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Exam 8: Cash and Internal Controls

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Question 51

Multiple Choice

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An internal control system consists of all of the following policies and procedures except ones designed to:

A) Protect assets.
B) Ensure reliable accounting.
C) Guarantee a return to investors.
D) Urge adherence to company policies.
E) Promote efficient operations.

F) C) and E)
G) A) and B)

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Question 52

Multiple Choice

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Merchandise with an invoice price of $2,000 was purchased on October 3, terms 1/15, n/60. The company uses the net method to record purchases. The entry to record the cash payment of this purchase obligation on October 17 is:

A) Debit Accounts Payable $1,980; credit Cash $1,980.
B) Debit Accounts Payable $2,000; credit Cash $2,000.
C) Debit Accounts Payable $1,980; credit Discounts Lost $20; credit Cash $2,000.
D) Debit Accounts Payable $2,000; credit Merchandise Inventory $20; credit Cash $1,980.
E) Debit Accounts Payable $2,000; credit Merchandise Inventory $40; credit Cash $1,960.

F) All of the above
G) A) and D)

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Question 53

Multiple Choice

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The number of days' sales uncollected:

A company purchased merchandise inventory costing $15,000 with credit terms of 2/10, n/30 on November 7. On November 15, the company paid 1/3 of the amount due. The remaining balance was paid on December 7. Required: a. Record the journal entries related to this transaction using the gross method of recording purchases. b. Record the journal entries related to this transaction using the net method of recording purchases.

Separation of duties divides responsibility for a transaction or a series of related transactions between two or more individuals or departments. Separation of duties reduces the risk of error and fraud.

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

Control of cash disbursements is important for companies as most large thefts occur from payment of fictitious invoices.

A voucher is an internal file:

Martha Company has an established petty cash fund in the amount of $500. The fund was last reimbursed on November 30. At the end of December, the fund contained the following petty cash receipts: If, in addition to these receipts, the petty cash fund contains $301 of cash, the journal entry to reimburse the fund on December 31 will include:

At the end of the current period, a company reported $475,000 in net credit sales and $75,000 in ending accounts receivable. Calculate this company's days' sales uncollected at the end of the current period.

Preparing a bank reconciliation on a monthly basis is an example of:

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

A properly designed internal control system:

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

The petty cash fund should be reimbursed when it is nearing zero and at the end of the accounting period when financial statements are prepared.

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, Regal Company has decided to drop its property insurance on assets; and stop bonding the cashiers who handle about $10,000 in cash each day. 2. Halton Company records each sale on a preprinted invoice. Since sometimes invoices are damaged in the process of being prepared, the invoices are not prenumbered, but the sales clerk writes the next number onto each invoice. 3. Marion Company is a very small business. Bob Lepley, one of the two office clerks, opens the mail each day and removes the cash receipts that come in the mail. Bob then records the receipts in the cash records and the customer's account and deposits the cash in the bank. 4. Gerald McNichols, the owner of McNichols Company prides himself on hiring only the most competent employees. McNichols believes that since these employees are highly competent and to show that he trusts them completely, he feels there is no need for anyone to check up on the employees' performance. 5. Service Products is a small business with only 3 accounting employees. Each employee is well-trained and so can perform any of the accounting tasks, including handling cash receipts and cash disbursements, and preparing the bank reconciliation.

A company using the net method of recording purchases failed to take advantage of a discount available. When they pay the full (gross) amount of an invoice at the end of the credit period the journal entry will include a debit to:

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

Cash equivalents are short-term highly liquid investment assets that are readily converted to a known cash amount, and have maturities of one year.

Internal control policies and procedures have limitations including: