Cash

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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

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 with interest rate risk
c. short term financial instruments whose fair market value changes
d. both a. & c.

Answer
A. By definition, cash equivalents are short term financial instruments readily exchangeable for cash, with a market value not expected to change with interest rate risk, usually having a maturity of 90 days or less.  
3. Restricted cash is reported as

a. cash
b. cash and cash equivalents
c. other long-term assets
d. investments and funds

Answer
D. Restricted cash is reported on the balance sheet as investments and funds. Current or noncurrent depends on how long the cash is restricted. The restricted cash is typically invested in very low risk securities.
4. The Committee of Sponsoring Organizations (COSO) provides a framework for

a. audit standards
b. the design and implementation of control systems
c. bank reconciliations
d. the format of financial statements

Answer
B. The Committee of Sponsoring Organizations provides a framework for defining internal control procedures that provide: 1) effectiveness and efficiency of operations 2) reliability of financial reporting and 3) compliance with applicable laws and regulations
5. 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

Answer
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.  
6. 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

Answer
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. 
Sales / Cash Discounts:
7. A cash discount is

a. the same thing as bad debt expense
b. offered to all customers by all companies
c. offered for early payment to customers
d. cost effective for the company offering the discount

Answer
C. A cash discount is a discount offered to customers who pay prior to the invoice due date. It is not offered by all companies because it is very costly. It is offered by companies who are in need of cash and can not borrow for a lower interest cost.
8. The term 2/20, n 40 means

a. 2% or 20% discount depending on when payment is made
b. 20% discount if payment is made within 40 days
c. 2% discount if payment is made within 20 days
d. 2% discount if payment is made within 40 days

Answer
C. The first number is the % discount offered. The second number is the number of days the payment must be made within to take the discount. The last number means the full amount is due in this number of days if the discount is not taken.
9. The account “sales discount” is reported

a. net of sales on the income statement
b. net of accounts receivable on the balance sheet
c. as an additional receivable on the balance sheet
d. as an expense on the income statement

Answer
A. Sales discount is a contra revenue account that is reported as a reduction to sales on the income statement.
10. The account “sales discount – forfeited” is used under which method?

a. the gross method
b. the net method
c. the revenue method
d. both a. and b.

Answer
B. Sales discount – forfeited is recorded when the discount is not taken under the net method. The net method assumes the discount will be taken and when it is not, the company adds “sales discounts – forfeited” to sales to get total sales.
11. When using the gross method to record receivables, accounts receivables is always recorded at the

a. full amount of the sale
b. amount actually collected from the customer
c. the full amount of the sale x the discount percent
d. the full amount of the sale x 1 less the discount percent

Answer
A. Accounts receivable is always recorded at the full amount of the sale for both debits and credits when using the gross method to record receivables.
12. When using the net method to record receivables, accounts receivables is always recorded at the

a. full amount of the sale
b. amount actually collected from the customer
c. the full amount of the sale x the discount percent
d. the full amount of the sale x 1 less the discount percent

Answer
D. When using the net method to record receivables, accounts receivable is always recorded at the net amount of the sale for both debits and credits. The net amount is computed as the full amount of the sales x 1 less the discount percent. It is the amount the company expects to collect.
13. Which of the following companies would typically offer a sales discount

a. a company that is attempting to get sales to grow
b. a company that does not have enough cash on hand to pay current liabilities
c. a company that does not have enough cash on hand to pay non current liabilities
d. a company attempting to maximize net income

Answer
B. A company that does not have enough cash on hand to pay current liabilities will resort to offering a sales/cash discount. It is an expensive way to generate cash and is not done unless the company needs cash. Cash to pay long term liabilities is often generated through other more permanent sources. A trade discount is used to lower prices to encourage sales growth (a.).  
Bank Reconciliation:
14. 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.

Answer
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.
15. Which of the following is recorded in the general ledger cash account during the month?

a. checks written and cleared
b. checks written
c. deposits made and cleared
d. deposits recorded by the bank

Answer
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 a check or records a deposit.
16. 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

Answer
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.  
17. 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

Answer
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.)
18. Which of the following is an item the bank will have recorded that has not yet been recorded by the company?

a. Nonsufficient funds check
b. Bank fees and service charges
c. automatic deposits and withdrawals
d. all of the above

Answer
D. The company typically waits to record all of the above after the bank statement is received. The amount of these items is not always known until the bank statement is received.
19. 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

Answer
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).
20. 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

Answer
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.
21. 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

Answer
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.  
22. 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

Answer
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.)
23. 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

Answer
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.
24. 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

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.