Edmonds 5e Chapter 04 TB 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. 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. 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 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

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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 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 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 8) Which internal control procedure addresses the idea that the likelihood of employee fraud or 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 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 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. 11) Which of the following is not a motive for the embezzlement of cash by employees? 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.

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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 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. 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 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 3 Copyright ©2018 McGraw-Hill

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 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 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 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.

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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. 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. 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. 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

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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 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.

Assets = Liab. + Equity 90 = NA + 90 990 = NA + 990 NA = NA + NA NA = NA + NA

Rev. 90 990 NA NA

− Expenses = Net Inc. Cash Flow − NA = 90 90 OA − NA = 90 990 OA − NA = NA 90 OA − NA = NA (90) OA

A) Option A B) Option B C) Option C D) Option D 26) While performing the monthly bank reconciliation, the bookkeeper for Avon Company made the adjusting entry for a bank service charge of $20. Which of the following correctly shows the effect of the entry on the financial statements?

A. B. C. D.

Assets NA (20) (20) (20)

= Liab. + Equity = NA + NA = (20) + NA = NA + (20) = NA + (20)

Rev. NA NA (20) NA

− Expenses = Net Inc. − NA = NA − NA = NA − NA = (20) − 20 = (20)

A) Option A B) Option B C) Option C D) Option D 6 Copyright ©2018 McGraw-Hill

Cash Flow (20) OA (20) OA (20) OA (20) OA

27) Which document issued by a bank reflects a transaction that decreases a company's checking account balance? A) A debit entry B) A debit memo C) A credit memo D) A reconciling entry 28) In a bank reconciliation, a customer's NSF check included with the bank statement is: A) deducted from the company's cash balance to get the true cash balance. B) added to the bank's cash balance to get the true cash balance. C) deducted from the bank's cash balance to get the true cash balance. D) added to the company's cash balance to get the true cash balance. 29) How will a certified check be treated in a company's bank reconciliation? A) As a deduction to the company's unadjusted book balance. B) As an increase to the bank's unadjusted bank balance. C) As a deduction to the bank's unadjusted bank balance. D) There is no adjustment when preparing the bank reconciliation. 30) In the reconciliation of the June bank statement, a deposit made on June 30 did not appear on the June bank statement. In preparing the bank reconciliation, this deposit in transit should be: A) subtracted from the unadjusted book balance. B) added to the unadjusted book balance. C) subtracted from the unadjusted bank balance. D) added to the unadjusted bank balance. 31) In a company's bank reconciliation, an outstanding check is a check that: A) has been issued by the company but has not been presented to the bank for payment. B) is guaranteed for payment by the bank. C) has been presented to the bank for payment but has not been reported on the bank statement. D) has been written for an amount that is greater than the balance in the account holder's bank account. 32) Jasper Company accepted a check from Harp Company as payment for services rendered. Jasper's bank statement revealed that the Harp check was an NSF check. What effect will the entry to record the NSF check have on the accounting equation of Jasper Company?

A. B. C. D.

Total assets Decrease No effect Decrease No effect

Total equity Decrease Decrease No effect No effect

A) Option A B) Option B C) Option C 7 Copyright ©2018 McGraw-Hill

D) Option D 33) Owen Company's unadjusted book balance at June 30 is $9,700. The company's bank statement reveals bank service charges of $45. Two credit memos are included in the bank statement: one for $900, which represents a collection that the bank made for Owen, and one for $50, which represents the amount of interest that Owen had earned on its interest-bearing account in June. Based on this information, Owen's true cash balance is: A) $9,700. B) $10,695. C) $10,550. D) $10,605. 34) Duke Company's unadjusted bank balance at March 31 is $2,300. The bank reconciliation revealed outstanding checks amounting to $500 and deposits in transit of $400. Based on this information, Duke's true cash balance is: A) $2,200. B) $2,000. C) $2,700. D) $2,400. 35) Rainey Company's true cash balance at October 31 is $5,710. The following information is available for the bank reconciliation: Outstanding checks, $600 Deposits in transit, $450 Bank service charges, $90 The bank had collected an account receivable for Rainey Company, $1,000 The bank statement included an NSF check written by one of Ramsey's customers for $600. Based on this information Rainey's unadjusted book balance at October 31 is: A) $5,870. B) $5,400. C) $6,400. D) $5,490. 36) The bank statement for Tetra Company contained the following items: a bank service charge of $10; a credit memo for interest earned, $15; and a $50 NSF check from a customer. The company had outstanding checks of $100 and a deposit in transit of $300. Assuming that the unadjusted bank balance was $500, what is the unadjusted book balance? A) $745 B) $455 C) $700 D) $800

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37) The bank statement for Tetra Company contained the following items: a bank service charge of $10; a credit memo for interest earned, $15; and a $50 NSF check from a customer. The company had outstanding checks of $100 and a deposit in transit of $300. The entry to record the customer's NSF check will: A) increase the Accounts Receivable balance. B) decrease the Cash account. C) decrease equity. D) increase the Accounts Receivable balance and decrease the Cash account balance. 38) Keatts Company's bank statement included an NSF check written by one of its customers. What effect will the entry to recognize the NSF check have on the company's financial statements? A. B. C. D.

Assets +/– +/– +/– –

= Liab. + Equity Rev. = NA + NA + = NA + NA NA = NA + NA NA = NA + – NA

− Expenses. = Net Inc. Cash Flows – NA = + + OA – NA = NA – OA – NA = NA NA – + = – NA

A) Option A B) Option B C) Option C D) Option D 39) On September 30, the bank statement of Fine Company showed a balance of $7,800. The following information was revealed by comparing the bank statement to the cash balance in Fine's accounting records: (1) deposits in transit amounted to $3,150 (2) outstanding checks amounted to $6,200 (3) a $550 check was incorrectly drawn on Fine's account (4) NSF checks returned by the bank were $750 (5) bank service charge was $29 (6) credit memo for $75 for the collection of one of the company's account receivable Based on the above information, the true cash balance was: A) $5,346. B) $5,300. C) $4,596. D) $7,096. 9 Copyright ©2018 McGraw-Hill

40) Which of the following is not a primary role of an independent auditor? A) Assume legal and professional responsibilities to the public B) Advise client on tax strategies C) Determine whether a company's financial statements are materially correct D) All of these answer choices are correct. 41) The most favorable audit opinion that a company can receive is a(n): A) adverse opinion. B) unqualified opinion. C) disclaimer of opinion. D) qualified opinion. 42) Which of the following statements about materiality is not true? A) Materiality is different for each company. B) A material error would change the opinion of the average prudent investor. C) Any error greater than $5,000 is considered material in a financial statement audit. D) Material misstatements should not exist in order for a company to receive an unqualified audit opinion. 43) If the financial statements cannot be relied upon because they contain one or more material departures from GAAP, the auditor will issue the following type of audit opinion: A) Qualified opinion. B) Disclaimer. C) Adverse opinion. D) Unqualified opinion. 44) An audit is useful to financial statement users because it: A) Guarantees that the financial statements are accurate and correct. B) Guarantees that management has not been involved in misappropriation of assets. C) Provides reasonable assurance that the financial statements do not have material misstatements. D) Assures users that confidentiality is maintained. 45) Which of the following is not a component of the fraud triangle? A) Reliance B) Rationalization C) Opportunity D) Pressure 46) Which of the following is not a principle of the AICPA Code of Professional Conduct? A) Due Care B) Objectivity and Independence C) Integrity D) Conservatism

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47) Which of the following is not a common feature of ethical misconduct? A) The capacity to rationalize B) The existence of pressure leading to an incentive C) The assistance of others D) The presence of an opportunity 48) Policies and procedures designed to reduce the opportunities for fraud are often called: A) Internal controls. B) Asset source transactions. C) Accounting standards. D) Financial systems. 49) Indicate whether each of the following statements regarding internal controls is true or false. _____ a) Internal controls are used to provide reasonable assurance that the objectives of an enterprise will be accomplished. _____ b) Internal controls can be divided into accounting controls and administrative controls. _____ c) The mechanics of internal control systems do not vary from company to company. _____ d) Accounting controls are concerned with the evaluation of performance and the assessment of the degree of compliance with company policies and public laws. _____ e) Administrative controls are composed of policies and procedures that are designed to safeguard the assets and to assure that accounting records contain reliable information. 50) Indicate whether each of the following statements regarding internal controls is true or false. _____ a) Separation of duties is an internal control feature that requires different individuals to perform the following functions: authorization, recording, and custody of assets. _____ b) Under proper internal controls, the person who collects customer payments should also maintain the records of cash receipts. _____ c) Under proper internal controls, those who are given authority should bear the corresponding responsibility. _____ d) One of the basic rules of internal control is to require some employees to take regular vacations. _____ e) A fidelity bond is a form of insurance that companies ask employees to buy to protect the company from loss due to employee dishonesty. 51) Indicate whether each of the following statements regarding internal controls is true or false. _____ a) Cash receipts should be deposited in a bank when they reach a predetermined level of materiality. _____ b) To improve operating efficiency, a company should make most of its disbursements in currency instead of checks. _____ c) ...