Survey of Accounting 7Th Edition By Carl Warren – Test Bank

Complete Test Bank With Answers

 

 

Sample Questions Posted Below

 

CHAPTER 5: SARBANES-OXLEY, INTERNAL CONTROL, AND

CASH

a. True

b. False

1. The Sarbanes-Oxley Act of 2002 applies to all publicly held companies.

ANSWER: True

2. The Sarbanes-Oxley Act of 2002 requires companies to maintain strong and effective internal

controls over recording transactions and preparing financial statements.

a. True

b. False

ANSWER: True

3. The Sarbanes-Oxley Act requires companies and their independent accountants to report on

the effectiveness of the company’s internal controls.

a. True

b. False

ANSWER: True

4. Employee fraud is the intentional act of deceiving an employer for personal gain.

a. True

b. False

ANSWER: True

5. All organizations face risks, and the assessment of these risks is necessary so that the

objectives of internal control can be achieved.

a. True

b. False

ANSWER: True

6. The internal control environment is enhanced by the hiring and retention of competent, honest

employees.

a. True

b. False

ANSWER: True

7. There are only two internal control objectives: to ensure accurate financial reports, and to

ensure compliance with applicable laws.

a. True

b. False

ANSWER: False

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

8. Separating the responsibilities for purchasing, receiving, and paying for equipment is an

example of the control procedure: separating operations, custody of assets, and accounting.

a. True

b. False

ANSWER: True

9. Adding a review of operations by an internal audit staff weakens internal control.

a. True

b. False

ANSWER: False

10. Information and communication are essential elements of an organization’s internal control.

a. True

b. False

ANSWER: True

11. Money orders are considered cash.

a. True

b. False

ANSWER: True

12. If a business has several bank accounts, it will have a separate record for each of them.

a. True

b. False

ANSWER: True

13. A customer’s check received in settlement of an account receivable is considered cash.

a. True

b. False

ANSWER: True

14. For a strong internal control system over cash, it is important to have the duties related to cash

receipts and cash payments divided among different employees.

a. True

b. False

ANSWER: True

15. A remittance advice is the notification accompanying the check issued to a creditor that states

the specific invoice being paid.

a. True

b. False

ANSWER: True

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

16. A voucher is a written authorization to make a cash payment.

a. True

b. False

ANSWER: True

17. A voucher system is an example of an internal control procedure over cash receipts.

a. True

b. False

ANSWER: False

18. A voucher is a form where pertinent data about a liability and the particulars of its payment are

recorded.

a. True

b. False

ANSWER: True

19. A voucher system is an example of an internal control procedure over cash payments.

a. True

b. False

ANSWER: True

20. In a computerized system, paid vouchers are transferred to a paid voucher file.

a. True

b. False

ANSWER: True

21. A voucher is the notification accompanying the check issued to a creditor that indicates the

specific invoice being paid.

a. True

b. False

ANSWER: False

22. Internal control is enhanced by combining the control of a transaction with the record-keeping

function.

a. True

b. False

ANSWER: False

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

23. For efficiency of operations and better control over cash, a company should maintain only one

bank account.

a. True

b. False

ANSWER: False

24. The bank informs the depositor of bank service charges by including a credit memorandum

with an monthly bank statement.

a. True

b. False

ANSWER: False

25. Bank customers are considered owners of the bank, so the bank shows their accounts as an

asset on the bank’s records.

a. True

b. False

ANSWER: False

26. A credit memorandum received with a bank statement means the company’s bank account has

been increased.

a. True

b. False

ANSWER: True

27. Depositing all cash, checks, etc. in a bank and paying with checks is an internal control

procedure over cash.

a. True

b. False

ANSWER: True

28. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the cash

balance per bank.

a. True

b. False

ANSWER: False

29. The bank section begins with the cash balance according to the bank statement and ends with

the adjusted balance.

a. True

b. False

ANSWER: True

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

30. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank

service charges is added to the cash balance per books.

a. True

b. False

ANSWER: False

31. In preparing a bank reconciliation, the amount of a canceled check omitted from the

depositor’s records is deducted from the cash balance per books.

a. True

b. False

ANSWER: True

32. The amount of the “adjusted balance” appearing on a bank reconciliation as of a given date is

the amount that is shown on the balance sheet for that date after all adjusting entries have been

entered.

a. True

b. False

ANSWER: True

33. The data needed to adjust a depositor’s books are shown in the “adjustments to the depositor’s

records” section of a bank reconciliation.

a. True

b. False

ANSWER: True

34. All bank memorandums reported on the bank reconciliation require entries in the depositor’s

accounts.

a. True

b. False

ANSWER: True

35. A bank reconciliation is an important part of the system of internal controls.

a. True

b. False

ANSWER: True

36. Outstanding checks are checks that have been issued but have not cleared by the bank.

a. True

b. False

ANSWER: True

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

37. The bank reconciles its statement to the depositor’s records.

a. True

b. False

ANSWER: False

38. The depositor reconciles the bank’s statement to the depositor’s records.

a. True

b. False

ANSWER: True

39. A check for $456 was erroneously charged by the bank as $654. In order for the bank

reconciliation to balance, you must subtract $198 from the bank statement balance.

a. True

b. False

ANSWER: False

40. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the cash

balance per books.

a. True

b. False

ANSWER: False

41. In preparing a bank reconciliation, the amount of outstanding checks is deducted from the cash

balance per books.

a. True

b. False

ANSWER: False

42. In preparing a bank reconciliation, the amount indicated by a credit memorandum for a note

receivable collected by the bank is added to the cash balance per books.

a. True

b. False

ANSWER: True

43. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank

service charges is deducted from the cash balance per bank.

a. True

b. False

ANSWER: False

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

44. A debit memorandum from the bank indicates that the bank has deducted an amount from the

depositor’s account.

a. True

b. False

ANSWER: True

45. A business that requires all cash payments be made by check cannot use a petty cash system.

a. True

b. False

ANSWER: True

46. When the petty cash fund is replenished, the petty cash account is adjusted for the total of all

expenditures made since the fund was last replenished.

a. True

b. False

ANSWER: False

47. Minimum cash balance maintained in the bank account is called line of credit.

a. True

b. False

ANSWER: False

48. Money market funds, commercial paper, and U.S. Treasury Bills are examples of cash

equivalents.

a. True

b. False

ANSWER: True

49. The purpose of the Sarbanes-Oxley Act of 2002 is to:

a. restore public confidence and trust in the financial statements of publicly held companies.

b. require all companies to prepare financial statements.

c. protect companies from demands of investors, stockholders, and creditors.

d. do all of these.

ANSWER: a

50. The Sarbanes-Oxley Act of 2002 requires companies and their independent accountants to:

a. report on the effectiveness of the company’s internal controls.

b. report on any fraud and theft detected in the company.

c. report on the state of the economy and likelihood of fraud.

d. report on the financial activities of the company.

ANSWER: a

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

51. The framework that has become widely accepted as the standard by which companies design,

analyze, and evaluate internal controls is the:

a. Internal Control – Integrated Framework by the Committee of Sponsoring Organizations.

b. Internal Control – Integrated Framework by the Congress of Special Offerings.

c. Internal Control Localized Structure by the Committee of Sponsoring Organizations.

d. Internal Control Localized Structure by the Congress of Special Offerings.

ANSWER: a

52. Internal controls are important because they:

a. deter fraud and prevent misleading financial statements.

b. eliminate fraud.

c. ensure that the company maintains a compensating balance.

d. guarantee accurate financial statements.

ANSWER: a

53. Which of the following 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 the collecting and recording of cash.

ANSWER: d

54. Internal control consist of policies and procedures that .

a. involve cost-benefit considerations

b. deal with human element of controls such as, fatigue, carelessness, etc.

c. ensure public relations

d. ensure the accuracy of business information

ANSWER: d

55. Which of the following is a factor influencing about internal control environment?

a. management’s operating style.

b. organizational behavior.

c. mandatory vacations.

d. security measures.

ANSWER: a

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

56. , which constitute one of the most important elements of internal control, include

separating operations, custody of assets, and accounting.

a. Risk assessment

b. Control Procedures

c. Control environment

d. Monitoring

ANSWER: b

57. An element of internal control is:

a. risk assessment.

b. journals.

c. subsidiary ledgers.

d. controlling accounts.

ANSWER: a

58. Risks can be analyzed to:

a. assess their likelihood of occurring.

b. separate responsibilities for related operations.

c. observe employees’ behavior and the accounting system.

d. ensure compliance with reporting, legal, and regulatory requirements.

ANSWER: a

59. An element of internal control is:

a. generally accepted accounting principles.

b. control procedures.

c. special-purpose fund.

d. electronic funds transfer.

ANSWER: b

60. An element of internal control is:

a. business.

b. management.

c. monitoring.

d. personnel policies.

ANSWER: c

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

61. Which element of internal control observes employees’ behavior and the accounting system

for indicators of control problems?

a. Control environment

b. Risk assessment

c. Control procedures

d. Monitoring

ANSWER: d

62. Separating the custody of assets from accounting for assets is a part of which element of

internal control?

a. Information and communication

b. Monitoring

c. Control environment

d. Control procedures

ANSWER: d

63. Which of the following elements of internal control focuses on locating weaknesses and

improving control effectiveness?

a. Control environment

b. Risk assessment

c. Control procedures

d. Monitoring

ANSWER: d

64. When a firm uses internal auditors, it is adhering to which of the following internal control

elements?

a. Risk assessment

b. Control procedures

c. Monitoring

d. Information and communication

ANSWER: c

65. Which of the following of internal control deals with hiring, training, evaluation,

compensation, and promotion of employees?

a. Monitoring

b. Control environment

c. Risk assessment

d. Control procedures

ANSWER: b

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

66. Which of the following is considered as cash?

a. Commercial papers

b. Bonds

c. Checks

d. Equities

ANSWER: c

67. Which of the following is true of EFT?

a. It cost more than receiving cash payments through the mail.

b. It can process certain cash transactions at less cost than by using the mail.

c. It is easy to document purchase and sale transactions.

d. It means Effective Funds Transfer.

ANSWER: b

68. A voucher:

a. is received from customers to explain the purpose of a payment.

b. is normally prepared in the Accounting Department.

c. system is used to control cash receipts.

d. system is an internal control procedure to verify that the assets in the records are the ones

the company owns.

ANSWER: b

69. On the bank’s accounting records, customers’ accounts are normally shown as a(n):

a. revenue.

b. liability.

c. asset.

d. expenses.

ANSWER: b

70. A credit memorandum from the bank :

a. decreases a bank customer’s account.

b. is used to show a bank service charge.

c. shows that a company has deposited a customer’s NSF check.

d. shows the bank has collected a note receivable for the customer.

ANSWER: d

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

71. A check drawn by a depositor for $295 in payment of a liability was recorded in the

depositor’s book as $925. The $630 difference would be included on the bank reconciliation as

a(n):

a. addition to the cash balance per books.

b. addition to the cash balance per bank.

c. deduction from the cash balance per bank.

d. deduction from the cash balance per books.

ANSWER: a

72. A check drawn by a depositor for $915 in payment of a liability was recorded in the

depositor’s book as $195. What adjustment is required in the depositor’s accounts?

a. Decrease Accounts Payable; decrease Cash

b. Increase Cash; decrease Accounts Receivable

c. Increase Cash; increase Accounts Payable

d. Increase Accounts Receivable; decrease Cash

ANSWER: a

73. A bank reconciliation should be prepared periodically because:

a. the depositor’s records and the bank’s records are in agreement.

b. the bank has not recorded all of its transactions.

c. any differences between the depositor’s records and the bank’s records should be

determined, and any errors made by either party should be discovered and corrected.

d. the bank must make sure that its records are correct.

ANSWER: c

74. The bank reconciliation:

a. should be prepared by an employee who records cash transactions.

b. is part of the internal control system.

c. is for information purposes only.

d. is sent to the bank for verification.

ANSWER: b

75. Accompanying the bank statement was a debit memorandum for bank service charges. What

adjustment is required in the depositor’s accounts?

a. Increase Miscellaneous Expense; decrease Cash

b. Increase Cash; increase Other Income

c. Increase Cash; increase Accounts Payable

d. Decrease Accounts Payable; decrease Cash

ANSWER: a

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

76. Receipts from cash sales of $5,700 were recorded incorrectly by the depositor as $7,500. The

$1,800 difference would be included on the bank reconciliation as a(n):

a. addition to the cash balance per books.

b. addition to the cash balance per bank.

c. deduction from the cash balance per bank.

d. deduction from the cash balance per books.

ANSWER: d

77. Receipts from cash sales of $7,500 were recorded incorrectly by the depositor as $5,700. What

adjustment is required in the bank’s accounts?

a. Decrease Sales; decrease Cash

b. Increase Cash; decrease Accounts Receivable

c. Increase Cash; increase Sales

d. No adjustment needed

ANSWER: d

78. Accompanying the bank statement was a credit memorandum for a short-term note collected

by the bank for the depositor. This item would be included on the bank reconciliation as a(n):

a. deduction from the cash balance per books.

b. addition to the cash balance per bank.

c. deduction from the cash balance per bank.

d. addition to the cash balance per books.

ANSWER: d

79. Accompanying the bank statement was a credit memorandum for a short-term note collected

by the bank for the customer. What adjustment is required in the depositor’s accounts?

a. Increase Notes Receivable; decrease Cash

b. Increase Cash; increase Miscellaneous Income

c. Increase Cash; decrease Notes Receivable

d. Increase Accounts Receivable; decrease Cash

ANSWER: c

80. The amount of the outstanding checks is included on the bank reconciliation as a(n):

a. deduction from the cash balance per books.

b. addition to the cash balance per bank.

c. deduction from the cash balance per bank.

d. addition to the cash balance per books.

ANSWER: c

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

81. What adjustment is required in the depositor’s accounts to record outstanding checks?

a. None

b. Increase Cash; decrease Accounts Receivable

c. Increase Cash; increase Accounts Payable

d. Increase Accounts Receivable; decrease Cash

ANSWER: a

82. Accompanying the bank statement was a debit memorandum for an NSF check received from

a customer. This item would be included on the bank reconciliation as a(n):

a. deduction from the cash balance per books.

b. addition to the cash balance per bank.

c. deduction from the cash balance per bank.

d. addition to the cash balance per books.

ANSWER: a

83. A check drawn by a depositor for $810 in payment of a liability was recorded by the depositor

as $180. The $630 difference would be included on the bank reconciliation as a(n):

a. addition to the cash balance per books.

b. addition to the cash balance per bank.

c. deduction from the cash balance per bank.

d. deduction from the cash balance per books.

ANSWER: d

84. The amount of deposits in transit is included on the bank statement as a(n):

a. deduction from the cash balance per books.

b. deduction from the cash balance per bank.

c. addition to the cash balance per bank.

d. addition to the cash balance per books.

ANSWER: c

85. Accompanying the bank statement was a debit memorandum for an NSF check received from

a customer. This item would require an adjusting entry including a:

a. debit to Accounts Receivable.

b. debit to Cash.

c. debit to Accounts Payable.

d. credit to Accounts Payable.

ANSWER: a

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

86. Which of the following would be deducted from the cash balance per books on a bank

reconciliation?

a. Service charges

b. Outstanding checks

c. Deposits in transit

d. Notes collected by the bank

ANSWER: a

87. Which of the following would be added to the cash balance per books on a bank

reconciliation?

a. Service charges

b. Outstanding checks

c. Deposits in transit

d. Notes collected by the bank

ANSWER: d

88. A special cash fund used to make small payments that occur frequently is called a(n):

a. operating expenses fund.

b. change fund.

c. market fund.

d. petty cash fund.

ANSWER: d

89. Which of the following should be considered as cash by an accountant?

a. Money orders

b. Corporate bonds

c. Postage stamps

d. Government bonds

ANSWER: a

90. Cash equivalents include:

a. checks.

b. coins and currency.

c. money market funds and commercial paper.

d. stocks and short-term bonds.

ANSWER: c

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

91. A minimum cash balance required by a bank is called:

a. cash in bank.

b. compensating balance.

c. average balance.

d. adjusted balance.

ANSWER: b

92. The ratio of cash to monthly cash expenses can be used to .

a. assess how long a company with positive cash flows from investing activities can continue

to operate

b. assess how long a company with negative cash flows from operations can continue to

operate

c. assess how long a company with negative cash flows from investing activities can continue

to operate

d. assess how long a company with positive cash flows from financing activities can continue

to operate

ANSWER: b

93. The ratio of cash to monthly cash expenses is computed as .

a. monthly cash expenses divided by cash

b. current assets divided by monthly cash expenses

c. cash divided by cash equivalents

d. cash and cash equivalents divided by monthly cash expenses

ANSWER: d

94. Denominator in the ratio of cash to monthly cash expense is calculated as .

a. total revenues divided by 12

b. net cash flows from investing activities divided by 12

c. earnings before taxes divided by 12

d. net cash flows from operations divided by 12

ANSWER: d

95. A primary cause of failure of new companies is that .

a. they don’t have sufficient cash from debt or equity financing to operate long enough to

generate positive cash flows from operations

b. they don’t have sufficient cash to operate long enough to generate positive cash flows from

financing activities

c. they pay double taxation

d. the occurrence of fraud is higher in such companies

ANSWER: a

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

96. When a company reports negative net cash flows from operations .

a. ratio of equity to annual cash expenses helps in assessing the survival of the company

b. ratio of equity to monthly cash expenses helps in assessing the survival of the company

c. ratio of cash to monthly cash expenses helps in assessing the survival of the company

d. ratio of accounts payable to annual financing expenses helps in assessing the survival of the

company

ANSWER: c

97. List the objectives of internal control and give an example of how each is implemented.

ANSWER: The objectives of internal control are to provide reasonable assurance that:

(1) Assets are safeguarded and used for business purposes.

(2) Business information is accurate.

(3) Employees comply with laws and regulations.

Examples are:

(1) Duties are separated.

(2) Duties are rotated.

(3) Reports are submitted to management.

There are many other examples that would be correct.

98. For each of the following procedures, indicate whether it is an internal control strength or a

weakness. Also, for each weakness, explain why it is a weakness and how it can be corrected.

(a) (b) Only the best accounting graduates are hired to eliminate the need for training.

The person responsible for ordering and receiving supplies is not permitted to record or

pay for the supplies.

(c) (d) (e) Company policy mandates that all employees take vacation time.

Internal auditors constantly monitor the internal control system.

The accountant deposits cash at least once each day to prevent holding large amounts of

cash on hand.

ANSWER:

(a) Weakness. All new hires need to be trained even though they may have graduated in the

top of the class. The company should institute a training program for all employees.

(b) Weakness. The employee who places this order should not be responsible for receiving

supplies. The company must assign this task to someone else.

(c) Strength.

(d) Strength.

(e) Weakness. The accountant should not be permitted to handle cash since this individual

is responsible for recording cash. These functions must be kept separate.

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

99. List and define each of the five elements of internal control set forth by the Integrated

Framework.

ANSWER:

(1) (2) (3) (4) (5) Control Environment: The control environment is the overall attitude of

management and employees about the importance of internal controls.

Risk Assessment: Risk assessment is the identification of risks faced by an

organization so that management can take necessary actions to control them.

Control Procedures: The control procedures are the policies and procedures

designed to provide reasonable assurance that the business goals are met and fraud

is prevented.

Monitoring: Monitoring locates deficiencies in the internal control system and

improves control effectiveness.

Information and Communication: Information and communication is an essential

element of internal control. Information about the control environment, risk

assessment, control procedures, and monitoring is used by management to guide

operations and ensure compliance with reporting, legal, and regulatory

requirements.

100. Describe the features of a voucher system and list typical supporting documents for a voucher.

ANSWER: A voucher system is used to control cash disbursements. For example, the voucher

system should provide reasonable assurance that only authorized payments are

made. Another example is that a voucher system should ensure that all cash

discounts are taken.

Specifically, a voucher system is a set of procedures for authorizing and recording

liabilities and cash payments. It usually consists of vouchers, a file for unpaid

vouchers, and a file for paid vouchers.

Typical supporting documents for a voucher are a supplier’s invoice, a purchase

order, and a receiving report.

101. List the advantages of Electronic Funds Transfers.

ANSWER: Advantages:

(1) EFTs cost less than receiving cash payments through the mail.

(2) EFTs enhances internal controls over cash since the cash is received directly by

the bank without any employees handling cash.

(3) EFTs reduces late payments from customers and speed up the processing of

cash receipts.

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

102. Using the following information, prepare a bank reconciliation for Hydrope Co. for May 31,

2015.

(a) (b) (c) (d) (e) (f) (g) The bank statement balance is $3,712.

The cash account balance is $3,790.

Outstanding checks amounted to $850.

Deposits in transit are $845.

The bank service charge is $45.

Interest added to the checking account by the bank is $15.

A check drawn for $45 was incorrectly charged by the bank as $98.

ANSWER:

Hydrope Co.

Bank Reconciliation

May 31, 2015

$3,172

$3,790

Cash balance according to bank statement Add: Error in check amount $ 53

Deposits in transit not recorded by bank 845 898

$4,610

Deduct: outstanding checks 850 850

Adjusted balance $3,760

Cash balance according to Salem Co. Add: Interest credited by bank $ 15 15

$3,805

Deduct: Bank service charge 45 45

Adjusted balance $3,760

103. Using the following information, list the items that will require adjustments to the accounts of

Salem Co. Also, indicate which accounts will increase or decrease due to the adjustment.

(a) The bank statement balance is $2,597.

(b) The cash account balance is $2,680.

(c) Outstanding checks amounted to $703.

(d) Deposits in transit are $732.

(e) The bank service charge is $25.

(f) Interest added to the checking account by the bank is $7.

(g) A check drawn for $59 was incorrectly charged by the bank as $95.

ANSWER: (e) (f) Service charge $25; Cash will decrease by $25 and Retained Earnings

decrease by $25.

Interest income $7; Cash will increase by $7 and Retained Earnings will

increase by $7.

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

104. The bank statement for Exible Co. indicates a balance of $10,252.50 on June 30, 2015. The

cash account for the company had a balance of $4,787.10. Prepare a bank reconciliation on the

basis of the following reconciling items:

(a) Cash sales of $351 had been erroneously recorded as $315.

(b) Deposits in transit not recorded by bank, $500.

(c) Bank debit memorandum for service charges, $45.

(d) Bank credit memorandum for note collected by bank, $2,782, including $63 interest.

(e) Bank debit memorandum for $223.40 NSF (not sufficient funds) check from Alice

Martin, a customer.

(f) Checks outstanding, $3,415.80.

ANSWER:

Exible Co.

Bank Reconciliation

June 30, 2015

Cash balance according to bank statement Add: Deposits in transit not recorded by bank $10,252.50

500.00

$10,752.50

Deduct: Outstanding checks $3,415.80 415.80

Adjusted balance $ 7,336.70

Cash balance according to Exible Co. Add: Note collected by bank, including $63 interest Error in recording cash sales of $351 as $315 $ 4,787.10

2,782.00

36.00

$ 7,605.10

Deduct: NSF check from BlueInk $ 223.40

Bank service charges 45.00 268.40

Adjusted balance $ 7,336.70

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

105. The bank statement for Marley Co. indicates a cash balance of $10,000.50 on June 30, 2015.

The cash account in Marley’s records had a balance of $4,677.10. Illustrate the adjustments to

the accounts and their effect on Marley’s financial statements, based on the following

reconciling items:

(a) Cash sales of $342 had been erroneously recorded in the cash receipts journal as $324.

(b) Deposits in transit not recorded by bank, $700.

(c) Bank debit memorandum for service charges, $30.

(d) Bank credit memorandum for note collected by bank, $2,050, including $50 interest.

(e) Bank debit memorandum for $207.40 NSF (not sufficient funds) check from Alice

Martin, a customer.

(f) Checks outstanding, $4,192.80.

Assets = Liabilities + Stockholders’ Equity

Cash Accounts

Receivable

Notes

Receivable

Accounts

Payable

Capital Stock Retained

Earnings

Statement of Cash Flows Income Statement

ANSWER:

Assets = Liabilities + Stockholders’ Equity

Cash Accounts

Receivable

Notes

Receivable

Accounts

Payable

Capital Stock Retained

Earnings

(a) 18.00 18.00

(c) -30.00 -30.00

(d) 2,050.00 -2,000.00 50.00

(e) -207.40 207.40

Statement of Cash Flows Income Statement

Operating 18.00 Sales Revenue 18.00

Operating -30.00 Service Charge -30.00

Operating 50.00 Interest Income 50.00

Operating -207.40

Investing 2,000.00

106.

(a) Where are cash equivalents disclosed in the financial statements?

(b) List three examples of cash equivalents.

ANSWER: (a) Cash account on the balance sheet.

(b) Money market funds; notes of major corporations (commercial paper); U.S.

Treasury Bills.

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

107. Why would a bank require a company to maintain a compensating balance?

ANSWER: Usually it is part of a loan agreement or line of credit.

108. What is the purpose of the Sarbanes-Oxley Act of 2002, and why was it enacted?

ANSWER: The Sarbanes-Oxley Act of 2002 was passed to restore public confidence in the

financial statements of companies after the financial scandals during the early

2000s. It requires publicly held companies to assess and maintain internal controls.

109. Discuss what would be included under personnel policies.

ANSWER: Personnel policies would include promotion criteria, codes of ethics, job

descriptions, and conflict of interest guidelines. Also, hiring, training, evaluation,

and compensation policies would be included.

110. Explain why one person should not be permitted to purchase, receive, and pay for supplies.

ANSWER: Supplies may be stolen by the employee or the employee could collaborate with a

dishonest supplier by overbilling the company and split the excess billed. Orders

could be placed on the basis of friendship with suppliers rather than price, etc.

Also, many errors could be undetected.

111. What is a special-purpose cash fund? What is its purpose? Give two examples.

ANSWER: A special-purpose cash fund is created for a particular purpose, e.g. travel, payroll.

These accounts aid in control. Restrictions on the type and amount of payments are

usually put into place.

112. Identify each of the following as related to (a) the control environment, (b) risk assessment, or

(c) control procedures.

(1) Mandatory vacations

(2) Personnel policies

(3) Report of outside consultants on future market changes

ANSWER: (1) (c) control procedures

(2) (a) the control environment

(3) (b) risk assessment

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Chapter 5: Sarbanes-Oxley, Internal Control, and Cash

113. Using the following information, prepare a bank reconciliation for Murack Co. for May 31,

2015:

(a) (b) (c) (d) (e) (f) The bank statement balance is $4,063.

The cash account balance is $3,735.

Outstanding checks amounted to $640.

Deposits in transit are $245.

The bank service charge is $40.

A check for $74 for supplies was recorded on the depositor’s books as $47.

ANSWER:

Murack Co.

Bank Reconciliation

May 31, 2015

$4,063

245

$4,308

Cash balance according to bank statement Add: Deposits in transit not recorded by bank Deduct: Outstanding checks $640 640

Adjusted balance $3,668

Cash balance according to Murack Co. Deduct: Bank service charge Error in recording 27 67

Adjusted balance $3,668

$3,735

$ 40

© 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.