Question 1

An internal control system is the policies and procedures that managers use to:
A) Protect assets.
B) Ensure reliable accounting.
C) Promote efficient operations.
D) Encourage adherence to company policies.
E) All of these answers are correct.

Accepted Answer

An internal control system serves all of the purposes listed, including protecting assets, ensuring reliable accounting, promoting efficient operations, and encouraging adherence to company policies. Therefore, option E is the correct answer.

Question 2

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

Accepted Answer

To reconcile the balance of the bank statement to the adjusted balance, you add outstanding deposits and subtract outstanding checks and bank service charges from the bank balance.

Question 3

Quick assets include cash,inventory,and receivables.

Accepted Answer

Quick assets include cash and receivables but exclude inventory because inventory is not as easily converted to cash without potentially losing value.

Question 4

Internal control procedures:
A) Eliminate the risk of loss.
B) Include policies and procedures to safeguard assets.
C) Prevent unavoidable losses.
D) Both eliminate the risk of loss and include policies and procedures to safeguard assets.
E) All of these answers are correct.

Accepted Answer

Internal control procedures are designed to safeguard assets and ensure accurate financial reporting, but they do not eliminate risk or prevent all losses.

Question 5

The acid-test ratio is current assets divided by current liabilities.

Accepted Answer

The acid-test ratio is calculated by dividing quick assets (current assets minus inventories and other non-liquid assets) by current liabilities.

Question 6

The acid-test ratio is a more accurate measure of a company's liquidity than the current ratio.

Accepted Answer

The acid-test ratio only considers the most liquid assets (cash, marketable securities, and accounts receivable), while the current ratio includes all current assets, including inventory, which may be harder to convert to cash quickly. Therefore, the acid-test ratio provides a more accurate picture of a company's ability to pay off its short-term liabilities.

Question 7

Omega Supply's current ratio is 2 to 1.Its acid test ratio is .75 to 1.Omega Supply is a good credit risk because the ratios reveal no liquidity problem.

Accepted Answer

A current ratio of 2 to 1 is generally considered good, but a low acid test ratio of only .75 to 1 indicates that Omega Supply may struggle to meet its short-term liabilities with its current assets. Therefore, these ratios do reveal a liquidity problem and Omega Supply may not be a good credit risk.

Question 8

Z-Mart's quick assets are $147,000.With current liabilities of $143,000,Z-Mart's acid-test ratio is 1.03 to 1.

Accepted Answer

The formula for acid-test ratio (also known as quick ratio) is:

Quick Ratio (acid-test ratio) = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities

Given that Z-Mart's quick assets are $147,000, which includes current assets that can be quickly converted to cash such as cash, marketable securities, and accounts receivable, we can assume that the inventory and prepaid expenses are not included in this calculation.

If the quick ratio is 1.03 to 1, it means that for every $1 of current liabilities, Z-Mart has $1.03 of quick assets, which is a good sign of its ability to cover its short-term obligations. Therefore, the statement is true.

Question 9

The common rule of thumb is that a company's acid-test ratio should be at least 1.5 to 1.

Accepted Answer

The common rule of thumb is that a company's acid-test ratio (also known as the quick ratio) should be at least 1 to 1, indicating that the company has enough liquid assets to cover its current liabilities.

Question 10

An error made by the bank should result in a reconciling item on the book side of a bank reconciliation.

Accepted Answer

An error made by the bank should result in a reconciling item on the bank side of a bank reconciliation, not the book side. The book side includes adjustments for items recorded by the company but not yet reflected on the bank statement.

Question 11

Cash,short-term investments and receivables,are called acid-test assets.

Accepted Answer

The answer of Cash,short-term investments and receivables,are called acid-test assets....

Question 12

The acid-test ratio is also called the quick ratio.

Accepted Answer

The acid-test ratio is indeed also known as the quick ratio.

Question 13

An NSF cheque for $17.50 would be recorded as a debit to Cash and a credit to Accounts Receivable.

Accepted Answer

An NSF (non-sufficient funds) cheque indicates that the cheque writer's bank account did not have enough funds to cover the amount of the cheque. Therefore, the cheque cannot be deposited and must be returned to the recipient.

When a company receives an NSF cheque from a customer, the following journal entry should be recorded:

Debit: Accounts Receivable (to reduce the amount owed by the customer)
Credit: Cash (to reverse the initial entry for receiving the payment)

Therefore, the correct answer is option B - an NSF cheque for $17.50 would be recorded as a debit to Accounts Receivable and a credit to Cash.

Question 14

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) All of these answers are correct.

Accepted Answer

Internal control systems are designed to address all the choices mentioned, including the prevention of avoidable losses, planning of operations, monitoring of company performance, and monitoring of employee performance. A well-designed internal control system helps managers ensure that company resources are used efficiently, effectively, and in compliance with applicable laws and regulations. Therefore, all the choices A to D are correct and fall under the umbrella of internal control systems.

Question 15

Bank service charges are treated as a reconciling item on the book side of a bank reconciliation.

Accepted Answer

Bank service charges are deducted from the book balance to reconcile with the bank statement balance, which makes them a reconciling item on the book side of the reconciliation.

Question 16

A bank reconciliation explains the difference between the balance of a chequing account on the customer's books and the balance on the bank statement.

Accepted Answer

A bank reconciliation is a statement that compares the balance in the customer's records with the balance in the bank statement and identifies any differences. It is used to ensure that both records are accurate and complete.

Question 17

Factors that cause the bank statement balance of a chequing account to be different from the business chequing account balance include: outstanding cheques,deposits in transit,deductions for bank fees,additions for interest,and errors.

Accepted Answer

These are all common reasons why the bank statement balance and the business chequing account balance may differ.

Question 18

A bank reconciliation results in creating an adjusted bank balance as well as an adjusted book balance.

Accepted Answer

A bank reconciliation compares the bank statement to the company's records of its bank account in order to identify any differences between the two records. As a result, adjustments may need to be made to both the bank balance and the book balance in order to reconcile them. The adjusted bank balance represents the updated amount of money that the bank is holding for the company, while the adjusted book balance represents the company's updated record of the funds that are available in its bank account.

Question 19

A good system of internal control:
A) Encourages adherence to prescribed managerial policies.
B) Promotes operational efficiencies.
C) Eliminates the need for an audit.
D) Both encourages adherence to prescribed managerial policies and promotes operational efficiencies.
E) All of these answers are correct.

Accepted Answer

A system of internal control that encourages adherence to prescribed managerial policies and promotes operational efficiencies is considered a good one. It helps ensure that the organization's objectives are achieved effectively and efficiently while also complying with laws and regulations. However, it does not eliminate the need for an audit, which serves as an independent assessment of the effectiveness of the internal control system. Thus, answer choice E is incorrect.

Question 20

Banks normally use a flat rate fee for the processing of debit card transactions and a percentage fee for the processing of credit card transactions.

Accepted Answer

This is because debit card transactions are usually processed as PIN-based transactions, which are considered to be more secure and have lower processing costs. Credit card transactions, on the other hand, involve more risk and often require additional verification, leading to a percentage-based fee.

Quiz 8: Internal Control and Cash

An internal control system is the policies and procedures that managers use to: