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Exam 8: Cash and Internal Controls

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Question 41

True/False

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Outstanding checks, deposits in transit, deductions for bank fees, additions for interest, and errors are all factors that can cause the bank statement balance for a checking account to be different from the company's checking account balance.

A) True
B) False

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Question 42

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Because employees know that bonding is an insurance policy against loss from theft, bonding does not generally discourage loss from theft.

A) True
B) False

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Question 43

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The document that the purchasing department prepares and sends to the vendor to place an order is called the:

Clayborn Company deposits all cash receipts on the day they are received and makes all cash payments by check. At the close of business on May 31, its Cash account shows a debit balance of $17,025. Clayborn's May bank statement shows $15,800 on deposit in the bank. Determine the adjusted cash balance using the following information: $\begin{array}{|l|r|}\hline \text { Deposit in transit } & \$ 5,200 \\\hline \text { Outstanding checks } & \$ 4,600 \\\hline \text { Bank service fees, not yet recorded by company } & \$ 25 \\\hline \text { A NSF check from a customer, not yet recorded by the company } & \$ 600\\\hline\end{array}$ The adjusted cash balance should be:

A voucher system's control over cash disbursements begins when a company incurs an obligation that will result in eventual payment of cash.

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

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 disbursements, and preparing the bank reconciliation. Because of this cross-training, the employees share responsibilities for all of the tasks.

The days' sales uncollected ratio measures a company's ability to manage its debt.

Assume that the custodian of a $450 petty cash fund has $65 in coins and currency plus $382 in receipts at the end of the month. The entry to replenish the petty cash fund will include:

In the process of reconciling its bank statement for April, Donahue Enterprises' accountant compiles the following information: $\begin{array} { | l | r | } \hline \text { Cash balance per company books on April } 30 & \$ 6,275 \\\hline \text { Deposits in transit at month-end } & \$ 1,300 \\\hline \text { Outstanding checks at month-end } & \$ 620 \\\hline \text { Bark charge for printing new checks } & \$ 45 \\\hline \text { Note receivable and interest collected by bank on Donahue's behalf } & \$ 770 \\\hline \text { A check paid to Donahue during the month by a customer is returned by the } &\$480\\\text { bank as NSF }\\\hline\end{array}$ The adjusted cash balance per the books on April 30 is:

An internal control system consists of the policies and procedures companies use to protect assets, ensure reliable accounting, promote efficient operations, and uphold company policies.

Ryan Company deposits all cash receipts on the day they are received and makes all cash payments by check. Ryan's June bank statement shows $18,361 on deposit in the bank. Ryan's comparison of the bank statement to its cash account revealed the following: $\begin{array}{|l|r|}\hline \text { Deposit in transit } & 1,450 \\\hline \text { Outstanding checks } & 837\\\hline\end{array}$ Additionally, a $29 check written and recorded by the company correctly was recorded by the bank as a $92 deduction. The adjusted cash balance per the bank records should be:

Separation of duties involves dividing responsibility for a transaction or a series of related transactions between two or more individuals or departments.

Proper internal control would require that a department manager inform the purchasing department of its needs for additional merchandise by preparing and signing a purchase requisition which lists the merchandise needed and requests that it be purchased.

The following information is taken from Reagan Company's December 31 balance sheet: $\begin{array}{|l|r|}\hline \text { Cash and cash equivalents } & \$ 8,419 \\\hline \text { Accounts receivable } & 70,422 \\\hline \text { Merchandise inventories } & 60,362 \\\hline \text { Prepaid expenses } & 4,100 \\\hline \text { Accounts payable } & \$ 14,950 \\\hline \text { Notes payable } & 86,638 \\\hline \text { Other current liabilities } & 9,500\\\hline\end{array}$ If net credit sales for the current year were $612,000, the firm's days' sales uncollected for the year is: (Use 365 days a year.)

Spencer Co. has a $200 petty cash fund. At the end of the first month the accumulated receipts represent $43 for delivery expenses, $127 for merchandise inventory, and $12 for miscellaneous expenses. The fund has a balance of $18. The journal entry to record the reimbursement of the account includes a:

A voucher is an internal document or file:

Signature cards, deposit tickets, checks, and bank statements are all examples of internal control devices for banking activities.

Cash registers, time clocks, and personal identification scanners are examples of technologies that can improve internal control.

Which of the following events would cause a bank to debit a depositor's account?