Fundamental Financial Accounting Concepts 10th Edition Edmonds Test Bank

Fundamental Financial Accounting
Concepts 10th Edition Edmonds Test

Bank
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Fundamental Financial Accounting Concepts, 10e (Edmonds)
Chapter 6 Internal Control and Accounting for Cash
1) Which of the following is an administrative control?

A) Performance evaluation
B) Accuracy of the recording procedures
C) Keeping cash in a safe
D) Maintenance of accurate inventory records
Answer: A
Explanation: Administrative controls are designed to evaluate performance and the degree of
compliance with company policies and public laws.
Difficulty: 2 Medium
Topic: Key Features of Internal Control Systems
Learning Objective: 06-01 Identify the key elements of a strong system of internal control.
Bloom's: Understand
AACSB: Ethics; Reflective Thinking
AICPA: BB Resource Management; FN Risk Analysis
2) Which of the following statements concerning internal controls is true?

A) Internal administrative controls are designed to limit the amount of funds spent on investments.
B) Strong internal controls provide reasonable assurance that the objectives of a company will be
accomplished.
C) Internal accounting controls are limited to the policies and procedures used to protect the
company from embezzlement.
D) The control procedure, segregation of duties, prohibits the employment of a husband and wife
or other closely related parties within the same company.
Answer: B
Explanation: Strong internal controls provide reasonable, but not absolute, assurance that the
objectives of a company will be accomplished.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA: BB Critical Thinking; BB Resource Management; FN Risk Analysis
1
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3) Chester Company has established internal control policies and procedures in order to achieve
the following objectives:
1) Effective evaluation of management performance.
2) Assure that the accounting records contain reliable information.
3) Safeguard the company's assets.
4) Assure that employees comply with company policy.
Which of these objectives are achieved by accounting controls?

A) Objectives 1 and 2
B) Objectives 2 and 3
C) Objectives 3 and 4
D) All four objectives
Answer: B
Explanation: Accounting controls are composed of procedures designed to safeguard company
assets and ensure the accounting records contain reliable information. Objectives 2 and 3 relate to
accounting controls. On the other hand, administrative controls are composed of procedures
designed to safeguard the assets and ensure that the accounting records contain reliable
information. Objectives 1 and 4 relate to administrative controls.
Bloom's: Understand
4) Which of the following is not one of the nine features of an internal control system?
A) Establishment of clear lines of authority
B) Having employees covered by a fidelity bond
C) Requiring regular vacations for certain employees
D) Customer service comment cards
Answer: D
Explanation: While customer service comment cards are helpful in monitoring company
performance, they are not a generally recognized internal control procedure.
Bloom's: Understand
2
5) Which of the following statements accurately describes a fidelity bond?
A) Procedures to provide reasonable assurance that the objectives of a company are accomplished.
B) Proper procedures for processing transactions.
C) Insurance that the company buys to protect itself from loss due to employee dishonesty.
D) Guidelines or policies that limit the actions of different levels of management.
Answer: C
Explanation: A fidelity bond provides insurance that protects a company from losses caused by
employee dishonesty.
Difficulty: 1 Easy
Bloom's: Understand
6) Which of the following is not a common feature of an internal control system?

A) Segregating duties
B) Performance evaluation
C) Bonding employees
D) Implementing the most effective marketing plan
Answer: D
Explanation: While the mechanics of internal control systems vary from company to company,
the more prevalent features include the following: segregation of duties, quality of employees,
bonded employees, required absence, a procedures manual, authority and responsibility,
prenumbered documents, physical control, and performance evaluations. Internal controls do not
relate to effective marketing plans.
Difficulty: 1 Easy
Bloom's: Understand
3
7) Which of the following is not an example of a common control activity?
A) Required absences
B) Collusion
C) Procedures manual
D) Use of prenumbered documents
Answer: B
Explanation: Internal controls can be circumvented by collusion among employees.
Difficulty: 1 Easy
Bloom's: Understand
8) Which internal control procedure is a deterrent to corruption?

A) Segregation of duties
B) Physical controls
C) Fidelity bonding
D) Use of prenumbered documents
Answer: A
Explanation: The likelihood of fraud or theft is reduced if employees must work together to
accomplish it. Clear segregation of duties is frequently used as a deterrent to corruption. When
duties are segregated, the work of one employee can act as a check on the work of another
employee.
Difficulty: 1 Easy
Bloom's: Understand
4
9) The accountant for Ye Olde Bookstore balanced out the cash register for the day. The company
began the day with $125 and ended the day with $1,150.25 in the cash drawer. That day's cash
register tape shows $1,031.50 in cash sales. What is the effect on the financial statements of the
entry to record the day's sales and any related overage or shortage?
Stk. Stmt of Cash

Assets = Liab. + Equity Rev. − Exp. = Net Inc. Flows
A. 1,150.25 NA 1,150.25 1,150.25 NA 1,150.25 1,150.25 OA
B. 1,031.50 NA 1,031.50 1,031.50 NA 1,031.50 1,031.50 OA
C. 1,025.25 NA 1,025.25 1,031.50 6.25 1,025.25 1,025.25 OA
D. 1,025.25 NA 1,025.25 294.76 3.25 1,025.25 1,025.25 FA
A) Option A
B) Option B
C) Option C
D) Option D
Answer: C
Explanation: Expected change in cash = Cash sales of $1,031.50
Actual change in cash = Ending cash on hand of $1,150.25 − Beginning cash on hand of $125.00 =
$1,025.25
Shortage = Expected change in cash (actual cash sales) of $1,031.50 − Actual change in cash of
$1,025.25 = $6.25
When the company records the day's sales and the shortage, it will increase assets (cash) by
$1,025.25 and decrease stockholders' equity (retained earnings) by the same amount. It will
increase revenue by the cash sales of $1,031.50 and increases expenses by the amount of the
shortage of $6.25; resulting in an increase to net income of $1,025.25. A cash inflow for operating
activities of $1,025.25 will be reported on the statement of cash flows.
Difficulty: 3 Hard
Topic: Reconciling the Bank Account
Learning Objective: 06-03 Prepare a bank reconciliation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement; BB Resource Management
5
10) Which of the following is not a common internal control procedure that would be implemented
with regards to cash receipts?
A) Preparing a record of all cash collections immediately upon receipt
B) Providing copies of written receipts to customers
C) Depositing cash receipts in a bank on a timely basis
D) Marking supporting documents Paid when checks are signed
Answer: D
Explanation: Supporting documents should be marked Paid when the check is signed. If the
documents are not indelibly marked, they could be retrieved from the files and resubmitted for a
duplicate unauthorized payment.
Topic: Accounting for Cash
Learning Objective: 06-02 Identify special internal controls for cash.
Bloom's: Understand
11) Which of the following is an internal control procedure used to safeguard a company's assets?
A) Depositing cash receipts in a bank on a timely basis
B) Segregation of duties
C) Preparing a bank reconciliation
D) All of these answer choices are correct
Answer: D
Explanation: All of these are controls that help safeguard a company's assets, including cash.
Difficulty: 1 Easy
Topic: Key Features of Internal Control Systems; Accounting for Cash
Learning Objective: 06-01 Identify the key elements of a strong system of internal control.;
06-02 Identify special internal controls for cash.
Bloom's: Understand
6
12) Which of the following is not a motive for the embezzlement of cash by employees?
A) Cash is the common unit of measurement
B) Ownership of cash is difficult to prove
C) Cash has universal appeal
D) Small quantities of high-denomination currency can represent significant value
Answer: A
Explanation: The fact that cash is the common unit of measurement is not a motive for
embezzlement.
Bloom's: Understand
13) Which of the following is not a typical document associated with a bank checking account?
A) Signature card
B) Bank statement
C) Cash register tape
D) Deposit ticket
Answer: C
Explanation: A cash register tape records the total cash receipts for the day.
Topic: Accounting for Cash; Reconciling the Bank Account
Learning Objective: 06-03 Prepare a bank reconciliation.; 06-02 Identify special internal controls
for cash.
Bloom's: Remember
14) Which of the following internal control procedures should be implemented to control cash?
A) Disbursements by prenumbered checks
B) Depositing cash receipts in the bank on a timely basis
C) Providing copies of written receipts to customers
D) All of these answer choices are correct
Answer: D
Explanation: All of the procedures relate to controlling cash.
Difficulty: 1 Easy
Bloom's: Understand
7
[The following information applies to the questions displayed below.]
A review of the bank statement and accounting records of Blake Company revealed the following
items:
Item No. Description

1) Three outstanding checks
2) A debit memo showing a bank service charge
3) A deposit in transit
4) An NSF check written by one of Blake's customers
5) A certified check written by Blake that remains outstanding
6) A credit memo reflecting interest revenue earned by Blake
15) Which of the item(s) would be subtracted from the company's unadjusted book balance to
determine the true cash balance?
A) Item numbers 2 and 4
B) Item numbers 2, 4, and 5
C) Item numbers 1 and 4
D) Item numbers 1, 2, 4, and 5
Answer: A
Explanation: Bank service charges (item 2) and non-sufficient-funds (NSF) checks (item 4) are
subtracted from the unadjusted book balance to determine the true cash balance. Outstanding
checks (item 1) are subtracted from and deposits in transit (item 3) are added to the unadjusted
bank balance to determine the true cash balance. Because certified checks (item 5) are deducted
both from bank and depositor records immediately, they do not cause differences between the
depositor and bank balances and are not listed on the bank reconciliation. A credit memo reflecting
interest earned (item 6) would be added to the unadjusted book balance to determine the true cash
balance.
Bloom's: Understand
AICPA: FN Measurement; BB Resource Management
8
16) Which of the item(s) would be added to the unadjusted bank balance to determine the true cash
balance?
A) Item numbers 3 and 3
B) Item number 2
C) Item numbers 3, 4, and 6
D) Item number 3
Answer: D
Explanation: Deposits in transit (item 3) are added to the unadjusted bank balance to determine
the true cash balance. Bank service charges (item 2) and non-sufficient-funds (NSF) checks (item
4) are subtracted from the unadjusted book balance to determine the true cash balance.
Outstanding checks (item 1) are subtracted from the unadjusted bank balance to determine the true
cash balance. Because certified checks (item 5) are deducted both from bank and depositor records
immediately, they do not cause differences between the depositor and bank balances and are not
listed on the bank reconciliation. A credit memo reflecting interest earned (item 6) would be added
to the unadjusted book balance to determine the true cash balance.
Bloom's: Understand
17) Which of the following describes an activity that increases a company's bank account balance?
A) Credit memo
B) Debit memo
C) Balance sheet
D) Certified check
Answer: A
Explanation: Bank statement credit memos describe activities that increase the customer's
account balance (the bank's liability).
Difficulty: 1 Easy
Bloom's: Understand
AICPA: FN Measurement; BB Industry
9
18) The April 30 bank statement for Trimble Corporation shows an ending balance of $34,351.
The unadjusted cash account balance was $28,250. The accountant for Trimble gathered the
following information:
There was a deposit in transit for $4,240.

The bank statement reports a service charge of $39.
A credit memo included in the bank statement shows interest earned of $95.
Outstanding checks totaled $10,935.
The bank statement included a $650 NSF check deposited in April.
What is the true cash balance as of April 30?

A) $27,656
B) $27,006
C) $31,801
D) $31,896
Answer: A
Explanation: True cash balance = Unadjusted bank balance of $34,351 + Deposits in transit of
$4,240 − Outstanding checks of $10,935 = $27,656.
Alternatively:
True cash balance = Unadjusted book balance of $28,250 − Service charge of $39 + Interest
revenue of $95 − NSF check of $650 = $27,656
Bloom's: Apply
AACSB: Knowledge Application
10
19) At March 31, Cummins Co. had an unadjusted balance in its cash account of $10,400. At the
end of March, the company determined that it had outstanding checks of $900, deposits in transit
of $600, a bank service charge of $20, and an NSF check from a customer for $200. What is the
true cash balance at March 31?
A) $10,100
B) $10,180
C) $10,380
D) $9,880
Answer: B
Explanation: True cash balance = Unadjusted book balance of $10,400 − Service charge of $20 −
NSF check of $200 = $10,180
Bloom's: Apply
20) Which of the following adjustments reflected on a bank reconciliation would not require an
adjusting journal entry?
A) An error in which the company's accountant recorded a check as $235 that was written correctly
for $253.
B) A check for $37 deposited during the month, but returned for non-sufficient funds.
C) An error in which the bank charged the company $83 for a check that had been written by
another account holder.
D) All of these answer choices would require adjusting journal entries.
Answer: C
Explanation: A bank error would cause an adjustment to the unadjusted bank balance rather than
to the book balance. Only adjustments to the book balance require adjusting entries.
Bloom's: Analyze
11
21) Following the February bank reconciliation, the accountant made the following entry in the
journal of Kincaid Company:
Accounts receivable 150

Cash 150
Which of the following is a possible explanation for this journal entry?

A) The bank statement included a debit memo advising of a customer's NSF check that was
returned
B) The collection of an account receivable by Kincaid that is part of a deposit in transit
C) Bank charges owed by Kincaid to the bank.
D) The collection of an account receivable by the bank that has been deposited in Kincaid's
account.
Answer: A
Explanation: When an NSF check is returned, the bank will deduct the amount of the check from
the company's bank account balance. Kincaid would have been advised of the NSF check through
a debit memo that appears on the bank statement. Since there were insufficient funds for payment,
Kincaid didn't actually receive cash from the customer, so it must decrease its Cash account with a
credit. The company will still try to collect the money from the customer, so it will increase
Accounts Receivable with a debit.
Bloom's: Analyze
12
22) In preparing the April bank reconciliation for Oscar Company, it was discovered that on April
10 a check was written to pay delivery expense of $45 but the check was erroneously recorded as
$54 in the company's books. Which of the following journal entries would correct this error?
A)
Delivery expense 45
Cash 45
B)
Cash 9
Delivery expense 9
C)
Delivery expense 9
Cash 9
D)
Cash 54
Delivery expense 54
Answer: B
Explanation: Here, delivery expense was overstated by $9, which is the difference between the
actual amount of the check of $54 and the amount recorded of $45, and cash was understated by
the same amount. To correct this error, the company must increase cash (with a debit) and decrease
delivery expense (with a credit) of $9.
Bloom's: Apply
13
23) Which of the following is not a common internal control procedure over cash payments?
A) A receipt should be provided to each cash customer
B) Checks should be properly authorized with approval signatures
C) All checks should be prenumbered
D) Voided checks should be defaced and retained
Answer: A
Explanation: Providing written copies of receipts to customers is an internal control procedure
relating to cash receipts rather than cash payments.
Bloom's: Understand
24) While preparing its bank reconciliation, Maynard Company determined that its bank had
collected a $650 account receivable for the company and deducted a $25 collection fee. Which of
the following shows the effect of this transaction on the financial statements?
Stk. Stmt of Cash

A. (25) NA (25) NA 25 (25) 625 OA
B. 625 NA 625 650 25 625 650 OA
C. (25) NA (25) NA 25 (25) 650 OA
D. (625) NA 625 650 25 625 625 OA
A) Option A
B) Option B
C) Option C
D) Option D
Answer: A
Explanation: The entry to record receipt of the receivable, less the bank's collection fee, increases
assets (cash) by $625 and decreases assets (accounts receivable) by $650; thus total assets decrease
by $25. Stockholders' equity (retained earnings) decreases by the same amount. The transaction
increases expenses by $25, which decreases net income. The net cash received of $625 is reported
as a cash inflow for operating activities.
Difficulty: 3 Hard
Bloom's: Analyze
14
25) While performing its monthly bank reconciliation, the bookkeeper for Mosaic Company
discovered that a check written for $421 for advertising expense was recorded in the firm's books
as $241. Which of the following shows the effect of the correcting entry on the financial
statements?
Stk. Stmt of Cash

A. 180 NA 180 NA (180) 180 180 OA
B. (180) NA (180) NA 180 (180) (180) OA
C. (421) NA (421) NA 421 (421) (421) OA
D. (180) NA (180) NA 180 (180) (421) OA
A) Option A
B) Option B
C) Option C
D) Option D
Answer: B
Explanation: Here, advertising expense was understated by $180, which is the difference
between the actual amount of the check of $421 and the amount recorded of $241, and cash was
overstated by the same amount. The entry to correct this error will decrease assets (cash) and
stockholders' equity (retained earnings). It will increase expenses, which decreases net income.
The $180 decrease to cash is reported on the statement of cash flows as a cash outflow for
operating activities.
Bloom's: Analyze
15
26) While performing its monthly bank reconciliation, the bookkeeper for Grace Corporation
noted that a deposit of $990 (received from a customer on account) was recorded in the company
books as $900. Which of the following shows the effect of the correcting entry on the financial
statements?
Stk. Stmt of Cash

A. 90 NA 90 90 NA 90 90 OA
B. 990 NA 990 990 NA 90 990 OA
C. NA NA NA NA NA NA 90 OA
D. NA NA NA NA NA NA (90) OA
A) Option A
B) Option B
C) Option C
D) Option D
Answer: C
Explanation: Here, cash was understated by $90, which is the difference between the actual
amount of the receipt of $990 and the amount recorded of $900, and accounts receivable was
overstated by the same amount. The entry to correct this error will increase assets (cash) and
decrease assets (accounts receivable); total assets do not change. The $90 increase to cash is
reported as a cash inflow for operating activities.
Difficulty: 3 Hard
Bloom's: Analyze
16
27) While performing the monthly bank reconciliation, the bookkeeper for Avon Company made
the journal entry for a bank service charge of $20. Which of the following correctly shows the
effect of the entry on the financial statements?
Stk. Stmt of Cash

A. NA NA NA NA NA NA (20) OA
B. (20) (20) NA NA NA NA (20) OA
C. (20) NA (20) (20) NA (20) (20) OA
D. (20) NA (20) NA 20 (20) (20) OA
A) Option A
B) Option B
C) Option C
D) Option D
Answer: D
Explanation: The entry to record the service charge will decrease assets (cash) and stockholders'
equity (retained earnings). It increases expenses, which decreases net income. It is reported as a
cash outflow for operating activities on the statement of cash flows.
Difficulty: 1 Easy
Bloom's: Analyze
28) Which of the following describes an activity that reduces a company's bank account balance?
A) A debit entry
B) A debit memo
C) A credit memo
D) A reconciling entry
Answer: B
Explanation: A bank statement debit memo describes a transaction that reduces the customer's
account balance (the bank's liability). Because a checking account is an asset (cash) to the
depositor, the debit memo requires a credit entry to decrease the Cash account on the depositor's
books.
Difficulty: 1 Easy
Bloom's: Understand
17
29) How is a customer's NSF check reflected on a bank reconciliation?
A) Subtracted from the unadjusted book balance to get the true cash balance
B) Added to the unadjusted bank balance to get the true cash balance
C) Subtracted from the unadjusted bank balance to get the true cash balance
D) Added to the unadjusted book balance to get the true cash balance
Answer: A
Explanation: The NSF check was unknown to the company prior to receiving the bank statement,
so it should be subtracted from the unadjusted book balance to arrive at the true cash balance.
Bloom's: Understand
30) How will a certified check be shown on a company's bank reconciliation?

A) As a deduction to the company's unadjusted book balance.
B) As an increase to the bank's unadjusted bank balance.
C) As a deduction to the bank's unadjusted bank balance.
D) There is no adjustment when preparing the bank reconciliation.
Answer: D
Explanation: A certified check is guaranteed for payment by a bank. Whereas a regular check is
deducted from the customer's account when it is presented for payment, a certified check is
deducted from the customer's account when the bank certifies that the check is good. Certified
checks, therefore, have been deducted by the bank in determining the unadjusted bank balance,
whether they have cleared the bank or remain outstanding as of the date of the bank statement.
Thus, a certified check that is still outstanding does not appear on a bank reconciliation.
Bloom's: Understand
18
31) In the reconciliation of the June bank statement, a deposit made on June 30 did not appear on
the June bank statement. How is this deposit in transit shown on the bank reconciliation?
A) Subtracted from the unadjusted book balance.
B) Added to the unadjusted book balance.
C) Subtracted from the unadjusted bank balance.
D) Added to the unadjusted bank balance.
Answer: D
Explanation: Because deposits in transit have been recorded in the depositor's accounting records
but have not yet been added to the depositor's account by the bank, they must be added to the
unadjusted bank balance.
Bloom's: Understand
32) What is an outstanding check?

A) A check that has been issued by the company but has not been presented to the bank for
payment.
B) A check that is guaranteed for payment by the bank.
C) A check that has been presented to the bank for payment but has not been reported on the bank
statement.
D) A check that was written for an amount that is greater than the balance in the account holder's
bank account.
Answer: A
Explanation: Outstanding checks are disbursements that have been properly recorded as cash
deductions on the depositor's books. However, the bank has not deducted the amounts from the
depositor's bank account because the checks have not yet been presented by the payee to the bank
for payment; that is, the checks have not cleared the bank.
Difficulty: 1 Easy
Bloom's: Remember
19
33) Jasper Company accepted a check from Harp Company as payment for services rendered.
Jasper's bank statement revealed that the Harp check was an NSF check. What effect will the entry
to record the NSF check have on the accounting equation of Jasper Company?
Total Assets Total Equity

A. Decrease Decrease
B. No effect Decrease
C. Decrease No effect
D. No effect No effect
A) option A
B) option B
C) option C
D) option D
Answer: D
Explanation: Recording the NSF check increases one asset (accounts receivable) and decreases
another asset (cash). This results in no overall effect on total assets. There is no effect on
stockholder's equity (retained earnings) since net income is not affected.
Bloom's: Analyze
34) Owen Company's unadjusted book balance at June 30 is $9,700. The company's bank
statement reveals bank service charges of $45. Two credit memos are included in the bank
statement: one for $900, which represents a collection that the bank made for Owen, and one for
$50, which represents the amount of interest that Owen had earned on its interest-bearing account
in June. What is the true cash balance?
A) $9,700
B) $10,695
C) $10,550
D) $10,605
Answer: D
Explanation: True cash balance = Unadjusted book balance of $9,700 − Service charge of $45 +
Accounts Receivable Collection of $900 + Interest revenue of $50 = $10,605
Difficulty: 1 Easy
Bloom's: Apply
20
35) Duke Company's unadjusted bank balance at March 31 is $2,300. The bank reconciliation
revealed outstanding checks amounting to $500 and deposits in transit of $400. What is the true
cash balance?
A) $2,200
B) $2,000
C) $2,700
D) $2,400
Answer: A
$400 − Outstanding checks of $500 = $2,200
Difficulty: 1 Easy
Bloom's: Apply
36) Rainey Company's true cash balance at October 31 is $5,710. The following information is
available for the bank reconciliation:
Outstanding checks, $600

Deposits in transit, $450
Bank service charges, $90
The bank had collected an account receivable for Rainey Company, $1,000
The bank statement included an NSF check written by one of Ramsey's customers for $600.
What was the unadjusted book balance at October 31?

A) $5,870
B) $5,400
C) $6,400
D) $5,490
Answer: B
Explanation: True cash balance of $5,710 = Unadjusted book balance (the unknown) − Service
charge of $90 + Collection of the accounts receivable of $1,000 − NSF check of $600
Unadjusted book balance = $5,710 + $90 − $1,000 + $600 = $5,400
Difficulty: 3 Hard
Bloom's: Apply
21
[The following information applies to the questions displayed below.]
The bank statement for Tetra Company contained the following items: a bank service charge of
$10; a credit memo for interest earned, $15; and a $50 NSF check from a customer. The company
had outstanding checks of $100 and a deposit in transit of $300.
37) Assuming that the unadjusted bank balance was $500, what is the unadjusted book balance?
A) $745
B) $455
C) $700
D) $800
Answer: A
Explanation: True cash balance = Unadjusted bank balance of $500 + Deposits in transit of $300
− Outstanding checks of $100 = $700
True cash balance of $700 (calculated above) = Unadjusted book balance (the unknown) − Service
charge of $10 + Interest earned of $15 − NSF check of $50
Unadjusted book balance = $700 + $10 − $15 + $50 = $745
Difficulty: 3 Hard
Bloom's: Apply
38) Which of the following will be caused by the entry to record the customer's NSF check?
A) Accounts receivable increases.
B) Cash decreases.
C) Stockholders' equity decreases.
D) Accounts receivable increases and cash decreases.
Answer: D
Explanation: The entry will increase the accounts receivable balance and decrease cash.
Bloom's: Analyze
22
39) Keatts Company's bank statement included an NSF check written by one of its customers.
What effect will the entry to recognize the NSF check have on the company's financial statements?
Stk. Stmt of Cash

Assets = Liab. + Equity Rev. - Exp. = Net Inc. Flows
A. +- = NA + NA + - NA = + + OA
B. +- = NA + NA NA - NA = NA - OA
C. +- = NA + NA NA - NA = NA NA
D. - = NA + - NA - + = - NA
A) Option A
B) Option B
C) Option C
D) Option D
Answer: B
Explanation: Recording the NSF check increases one asset (accounts receivable) and decreases
another asset (cash). This results in no overall effect on total assets. There is no effect on
stockholder's equity or net income. Since the company must reduce its Cash account, this
transaction is reported as a cash outflow for operating activities on the statement of cash flows.
Bloom's: Analyze
23
40) On September 30 the bank statement of Fine Company showed a balance of $7,800. The
following information was revealed by comparing the bank statement to the cash balance in Fine's
accounting records:
Deposits in transit amounted to $3,150

Outstanding checks amounted to $6,200
A $550 check was incorrectly drawn on Fine's account
NSF checks returned by the bank were $750
The bank service charge was $29
Credit memo for $75 for the collection of one of the company's account receivable
What is the true cash balance?

A) $5,346
B) $5,300
C) $4,596
D) $7,096
Answer: B
$3,150 − Outstanding checks of $6,200 + Error correction of $550 = $5,300
Bloom's: Apply
24
41) The owner of Barnes Company established a petty cash fund amounting to $400. What is the
effect on the financial statements of the entry to record this transaction?
Stk. Stmt of Cash

A. NA NA NA NA NA NA (400) OA
B. (400) NA (400) NA 400 (400) (400) OA
C. NA NA NA NA NA NA NA
D. (400) (400) NA NA NA NA (400) OA
A) Option A
B) Option B
C) Option C
D) Option D
Answer: C
Explanation: Establishing a petty cash fund increases one asset (petty cash) and decreases
another asset (cash). This asset exchange transaction has no overall effect on total assets. There is
no effect on stockholder's equity or net income. It does not affect the statement of cash flows.
Topic: Using Petty Cash Funds
Learning Objective: 06-04 Show how a petty cash fund affects financial statements.
Bloom's: Analyze
42) What account is used to record the amount of cash shortages or overages relative to a petty
cash system?
A) Petty Cash Payable
B) Gain or Loss on Petty Cash
C) Petty Cash Expense
D) Cash Short and Over
Answer: D
Explanation: A cash shortage is recorded by debiting the Cash Short and Over Account while a
cash overage is recorded by crediting the Cash Short and Over account.
Difficulty: 1 Easy
Bloom's: Understand
25
43) Assuming the entries used to record the disbursements and to replenish the fund are combined,
which of the following is included in the entry to replenish a petty cash fund?
A) A credit to Cash
B) A credit to Petty Cash
C) Credits to expenses
D) A debit to Cash
Answer: A
Explanation: The entry to replenish a petty cash fund includes debits to the affected expense or
asset accounts (as reflected on the related petty cash vouchers) and a credit to cash.
Bloom's: Understand
44) Which of the following procedures are typically used when a petty cash fund is established?
A) Assigning a petty cash custodian.
B) Use of petty cash vouchers.
C) Physical control over the petty cash fund.
D) All of these procedures are used when a petty cash fund is established.
Answer: D
Explanation: The fund is established for a specified dollar amount and is controlled by the petty
cash custodian. The custodian normally keeps the currency under lock and key (which are physical
controls). When money is disbursed from the petty cash fund, the custodian completes a petty cash
voucher.
Topic: Using Petty Cash Funds; Accounting for Cash
Learning Objective: 06-04 Show how a petty cash fund affects financial statements.; 06-02
Identify special internal controls for cash.
Bloom's: Understand
26
45) On April 30, Midwest Company established a petty cash fund of $1,000. On May 1, a
disbursement of $355 was made from the fund for payment of delivery expense. What entry should
be made on May 1 to record this disbursement?
A) Debit delivery expense and credit cash for $355.
B) Debit petty cash and credit cash for $355.
C) Debit delivery expense and credit petty cash for $355.
D) No entry is necessary on May 1.
Answer: D
Explanation: When petty cash is used to pay an expense, no entry is made. The expense will be
recorded when the petty cash account is replenished.
Bloom's: Apply
27
46) Peterson Company's petty cash fund was established on January 1 with $500. On January 31, a
count of the fund revealed: $105 in cash remaining and vouchers for miscellaneous expenses
totaling $400. If the entries to record the disbursements and to replenish the fund are combined,
what effect will the resulting entry have on the elements of the' financial statements?
Stk. Stmt of Cash

A. (400) NA (400) NA 400 (400) (395) OA
B. (400) NA (400) NA 400 (400) (400) OA
C. (500) NA (500) NA 500 (500) (500) FA
D. (395) NA (395) NA 400 (395) (395) OA
A) Option A
B) Option B
C) Option C
D) Option D
Answer: D
Explanation: Since the amount of petty cash on hand is $105, it will take $395 to replenish the
petty cash fund to its imprest balance of $500.Because the miscellaneous expenses paid by the
fund totaled $400, there is a cash overage of $5. (Note that an overage of cash represents revenue
and is recorded by crediting the Cash Short and Over account.) The entry will cause total assets
(cash) and stockholders' equity (retained earnings) to decrease by $395. Revenues will increase by
$5 and expenses will increase by $400, resulting in a decrease in net income of $395.The
replenishment is reported as a cash outflow for operating activities.
Difficulty: 3 Hard
Bloom's: Analyze
28
47) Gross Company established a $250 petty cash fund on January 1. On March 1, the fund
contained $160 in receipts for miscellaneous expenses and $85 in cash. If the entries to record the
disbursements and to replenish the fund are combined, what effect will the resulting entry have on
the elements of the financial statements?
A) No effect on total assets
B) Decrease stockholder's equity by $160
C) Increase stockholder's equity by $165
D) Decrease total assets by $165
Answer: D
petty cash fund to its imprest balance of $250. Because the miscellaneous expenses paid by the
fund totaled $160, there is a cash shortage of $5 (Note that a cash shortage is an expense that is
recorded by debiting the Cash Short and Over account.). The entry will cause total assets (cash)
and stockholders' equity (retained earnings) to decrease by $165. Expenses will increase by $5 and
net income will decrease by that same amount.
Difficulty: 3 Hard
Bloom's: Analyze
29
48) Blake Company established a petty cash fund in the amount of $400. At the end of the
accounting period, the petty cash box contained receipts for expenditures amounting to $180 and
$215 in cash. If the entries to record the disbursements and to replenish the fund are combined,
what effect will the entries to replenish the fund have on total assets and expenses?
Total Assets Expenses

A. -$ 180 +$ 185
B. -$ 185 +$ 185
C. -$ 185 +$ 180
D. -$ 180 +$ 180
A) Option A
B) Option B
C) Option C
D) Option D
Answer: B
petty cash fund to its imprest balance of $400. Because the miscellaneous expenses paid by the
fund totaled $180, there is a cash shortage of $5 (Note that a cash shortage is an expense that is
recorded by debiting the Cash Short and Over account.). The entry will cause total assets (cash)
and stockholders' equity (retained earnings) to decrease by $185. Expenses will increase by $5.
Bloom's: Analyze
30
49) Which of the following entries would be required to establish a $500 petty cash fund?
A)
Petty Cash 500
Cash 500
B)
Petty Cash 500
Miscellaneous expense 500
C)
Miscellaneous expense 500
Petty Cash 500
D)
Cash 500
Petty Cash 500
Answer: A
Explanation: Establishing the petty cash fund will decrease cash (with a credit) and increase petty
cash (with a debit) by $500.
Difficulty: 1 Easy
Bloom's: Apply
31
50) Which of the following is not a primary role of an independent auditor?
A) Assume legal and professional responsibilities to the public.
B) Advise client on tax strategies.
C) Determine whether a company's financial statements are materially correct.
D) All of these answer choices are correct.
Answer: B
Explanation: The primary roles of an independent auditor (CPA) are summarized below:
Conducts a financial audit (a detailed examination of a company's financial statements and
underlying accounting records).
Assumes both legal and professional responsibilities to the public, as well as to the company
paying the auditor.
Determines if financial statements are materially correct rather than absolutely correct.
Presents conclusions in an audit report that includes an opinion as to whether the statements are
prepared in conformity with GAAP. In rare cases, the auditor issues a disclaimer.
Maintains professional confidentiality of client records.
Topic: Role of the Independent Auditor
Learning Objective: 06-05 Describe the auditor's role in financial reporting.
Bloom's: Understand
AICPA: FN Reporting; BB Industry
51) Which of the following statements regarding the Securities and Exchange Commission (SEC)
is not true?
A) SEC rules frequently require disclosures in addition to those required by GAAP.
B) The SEC has the authority to establish and enforce accounting rules for public companies.
C) The SEC is a private professional organization.
D) Public companies must register with the SEC.
Answer: C
Explanation: The SEC is a government agency authorized to establish and enforce the accounting
rules for public companies.
Bloom's: Understand
AICPA: BB Legal
32
52) What is the most favorable audit opinion that a company can receive on its financial
statements?
A) Adverse opinion
B) Unqualified opinion
C) Disclaimer of opinion
D) Qualified opinion
Answer: B
Explanation: An unqualified opinion is the most favorable opinion auditors can express. It means
the auditor believes the financial statements are in compliance with GAAP without material
qualification, reservation, or exception.
Difficulty: 1 Easy
Bloom's: Remember
AICPA: FN Reporting
53) Which of the following statements about the materiality concept is not true?
A) Materiality is different for each company.
B) A material error would change the opinion of the average prudent investor.
C) Any error greater than $5,000 is considered material in a financial statement audit.
D) Material misstatements should not exist in order for a company to receive an unqualified audit
opinion.
Answer: C
Explanation: The concept of materiality is very subjective. An error, or other reporting problem,
is material if knowing about it would influence the decisions of an average prudent investor. Thus,
materiality is different for each company and $5,000 is not necessarily a threshold for materiality.
Bloom's: Understand
AICPA: BB Critical Thinking; FN Measurement; FN Reporting
33
54) If the financial statements cannot be relied upon because they contain one or more material
departures from GAAP, what type of opinion will the auditor issue?
A) Qualified opinion
B) Disclaimer of opinion
C) Adverse opinion
D) Unqualified opinion
Answer: C
Explanation: An adverse opinion indicates that the independent auditor found one or more
material departures from GAAP and the departures from GAAP are so material that the financial
statements do not present a fair picture of the company's status.
Bloom's: Understand
AICPA: BB Critical Thinking; FN Reporting
55) Which of the following statements is true with regards to financial statement audits?
A) The auditors guarantee that the financial statements are accurate and correct.
B) Financial audits are directed toward the discovery of fraud.
C) Auditors provide reasonable assurance that statements are free from material misstatements,
whether caused by errors or fraud.
D) Auditors will not disclose information that they have acquired as a result of their
accountant-client relationship.
Answer: C
Explanation: Auditors do not guarantee that financial statements are absolutely correct—only
that they are materially correct. Financial audits are not directed toward the discovery of fraud.
Auditors are, however, responsible for providing reasonable assurance that financial statements
are free from material misstatements, whether caused by errors or fraud. The confidentiality rules
in the code of ethics for CPAs prohibit auditors from voluntarily disclosing information they have
acquired as a result of their accountant–client relationships. However, accountants may be
required to testify in a court of law.
Bloom's: Understand
34
56) A well-designed system of internal controls will eliminate all fraud.
Answer: FALSE
Explanation: No system can prevent all fraud. However, a good system of internal controls
minimizes illegal or unethical activities by reducing temptation and increasing the likelihood of
early detection.
Difficulty: 1 Easy
Bloom's: Understand
AICPA: BB Resource Management; FN Risk Analysis; BB Ethics
57) Internal controls designed to evaluate performance and the degree of compliance with
company policies and public laws are classified as administrative controls.
Answer: TRUE
Explanation: Administrative controls are designed to evaluate performance and the degree of
compliance with company policies and public laws.
Difficulty: 1 Easy
Bloom's: Understand
58) Segregation of duties in an organization should be required to reduce the likelihood of theft.
Answer: TRUE
Explanation: Segregation of duties helps to prevent theft by having the work of one employee act
as a check of the work of another employee.
Difficulty: 1 Easy
Bloom's: Understand
35
59) Requiring segregation of duties in a business eliminates the need for the work of one employee
to serve as a check on the work of other employees.
Answer: FALSE
Explanation: When duties are segregated, the work of one employee can act as a check on the
work of another employee.
Difficulty: 1 Easy
Bloom's: Understand
60) Even a good system of internal controls can be circumvented by collusion among employees.
Answer: TRUE
Explanation: Collusion means that two or more employees work together to hide embezzlement
by covering for each other. No system can prevent all fraud. However, a good system of internal
controls minimizes illegal or unethical activities by reducing temptation and increasing the
likelihood of early detection.
Bloom's: Understand
61) A savings account or certificate of deposit that imposes a substantial penalty for early
withdrawals should not be classified as Cash on the balance sheet.
Answer: TRUE
Explanation: If a savings account or certificate of deposit imposes a substantial penalty for early
withdrawal, it should be classified as an investment.
Difficulty: 1 Easy
Bloom's: Understand
AICPA: BB Critical Thinking; FN Measurement
36
62) For financial reporting purposes, cash generally includes currency and other items that are
payable on demand, such as checks, money orders, bank drafts, and certain savings accounts.
Answer: TRUE
Explanation: For financial reporting purposes, cash generally includes currency and other items
that are payable on demand, such as checks, money orders, bank drafts, and certain savings
accounts. Savings accounts that impose substantial penalties for early withdrawal should be
classified as investments rather than cash.
Difficulty: 1 Easy
Bloom's: Understand
63) To ensure proper segregation of duties, after the check is signed, an employee should record
the check in the accounting records and review the appropriate supporting documents.
Answer: FALSE
Explanation: The duties of approving disbursements, signing checks, and recording transactions
should be segregated. By separating these duties, the check signer reviews the documentation
provided by the approving individual before signing the check. Likewise, the recording clerk
reviews the work of both the approving person and the check signer when the disbursement is
recorded in the accounting records.
Bloom's: Understand
64) A bank statement debit memo describes a transaction that increases a customer's account
balance.
Answer: FALSE
Explanation: A bank statement debit memo describes a transaction that reduces the customer's
account balance (the bank's liability).
Difficulty: 1 Easy
Bloom's: Understand
37
65) A bank reconciliation normally begins with the ending cash balance shown on the bank
statement and reconciles it to the unadjusted cash account balance on the company's books.
Answer: FALSE
Explanation: A bank reconciliation normally begins with the cash balance reported by the bank,
which is called the unadjusted bank balance. The adjustments necessary to determine the amount
of cash that the depositor actually owns as of the date of the bank statement are then added to and
subtracted from the unadjusted bank balance. The final total is the true cash balance.
Bloom's: Understand
66) Typical adjustments to the unadjusted bank balance on a bank reconciliation include deposits
in transit and outstanding checks.
Answer: TRUE
Explanation: These are typical adjustments to the bank balance.
Difficulty: 1 Easy
Bloom's: Remember
67) Typical adjustments to the unadjusted book balance on a bank reconciliation include bank
service charges, customer NSF checks, and certified checks.
Answer: FALSE
Explanation: Typical adjustments to the book balance on a bank reconciliation include account
receivable collection, interest earned, service charges, and NSF checks. A certified check is
deducted from the customer's account when the bank certifies that the check is good. Certified
checks, therefore, have been deducted by the bank in determining the unadjusted bank balance,
whether they have cleared the bank or remain outstanding as of the date of the bank statement.
Thus, certified checks do not affect the unadjusted book or bank balance on the bank
reconciliation.
Bloom's: Understand
38
68) All journal entries made related to bank reconciliations include an expense or revenue account.
Answer: FALSE
Explanation: Adjusting entries relating to NSF checks involve a debit to Accounts Receivable
and a credit to Cash.
Bloom's: Understand
69) All adjustments to the unadjusted book balance on a bank reconciliation require journal
entries, but adjustments to the unadjusted bank balance do not require journal entries.
Answer: TRUE
Explanation: Only adjustments to the unadjusted cash (book) balance require journal entries.
Adjustments to the unadjusted bank balance, such as deposits in transit and outstanding checks, are
items that have already been recorded in the company's records.
Bloom's: Understand
70) Preparing a bank reconciliation is a control activity.
Answer: TRUE
Explanation: Control activities, the activities usually thought of as "the internal controls," include
such things as account reconciliations.
Topic: Key Features of Internal Control Systems; Reconciling the Bank Account
Learning Objective: 06-03 Prepare a bank reconciliation.; 06-01 Identify the key elements of a
strong system of internal control.
Bloom's: Understand
39
71) After the adjustments identified on the bank reconciliation have been recorded, the ending cash
(book) balance reflected in the company's records will equal the true cash balance.
Answer: TRUE
Explanation: The adjusting entries bring the book balance in agreement with the true cash
balance.
Difficulty: 1 Easy
Bloom's: Understand
72) The true cash balance can only be determined if both the unadjusted bank balance and the
unadjusted book balance are known.
Answer: FALSE
Explanation: A bank reconciliation normally begins with the cash balance reported by the bank,
which is called the unadjusted bank balance. The adjustments necessary to determine the amount
of cash that the depositor actually owns as of the date of the bank statement are then added to and
subtracted from the unadjusted bank balance. The final total is the true cash balance. The true cash
balance is independently reached a second time by making adjustments to the unadjusted book
balance.
Bloom's: Analyze
73) A business learns about customers' NSF checks through debit memos that are included with
the bank statement.
Answer: TRUE
Explanation: The company is advised of NSF checks through debit memos that appear on the
bank statement.
Bloom's: Understand
AICPA: FN Measurement; BB Resource Management; BB Industry
40
74) A credit balance in the Cash Short and Over account represents a shortage of cash and would
be treated as an expense.
Answer: FALSE
Explanation: A debit balance in the Cash Short and Over account represents a shortage of cash
and would be treated as an expense. An overage of cash represents revenue and is recorded by
crediting the Cash Short and Over account.
Difficulty: 1 Easy
Bloom's: Analyze
75) The purpose of a petty cash fund is to eliminate the need for control over a business's small
cash disbursements.
Answer: FALSE
Explanation: Companies frequently establish a petty cash fund to maintain effective control over
small cash disbursements.
Bloom's: Understand
76) Establishment of a petty cash fund is an asset exchange transaction.
Answer: TRUE
Explanation: Establishing a petty cash fund increases one asset, petty cash, and decreases another
asset, cash.
Bloom's: Understand
41
77) At the time petty cash funds are disbursed, a journal entry should be made, debiting the
appropriate asset or expense account.
Answer: FALSE
Explanation: No journal entry is made in the accounting records when petty cash funds are
disbursed. The effects on the financial statements are recorded only when the petty cash fund is
replenished.
Bloom's: Understand
78) For a petty cash fund to be most useful to a business, one of the employees of the business
should be designated as responsible for the fund.
Answer: TRUE
Explanation: A petty cash fund should be controlled by one employee, called the petty cash
custodian.
Difficulty: 1 Easy
Bloom's: Understand
79) Most audits result in unqualified audit opinions.
Answer: TRUE
Explanation: Most audits result in unqualified opinions because companies correct any material
reporting deficiencies the auditors find before the financial statements are released.
Difficulty: 1 Easy
Bloom's: Understand
42
80) An error is considered material if it would trigger an IRS audit.
Answer: FALSE
Explanation: An error is material if knowing about it would influence the opinion of the average
prudent investor.
Difficulty: 1 Easy
Bloom's: Understand
81) The Securities and Exchange Commission is authorized to establish and enforce the
accounting rules for public companies.
Answer: TRUE
Explanation: The SEC is authorized to establish and enforce the accounting rules for public
companies.
Bloom's: Understand
AICPA: BB Legal
82) The primary focus of financial statement audits is the discovery of fraud.
Answer: FALSE
Explanation: Financial audits are not directed toward the discovery of fraud. Auditors are,
however, responsible for providing reasonable assurance that statements are free from material
misstatements, whether caused by errors or fraud.
Difficulty: 1 Easy
Bloom's: Understand
AICPA: BB Critical Thinking; FN Risk Analysis; FN Reporting; BB Ethics
43

Fundamental Financial Accounting Concepts 10th Edition Edmonds Test Bank

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Fundamental Financial Accounting Concepts 10th Edition Edmonds Test Bank

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Fundamental Financial Accounting

Concepts 10th Edition Edmonds Test

1) Which of the following is an administrative control?

2) Which of the following statements concerning internal controls is true?

Which of these objectives are achieved by accounting controls?

6) Which of the following is not a common feature of an internal control system?

8) Which internal control procedure is a deterrent to corruption?

Stk. Stmt of Cash

Item No. Description

There was a deposit in transit for $4,240.

What is the true cash balance as of April 30?

Accounts receivable 150

Which of the following is a possible explanation for this journal entry?

Stk. Stmt of Cash

Stk. Stmt of Cash

Stk. Stmt of Cash

Stk. Stmt of Cash

30) How will a certified check be shown on a company's bank reconciliation?

32) What is an outstanding check?

Total Assets Total Equity

Outstanding checks, $600

What was the unadjusted book balance at October 31?

Stk. Stmt of Cash

Deposits in transit amounted to $3,150

What is the true cash balance?

Stk. Stmt of Cash

Stk. Stmt of Cash

Total Assets Expenses

70) Preparing a bank reconciliation is a control activity.

76) Establishment of a petty cash fund is an asset exchange transaction.

79) Most audits result in unqualified audit opinions.

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