Cash

Medium Test 

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Medium Test

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1. Which of the following is an example of good cash internal controls?

a. the same person receives checks and records checks from customers
b. the bank reconciliation is done annually
c. outstanding checks do not ever occur
d. the accounting manager signs all checks after agreeing the check to supporting documentation approved by another manager

Answer
D. Good internal controls have approval procedures before money is paid. A different manager should give approval before the check is signed by the accounting manager. The same person should not handle cash and record cash (a). Bank reconciliations should be done monthly (b). Outstanding checks will occur every month due to the delay of when the check is written and the check is cleared by the bank (c).
2. Cash equivalents are defined as

a. short term investments of one month or less
b. short term investments of three months or less
c. short term investments of one year or less
d. certificates of deposits only

Answer
B. Cash equivalents are short term investments of three months or less with no interest rate risk and market value is not expected to change.
3. The cash and cash equivalents balance will not include

a. foreign currency
b. one-year treasury bills
c. customer checks received and not deposited by the bank
d. checks written and not cleared

Answer
B. Cash and cash equivalents consist of cash and all short term investment with a maturity of less than 3 months. Foreign currency is considered cash. Checks are recorded to the cash balance when written or received from the customer.  
4. COSO defines internal control as the process that provides reasonable assurance regarding meeting the objectives of

a. compliance with COSO codes and regulations
b. providing financial statements that are 100% accurate
c. effectiveness and efficiency of operations
d. all of the above

Answer
C. One objective of strong internal controls is to enhance the effectiveness and efficiency of the company’s operations. COSO does not have a code of regulations that companies must follow. Financial statements are required to be in accordance with GAAP in all material respects, not 100% accurate.
5. When a company ships good to a customer who later refuses to accept the order, accounts receivable is credited and _________ is debited.

a. sales discounts
b. sales returns
c. sales allowances
d. net sales

Answer
B. The goods will be returned and “sales returns” is debited. “Sales returns” is a contra revenue account that reduces net sales. Sales discount is used when a customer pays for goods within the discount period and the gross method is used. Sales allowances is used for customer price discounts.
6. A “compensating balance” means

a. there are funds in a bank account that can not be used
b. the amount is subject to interest expense
c. the amount is available to be used
d. the amount the bank is willing to loan

Answer
A. A compensating balance is the amount that must be left in the bank account that can not be spent. This is usually associated with a line of credit or a short term loan.
Bank Reconciliation:
7. A company that is notified of a non-sufficient funds check related to a customer should

a. credit cash for the amount of the check
b. credit accounts receivable for the amount of the check
c. not put the amount as a reconciling item on the bank reconciliation
d. debit cash for the amount of the check

Answer
A. A non-sufficient funds check means the check did not clear and company was not paid. Since the company was not paid, the customer still owes the company. The entry that was made when the check was deposited, debit cash and credit accounts receivable, must be reversed. Cash was not really received and it must be credited to decrease the balance.
8. A deposit in transit should be written on the bank reconciliation as

a. a positive amount in the company general ledger cash column
b. a positive amount in the bank column
c. a negative amount in the bank column
d. a negative amount in the company general ledger cash column

Answer
B. A deposit in transit will be added to the bank account when the deposit is posted by the bank. Items the bank will record next period go in the bank column. It has already been added to the company cash account. “Added” to cash is done with a positive amount on the bank reconciliation.
9. When preparing the monthly bank reconciliation, the accountant noticed that a check written for $300 was cleared by the bank for $280. How should the error be stated on the bank reconciliation?

a. as a positive amount in the bank column for $20
b. as a negative amount in the bank column for $20
c. as a positive amount in the company cash G/L column for $280
d. as a negative amount in the company cash G/L column for $20

Answer
B. The error was made by the bank so the amount is written in the bank column. The amount is a negative $20 because if the check had cleared for the correct amount the bank account would have $20 less. The amount will always be the difference.
10. When preparing the monthly bank reconciliation, the accountant noticed that a deposit in the amount of $1,000 was stated on the bank statement as $1,100. How should the error be stated on the bank reconciliation?

a. as a positive amount in the bank column for $100
b. as a negative amount in the bank column for $100
c. as a positive amount in the company cash G/L column for $100
d. as a negative amount in the company cash G/L column for $100

Answer
B. The error was made by the bank so the amount is written in the bank column. The amount will always be for the difference. If the deposit was posted for the correct amount, the bank balance would be $100 less. The amount is negative to reduce the bank balance to what it should be.
11. Amounts written in the company cash G/L column should include

a. errors made by the bank
b. deposits in transit
c. outstanding checks
d. non-sufficient funds checks

Answer
D. Non-sufficient funds checks are not known by the company until they receive notice on the bank statement. Items not yet know by the company are recorded in the company cash column. The error made by the bank must be fixed by the bank so it is in the bank column (a). The company has already recorded the deposits in transit and outstanding checks. The bank does not know about (b. & c.) and these go in the bank column.
12. Which of the following requires a journal entry after the bank reconciliation has been prepared?

a. a deposit in transit
b. an outstanding check
c. a service charge
d. an error made by the bank

Answer
C. Only amounts in the company cash column will be recorded. These are items that were not recorded before the bank statement was received. (a.) & (b.) have already been recorded by the company. (d.) will not be recorded by the company.
13. On March 2nd the company sold inventory that cost $34,000 for a price of $52,000. Terms to the customer were 2.5/15, n 30. Payment of $22,000 was received on March 14th and $29,000 was received on March 29th. All amounts are stated as gross. Record the required journal entries for the sale and collections given the company uses the

A. net method
B. gross method

Answer

The gross sales price to the customer is $52,000. The discount offered to the customer is $52,000 x 2.5% = $1,300 and the net amount is $52,000 – $1,300 = 50,700

Collections:

Gross 22,000 – discount 2.5% of 550 = 21,450 net
Gross 29,000 – discount 2.5% of 725 = 28,275 net

13.A. Net method: Record the accounts receivable always at the net amount

March 2nd Sale:

Accounts Receivable                 50,700
             Sales                                           50,700

March 14th Collection, take the discount:

Cash                                    21,450
            Accounts Receivable         21,450

March 29thCollection, did not take the discount:

Cash                                           29,000
            Accounts Receivable                  28,275
            Sales Discount – Forfeited         725

Note: the balance in accounts receivable is now $975, net.

13.B. Gross method: Record the accounts receivable always at the full amount

March 2nd Sale:

Accounts Receivable               52,000
             Sales                                         52,000

 

March 14th Collection, take the discount:

Cash                                          21,450
Sales Discount                              550
          Accounts Receivable                22,000

March 29th Collection, did not take the discount:

Cash                                              29,000
           Accounts Receivable                   29,000

Note: The balance in accounts receivable is now $1,000, gross.

14. On July 6th the company sold inventory with a normal sales price of $36,000 to a long-term customer for a trade discount of 20%. Terms to the customer are always 1/10, n 40. Payment representing gross amounts of $26,500 was received on July 14th and $1,000 was received on September 29th. Record the required journal entries for the sale and collections given the company uses the

A. gross method
B. net method

Answer

The gross sales price to the customer is $36,000 x 80% = 28,800. The discount offered to the customer is $28,800 x 1% = $288 and the net amount is $28,800 – $288 = 28,512

Collections:

Gross 26,500 – discount 1% of 265 = 26,235 net
Gross 1,000 – discount 1% of 10 = 990 net

14.A. Gross method: Record the accounts receivable always at the full amount

July 6th Sale, the trade discount is not recorded:

Accounts Receivable                 28,800
               Sales                                        28,800

July 14th Collection, take the discount:

Cash                                            26,235
Sales Discount                                265
           Accounts Receivable                  26,500

September 29th Collection, did not take the discount:

Cash                                        1,000
          Accounts Receivable             1,000

Note: The balance in accounts receivable is now $1,300, gross.

14.B. Net method: Record the accounts receivable always at the net amount

July 6th Sale, the trade discount is not recorded:

Accounts Receivable              28,512
               Sales                                    28,512

March 14th Collection, take the discount:

Cash                                           26,235
           Accounts Receivable               26,235

March 29th Collection, did not take the discount:

Cash                                         1,000 
           Accounts Receivable               990
           Sales Discount – Forfeited        10

Note: The accounts receivable balance is $1,287, net.

15. The company’s May 31st bank statement showed an ending balance of $8,827
The unadjusted cash balance for the company on May 31st is $7,835. The following information was gathered by the company’s accountant:

Check # 21 was written for $196 to utility expense and cleared by the bank for $169
Check # 29 was recorded for $389 to pay a supplier owed and the bank correctly
     cleared it for $398
Outstanding checks totaled $2,789
Deposits in transit totaled $1,654
A customer had a NSF check in the amount of $235
The bank statement showed $103 interest earned on the outstanding balance
Deposits made and cleared totaled $14,926
Checks written and cleared totaled $18,976
Bank fees were $29

A. Prepare the bank reconciliation for the company for the month of May.
B. Prepare the journal entries required to the cash account.

Answer

15.A.

Cash Bank
Ending Balance 5/31 $7,835 $8,827
Bank fees ($29)
Deposits in transit $1,654
Outstanding Checks ($2,789)
NSF Checks (235)
Interest earned 103
Bank Error ($27)
Company Error      ($9)
Adjusted 5/31 balance $ 7,665 = $7,665

Deposits made and cleared and checks written and cleared are already recorded by both the bank and the company and are not a reconciling item.

Reconciling items are items not yet recorded by both or errors to be fixed.

15.B. Record only items in the cash column. Record the difference in the current ending balance and the adjusted balance to the cash account.

Accounts Payable                  9 **
Bank Fees                               29
Accounts Receivable           235
                     Interest Revenue       103
                     Cash                             170

** The error was made on the check to pay a supplier owed.
The entry to record the check debited accounts payable.
The additional amount must go to accounts payable also.

Do not use the account “error”, this is not an account.
Use the account name that was used in the entry that recorded the error.

Negative amounts are debits
Positive amounts are credits

16. On April 30th, the balance on the bank statement was $11,749. The cash balance on the books on April 30th was $19,765. Total checks written were $39,014 and checks that have yet to clear total $1,329. Total deposits for the month were $44,209 and deposits in transit totaled $3,976. The bank statement showed the following: NSF check for $300. Interest earned $110. Service charges $40. Auto direct payment of a utility bill was $239. Auto direct payment to a supplier was $4,900.

A. Prepare the bank reconciliation for the company for the month of May.
B. Prepare the journal entries required to the cash account.

Answer

16.A.

Cash Bank
Ending Balance 4/30 $19,765 $11,749
Service Charges ($40)
Deposits in transit $3,976
Outstanding Checks ($1,329)
NSF Checks (300)
Interest earned 110
Auto Payment ($239)
Auto Payment ($4,900)
Adjusted 4/30 balance $14,396 = $14,396

16.B. Record only amounts in the cash column.
Record the total difference in the cash column to the cash account.
Negatives are debits, positives are credits.

Service Charges                         40
Accounts Receivable               300
Utilities Expense                      239
Accounts Payable                    4,900
               Interest Revenue                 110
               Cash                                       5,369

Do not use “auto…” in the journal entry.
Use the account that describes what the payment/receipt was made for