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Chapter 6
True / False
1. A six-month bank certificate of deposit would be classified as a cash equivalent.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
REFERENCES: pp. 278, 279
LEARNING OBJECTIVES: FACC.PONO.18.06-01 - LO: 06-01
NATIONAL STANDARDS: United States - BUSPROG: Communications
ACCREDITING STANDARDS: ACBSP: APC-10-Internal Control
AICPA: FN-Reporting
KEYWORDS: Bloom's: Remembering
2. Petty cash typically is composed of coins and currency kept on hand in a business to make minor disbursements.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
REFERENCES: pp. 278-283
AICPA: FN-Reporting
3. The key to the classification of an amount as cash is that it be available to pay debts within a three-month period of
time.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
© 2018 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Page 1
Chapter 6
4. For a buyer, a purchase order is not the basis for recording a purchase and an account payable.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
AICPA: FN-Reporting
5. Coin and currency on hand and cash on deposit in the form of checking and savings accounts are the most obvious
forms of cash.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
AICPA: FN-Reporting
6. A bank does not have the legal right to demand that a customer notify it before making a withdrawal from a savings
account.
a. True
b. False
ANSWER: False
DIFFICULTY: Moderate
AICPA: FN-Reporting
Chapter 6
7. The key to the classification of an amount as cash is that it be readily available to pay debts.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
AICPA: FN-Reporting
8. Cash equivalents are investments that are readily convertible to a known amount of cash, where readily means six
months or less.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
9. Treasury notes with a maturity of six months or less that are issued by the federal government are cash equivalents.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
10. A check written by a company but not yet presented to the bank for payment is called a check in transit.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
11. When reconciling a bank account, the company does not have to prepare an adjusting entry for outstanding checks.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
NATIONAL STANDARDS: United States - BUSPROG: Analytic
AICPA: FN-Measurement
12. When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
Chapter 6
13. In a sound internal control system, all cash receipts should be deposited intact in the bank on a daily basis.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
AICPA: FN-Reporting
14. Checks received from customers are considered to be cash in the company’s books.
a. True
b. False
ANSWER: True
AICPA: FN-Reporting
15. A bank informs a customer that a service charge has been assessed on its account by including a credit memorandum
on the monthly bank statement.
a. True
b. False
ANSWER: False
AICPA: FN-Reporting
Chapter 6
16. On a bank reconciliation, outstanding checks are added to the cash balance per the bank statement.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
17. When a bank pays interest or collects an amount owed to a company by one of the bank's customers, the bank issues a
debit memorandum.
a. True
b. False
ANSWER: False
AICPA: FN-Reporting
18. When a bank pays interest or collects an amount owed to a company by one of the bank's customers, the bank issues a
credit memorandum.
a. True
b. False
ANSWER: True
AICPA: FN-Reporting
Chapter 6
19. On a bank reconciliation, bank charges for the month are added to the cash balance per the books.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
20. On a bank reconciliation, interest earned for the month is added to the cash balance per the books.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
AICPA: FN-Reporting
21. A company prepares adjusting entries for debit memorandums but not for credit memorandums.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
22. At the time a petty cash fund is replenished, an adjustment must be made to record its replenishment and to recognize
the various expenses incurred.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
AICPA: FN-Reporting
23. The Sarbanes-Oxley Act requires that a company’s internal audit staff issue a report on their assessment of the
company’s internal control.
a. True
b. False
ANSWER: False
AICPA: FN-Reporting
24. After it completes a bank reconciliation, a business must prepare a number of adjustments to its records. The additions
and deductions from the Cash account on the books should be the basis for the adjustments.
a. True
b. False
ANSWER: True
AICPA: FN-Reporting
Chapter 6
25. A good system of internal control is important to make a company's accounting records completely foolproof.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
26. An accounting system must be fully computerized in order to ensure the company has proper internal control.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
27. Audit committees are required to consist of only directors who are key officers of the company.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
28. A company policy that requires all prospective employees to be interviewed by the personnel department is an
example of an accounting control.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
29. One concern of the internal auditor is the efficiency with which the organization is run.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
AICPA: FN-Reporting
30. If a company has internal auditors, it does not need to have external auditors.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
31. Accounting controls primarily concern safeguarding assets and ensuring the reliability of the financial statements.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
AICPA: FN-Reporting
32. A company’s internal control system is designed by its external auditors.

a. True
b. False
ANSWER: False
AICPA: FN-Reporting
33. The only reason a company needs to create an internal control system is to deter intentional fraudulent acts.
a. True
b. False
ANSWER: False
AICPA: FN-Reporting
Chapter 6
34. A good system of internal control requires that the physical custody of assets be separated from the accounting for
those assets. This concept is known as safeguarding assets and records.
a. True
b. False
ANSWER: False
AICPA: FN-Reporting
35. Independent verification can be effective in preventing collusion.

a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
36. As part of good internal control, disbursements can be made either by check or cash.
a. True
b. False
ANSWER: False
AICPA: FN-Reporting
Chapter 6
37. Most merchandisers receive checks and currency from customers in two ways: (1) cash received over the counter from
cash sales and (2) cash received in the mail from credit sales.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
AICPA: FN-Reporting
38. Only one copy of the list of cash received should be prepared when an employee opens mail with customer payments
to avoid complexity in the accounting system and maintain control.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
AICPA: FN-Reporting
39. The use of customer statements as a control device will be effective only if the employees responsible for the custody
of cash received through the mail, for record keeping, and for authorization of adjustments to customers’ accounts are not
allowed to prepare and mail statements to customers.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
Multiple Choice
40. Which of the following assets is considered the most liquid?

a. Cash
b. Accounts receivable
c. Merchandise inventory
d. Prepaid expenses
ANSWER: a
DIFFICULTY: Easy
AICPA: FN-Reporting
KEYWORDS: Bloom's: Applying
41. Which of the following items is not included in cash?

a. A bank certificate of deposit for one year
b. A savings account at the bank
c. A checking account at the bank
d. All of these are included in cash.
ANSWER: a
AICPA: FN-Reporting
KEYWORDS: Bloom's: Understanding
42. Which of the following is not considered to be a cash equivalent?

a. Corporate commercial paper due in 90 days after purchase
b. U.S. Treasury bills with an original maturity of six months
c. A money market account with a stock brokerage firm
d. A certificate of deposit with a term of 75 days when acquired
ANSWER: b
AICPA: FN-Reporting
Chapter 6
43. How are cash equivalents reported or disclosed in the financial statements?
a. They appear only on the statement of cash flows.
b. They are included with short-term investments under current assets on the balance sheet.
c. They are included with cash under current assets on the balance sheet.
d. They are disclosed only in a footnote to the balance sheet.
ANSWER: c
AICPA: FN-Reporting
44. Which of the following could never be considered to be cash equivalents?

a. Common stock issued by a corporation
b. Money market funds
c. Corporate commercial paper
d. U.S. Treasury bills
ANSWER: a
AICPA: FN-Reporting
45. Which of the following is not a cash equivalent?

a. 30-day certificate of deposit
b. 60-day commercial paper
c. 90-day U.S. Treasury bill
d. 180-day note issued by a local or state government
ANSWER: d
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
46. Effective cash management and control includes all of the following except
a. the use of a petty cash fund.
b. bank reconciliations.
c. short-term investments of excess cash.
d. purchase of stocks and bonds.
ANSWER: d
DIFFICULTY: Easy
AICPA: FN-Reporting
47. Checks presented for payment and paid by the bank are known as
a. canceled checks.
b. certified checks.
c. NSF checks.
d. outstanding checks.
ANSWER: a
AICPA: FN-Reporting
48. Deposits made by a company but not yet reflected on a bank statement are called
a. debit memoranda.
b. deposits in transit.
c. credit memoranda.
d. none of these are correct.
ANSWER: b
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
49. Which of the following statements is true?
a. Good cash management practices dictate that a company should maintain as large a balance as possible in its
Cash account.
b. Sound internal control practice dictates that all cash payments should be made by check.
c. The person handling the cash should also prepare the bank reconciliation.
d. Petty cash can be substituted for a checking account to expedite the payment of all disbursements.
ANSWER: b
AICPA: FN-Reporting
50. Checks returned by a bank because customers did not have sufficient funds in their account are called
a. canceled checks.
b. certified checks.
c. NSF checks.
d. outstanding checks.
ANSWER: c
DIFFICULTY: Easy
AICPA: FN-Reporting
51. Which of the following would not appear on a bank statement for a checking account?
a. Service charges
b. Interest earned
c. Outstanding checks
d. Deposits
ANSWER: c
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
52. Which of the following procedures is not part of preparing a bank reconciliation of a checking account?
a. Tracing deposits listed on the bank statement to the books to identify deposits in transit
b. Arranging canceled checks in numerical order and tracing them to the books to identify outstanding checks
c. Identifying items added on the bank statement which have not been recorded as cash receipts by the company
d. Preparing adjustments to reverse the transactions recorded for checks that are still outstanding
ANSWER: d
53. Which of the following items would not be a reconciling item?

a. Canceled checks
b. NSF checks
c. Outstanding checks
d. Deposits in transit
ANSWER: a
54. Which of the following items would be added to the balance per books on a bank reconciliation?
a. Outstanding checks
b. Deposit in transit
c. Service charge assessed by the bank
d. Interest collected by the bank on a customer note
ANSWER: d
Chapter 6
55. Which of the following items would be added to the balance per bank statement on a bank reconciliation?
ANSWER: b
56. Which of the following items would be subtracted from the balance per books on a bank reconciliation?
ANSWER: c
57. Which of the following items would be subtracted from the balance per bank statement on a bank reconciliation?
ANSWER: a
Chapter 6
58. Which of the following statements best describes the term “outstanding check?”
a. A check written by a company and presented to the bank for payment.
b. A check written by a company but not yet presented to the bank for payment.
c. A check written by a customer that has been presented to the bank for payment.
d. A check written by a customer that has not yet been presented to the bank for payment.
ANSWER: b
AICPA: FN-Reporting
59. The accountant for Fazzi Corp. was preparing a bank reconciliation as of April 30, 2017. The following items were
identified:
Fazzi’s book balance $46,200

Outstanding checks 1,100
Interest earned on checking account 50
Customer's NSF check returned by the bank 500
In addition, Fazzi incorrectly recorded a customer's check in cash receipts as $150; the bank recorded the amount correctly
as $510. What amount will Fazzi report as its adjusted cash balance at April 30, 2017?
a. $44,650
b. $45,890
c. $46,110
d. $46,250
ANSWER: c
RATIONALE: $46,200 (Book balance) + $50 (Interest earned) – $500 (NSF check) + $360
(Transposition error) = $46,110
KEYWORDS: Bloom's: Analyzing
Chapter 6
60. The accountant for Busch Corp. was preparing a bank reconciliation as of February 28, 2017. The following items
were identified:
Busch’s book balance $15,000

Service charge 15
What amount will Busch report as its adjusted cash balance at February 28, 2017?
a. $12,385
b. $12,500
c. $14,885
d. $17,385
ANSWER: c
RATIONALE: $15,000 (Book balance) – $100 (NSF check) – $15 (Service charge) = $14,885
61. When preparing a bank reconciliation, deposits in transit are

a. added to the bank statement balance.
b. deducted from the company’s book balance.
c. added to the company's bank balance.
d. deducted from the bank statement balance.
ANSWER: a
DIFFICULTY: Easy
Chapter 6
62. When preparing a bank reconciliation, NSF checks are
a. added to the company’s book balance.
c. added to the bank statement balance.
ANSWER: b
DIFFICULTY: Easy
63. When preparing a bank reconciliation interest earned on a checking account is

ANSWER: a
DIFFICULTY: Easy
64. When preparing a bank reconciliation, outstanding checks are

a. deducted from the bank statement balance.
d. added to the company’s book balance.
ANSWER: a
DIFFICULTY: Easy
Chapter 6
65. When preparing a bank reconciliation, bank service charges are
ANSWER: b
DIFFICULTY: Easy
66. The set of items below was identified in preparing a bank reconciliation for Mars Corp. as of August 31, 2017.
Bank statement balance $19,500

Mars’s book balance (before adjustments) ?
Customer's NSF check 350
Service charges 100
Deposit in transit 1,000
Mars Corp.’s balance per books before the reconciliation is
a. $17,410.
b. $17,900.
c. $18,190.
d. $18,310.
ANSWER: c
RATIONALE: $19,500 (Bank statement balance) + $1,000 (Deposit in transit) – $2,700 (Outstanding
checks) = $17,800 (Adjusted bank balance)
Assuming that the adjusted book balance is equal to the adjusted bank balance, there is a
need to reverse the adjustments. Therefore $17,800 (Adjusted book balance) + $350
(NSF check) + $100 (Service charge) – $60 (Interest earned) = $18,190
DIFFICULTY: Challenging
Chapter 6
67. While reconciling the checking account, an accountant with Sonic Corporation noticed that an error had been made in
recording a check received by the company. Sonic recorded the receipt as $729, and the correct amount of the check was
$279. Which of the following reconciling adjustments is required?
a. Add $450 to the company’s book balance
b. Deduct $450 from the company’s book balance
c. Add $450 to the bank statement balance
d. Deduct $450 from the bank statement balance
ANSWER: b
68. A debit memorandum appeared on Cinco Inc.’s May bank statement. How will Cinco treat this amount on its May
bank reconciliation?
a. Add it to the bank balance
b. Add it the book balance
c. Deduct it from the bank balance
d. Deduct it from the book balance
ANSWER: d
69. A credit memorandum appeared on Central Company’s bank statement. How will Central treat this amount on its bank
reconciliation?
a. Add it to the bank balance
b. Add it to the book balance
c. Deduct it from the bank balance
d. Deduct it from the book balance
ANSWER: b
Chapter 6
70. Which of the following is an example of a debit memorandum?
a. Service charge
b. Interest earned on the account balance
c. Outstanding check
d. Company error in recording a $500 deposit as $600
ANSWER: a
71. Which of the following is an example of a credit memorandum?

a. Service charge
b. Collection of a note receivable by the bank
c. Outstanding check
d. Company error in recording a $600 deposit as $500
ANSWER: b
72. Which of the following procedures is incorrect for setting up and maintaining a petty cash fund?
a. A check is prepared for a fixed amount; when the check is cashed, the money is entrusted to a petty cash
custodian.
b. A journal entry is recorded to establish the fund and obtain the cash.
c. When appropriate documentation is presented, cash payments are made from the fund; the petty cash
custodian retains the documentation.
d. When the petty cash fund is replenished, a journal entry is recorded to recognize an increase in the petty cash
account.
ANSWER: d
Chapter 6
73. Which of the following statements regarding a credit memorandum is true?
a. A credit memorandum is subtracted from the balance per the company’s books.
b. A credit memorandum could be issued for bank service charges.
c. A credit memorandum is issued when a customer gives the company an NSF check.
d. A credit memorandum is added to the balance per the company’s books.
ANSWER: d
74. Which of the following statements regarding a credit memorandum is not true?
a. A credit memorandum is added to the balance per the company’s books.
b. A credit memorandum could be issued for interest earned on checking account balances.
c. A credit memorandum is issued when the bank collects a note for the customer.
d. A credit memorandum is subtracted from the balance per the company’s books.
ANSWER: d
75. If a company erroneously records a $500 deposit as $400 in its books, which of the following must occur when
reconciling the bank statement?
a. The company will have to increase the balance per the bank statement by $100.
b. The company will have to increase the balance per the books by $100.
c. The company will have to decrease the balance per bank statement by $100.
d. The company will have to decrease the balance per the books by $100.
ANSWER: b
DIFFICULTY: Easy
Chapter 6
76. Realistic Sound’s unadjusted bank balance amounted to $3,000. Outstanding checks amounted to $500 and deposits in
transit totaled $300. Based on this information alone, Realistic’s adjusted cash balance is
a. $3,200.
b. $3,300.
c. $2,800.
d. $2,700.
ANSWER: c
RATIONALE: $3,000 (Unadjusted bank balance) – $500 (Outstanding checks) + $300 (Deposits in
transit) = $2,800
77. If the balance on the bank statement does not equal the balance in the Cash account, then it can be assumed that
a. the company has no errors in its records concerning the Cash account.
b. the bank has made errors in preparing the statement.
c. the company has made errors in is records concerning the Cash account.
d. there will be items reconciling the difference.
ANSWER: d
DIFFICULTY: Easy
78. Which of the following items is a reconciling item on the bank side of a bank reconciliation?
a. Canceled checks
b. Outstanding checks
c. NSF checks
d. Service charge
ANSWER: b
DIFFICULTY: Easy
Chapter 6
79. When preparing a bank reconciliation, deposits in transit should be
a. added to the unadjusted book balance.
b. subtracted from the unadjusted book balance.
c. added to the unadjusted bank balance.
d. subtracted from the unadjusted bank balance.
ANSWER: c
DIFFICULTY: Easy
80. An outstanding check is a check that

a. has been presented to the bank for payment but has not been reported on the bank statement.
b. has been written by the account holder but has not been presented to the bank for payment.
c. is guaranteed for payment by the bank.
d. has been written for an amount that is greater than the balance in the account holder's bank account.
ANSWER: b
DIFFICULTY: Easy
Chapter 6
81. The treasurer for Rahm Corp. was preparing a bank reconciliation as of September 30, 2017. The following items
were identified:
Rahm’s book balance $32,800

Deposits in transit 4,300
Rahm Corp.'s adjusted cash balance at September 30, 2017 is
a. $34,600.
b. $34,900.
c. $32,500.
d. $32,800.
ANSWER: c
RATIONALE: $32,800 (Book balance) + $100 (Interest earned) – $400 (NSF check) = $32,500
82. Border Company’s Cash account had a balance of $962 on August 31. This included a bank deposit of $87 that was in
transit. The August 31 bank statement contained the following information:

NSF check 16
Bank service charge 7
Collection of notes receivable 68
Border also had checks outstanding of $169. What is Border’s adjusted cash balance at August 31?
a. $920
b. $940
c. $1,007
d. $1,089
ANSWER: c
RATIONALE: $1,089 (Bank balance) + $87 (Deposit in transit) – $169 (Outstanding checks) = $1,007,
or $962 (Book balance) + $68 (Note receivable) – $16 (NSF check) – $7 (Service charge)
= $1,007
Chapter 6
83. The accountant for Lola Corp. was preparing a bank reconciliation as of February 28, 2017. The following items were
identified:
Lola’s book balance $35,900

Interest earned on checking accounts 75
Customer’s NSF check returned by the bank 325
There was an error in recording a customer’s check as the check was recorded by Lola as $110, but the correct amount of
$101 was recorded by the bank.
Lola’s adjusted cash balance at February 28, 2017 is

a. $23,591.
b. $35,641.
c. $35,659.
d. $47,691.
ANSWER: b
RATIONALE: $35,900 (Book balance) – $9 (Transposition error) + $75 (Interest earned) – $325 (NSF
check) = $35,641
Chapter 6
84. Gentech Corp. prepared a bank reconciliation as of June 30, 2017. The following items were identified:
Gentech’s bank balance $14,300

Bank service charge 50
Gentech’s adjusted cash balance at June 30, 2017 is
a. $13,800.
b. $14,100.
c. $14,000.
d. $14,300.
ANSWER: c
RATIONALE: $14,300 (Bank balance) + $1,000 (Deposit in transit) – $1,300 (Outstanding checks) =
$14,000
Chapter 6
85. Taylor Corp. identified the following data in preparing a bank reconciliation on October 31, 2017.

Taylor’s book balance (before adjustments) ?
NSF check 300
Service charge 200
How much is Taylor’s adjusted cash balance on October 31, 2017?
a. $28,700
b. $29,100
c. $28,300
d. $29,600
ANSWER: a
RATIONALE: $29,600 (Bank statement balance) + $2,200 (Deposits in transit) – $3,100 (Outstanding
checks) = $28,700
Chapter 6
86. Taylor Corp. identified the following data in preparing a bank reconciliation on October 31, 2017.

Taylor’s book balance (before adjustments) ?
NSF check 300
Service charge 200
What is the net amount of the adjustments to Taylor’s cash balance as a result of the bank reconciliation?
a. No amounts need to be recorded.
b. $400 increase
c. $400 decrease
d. $900 decrease
ANSWER: c
RATIONALE: $100 (Interest earned) – $300 (NSF check) – $200 (Service charge) = ($400)
Chapter 6
87. Dinho Corporation identified the following data when preparing its April bank reconciliation:

Dinho’s book balance (before adjustments) ?
NSF checks 1,400
Service charge 300
In addition, Dinho incorrectly recorded a deposit in its books in the amount of $1,000. The correct amount was recorded
by the bank as $1,200.
What is the adjusted cash balance at the end of April?

a. $44,300
b. $45,500
c. $45,000
d. $45,700
ANSWER: b
RATIONALE: $45,000 (Bank statement balance) + $5,000 (Deposits in transit) – $4,500 (Outstanding
checks) = $45,500
Chapter 6
88. Dinho Corporation identified the following data when preparing its April bank reconciliation:

Dinho’s book balance (before adjustments) ?
NSF checks 1,400
Service charge 300
In addition, Dinho incorrectly recorded a deposit in its books in the amount of $1,000. The correct amount was recorded
by the bank as $1,200.
What is the net amount of the adjustments to Dinho’s book balance as a result of the bank reconciliation?
a. $1,675 increase
b. $1,700 increase
c. $1,675 decrease
d. $1,475 decrease
ANSWER: d
RATIONALE: $200 (Error correction) + $25 (Interest earned) – $300 (Service charge) – $1,400 (NSF
checks) = $(1,475)
Chapter 6
89. The following data was identified by Raines Corp. in preparation of its bank reconciliation on October 31, 2017:

Raines’ book balance (before adjustments) ?
NSF checks 400
Service charge 300
What is the adjusted cash balance on October 31, 2017?
a. $29,600
b. $30,100
c. $30,200
d. $30,700
ANSWER: a
RATIONALE: $30,700 (Bank statement balance) – $4,200 (Outstanding checks) + $3,100 (Deposits in
transit) = $29,600
Chapter 6
90. The following data was identified by Raines Corp. in preparation of a bank reconciliation on October 31, 2017:
Raines’ book balance (before adjustments) ?
NSF checks 400
Service charge 300
What is the net amount of the increase or decrease in Raines’ cash balance which must be recorded as a result of the
adjustments identified by the bank reconciliation?
a. $100 decrease
b. $300 decrease
c. $400 decrease
d. $600 decrease
ANSWER: d
RATIONALE: $100 (Interest earned) – $400 (NSF checks) – $300 (Service charges) = ($600)
91. If a credit memorandum appears on a bank reconciliation, this could be an indication that there has been a
a. decrease the company's bank account.
b. bank service charge.
c. customer's NSF check.
d. note receivable collected by the bank for the company.
ANSWER: d
AICPA: FN-Reporting
Chapter 6
92. A check drawn by a company for $360 in payment of a liability was recorded in the journal as $630. This item would
be included on the bank reconciliation as a(n)
a. addition to the balance per the company's records.
b. addition to the balance per the bank statement.
c. deduction from the balance per the bank statement.
d. deduction from the balance per the company's records.
ANSWER: a
93. If receipts from cash sales of $7,500 were recorded incorrectly as $5,700 in the company’s books, then this item
would be included on the bank reconciliation as a(n)
a. deduction from the balance per the company's records.
b. addition to the balance per the bank statement.
c. deduction from the balance per the bank statement.
d. addition to the balance per the company's records.
ANSWER: d
94. Annual reports must include an internal control report. In this report, which group has the primary responsibility for
establishing and maintaining an adequate control structure and procedures for financial reporting?
a. Management
b. The company’s CPAs
c. The company’s internal audit staff
d. The audit committee of the company’s board of directors
ANSWER: a
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
95. Which of the following is not a requirement of the Sarbanes-Oxley Act?
a. A company's annual report must include an internal control report.
b. External auditors can no longer provide human resource services.
c. External auditors can no longer provide brokerage services.
d. An internal control system that guarantees financial accuracy must be established.
ANSWER: d
AICPA: FN-Reporting
96. Which of the following is not a requirement of a company’s external auditors under the Sarbanes-Oxley Act?
a. They must give an opinion that the company maintained an effective internal control system over financial
reporting.
b. They must design and implement an effective information system design.
c. They cannot perform any brokerage services for the company.
d. All of these are requirements of a company’s external auditors the Sarbanes-Oxley Act.
ANSWER: b
AICPA: FN-Reporting
97. Which of the following represents the subset of board of directors that acts as a direct contact between stockholders
and the independent accounting firm?
a. External auditors
b. Internal audit staff
c. Audit committee
d. Stockholders’ representative
ANSWER: c
AICPA: FN-Reporting
Chapter 6
98. The Sarbanes-Oxley Act requires that the audit committee be composed of
a. at least 50 percent of key officers who are on the board of directors.
b. a majority of all of the members of the board of directors.
c. the outside members of the board of directors and the external auditor.
d. entirely outside members of the board of directors.
ANSWER: d
AICPA: FN-Reporting
99. Which of the following represents a group composed of key officers of a corporation and outside members responsible
for the general oversight of the affairs of the company?
a. Board of directors
b. Internal audit staff
c. External auditors
d. Audit committee
ANSWER: a
AICPA: FN-Reporting
100. Which of the following statements is true?

a. The audit committee provides contact between the board of directors and the key officers of the company.
b. The audit committee has become less involved in the financial accounting system as a result of the Foreign
Corrupt Practices Act.
c. The audit committee is a subset of individuals on the board of directors that acts as a direct contact between
the stockholders and the independent accounting firm.
d. The board of directors consists of the company's external auditors.
ANSWER: c
AICPA: FN-Reporting
Chapter 6
101. What five-member body created by the Sarbanes-Oxley Act was given authority to set U.S. auditing standards?
a. FASB
b. SEC
c. IAS
d. PCAOB
ANSWER: d
DIFFICULTY: Easy
AICPA: FN-Reporting
102. Which of the following is a sound internal control procedure for cash disbursements?
a. Making copies of purchase orders for the receiving department so they know how many items to be expected
upon delivery.
b. Using presigned checks to facilitate payment within the cash discount period.
c. Comparing purchase requisitions, purchase orders, receiving reports, and invoices.
d. Requiring the signature of the purchasing department supervisor on checks.
ANSWER: c
AICPA: FN-Reporting
103. An internal control system consists of all of the following policies and procedures except those necessary to ensure
a. the safeguarding of an entity’s assets.
b. that cash on hand and on deposit in checking accounts is beyond the minimal amount for ongoing operations.
c. the reliability of an entity's accounting records.
d. the accomplishment of an entity's overall objectives.
ANSWER: b
AICPA: FN-Reporting
Chapter 6
104. Which of the following situations reflects a weak internal control system?
a. All employees are well supervised.
b. A single employee is responsible for comparing a receiving report to an invoice.
c. All employees must take their vacations.
d. A single employee is responsible for ordering inventory and receiving it from the shipper.
ANSWER: d
AICPA: FN-Reporting
105. The group within an organization that is responsible for monitoring and evaluating the internal control system is
called the
a. audit committee.
b. internal audit staff.
c. board of directors.
d. accounting staff.
ANSWER: b
AICPA: FN-Reporting
106. Which of the following statements does not describe the responsibilities of a company’s internal audit staff?
a. Internal auditors ensure that the company’s financial statements have been presented fairly.
b. Internal auditors focus on the efficiency with which the organization is run.
c. Internal auditors help ensure that the company’s policies and procedures are followed.
d. Internal auditors periodically review both accounting and administrative controls.
ANSWER: a
AICPA: FN-Reporting
Chapter 6
107. Which of the following is considered one of the six most important internal control procedures?
a. Computerized accounting systems
b. The board of directors
c. Proper authorizations
d. Verification by government agencies
ANSWER: c
DIFFICULTY: Easy
AICPA: FN-Reporting
108. Which of the following is not a generally recognized internal control procedure?
a. Establishing of clear lines of authority to carry out specific tasks
b. Physically counting inventory in a perpetual inventory system
c. Reducing the cost of hiring seasonal employees
d. Limiting access to computerized accounting records
ANSWER: c
AICPA: FN-Reporting
109. Which of the following is not a generally recognized internal control procedure?
a. Internal review by the audit committee of the board of directors
b. Independent verification of the work of one employee by another employee
c. Independent review and appraisal by internal auditors
d. Segregation of duties
ANSWER: a
AICPA: FN-Reporting
Chapter 6
110. Allowing only certain employees to order goods and services for the company is an example of what internal control
procedure?
a. Segregation of duties
b. Safeguarding of assets and records
c. Independent verification
d. Proper authorizations
ANSWER: d
AICPA: FN-Reporting
111. Which internal control procedure is followed when management authorizes the purchasing department to order goods
and services for the company?
b. Safeguarding of assets and records
ANSWER: d
AICPA: FN-Reporting
112. Which internal control procedure is followed when the work of one department acts as a check on the work of
another?
b. Safeguarding assets and records
ANSWER: c
AICPA: FN-Reporting
Chapter 6
113. Which internal control procedure is followed when storage areas are secured with limited access?
a. Segregation duties
ANSWER: b
AICPA: FN-Reporting
114. Which internal control procedure is followed when a physical count of inventory is performed in a perpetual
inventory system?
ANSWER: c
AICPA: FN-Reporting
115. Which of the following is not considered a business (source) document?

a. Time card
b. Purchase order
c. Sales invoice
d. Schedule listing all of the insurance policies in force
ANSWER: d
AICPA: FN-Reporting
Chapter 6
116. Having only one person authorized to both prepare and sign checks is a violation of what internal control procedure?
a. Proper authorizations
b. Independent review and appraisal
d. Segregation of duties
ANSWER: d
AICPA: FN-Reporting
117. Which of the following statements regarding limitations on internal control is true?
a. Companies can design a system of internal control that is foolproof.
b. A well-designed internal control system is a luxury that few companies can afford.
c. An entity's size has little effect on the degree of control that it can obtain.
d. Human errors can weaken an internal control system.
ANSWER: d
AICPA: FN-Reporting
118. Administrative controls are

a. concerned with efficient operations and adherence to managerial policies.
b. concerned with the reliability of the financial statements.
c. the responsibility of the company's auditors.
d. concerned primarily with safeguarding assets.
ANSWER: a
AICPA: FN-Reporting
Chapter 6
119. Segregation and rotation of duties is most effective in
a. increasing cost of goods sold.
b. assisting management in overriding controls.
c. preventing collusion.
d. misappropriating company assets.
ANSWER: c
AICPA: FN-Reporting
120. Which internal control procedure is violated when the cashier at the checkout stand also records the daily receipts in
the journal?
b. Independent review and appraisal
ANSWER: a
AICPA: FN-Reporting
121. Which of the following documents is used in the control of cash receipts?
a. Purchase requisitions
b. Receiving reports
c. Canceled checks from customers
d. Bank deposit slips
ANSWER: d
DIFFICULTY: Easy
Chapter 6
122. Each of the following documents is used in the control of cash receipts except
a. cash register tapes.
b. prenumbered customer receipts.
c. canceled checks from customers.
d. bank deposit slips.
ANSWER: c
DIFFICULTY: Easy
123. Each of the following documents is used in the control of cash disbursements except
a. purchase requisitions.
b. purchase orders.
c. receiving reports.
d. cash register tapes.
ANSWER: d
DIFFICULTY: Easy
124. Which of the following documents is used in the control of cash disbursements?
a. Income statement
b. Bank deposit slips
c. Receiving reports
d. Cash register tapes
ANSWER: c
DIFFICULTY: Easy
Chapter 6
125. The following set of items describes activities completed by a company in purchasing and paying for merchandise.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
Although the department supervisor can indicate a preferred supplier or vendor on purchase requisitions, the purchasing
department has the responsibility for making the final decision on a vendor.
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
ANSWER: a
The receiving department compares the quantity received with the quantity printed on the receiving report when the
purchase order was prepared.
ANSWER: b
Chapter 6
All documents attached to an invoice approval form are canceled before a check is signed.
ANSWER: a
DIFFICULTY: Easy
The clerk in the accounting department records both purchases and payments of invoices.
ANSWER: b
Chapter 6
Checks are issued by designated officers in the finance department.
ANSWER: a
DIFFICULTY: Easy
130. The following set of items describes activities completed by a company in collecting cash for merchandise sales. For
each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
A single employee in the mailroom opens the mail, counts the money received, and prepares a control list of the amount
received.
ANSWER: b
DIFFICULTY: Easy
Chapter 6
An employee in the accounting department records cash receipts from customers and prepares a bank deposit slip.
ANSWER: b
DIFFICULTY: Easy
Cash register tapes are picked up on a regular basis each day by an employee from the accounting department.
ANSWER: a
Chapter 6
An employee from the accounting department compares the control list and the cash register tapes with the bank deposit
slip.
ANSWER: a
DIFFICULTY: Easy
Monthly statements, indicating the current balance due, are mailed to customers.
ANSWER: a
DIFFICULTY: Easy
Chapter 6
135. Which of the following is not a procedure in the approval of a specific invoice for payment?
a. The purchase requisition, purchase order, receiving report, and invoice are compared.
b. An accounting department employee must verify the mathematical accuracy of the amounts that appear on the
invoice.
c. The purchasing department prepares a voucher to request payment.
d. All of these are procedures in the approval of a specific invoice for payment.
ANSWER: c
AICPA: FN-Reporting
136. The form sent by the seller to the buyer as evidence of a sale is called a(n)
a. invoice approval form.
b. invoice.
c. receiving report.
d. purchase order.
ANSWER: b
DIFFICULTY: Easy
AICPA: FN-Reporting
137. The department in an organization that is responsible for preparing the invoice approval form to document all of the
information about a particular purchase is the
a. human resources department.
b. purchasing department.
c. receiving department.
d. accounting department.
ANSWER: d
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
138. Which of the following is another term for the invoice approval form?
a. a receiving report
b. an invoice
c. a voucher
d. a remittance advice
ANSWER: c
DIFFICULTY: Easy
AICPA: FN-Reporting
139. A voucher is usually supported by

a. a supplier's invoice.
b. a purchase order.
c. a receiving report.
d. all of these.
ANSWER: d
DIFFICULTY: Easy
AICPA: FN-Reporting
140. The notification accompanying a check that indicates the specific invoice being paid is called a
a. remittance advice.
b. voucher.
c. debit memorandum.
d. credit memorandum.
ANSWER: a
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
Completion
141. Typically the classification known as "readily available" refers to investments that are converted into cash in
__________ months or less.
ANSWER: three
DIFFICULTY: Easy
AICPA: FN-Reporting
142. The IFRS definition of cash equivalents is very similar to that used by __________.
ANSWER: U.S. GAAP
DIFFICULTY: Easy
AICPA: FN-Reporting
143. __________ are those investments that are readily convertible into known amounts of cash and that have an original
maturity to the investor of three months or less.
ANSWER: Cash equivalents
DIFFICULTY: Easy
AICPA: FN-Reporting
144. __________ describes a form used by the accountant to reconcile or resolve any differences between the balance
shown on the bank statement for a particular account with the balance shown in the accounting records.
ANSWER: bank reconciliation
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
145. A check written by a company but not yet presented to the bank for payment is called a(n) __________.
ANSWER: outstanding check
DIFFICULTY: Easy
AICPA: FN-Reporting
146. Additions on a bank statement for such items as interest paid on the account and notes collected by the bank for the
customer are called __________.
ANSWER: credit memoranda
DIFFICULTY: Easy
AICPA: FN-Reporting
147. A check that is returned or "bounces" because of insufficient funds is called a(n) __________.
ANSWER: NSF check
DIFFICULTY: Easy
AICPA: FN-Reporting
148. An amount has been recorded as an increase to the company's Cash account, but has not yet been reflected on the
bank statement is called a(n) __________.
ANSWER: deposit in transit
DIFFICULTY: Easy
Chapter 6
149. Deductions on a bank statement for items such as NSF checks and bank service charges are called __________.
ANSWER: debit memoranda
DIFFICULTY: Easy
150. If a company records a $310 receipt as $130, this type of error is called a(n) __________.
ANSWER: transposition error
DIFFICULTY: Easy
AICPA: FN-Reporting
151. The audit committee of the board of directors provides direct contact between the __________ and the __________.
ANSWER: stockholders, independent accounting firm
AICPA: FN-Reporting
152. The __________ is the body created by the Sarbanes-Oxley Act that was given the authority to set auditing standards
in the United States.
ANSWER: Public Company Accounting Oversight Board (PCAOB)
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
153. The __________ is a subset of the board of directors that acts as a direct contact between the stockholders and the
independent accounting firm.
ANSWER: audit committee
DIFFICULTY: Easy
AICPA: FN-Reporting
154. A(n) __________ is a report required by section 404 of the Sarbanes-Oxley Act.
ANSWER: internal control report
DIFFICULTY: Easy
AICPA: FN-Reporting
155. __________ controls within a company are more concerned with the efficient operation of the business and
adherence to management policies than with the accurate reporting of financial information.
ANSWER: Administrative
DIFFICULTY: Easy
AICPA: FN-Reporting
156. __________ controls primarily concern safeguarding assets and ensuring the reliability of the financial statements.
ANSWER: Accounting
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
157. __________ are the crucial link between economic transactions entered into by an entity and the accounting records
of those events.
ANSWER: Business documents
DIFFICULTY: Easy
AICPA: FN-Reporting
158. A(n) __________ is a form that a department uses to initiate a request to order merchandise.
ANSWER: purchase requisition form
DIFFICULTY: Easy
AICPA: FN-Reporting
159. A(n) __________ is a form sent by the purchasing department to the supplier.
ANSWER: purchase order
DIFFICULTY: Easy
AICPA: FN-Reporting
160. A(n) __________ is a form sent by the seller to the buyer as evidence of a sale.
ANSWER: invoice
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
161. A(n) __________ is a form used by the receiving department to account for the quantity and condition of
merchandise received from a supplier.
ANSWER: blind receiving report
DIFFICULTY: Easy
AICPA: FN-Reporting
162. A(n) __________ is a form the accounting department uses before making payment to document the accuracy of all
information about a purchase.
ANSWER: invoice approval form or voucher
DIFFICULTY: Easy
AICPA: FN-Reporting
Matching
Latahmer Corporation is reconciling its May bank account. For each item listed, state how it would be handled on the
bank reconciliation.
a. Addition to the bank balance
b. Deduction from the bank balance
c. Addition to the book balance
d. Deduction from the book balance
e. Would not appear on the May reconciliation
AICPA: FN-Reporting
163. A check written from the company’s account and paid by the bank is returned with the bank statement
ANSWER: e
164. A check written from the company's account in May that does not appear on the bank statement
ANSWER: b
Chapter 6
165. Service charge on the May bank statement for new checks
ANSWER: d
166. Interest earned on the checking account for May

ANSWER: c
167. Customer’s NSF check is returned with the bank statement

ANSWER: d
168. Customer’s check which was deposited on May 31 is not listed on the bank statement
ANSWER: a
Match the term with the statement that best defines it.
a. Accounting controls
b. Accounting system
c. Administrative controls
d. Audit committee
e. Board of directors
DIFFICULTY: Easy
REFERENCES: pp. 284-287 and pp. 287-289
FACC.PONO.18.06-04 - LO: 06-04
AICPA: FN-Reporting
169. Provides direct contact between the stockholders and the independent auditing firm.
ANSWER: d
170. Consists of all methods and records used to accurately report an entity's transactions.
ANSWER: b
171. Controls that are focused more on efficient operation of the business than with the accurate reporting of information.
ANSWER: c
172. Procedures concerned with safeguarding the assets or the reliability of financial statements.
ANSWER: a
Chapter 6
Match the action with the category of internal control procedures.
a. One department should act as a check on the work of another
b. The internal audit staff ensure all is working as intended
c. Accounting and cash collection is properly separated
d. Blank checks are locked at all times when not in use
e. Origination of initial entry into the accounting system
f. Specific authority is given by management for the performance of activities.
DIFFICULTY: Easy
AICPA: FN-Reporting
173. Proper authorization

ANSWER: f
174. Segregation of duties

ANSWER: c
175. Independent verification

ANSWER: a
176. Safeguarding of assets and records

ANSWER: d
177. Design and use of business documents

ANSWER: e
Chapter 6
Match the following terms with the best definitions.
a. Purchase requisition
b. Receiving report
c. Vendor invoice
d. Check
e. Control procedures
f. Inventory count
g. Segregation of duties
h. Source documents
FACC.PONO.18.06-05 - LO: 06-05
NATIONAL STANDARDS: United States - BUSPROG: Communication - Communication
AICPA: FN-Reporting
KEYWORDS: Blooms: Application
178. The practice of not combining physical custody of assets with the function of accounting for those same assets.
ANSWER: g
179. A form used to initiate a request to order merchandise.

ANSWER: a
180. A form sent by the seller to the buyer as evidence of a sale.

ANSWER: c
181. Actions that company personnel take to make sure that policies set forth by management are followed.
ANSWER: e
182. An example of independent verification.

ANSWER: f
183. May be generated by computer or completed manually and include items such as employee's time card and a sales
invoice.
ANSWER: h
184. Typically sent along with a remittance advice.

ANSWER: d
185. A form used for verification that the items originally requested have been received.
ANSWER: b
Chapter 6
Subjective Short Answer
186. Euro Corp. began the year with $19,000 in cash and another $1,000 in cash equivalents. During the year, operations
generated $132,000 in cash. Net cash used in investing activities during the year was $213,000, and the company raised a
net amount of $168,000 from financing activities.
Required
Determine the year-end balance in cash and cash equivalents.
ANSWER:
Beginning balance in cash and cash equivalents $20,000*
Cash provided by operating activities $ 132,000
Cash used in investing activities (213,000)
Cash provided by financing activities 168,000
Net increase in cash and cash equivalents 87,000
Ending balance in cash and cash equivalents $107,000
*$19,000 + $1,000
Chapter 6
187. Lakeland Enterprises invested its excess cash in the following instruments during December 2017:
Certificate of deposit, due January 31, 2020 $ 85,000

Certificate of deposit, due March 30, 2018 120,000
Commercial paper, original maturity date February 28, 2018 105,000
Deposit into a money market fund 45,000
Investment in stock 55,000
90-day Treasury bills 110,000
Treasury note, due December 1, 2045 400,000
Required
Determine the amount of cash equivalents that should be combined with cash on the company’s balance sheet at
December 31, 2017, and for purposes of preparing a statement of cash flows for the year ended December 31, 2017.
ANSWER: Cash equivalents at December 31, 2017:
Certificate of deposit, due March 30, 2018 $120,000
Commercial paper, original maturity date February 28, 2018 105,000
Deposit into a money market fund 45,000
90-day Treasury bills 110,000
Cash equivalents $380,000
TOPICS: Example 6-1
Chapter 6
188. The following accounts are listed in a company’s general ledger:
December 31, 2017 December 31, 2016

Accounts receivable $ 12,300 $10,000
Certificates of deposit (three months) 10,000 15,000
Marketable securities 4,500 4,000
Petty Cash fund 800 1,000
Money Market fund 23,200 28,700
Cash in checking account 6,200 5,400
Required
1. Which items are cash and which items are cash equivalents?
2. Explain where items that are not cash equivalents should be classified on the balance sheet.
3. What are the amount and the direction of change in cash and cash equivalents for 2017? Is the company as liquid at the
end of 2017 as it was at the end of 2016? Explain your answer.
ANSWER: 1. Cash in the checking account and the petty cash fund are cash. The three-month
certificates of deposit and the money market fund are both cash equivalents.
2. Accounts receivable and marketable securities should be classified on the balance
sheet as current assets and listed in the order of their liquidity (marketable securities are
more liquid than accounts receivable).
3.
Cash and Cash December 31, December 31,
Increase (Decrease)
Equivalents 2017 2016
Certificates of deposit $10,000 $15,000 $ (5,000)
Petty cash fund 800 1,000 (200)
Money market fund 23,200 28,700 (5,500)
Cash in checking account 6,200 5,400 800
Totals $40,200 $50,100 $ (9,900)
The company is not as liquid at the end of 2017 as it was at the end of 2016. Although the
decrease in liquidity is not large, it is due to the decreases in the balances in the
certificates of deposit, petty cash fund, and money market fund.
TOPICS: Example 6-1
Chapter 6
189. Given the following items, what amount should be reported on the balance sheet as Cash and
cash equivalents?
Cashier's check $ 5,000

Certificate of deposit (due in 9 months) 12,000
Checking account 5,500
Coins and currency on hand 1,225
IOU from employee 565
Money market account 15,000
Postage stamps 375
Savings account 22,000
Undeposited customer checks 1,750
ANSWER: ($5,000 + $5,500 + $1,225 + $15,000 + $22,000 + $1,750) = $50,475

TOPICS: Example 6-1
Chapter 6
190. Blairsville Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for July
2017 indicated the following:
Balance, July 31, 2017 $63,400

Service charge for July 160
Interest earned during July 100
NSF check from Black Corp. (deposited by Blairsville) 1,150
Note ($3,000) and interest ($80) collected for Blairsville from a
3,080
customer
An analysis of canceled checks and deposits and the records of Blairsville revealed the following items:
Checking account balance per Blairsville’s books $58,770

Outstanding checks as of July 31 4,630
Deposit in transit at July 31 1,780
Error in recording check #205 issued by Blairsville 90
The correct amount of check #205 is $540, but it was recorded as a cash disbursement of $450. The check was issued to
pay for merchandise purchases. The check appeared on the bank statement correctly.
A) Prepare a bank reconciliation schedule at July 31, 2017, in proper form.

B) What amount would Blairsville report on its balance sheet at July 31, 2017, for cash?
ANSWER: A)
Blairsville Corp.
Bank Reconciliation
July 31, 2017
Balance per bank statement, July 31 $63,400
Deposit in transit 1,780
Deduct outstanding checks (4,630)
Adjusted balance, July 31 $60,550
Balance per books, July 31 $58,770
Add: Customer note collected $3,000
Interest on customer note 80
Interest earned during July 100 3,180
Deduct: NSF check $1,150
Service charge 160
Error in recording check #205 90 (1,400)
Adjusted balance, July 31 $60,550
B) $60,550
TOPICS: Example 6-2
Chapter 6
191. Delmont Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for May,
2017, indicated the following:
Balance, May 31, 2017 $29,700

Service charge for May 80
Interest earned during May 120
NSF check from Viacon Corp. (deposited by Delmont) 230
Note ($4,000) and interest ($100) collected for Delmont from a
4,100
customer
An analysis of canceled checks and deposits and the records of Delmont Corp. revealed the following items:
Checking account balance per Delmont’s books $26,040

Outstanding checks as of May 31 2,950
Deposit in transit at May 31 3,110
Error in recording check # 4456 issued by Delmont 90
The correct amount of check #4456 is $760, but it was recorded as a cash disbursement of $670 by mistake. The check
was issued to pay for merchandise purchases. The check appeared on the bank statement correctly.
Required
A) Prepare a bank reconciliation schedule at May 31, 2017 in proper form.
B) Explain how checking accounts, bank statements, and bank reconciliations are used by Delmont to control its cash.
ANSWER: A)
Delmont Corp.
Bank Reconciliation
May 31, 2017
Balance per bank statement, May 31 $29,700
Add: Deposit in transit 3,110
Deduct: Outstanding checks (2,950)
Adjusted balance, May 31 $29,860
Balance per books, May 31 $26,040
Interest earned during May 120 4,220
Deduct: NSF check $ 230
Service charge 80
Error in recording check #4456 90 (400)
Adjusted balance, May 31 $29,860
B) Checking accounts allow entities an opportunity to make all, or almost all, cash
payments by check. Preventing direct access to cash provides better internal control.
Bank statements and bank reconciliations allow verification of the cash balance and help
identify errors that have been made.
Chapter 6
TOPICS: Example 6-2
192. Sarcon Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for
October, 2017, indicated the following:
Balance, October 31, 2017 $7,920

Service charge for October 20
Interest earned during October 30
NSF check from Grey Corp. (deposited by Sarcon) 32
Note ($1,000) and interest ($40) collected for Sarcon from a customer 1,040
An analysis of canceled checks and deposits and the records of Sarcon revealed the following items:
Checking account balance per Sarcon books $7,170

Outstanding checks as of October 31 952
Deposit in transit at October 31 1,310
Error in recording check #313 issued by Sarcon. 90
The correct amount of check #313 is $450, but it was recorded as a cash disbursement of $540. The check was issued to
pay for merchandise purposes. The check appeared on the bank statement correctly.
Required
Prepare a bank reconciliation at October 31, 2017 in proper form.
ANSWER: Sarcon Corp.
Bank Reconciliation
October 31, 2017
Balance per bank statement, October 31 $7,920
Deduct: Outstanding checks (952)
Adjusted balance, October 31 $8,278
Balance per books, October 31 $7,170

Interest earned during October 30
Error in recording check #313 90 1,160
Deduct: NSF check $ 32
Service charge 20 (52)
TOPICS: Example 6-2
Chapter 6
193. Sarcon Corp. prepares monthly bank reconciliations of its checking account balance.
Required
1. Explain how checking accounts, bank statements, and bank reconciliations are used by Engel to control its cash.
2. Explain how Engel can control small payments that must be made in cash rather than by check.
ANSWER: 1. Checking accounts allow entities an opportunity to make all, or almost all, cash
payments by check. Preventing direct access to cash provides better internal control.
Bank statements and bank reconciliations allow verification of the cash balance and help
identify errors that have been made.
2. Small cash payments can be controlled by using a petty cash fund. The amount of cash
to which employees have direct access is small. The system established for petty cash
provides a convenient and sound procedure for identifying the assets and expenses that
must be recorded when small cash payments are made.
AICPA: FN-Reporting
Chapter 6
194. Viva Stores has decided to set up a petty cash fund.
A count of the cash in the drawer on January 31 revealed a balance of $53.25. The treasurer wrote and cashed a check on
the same day to restore the fund to its original balance of $250.
Required
1. Explain the necessary steps that Viva Stores must take to set up and maintain the petty cash fund.
2. What are the potential benefits of using the petty cash fund?
ANSWER: 1. To set up the petty cash fund, a check is written for a lump-sum amount, such as $100
or $250. The check is cashed, and the coin and currency that make up the petty cash fund
are entrusted to a petty cash custodian. A journal entry is then made to record the
establishment of the fund. Upon presentation of the necessary documentation, employees
receive minor disbursements from the fund. To maintain the fund, a check must be
written and cashed periodically in the amount necessary to bring the fund back to its
original balance. At the time the petty cash fund is replenished, an adjustment must be
made to record its replenishment and to recognize the various expenses incurred.
2. A petty cash fund serves a practical purpose for certain expenditures, such as postage,
that often must be paid in cash. Also, the time saved in making minor disbursements from
cash can outweigh the cost associated with the risk of loss from decreased control over
cash disbursements.
AICPA: FN-Reporting
Chapter 6
195. Marathon Street Bank sent Flank Industries their end-of-month bank statement for October. The end-of-month
balance by the bank is $11,229. From the statement, it can be determined that a deposit for $4,250 is in transit at the end
of the statement period. Also, the statement reveals that checks for $86, $106, and $95 are outstanding. Marathon Street
collected a 90-day, 12% interest, $4,000 note receivable charging $20 for the service. Accrued interest of $120 on the note
has also been collected. The bank charges a monthly account fee of $35. The end-of-month balance per the company
books is $11,127.
Required
1. Complete a bank reconciliation for Flank Industries at October 31, 2017.
2. Identify any necessary adjustments to the accounting records identified in the reconciliation.
ANSWER: Flank Industries
Bank Reconciliation
October 31, 2017
Balance per statement, Oct. 31: $11,229
Deduct: Outstanding checks $ 86
106
95 (287)
Balance per books, October 31 $11,127

Interest on customer note 120 4,120
Deduct: Collection fee on note $ 20
Bank service charge 35 55
2. Adjustments needed in the accounting records are for the bank service charge
(expense), collecting the cash for the note receivable and its accrued interest, and the
collection fee.
TOPICS: Example 6-2
Chapter 6
196. At Jungle Industries, all sales are on account. Domenic Marconi is responsible for mailing invoices to customers,
recording the amount billed, opening mail, recording the payment, and making deposits to the bank. The customers know
Domenic and sometimes send personal notes with their payments. Another clerk handles all aspects of accounts payable.
Domenic’s brother, who is president of Jungle Industries, has hired an accountant to help with expansion.
Required
1. List some problems with the current accounts receivable system.
2. What suggestions would you make to improve internal control?
3. How would you explain to Domenic that he personally is not the problem?
ANSWER: 1. Unfortunately, Jungle Industries suffers from a lack of segregation of duties. Domenic
handles all tasks associated with collection of customer accounts.
2. Domenic should not handle all aspects of accounts receivable, billing, collection, and
bank deposits. Two different employees should mail invoices and record the amounts
billed. Two employees should be present when the mail is opened. Another employee
should be responsible for recording collections from customers and this employee should
be separate from the person who makes the bank deposits. Finally, there should be
rotation of job duties among employees.
3. Someone should explain to Domenic that he personally is not the problem but that a
good system of internal control requires certain changes to be made. This could be
explained to him not in the context of fraud but rather in the context of the necessity to
verify and check the work performed by all employees.
FACC.PONO.18.06-04 - LO: 06-04
Essay
197. What rational is used in order to determine if an amount is "cash"?

ANSWER: The key to the classification of an amount as cash is that it be readily available to pay
debts.
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
198. What is meant by "cash equivalents"?
ANSWER: "Cash equivalents" refer to very short-term, highly liquid marketable securities with an
original maturity of three months or less at the date of purchase. Because these securities
can be converted into cash when needed very quickly and without material loss, they are
considered to be the equivalent of cash and are normally included with cash on the
balance sheet and on the statement of cash flows.
DIFFICULTY: Easy
AICPA: FN-Reporting
199. Why are adjustments often necessary after the reconciliation of a bank account?
ANSWER: Adjustments are necessary because the dollar amount in the company's Cash account may
differ from the actual amount available to use. Items that cause this difference include
service charges the bank deducted from the company's account, interest the bank has
added to the company's account, NSF checks returned, and other miscellaneous transfers
that may not have been recorded in the company's accounting records.
200. Why is cash management necessary?

ANSWER: Cash management is necessary to ensure that at any point in time, a company has neither
too little nor too much cash on hand. Cash on hand is necessary for payment to suppliers,
employees, and other creditors. Since cash is essentially a non-earning asset, too much
cash means the company may not be earning the return on it that it could if it were
invested otherwise.
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
201. Explain how a company can control small payments that must be made in cash rather than by check.
ANSWER: Using a petty cash fund can control small cash payments. The amount of cash to which
employees have direct access is small. The system established for petty cash provides a
convenient and sound procedure for identifying the assets and expenses that must be
recorded when small cash payments are made.
AICPA: FN-Reporting
202. Your friend, Mike, has just started a business and comes to you with a question. “I’m confused. I have a memo
included with my bank statement indicating a $55 service charge for printing new checks. Since you’re an accounting
major, maybe you can explain to me why they call it a ‘debit memorandum,’ even though they are deducting this amount
from my account. When I took Accounting in school, I could have sworn that a decrease in the Cash account would be a
credit and not a debit."
Required
In a short paragraph, explain this issue to your friend.
ANSWER: I agree that it is a bit confusing. You see, the meaning of a debit or a credit depends on
which company is concerned. To the bank, a company’s checking account is a liability.
Therefore, when a bank deducts a service charge from a company’s account, it is
reducing its liability to the company. A liability is decreased with a debit. Therefore,
banks refer to charges to a company’s account as debit memoranda.
AICPA: FN-Reporting
203. What is the typical composition of a board of directors of a publicly held corporation?
ANSWER: A board of directors normally is composed of a combination of key officers of the
corporation, such as the president, and outsiders. The outsiders usually have been or are
presently key officers themselves of other corporations or have significant business
experience.
DIFFICULTY: Easy
AICPA: FN-Reporting
Chapter 6
204. Section 404 of the Sarbanes-Oxley Act requires corporations to include an internal control report in their annual
report. Describe, in general, the main elements that should be included in an internal control report.
ANSWER:
In an internal control report, management states its responsibility for the internal control
system and assesses the effectiveness of its internal control structure and procedures for
financial reporting. The internal control report should also verify that the company’s
outside auditors have issued a report on their assessment of the company’s internal
control.
AICPA: FN-Reporting
205. What are some of the limitations on a company’s effective system of internal control?
ANSWER: There are a number of limitations on the efficiency of internal control. First, a system of
internal control is not cost free. For example, the segregation of duties may require a
larger staff than would otherwise be necessary. An internal audit staff may be too costly
for a small company. Second, no system of internal control can ensure collusion by two
or more employees will not happen. Third, the lack of support from upper management
may weaken an otherwise strong commitment to a system of internal control. Finally, the
element of human error can never be eliminated in any operation, regardless of how big
or small.
Chapter 6
206. An effective system of internal control is critical to protecting a company’s investment in three of its major assets:
cash, accounts receivable, and inventory. For each asset, describe how a company might protect that asset.
ANSWER: Cash registers, safes, and lockboxes are important safeguards for cash. Several control
mechanisms are used to handle cash receipts. Cash registers allow the customer to see the
display. Customers are an important part of a company’s control system. Monthly
customer statements act as an additional control device for customer receipts received in
the mail. In addition, a locked-in cash register tape can facilitate the detection of
differences between a cashier’s cash and the sales that have been rung up during the day.
Prenumbered customer receipts, prepared in duplicate, are also a useful control
mechanism for cash. Storage areas with limited access are essential for safekeeping of
inventory.
FACC.PONO.18.06-05 - LO: 06-05
AICPA: FN-Reporting
207. What are at least four important internal control procedures?

ANSWER: Student answers may vary but can include:
1. Proper authorizations
2. Segregation of duties
3. Independent verification
4. Safeguarding of assets and records
5. Independent review and appraisal
6. Design and use of business documents
DIFFICULTY: Easy
Chapter 6
208. The garden club is planning a raffle. The president overheard you talking about internal controls to another member
and asked you to set up some guidelines to “make sure” that all money collected for the upcoming raffle is accounted for
by the club.
Required
1. In general, describe some guidelines that the club should follow to achieve an acceptable level of internal control.
2. Regarding the president’s request, is it really possible to make sure that all money is collected and recorded?
ANSWER:
1. Students answers will vary but may include:
a. Prenumbered tickets
b. Segregation of duties for collecting cash, counting and recording cash, and
depositing cash in a bank account
c. Payment by check of any expenses associated with the raffle
2. It may be difficult, if not impossible, to be completely make sure that this happens, due
to human errors in counting and handling the cash, as well as making change. Student
answer should focus on the fact that internal controls are the best prevention; however, if
two or more individuals collude to misdirect cash, these controls can be circumvented.
REFERENCES: pp. 287-289 and 289-296
209. McDonald's Corporation is the largest food service organization in the world. The proper handling of cash and food
is important to the profitability of McDonald's. Based on your personal knowledge of McDonald's and the internal control
concepts and procedures described in the textbook, answer the following questions.
Describe procedures that you believe McDonald's may use to control cash receipts.
ANSWER: Each cashier should start with his or her own cash drawer, with the manager noting how
much cash the cashier starts with at the beginning of the shift. The cash would be counted
when the cashier ends work. The manager would take a cash register reading and
reconcile this reading with the cash in the drawer. The manager also could observe the
activities of the cashiers on a spot basis. It may not be possible to separate the duties of
counting the cash and making bank deposits since the manager likely will be responsible
for both.
Chapter 6
210. McDonald's Corporation is the largest food service organization in the world. The proper handling of cash and food
is important to the profitability of McDonald's. Based on your personal knowledge of McDonald's and the internal control
concepts and procedures described in the textbook, answer the following questions.
Describe procedures that you believe McDonald's may use to control the purchase and payment of food products.
ANSWER: A company like McDonald's might negotiate contracts with vendors to supply food
products to arrive daily or weekly. This might suppress the need for using purchase
requisitions and purchase orders for food products. However, the typical procedures
beginning with receiving reports for invoice approval would apply. Receiving reports and
contracts would be compared with invoices. Completion of all steps in the approval
process would be verified before checks are prepared. All documents included in the
invoice approval process would be canceled when the checks are prepared. Specified
employees would sign the checks. Employees who handle the checks would not be
allowed to prepare journal entries.
Chapter 6
211. Herbert and Evita are planning to open a quick copy center near the local college. They will make both cash and
credit sales. They will hire college students to make copies and to operate the cash register. Either Herbert or Evita will
act as manager during most hours that the business will be open. One student will be designated as assistant manager
when they cannot be present.
Required
Describe procedures that Herbert and Evita might use to provide adequate internal control over cash and credit sales and
bank deposits.
ANSWER: The following procedures should be considered by Herbert and Evita to control cash and
credit sales and bank deposits:
(a) All sales should be recorded on prenumbered sales slips. Separate types of forms
should be used for cash and credit sales.
(b) On the cash sales slips, the quantity, price, and amounts should be recorded.
(c) Separate cash register keys should be used for cash and credit sales.
(d) The number of employees allowed to operate the cash register should be limited. If
possible, separate cash drawers should be used for each cash register operator.
(e) The cash register tape should be reconciled with the cash, cash sales slips, and
credit sales slips each day.
(f) Herbert and Evita should try to be the only ones who can make bank deposits.
(g) Herbert and Evita should observe that employees follow the procedures they
establish for control over cash and credit sales.
Chapter 6
212. Jack’s Jungle Fun, Inc. is a manufacturer of children's outdoor play equipment. The factory foreman determines
when orders for materials are necessary. The orders are sent to the purchasing department that places orders with the
vendors recommended by the factory foreman. When the materials are received, they are delivered directly to a central
storeroom without counting what has been received. When invoices are received for the materials purchased, they are sent
to the accounting department for payment. The accounting department compares the invoices with purchase orders. If the
two documents are in agreement, the invoice is approved for payment. The accounting department prepares the checks
that are signed by the company treasurer.
Required
Recommend improvements in the company's procedures for purchasing and paying for purchases of materials that will
provide better internal control over purchases and payment for those purchases.
ANSWER: Recommended improvements in the company's procedures for purchasing and paying for
materials are:
(a) Vendors normally should be determined by the purchasing department rather than
the foreman.
(b) All materials should be counted as they are received, and a receiving report should
be completed. A Copies of the receiving report should be sent to the accounting
department and the purchasing department.
(c) The invoices should be compared with both the purchases orders and the receiving
reports.
(d) The checks should be prepared in the treasurer's department, with the treasurer or
other designated employees assigned the responsibility of signing checks.
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Using Financial Accounting Information

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Financial Accounting The Impact on Decision Makers 10th

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1. A six-month bank certificate of deposit would be classified as a cash equivalent.

32. A company’s internal control system is designed by its external auditors.

35. Independent verification can be effective in preventing collusion.

40. Which of the following assets is considered the most liquid?

41. Which of the following items is not included in cash?

42. Which of the following is not considered to be a cash equivalent?

44. Which of the following could never be considered to be cash equivalents?

45. Which of the following is not a cash equivalent?

53. Which of the following items would not be a reconciling item?

Fazzi’s book balance $46,200

Busch’s book balance $15,000

61. When preparing a bank reconciliation, deposits in transit are

63. When preparing a bank reconciliation interest earned on a checking account is

64. When preparing a bank reconciliation, outstanding checks are

Bank statement balance $19,500

71. Which of the following is an example of a credit memorandum?

80. An outstanding check is a check that

Rahm’s book balance $32,800

Bank statement balance $1,089

Lola’s book balance $35,900

Lola’s adjusted cash balance at February 28, 2017 is

Gentech’s bank balance $14,300

Bank statement balance $29,600

Bank statement balance $29,600

Bank statement balance $45,000

What is the adjusted cash balance at the end of April?

Bank statement balance $45,000

Bank statement balance $30,700

100. Which of the following statements is true?

115. Which of the following is not considered a business (source) document?

118. Administrative controls are

139. A voucher is usually supported by

166. Interest earned on the checking account for May

167. Customer’s NSF check is returned with the bank statement

173. Proper authorization

174. Segregation of duties

175. Independent verification

176. Safeguarding of assets and records

177. Design and use of business documents

179. A form used to initiate a request to order merchandise.

180. A form sent by the seller to the buyer as evidence of a sale.

182. An example of independent verification.

184. Typically sent along with a remittance advice.

Certificate of deposit, due January 31, 2020 $ 85,000

December 31, 2017 December 31, 2016

Cashier's check $ 5,000

ANSWER: ($5,000 + $5,500 + $1,225 + $15,000 + $22,000 + $1,750) = $50,475

Balance, July 31, 2017 $63,400

Checking account balance per Blairsville’s books $58,770