Cash
Self Test
Introduction to Accounting
Cash
Self Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. Cash is defined as
a. only paper money
b. an instrument that banks will accept for deposit
c. assets that are acceptable in an exchange
d. anything that is exchangeable for an asset
Check Your Answer
B. Cash includes anything a bank will accept for deposit. This includes checks, money orders, bank drafts and foreign monies. Coins are also cash (a.) Property, plant, and equipment are often used in exchanges and are not cash (c. & d.).
2. Cash equivalents are
a. readily exchangeable into cash
b. short term financial instruments
c. short term financial instruments whose fair market value changes
d. both a. & c.
Check Your Answer
A. By definition, cash equivalents are short term financial instruments readily exchangeable for cash, with a market value not expected to change, usually having a maturity of 90 days or less. Many short term financial instruments (less than one year) have a maturity of greater than 90 days and are not considered cash equivalents (b.)
3. Cash management includes:
a. ensuring enough cash is on hand to pay liabilities
b. making sure excess cash is used to minimize interest earned
c. inaccurate tracking of cash for reporting
d. all of the above
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A. A significant part of cash management is making sure cash is on hand to pay liabilities timely. Good cash management will maximize interest earned (b.) and minimize interest expense. Cash is often moved between several accounts and must be accurately tracked.
4. Strong internal controls related to cash will include
a. Depositing checks weekly
b. Authorization of the purchase and the payment is made by one person
c. Use pre-numbered checks and account for each one
d. Reconcile bank statements annually
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C. All checks must be accounted for and pre-numbering checks makes this possible. The company should deposit checks daily (a.). The same person should not authorize a purchase and make the payment (b). Bank statements should be reconciled monthly.
5. The purpose of the bank reconciliation is to
a. agree the beginning cash balance to the adjusted cash balance
b. agree the ending balance on the bank statement to the ending balance in the cash account
c. agree the beginning balance on the bank statement to the beginning balance in the cash account
d. account for differences in the bank statement and the cash account and adjust the cash account to the true balance.
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D. The bank reconciliation is done to determine the amount of cash the company really has at the end of the period. The bank statement balance will not agree to the company cash balance due to timing differences of when things are recorded by the bank. The bank reconciliation uses ending balances; beginning balances are not used.
6. The general ledger cash account will always record during the month
a. checks written and cleared
b. checks written
c. deposits made and cleared
d. deposits recorded by the bank
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B. Transactions recorded during the month will be increases and decreases to cash. Checks written are considered decreases when they are written and deposits are considered increases when they are made. Entries are not made to the cash account when the bank clears checks or records deposits.
7. An item that most likely will not be recorded in the cash account before the bank reconciliation is done is
a. interest earned on the average balance
b. checks written
c. deposits made
d. a payment sent to a supplier
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A. The company will not be able to determine the exact amount of interest earned because they can not calculate the average bank balance. The interest is recorded after the bank statement is received. Checks written and deposits made are recorded in the cash account during the period. A payment to a supplier is done with a check and will be recorded when the check is written.
8. An item that most likely will be reported on the bank statement is
a. Checks written by the company that have cleared
b. Deposits made by the company and not yet cleared
c. Checks written by the company that have not yet cleared
d. Bank fees charged by the company
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A. The bank statement shows activity by the bank during the period. “Cleared” is a word that indicates bank activity. Bank fees are charged by the bank (d.)
9. Which of the following is an item the bank will have recorded that has not yet been recorded by the company?
a. Non sufficient funds check
b. Bank fees and service charges
c. automatic deposits and withdrawals
d. all of the above
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D. The company typically waits to record all of the above after the bank statement is received. The amount of these items are not always known until the bank statement is received.
10. A check that is considered a non-sufficient funds check
a. was not actually paid by the company that wrote the check
b. was not actually paid by the company that received the check
c. will be paid to the company in the next accounting period
d. will cause accounts receivable to decrease
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A. A non-sufficient funds check means the company that wrote the check did not have enough funds in their account to clear the check. Clear the check means the funds were taken from their account and moved to the other company’s account the check was written to. Accounts receivable must be increased because the account was not really paid (d).
11. Which of the following is an example of an automatic deposit to the company’s account by the bank?
a. interest paid
b. a monthly payment to reduce a note payable
c. a monthly payment to reduce a note receivable
d. service charges
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C. An automatic deposit means cash is received by the company. Reduction of a note receivable is done when cash is received. The other choices reduce cash.
12. An outstanding check is a check that
a. has been cleared by the bank
b. was written by the company
c. was written by the company and has been cleared by the bank
d. was written by the company and the bank has not deducted the amount from the company’s account
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D. An outstanding check is a check written by the company that has not yet been cleared by the bank. The check was written and the cash is still in the company’s bank account.
13. A deposit in transit is a deposit that
a. has been added to the company’s account by the bank
b. has been recorded in the company’s cash account and added to the company’s bank account
c. has not been added to the company’s bank account
d. will not be recorded on the bank reconciliation
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C. A deposit in transit is a deposit made by the company that has not been added to the company’s account by the bank. Deposits in transit are written as a positive number in the bank column on the bank reconciliation (d.)
14. Journal entries are made for
a. all reconciling amounts listed in the bank column
b. all reconciling amount listed in the general ledger cash column
c. all amounts on the bank reconciliation
d. items that were recorded by the company during the period
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B. The company must make an entry to record the items they find out about on the bank statement that have not already been recorded. These items are written in the cash column on the bank reconciliation. These items are already included in the bank’s ending cash balance. The company only makes an entry for items written in the cash G/L column. The entries to record items in the bank column are done by the bank.
15. The final balance in the cash account that is reported on the balance sheet will agree with
a. the unadjusted cash balance
b. the ending balance on the bank statement
c. the reconciled cash balance that considers all transactions that impacted cash
d. the reconciled cash balance that considers only transactions the bank has recorded
Check Your Answer
C. The final balance that is reported is the reconciled balance. This balance includes everything that happened at the bank and everything that happened at the company.