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

Copyright © 2007 Prentice-Hall. All rights reserved

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Internal Control and CashInternal Control and Cash

Chapter 8


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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


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Answer: 2 Even a strong internal control system can not ensure a company will be profitable.


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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


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Answer: 4 Assigning one person the responsibility for accounting and custody of assets is a violation of separation of duties.


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When preparing the bank reconciliation, which item shows on the Bank side:

1. Bank service charge2. NSF check3. Outstanding checks. 4. Electronic funds transfers


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Answer: 3Outstanding checks are checks that have been recorded on the company books, but have not yet cleared the bank.


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Which of the following is added to the Book side?

1. Service charge2. Deposits in transit3. Bank collections4. NSF check


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Answer: 3 Bank collections have been added to the cash balance in the bank, but have not been added on the books.


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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 side2. Addition on the books side3. Deduction on the bank side4. Deduction on the book side


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Answer: 2The 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.


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Which of the following items found on a bank reconciliation does not require a journal entry to adjust the cash balance?

1. Deposit in transit2. NSF check3. Collection by bank4. Bank service charge


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Answer: 1A deposit in transit means that the company has already debited cash for the amount of the deposit.


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The following data is available for EcoSave Company for MayBook balance, May 31 $500Outstanding checks 200Deposits in transit 400Service charge 30Interest earned on checking 10NSF check 50What is the adjusted book balance on May 31?


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Answer:

Book balance, May 31 $500Add: Interest earned on checking 10Deduct: Service charge (30) NSF check (50)Adjusted book balance $430


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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 receivable2. Debit accounts receivable, credit cash3. Debit bad debts expense, credit cash4. Debit accounts payable, credit cash


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Answer: 2NSF 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.


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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


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Answer: 3The 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.


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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-numbered3. All expenditures should be made by check4. All expenditures should be accompanied by

appropriate documentation


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Answer: 1Checks should only be signed when they are complete as to the payee and the amount and when proper documentation is available.


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Which journal entry establishes a petty cash fund?

1. Debit cash, credit petty cash2. Debit petty cash, credit cash3. Debit expenses, credit petty cash4. Debit expenses, credit cash


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Answer: 2The petty cash fund is an asset so it is increased with a debit.


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Which journal entry replenishes a petty cash fund?

1. Debit cash, credit petty cash2. Debit petty cash, credit cash3. Debit expenses, credit petty cash4. Debit expenses, credit cash


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Answer: 4When 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.


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

Documents

check slide

bank service charge

bank reconciliation

bank collections

company policy slide

custody of assets slide

cash balance

company books