Edmonds 5e Chapter 04 TB Answer Key PDF

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Survey of Accounting, 5e (Edmonds) Chapter 4 Internal Controls, Accounting for Cash, and Ethics 1) In establishing a strong internal control system at Banks Company, management is concerned with administrative controls. Administrative controls include: A) performance evaluation. B) accuracy of the recording procedures. C) keeping cash in a safe. D) maintenance of accurate inventory records. Answer: A Explanation: Administrative controls are concerned with evaluating performance and addressing the degree of compliance with company policies and public laws. Difficulty: 2 Medium Topic: Key Features of Internal Control Systems Learning Objective: 04-01 Identify the key elements of a strong system of internal control. Bloom's: Understand AACSB: Reflective Thinking; Ethics AICPA: BB Resource Management; FN Risk Analysis

2) Which of the following statements concerning internal controls is true? A) Internal administrative controls are designed to limit the amount of funds spent on investments. B) Strong internal controls provide reasonable assurance that the objectives of a company will be accomplished. C) Internal accounting controls are limited to the policies and procedures used to protect the company from embezzlement. D) The control procedure, separation of duties, prohibits the employment of a husband and wife or other closely related parties within the same company. Answer: B Explanation: Strong internal controls provide reasonable, but not absolute, assurance that the objectives of a company will be accomplished. Difficulty: 2 Medium Topic: Key Features of Internal Control Systems Learning Objective: 04-01 Identify the key elements of a strong system of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Resource Management; FN Risk Analysis; BB Critical Thinking

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3) Chester Company has established internal control policies and procedures in order to achieve the following objectives: 1) Effective evaluation of management performance. 2) Assure that the accounting records contain reliable information. 3) Safeguard the company's assets. 4) Assure that employees comply with company policy. Which of these objectives are achieved by accounting controls? A) Objectives 1 and 2 B) Objectives 2 and 3 C) Objectives 3 and 4 D) All four objectives Answer: B Explanation: Accounting controls are designed to safeguard company assets and ensure reliable accounting records. Objectives 1 and 4 relate to administrative controls. Difficulty: 2 Medium Topic: Key Features of Internal Control Systems Learning Objective: 04-01 Identify the key elements of a strong system of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Resource Management; FN Risk Analysis; BB Critical Thinking

4) Which of the following is not a generally recognized internal control procedure? A) Establishment of clear lines of authority B) Having employees covered by a fidelity bond C) Requiring regular vacations for certain employees D) Customer service comment cards Answer: D Explanation: While customer service comment cards are helpful in monitoring company performance, they are not a generally recognized internal control procedure. Difficulty: 2 Medium Topic: Key Features of Internal Control Systems Learning Objective: 04-01 Identify the key elements of a strong system of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Resource Management; FN Risk Analysis

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5) Which of the following statements accurately describes a fidelity bond? A) Procedures to provide reasonable assurance that the objectives of a company are accomplished B) Proper procedures for processing transactions. C) Insurance that the company buys to protect itself from loss due to employee dishonesty D) Guidelines or policies that limit the actions of different levels of management Answer: C Explanation: Employees in a position of trust should be bonded. Difficulty: 1 Easy Topic: Key Features of Internal Control Systems Learning Objective: 04-01 Identify the key elements of a strong system of internal control. Bloom's: Understand AACSB: Reflective Thinking; Ethics AICPA: BB Resource Management; FN Risk Analysis

6) Which of the following is not one of the purposes of an internal control system? A) Safeguarding the company's assets B) The evaluation of performance C) The assessment of the degree of compliance with company policies and public laws D) Ensuring that the company is using the most effective marketing plan Answer: D Explanation: Internal controls do not relate to effective marketing plans. They do relate to safeguarding assets, evaluating performance, and assessing compliance with company policies and public laws. Difficulty: 1 Easy Topic: Key Features of Internal Control Systems Learning Objective: 04-01 Identify the key elements of a strong system of internal control. Bloom's: Understand AACSB: Reflective Thinking; Ethics AICPA: BB Resource Management; FN Risk Analysis

7) Which of the following is not considered an accounting control? A) Requiring employees to take vacations B) Performance evaluations C) Bonding of employees D) Use of prenumbered documents Answer: B Explanation: Performance evaluations is considered an administrative control. Requiring vacations, bonding employees, and using prenumbered documents help to safeguard assets and ensure reliable accounting records. Difficulty: 1 Easy Topic: Key Features of Internal Control Systems Learning Objective: 04-01 Identify the key elements of a strong system of internal control. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Resource Management; FN Risk Analysis

8) Which internal control procedure addresses the idea that the likelihood of employee fraud or 3 Copyright ©2018 McGraw-Hill

theft is reduced if collusion is required to accomplish it? A) Separation of duties B) Physical controls C) Fidelity bonding D) Use of prenumbered documents Answer: A Explanation: Separation of duties reduces the ability of a single employee to commit fraud without the assistance of other employees. Difficulty: 1 Easy Topic: Key Features of Internal Control Systems Learning Objective: 04-01 Identify the key elements of a strong system of internal control. Bloom's: Understand AACSB: Reflective Thinking; Ethics AICPA: BB Resource Management; FN Risk Analysis; BB Critical Thinking

9) Which of the following is not an internal control procedure for the control of cash receipts? A) Immediate preparation of records of all cash receipts B) Customers should be given written receipts for all monies paid C) All cash should be deposited frequently D) Use of prenumbered checks Answer: D Explanation: Use of prenumbered checks is a control procedure for the control of cash disbursements, not cash receipts. Difficulty: 2 Medium Topic: Accounting for Cash Learning Objective: 04-02 Identify special internal controls for cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Resource Management; FN Risk Analysis; BB Critical Thinking

10) Which of the following is an internal control procedure used to safeguard a company's assets? A) Timely deposits of cash receipts into a checking account B) Separation of duties C) Reconciliation of the bank statement D) All of these answer choices are correct. Answer: D Explanation: All of these are accounting controls that help safeguard a company's assets, including cash. Difficulty: 1 Easy Topic: Key Features of Internal Control Systems; Accounting for Cash Learning Objective: 04-01 Identify the key elements of a strong system of internal control.; 04-02 Identify special internal controls for cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Resource Management; FN Risk Analysis

11) Which of the following is not a motive for the embezzlement of cash by employees? 4 Copyright ©2018 McGraw-Hill

A) Cash is the common unit of measurement. B) Ownership of cash is difficult to prove. C) Cash has universal appeal. D) Small quantities of high denomination can represent significant amounts of value. Answer: A Explanation: The fact that cash is the common unit of measurement is not a motive for embezzlement. Difficulty: 1 Easy Topic: Accounting for Cash Learning Objective: 04-02 Identify special internal controls for cash. Bloom's: Understand AACSB: Reflective Thinking; Ethics AICPA: BB Resource Management; FN Risk Analysis

12) Which of the following is not a typical form associated with a bank checking account? A) Signature card B) Bank statement C) Debit memo D) Deposit ticket Answer: C Explanation: A debit memo is not a separate document. It is a notation on a bank statement indicating that the bank took cash out of a company's checking account, often for bank service charges. Difficulty: 2 Medium Topic: Accounting for Cash Learning Objective: 04-02 Identify special internal controls for cash. Bloom's: Remember AACSB: Reflective Thinking AICPA: BB Resource Management; FN Risk Analysis

13) Effective internal controls for cash include: A) disbursements made by prenumbered check. B) cash deposited in the bank on a timely basis. C) written cash receipts given to customers as evidence of payment. D) all of these answer choices are correct. Answer: D Difficulty: 1 Easy Topic: Accounting for Cash Learning Objective: 04-02 Identify special internal controls for cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Resource Management; FN Risk Analysis

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14) A review of the bank statement and accounting records of the Blake Company revealed the following items: Item no. 1) 2) 3) 4) 5) 6)

Description Three outstanding checks A debit memo showing a bank service charge A deposit in transit An NSF check written by one of Blake's customers A certified check written by Blake A credit memo reflecting interest revenue earned by Blake

Which of the item(s) would be subtracted from the company's unadjusted book balance to determine the true cash balance? A) Item numbers 2 and 4 B) Item numbers 2, 4, and 5 C) Item numbers 1 and 4 D) Item numbers 1, 2, 4, and 5 Answer: A Explanation: The NSF check and the debit memo both reduce Blake's cash balance, but have not yet been recorded, so they should be subtracted from the unadjusted book balance. The outstanding checks and the certified checks were recorded when they were written, so they would not be subtracted again. Difficulty: 2 Medium Topic: Reconciling the Bank Account Learning Objective: 04-03 Prepare a bank reconciliation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Resource Management; FN Measurement

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15) A review of the bank statement and accounting records of the Blake Company revealed the following items: Item no. 1) 2) 3) 4) 5) 6)

Description Three outstanding checks A debit memo showing a bank service charge A deposit in transit An NSF check written by one of Blake's customers A certified check written by Blake A credit memo reflecting interest revenue earned by Blake

Which of the item(s) would be added to the unadjusted bank balance to determine the true cash balance? A) Item numbers 3 and 3 B) Item number 2 C) Item numbers 3, 4, and 6 D) Item number 3 Answer: D Explanation: Deposits in transit increase a company's cash balance, and have already been recorded by Blake, so they should be added to the unadjusted bank balance. Difficulty: 2 Medium Topic: Reconciling the Bank Account Learning Objective: 04-03 Prepare a bank reconciliation. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Resource Management; FN Measurement

16) What documentation issued by a bank increases a company's checking account balance at the bank? A) Credit memo B) Debit memo C) Balance sheet D) Certified check Answer: A Explanation: Credit memos include things such as interest earned. Difficulty: 1 Easy Topic: Reconciling the Bank Account Learning Objective: 04-03 Prepare a bank reconciliation. Bloom's: Understand AACSB: Reflective Thinking AICPA: FN Measurement; BB Industry

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17) The April 30 bank statement for Trimble Corporation shows an ending balance of $34,351. The unadjusted cash account balance was $28,250. The accountant for Trimble gathered the following information: There was a deposit in transit for $4,240. The bank statement reports a service charge of $39. A credit memo included in the bank statement shows interest earned of $95. Outstanding checks totaled $10,935. The bank statement included a $650 NSF check deposited in April. What is the true cash balance as of April 30? A) $27,656 B) $27,006 C) $31,801 D) $31,896 Answer: A Explanation: $34,351 unadjusted bank balance + $4,240 deposit in transit – $10,935 outstanding checks = $27,656 true cash balance. Alternatively, $28,250 unadjusted book balance – $39 service charge + $95 interest revenue – $650 NSF check = $27,156. Difficulty: 2 Medium Topic: Reconciling the Bank Account Learning Objective: 04-03 Prepare a bank reconciliation. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Resource Management; FN Measurement

18) At March 31, Cummins Co. had a balance in its cash account of $10,400. At the end of March the company determined that it had outstanding checks of $900, deposits in transit of $600, a bank service charge of $20, and an NSF check from a customer for $200. The true cash balance at March 31 is: A) $10,100 B) $10,180 C) $10,380 D) $9,880 Answer: B Explanation: $10,400 unadjusted book balance – $20 service charge – $200 NSF check = $10,180 true cash balance Difficulty: 2 Medium Topic: Reconciling the Bank Account Learning Objective: 04-03 Prepare a bank reconciliation. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Resource Management; FN Measurement

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19) For which of the following bank reconciliation adjustments would an adjusting journal entry not be necessary? A) An error in which the company's accountant recorded a check as $235 that was written correctly for $253. B) A check for $37 deposited during the month, but returned for non-sufficient funds. C) An error in which the bank charged the company $83 for a check that had been written by another account holder. D) All of these answer choices would require adjusting journal entries. Answer: C Explanation: A bank error would cause an adjustment to the unadjusted bank balance, not the book balance. Only adjustments to the book balance require adjusting entries. Difficulty: 2 Medium Topic: Reconciling the Bank Account Learning Objective: 04-03 Prepare a bank reconciliation. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Resource Management; FN Measurement

20) Following the February bank reconciliation, the accountant made an entry that increased accounts receivable and decreased cash by $150. This entry may have been used to record: A) an NSF check received by Kincaid from a customer. B) the collection of an account receivable by Kincaid that is part of a deposit in transit. C) bank charges owed by Kincaid to the bank. D) the collection of an account receivable by the bank that has been deposited in Kincaid's account. Answer: A Explanation: When a company discovers an NSF check, it reduces its cash account and increases accounts receivable while it attempts to collect on the check. Difficulty: 2 Medium Topic: Reconciling the Bank Account Learning Objective: 04-03 Prepare a bank reconciliation. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Resource Management; BB Critical Thinking; FN Measurement

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21) In preparing the April bank reconciliation for Oscar Company, it was discovered that on April 10 a check was written to pay delivery expense of $45 but the check was erroneously recorded as $54 in the company's books. The correction the error of this error would increase: A) delivery expense and decrease cash by $45. B) cash and decrease delivery expense by $9. C) delivery expense and decrease cash by $9. D) cash and decrease delivery expense by 54. Answer: B Explanation: In order to correct the error, which caused delivery expense to be overstated and cash to be understated, the company must increase cash and decrease delivery expense by $9, which is the difference between the actual amount of the check of $45 and the amount recorded of $54. Difficulty: 2 Medium Topic: Reconciling the Bank Account Learning Objective: 04-03 Prepare a bank reconciliation. Bloom's: Apply AACSB: Knowledge Application AICPA: BB Resource Management; FN Measurement

22) Which of the following is not a procedure to maintain internal controls over cash payments? A) A receipt should be provided to each cash customer. B) Checks should be properly authorized with approval signatures. C) All checks should be prenumbered. D) Voided checks should be defaced and retained. Answer: A Explanation: Providing receipts to each cash customer is a procedure to maintain internal controls over cash receipts, not cash payments. Difficulty: 2 Medium Topic: Accounting for Cash Learning Objective: 04-02 Identify special internal controls for cash. Bloom's: Understand AACSB: Reflective Thinking AICPA: BB Resource Management; FN Risk Analysis

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23) While preparing its bank reconciliation, Maynard Company determined that its bank had collected a $650 account receivable for the company and deducted a $25 collection fee. Which of the following shows the effect of this transaction on the financial statements?

A. B. C. D.

Assets (25) 625 (25) 625

= Liab. + Equity = NA + (25) = NA + 625 = NA + (25) = NA + 625

Rev. NA 650 NA 650

− Expenses = Net Inc. Cash Flow − 25 = (25) 625OA − 25 = 625 650OA − 25 = (25) 650OA − 25 = 625 625OA

A) Option A B) Option B C) Option C D) Option D Answer: A Explanation: The entry to record receipt of the receivable, less the bank's collection fee, increases cash (an asset) by $625, decreases accounts receivable (an asset) by $650, and increases miscellaneous expenses by $25, which decreases net income and equity. It is reported as a cash inflow for operating activities. Difficulty: 3 Hard Topic: Reconciling the Bank Account Learning Objective: 04-03 Prepare a bank reconciliation. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement

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24) While performing its monthly bank reconciliation, the bookkeeper for the Mosaic Company discovered that a check written for $421 for advertising expense was recorded in the firm's books as $241. Which of the following shows the effect of the correcting entry on the financial statements? Assets = Liab. + A. 180 = NA + B. (180) = NA + C. (421) = NA + D. (180) = NA +

Equity Rev. − Expenses = Net Inc. Cash Flow 180 NA − (180) = 180 180 OA (180) NA − 180 = (180) (180) OA (421) NA − 421 = (421) (421) OA (180) NA − 180 = (180) (421) OA

A) Option A B) Option B C) Option C D) Option D Answer: B Explanation: The error that recorded the check for less than it should have been understated advertising expense and overstated cash by the difference, $180. The correcting entry will decrease cash and increase expense, which decreases net income and equity. It is reported on the statement of cash flows as a cash outflow for operating activities. Difficulty: 2 Medium Topic: Reconciling the Bank Account Learning Objective: 04-03 Prepare a bank reconciliation. Bloom's: Analyze AACSB: Analytical Thinking AICPA: BB Resource Management; BB Critical Thinking; FN Measurement

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25) While performing its monthly bank reconciliation, the bookkeeper for the Grace Corporation noted that a deposit of $990 (received from a customer on account) was recorded in the company books as $900. Which of the following shows the effect of the correcting entry on the financial statements?

A. B. C. D.