Cash
Easy Test
Easy Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. Good internal controls related to cash are designed to
a. defer fraud and theft
b. determine the most responsible person in the company and put them in charge of all duties related to cash
c. ensure different employees handle cash and account for cash
d. have the same employee record customer payments and record the reduction to accounts receivable
Answer
C. Good internal controls provide for separation of duties. This means that the same person does not handle the asset and record the journal entry. Good internal controls prevent fraud and theft (a.)
2. Which of the following will a bank consider cash or cash equivalents?
a. a money order
b. a 1 month certificate of deposit
c. a 30 day investment with no interest rate risk
d. all of the above
Answer
D. All of the above are considered cash equivalents.
3. As part of good daily cash management a company will
a. make monthly payments on notes payable timely
b. maximize interest earned on excess cash
c. negotiate favorable interest rates on long term debt
d. all of the above
Answer
B. Good cash management includes paying current liabilities and investing cash short term in a manner that maximizes interest earned on the excess cash. Both a. and c. are related to long term obligations.
4. Segregation of duties means
a. an employee who pays suppliers also authorizes payment
b. the employee who handles cash does not keep records of cash transactions
c. the employee who bills customers also records collection from customers
d. all of the above
Answer
B. Proper segregation of duties separates the handling of cash from the record keeping related to cash. This applies for payables and receivables. Both a. and c. are examples of not segregating duties.
5. Cash that is reported on the balance sheet consists of
a. cash and cash invested in maturities of less than 90 days with no interest rate risk
b. investments with interest rate risk
c. cash and cash in money market funds only
d. cash and restricted cash
Answer
A. Cash reported on the balance sheet may consist of both cash and cash equivalents, which is cash invested with no interest rate risk in instruments with maturities of 90 days or less. Cash equivalents is not limited to money market funds. Restricted cash is reported as investments and funds.
6. Cash discounts are offered only on
a. items shipped
b. items sold on credit
c. items that qualify for a trade discount
d. certain items as specified by the company
Answer
B. A cash discount can be taken if payment is made within a stated number of days for items purchased on credit. The company offers a cash discount on the entire amount owed and it is not offered by item and is not considered a price reduction (trade discount).
7. A company would use the net method of accounting for sales discounts when
a. it is expected the discount will be taken
b. it is not expected the discount will be taken
c. most customers do not take the discount
d. the discount is offered if payment is made within 10 days or less
Answer
A. A company should use the net method when customers are expected to take the discount. The accounts receivable and sales are recorded at the net amount which is the amount that is expected to be collected on the sale. The terms of the discount do not impact whether the net or gross method is used.
8. Which method of recording sales discounts requires “sales discounts – forfeited” to be recorded?
a. net method
b. gross method
c. interest method
d. discount method
Answer
A. The net method records the accounts receivable and the sale initially at the net amount. If the customer pays more than the net amount, the difference is added to sales as sales discounts forfeited.
Bank Reconciliation:
9. An item with a positive amount in the cash general ledger column of the bank reconciliation will be recorded as a
a. debit to cash
b. credit to cash
c. debit to an expense
d. debit to revenue
Answer
A. A positive amount means the item increases the cash account. An increase to cash is recorded with a debit to cash. A debit to an expense or revenue does not increase cash (c. & d.).
10. Reconciling amounts on the bank reconciliation are
a. recorded in the same period by the company and the bank
b. recorded in different periods by the company and the bank
c. always an error made by the company or the bank
d. always added to the company’s cash account
Answer
B. Items on the bank reconciliation are ones that are included in either the company’s cash balance or the bank’s cash balance but not both. This occurs because items are recorded in different time periods (this period or next period). An error will always be on the bank reconciliation, but most items are not errors.
11. When the bank reconciliation shows a reconciling item for an automatic withdrawal made by the company to repay amounts owed to another bank, a journal entry must be made that will
a. debit cash
b. debit notes payable
c. credit interest payable
d. credit notes payable
Answer
B. This transaction is cash taken out of the company’s account and payment made to the note payable reducing the balance owed. This is done with a debit to notes payable and a credit to cash.
12. Reconciling items listed in the bank column will always
a. be recorded by the company in the cash entry
b. be items the company does not know occurred
c. be items the bank has not yet recorded but the company knows occurred
d. be items the company has not yet recorded
Answer
C. Items in the bank column will be recorded by the bank next period and are not recorded in the cash entry because they have already been recorded in the cash account. The company knows the transaction occurred and the bank will know and record the transaction next period.
13. In which column should an error amount be written on the bank reconciliation?
a. always in the company column
b. in the column of the party that made the error
c. in the column of the party that did not make the error
d. in the column of the party that recorded the entry correctly
Answer
B. The error should be written in the column of whoever made the error. The one that made the error is the one that needs to correct it to get to the true balance.
14. Which of the following are always recorded by the company prior to preparing the bank reconciliation?
a. deposits made and checks written
b. deposits and checks that are cleared only
c. service charges
d. interest earned on the average balance
Answer
A. The company only records transactions and amounts that they know about during the period. The company does not know which items have cleared or the exact amount of service charges and interest earned.
15. Deposits in transit are recorded after the bank reconciliation is prepared with
a. a debit to cash
b. a credit to accounts receivable
c. a debit to accounts payable
d. they are not recorded after the bank reconciliation is prepared
Answer
D. Deposits in transit are already recorded by the company when made prior to the end of the period and are not recorded again. The journal entry was made to increase cash when the deposit was made.
16. On February 10th, the company sold goods to a customer for $18,600 with terms
of 1/10, n30. Full payment was received on February 18th.
Record the required entries for the sale and collection given the company uses the
A. Gross method
B. Net method
C. Net method given the payment is received on March 8th.
Answer
The discount was taken because payment was made in 8 days, within the 10 day offer.
The amount of the discount is 1% x 18,600 = 186
Cash received is 18,600 – 186 = 18,414 (99%)
16.A. Gross Method: The receivable is always for the full sales price.
| Accounts Receivable 18,600 Sales 18,600 Cash 18,414 |
16.B. Net Method: The receivable is always for the net amount
| Accounts Receivable 18,414 Sales 18,414 Cash 18,414 Accounts Receivable 18,414 |
16.C. Net Method and no discount taken
| Accounts Receivable 18,414 Sales 18,414 Cash 18,600 Accounts Receivable 18,414 |
17. On August 3rd, the company sold goods to a customer for $25,000 with terms of 1.8 /15, n60. Record the required entries for the sale and collection given full payment was received on September 29th using
A. the gross method
B. the net method
C. the gross method given the payment was received on August 12th
Answer
The discount was not taken because payment was made after 15 days for A. and B.
The amount of the discount offered is 1.8% x 25,000 = 450 The net amount, cash received if the discount is taken, is 25,000 – 450 = 24,550 (98.2%)
17.A. Gross Method: The receivable is always for the full sales price.
| Accounts Receivable 25,000 Sales 25,000 Cash 25,000 |
17.B. Net Method: The receivable is always for the net amount
| Accounts Receivable 24,550 Sales 24,550 Cash 25,000 |
17.C. Gross Method and the Discount is Taken: The receivable is always full price.
| Accounts Receivable 25,000 Sales 25,000 Cash 24,550 |
18. The company has the following information for the month of May:
1. The bank statement ending balance is $4,123 on the May statement
2. The cash account balance is $3,956 on May 31st.
3. The bank service charge for May is $19
4. Deposits not yet posted by the bank as of May 31st total $2,100.
5. Checks written by the company, not yet cleared by the bank on May 31st total $943
6. A customer paid $1,297 with an automatic payment to the company’s account on May 27th.
7. Interest earned on the average balance for May was $46.
A. Prepare the bank reconciliation for the company for the month of May.
B. Prepare the journal entries required to the cash account.
Answer
18.A.
| Cash | Bank | |
| Ending Balance 5/31 | $3,956 | $4,123 |
| Bank service charge | ($19) | |
| Deposits in transit | $2,100 | |
| Outstanding Checks | ($943) | |
| Customer auto payment | 1,297 | |
| Interest earned | 46 | |
| ______ | ______ | |
| Adjusted 5/31 balance | $5,280 | $5,280 |
18.B. Make a journal entry for items in the cash column only.
| Cash 1,324 Service Charge 19 Accounts Receivable 1,297 Interest Revenue 46 |
Cash has increased so cash must be a debit.
A customer payment reduces accounts receivable
Decreases on the reconciliation are recorded as a debit
Increases on the reconciliation are recorded as a credit
19. The company’s unadjusted cash balance on March 31st is $9,012. The following information was determined after reviewing the bank statement:
| Checks that have not cleared the bank | $2,206 |
| Deposits not yet posted by the bank | $2,907 |
| Bank service charges | $ 85 |
| NSF check written by a customer for | $ 125 |
| Bank error – deposit recorded was less than the actual deposit | $ 300 |
| Interest earned by the company $110 for March |
A. Determine the company’s true cash balance on March 31st.
B. Prepare the journal entries required to the cash account.
Answer
19.A.
| Cash | Bank | ||
| Ending Balance 3/31 | $9,012 | $ ?? must be $7,911 | |
| Bank service charge | ($85) | ||
| Deposits in transit | $2,907 | ||
| Outstanding Checks | ($2,206) | ||
| NSF Checks | (125) | ||
| Interest earned | 110 | ||
| Bank error | 300 | ||
| Adjusted 3/31 balance | $8,912 | = | $ ?? must also be $8,912 |
To determine the company’s true cash balance you don’t need to know the bank balance. If you identify all the items the bank recorded and the company has not yet recorded, this will give you the adjusted cash balance. The bank adjusted balance must be the same amount. You can work backwards and get the balance per the bank statement, $7,911.
19.B. Record items in the cash column only
| Service Charge 85 Accounts receivable 125 Cash 100 Interest Earned 110 |
Cash is lower, so you must decrease the cash account with a credit for the difference
A NSF check means the customer did not pay, so you must put the accounts
receivable amount back on the books because they still owe the company.
Service charge is an expense which must be recorded with a debit
Interest earned is a revenue which increases with a credit
Decreases on the reconciliation are recorded as a debit
Increases on the reconciliation are recorded as a credit
20. The company received the bank statement stating the April 30th balance of $12,013 and noted the following items on the bank statement that had not yet been recorded:
Bank fees for the month were $29
Interest earned during the month totaled $148
NSF checks totaled $397
The company’s cash account had the following entries:
| Checks written | $ 7,856 |
| Deposits made | $10,200 |
| Balance on 4/30 | $13,650 |
The company’s accountant noted the following:
| Outstanding checks totaled | $1,300 |
| Deposits in transit | $2,659 |
A. Prepare the bank reconciliation for the company for the month of April.
B. Prepare the journal entries required to adjust the cash account.
Answer
20.A.
| Cash | Bank | ||
| Ending Balance 4/30 | $13,650 | $12,013 | |
| Bank fees | ($29) | ||
| Deposits in transit | $2,659 | ||
| Outstanding Checks | ($1,300) | ||
| NSF Checks | (397) | ||
| Interest earned | 148 | ||
| Adjusted 3/31 balance | $13,372 | = | $13,372 |
Items noted on the bank statement have not been recorded by the company and must be written in the cash column.
Checks written and deposits made are already recorded by the company and included in the ending balance and are not written in the cash column. Only the amounts the bank does not know about are written in the bank column (deposits in transit and outstanding checks)
20. B. Only record items in the cash column. Record the difference in the beginning and ending cash balance to the cash account.
| Bank Fees 29 Accounts Receivable 397 Interest Revenue 148 Cash 278 |
Negative amounts are debits
Positive amounts are credits