Deck 6: Reporting and Analyzing Cash and Internal Controls

Question 1

Cash registers, check protectors, time clocks and personal identification scanners are examples of devices that can improve internal control.

Answer 1

True

Question 2

Separation of duties involves dividing responsibility for a transaction or a series of related transactions between two or more individuals or departments.

Answer 2

True

Question 3

All internal control policies and procedures have limitations that usually arise from either (1) human error or human fraud, or (2) the cost-benefit principle.

Answer 3

True

Question 4

One effective cash management principle is to invest excess cash beyond what is needed for regular business in order to earn a return on the cash.

Question 5

The use of internal controls provides a guarantee against a company's risk of loss.

Question 6

Maintaining adequate records is an important internal control principle.

Question 7

Technologically advanced accounting systems rarely need monitoring for errors because computers always process transactions correctly.

Question 8

Liquidity refers to a company's ability to pay its long-term obligations.

Question 9

Insuring assets and requiring all accounting personnel to have CPA licenses are two important principles of internal control.

Question 10

Cash-only sales policies or offering early payment discounts are not considered effective cash management policies.

Question 11

Collusion is a form of fraud where two or more individuals collaborate to circumvent separation of duties.

Question 12

Cash equivalents are short-term highly liquid investment assets that are readily converted to a known cash amount, and have maturities of one year.

Question 13

Because employees know that bonding is an insurance policy against loss from theft, bonding does not generally discourage loss from theft.

Question 14

According to good internal control policies, a person who controls an asset also maintains that asset's accounting records.

Question 15

A properly designed internal control system is a key part of systems design, analysis, and performance.

Question 16

Internal control in technologically advanced accounting systems depends less on the design and operation of the information system and more on the analysis of its resulting documents.

Question 17

Establishing responsibilities and assigning both the recordkeeping and custody of assets to one person are important principles of internal control.

Question 18

An internal control system consists of the policies and procedures managers use to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies.

Question 19

Money orders, cashier's checks, and certified checks are all examples of cash.

Question 20

Effective cash management includes making efforts to pay bills on the earliest possible day.

Question 21

Basic bank services such as bank accounts, bank deposits, and checking contribute to the control of cash.

Question 22

A check involves 3 parties: a maker who signs the check, a payee who is the recipient, and a bank on which the check is drawn.

Question 23

Electronic funds transfers (EFTs) are decreasingly used by companies due to the inconvenience and high cost.

Question 24

Canceled checks are checks the bank has paid and deducted from the customer's account during the period.

Question 25

A voucher system is a set of procedures and approvals designed to control cash disbursements and the acceptance of obligations.

Question 26

Assigning the responsibilities of purchasing, receiving, and paying for merchandise to one department or individual is a way to streamline a voucher system.

Question 27

A voucher is an external document used to accumulate information to control cash disbursements and to ensure that a transaction is properly recorded.

Question 28

A voucher system establishes procedures for verifying, approving, and recording cash collections.

Question 29

The days' sales uncollected ratio measures the liquidity of accounts receivable.

Question 30

The days' sales uncollected ratio measures a company's ability to manage its debt.

Question 31

When evaluating the days' sales uncollected ratio, generally the higher the receivables balance, the better the ratio.

Question 32

Internal control of cash ensures that cash received is properly recorded and deposited.

Question 33

The clerk who has access to the cash in the cash register should also have access to the cash register tape or file.

Question 34

A voucher system's control over cash disbursements begins when a company incurs an obligation that will result in eventual payment of cash.

Question 35

Most large thefts occur from payment of fictitious invoices, which makes control of cash disbursements especially important for companies.

Question 36

Vouchers should be used for purchases of inventory and all other expenditures made within a company.

Question 37

The payee is the party to a check who signs the check, authorizing its payment.

Question 38

On a bank statement, deposits are listed as credits because the bank increases its liability to the depositor when the deposit is made.

Question 39

If the Cash Over and Short account has a credit balance at the end of the period, the amount is reported as miscellaneous revenue.

Question 40

Signature cards, deposit tickets, checks, and bank statements are all examples of internal control devices for banking activities.

Question 41

When a voucher system is used, an invoice approval is not needed as long as the purchase is evidenced by an invoice and purchase order.

Question 42

Proper internal control would require that a department manager inform the purchasing department of its needs for additional merchandise by preparing and signing a purchase requisition which lists the merchandise needed and requests that it be purchased.

Question 43

The Petty Cash account is a separate bank account used for small amounts.

Question 44

Approved vouchers are recorded in a journal called the voucher register.

Question 45

The petty cash fund should be reimbursed when it is nearing zero and at the end of the accounting period when financial statements are prepared.

Question 46

Petty cash reimbursement requires a journal entry that involves a debit to the appropriate expenses and a credit to Cash.

Question 47

Since petty cash is concerned with such small amounts of cash, it is not necessary to document all transactions with a petty cash receipt.

Question 48

After preparing a bank reconciliation, adjustments must be made for items reconciling the book balance.

Question 49

Outstanding checks, deposits, and bank service charges are added to the beginning balance of the bank statement to determine the adjusted bank balance.

Question 50

In order to streamline the purchasing process, department managers should place orders directly with suppliers.

Question 51

Outstanding checks, deposits in transit, deductions for bank fees, additions for interest, and errors are all factors that can cause the bank statement balance for a checking account to be different from the company's checking account balance.

Question 52

It is generally not necessary for businesses to reconcile their checking accounts since banks keep accurate records and provide internal control support for cash.

Question 53

A debit balance in the Cash Over and Short account reflects an expense and is reported on the income statement as part of general and administrative expenses.

Question 54

The entry to increase the balance in petty cash from $50 to $75 would include a credit to Petty Cash of $25.

Question 55

Outstanding checks are checks the bank has paid and deducted from the customer's account during the month.

Question 56

A receiving report is a document used within a company to notify the appropriate persons that ordered goods have been received and to describe the quantities and condition of the goods.

Question 57

A bank reconciliation explains any differences between the balance of a checking account on the depositor's records and the balance reported on the bank statement.

Question 58

A purchase order is a document the purchasing department sends to the vendor to place an order.

Question 59

An invoice is an itemized statement of goods prepared by the customer listing the customer's name, items sold, sales prices, and terms of sale.

Question 60

Deposits in transit are deposits made and recorded by the depositor but not yet recorded on the bank statement.

Question 61

Managers place a high priority on internal control systems because the systems assist managers in all of the following except:

A)Promoting efficient operations.
B)Protecting assets.
C)Urging adherence to company policies.
D)Ensuring reliable accounting.
E)Assuring that no loss will occur.

Question 62

Petty cash activities are part of an imprest system, which means the withdrawal amounts are recorded in the accounting records as they are incurred.

Question 63

Principles of internal control include all of the following except:

A)Apply technological controls.
B)Maintaining security by having one person track and record assets.
C)Perform regular and independent reviews.
D)Separate recordkeeping from custody of assets.
E)Divide responsibilities for related transactions.

Question 64

Cash equivalents:

A)Include savings accounts.
B)Include checking accounts.
C)Are readily converted to a known cash amount.
D)Include time deposits.
E)Have no immediate value.

Question 65

The limitations of internal control policies and procedures do not include:

A)Human error.
B)Human fraud.
C)Cost-benefit principle.
D)Collusion.
E)Establishing responsibilities.

Question 66

After the petty cash fund is established, the Petty Cash account is not debited or credited again unless the amount of the fund is changed.

Question 67

Two clerks sharing the same cash register is a violation of which internal control principle?

A)Establish responsibilities.
B)Maintain adequate records.
C)Insure assets.
D)Bond key employees.
E)Apply technological controls.

Question 68

Which internal control principle prescribes the use of pre-numbered printed checks?

A)Technological controls.
B)Maintain adequate records.
C)Perform regular and independent reviews.
D)Establish responsibilities.
E)Divide responsibility for related transactions.

Question 69

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.

Question 70

A properly designed internal control system:

A)Lowers the company's risk of loss.
B)Insures profitable operations.
C)Eliminates the need for an audit.
D)Requires the use of non-computerized systems.
E)Is not necessary if the company uses a computerized system.

Question 71

An internal control system consists of the policies and procedures used to accomplish all of the following except:

A)Protect assets.
B)Ensure reliable accounting.
C)Guarantee a return to investors.
D)Urge adherence to company policies.
E)Promote efficient operations.

Question 72

Internal control systems are:

A)Developed by the Securities and Exchange Commission for public companies.
B)Developed by the Small Business Administration for non-public companies.
C)Developed by the Internal Revenue Service for all U.S.companies.
D)Required by Sarbanes-Oxley (SOX) to be documented and certified if the company's stock is traded on an exchange.
E)Required only if a company plans to engage in interstate commerce.

Question 73

If the petty cashier fails to get a receipt for a payment or overpays for the amount due, the shortage in the account is debited to the Cash Over and Short account.

Question 74

Cash equivalents:

A)Are short-term, highly liquid investment assets.
B)Include 6-month certificates of deposit.
C)Include checking accounts.
D)Are recorded in petty cash.
E)Include money orders.

Question 75

Cash, not including cash equivalents, includes:

A)Postage stamps.
B)Customer checks, cashier checks, and money orders.
C)IOUs.
D)Two-year certificates of deposit.
E)Money market funds.

Question 76

The following information is available for Birch Company at December 31: Based on this information, Birch Company should report Cash and Cash Equivalents on December 31 of:

A)$29,420
B)$41,345
C)$31,345
D)$39,420
E)$38,770

Question 77

A company's internal control system:

A)Eliminates the company's risk of loss.
B)Monitors company and employee performance.
C)Eliminates human error.
D)Eliminates the need for audits.
E)Eliminates the need for managers' certification of controls.

Question 78

Cash equivalents meet all of the following criteria except:

A)Are readily convertible to a known cash amount.
B)Include short-term investments purchased within 3 months of their maturity dates.
C)Have a market value that is not sensitive to interest rate changes.
D)Include short-term U.S.treasury bills.
E)Are more liquid than cash.

Question 79

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.

Question 80

The following information is available for Fenton Manufacturing Company at June 30: Based on this information, Fenton Manufacturing Company should report Cash and Cash Equivalents on June 30 of:

A)$28,495
B)$29,286
C)$23,286
D)$12,095
E)$22,495