Deck 8: Cash and Internal Controls

Question 1

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

Answer 1

True

Question 2

Electronic funds transfer (EFT) is the electronic transfer of cash from one party to another.

Answer 2

True

Question 3

Good internal control dictates that a person who controls an asset also maintains that asset's accounting records.

Answer 3

False

Question 4

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

Question 5

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 6

Bonding does not discourage loss from theft because employees know that bonding is an insurance policy against loss from theft.

Question 7

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

Question 8

Technology such as cash registers, check protectors, time clocks and personal identification scanners can improve internal control.

Question 9

Two important limitations of internal control systems are (1) human error or human fraud, and (2) cost-benefit.

Question 10

Separation of duties divides responsibility for a transaction or a series of related transactions between two or more individuals or departments. Separation of duties reduces the risk of error and fraud.

Question 11

Proper internal control means that responsibility for a task is clearly established and assigned to one person.

Question 12

Fraud does not include collusion, which is necessary to thwart separation of duties.

Question 13

The use of internal controls provides guaranteed protection against losses due to operating activities.

Question 14

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

Question 15

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

Question 16

The principles of internal control include: establish responsibilities, maintain adequate records, insure assets, separate recordkeeping from custody of assets, and perform regular and independent reviews.

Question 17

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

Question 18

Maintaining adequate records is an important internal control principle.

Question 19

Technologically advanced accounting systems do not need monitoring for errors because computers always process transactions correctly.

Question 20

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

Question 21

Internal control of cash receipts aims to ensure that all cash received is properly recorded and deposited.

Question 22

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

Question 23

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

Question 24

Control of cash disbursements is important for companies as most large thefts occur from payment of fictitious invoices.

Question 25

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

Question 26

Vouchers should be used only for purchases. Other expenditures do not need to go through the voucher system.

Question 27

A voucher system establishes procedures for verifying, approving, and recording obligations for eventual cash disbursement.

Question 28

The clerk who has access to the cash in the cash register should not have access to the cash register tape or file.

Question 29

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

Question 30

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 31

To streamline a voucher system, procedures for purchasing, receiving, and paying for merchandise can be performed by one department or individual.

Question 32

On a bank statement, deposits are listed as debits because the bank increases its cash account when the deposit is made.

Question 33

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

Question 34

Internal control devices for banking activities include signature cards, deposit tickets, checks, and bank statements.

Question 35

All disbursements from petty cash should be documented by a petty cash receipt.

Question 36

When evaluating the days' sales uncollected ratio, generally the less time that money is tied up in receivables the better.

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

Factors that cause the bank statement balance for a checking account to be different from the company's checking account balance include: outstanding checks, deposits in transit, deductions for bank fees, additions for interest, and errors.

Question 42

The voucher register is a journal that is used to record approved vouchers.

Question 43

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

Question 44

The net method for recording purchases records the purchase invoice at its net amount of any cash discount.

Question 45

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

Question 46

The steps to reconcile the balance of the bank statement to the adjusted balance include adding outstanding checks, deposits, and bank service charges.

Question 47

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 48

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

Question 49

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

Question 50

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

Question 51

The journal entry for petty cash reimbursement involves a debit to the appropriate expenses and a credit to Petty Cash.

Question 52

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

Question 53

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

Question 54

An invoice is a document that is 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 55

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

Question 56

When merchandise is needed, a department manager must inform the purchasing department of its needs by preparing and signing a purchase requisition which lists the merchandise needed and requests that it be purchased.

Question 57

When a voucher system is used, recording a purchase is initiated by an invoice approval and a voucher, not an invoice.

Question 58

Under the net method an invoice for $2,000 with terms of 2/10, n/30 should be recorded with a debit to Inventory and a credit to Accounts Payable of $2,000.
$2,000 x .98 = $1,960

Question 59

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 60

The Discounts Lost account represents the savings earned in taking advantage of purchase discounts.

Question 61

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 62

Internal control policies and procedures have limitations including:

A) Human error.
B) Human fraud.
C) Cost-benefit principle.
D) Collusion.
E) All of these.

Question 63

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

A) $15,062
B) $20,146
C) $20,072
D) $19,205
E) $19,462

Question 64

Managers place a high priority on internal control systems because the systems assist managers in the:

A) Prevention of avoidable losses.
B) Planning of operations.
C) Monitoring of company performance.
D) Monitoring of employee performance.
E) Assurance that no loss will occur.

Question 65

Cash equivalents:

A) Include savings accounts.
B) Include checking accounts.
C) Are short-term investments sufficiently close to their maturity date that their value is not sensitive to interest rate changes.
D) Include time deposits.
E) Have no immediate value.

Question 66

Principles of internal control include all of the following except:

A) Apply technological controls.
B) Maintain minimal assets.
C) Perform regular and independent reviews.
D) Separate recordkeeping from custody of assets.
E) Divide responsibilities for related transactions.

Question 67

A remittance advice is:

A) An explanation for a payment by check.
B) A bank statement.
C) A voucher.
D) An EFT.
E) A cancelled check.

Question 68

The principles of internal control include:

A) Establish responsibilities.
B) Maintain minimal records.
C) Use only computerized systems.
D) Bond all employees.
E) Require automated sales systems.

Question 69

When two clerks share the same cash register it 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 70

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 71

A check involves three parties:

A) The writer, the cashier, and the bank.
B) The maker, the payee, and the bank.
C) The maker, the manager, and the payee.
D) The bookkeeper, the payee, and the bank.
E) The signer, the cashier, and the company.

Question 72

Cash equivalents:

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) All of these.

Question 73

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

A) $35,421
B) $50,421
C) $37,546
D) $36,246
E) $40,439

Question 74

Cash equivalents:

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

Question 75

An internal control system consists of all of the following policies and procedures except ones designed to:

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

Question 76

Basic bank services include:

A) Bank accounts.
B) Bank deposits.
C) Checking.
D) Electronic funds transfer.
E) All of these.

Question 77

Cash, not including cash equivalents, includes:

A) Postage stamps.
B) Coins, currency, and checking accounts.
C) IOUs.
D) Two-year certificates of deposit.
E) Money market funds.

Question 78

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 79

Prenumbered printed checks are an example of which internal control principle?

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

Question 80

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.