Problem on Cash | Test Bank – 10e

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Student name:__________

FILL IN THE BLANK. Write the word or phrase that best completes each statement or answers the question.
1) A(n) ____________________________ refers to the policies and procedures managers use to protect assets, ensure reliable accounting, promote efficient operations, and uphold company policies.

2) When a company purchases an insurance policy against losses from theft by an employee, that employee is ________________.

3) Two sales clerks not being permitted to share the same cash register is an example of the internal control principle of _______________________.

4) A sales system with pre-numbered, controlled sales slips is an example of the internal control principle of _______________________.

5) A person who controls or has access to an asset must not have access to that asset's accounting records. This describes the internal control principle of ________________________.

6) Having external auditors test the company's financial records and evaluate the effectiveness of the internal control system is part of the internal control principle of ___________________.

7) Two limitations of internal control systems are ______________ and ________________.

8) ____________________ are short-term, highly liquid investment assets that are readily convertible to a known amount of cash.

9) ________________ includes currency, coins, and amounts on deposit in checking accounts and savings accounts.

10) The electronic transfer of cash from one party to another is called

11) A(n) __________________________ is a document telling the bank to pay a specified amount to a designated recipient.

12) On a bank statement, deposits are shown as __________________, because the depositor's account is a liability on the bank's records.

13) __________________________ is a measure of how quickly a company can convert its accounts receivable into cash.

14) The ________________________________ account is used to record the effects of cash overages and shortages from errors in making change or managing a petty cash fund.

15) A(n) ___________ is an internal document (or file) that is used to accumulate information to control cash payments.

16) A(n) ________________ fund is used to make cash payments of small amounts to avoid the time and cost of writing checks.

17) ________________ are checks written by the depositor, deducted on the depositor's records, and sent to the payee, but not yet turned in for payment at the bank statement date.

18) Deposits made and recorded by the depositor but not yet recorded on the bank statement are called _______________________.

19) A(n) ____________________ is a report explaining any differences between the checking account balance according to the depositor's records and the balance reported on the bank statement.

20) The document the purchasing department uses to place an order with a vendor is the __________________________.

21) The document prepared by the vendor that is an itemized statement of goods listing the customer's name, items sold, sales prices, and terms of the sale is the _________________.

22) The internal document that is used to notify the appropriate person that ordered goods have been received and to describe the quantities and condition of the goods is the _______________.

23) Document used to place an order with a vendor is a _________________________.

24) The __________ requires the managers and auditors of companies whose stock is traded on an exchange (called public companies) to document and verify the system of internal controls.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
25) Define an internal control system and describe its purpose.

26) List the principles of internal control.

27) Define cash and cash equivalents.

28) Describe the basic bank services that contribute to the control of cash and identify at least two internal control objectives served by the banking activities.

29) What is the purpose of the days' sales uncollected ratio?

30) What is a voucher system and what are the two areas for which it establishes control procedures?

31) Discuss how the principles of internal control apply to cash receipts over-the-counter by giving several examples of good control measures that should be implemented.

32) Discuss how the principles of internal control apply to cash receipts through the mail by giving several examples of good control measures that should be implemented.

33) Describe a petty cash account and its purpose.

34) Describe a bank reconciliation and discuss its purpose.

35) When using a voucher system, what are the steps on the invoice approval checklist that must be completed before an invoice approval is complete and a voucher prepared?

36) Describe the use and purpose of purchase requisitions?

37) The Sarbanes-Oxley Act (SOX) requires managers and auditors of companies whose stock is traded on an exchange to document and verify internal controls. What are the specific requirements for auditors set forth by Sarbanes-Oxley Act (SOX)?

38) The treasurer of a company is responsible for cash management. List five cash management strategies that are essential for effective cash management.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
39) For each of the independent cases below, identify the principle of internal control that is violated, and recommend what should be done to remedy the violation.

1. In order to save money, Indigo Company has decided to drop its property insurance on assets; and stop bonding the cashiers who handle upwards of $5,000 in cash each day.
2. Jobs Company records each sale on a preprinted invoice. Because invoices are sometimes damaged in the process of preparation, the invoices are not prenumbered. Instead, the sales clerk writes the next number on each invoice as it is prepared.
3. Keegan Company is a very small business. Dylan Epps, one of the two office clerks, opens the mail each day and removes the cash receipts that come in the mail. Dylan also records the receipts in the cash records and the customer's account and deposits the cash in the bank.
4. Ludwig Company prides itself on hiring only the most competent employees. The owner, Jeremy Ludwig, believes that since the employees are highly competent he can show he trusts them completely by not checking up on their performance.
5. Maple Industries is a small business with three accounting employees. Each employee is well-trained and able to perform any of the accounting tasks, including handling cash receipts and cash payments, and preparing the bank reconciliation. Because of this cross-training, the employees share responsibilities for all of the tasks.

40) At the end of the current period, a company reported $725,000 in net sales and $100,000 in accounts receivable. Calculate this company's days' sales uncollected at the end of the current period.

41) Norman Company had $6,000 million in net sales and $1,200 million in accounts receivable for the current period. For the same period, Opal Company reported $6,400 million in net sales and $768 million in accounts receivable. Calculate the days' sales uncollected for both companies as of the end of the current period and indicate which company is doing a better job in managing the collection of its receivables.

42) A company reported net sales for Year 1 of $250,000 and $545,000 for Year 2. The year-end balances of accounts receivable were $40,000 for Year 1 and $98,100 for Year 2. Calculate the days' sales uncollected at the end of each year for this company and describe any changes in the apparent liquidity of the company's receivables.

43) At the end of the day on March 15, the cash register's record shows $1,957, but the count of cash in the register is $1,951. Prepare the general journal entry to record the day's cash sales.

44) Plenty Company established a petty cash fund of $150 on October 1. On October 10, the petty cash fund was replenished when there was $49 remaining and there were petty cash receipts for: office supplies, $47; transportation-in on inventory purchased, $32; and postage, $22. On October 15, the petty cash fund was decreased to $125 in total. Plenty Company uses the perpetual inventory system. Record the above transactions in general journal form.

45) A petty cash fund was originally established with a check for $100. On August 31, which is the period end, the petty cash fund included the following:

Prepare the general journal entry to record the replenishment of the petty cash fund on August 31.

46) Quibble Company established a $300 petty cash fund by issuing a check to the custodian on February 1. On February 15, the petty cash fund was replenished and increased to $800 in total. The contents of the petty cash fund at the time of the February 15 replenishment were:

The company uses the perpetual inventory method. Prepare Quibble's general journal entry to record both the reimbursement and the increase of the petty fund on February 15.

47) On March 1, a company established a $75 petty cash fund. On March 12, the petty cash fund contains $3 in cash and the following paid petty cash receipts: transportation-in on merchandise inventory $14.25; postage, $19.50; and office supplies, $36. Give the general journal entry to reimburse the fund and to increase its amount to $150 on March 12.

48) On June 1, a company established a $75 petty cash fund. On June 27, the petty cash fund contains $5.25 in cash and the following paid petty cash receipts: postage, $19.50; office supplies, $36.25; and miscellaneous expense $14.00. Give the general journal entry to reimburse the fund on June 27.

49) A company established a petty cash fund in November of the current year and experienced the following transactions affecting the fund during November:

Prepare the journal entries to establish the fund on November 1 and to reimburse the fund on November 28.

50) Following are seven items a through g that would cause Rembrandt Company's book balance of cash to differ from its bank statement balance of cash.

a. A service charge imposed by the bank.
b. A check listed as outstanding on the previous period's reconciliation and still outstanding at the end of this month.
c. A customer's check returned by the bank is marked "Not Sufficient Funds (NSF)".
d. A deposit mailed to the bank on the last day of the current month and not recorded on this month's bank statement.
e. A check paid by the bank at its correct $190 amount recorded in error in the company's check register at $109.
f. The bank collected a note receivable for Rembrandt Company and deposited the proceeds in the company's account. At period end, Rembrandt had yet to record this deposit.
g. A check written in the current period that is not yet paid or returned by the bank.

Indicate where each item, letters a-g, would appear on Rembrandt Company's bank reconciliation by placing its identifying letter in the parentheses in the proper section of the form below.

51) The following information is available for the Savvy Company for the month of June.

a. On June 30, after all transactions have been recorded, the balance in the company's Cash account has a balance of $17,202.
b. The company's bank statement shows a balance on June 30 of $19,279.
c. Outstanding checks at June 30 total $2,984.
d. The bank collected $770 on a note receivable that is not yet recorded by Savvy Company.
e. A $67 NSF check from a customer, J. Maroon is shown on the bank statement but not yet recorded by the company.
f. A deposit placed in the bank's night depository on June 30 totaling $1,675 did not appear on the bank statement.
g. Comparing the checks on the bank statement with the entries in the accounting records reveals that check #3445 for the payment of an account payable was correctly written for $2,450, but was recorded in the accounting records as $2,540.
h. Included with the bank statement was a bank service charge in the amount of $25 . It has not been recorded on the company's books.

1. Prepare the June bank reconciliation for the Savvy Company.
2. Prepare the general journal entries to bring the company's book balance of cash into conformity with the reconciled balance as of June 30.

52) The following information is available for the Topper Company for the month of July.

a. On July 31, after all transactions have been recorded, the balance in the company's Cash account has a balance of $15,244.
b. The company's bank statement shows a balance on July of $16,450.
c. Outstanding checks at July total $2,063.
d. A note receivable is collected by the bank for $570, but it is not yet recorded by Topper Company.
e. A $107 NSF check from a customer, P. Flank is shown on the bank statements, but not yet recorded by Topper.
f. A deposit placed in the bank's night depository on July 31 totaling $1,275 did not appear on the bank statement.
g. Bank fees of $45 for check printing are not yet recorded by Topper Company.

Prepare the July bank reconciliation for the Topper Company.

53) Umber Company's bank reconciliation for September is presented below. Prepare the necessary adjusting journal entries based on the reconciliation report.

54) The following information is available for the Victor Company for its March 31 bank reconciliation:

From the March 31 bank statement:

NSF: A check from a customer, Booker Company in payment of their account.
IN: Interest earned on the account.

From the Victor Company's accounting records:

1. Based on the above information, prepare a bank reconciliation for the Victor Company.
2. Prepare the necessary general journal entries to adjust cash to the reconciled balance.

55) Zhang company uses a voucher system for documentation and verification. Complete the following grid regarding their system.

56) Determine whether each of the following is an internal control strength or weakness

1. Receiving department manager places an order with the vendor for merchandise inventory.
2. A voucher is used to certify a transaction and authorize recording of the liability.
3. Goods are received by the receiving department and documented with a receiving report.
4. Accounting department pays the vendor invoices before goods are received.
5. Invoices are paid after completion of the invoice approval documenting the purchase requisition, purchase order, receiving report, invoice, and approval for payment.

57) The following items a through f would cause Samson Company's book balance of cash to differ from its bank statement balance of cash.

a. A check printing charge imposed by the bank.
b. A check listed as outstanding on the previous period's reconciliation and still outstanding at the end of this month.
c. A deposit made on the last day of the month was not included on the bank statement.
d. A customer’s check was returned for insufficient funds (NSF).
e. A check written in the current period has not yet been paid or returned by the bank.
f. A note receivable was collected by the bank and added to Samson’s account.

Indicate where each item, letters a-f, would appear on Samson Company's bank reconciliation by placing its identifying letter in the parentheses in the proper section of the form below.

58) The following information is available for Bosch Company for the month of May.

a. On May 31, after all transactions have been recorded, the balance in the company's Cash account has a balance of $6,322.
b. The company's bank statement shows a balance on July of $6,450.
c. Outstanding checks total $63.
d. A $47 NSF check from a customer, T. Shannon is shown on the bank statement but not yet recorded by Bosch Company.
e. A deposit placed in the bank's night depository on May 31 totaling $275 did not appear on the bank statement.
f. Bank fees for check printing of $45 are not yet recorded by Bosch Company.
g. A note receivable for $432 is collected by the bank for Bosch Company, but it not yet recorded by Bosch Company.

Prepare the May bank reconciliation for the Bosch Company.

59) Bosch Company's bank reconciliation for May is presented below. Prepare the necessary adjusting journal entries based on the reconciliation report.

60) The following information is available to reconcile Dibble Company's book balance of cash with its bank statement cash balance as of April 30. The April 30 cash balance according to the accounting records is $68,356, and the bank statement cash balance for that date is $73,525.

a. The bank erroneously cleared a $480 check against the account in April that was not issued by Dibble. The check documentation included with the bank statement indicates the check was actually issued by Flushing company
b. $53 interest earned on Dibble's cash balance in the bank is not yet recorded by Dibble.
c. When the April checks are compared with entries in the accounting records, it is found that Check Number 1828 had been correctly drawn for $1,530 to pay for advertising but was erroneously entered in the accounting records as $1,350.
d. The bank collected $9,970 cash on a note receivable for Dibble. Dibble did not record this transaction before receiving the statement.
e. The bank statement includes an NSF check for $895 received from a customer. Dibble did not record this NSF check before receiving the statement.
f. Dibble's April 30 daily cash receipts of $5,102 were placed in the bank's night depository on that date, but do not appear on the April 30 bank statement.
g. Dibble's April 30 cash payments journal indicates that Check Number 1837 for $584 and Check Number 1840 for $1,219 were both written and entered in the accounting records, but are not among the canceled checks.

1. Prepare the bank reconciliation for this company as of April 30.
2. Prepare the journal entries necessary to bring the company's book balance of cash into conformity with the reconciled cash balance as of April 30.

61) The following account balances are taken from Everest Events at December 31.

Calculate the number of days' sales uncollected for both years. According to this analysis, is the company's collection of receivables improving? Explain.

62) The following account balances are taken from Ferguson Sports at December 31.

Calculate the number of days' sales uncollected for both years. According to this analysis, is the company's collection of receivables improving? Explain.

63) On May 1, a company established a $125 petty cash fund. On May 22, the petty cash fund contains $6 in cash and the following paid petty cash receipts: transportation-in on merchandise inventory $25; postage, $21; and office supplies, $66. Record the general journal entry to reimburse the fund.

64) A company established a petty cash fund in April of the current year and experienced the following transactions affecting the fund during April. Prepare journal entries to establish the fund on April 1, to replenish it on April 25, and to record the increase in the fund on April 25.

65) The following information is available to reconcile Hinckley Company's book balance of cash with its bank statement cash balance as of June 30. The June 30 cash balance according to the accounting records is $57,542, and the bank statement cash balance for that date is $67,047.

a. The bank erroneously cleared a $295 check against the account in June that was not issued by Hinckley. The check documentation included with the bank statement indicates the check was actually issued by Dancer company.
b. $35 interest earned on Hinckley's cash balance in the bank is not yet recorded by Hinckley.
c. When the June checks are compared with entries in the accounting records, it is found that Check Number 1727 had been correctly drawn for $1,450 to pay for advertising but was erroneously entered in the accounting records as $1,540.
d. The bank collected $8,970 cash on a note receivable for Hinckley. Hinckley did not record this transaction before receiving the statement.
e. An $865 NSF check received from a customer is shown on the bank statement, but not yet recorded by Hinckley Company.
f. Hinckley's June 30 daily cash receipts of $6,425 were placed in the bank's night depository on that date, but do not appear on the June 30 bank statement.
g. Hinckley's June 30 cash payments journal indicates that Check Number 1737 for $4,830 and Check Number 1740 for $3,280 were both written and entered in the accounting records, but are not among the canceled checks.
h. The bank lock box fee for $115.00 is shown on the bank statement, but not yet recorded by Hinckley Company.

1. Prepare the bank reconciliation for this company as of June 30.
2. Prepare the journal entries necessary to bring the company's book balance of cash into conformity with the reconciled cash balance as of June 30.

Answer Key

Test name: John Wild Ch06 Problem Material

1) internal control system

2) bonded

3) establish responsibilities

4) maintain adequate records

5) separate recordkeeping from custody of assets

6) perform regular and independent reviews

7) [human error/human fraud, the cost-benefit constraint]

8) Cash equivalents

9) Cash

10) electronic fund transfer or EFT

11) check

12) credits

13) Days' sales uncollected or Days' sales uncollected ratio

14) Cash Over and Short

15) voucher

16) petty cash

17) Outstanding checks

18) deposits in transit

19) bank reconciliation

20) purchase order

21) invoice

22) receiving report

23) purchase order

24) Sarbanes-Oxley Act or SOX

25) An internal control system refers to the policies and procedures used to monitor and control business activities. It is designed to protect the firm's assets and to ensure reliable accounting. It also should promote efficient operations and urge employees to comply with company policies. Internal control systems can help prevent losses, help managers plan operations, and monitor company and employer performance.

26) Principles of internal control include establishing responsibilities, maintaining adequate records, insuring assets and bonding key employees, separating recordkeeping from custody of assets, dividing responsibilities for related transactions, applying technological controls, and performing regular and independent reviews.

27) Cash includes currency, coins, deposits in bank accounts, checking accounts, and savings accounts. Cash also includes items that can be deposited in bank accounts such as customer checks, cashier’s checks, certified checks, and money orders. Cash equivalents are short-term, highly liquid investment assets that meet the two specific criteria of being readily convertible to a known cash amount and being close enough to their due date so that their market value will not greatly change. Examples of short-term investments include certificates of deposits and government treasury bills.

28) Basic bank services can be organized into the bank account, deposit services, and checking services. A bank account is a record set up by a bank permitting a customer to deposit money for safekeeping and helps control withdrawals. All persons authorized to write checks on the account must sign a signature card used to verify signatures on checks. Bank deposits are supported by a deposit ticket as proof of the deposit. The internal control objectives aided by the basic bank services include safeguarding of cash, record keeping, technological controls, independent review, and divided responsibility for transactions. Any two of the internal control objectives are acceptable as an answer in the second part of the question.

29) The days' sales uncollected ratio is a liquidity measure. It is used to estimate how quickly a company can convert its accounts receivable into cash. The measure is also valuable in comparing ratios from other companies in the same industry and as a means to compare current with prior years' performance.

30) A voucher system is a set of procedures and approvals designed to control cash payments and acceptance of liabilities. The voucher system establishes control procedures for verifying, approving, and recording liabilities for eventual cash payment and for issuing checks for payment of verified, approved, and recorded liabilities.

31) Internal control principles as applied to cash receipts should ensure that all cash received is properly recorded and deposited. Cash receipts generated via over-the-counter sales should be recorded on a cash register at the time of sale. The register should be located so customers can read the amounts entered, and clerks should give the customers a receipt for each sale. Custody of the cash should be separate from its recordkeeping, which means the clerk and cashier have access to the cash in the register, but a separate third employee without access to the cash has access to the cash register tape or file. The cash in the register should be compared to the cash register tape or file daily to reveal discrepancies. This meets the internal control principles of establishing responsibilities and dividing responsibility for related transactions.

32) Internal control principles as applied to cash receipts should ensure that all cash received is properly recorded and deposited. Control of cash receipts generated through the mail starts with the person who opens the mail. Responsibilities for receipt of cash receipts through the mail should include two people who are assigned to open mail and prepare a list in triplicate that includes the sender's name, amount, and explanation for the payment. One copy of the list is sent to the cashier, a second copy to the recordkeeper in the accounting area, and a third copy is kept by the clerks who opened the mail. The cashier deposits the money in the bank, and the recordkeeper records amounts received in the accounting records. This meets the internal control principles of establishing responsibilities and dividing responsibility for related transactions.

33) The petty cash account is established to avoid the time and cost of writing checks for small amounts such as postage, courier fees, minor repairs, and low-cost supplies. It serves as a controlling account for such small cash payments.

34) A bank reconciliation is a report explaining any differences between the checking account balance according to a depositor's records and the balance reported on the bank statement. It can be used to prove the accuracy of a company's cash records. The balance of a checking account reported on the bank statement rarely equals the balance in the depositor's accounting records due to information that one part has that the other does not, or due to potential errors. The reconciliation procedure examines the differences based on the information available to the company and adjusts for the differences. It also serves as a format for the discovery and correction of errors.

35) There are four steps that must be completed for an invoice approval. The requisition check determines whether the items on the invoice are requested per the purchase requisition. The purchase order check determines whether the items on the invoice are ordered per the purchase order. The receiving report check determines whether the items on the invoice are received per the receiving report. Finally, the invoice check determines whether the invoice prices are as agreed with the vendor, the invoice has no mathematical errors, and the terms are as agreed with the vendor.

36) Purchase requisitions are used to divide responsibility. A department manager informs the purchasing department of its needs by preparing and signing a purchase requisition. The purchase requisition lists the merchandise requested to be purchased.

37) Companies must have effective internal control systems established. Auditors must evaluate a company’s internal controls. The work performed by auditors is overseen by the Public Company Accounting Oversight Board (PCAOB). Harsh penalties exist for violators, including fines and prison sentences of up to 25 years

38) Encourage collection of receivables by such means as offering discounts for early payment; delay payment of liabilities as long as possible without losing discounts or damaging credit standing; keep only necessary levels of assets to have less money tied up; plan expenditures for when cash is available; invest excess cash in interest bearing accounts or short-term investments to earn income.

39) 1. Insure assets and bond key employees. Even though it may save money in the short run, insurance protects the company if assets are stolen. Bonding reduces the risk of loss from the theft of cash by employees. It also discourages theft because bonded employees know that an independent company will be involved when a theft is discovered. It is unlikely that the bonding company will be sympathetic to any employee involved in the theft.<br> 2. Maintain adequate records. All important documents, including sales invoices, should be pre-numbered. This will help ensure that all sales are recorded and that salespeople cannot pocket cash from a sale and destroy the sales invoice.<br> 3. Divide responsibility for related transactions. Dylan has too many responsibilities with respect to cash. He controls the cash and maintains the records of cash. These responsibilities with respect to cash should be split up among several employees. One person should open the mail (ideally with a second employee present) and prepare a list in triplicate that indicates each sender's name, the amount sent, and an explanation of why the money was sent. One copy goes to the cashier with the money. The cashier deposits the money in the bank and records the amounts received in the accounting records for cash. The second copy goes to the record keeper in the accounting area who records the amounts in the customer's records. The third copy stays with the person who opens the mail. Dylan may carry out one of these tasks, but not all of them.<br> 4. Perform regular and independent reviews. Even the most competent person sometimes makes mistakes. Sometimes individuals who appear honest may turn out not to be. Jeremy should set up regular, independent reviews of each employee's performance to evaluate possible errors and to ensure that procedures are followed.<br> 5. Establish responsibilities. Each employee should be assigned specific tasks. Now, if a problem occurs, it is difficult to know who is at fault. It is hard to hold employees accountable for their actions if it cannot be determined who is responsible for the action.

40) Days' Sales Uncollected Ratio = Accounts Receivable/Net Sales × 365
Days' Sales Uncollected Ratio = $100,000/$725,000 × 365 = 50.3 days

41) Days' Sales Uncollected Ratio = Accounts Receivable/Net Sales × 365

Norman: ($1,200 million/$6,000 million) × 365 = 73.0 days
Opal: ($768 million/$6,400 million) × 365 = 43.8 days

Opal is doing a better job of collecting its receivables in a timely manner.

42) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Credit Sales × 365

Year 1: ($40,000/$250,000) × 365 = 58.4 days
Year 2: ($98,100/$545,000) × 365 = 65.7 days

The increase of 7.3 days means that this company is less effective in its management of receivables and its liquidity position in Year 2 compared to Year 1.

43)