CHAPTER 7

INTERNAL CONTROL AND CASH

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

LOD: E = Easy M = Medium H = Hard

Bloom’s: AP = Application C = Comprehension K = Knowledge

CPA: AA = Audit & Assurance

AACSB: AN = Analytic

Summary of Question TYPEs by LEARNING Objective, Level of difficulty, BLOOM’S TAXONOMY, CPA CODES, and AACSB Codes

(Cont’d)

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension

CPA: AA = Audit & Assurance C = Communication

AACSB: AN = Analytic

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Note: TF = True-False MC = Multiple Choice Ma = Matching

Ex = Exercise SAE = Short-Answer Essay CP = CPA Questions

CHAPTER LEARNING OBJECTIVES

1. Identify and describe the components of a good internal control system, including its limitations. Internal control systems have the following components: the control environment, risk assessment, control activities, information and communication, and monitoring activities. Control activities include assignment of responsibility, segregation of duties, documentation, physical controls, and review and reconciliation. Internal controls help to minimize the opportunity for fraud to occur or to detect it when it has. However, internal controls have some limitations, including cost/benefit constraints, human error, collusion, and management override. The three main factors that contribute to fraudulent activity are opportunity, financial pressure, and rationalization.

2. Apply the key control activities to cash receipts and payments. Control activities over cash receipts include (a) designating only personnel such as cashiers to handle cash; (b) assigning the duties of receiving cash, recording cash, and custody of cash to different individuals; (c) obtaining remittance advices for mail receipts, cash register tapes for over-the-counter receipts, and deposit slips or confirmations for bank deposits; (d) using company safes and banks to store cash, with access limited to authorized personnel, and using cash registers in executing over-the-counter receipts; (e) depositing all cash intact daily in the bank account or using EFT; and (f) making independent daily counts of register receipts and daily comparisons of total receipts with total deposits.

Control activities over cash payments include (a) making all payments by cheque or by EFT; (b) having only specified individuals authorized to sign cheques; (c) assigning to different individuals the duties of approving items for payment, paying the items, and recording the payments; (d) using prenumbered cheques and accounting for all cheques; (e) storing blank cheques in a safe with access restricted to authorized personnel, and using electronic methods to print amounts on cheques; (f) comparing each cheque or EFT payment with the approved invoices before initiating payments; and (g) making monthly reconciliations of bank and book balances.

3. Prepare a bank reconciliation. In reconciling the bank account, the cash balance per the company’s books is reconciled with the cash balance reported by the bank on the bank statement. There can be differences between the company’s books and the bank due to timing differences and errors. Reconciling items for the bank include deposits in transit, outstanding cheques, and any errors made by the bank. Reconciling items for the company include EFT receipts, interest, EFT payments, service charges, NSF cheques, and any errors made by the company. Journal entries must be made for all items required to adjust the balance per books to the reconciled cash balance.

4. Explain the reporting and management of cash. Cash and cash equivalents are usually the first current asset listed on the statement of financial position. Cash inflows and outflows are reported on the statement of cash flows. The ending cash balance reported on the statement of cash flows agrees with the cash and cash equivalents reported on the statement of financial position. Cash equivalents are highly liquid investments with maturities of three months or less that are subject to an insignificant risk of changes in value. The six principles of cash management are to (a) collect receivables quicker, (b) keep inventory levels low, (c) delay the payment of liabilities, (d) plan the timing of major expenditures, (e) invest idle cash, and (f) prepare a cash budget.TRUE-FALSE STATEMENTS

1. Fraud is an unintentional act to misappropriate (steal) assets or misstate financial statements.

2. Errors give rise to unintentional misstatements in the financial statements.

3. The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

4. The person responsible for making credit sales should be the vice-president of finance.

5. External auditors report on whether or not the company’s financial statements fairly present its financial position and results of operations.

6. External auditors are usually employees of the company.

7. An effective control activity results when at least two individuals are assigned to one cash drawer so that each can serve as check on the other.

8. The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.

9. Segregation of duties among employees eliminates the possibility of collusion.

10. All documents should be prenumbered.

11. The use of a bank account makes internal control over cash more difficult.

12. The use of electronic funds transfers normally results in better control over cash.

13. Control over cash disbursements is improved if all expenditures are paid by cheque or through use of electronic funds transfers.

14. An example of segregation of duties is having a cheque signer record cash disbursements.

15. An authorized signing officer should sign a cheque only after reviewing the appropriate supporting documentation.

16. To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by the person authorized to sign cheques.

17. Electronic funds transfers never have to be recorded.

18. All reconciling items in determining the reconciled cash balance per books require the depositor to make adjusting journal entries to the Cash account.

19. NSF cheques received from customers are debited by the bank to the depositor’s account.

20. A bank reconciliation is generally prepared by the bank and sent to the depositor along with cancelled cheques.

21. An NSF cheque that was received is recorded as an account receivable.

22. NSF cheques received are accounted for by adding them to the cash balance per books.

23. Deposits in transit require an adjustment to the cash balance per books.

24. Management only needs to know how much cash is available at the end of the month (when the bank reconciliation is prepared).

25. Debt investments due within three months are normally classified as cash equivalents.

26. Equity Investments (in common shares) are normally classified as cash equivalents.

27. When the cash account has a credit balance in the general ledger, it is reported as a non-current liability.

28. Idle cash should not be reported as cash and cash equivalents.

ANSWERS TO TRUE-FALSE STATEMENTS

MULTIPLE CHOICE QUESTIONS

29. Which of the following statements is true?

(a) A good system of internal control does not require monitoring.

(b) Risk assessment is one component of a good system of internal control.

(c) When one individual is responsible for all related activities, the potential for errors and irregularities is decreased.

(d) Control activities are most effective when several people are responsible for a given task.

30. Which of the following statements is true in terms of an internal control system?

(a) A good internal control system will help a company achieve reliable financial reporting, effective and efficient operations, and compliance with laws and regulations.

(b) An internal control system cannot be considered effective until the possibility of human error has been completely eliminated.

(c) Only large companies need to be concerned with a system of internal control.

(d) The extent of internal control activities adopted by a company must not be evaluated in terms of cost-benefit.

31. Internal controls may be limited by each of the following except

(a) the size of the business.

(b) the human element.

(c) internal audits.

(d) collusion.

32. Which one of the following is not a primary component of an internal control system?

(a) control activities

(b) delay payment of liabilities

(c) risk assessment

(d) control environment

33. Independent internal reviews should be done

(a) at the end of each accounting period.

(b) at the end of each month.

(c) periodically on a surprise basis.

(d) by the external auditor.

34. All of the following are examples of a control activity except

(a) using prenumbered documents.

(b) reconciling the bank statement.

(c) insistence that employees work overtime.

(d) prenumbering cheques.

35. All of the following are examples of a control activity except

(a) an extensive marketing plan.

(b) assignment of responsibility.

(c) segregation of duties.

(d) insurance on assets.

36. All of the following are examples of a control activity except

(a) limited access to assets.

(b) review and reconciliation.

(c) assignment of responsibility.

(d) increasing the speed of collection on receivables.

37. Which of the following is not a limitation of internal control?

(a) cost of establishing control procedures

(b) the human element

(c) use of a bank account

(d) the size of the company

38. Internal controls are concerned with all of the following except

(a) computerized systems of accounting.

(b) effective and efficient operations.

(c) ensuring reliable financial reporting.

(d) compliance with relevant laws and regulations.

39. An employee who makes a sale, ships the goods, and bills the customer violates which control activity?

(a) review and reconciliation

(b) documentation

(c) segregation of duties

(d) assignment of responsibility

40. Physical controls are not designed to safeguard assets from

(a) natural disasters.

(b) employee theft.

(c) robbery.

(d) unauthorized use.

41. Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them

(a) increases the potential for errors and fraud.

(b) decreases the potential for errors and fraud.

(c) is an example of a control activity.

(d) reduces cost and maximizes benefit.

42. External auditors

(a) evaluate the system of internal controls for the companies that employ them.

(b) are employees of the company.

(c) are independent of the company.

(d) plan and perform an internal audit.

43. Internal auditors

(a) are hired by independent accounting firms to audit companies.

(b) are employees of the government who evaluate the internal controls of companies filing tax returns.

(c) evaluate the system of internal controls for the companies that employ them.

(d) cannot evaluate the system of internal controls of the companies that employ them because they are not independent.

44. When two or more people get together for the purpose of circumventing prescribed controls, it is called

(a) fraud prevention.

(b) collusion.

(c) a division of duties.

(d) assignment of responsibilities.

45. The control activity related to not having the same person authorize and pay for goods is known as

(a) physical controls.

(b) review and reconciliation.

(c) segregation of duties.

(d) assignment of responsibility.

46. Arthur is warehouse custodian and also maintains the accounting records of the inventory held at the warehouse. Which control activity is violated?

(a) documentation

(b) review and reconciliation

(c) segregation of duties

(d) assignment of responsibility

47. Physical controls to safeguard assets do not include

(a) cashier department supervisors.

(b) vaults.

(c) safety deposit boxes.

(d) locked warehouses.

48. In large companies, review and reconciliation is often assigned to

(a) shift supervisors.

(b) management.

(c) internal auditors.

(d) external auditors.

49. Maximum benefit from review and reconciliation is obtained when

(a) it is made on a pre-announced basis.

(b) it is done by the employee possessing custody of the asset.

(c) discrepancies are reported to management.

(d) it is done at the time of the external audit.

50. The independent audit committee of the board of directors is not responsible for reviewing the company’s internal control systems to ensure that they are adequate to result in

(a) fair financial results.

(b) complete financial results.

(c) reasonable financial results.

(d) accurate financial results.

51. A system of internal control can only provide reasonable assurance, which is based on the belief that

(a) the system is infallible.

(b) the system can always detect errors and irregularities.

(c) the costs of establishing control activities should not be greater than the expected benefit.

(d) the human element is not important.

52. Two employees at a retail store work the same cash register. You evaluate this situation as

(a) a violation of assignment of responsibility.

(b) a violation of segregation of duties.

(c) supporting assignment of responsibility.

(d) supporting review and reconciliation.

53. An accounts payable clerk also has cheque signing authority. Which control procedure is violated?

(a) assignment of responsibility

(b) review and reconciliation

(c) documentation

(d) segregation of duties

54. Internal controls can be detective controls that

(a) stop something management does not want to happen from occurring.

(b) identify fraudulent activities that have already occurred.

(c) do not quantify fraudulent activities.

(d) indicate when something that management wanted to happen occurred.

55. Cash does not include

(a) currency.

(b) money orders.

(c) post dated cheques.

(d) coins.

56. The use of electronic funds transfers

(a) normally results in better internal controls.

(b) does not require segregation of duties.

(c) eliminates opportunities for fraud.

(d) does not require proper authorization.

57. Which of the following is not a good control activity over cash?

(a) Payments to creditors should be made in cash.

(b) There should be limited access to cash.

(c) The amount of cash on hand should be kept at a minimum.

(d) Cash should be deposited daily.

58. Control over cash disbursements is generally more effective when

(a) all bills are paid in cash.

(b) disbursements are made by the accounts payable subsidiary clerk.

(c) payments are made by cheque or electronic funds transfer.

(d) all purchases are made on credit.

59. Which of the following is not a suggested procedure to establish a good control activity over cash disbursements?

(a) pre-signed blank cheques

(b) Different individuals approve and make payments.

(c) Blank cheques are stored with limited access.

(d) The bank statement is reconciled monthly.

60. Which of the following is not a control activity over cash?

(a) Only designated personnel are authorized to handle cash.

(b) The same individual receives the cash and pays the bills.

(c) Surprise audits of cash on hand should be made occasionally.

(d) Access to cash is limited.

61. The use of prenumbered cheques is an example of

(a) documentation.

(b) review and reconciliation.

(c) assignment of responsibility.

(d) segregation of duties.

62. Allowing only the treasurer to sign cheques is an example of which control activity?

(a) documentation

(b) segregation of duties

(c) physical controls

(d) assignment of responsibility

63. Blank cheques

(a) should be safeguarded.

(b) should be pre-signed.

(c) do not need to be safeguarded since they must be signed to be valid.

(d) should not be prenumbered.

64. An employee authorized to sign cheques should not record

(a) shipping documents.

(b) mail receipts.

(c) cash disbursement transactions.

(d) sales transactions.

65. Which of the following is considered to be Cash?

(a) returned cheques

(b) cheques

(c) postdated cheques

(d) stale-dated cheques

66. A bank statement

(a) lets a depositor know the financial position of the bank as of a certain date.

(b) is a credit reference letter written by the depositor's bank.

(c) is a bill from the bank for services provided.

(d) shows the activity that increased or decreased the depositor's account balance.

67. Which one of the following would not cause a bank to debit a depositor's account?

(a) bank service charge

(b) collection of a note receivable

(c) payment of a note payable

(d) cheques marked NSF

68. On the April 30 bank reconciliation, a deposit made by a company to its bank account on April 18 will likely appear as a(n)

(a) addition to the balance per books.

(b) deduction from the balance per books.

(c) deduction from the balance per bank.

(d) This will not affect the current period’s bank reconciliation.

69. An NSF cheque received from a customer should appear in which section of the bank reconciliation?

(a) addition to the balance per books

(b) deduction from the balance per books

(c) addition to the balance per bank

(d) deduction from the balance per bank

70. On a bank reconciliation, which of the following would be deducted from the balance per books?

(a) outstanding cheques

(b) deposits in transit

(c) electronic payment by a customer on account

(d) bank service charges

71. On a bank reconciliation, which of the following would be added to the balance per books?

(a) outstanding cheques

(b) deposits in transit

(c) electronic payment by a customer on account

(d) bank service charges

72. On a bank reconciliation, which of the following would be deducted from the balance per bank?

(a) outstanding cheques

(b) deposits in transit

(c) electronic payment by a customer on account

(d) bank service charges

73. On a bank reconciliation, which of the following would be added to the balance per bank?

(a) outstanding cheques

(b) deposits in transit

(c) electronic payment by a customer on account

(d) bank service charges

74. A cheque in the amount of $425 was returned by the bank marked "NSF". A bank service fee of $20 was charged for processing the returned cheque. Upon notification of the NSF, the company who initially received the customer’s cheque will most likely

(a) reverse the customer’s payment on their books to re-establish the accounts receivable for $425.

(b) make no changes to the accounting records but advise the customer that the payment was declined and is still outstanding.

(c) reverse the customer’s payment on their books to re-establish the accounts receivable for $425 and debit bank charges expense for the bank service fee of $20.

(d) reverse the customer’s payment on their books to re-establish the accounts receivable for $425 and debit the accounts receivable for the bank service fee of $20.

75. Outstanding cheques from the prior period which clear the bank in the current period

(a) should be added to the balance per books.

(b) should be deducted from the balance per books.

(c) should be deducted from the balance per bank.

(d) do not affect the current period’s bank reconciliation.

76. In preparing a bank reconciliation, outstanding cheques are

(a) added to the balance per bank.

(b) deducted from the balance per books.

(c) added to the balance per books.

(d) deducted from the balance per bank.

77. If a cheque correctly written and paid by the bank for $483 is incorrectly recorded on the company's books for $384, the appropriate treatment on the bank reconciliation would be to

(a) add $99 to the balance per bank.

(b) add $99 to the balance per books.

(c) deduct $99 from the balance per books.

(d) deduct $99 from the balance per bank.

Ex. 97

Ride-Rite Shops have two purchasing agents. Each agent prepares purchase orders to suppliers by entering the purchase details into the company’s financial system under the username “purchaser” and password “purchaser”. Both agents are using the same credentials to access the system. The purchasing agents record the receipt of the shipment and match this to the purchase order and invoice. The agents then transfer the goods to the respective shop, sign off on the invoice and forward to accounts payable for vendor payment.

Instructions

Identify any control activities that are violated in this situation and why.

Ex. 98

Below are descriptions of internal control problems. In the space to the left of each item, enter the code letter of the one best control activity that is related to the problem described.

Control Activity

A. Assignment of responsibility

B. Segregation of duties

C. Physical controls

D. Documentation

E. Review and reconciliation

1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger.

2. Three people handle cash sales from the same cash register drawer.

3. A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise.

4. The person who is authorized to sign cheques approves purchase orders for payment.

5. Some cash payments are not recorded because cheques are not prenumbered.

6. Cash shortages are not discovered because there are no daily cash counts by supervisors.

7. The external audit firm reports on the financial statements each year.

Ex. 99

Indicate whether each of the business practices listed below strengthens (S) or weakens (W) a company’s system of control activities.

(a) Controller pays invoices, signs cheques and makes deposits.

(b) All payments are made with cheques instead of cash.

(c) Two people handle cash sales from the same cash register drawer.

(d) The company uses prenumbered sales invoices.

(e) Audited financial statements are provided to the creditors each fiscal year.

Ex. 100

Craig Thompson has worked for Dr. Hung Pow, a dentist, for several years. Craig demonstrates a loyalty that is rare among employees. He hasn't taken a vacation in the last three years. One of Craig's primary duties is to open the mail and list the cheques received. He also takes cash from patients as they leave. At times it is so hectic that Craig doesn't bother with giving patients a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit and a receipt later. When it is slow in the office, Craig offers to help Julia post payments to the patients' accounts receivable. She is always happy to receive his help, because Craig is such a conscientious worker.

Instructions

Identify any internal control activities that may be violated in this situation.

Ex. 101

Sally Small is the sole shareholder of a corner store, The Small Store Inc. She hasn't taken a vacation in two years and is planning to take one next month. She would like to know things are being properly handled in the store before she leaves. She has asked you to observe her operations for a day and tell her if there are any problems you see or improvements you can suggest to the way the company operates with respect to internal controls. She would also like to know if there are things she is doing correctly so that she can continue to do them.

You note the following activities during the day. Sally opens the store at 9 a.m. She balances the cash from the previous day before opening. Sarah, a long-time employee, starts work at 10 a.m. and works until 5 p.m. Peter, another part time employee, works from 4 p.m. until 11 p.m. and closes the store. He locks the cash register when he leaves. Sally, Sarah and Peter all serve customers during the day. There is only one cash register. Sally leaves the store for lunch and finishes for the day around 6 p.m. She tells you she sometimes drops back in at night to see how things are going.

Bread and milk are delivered to the store during the day and whoever is at the cash register at the time takes money from the register to pay for the products.

There is a camera that records customers at the cash register and a mirror so the person serving at the cash register can see most of the store.

Instructions

a) Prepare a list of control activity weaknesses over cash, explaining why each is a weakness and a suggestion as to how to improve. Use point form.

b) Prepare a list of items that are being done correctly and why they provide good control. Use point form.

Ex. 102

Listed below are six errors or problems that might occur in the processing of cash transactions. Also shown is a list of control activities. Evaluate each possible error and cite a control activity given that would reduce the probability of the error occurring. If none of the control activities given will correct the problem, write "None." If you think more than one control is appropriate, list all that apply.

Possible Errors or Problems

1. An employee steals the cash collected from a customer for an account receivable and conceals this theft by issuing a credit memorandum indicating that the customer returned the merchandise.

2. A small fire destroys 3 days of cash receipts.

3. The official designated to sign cheques is able to steal blank cheques and issue them to herself without fear of detection.

4. A salesclerk in serving customers often rings up a sale for less than the actual amount and then keeps the additional cash collected from the customer.

5. Three cashiers use one cash register drawer and the cash in the drawer is often short.

6. Each cashier counts his/her own register drawer each day and verbally reports the results to the supervisor.

Internal Control Activities

(a) Assignment of responsibility

(b) Segregation of duties

(c) Physical controls

(d) Documentation

(e) Review and reconciliation

Ex. 103

Due to limited staff resources, the Junior Accountant Alex Short has been collecting cash from customers, posting to the accounts receivable sub-ledger and making the deposit to the bank. Alex recently met with the Accounting manager to discuss and request a $5,000 raise in pay. The manager told Alex that he had a few concerns with his performance but if these issues could be overcome he would revisit the raise in 3-months. Dissatisfied with the manager’s response Alex stole $5,000 from the cash collected from customers. To cover his tracks he cleared the customer’s receivable from the sub-ledger by posting a debit to Cash and credit to accounts receivable; however, he never made the deposit and kept the funds for himself.

Instructions

How will the company discover that the $5,000 is missing? Discuss any internal control weaknesses in this situation and how the company could avoid this type of fraud in the future.

Ex. 104

The following information has been provided for Daniel Enterprises:

1. The company has $115,700 on deposit (available for use) in their chequing account with the bank.

2. The company has the following short-term investments:

(a) $20,000 in government Treasury bills that mature in 120 days

(b) $35,000 in money market funds that mature in 90 days

3. The company has a $25,000 line of credit on their chequing account with the bank.

4. A cheque was returned in the amount of $3,250.

5. The company has cash on hand in its cash registers for $2,100.

6. The company has $4,500 in stale-dated cheques.

7. The company has $23,600 in customer postdated cheques.

Instructions

Determine the amount of cash and cash equivalents that should be reported on Daniel’s statement of financial position. If any items are not to be included, identify the reason(s) why.

Ex. 105

The bank reconciliation for Burbank Ltd. showed the following deposits in transit and outstanding cheques at September 30, 2022:

Deposits in transit Outstanding cheques

Sept 28 $ 450 Sept 2 #110 $425.00

Sept 30 2,500 Sept 13 #109 750.00

Sept 23 #108 150.00

The general ledger Cash account for October 2022 show the following cheques issued and cash receipts:

Cheques Receipts

No. Amount No. Amount Amount

111 $525.00 116 $ 345.67 $ 436.50

112 147.10 117 1,428.83 728.30

113 58.00 118 876.92 326.45

114 681.93 119 2,128.32 1,452.28

115 210.25 586.22

In addition, the deposits and cheques that cleared the bank during the month of October is presented below:

Cheques and other debits Deposits

——————————————————————— -----------------

No. Amount No. Amount No. Amount

————————————————————————————————————————

109 750.00 111 525.00 116 345.67 2,500.00

110 425.00 117 1,428.83 450.00

113 85.00 119 2,128.32 436.50

114 681.93 728.30

115 210.25 326.45

————————————————————————————————————————

Instructions

Assuming no errors have been made by the company:

(a) Calculate the amount of the deposits in transit, identifying the individual items, at October 31.

(b) Calculate the amount of the outstanding cheques, identifying the individual items, at October 31.

Ex. 106

LFL Corp. has been implementing a financial system conversion project over the past year. The company is moving from its legacy system to an enterprise resource planning (ERP) system. The project was expected to be completed by September 30, 2022 but has now been extended to December 31, 2022. Given LFL’s small accounting & finance team, employees are strapped for time. Employees are trying to stay up to date with their regular daily activities while also devoting time to the implementation project. The Senior Accountant who is responsible for preparing the monthly bank reconciliation has fallen behind by 3-months.

Instructions

Explain the risks of not having the bank reconciliations up to date.

Ex. 107

Using the following information, prepare a bank reconciliation for Craven Corporation at July 31, 2022:

1. The unadjusted bank statement balance is $9,918.

2. The unadjusted cash account balance in the general ledger is $14,803.

3. Outstanding cheques totalled $1,755.

4. Deposits in transit are $6,525.

5. The bank service charge is $75.

6. A cheque for $294 for supplies was posted as $254 in the company’s general ledger.

Ex. 108

Using the following information, prepare a bank reconciliation for Biling Inc. at May 31, 2022:

1. The unadjusted bank statement balance is $7,200.

2. The unadjusted cash account balance is $6,024.

3. Outstanding cheques totalled $1,600.

4. Deposits in transit are $800.

5. The bank service charge is $24.

6. Electronic collections on account totalled $400.

Ex. 109

Given the following information, determine the reconciled cash balance per books.

1. Unadjusted balance per books at March 31, $9,700.

2. Outstanding cheques, $1,600.

3. NSF cheque returned with bank statement, $190.

4. Deposit placed in night deposit the evening of March 31 (not on bank statement), $750.

5. Cheque printing charges $45.

6. Interest earned on chequing account, $100.

Ex. 110

Seattle Coffee Limited's bank statement for the month of November 2022 showed a balance per bank of $7,000. The company's general ledger Cash account showed a balance of $5,659 at November 30. Other information is as follows:

1. Cash receipts for November 30 recorded on the company's books were $5,200, but this amount does not appear on the bank statement.

2. The bank statement shows a debit memorandum for $40 for cheque printing charges.

3. Cheque #119 payable in the amount of $248 to Holt Corporation was recorded in the general journal and cleared the bank for $248. A review of the accounts payable records shows a $36 credit balance in Holt’s account and that the total payment should have been for $284.

4. The total amount of cheques outstanding at November 30 was $5,800.

5. Cheque #138 was correctly written and paid by the bank for $409. The cash payment journal reflects an entry for Cheque #138 as a debit to Accounts Payable and a credit to Cash for $490.

6. The bank returned an NSF cheque from a customer for $560.

7. The bank statement included a deposit for $1,260, which represents the electronic collection of customer accounts which have not yet been recorded on the company’s books.

Instructions

(a) Prepare a bank reconciliation for Seattle Coffee Limited at November 30, 2022.

(b) Prepare any journal entries necessary as a result of the bank reconciliation.

Ex. 111

The bank statement for Indiana Inc. shows an unadjusted balance of $2,330 at June 30, 2022, while the unadjusted cash balance per books was $599. The following information pertains to the bank transactions for the company.

1. Deposits of $160, representing cash receipts of June 30, did not appear on the bank statement.

2. Outstanding cheques totalled $240.

3. Bank service charges for June were $9.

4. Electronic collections on account totalled $1,740, and have not yet been recorded by the company.

5. An NSF cheque for $80 from a customer was returned with the statement.

Instructions

(a) Prepare a bank reconciliation at June 30.

(b) Prepare any journal entries necessary as a result of the bank reconciliation.

Ex. 112

Smith’s Cafe Ltd. had the following information regarding its bank transactions for the month of April 2022:

Unadjusted balance per books April 30 $ 2,805

Unadjusted balance per bank statement April 30 11,400

1. Cheques written in April but still outstanding, $6,000.

2. Cheques written in March but still outstanding, $2,800.

3. Deposits of April 30 not yet recorded by bank, $6,100.

4. A customer’s cheque for $700 was returned by the bank as NSF.

5. Cheque #210 for $594 was correctly issued and paid by bank but incorrectly entered in the general journal as a payment on account for $549.

6. Bank service charge for April was $50.

7. A payment on account (Cheque #318) was incorrectly entered in the general journal and posted to the general ledger as $824. However it had been correctly prepared for $284. The cheque cleared the bank in April.

8. Electronic collections on account totalled $6,150, and have not yet been recorded by the company.

Instructions

Prepare a bank reconciliation for Smith’s Cafe Ltd. at April 30.

Ex. 113

Using the code letters below, indicate how each of the items listed would be handled in preparing a bank reconciliation. Enter the appropriate code letter in the space to the left of each item.

Code

A Add to cash balance per books

B Deduct from cash balance per books

C Add to cash balance per bank

D Deduct from cash balance per bank

E Does not affect the bank reconciliation

Items

1. Outstanding cheques

2. Bank service charge

3. Cheque for $320 correctly written and paid by the bank but incorrectly entered in the general journal for $230.

4. Deposit in transit

5. Bank returned a customer’s deposited cheque marked NSF.

6. Interest earned on bank account

7. Bank debit memorandum for cheque printing fees

8. Bank charged a cheque against the company, which should have been charged to another company.

9. A cheque for $236 was correctly paid by the bank but was incorrectly entered in the general journal for $263.

Ex. 114

The reconciled cash balance per books and per bank for Maddison Ltd. at November 30, 2022 is $13,211.55. The following cheques and receipts were recorded for the month of December, 2022:

Cheques Receipts

No. Amount No. Amount Amount Date

17 $423.22 22 $ 534.76 $ 985.5 Dec 5

18 981.23 23 1,924.43 846.52 21

19 126.00 24 876.92 722.63 27

20 622.50 25 218.05 1,328.00 31

21 342.15

In addition, the bank statement for the month of December is presented below:

Balance Amounts Deducted (Debits) Amounts Added (Credits) Balance

Last Statement No. Total Amount No. Total Amount This Statement

$7,111.98 10 $3,942.14 5 $10,339.03 $13,508.87

—————————————————————————————————————––——

Cheques and other debits Deposits Date Balance

———————————————————————

No. Amount No. Amount No. Amount

————————————————————————————————————————

14 184.81 17 423.22 22 534.76 6,284.38 Dec 1 $12,253.57

18 891.23 24 876.92 985.50 8 $11,470.92

19 126.00 25 218.05 846.52 23 $11,973.39

21 342.15 20.00 SC 722.63 29 $12,333.87

325.00 NSF 1,500.00 EFT 31 $13,508.87

————————————————————————————————————————

Symbols: NSF (Not sufficient funds) SC (Service charge) EFT (Electronic funds transfer)

————————————————————————————————————————

Cheque #18 was correctly written for $891.23 for a payment on account. The NSF cheque was from Mrs. W. Rask, a customer, in settlement of an account receivable. An entry had not been made for this. The EFT is for an electronic collection of accounts receivable in the amount of $1,500, which has not yet been recorded by the company. The bank service charge is $20.

Instructions

(a) Calculate the unadjusted cash balance per books at December 31, 2022.

(b) Prepare a bank reconciliation at December 31, 2022.

(c) Prepare any journal entries necessary as a result of the bank reconciliation.

Ex. 115

Graham Corporation’s bank statement included two types of electronic funds transfers (EFT). One type of EFT totalled $12,500 and was from customers paying their accounts online. Another type of EFT totalled $23,000 and was from Graham paying its accounts payable online.

Instructions

(a) How will each of these items affect Graham’s bank reconciliation, assuming the company does not record these until it receives the bank statement?

(b) Prepare the required journal entries, if any, that Graham will make to record the above information on its books.

Ex. 116

The cash records of Emmett Corp. show the following:

1. The January 31 bank reconciliation indicated that deposits in transit totalled $950. During February, the general ledger account, Cash, shows deposits of $14,500, but the bank statement indicates that only $12,000 in deposits were received during the month.

2. The January 31 bank reconciliation also reported outstanding cheques of $2,200. During February, Emmett Corp.’s books show that $13,900 of cheques were issued, yet the bank statement showed that $13,300 of cheques cleared the bank in February.

No errors were made by either the bank or Emmett Corp.

Instructions

(a) Calculate the amount of the deposits in transit at February 29.

(b) Calculate the amount of the outstanding cheques at February 29.

Ex. 117

The records of Western Cattle Co. Ltd. show the following:

1. In February, deposits per the bank statement totalled $18,850; deposits per books $19,500; and deposits in transit at February 28 were $1,400.

2. In February, cheques issued per books were $17,750; cheques clearing the bank were $18,400; and outstanding cheques at February 28 were $1,250.

No errors were made by either the bank or Western Cattle Co. Ltd.

Instructions

(a) Calculate the amount of the deposits in transit at January 31.

(b) Calculate the amount of the outstanding cheques at January 31.

Ex. 118

Listed below are items that may be useful in preparing the March 2022 bank reconciliation for Kelvin Industrial.

Using the code letters below, insert in the space before each item the letter where the amount would be located or otherwise treated in the bank reconciliation process.

Code Located or Treated

A Add to the cash balance per books

B Deduct from the cash balance per books

C Add to the cash balance per bank

D Deduct from the cash balance per bank

E Does not affect the bank reconciliation

1. Included with the bank statement materials was a cheque from Angus Reeds for $65 stamped "account closed."

2. The bank statement included a bank service charge of $45 in payment of the annual safety deposit box fee.

3. The bank statement included a bank service charge of $18 for three books of blank cheques for Kelvin Industrial.

4. The bank statement contains a credit of $38.00 for interest earned on the chequing account balance during the month.

5. The deposits of March 30 and March 31, for $4,282 and $4,391 respectively, were not included on the bank statement.

6. Two cheques totalling $742.44, which were outstanding at the end of February, cleared in March and were returned with the March statement.

7. The bank statement included a credit of $85 for the monthly interest on a certificate of deposit that the company owns.

8. Four cheques, #3416, #3420, #3422, #3423, totalling $7,412.32, did not clear the bank during March.

9. On March 24, $2,600 was credited by the bank to Kelvin Industrial bank account as an electronic funds transfer from a customer in payment of its account. This was not recorded in advance by the company.

10. On March 31,, Kelvin Industrial paid its $650 utility bill using the bank online payment system. As Kelvin Industrial initiated this payment, it recorded it in advance of receiving the bank statement.

Ex. 119

You have recently started a part time job in the accounting department of Home Energy Limited. The accountant, Joe Kool, had prepared the company's bank reconciliation for June 2022. After completing the reconciliation he made the following journal entry:

Jun 30 Cash 2,390

Bank Charges Expense 124

Accounts Receivable ($3,000 collection less $500 NSF) 2,500

Interest Income 14

Joe was reviewing the bank reconciliation with you when unfortunately, you spilled your coffee on it. He asks you to rewrite the reconciliation, in good form. He remembers that the only outstanding deposit was the last deposit for the month. You check the general ledger and the bank balance at June 30 was $24,527 (credit). You also check the bank statement and the balance was $22,314 (debit on the bank statement, that is, overdrawn). You look up the last deposit for the month—it was for $21,789.

Instructions

Using the above information prepare, in good form, the bank reconciliation for Home Energy Limited for June.

Ex. 120

The Cash account of Treasury Plus showed a balance of $65,332 on December 31. The bank statement as at that date showed a balance of $72,336. After comparing the bank statement with the company records, the following information was determined:

1. Deposits in transit as at December 31 amounted to $14,572.

2. Cheques issued in December but still outstanding at the end of the month amounted to $12,000. Cheques still outstanding from the month of November totalled $1,120.

3. The bank made a mistake in recording a payment received from a customer, overstating the funds deposited into the account by $112.

4. Electronic receipts from customers in payment of their accounts totalled $9,398. These receipts have not yet been recorded by the company.

5. The company made an error in recording a customer’s deposit in payment of its account. The company recorded the collection of the account as $418, when it should have been $580. The bank correctly recorded the deposit as $580.

6. The bank returned an NSF cheque in the amount of $956 that Oakville had deposited on December 20. The cheque was a payment on a customer’s account.

7. The bank debited Treasury Plus' account for service charges of $260. This included $90 for processing the NSF cheque (see item 6 above), and $170 for bank service charges and debit and credit card fees.

Instructions

Prepare a bank reconciliation for Treasury Plus at December 31.

Ex. 121

Fresno Place Limited reported the following selected items on July 31, 2022:

Instructions

Calculate the total of Fresno Place’s cash and cash equivalents.

Ex. 122

About eight months ago, your friend Minnie Minder started her own bookkeeping business. She caters to small businesses and has now developed a fairly large clientele. Yesterday, she called you and asked you to come over and give her some advice. It appears that although she has lots of business, she is having serious cash flow problems. “I can’t pay my bills!” she exclaims, “and I want to get a bank loan to get more up-to-date office equipment, but the bank won’t lend the business any money. Please come over and help me!”

So today you went to Minnie’s office, and asked to see her general ledger and her latest financial statements. Although the records are up to date, including the receivables and payables, Minnie admits she hasn’t had time to prepare any financial statements yet. You ask her about the receivables, and she agrees they are rather high, but all of her revenue is on account. She also adds that “The economy still isn’t very good, and most of my clients are self-employed tradesmen, and I hate to ask them for money when they’re having a tough time.”

You create a trial balance, based on the general ledger, which follows:

MINNIE MINDER ENTERPRISES

Trial Balance

(date)

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Dr Cr

Cash $ 3,375

Accounts receivable 56,250

Prepaid insurance 2,250

Supplies 3,500

Equipment 11,250

Vehicles 31,250

Accounts payable $ 17,625

Deferred revenue 10,125

Dividends declared 22,500

Common shares 18,750

Service revenue 137,500

Rent expense 40,000

Utilities expense 8,750

Salaries expenses 4,875 _______

Totals $184,000 $184,000

Notes:

The “official” credit terms for receivables and payables are n/30.

Instructions

Suggest ways that Minnie can improve her cash flows. Do not list generalities but address her specific situation.