank reconciliation, the amount of a check omitted from the journal is added
to the balance per depositor's records.
ANS: F
32. A check for $456 was erroneously charged by the bank as $654. In order for the bank
reconciliation to balance, you must add $198 to the bank statement balance.
ANS: T
DIF: Moderate
OBJ: 07-05
33. If an adjustment for an NSF check is made in a companys bank reconciliation, then the
company must have written a bad check during the month.
ANS: F
34. The amount of the "adjusted balance" appearing on the bank reconciliation as of a given date
is the amount that is shown on the balance sheet for that date.
ANS: T
35. All bank memorandums reported on the bank reconciliation require entries in the depositor's
accounts.
ANS: T
36. The bank reconciliation is an important part of the system of internal controls.
ANS: T
37. The main reason that the bank statement cash balance and the depositor's cash balance do
not initially balance is due to timing differences.
ANS: T
38. The bank reconciles its statement to the depositor's records.
ANS: F
39. In preparing a bank reconciliation, the amount indicated by a credit memorandum for a note
receivable collected by the bank is added to the balance per depositor's records.
ANS: T
40. In preparing a bank reconciliation, the amount of an error indicating the recording of a check
in the journal for an amount larger than the amount of the check is added to the balance per
depositor's records.
ANS: T
DIF: Moderate
OBJ: 07-05
41. A check outstanding for two consecutive months will appear only on the first month's bank
reconciliation.
ANS: F
42. After a bank reconciliation is completed, adjusting entries are prepared for items in the
balance per depositor's records as well as items in the balance per bank statement.
ANS: F
43. A business who requires that all cash payments be made by check, can not use a petty cash
system.
ANS: T
44. In establishing a petty cash fund, a check is written for the amount of the fund and is
recorded as a debit to Accounts Payable and a credit to Petty Cash.
ANS: F
45. Expenditures from a petty cash fund are documented by a petty cash receipt.
ANS: T
46. The sum of the money on hand and petty cash receipts in a petty cash fund will always be
equal to the balance in the Petty Cash account.
ANS: F
47. When the petty cash fund is replenished, the petty cash account is credited for the total of all
expenditures made since the fund was last replenished.
ANS: F
48. Most companies who have several bank accounts, petty cash, and cash on hand, would list
each separately on the balance sheet..
ANS: F
49. A petty cash fund is used to pay relatively large amounts.
ANS: F
50. The petty cash fund eliminates the need for a bank checking account.
ANS: F
51. A compensating balance occurs when a bank may require a depositor to maintain a
maximum cash balance.
ANS: F
52. Cash equivalents are short -term investments that will be converted to cash within 120 days.
ANS: F
53. Money market accounts, commercial paper, and United States Treasury Notes are examples
of cash equivalents.
ANS: F
54. The doomsday ratio includes both cash and cash equivalents in the numerator.
ANS: T
MULTIPLE CHOICE
1.
Which one of the following below is not an element of internal control?

a. risk assessment
b. monitoring
c. information and communication
d. behavior analysis
ANS: D
2.
Which one of the following below is not a factor that influences a business's control
environment?
a. management's philosophy and operating style
b. organizational structure
c. proofs and security measurers
d. personnel policies
ANS: C
3.
When a firm uses internal auditors, it is adhering to which one of the following internal
control elements?
a. risk assessment
b. monitoring
c. proofs and security measures
d. separating responsibilities for related operations
ANS: B
4.
The objectives of internal control are to

a. control the internal organization of the accounting department personnel and equipment
b. provide reasonable assurance that operations are managed to achieve goals, financial
reports are accurate, and laws and regulations are complied with
c. prevent fraud, and promote the social interest of the company
d. provide control over "internal-use only" reports and employee internal conduct
ANS: B
5.
Which one of the following below reflects a weak internal control system?
a. all employees are well supervised
b. a single employee is responsible for comparing a receiving report to an invoice
c. all employees must take their vacations
d. a single employee is responsible for collecting and recording of cash
ANS: D
6.
Internal control does not consist of policies and procedures that

a. protect assets from misuse
b. aid management in directing operations toward achieving business goals
c. guarantee the company will not go bankrupt
d. ensure that business information is accurate
ANS: C
7.
A firm's internal control environment is not influenced by

a. management's operating style
b. organizational structure
c. personnel policies
d. monitoring policies
ANS: D
8.
An element of internal control is

a. risk assessment
b. journals
c. subsidiary ledgers
d. controlling accounts
ANS: A
9.
A necessary element of internal control is

a. database
b. systems design
c. systems analysis
d. information and communication
ANS: D
10. In management's internal control report that is now required of all public companies, which
of the following does not have a direct effect on a company's internal control system.
a. internal auditors
b. independent accountants
c. Board of Director's audit committee
d. Board of trustees
ANS: D
DIF: Moderate
OBJ: 07-02
NAT: AACSB Analytic | AICPA BB-Legal
11. Which of the following should not be considered cash by an accountant?
a. money orders
b. bank checking accounts
c. postage stamps
d. travelers' checks
ANS: C
12. The cash account in the depositor's ledger is a(n)
a. asset with a debit balance
b. asset with a credit balance
c. liability with a debit balance
d. liability with a credit balance
ANS: A
13. The notification accompanying a check that indicates the specific invoice being paid is
called a
a. remittance advice
b. voucher
c. debit memorandum
d. credit memorandum
ANS: A
14. The debit balance in Cash Short and Over at the end of an accounting period is reported as
a. an expense on the income statement
b. income on the income statement
c. an asset on the balance sheet
d. a liability on the balance sheet
ANS: A
15. An example of a preventive control is

a. the use of a bank account
b. separation of the Purchasing Department and Accounting Department personnel
c. bonding employees who handle cash
d. accepting payment in currency only
ANS: B
16. Procedures designed to protect cash from theft and misuse from the time it is received until
it can be deposited in a bank are called
a. accounting controls
b. cash controls
c. preventive controls
d. detective controls
ANS: C
17. A special form on which is recorded pertinent data about a liability and the particulars of its
payment is called a(n)
a. invoice
b. voucher
c. debit memorandum
d. remittance advice
ANS: B
18. EFT
a. means Efficient Funds Transfer
b. can process certain cash transactions at less cost than by using the mail
c. makes it easier to document purchase and sale transactions
d. means Effective Funds Transfer
ANS: B
19. A voucher
a. is received from customers to explain the purpose of a payment
b. is normally prepared in the Accounting Department
c. system is used to control cash receipts
d. system is an internal control procedure to verify that the assets in the ledger are the ones
the company owns
ANS: B
20. A voucher is usually supported by

a. a supplier's invoice
b. a purchase order
c. a receiving report
d. all of the above
ANS: D
21. Under the voucher system, every transaction is recorded at the time of
a. requisitioning
b. ordering
c. incurring
d. paying
ANS: C
22. The reconciliation of the cash register tape with the cash in the register is an example of
a. other controls.
b. independent internal verification.
c. establishment of responsibility.
d. segregation of duties.
ANS: B
23. Which of the following is not an internal control activity for cash?
a. The number of persons who have access to cash should be limited.
b. All cash receipts should be recorded promptly.
c. The functions of record keeping and maintaining custody of cash should be combined.
d. Surprise audits of cash on hand should be made occasionally.
ANS: C
24. The term cash includes
a. coins, currency (paper money), checks
b. money orders, and money on deposit that is available for unrestricted withdrawal
c. short-term receivables
d. a and b
ANS: D
25. On the bank's accounting records, customers' accounts are normally shown as
a. debit balances
b. expenses
c. an asset
d. a liability
ANS: D
26. Credit memorandums from the bank
a. decrease a bank customer's account
b. are used to show a bank service charge
c. show that a company has deposited a customer's NSF check
d. show the bank has collected a note receivable for the customer
ANS: D
27. A bank statement
a. is a credit reference letter written by the depositor's bank.
b. lets a depositor know the financial position of the bank as of a certain date.
c. is a bill from the bank for services rendered.
d. shows the activity that increased or decreased the depositor's account balance.
ANS: D
28. Which one of the following would not cause a bank to debit a depositor's account?
a. Bank service charge
b. Collection of a note receivable
c. Checks marked NSF
d. Wiring of funds to other locations
ANS: B
29. There are three parties to a check. The drawer is
a. a written document signed by the depositor
b. is the one who signs the check ordering payment by the bank
c. the bank on which the check is drawn
d. the party to whom payment is to be made
ANS: B
DIF: Moderate
OBJ: 07-04
30. A debit or credit memorandum describing entries in the depositor's bank account may be
enclosed with the bank statement. An example of a credit memorandum is
a. deposited checks returned for insufficient funds
b. a promissory note left for collection
c. a service charge
d. notification that a customer's check for $375 was recorded by the depositor as $735 on
the deposit ticket
ANS: B
31. Following the completion of the bank reconciliation, an adjusting entry was made that
debited cash and credited Interest Revenue. Therefore the bank reconciliation must have
included an item that was
a. deducted from the balance per depositor's records
b. deducted from the balance per bank statement
c. added to the balance per bank statement
d. added to the balance per depositor's records
ANS: D
32. A person authorized to write checks drawn on a checking account at a bank must sign and
have on file with the bank a
a. signature card
b. deposit ticket
c. checkbook
d. bank card
ANS: A
33. A check drawn by a depositor for $180 in payment of a liability was recorded in the journal
as $810. This item would be included on the bank reconciliation as a(n)
a. addition to the balance per the depositor's records
b. addition to the balance per the bank statement
c. deduction from the balance per the bank statement
d. deduction from the balance per the depositor's records
ANS: A
DIF: Moderate
OBJ: 07-05
34. A check drawn by a depositor for $180 in payment of a liability was recorded in the journal
as $810. What entry is required in the depositor's accounts?
a. debit Accounts Payable; credit Cash
b. debit Cash; credit Accounts Receivable
c. debit Cash; credit Accounts Payable
d. debit Accounts Receivable; credit Cash
ANS: C
DIF: Moderate
OBJ: 07-05
35. A bank reconciliation should be prepared periodically because
a. the depositor's records and the bank's records are in agreement
b. the bank has not recorded all of its transactions
c. any differences between the depositor's records and the bank's records should be
determined, and any errors made by either party should be discovered and corrected
d. the bank must make sure that its records are correct
ANS: C
36. The bank reconciliation
a. should be prepared by an employee who records cash transactions
b. is part of the internal control system
c. is for information purposes only
d. is sent to the bank for verification
ANS: B
37. Journal entries based on the bank reconciliation are required in the depositor's accounts for
a. outstanding checks
b. deposits in transit
c. bank errors
d. book errors
ANS: D
38. Accompanying the bank statement was a debit memorandum for bank service charges. On
the bank reconciliation, the item is
a. a deduction from the balance per depositor's records
b. an addition to the balance per bank statement
c. a deduction from the balance per bank statement
d. an addition to the balance per depositor's records
ANS: A
39. Accompanying the bank statement was a debit memorandum for bank service charges. What
entry is required in the depositor's accounts?
a. debit Miscellaneous Administrative Expense; credit Cash
b. debit Cash; credit Other Income
d. debit Accounts Payable; credit Cash
ANS: A
40. A check drawn by a depositor in payment of a voucher for $725 was recorded in the journal
as $257. This item would be included in the bank reconciliation as a(n)
a. deduction from the balance per the depositor's records
b. addition to the balance per the bank statement
c. deduction from the balance per the bank statement
d. addition to the balance per the depositor's records
ANS: A
DIF: Moderate
OBJ: 07-05
41. A check drawn by a depositor in payment of a voucher for $725 was recorded in the journal
as $257. What entry is required in the depositor's accounts?
a. debit Accounts Payable; credit Cash
ANS: A
DIF: Moderate
OBJ: 07-05
42. Receipts from cash sales of $9,500 were recorded incorrectly in the cash receipts journal as
$5,900. This item would be included on the bank reconciliation as a(n)
a. deduction from the balance per depositor's records
b. addition to the balance per bank statement
c. deduction from the balance per bank statement
d. addition to the balance per depositor's records
ANS: D
DIF: Moderate
OBJ: 07-05
43. Receipts from cash sales of $9,500 were recorded incorrectly in the cash receipts journal as
$5,900. What entry is required in the depositor's accounts?
a. debit Sales; credit Cash
c. debit Cash; credit Sales
ANS: C
DIF: Moderate
OBJ: 07-05
44. Accompanying the bank statement was a credit memorandum for a short-term note collected
by the bank for the depositor. This item is a(n)
ANS: D
DIF: Moderate
OBJ: 07-05
45. Accompanying the bank statement was a credit memorandum for a short-term note collected
by the bank for the customer. What entry is required in the depositor's accounts?
a. debit Notes Receivable; credit Cash
b. debit Cash; credit Miscellaneous Income
c. debit Cash; credit Notes Receivable
ANS: C
DIF: Moderate
OBJ: 07-05
46. The amount of deposits in transit is included on the bank statement as a(n)
a. deduction from the balance per the depositor's books
b. deduction from the balance per bank statement
c. addition to the balance per bank statement
d. addition to the balance per depositor books
ANS: C
47. The amount of the outstanding checks is included on the bank reconciliation as a(n)
ANS: C
48. Which of the following items that appeared on the bank reconciliation did not require an
adjusting entry?
a. bank service charges
b. deposits in transit
c. NSF checks
d. A check for $520, recorded in the check register for $250.
ANS: B
49. What entry is required in the depositor's accounts to record outstanding checks?
a. debit Accounts Receivable; credit Cash
d. none
ANS: D
50. Accompanying the bank statement was a debit memorandum for an NSF check received
from a customer. This item would be included on the bank reconciliation as a(n)
ANS: A
51. Accompanying the bank statement was a debit memorandum for an NSF check received
from a customer. What entry is required in the depositor's accounts?
a. debit Other Income; credit Cash
b. debit Cash; credit Other Income
c. debit Cash; credit Accounts Receivable
ANS: D
52. During the month, a company was informed that a check they had issued was accidentally
destroyed. On the bank reconciliation, the company would
a. deduct the amount from the balance per the depositor's records
b. deduct the amount from the balance per the bank statement
c. Add the amount to the balance per the bank statement
d. Add the amount to the balance per the depositor's records
ANS: D
53. The amount of cash to be reported on the balance sheet at June 30 is the
a. total of the cash column in the cash receipts journal as of June 30
b. adjusted balance appearing in the bank reconciliation for June 30
c. total of the cash column in the cash payments journal as of June 30
d. balance as of June 30 on the bank statement
ANS: B
54. Which of the following would be deducted from the balance per books on a bank
reconciliation?
a. Service charges
b. Outstanding checks
c. Deposits in transit
d. Notes collected by the bank
ANS: A
55. Which of the following would be added to the balance per books on a bank reconciliation?
a. Service charges
b. Outstanding checks
c. Deposits in transit
d. Notes collected by the bank
ANS: D
56. Which of the following would be subtracted from the balance per books on a bank
reconciliation?
a. Outstanding checks
b. Deposits in transit
c. Notes collected by the bank
d. Service charges
ANS: D
57. Which of the following would be subtracted from the balance per bank on a bank
reconciliation?
a. Outstanding checks
b. Deposits in transit
c. Notes collected by the bank
d. Service charges
ANS: A
58. A bank reconciliation should be prepared
a. whenever the bank refuses to lend the company money.
b. to explain any difference between the depositor's balance per books with the balance per
bank.
c. when an employee is suspected of fraud.
d. by the person who is authorized to sign checks.
ANS: B
59. Jones Company had checks outstanding totaling $5,400 on its June bank reconciliation. In
July, Jones Company issued checks totaling $38,900. The July bank statement shows that
$26,300 in checks cleared the bank in July. A check from one of Jones Company's customers
in the amount of $300 was also returned marked "NSF." The amount of outstanding checks
on Davis Company's July bank reconciliation should be
a. $7,200.
b. $12,600.
c. $17,700.
d. $18,000.
ANS: D
DIF: Moderate
OBJ: 07-05
60. Santos Company gathered the following reconciling information in preparing its August
bank reconciliation:
Cash balance per books, 8/31
Deposits in transit
Notes receivable and interest collected by bank
Bank charge for check printing
Outstanding checks
NSF check
The adjusted cash balance per books on August 31 is
a.
b.
c.
d.
ANS:
NAT:
$3,500
150
850
20
2,000
170
$4,160.
$4,010.
$2,310.
$2,460.
A
DIF: Moderate
OBJ: 07-05
AACSB Analytic | AICPA FN-Measurement
61. Jonas Company gathered the following reconciling information in preparing its April bank
reconciliation:
Cash balance per books, 4/30
Deposits in transit
Notes receivable and interest collected by bank
Bank charge for check printing
Outstanding checks
NSF check
The adjusted cash balance per books on April 30 is
$2,200
300
740
25
1,500
140
a.
b.
c.
d.
ANS:
NAT:
$3,075.
$2,940.
$2,775.
$3,055.
C
DIF: Moderate
OBJ: 07-05
AACSB Analytic | AICPA FN-Measurement
62. Marcus Company developed the following reconciling information in preparing its
September bank reconciliation:
Cash balance per bank, 9/30
Note receivable collected by bank
Outstanding checks
Deposits-in-transit
Bank service charge
NSF
$11,000
6,000
9,000
4,500
75
1,200
Using the above information, determine the cash balance per books (before adjustments) for
the Marcus Company.
a. $9,775
b. $15,725
c. $15,500
d. $1,775
ANS: D
DIF: Moderate
OBJ: 07-05
63. Morris Company developed the following reconciling information in preparing its
December bank reconciliation:
Cash balance per bank, 12/31
Note receivable collected by bank
Outstanding checks
Deposits-in-transit
Bank service charge
NSF check
$13,000
6,000
8,000
4,500
75
1,200
Using the above information, determine the cash balance per books (before adjustments) for
the Morris Company.
a. $4,775
b. $14,225
c. $15,500
d. $17,725
ANS: A
DIF: Moderate
OBJ: 07-05
64. A $100 petty cash fund has cash of $18 and receipts of $80. The journal entry to replenish
the account would include a
a. credit to Petty Cash for $84.
b. debit to Cash for $80.
c. debit to Cash Over and Short for $2.
d. credit to Cash for $80
ANS: C
the account would include a
a. credit to Petty Cash for $86.
b. debit to Cash for $86.
c. credit to Cash Over and Short for $2.
d. credit to Cash for $80
ANS: C
66. Entries are made to the Petty Cash account when
a. making payments out of the fund.
b. recording shortages in the fund.
c. replenishing the petty cash fund.
d. establishing the fund.
ANS: D
67. The type of account and normal balance of Petty Cash is a(n)
a. revenue, credit
b. asset, debit
c. liability, credit
d. expense, debit
ANS: B
68. The debit recorded in the journal to reimburse the petty cash fund is to
a. Petty Cash
b. Accounts Receivable
c. Cash
d. various accounts for which the petty cash was disbursed
ANS: D
69. A $100 petty cash fund contains $92 in petty cash receipts, and $6.50 in currency and coins.
The journal entry to record the replenishment of the fund would include a
a. credit to Petty Cash for $93.50
b. credit to Cash for $92
c. debit to Cash Short and Over for $1.50
d. credit to Cash Short and Over for $1.50
ANS: C
DIF: Moderate
OBJ: 07-06
the account would include a credit to
a. Cash for $80.
b. Cash Over and Short for $4.
c. Petty Cash for $84.
d. Cash for $84.
ANS: D
71. Cash equivalents include
a. checks
b. coins and currency
c. money market accounts and commercial paper
d. stocks and short-term bonds
ANS: C
72. Cash equivalents
a. are illegal in some states
b. will be converted to cash within two years
c. will be converted to cash within 90 days
d. will be converted to cash within 120 days
ANS: C
73. A minimum cash balance required by a bank is called
a. cash in bank
b. cash equivalents
c. compensating balance
d. EFT
ANS: C
74. During 2007, Creative Inc has monthly cash expenses of $150,000. On December 31, 2007,
their cash balance is $1,550,000. The ratio of cash to monthly cash expenses is
a. 9.7
b. 10.3
c. 10.7
d. 11.1
ANS: B
75. During a bank reconciliation process,
a. Outstanding checks and deposits in transit are added to the bank statement balance.
b. Outstanding checks are subtracted and deposits in transit are added to the bank statement
balance.
c. Outstanding checks and deposits in transit are subtracted from the bank statement
balance.
d. Outstanding checks are added and deposits in transit are subtracted to the bank statement
balance.
ANS: B
76. In the normal operation of business you receive a check from a customer and deposit it into
your checking account. With your bank statement you are advised that this check for $450 is
NSF. The bank also informs you that due to the amount of activity on your business
account the monthly service charge is $40.
During a bank reconciliation:
a. subtract both values from balance according to bank.
b. add both values from balance according to books.
c. add both values from balance according to bank.
d. subtract both values from balance according to books.
ANS: D
DIF: Moderate
OBJ: 07-07
77. Which of the following would not be included with the Cash and Equivalents on the Balance
Sheet?
a. Commercial Paper
b. Short-Term Receivables
c. Certificates of Deposit
d. Municipal Securities
e. Money Market Mutual Funds
ANS: B
DIF: Moderate
OBJ: 07-07
EXERCISE/OTHER
1.
Identify each of the following as relating to (a) the control environment, (b) risk assessment,
or (c) control procedures.
(1) Mandatory vacations

(2) Personnel policies
(3) Report of outside consultants on future market changes
ANS:
(1) (c) control procedures
(2) (a) the control environment
(3) (b) risk assessment
DIF: Easy OBJ: 07-01 TOP: Example Exercise 7-1
2.
Distinguish preventive controls from detective controls and give examples of each as they
relate to cash.
ANS:
Preventive controls are to protect cash from theft and misuse. They are meant to prevent theft
and misuse. Detective controls are to detect theft or misuse of cash. They are meant to detect a
theft or misuse after it occurs. An example of preventive controls is the use of cash registers. An
example of detective controls is the use of bank accounts and bank reconciliation.
3. List the objectives of internal control and give an example of how each is implemented.
ANS:
Internal control provides reasonable assurance that
(1) assets are safeguarded and used for business purposes
(2) business information is accurate
(3) employees comply with laws and regulations
Examples are
(1) duties are separated
(2) duties are rotated
(3) reports are submitted to management
There are many other examples that would be correct.
4.
The following selected transactions relate to cash collections for a firm that maintains a
$100 change fund at all times. Present entries to record the transactions for each of the two
days of cash receipts from sales.
(a)
(b)
Actual cash in cash register, $3,012.26; cash receipts per cash register tally,
$2,913.21.
Actual cash in cash register, $2,912.95; cash receipts per cash register tally,
$2,812.32.
ANS:
(a)
Cash
Cash Short and Over
Sales
(b)
Cash
Cash Short and Over
Sales
2,912.26
0.95
2,913.21
2,812.95
0.63
2,812.32

5.
Describe the features of a voucher system and list typical supporting documents for a
voucher.
ANS:
A voucher system is used to control cash disbursements. For example, the voucher system should
provide reasonable assurance that only authorized payments are made. Another example is that a
voucher system should ensure that all cash discounts are taken.
Specifically, a voucher system is a set of procedures for authorizing and recording liabilities and
cash payments. It usually consists of vouchers, a file for unpaid vouchers and a file for paid
vouchers.
Typical supporting documents for a voucher are a supplier's invoice, a purchase order, and a
receiving report.
6.
The actual cash received during the week ended January 7 for cash sales was $17,547.00,
and the amount indicated by the cash register total was $17,541.00. Journalize the entry to
record the cash receipts and cash sales.
Journal
Post
Date
Description
Ref
Debit
Credit
ANS:
Journal
Date
Jan 7
Description
Post
Ref
Cash
Sales
Cash Short and Over
Debit
17,547.00
Credit
17,541.00
6.00

7. List the principal advantage of Electronic Funds Transfers.
ANS:
Advantage: more efficient transfer and recording of cash among companies.
NAT: AACSB Technology | AICPA BB-Leveraging Technology
8. Why would a bank require a company to maintain a compensating balance?
ANS:
Usually it is part of a loan agreement or line of credit.
9.
The following items may appear on a bank statement:

1.
2.
3.
4.
NSF check
EFT Deposit
Service charge
Bank correction of an error from recording a $300 check as $30.
Indicate whether the item would appear as debit or credit memorandum on the bank
statement and whether the item would increase or decrease the balance of your account. Use
the following format:
Appears on the
Bank Statement as a
Increases (Decreases) the
a Debit or Credit
Balance of the Depositors
Item No.
Memorandum
Bank Account
ANS:
Item No.
1.
2.
3.
4.
Appears on the
Bank Statement as a
a Debit or Credit
Memorandum
Debit Memorandum
Credit Memorandum
Debit Memorandum
Debit Memorandum
Increases (Decreases) the

Balance of the Depositors
Bank Account
Decreases
Increases
Decreases
Decreases

NAT: AACSB Analytic | AICPA FN-Measurement TOP: Example Exercise 7-2
10. Using the following bank reconciliation for Cole Co. for May 31, 2007, record the
appropriate journal entries that would be necessary.
Cole Co.
Bank Reconciliation
May 31, 2007
Cash balance according to bank statement
Add deposits in transit not recorded by bank
$3,012
704
$3,716
590
$3,126
$3,165
Deduct outstanding checks

Adjusted balance
Cash balance according to depositor's records
Deduct: Bank service charge
Error in recording
Adjusted balance
ANS:
Miscellaneous Administrative Expense
Supplies
Cash
$ 30
9
39
$3,126
30
9
39
11. Using the following bank reconciliation for Allen Co. for June 30, 2007, record the
appropriate journal entries that would be necessary.
Allen Co.
Bank Reconciliation
June 30, 2007
Adjusted balance
Add: Note collected by bank, including
$50 interest
Error in recording cash sales of
$342 as $324
Deduct: NSF check from Alice Bell
Bank service charges
Adjusted balance
ANS:
Cash
Notes Receivable
Interest Revenue
Sales
Accounts Receivable-Alice Bell
Cash
$8,000.00
500.00
$8,500.00
2,200.00
$6,300.00
$3,675.00
$2,850.00
18.00
$ 218.00
25.00
2,868.00
$6,543.00
243.00
$6,300.00
2,868.00
2,800.00
50.00
18.00
218.00
25.00
243.00
DIF: Moderate
OBJ: 07-05
12. Using the following information, prepare a bank reconciliation for Cole Co. for May 31,
2007:
(a)
(b)
(c)
(d)
(e)
(f)
The bank statement balance is $3,012.

The cash account balance is $3,165.
Outstanding checks amounted to $590.
Deposits in transit are $704.
The bank service charge is $30.
A check for $76 for supplies was recorded as $67 in the ledger.
ANS:
Cole Co.
Bank Reconciliation
May 31, 2007
Adjusted balance
Error in recording
Adjusted balance
$3,012
704
$3,716
590
$3,126
$3,165
$ 30
9
39
$3,126
DIF: Moderate
OBJ: 07-05
13. Identify each of the following reconciling items as (a) an addition to the cash balance
according to the bank statement, (b) deduction from the cash balance according to the bank
statement, (c) an addition to the cash balance according to the companys records, or (d) a
deduction from the cash balance according to the companys records. Assume that none of
the transactions reported by bank debit and credit memorandums have been recorded by the
depositor. Also, indicate by writing (Entry) those items that will require a journal entry in the
companys accounts.
1.
2.
3.
4.
5.
6.
Deposits in transit.
Bank service charges.
NSF check.
Outstanding checks.
Check for $570 incorrectly recorded by the company as $750.
Check for $540 incorrectly recorded by the company as $450.
ANS:
1. (a) an addition to the cash balance according to the bank statement
2. (d) a deduction from the cash balance according to the companys records (entry)
4. (b) deduction from the cash balance according to the bank statement
5. (c) an addition to the cash balance according to the companys records (entry)
DIF: Moderate
OBJ: 07-05
14. Using the following information, prepare a bank reconciliation for Nature Co. for July 31,
2007:
(a)
(b)
(c)
(d)
(e)
(f)
The bank statement balance is $4,062

The cash account balance is $4,165.
Outstanding checks amounted to $640.
Deposits in transit are $704.
The bank service charge is $30.
A check for $76 for supplies was recorded as $67 in the ledger.
ANS:
Nature Co.
Bank Reconciliation
July 31, 2007
Adjusted balance
Error in recording
Adjusted balance
$4,062
704
$4,766
640
$4,126
$4,165
$ 30
9
39
$4,126
DIF: Moderate
OBJ: 07-05
15. Journalize the entries to record the following:
Jan 1
Established a petty cash fund of $500.00
Jan 31 The amount of cash in the petty cash fund is now $123.00. The fund is
replenished based on the following receipts: office supplies, $215.00; selling
expenses, $168.00.
Record any discrepancy in the cash short and over account.
Journal
Date
Post
Ref
Description
Debit
Credit
ANS:
Journal
Date
Jan 1
Jan 31
Description
Petty Cash
Cash
Office Supplies
Selling Expenses
Cash Short and Over
Cash
Post
Ref
Debit
500.00
Credit
500.00
215.00
168.00
6.00
377.00
DIF: Moderate
OBJ: 07-06
16. On January 2nd Mega Sales decides to establish a $100.00 Petty Cash Account to relieve the
burden on Accounting.
(a)
Journalize this event.
(b) On January 10th the petty cash fund has receipts for mail and postage of
$37.50, contributions and donations of $14.75, meals and entertainment of
$36.25 and $11.25 in cash. Journalize the replenishment of the fund.
(c)
On January 11th Mega Sales decides to increase petty cash to $200.00.
ANS:
(a) Jan 2
(b) Jan 10
(c) Jan 11
Petty Cash
Cash
Mail and Postage Expense
Contributions and Donations Expense
Meals and Entertainment Expense
Cash Over and Under
Cash
Petty Cash
Cash
100.00
100.00
37.50
14.75
36.25
0.25
88.75
100.00
100.00
DIF: Moderate
OBJ: 07-06
17.
(a)
(b)
Where are cash equivalents disclosed in the financial statements?

List three examples of cash equivalents.
ANS:
(a) Cash account on the balance sheet.
(b) Money market funds; notes of major corporations (commercial paper); United
States Treasury Bills.
PROBLEM
1. List and define each of the five elements of internal control.
ANS:
(1) Control Environment. The control environment is the overall attitude of
management and employees about the importance of internal controls.
(2) Risk assessment. Risk assessment is the identification of risks faced by an
organization so that management can take necessary actions to control them.
(3) Control Procedures. The control procedures are the policies and procedures
designed to provide reasonable assurance that the business goals are met and
fraud is prevented.
(4) Monitoring. Monitoring locates deficiencies in the internal control system
and improves control effectiveness.
(5) Information and Communication. Information and communication to
management about the control environment, risk assessment, control
procedures, and monitoring elements of internal control are needed by
management to guide operations and ensure compliance with reporting,
legal, and regulatory requirements.
2.
Two features of internal control are presented in the following sections. Each is followed by
a list of four irregularities that occurred in processing data. Identify the one irregularity from
each list that would be discovered or prevented by the feature of internal control described.
(a)
The sum of the balances of the accounts in the customers ledger is compared at the
end of each month with the balance of the accounts receivable account in the
general ledger by a person who has no responsibility for maintaining either the
general ledger or the customers ledger.
(1)
(2)
(3)
(4)
(b)
Five hours of services were rendered but the customer was only billed for four
hours.
A cash receipt of $750 was recorded correctly in the accounts receivable
controlling account but was posted to the customers ledger as $75.
A bill for services rendered to Cole Co. was erroneously posted to the account
of Coleman Co. in the customers ledger.
No entry was made in the accounting records for services rendered to a
customer.
Both cash and credit charges for services rendered are recorded on prenumbered
invoices. At the end of the day, all invoices are accounted for before the duplicate
copies of the invoices are routed to the accounting department for entry into the
accounts and the cash is sent to the cashier's department for deposit.
(1)
(2)
(3)
(4)
Some charge customers complained that the monthly statements of account did
not add all amounts correctly.
Some clerks used incorrect hourly rates in preparing invoices.
Some clerks destroyed duplicate copies of cash invoices and misappropriated
the cash.
Some charge customers complained that the monthly statement of account did
not indicate credits for payments made.
ANS:
(a) (2)
(b) (3)
DIF: Moderate
OBJ: 07-02
3.
The bank statement for Allen Co. indicates a balance of $8,000.00 on June 30, 2007. After
the journals for June had been posted, the cash account had a balance of $3,675.00. Prepare
a bank reconciliation on the basis of the following reconciling items:
(a)
(b)
(c)
(d)
(e)
(f)
Cash sales of $342 had been erroneously recorded in the cash receipts journal as
$324.
Deposits in transit not recorded by bank, $500.00.
Bank debit memorandum for service charges, $25.00.
Bank credit memorandum for note collected by bank, $2850, including $50 interest.
Bank debit memorandum for $218.00 NSF (not sufficient funds) check from Alice
Bell, a customer.
Checks outstanding, $2,200.00.
ANS:
Allen Co.
Bank Reconciliation
June 30, 2007
Adjusted balance
Add: Note collected by bank, including
$50 interest
Error in recording cash sales of
$342 as $324
Deduct: NSF check from Alice Bell
Bank service charges
Adjusted balance
DIF: Moderate
OBJ: 07-05
$8,000.00
500.00
$8,500.00
2,200.00
$6,300.00
$3,675.00
$2,850.00
18.00
$ 218.00
25.00
2,868.00
$6,543.00
243.00
$6,300.00
4.
Western Flyers received its bank statement for the month of July with an ending balance of
$11,065.00. Western Flyers determined that check #598 for $125.00 and check #601 for
$375.00 were both outstanding. Also, a $7,500.00 deposit for July 30th was in transit as of
the end of the month. Big Bucks Bank also collected a $5,000.00 notes receivable on July
1st that was issued January 1st at 12% annual interest. No interest revenue has been accrued
on this note and Big Bucks Bank charged a $15.00 fee for the collection service.The
companys morning reports resulted in a bank service charge of $20.00 and a customer
check for $75.00 was returned with the statement marked NSF. The ending balance of the
Western Flyers cash account is $12,875.00.
Complete a bank/account reconciliation and write any necessary journal entries for the
reconciliation.
ANS:
Bank balance July 31:
$11,065.00
Add deposits in transit
7,500.00
Less outstanding checks
125.00
375.00
(500.00)
Adjusted balance - bank:
$18,065.0
0
Company balance July 31:

Add N/R
Interest Revenue
Less collection fee
Less morning report fee
Less NSF check
Adjusted balance - company
Jul 31
Jul 31
Jul 31
$12,875.0
0
5,000.00
300.00
(15.00) 5,285.00
(20.00)
(75.00)
$18,065.0
0
Cash
Bank Service Charge Expense
Notes Receivable
Interest Revenue
5,285.00
15.00

Cash
20.00
Accounts Receivable
Cash
75.00
5,000.00
300.00
20.00
75.00
DIF: Difficult
OBJ: 07-05
5.
Big Vault Bank sent Paper Punchers their end of month bank statement for March. The end
of month balance by the bank is $9,755.00. The statement shows that a deposit for $5,750 is
in transit at the end of the statement period. The statement also revealed that checks for
$75.00, $145.00, and $85.00 are outstanding. Big Vault collected a 90 day, 10% interest
$3,000.00 note receivable charging $10 for the service. No interest has been accrued on the
note. The bank charges a monthly account fee of $10.00. The end of month balance per
company books is $12,145.00.
Complete a bank/account reconciliation and write any necessary journal entries for the
reconciliation.
ANS:
Bank balance March 31:
9,755.00
Add deposits in transit
5,750.00
Less outstanding checks
75.00
145.00
85.00
(305.00)
Adjusted balance - bank:
15,200.00
Company balance July 31:

Add N/R
Interest Revenue
Less collection fee
Less bank service charge
12,145.00
3,000.00
75.00
(10.00)
Adjusted balance - company

Jul 31
Jul 31
3,065.00
(10.00)
15,200.00
Cash
Notes Receivable
Interest Revenue
3,065.00
10.00

Cash
10.00
DIF: Difficult
OBJ: 07-05
3,000.00
75.00
10.00
6.
The cash account for JKL Co. on March 31,2007 indicated a balance of $16,450.00. The
March bank statement indicated an ending balance of $18,345.00. Comparing the bank
statement, the canceled checks, and the accompanying memorandums with the records
revealed the following reconciling items:
(a)
(b)
(c)
(d)
(e)
(f)
Checks outstanding totaled $3,620.00

A deposit of $4,496.00 had been made too late to appear on the bank statement.
A check for $1,233.00 returned with the statement had been incorrectly
recorded as $233.00. The check was originally credited to accounts payable.
The bank collected $4,541.00 on a note left for collection.
Bank service charges for March amounted to $25.00.
A check for $745.00 was returned by the bank because of insufficient funds.
Prepare a bank reconciliation as of March 31, 2007. Journalize the necessary entries.
JKL Co.
Bank Reconciliation
March 31, 2007
Journal
Date
Description
Post
Ref
Debit
Credit
ANS:
JKL Co.
Bank Reconciliation
March 31, 2007
Add: Deposits not recorded by bank
$18,345.00
4,496.00
22,841.00
3,620.00
$19,221.00
Deduct: Outstanding Checks

Adjusted balance
Cash balance according to depositors records
Add: Proceeds of note collected by bank
$16,450.00
4,541.00
20,991.00
Deduct: Error in recording check

Service Charges
Nonsufficient funds check
Adjusted balance
$1,000
25.00
745.00
1,770.00
$19,221.00
Journal
Date
Mar 31
Description
Post
Ref
Cash
Note Receivable
Accounts Payable
Bank Charge Expense
Accounts Receivable
Cash
Debit
4,541.00
Credit
4,541.00
1,000.00
25.00
745.00
1,770.00
DIF: Moderate
OBJ: 07-05
7.
On February 3rd Mega Sales decides to establish a $100.00 Petty Cash Account to relieve
the burden on Accounting.
(a) Journalize this event.
(b) On February 11th the petty cash fund has receipts for mail and postage of
(c) On February 12th Mega Sales decides to increase petty cash to $200.00.
ANS:
(a) Feb 3
Petty Cash
Cash
(b) Feb 11

Cash Over and Under
Cash
(c) Feb 12
Petty Cash
Cash
100.00
100.00
36.75
15.25
35.50
0.25
87.25
100.00
100.00
DIF: Moderate
OBJ: 07-06
8.
Present entries to record the following transactions:

(a)
(b)
(c)
Established a petty cash fund of $350.

The petty cash fund now has a balance of $75.80. Replenished the fund, based on
the following disbursements as indicated by a summary of the petty cash receipts:
office supplies expense, $89.50; miscellaneous administrative expense, $108.75;
and miscellaneous selling expense, $65.60.
Increased the petty cash fund to $400.
ANS:
(a)
Petty Cash
Cash
(b)
Office Supplies Expense
Miscellaneous Selling Expense
Cash Short and Over
Cash
(c)
Petty Cash
Cash
DIF: Moderate
OBJ: 07-06
350.00
350.00
89.50
108.75
65.60
10.35
274.20
50.00
50.00
9.
On February 3rd Mega Sales decides to establish a $200.00 Petty Cash Account to relieve
the burden on Accounting.
(a)
(b) On February 11th the petty cash fund has receipts for mail and postage of
(c)
On February 12th Mega Sales decides to increase petty cash to $300.00.
ANS:
(a) Feb 3
(b) Feb 11
(c) Feb 12
Petty Cash
Cash
Cash Over and Under
Cash
Petty Cash
Cash
DIF: Moderate
OBJ: 07-06
200.00
200.00
84.75
45.25
35.50
8.75
174.25
100.00
100.00

Ch07 Sarbanes-Oxley, Internal Control, &amp; Cash

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Ch07 Sarbanes-Oxley, Internal Control, &amp; Cash

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Chapter 7

Sarbanes-Oxley, Internal Control, & Cash

Chapter 7 /Sarbanes-Oxley, Internal Control, & Cash 356

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Chapter 7Sarbanes-Oxley, Internal Control, and Cash

management's conclusions about the effectiveness of the company's internal control

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A backlog in recording transactions is an example of a warning sign from the accounting

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Which one of the following below is not an element of internal control?

The objectives of internal control are to

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Internal control does not consist of policies and procedures that

A firm's internal control environment is not influenced by

An element of internal control is

A necessary element of internal control is

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15. An example of a preventive control is

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20. A voucher is usually supported by

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(1) Mandatory vacations

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DIF: Easy OBJ: 07-03

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DIF: Easy OBJ: 07-03

The following items may appear on a bank statement:

Chapter 7 /Sarbanes-Oxley, Internal Control, & Cash 383

Increases (Decreases) the

DIF: Easy OBJ: 07-04

Deduct outstanding checks

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The bank statement balance is $3,012.

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The bank statement balance is $4,062

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Where are cash equivalents disclosed in the financial statements?

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Company balance July 31:

Bank Service Charge Expense

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Company balance July 31:

Ch07 Sarbanes-Oxley, Internal Control, & Cash

Ch07 Sarbanes-Oxley, Internal Control, & Cash