CHAPTER 7

INTERNAL CONTROL AND CASH

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF
DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
Bloom’ CP AACSB L LO Bloom’s CPA AACSB L LO Bloom’ CP AACSB
Item LO LOD Item Item
s A O D O D s A
True-False Statements
1. 1 E K AA AN 11. 2 E C AA AN 21. 3 M C AA AN
2. 1 E K AA AN 12. 2 E C AA AN 22. 3 E C AA AN
3. 1 M C AA AN 13. 2 M C AA AN 23. 3 M C AA AN
4. 1 M C AA AN 14. 2 E C AA AN 24. 4 E K AA AN
5. 1 M K AA AN 15. 2 E C AA AN 25. 4 M K AA AN
6. 1 M K AA AN 16. 3 E C AA AN 26. 4 M C AA AN
7. 1 M C AA AN 17. 3 E C AA AN 27. 4 E K AA AN
8. 1 E C AA AN 18. 3 M K AA AN 28. 4 E C AA AN
9. 1 M C AA AN 19. 3 M K AA AN 29. 4 E C AA AN
10. 1 E C AA AN 20. 3 E K AA AN
Multiple Choice Questions
30. 1 M C AA AN 52. 1 H C AA AN 74. 3 M C AA AN
31. 1 M C AA AN 53. 1 M C AA AN 75. 3 E C AA AN
32. 1 H K AA AN 54. 1 E C AA AN 76. 3 M AP AA AN
33. 1 E K AA AN 55. 2 E C AA AN 77. 3 M AP AA AN
34. 1 E C AA AN 56. 2 E C AA AN 78. 3 M C AA AN
35. 1 M K AA AN 57. 2 M C AA AN 79. 3 M C AA AN
36. 1 M K AA AN 58. 2 E C AA AN 80. 3 M C AA AN
37. 1 E K AA AN 59. 2 E C AA AN 81. 3 E C AA AN
38. 1 M K AA AN 60. 2 M C AA AN 82. 3 E AP AA AN
39. 1 M C AA AN 61. 2 M C AA AN 83. 3 H AP AA AN
40. 1 M C AA AN 62. 2 E K AA AN 84. 3 M AP AA AN
41. 1 M C AA AN 63. 2 E C AA AN 85. 3 M AP AA AN
42. 1 M C AA AN 64. 2 M C AA AN 86. 3 H AP AA AN
43. 1 E C AA AN 65. 3 M K AA AN 87. 4 M C AA AN
44. 1 M K AA AN 66. 3 M C AA AN 88. 4 M C AA AN
45. 1 E K AA AN 67. 3 M C AA AN 89. 4 M C AA AN
46. 1 E K AA AN 68. 3 M C AA AN 90. 4 M C AA AN
47. 1 E C AA AN 69. 3 M C AA AN 91. 4 E K AA AN
48. 1 M K AA AN 70. 3 M C AA AN 92. 4 M K AA AN
49. 1 M C AA AN 71. 3 E C AA AN 93. 4 M K AA AN
50. 1 H C AA AN 72. 3 E C AA AN 94. 4 E K AA AN
51. 1 M K AA AN 73. 3 M K AA AN 95. 4 E C AA AN

LOD: E = Easy M = Medium H = Hard

Bloom’s: AP = Application C = Comprehension K = Knowledge
CPA: AA = Audit & Assurance
AACSB: AN = Analytic

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7 - 2 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

SUMMARY OF QUESTION TYPES BY LEARNING OBJECTIVE, LEVEL OF

DIFFICULTY, BLOOM’S TAXONOMY, CPA CODES, AND AACSB CODES
(CONT’D)
Bloom’ L LO Bloom’ L LO Bloom’ CP
Item LO LOD CPA AACSB Item CPA AACSB Item AACSB
s O D s O D s A
Exercises
96. 1 H C AA AN 104. 3 H AP AA AN 112. 3 M C AA AN
97. 1 E C AA AN 105. 3 M C AA AN 113. 3 H AP AA AN
98. 1 E C AA AN 106. 3 E AP AA AN 114. 3 M AP AA AN
99. 1 M C AA AN 107. 3 E AP AA AN 115. 3 E AP AA AN
100. 1,2 M C AA AN 108. 3 E AP AA AN 116. 3 M AP AA AN
101. 1,2 M C AA AN 109. 3 M AP AA AN 117. 3 E C AA AN
102. 1,3 H AP AA AN 110. 3 M AP AA AN 118. 3 H AP AA AN
103. 2,4 M AP AA AN 111. 3 M AP AA AN 119. 4 H AN AA AN
Matching
1–4 E, K AA AN
120.
M
Short-Answer Essay
121. 1 E C AA AN 124. 3 M C AA AN 127. 4 E C AA AN
1 M AA, AN 3 AA AN 4 AA AN
122. C 125. M C 128. M C
C
2 M AA AN 3 AA, AN
123. C 126. M C
C
CPA Questions
1 M AA AN 3, AA AN 4 AN
129. C 131. H AN 133. M AN AA
4
130. 3 M AN AA AN 132. 4 M C AA AN

LOD: E = Easy M = Medium H = Hard

Bloom’s: AN = Analysis AP = Application C = Comprehension
CPA: AA = Audit & Assurance C = Communication
AACSB: AN = Analytic

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 Internal Control and Cash 7 - 3

SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 8. TF 34. MC 41. MC 47. MC 54. MC 102. Ex
2. TF 9. TF 35. MC 41. MC 48. MC 96. Ex 120. Ma
3. TF 10. TF 36. MC 42. MC 49. MC 97. Ex 121. SAE
4. TF 30. MC 37. MC 43. MC 50. MC 98. Ex 122. SAE
5. TF 31. MC 38. MC 44. MC 51. MC 99. Ex 129. CP
6. TF 32. MC 39. MC 45. MC 52. MC 100. Ex
7. TF 33. MC 40. MC 46. MC 53. MC 101. Ex
Learning Objective 2
11. TF 14. TF 56. MC 59. MC 62. MC 100. Ex 120. Ma
12. TF 15. TF 57. MC 60. MC 63. MC 101. Ex 123. SAE
13. TF 55. MC 58. MC 61. MC 64. MC 103. Ex
Learning Objective 3
16. TF 65. MC 73. MC 81. MC 105. Ex 113. Ex 125. SAE
17. TF 66. MC 74. MC 82. MC 106. Ex 114. Ex 126. SAE
18. TF 67. MC 75. MC 83. MC 107. Ex 115. Ex 130. CP
19. TF 68. MC 76. MC 84. MC 108. Ex 116. Ex 131. CP
20. TF 69. MC 77. MC 85. MC 109. Ex 117. Ex
21. TF 70. MC 78. MC 86. MC 110. Ex 118. Ex
22. TF 71. MC 79. MC 102. Ex 111. Ex 120. Ma
23. TF 72. MC 80. MC 104. Ex 112. Ex 124. SAE
Learning Objective 4
24. TF 28. TF 89. MC 93. MC 119. Ex 131. CP
25. TF 29. TF 90. MC 94. MC 120. Ma 132. CP
26. TF 87. MC 91. MC 95. MC 127. SAE 133. CP
27. TF 88. MC 92. MC 103. Ex 128. SAE

Note: TF = True-False MC = Multiple Choice Ma = Matching

Ex = Exercise SAE = Short-Answer Essay CP = CPA Questions

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7 - 4 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

CHAPTER LEARNING OBJECTIVES

1. Explain the components of an internal control system, including its control activities and
limitations. Internal control systems have the following components: the control environment, risk
assessment, control activities, information and communication, and monitoring activities. Control activities
include assignment of responsibility, segregation of duties, documentation, physical controls, and review
and reconciliation.

2. Apply the key control activities to cash receipts and payments. Control activities over cash receipts
include (a) designating only personnel such as cashiers to handle cash; (b) assigning the duties of
receiving cash, recording cash, and custody of cash to different individuals; (c) obtaining remittance
advices for mail receipts, cash register tapes for over-the-counter receipts, and deposit slips or
confirmations for bank deposits; (d) using company safes and banks to store cash, with access limited to
authorized personnel, and using cash registers in executing over-the-counter receipts; (e) depositing all
cash intact daily in the bank account or using EFT; and (f) making independent daily counts of register
receipts and daily comparisons of total receipts with total deposits.
Control activities over cash payments include (a) making all payments by cheque or by EFT; (b) having
only specified individuals authorized to sign cheques; (c) assigning to different individuals the duties of
approving items for payment, paying the items, and recording the payments; (d) using prenumbered
cheques and accounting for all cheques; (e) storing blank cheques in a safe with access restricted to
authorized personnel, and using electronic methods to print amounts on cheques; (f) comparing each
cheque or EFT payment with the approved invoices before initiating payments; and (g) making monthly
reconciliations of bank and book balances.

3. Prepare a bank reconciliation. In reconciling the bank account, the cash balance per the company’s
books is reconciled with the cash balance reported by the bank on the bank statement. There can be
differences between the company’s books and the bank due to timing differences and errors. Reconciling
items for the bank include deposits in transit, outstanding cheques, and any errors made by the bank.
Reconciling items for the company include EFT receipts, interest, EFT payments, service charges, NSF
cheques, and any errors made by the company. Journal entries must be made for all items required to
adjust the balance per books to the reconciled cash balance.

4. Explain the reporting and management of cash. Cash is usually the first current asset listed on the
statement of financial position. Cash that is restricted for a special purpose is reported separately as a
current asset or as a non-current asset, depending on when the cash is expected to be used.
Compensating balances are a form of restriction on the use of cash and are reported as a current or non-
current asset depending on the term of the restriction.
The six principles of cash management are to (a) collect receivables quicker, (b) keep inventory levels low,
(c) delay the payment of liabilities, (d) plan the timing of major expenditures, (e) invest idle cash, and (f)
prepare a cash budget.

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 Internal Control and Cash 7 - 5

TRUE-FALSE STATEMENTS

1. Fraud is an unintentional act to misappropriate (steal) assets or misstate financial statements.

2. Errors give rise to unintentional misstatements in the financial statements.

3. The responsibility for keeping the records for an asset should be separate from the physical custody of that
asset.

4. The person responsible for making credit sales should be the vice-president of finance.

5. External auditors report on whether or not the company’s financial statements fairly present its financial
position and results of operations.

6. External auditors are usually employees of the company.

7. An effective control activity results when at least two individuals are assigned to one cash drawer so that
each can serve as check on the other.

8. The responsibility for ordering, receiving, and paying for merchandise should be assigned to different
individuals.

9. Segregation of duties among employees eliminates the possibility of collusion.

10. All documents should be prenumbered.

11. The use of a bank account makes internal control over cash more difficult.

12. The use of electronic funds transfers normally results in better control over cash.

13. Control over cash disbursements is improved if all expenditures are paid by cheque or through use of
electronic funds transfers.

14. An example of segregation of duties is having a cheque signer record cash disbursements.

15. An authorized signing officer should sign a cheque only after reviewing the appropriate supporting
documentation.

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7 - 6 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

16. To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by the person
authorized to sign cheques.

17. Electronic funds transfers never have to be recorded.

18. All reconciling items in determining the reconciled cash balance per books require the depositor to make
adjusting journal entries to the Cash account.

19. NSF cheques received from customers are debited by the bank to the depositor’s account.

20. A bank reconciliation is generally prepared by the bank and sent to the depositor along with cancelled
cheques.

21. An NSF cheque that was received is recorded as an account receivable.

22. NSF cheques received are accounted for by adding them to the cash balance per books.

23. Deposits in transit require an adjustment to the cash balance per books.

24. Management only needs to know how much cash is available at the end of the month (when the bank
reconciliation is prepared).

25. Debt investments due within three months are normally classified as cash equivalents.

26. A compensating balance is always reported as a non-current asset.

27. Cash restricted in use should be reported separately on the statement of financial position.

28. When the cash account has a credit balance in the general ledger, it is reported as a non-current liability.

29. Idle cash should be reported as restricted cash.

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 Internal Control and Cash 7 - 7

ANSWERS TO TRUE-FALSE STATEMENTS

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. F 11. F 16. F 21. T 26. F
2. T 7. F 12. T 17. F 22. F 27. T
3. T 8. T 13. T 18. T 23. F 28. F
4. F 9. F 14. F 19. T 24. F 29. F
5. T 10. T 15. T 20. F 25. T

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7 - 8 Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

MULTIPLE CHOICE QUESTIONS

30. Which of the following statements is true?

(a) A good system of internal control does not require monitoring.
(b) Risk assessment is one component of a good system of internal control.
(c) When one individual is responsible for all related activities, the potential for errors and irregularities is
decreased.
(d) Control activities are most effective when several people are responsible for a given task.

31. Which of the following statements is true in terms of an internal control system?
(a) A good internal control system will help a company achieve reliable financial reporting, effective and
efficient operations, and compliance with laws and regulations.
(b) An internal control system cannot be considered effective until the possibility of human error has been
completely eliminated.
(c) Only large companies need to be concerned with a system of internal control.
(d) The extent of internal control activities adopted by a company must not be evaluated in terms of cost-
benefit.

32. Internal controls may be limited by each of the following except

(a) the size of the business.
(b) the human element.
(c) internal audits.
(d) collusion.

33. Which one of the following is not a primary component of an internal control system?
(a) control activities
(b) delay payment of liabilities
(c) risk assessment
(d) control environment

34. Independent internal reviews should be done

(a) at the end of each accounting period.
(b) at the end of each month.
(c) periodically on a surprise basis.
(d) by the external auditor.

35. All of the following are examples of a control activity except

(a) using prenumbered documents.
(b) reconciling the bank statement.
(c) insistence that employees work overtime.
(d) prenumbering cheques.

36. All of the following are examples of a control activity except

(a) an extensive marketing plan.
(b) assignment of responsibility.
(c) segregation of duties.
(d) insurance on assets.
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 Internal Control and Cash 7 - 9

37. All of the following are examples of a control activity except

(a) limited access to assets.
(b) review and reconciliation.
(c) assignment of responsibility.
(d) increasing the speed of collection on receivables.

38. Which of the following is not a limitation of internal control?

(a) cost of establishing control procedures
(b) the human element
(c) use of a bank account
(d) the size of the company

39. Internal controls are concerned with all of the following except
(a) computerized systems of accounting.
(b) effective and efficient operations.
(c) ensuring reliable financial reporting.
(d) compliance with relevant laws and regulations.

40. An employee who makes a sale, ships the goods, and bills the customer violates which control activity?
(a) review and reconciliation
(b) documentation
(c) segregation of duties
(d) assignment of responsibility

41. Physical controls are not designed to safeguard assets from

(a) natural disasters.
(b) employee theft.
(c) robbery.
(d) unauthorized use.

42. Having one person responsible for the related activities of ordering merchandise, receiving goods, and
paying for them
(a) increases the potential for errors and fraud.
(b) decreases the potential for errors and fraud.
(c) is an example of a control activity.
(d) reduces cost and maximizes benefit.

43. External auditors

(a) evaluate the system of internal controls for the companies that employ them.
(b) are employees of the company.
(c) are independent of the company.
(d) plan and perform an internal audit.

44. Internal auditors

(a) are hired by independent accounting firms to audit companies.
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7 - 10Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

(b) are employees of the government who evaluate the internal controls of companies filing tax returns.
(c) evaluate the system of internal controls for the companies that employ them.
(d) cannot evaluate the system of internal controls of the companies that employ them because they are not
independent.

45. When two or more people get together for the purpose of circumventing prescribed controls, it is called
(a) fraud prevention.
(b) collusion.
(c) a division of duties.
(d) assignment of responsibilities.

46. The control activity related to not having the same person authorize and pay for goods is known as
(a) physical controls.
(b) review and reconciliation.
(c) segregation of duties.
(d) assignment of responsibility.

47. Arthur is warehouse custodian and also maintains the accounting records of the inventory held at the
warehouse. Which control activity is violated?
(a) documentation
(b) review and reconciliation
(c) segregation of duties
(d) assignment of responsibility

48. Physical controls to safeguard assets do not include

(a) cashier department supervisors.
(b) vaults.
(c) safety deposit boxes.
(d) locked warehouses.

49. In large companies, review and reconciliation is often assigned to

(a) shift supervisors.
(b) management.
(c) internal auditors.
(d) external auditors.

50. Maximum benefit from review and reconciliation is obtained when

(a) it is made on a pre-announced basis.
(b) it is done by the employee possessing custody of the asset.
(c) discrepancies are reported to management.
(d) it is done at the time of the external audit.

51. The independent audit committee of the board of directors is not responsible for reviewing the company’s
internal control systems to ensure that they are adequate to result in
(a) fair financial results.
(b) complete financial results.
(c) reasonable financial results.
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 Internal Control and Cash 7 - 11

(d) accurate financial results.

52. A system of internal control can only provide reasonable assurance, which is based on the belief that
(a) the system is infallible.
(b) the system can always detect errors and irregularities.
(c) the costs of establishing control activities should not be greater than their expected benefit.
(d) the human element is not important.

53. Two employees at a retail store work the same cash register. You evaluate this situation as
(a) a violation of assignment of responsibility.
(b) a violation of segregation of duties.
(c) supporting assignment of responsibility.
(d) supporting review and reconciliation.

54. An accounts payable clerk also has cheque signing authority. Which control procedure is violated?
(a) assignment of responsibility
(b) review and reconciliation
(c) documentation
(d) segregation of duties

55. The use of electronic funds transfers

(a) normally results in better internal controls.
(b) does not require segregation of duties.
(c) eliminates opportunities for fraud.
(d) does not require proper authorization.

56. Which of the following is not a good control activity over cash?
(a) Payments to creditors should be made in cash.
(b) There should be limited access to cash.
(c) The amount of cash on hand should be kept at a minimum.
(d) Cash should be deposited daily.

57. Control over cash disbursements is generally more effective when

(a) all bills are paid in cash.
(b) disbursements are made by the accounts payable subsidiary clerk.
(c) payments are made by cheque or electronic funds transfer.
(d) all purchases are made on credit.

58. Which of the following is not a suggested procedure to establish a good control activity over cash
disbursements?
(a) pre-signed blank cheques
(b) Different individuals approve and make payments.
(c) Blank cheques are stored with limited access.
(d) The bank statement is reconciled monthly.

59. Which of the following is not a control activity over cash?

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7 - 12Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

(a) Only designated personnel are authorized to handle cash.

(b) The same individual receives the cash and pays the bills.
(c) Surprise audits of cash on hand should be made occasionally.
(d) Access to cash is limited.

60. The use of prenumbered cheques is an example of

(a) documentation.
(b) review and reconciliation.
(c) assignment of responsibility.
(d) segregation of duties.

61. Allowing only the treasurer to sign cheques is an example of which control activity?
(a) documentation
(b) segregation of duties
(c) physical controls
(d) assignment of responsibility

62. Blank cheques

(a) should be safeguarded.
(b) should be pre-signed.
(c) do not need to be safeguarded since they must be signed to be valid.
(d) should not be prenumbered.

63. An employee authorized to sign cheques should not record

(a) shipping documents.
(b) mail receipts.
(c) cash disbursement transactions.
(d) sales transactions.

64. Which of the following is considered to be Cash?

(a) returned cheques
(b) cheques
(c) postdated cheques
(d) stale-dated cheques

65. A bank statement

(a) lets a depositor know the financial position of the bank as of a certain date.
(b) is a credit reference letter written by the depositor's bank.
(c) is a bill from the bank for services provided.
(d) shows the activity that increased or decreased the depositor's account balance.

66. Which one of the following would not cause a bank to debit a depositor's account?
(a) bank service charge
(b) collection of a note receivable
(c) payment of a note payable
(d) cheques marked NSF

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 Internal Control and Cash 7 - 13

67. On the April 30 bank reconciliation, a deposit made by a company to its bank account on April 18 will likely
appear as a(n)
(a) addition to the balance per books.
(b) deduction from the balance per books.
(c) deduction from the balance per bank.
(d) This will not affect the current period’s bank reconciliation.

68. An NSF cheque received from a customer should appear in which section of the bank reconciliation?
(a) addition to the balance per books
(b) deduction from the balance per books
(c) addition to the balance per bank
(d) deduction from the balance per bank

69. On a bank reconciliation, which of the following would be deducted from the balance per books?
(a) outstanding cheques
(b) deposits in transit
(c) electronic payment by a customer on account
(d) bank service charges

70. On a bank reconciliation, which of the following would be added to the balance per books?
(a) outstanding cheques
(b) deposits in transit
(c) electronic payment by a customer on account
(d) bank service charges

71. On a bank reconciliation, which of the following would be deducted from the balance per bank?
(a) outstanding cheques
(b) deposits in transit
(c) electronic payment by a customer on account
(d) bank service charges

72. On a bank reconciliation, which of the following would be added to the balance per bank?
(a) outstanding cheques
(b) deposits in transit
(c) electronic payment by a customer on account
(d) bank service charges

73. A cheque in the amount of $425 was returned by the bank marked "NSF". A bank service fee of $20 was
charged for processing the returned cheque. Upon notification of the NSF, the company who initially received
the customer’s cheque will most likely
(a) reverse the customer’s payment on their books to re-establish the accounts receivable for $425.
(b) make no changes to the accounting records but advise the customer that the payment was declined and is
still outstanding.
(c) reverse the customer’s payment on their books to re-establish the accounts receivable for $425 and debit
bank charges expense for the bank service fee of $20.
(d) reverse the customer’s payment on their books to re-establish the accounts receivable for $425 and debit
the accounts receivable for the bank service fee of $20.
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7 - 14Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

74. Outstanding cheques from the prior period which clear the bank in the current period
(a) should be added to the balance per books.
(b) should be deducted from the balance per books.
(c) should be deducted from the balance per bank.
(d) do not affect the current period’s bank reconciliation.

75. In preparing a bank reconciliation, outstanding cheques are

(a) added to the balance per bank.
(b) deducted from the balance per books.
(c) added to the balance per books.
(d) deducted from the balance per bank.

76. If a cheque correctly written and paid by the bank for $483 is incorrectly recorded on the company's books
for $384, the appropriate treatment on the bank reconciliation would be to
(a) add $99 to the balance per bank.
(b) add $99 to the balance per books.
(c) deduct $99 from the balance per books.
(d) deduct $99 from the balance per bank.
Solution: $384 – $483 = ($99)

77. A cheque written by the company for $182 is incorrectly recorded as $218. On the bank reconciliation, the
$36 error should be
(a) added to the balance per books.
(b) deducted from the balance per books.
(c) added to the balance per bank.
(d) deducted from the balance per bank.

78. For which of the following errors should the appropriate amount be added to the balance per bank on a
bank reconciliation?
(a) cheque for $86 recorded as $68 by the depositor
(b) deposit of $300 recorded by the bank as $30
(c) a paid cheque for $600 recorded by the bank as $60
(d) cheque for $28 recorded as $82 by the depositor

79. Which of the following bank reconciliation items would not require an adjusting entry on the depositor’s
books?
(a) bank service charge
(b) outstanding cheques
(c) a customer’s NSF cheque
(d) electronic payment on account

80. Which of the following bank reconciliation items would require an adjusting entry on the depositor’s books?
(a) error by the bank
(b) outstanding cheques
(c) bank service charge
(d) deposit in transit
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 Internal Control and Cash 7 - 15

81. All of the following bank reconciliation items would require an adjusting entry on the depositor’s books
except
(a) interest earned.
(b) deposits in transit.
(c) a bank service charge.
(d) a customer’s NSF cheque.

82. Notification by the bank that a customer’s deposited cheque was returned NSF requires that the depositor
make the following adjusting entry:
(a) Accounts Receivable
Cash
(b) Cash
Accounts Receivable
(c) Bank Charges Expense
Accounts Receivable
(d) No adjusting entry is necessary.

83. On Andrew Corp.’s April bank reconciliation, cheques outstanding totalled $9,620. In May, the corporation
issued cheques totalling $26,800. The May bank statement shows that $24,250 in cheques cleared the bank in
May. A cheque from one of Andrew Corp.'s customers in the amount of $325 was also returned marked "NSF."
The amount of outstanding cheques on Andrew’s May bank reconciliation should be
(a) $2,550.
(b) $11,845.
(c) $12,495.
(d) $12,170.
Solution: $9,620 + $26,800 – $24,250 = $12,170.

84. Stardust Corporation gathered the following reconciling information in preparing its October bank
reconciliation:
Cash balance per books, October 31.......................... $6,200
Deposits in transit........................................................ 225
Electronic collection of account receivable.................. 1,150
Bank charge for cheque printing.................................. 25
Outstanding cheques................................................... 1,700
NSF cheque................................................................ 200
The reconciled cash balance per books at October 31 is
(a) $7,125.
(b) $6,900.
(c) $5,200.
(d) $5,650.
Solution: $6,200 + $1,150 – $25 – $200 = $7,125.

85. Angel Hair Limited gathered the following reconciling information in preparing its November bank
reconciliation:
Cash balance per books, November 30....................... $36,100
Electronic collection of account................................... 7,200
Outstanding cheques................................................... 13,600
Deposits in transit........................................................ 18,100
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7 - 16Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

Bank service charge.................................................... 3,650

NSF cheque................................................................ 2,875
The reconciled cash balance per books at November 30 is
(a) $16,675.
(b) $21,175.
(c) $39,275.
(d) $36,775.
Solution: $36,100 + $7,200 – $3,650 – $2,875 = $36,775.

86. Sunny Sky Corporation gathered the following reconciling information in preparing its August bank
reconciliation:
Cash balance per bank, August 31.............................. $18,200
Note receivable collected by bank............................... 4,500
Outstanding cheques................................................... 10,825
Deposit in transit.......................................................... 6,700
Bank service charge.................................................... 40
NSF cheque................................................................ 750
The reconciled cash balance per bank at August 31 is
(a) $ 17,785.
(b) $ 14,075.
(c) $ 9,575.
(d) $18,575.
Solution: $18,200 + $6,700 – $10,825 = $14,075.

87. Which of the following would not be included in the determination of cash equivalents?
(a) bank overdrafts
(b) 90 day treasury bills
(c) restricted cash
(d) money markets

88. A bank overdraft would be reported as

(a) a current liability.
(b) accounts payable.
(c) negative cash under current assets.
(d) restricted cash.

89. Which of the following statements is false?

(a) A basic principle of cash management is to increase the speed of paying liabilities.
(b) A company should plan the timing of major expenditures in light of its operating cycle.
(c) A cash budget will help determine if additional financing will be necessary.
(d) A key principle of cash management is to increase the speed of collection on receivables.

90. Restricted cash is

(a) only available for general use.
(b) only for overdraft purposes.
(c) not available for general use.
(d) included with cash and cash equivalents.

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 Internal Control and Cash 7 - 17

91. Cash equivalents are

(a) often combined with cash and reported as a current asset.
(b) usually reported as a non-current asset.
(c) reported as a current liability.
(d) included as a compensating balance.

92. Which of the following is not true with respect to the reporting of cash?
(a) Cash equivalents are normally combined with cash and reported as a current asset.
(b) Compensating balances are minimum cash balances required by the bank.
(c) Restricted cash can be either a current or a non-current asset, depending on when it is expected to be
used.
(d) Cash overdrafts are reported as contra-assets.

93. Cash equivalents

(a) include all investments in shares.
(b) include short-term, highly liquid trading investments plus accounts receivable less any bank overdrafts.
(c) include short-term, highly liquid trading investments less any bank overdrafts.
(d) are reported as non-current assets.

94. Which of the following is not a basic principle of cash management?

(a) Increase collection of receivables.
(b) Keep inventory levels high.
(c) Delay payment of liabilities.
(d) Invest idle cash.

95. It is a good idea to invest idle cash because

(a) it will increase the speed of collection on receivables.
(b) it will keep inventory levels low.
(c) cash on hand earns nothing.
(d) it will delay the payment of liabilities.

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7 - 18Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

ANSWERS TO MULTIPLE CHOICE QUESTIONS

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
30. b 41. a 52. c 63. c 74. d 85. d
31. a 42. a 53. a 64. b 75. d 86. b
32. c 43. c 54. d 65. d 76. c 87. c
33. b 44. c 55. a 66. b 77. a 88. a
34. c 45. b 56. a 67. d 78. b 89. a
35. c 46. c 57. c 68. b 79. b 90. c
36. a 47. c 58. a 69. d 80. c 91. a
37. d 48. a 59. b 70. c 81. b 92. d
38. c 49. c 60. a 71. a 82. a 93. c
39. a 50. c 61. d 72. b 83. d 94. b
40. c 51. c 62. a 73. d 84. a 95. c

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 Internal Control and Cash 7 - 19

EXERCISES

Ex. 96
Aiken Bike Shops has two purchasing agents. Each agent prepares purchase orders to suppliers by entering
the purchase details into the company’s financial system under the username “purchaser” and password
“purchaser”. Both agents are using the same credentials to access the system. The purchasing agents record
the receipt of the shipment and match this to the purchase order and invoice. The agents then transfer the
goods to the respective shop, sign off on the invoice and forward to accounts payable for vendor payment.

Instructions
Identify any control activities that are violated in this situation and why.

Solution 96
The assignment of responsibility control activity is violated as the username and password is not assigned to
the individual purchasing agents making it impossible for the company to identify which purchasing agent has
made which order. As responsibility has not been assigned to specific individuals, accountability cannot be
determined.

The segregation of duties control activity is also violated as the same individual is authorized to make a
purchase order, record the receipt of shipment, match the purchase to the shipment and the invoice, and
authorize payment. As these duties to authorize, record and take asset custody are not segregated to different
individuals, opportunity for fraud exists.

Ex. 97
Below are descriptions of internal control problems. In the space to the left of each item, enter the code letter of
the one best control activity that is related to the problem described.
Control Activity
A. Assignment of responsibility
B. Segregation of duties
C. Physical controls
D. Documentation
E. Review and reconciliation

______ 1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger.
______ 2. Three people handle cash sales from the same cash register drawer.
______ 3. A clothing store is experiencing a high level of inventory shortages because people try on clothing
and walk out of the store without paying for the merchandise.
______ 4. The person who is authorized to sign cheques approves purchase orders for payment.
______ 5. Some cash payments are not recorded because cheques are not prenumbered.
______ 6. Cash shortages are not discovered because there are no daily cash counts by supervisors.
______ 7. The external audit firm reports on the financial statements each year.

Solution 97 (5 min.)
1. B

2. A

3. C
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7 - 20Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

4. B

5. D

6. E

7. E

Ex. 98
Indicate whether each of the business practices listed below strengthens (S) or weakens (W) a company’s
system of control activities.
______(a) Controller pays invoices, signs cheques and makes deposits.
______(b) All payments are made with cheques instead of cash.
______(c) Two people handle cash sales from the same cash register drawer.
______(d) The company uses prenumbered sales invoices.
______(e) Audited financial statements are provided to the creditors each fiscal year.

Solution 98 (5 min.)
(a) W

(b) S

(c) W

(d) S

(e) S

Ex. 99
Craig Thompson has worked for Dr. Hung Pow, a dentist, for several years. Craig demonstrates a loyalty that
is rare among employees. He hasn't taken a vacation in the last three years. One of Craig's primary duties is to
open the mail and list the cheques received. He also takes cash from patients as they leave. At times it is so
hectic that Craig doesn't bother with giving patients a receipt for the cash paid on their accounts. He assures
them he will see to it that they receive the proper credit and a receipt later. When it is slow in the office, Craig
offers to help Julia post payments to the patients' accounts receivable. She is always happy to receive his help,
because Craig is such a conscientious worker.

Instructions
Identify any internal control activities that may be violated in this situation.

Solution 99 (10 min.)

Violations:
1. It is Julia's responsibility to post payments to patient accounts. In allowing Craig to assist her, the control
activity of assignment of responsibility is violated.

2. Although it appears to be a small office, it is not appropriate that Craig both opens the mail and receives
and records cash receipts from patients. He also appears to have custody of cash. This situation violates
the segregation of duties control activity. By posting to patients' accounts, it would be possible to post
credits to patient accounts and pocket the cash.
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 Internal Control and Cash 7 - 21

3. The documentation control is violated when patients are not given cash receipts. Although many
professional offices do not have cash registers, computerized or manual receipts are customary and
necessary.

4. Review and reconciliation is also being violated. There is no independent counting of the cash and
comparison to total receipts.

Ex. 100
Sally Small is the sole shareholder of a corner store, The Small Store Inc. She hasn't taken a vacation in two
years and is planning to take one next month. She would like to know things are being properly handled in the
store before she leaves. She has asked you to observe her operations for a day and tell her if there are any
problems you see or improvements you can suggest to the way the company operates with respect to internal
controls. She would also like to know if there are things she is doing correctly so that she can continue to do
them.

You note the following activities during the day. Sally opens the store at 9 a.m. She balances the cash from the
previous day before opening. Sarah, a long-time employee, starts work at 10 a.m. and works until 5 p.m. Peter,
another part time employee, works from 4 p.m. until 11 p.m. and closes the store. He locks the cash register
when he leaves. Sally, Sarah and Peter all serve customers during the day. There is only one cash register.
Sally leaves the store for lunch and finishes for the day around 6 p.m. She tells you she sometimes drops back
in at night to see how things are going.

Bread and milk are delivered to the store during the day and whoever is at the cash register at the time takes
money from the register to pay for the products.

There is a camera that records customers at the cash register and a mirror so the person serving at the cash
register can see most of the store.

Instructions
a) Prepare a list of control activity weaknesses over cash, explaining why each is a weakness and a
suggestion as to how to improve. Use point form.
b) Prepare a list of items that are being done correctly and why they provide good control. Use point form.

Solution 100 (10 min.)

a) Weaknesses
 The cash is left in the store in the cash register overnight. This increases the risk of it being stolen. It
should be locked in the safe or taken to the night deposit.
 There is only one cash register but three people work the cash. This means it is not possible to establish
who is responsible for any shortages. Each person should have his or her own cash drawer and user
numbers for the cash register.
 Cash is not deposited intact—payments are made in cash for purchases. This may result in inadequate
documentation and will make errors harder to find. Purchases should be paid for with a cheque.

b) Strengths
 The camera is a good control because it records events.
 Sally dropping in unexpectedly at night is a good control as she can do spot checks.

Ex. 101
Listed below are six errors or problems that might occur in the processing of cash transactions. Also shown is
a list of control activities. Evaluate each possible error and cite a control activity given that would reduce the
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7 - 22Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

probability of the error occurring. If none of the control activities given will correct the problem, write "None." If
you think more than one control is appropriate, list all that apply.

Possible Errors or Problems

_____1. An employee steals the cash collected from a customer for an account receivable and conceals this
theft by issuing a credit memorandum indicating that the customer returned the merchandise.
_____2. A small fire destroys 3 days of cash receipts.
_____3. The official designated to sign cheques is able to steal blank cheques and issue them to herself
without fear of detection.
_____4. A salesclerk in serving customers often rings up a sale for less than the actual amount and then
keeps the additional cash collected from the customer.
_____5. Three cashiers use one cash register drawer and the cash in the drawer is often short.
_____6. Each cashier counts his/her own register drawer each day and verbally reports the results to the
supervisor.

Internal Control Activities

(a) Assignment of responsibility
(b) Segregation of duties
(c) Physical controls
(d) Documentation
(e) Review and reconciliation

Solution 101 (10 min.)

1. (b)

2. (c)

3. (c) and (a)

4. (e)

5. (a) and (e)

6. (d) and (e)

Ex. 102
Due to limited staff resources, the Junior Accountant Alex Short has been collecting cash from customers,
posting to the accounts receivable sub-ledger and making the deposit to the bank. Alex recently met with the
Accounting manager to discuss and request a $5,000 raise in pay. The manager told Alex that he had a few
concerns with his performance but if these issues could be overcome he would revisit the raise in 3-months.
Dissatisfied with the manager’s response Alex stole $5,000 from the cash collected from customers. To cover
his tracks he cleared the customer’s receivable from the sub-ledger by posting a debit to Cash and credit to
accounts receivable; however, he never made the deposit and kept the funds for himself.

Instructions
How will the company discover that the $5,000 is missing? Discuss any internal control weaknesses in this
situation and how the company could avoid this type of fraud in the future.

Solution 102

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 Internal Control and Cash 7 - 23

The company will discover the missing funds when they complete the bank reconciliation. Companies, in
general, complete bank reconciliations on a monthly basis. Shortly after the month in which Alex stole the
funds, the bank reconciliation would show a deposit in transit in the amount of $5,000 on the bank side of the
reconciliation as a reconciling item. Deposits in transit reflect funds that have been recorded on the company
books but not yet recorded by the bank. The item will remain as a reconciling item until the funds have been
deposited to the bank.

The segregation of duties control activity is violated resulting in an internal control weakness. The same
individual is authorized to collect cash, record the receipt (clearing the customer’s receivable balance) and take
asset custody (control of the physical cash). This allows for the opportunity to commit fraud. The company
should segregate the duties to authorize, record and take asset custody to different individuals in order to
minimize the risk and opportunity for fraud.

Ex. 103
The following information has been provided for Daniel Enterprises:
1. The company has $115,700 on deposit (available for use) in their chequing account with the bank.
2. The company has the following short-term investments:
(a) $20,000 in government treasury bills that mature in 120 days
(b) $35,000 in money market funds that mature in 90 days
3. The company has a $25,000 line of credit on their chequing account with the bank.
4. The company has a compensating balance loan and must maintain a minimum cash balance of $15,000.
5. A cheque was returned in the amount of $3,250.
6. The company has cash on hand in its cash registers for $2,100.
7. The company has $4,500 in stale-dated cheques.
8. The company has $23,600 in customer postdated cheques.

Instructions
Determine the amount of cash and cash equivalents and restricted cash that should be reported on Daniel’s
statement of financial position. If any items are not to be included, identify the reason(s) why.

Solution 103
Cash and cash equivalents
1. Chequing account cash $115,700
2. Money market fund 35,000
6. Cash on hand in registers 2,100
Total cash and cash equivalents $152,800

Restricted cash
4. Compensating balance loan $15,000

Items not included as cash and cash equivalents or restricted cash

2. Treasury bills do not mature within 90 days and therefore are not regarded as cash equivalents.
3. The company has not used the line of credit as no “negative” balance is noted.
5. Cheques received from customers, but returned by the bank because the customer’s account was
lacking sufficient funds is not regarded as cash but as accounts receivable.
7. Cheques that will not be honoured because they are more than six months old are not regarded as
cash.
8. Cheques payable in the future are not regarded as cash but as accounts receivable.

Ex. 104
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7 - 24Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

The bank reconciliation for Burbank Ltd. showed the following deposits in transit and outstanding cheques at
September 30, 2018:

Deposits in transit Outstanding cheques

Sept 28 $ 450 Sept 2 #110 $425.00
Sept 30 2,500 Sept 13 #109 750.00
Sept 23 #108 150.00

The general ledger Cash account for October 2018 show the following cheques issued and cash receipts:

Cheques Receipts
No. Amount No. Amount Amount
111 $525.00 116 $ 345.67 $ 436.50
112 147.10 117 1,428.83 728.30
113 58.00 118 876.92 326.45
114 681.93 119 2,128.32 1,452.28
115 210.25 586.22

In addition, the deposits and cheques that cleared the bank during the month of October is presented below:

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 Internal Control and Cash 7 - 25

Cheques and other debits Deposits

——————————————————————— -----------------
No. Amount No. Amount No. Amount
————————————————————————————————————————
109 750.00 111 525.00 116 345.67 2,500.00
110 425.00 117 1,428.83 450.00
113 85.00 119 2,128.32 436.50
114 681.93 728.30
115 210.25 326.45
————————————————————————————————————————

Instructions
Assuming no errors have been made by the company:
(a) Calculate the amount of the deposits in transit, identifying the individual items, at October 31.
(b) Calculate the amount of the outstanding cheques, identifying the individual items, at October 31.

Solution 104
(a) Deposits in transit:
Deposits per books in October ...................................................... $3,529.75
Deposits per the bank in October................................................... $4,441.25
Less: September 30 deposits in transit.......................................... 2,950
October receipts deposited in October........................................... 1,491.25
Deposits in transit, October 31....................................................... $ 2,038.50

October 31 deposits: $1,452.28 + $586.22 = $2,038.50

(b) Outstanding cheques:

Cheques per books in October...................................................... $6,402.02
Cheques clearing the bank in October........................................... $6,580
Less: Outstanding cheques, September 30................................... 1,325
October cheques clearing in October............................................. 5,255.00
Bank error – cheque #113 cleared for $85; should have cleared for $58 27.00
Outstanding cheques, October 31........................................................ $1,174.02

October 31 outstanding cheques: #108 $150.00

#112 $147.10
#118 $876.92
Total: $1,174.02

Ex. 105
LFL Corp. has been implementing a financial system conversion project over the past year. The company is
moving from its legacy system to an enterprise resource planning (ERP) system. The project was expected to
be completed by September 30, 2016 but has now been extended to December 31, 2016. Given LFL’s small
accounting & finance team, employees are strapped for time. Employees are trying to stay up to date with their
regular daily activities while also devoting time to the implementation project. The Senior Accountant who is
responsible for preparing the monthly bank reconciliation has fallen behind by 3-months.

Instructions
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7 - 26Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

Explain the risks of not having the bank reconciliations up to date.

Solution 105
Bank reconciliations are a key internal control related to cash. If the bank reconciliations are not up to date the
company is not in a position to detect and prevent fraudulent activity or errors that may have occurred during
the period in which the reconciliations were not complete. In addition, the company would not be able to
determine its true cash position, which could put the company at risk of meeting its obligations. For example,
1. Cash receipts that were not deposited into the bank due to fraudulent activity will not be detected;
therefore, missed and potentially lost if deposits in transit are not identified.

2. By relying on the balance provided directly from the bank and ignoring outstanding cheques could result in
the company putting itself in an overdraft position and in jeopardy of meeting its obligations.

3. Bank and accounting errors would be undetectable. For example, a cheque issued for $25 by the company
but cleared by the bank for $52 in error would not be discovered as no comparison between the bank
statement and cash general ledger would be conducted.

Ex. 106
Using the following information, prepare a bank reconciliation for Gloss Corporation at July 31, 2018:
1. The unadjusted bank statement balance is $6,612.
2. The unadjusted cash account balance in the general ledger is $9,869.
3. Outstanding cheques totalled $1,170.
4. Deposits in transit are $4,350.
5. The bank service charge is $50.
6. A cheque for $196 for supplies was posted as $169 in the company’s general ledger.

Solution 106 (10 min.)

GLOSS CORPORATION
Bank Reconciliation
July 31, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash balance per bank......................................................................... $6,612
Add: (d) Deposit in transit................................................................. 4,350
10,962
Less: (c) Outstanding cheques......................................................... 1,170
Reconciled cash balance per books..................................................... $9,792

Cash balance per books....................................................................... $9,869

Less: (f) Cheque amount error ($196 – $169).................................. $ 27
(e) Bank service charge........................................................... 50 77
Reconciled cash balance per books..................................................... $9,792

Ex. 107
Using the following information, prepare a bank reconciliation for Biling Inc. at May 31, 2018:
1. The unadjusted bank statement balance is $7,200.
2. The unadjusted cash account balance is $6,024.
3. Outstanding cheques totalled $1,600.
4. Deposits in transit are $800.
5. The bank service charge is $24.
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 Internal Control and Cash 7 - 27

6. Electronic collections on account totalled $400.

Solution 107 (10 min.)

BILING INC.
Bank Reconciliation
May 31, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash balance per bank......................................................................... $7,200
Add: (d) Deposit in transit................................................................. 800
8,000
Less: (c) Outstanding cheques......................................................... 1,600
Reconciled cash balance...................................................................... $6,400

Cash balance per books....................................................................... $6,024

Add: (f) Electronic collections.......................................................... 400
6,424
Less (e) Bank service charge........................................................... 24
Reconciled cash balance...................................................................... $6,400

Ex. 108
Given the following information, determine the reconciled cash balance per books.
1. Unadjusted balance per books at March 31, $9,700.
2. Outstanding cheques, $1,600.
3. NSF cheque returned with bank statement, $190.
4. Deposit placed in night deposit the evening of March 31 (not on bank statement), $750.
5. Cheque printing charges $45.
6. Interest earned on chequing account, $100.

Solution 108 (5 min.)

$9,565 ($9,700 – $190 – $45+ $100)

Ex. 109
Seattle Coffee Limited's bank statement for the month of November 2018 showed a balance per bank of
$7,000. The company's general ledger Cash account showed a balance of $5,659 at November 30. Other
information is as follows:
1. Cash receipts for November 30 recorded on the company's books were $5,200, but this amount does not
appear on the bank statement.
2. The bank statement shows a debit memorandum for $40 for cheque printing charges.
3. Cheque #119 payable in the amount of $248 to Holt Corporation was recorded in the general journal and
cleared the bank for $248. A review of the accounts payable records shows a $36 credit balance in Holt’s
account and that the total payment should have been for $284.
4. The total amount of cheques outstanding at November 30 was $5,800.
5. Cheque #138 was correctly written and paid by the bank for $409. The cash payment journal reflects an
entry for Cheque #138 as a debit to Accounts Payable and a credit to Cash for $490.
6. The bank returned an NSF cheque from a customer for $560.
7. The bank statement included a deposit for $1,260, which represents the electronic collection of customer
accounts which have not yet been recorded on the company’s books.

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7 - 28Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

Instructions
(a) Prepare a bank reconciliation for Seattle Coffee Limited at November 30, 2018.
(b) Prepare any journal entries necessary as a result of the bank reconciliation.

Solution 109 (25 min.)

(a)
SEATTLE COFFEE LIMITED
Bank Reconciliation
November 30, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash balance per bank......................................................................... $ 7,000
Add: (1) Deposit in transit.................................................................. 5,200
12,200
Less: (4) Outstanding cheques........................................................... 5,800
Reconciled cash balance per bank....................................................... $ 6,400

Cash balance per books....................................................................... $ 5,659

Add: (5) Accounts payable error ($490 – $409)................................. $ 81
(7) Electronic collections........................................................... 1,260 1,341
7,000
Less: (2) Cheque printing................................................................... $ 40
(6) NSF cheque......................................................................... 560 600
Reconciled cash balance per books..................................................... $ 6,400

Note: Item (3) is not relevant.

(b)
Nov 30 Cash................................................................................... 81
Accounts Payable........................................................ 81
(To correct error in recording Cheque #138)

30 Cash................................................................................... 1,260
Accounts Receivable................................................... 1,260
(To record collection of accounts receivable)

30 Bank Charges Expense...................................................... 40

Cash............................................................................ 40
(To record cheque printing charges)

30 Accounts Receivable.......................................................... 560

Cash............................................................................ 560
(To record NSF cheque)

Ex. 110
The bank statement for Indiana Inc. shows an unadjusted balance of $2,330 at June 30, 2018, while the
unadjusted cash balance per books was $599. The following information pertains to the bank transactions for
the company.
1. Deposits of $160, representing cash receipts of June 30, did not appear on the bank statement.
2. Outstanding cheques totalled $240.
3. Bank service charges for June were $9.
4. Electronic collections on account totalled $1,740, and have not yet been recorded by the company.
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 Internal Control and Cash 7 - 29

5. An NSF cheque for $80 from a customer was returned with the statement.

Instructions
(a) Prepare a bank reconciliation at June 30.
(b) Prepare any journal entries necessary as a result of the bank reconciliation.

Solution 110 (25 min.)

(a)
INDIANA INC.
Bank Reconciliation
June 30, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash balance per bank......................................................................... $2,330
Add: (1) Deposit in transit.................................................................. 160
2,490
Less: (2) Outstanding cheques........................................................... 240
Reconciled cash balance per bank....................................................... $2,250

Cash balance per books....................................................................... $ 599

Add: (4) Electronic collections on account......................................... 1,740
2,339
Less: (3) Bank service charge............................................................ $ 9
(5) NSF cheque......................................................................... 80 89
Reconciled cash balance per books..................................................... $2,250

(b)
Jun 30 Cash................................................................................... 1,740
Accounts Receivable................................................... 1,740
(To record collection of accounts receivable)

30 Accounts Receivable.......................................................... 80
Cash............................................................................ 80
(To record NSF cheque)

30 Bank Charges Expense...................................................... 9

Cash............................................................................ 9
(To record bank service charges)

Ex. 111
Smith’s Cafe Ltd. had the following information regarding its bank transactions for the month of April 2018:
Unadjusted balance per books April 30......................................... $ 2,805
Unadjusted balance per bank statement April 30........................... 11,400

1. Cheques written in April but still outstanding, $6,000.

2. Cheques written in March but still outstanding, $2,800.
3. Deposits of April 30 not yet recorded by bank, $6,100.
4. A customer’s cheque for $700 was returned by the bank as NSF.
5. Cheque #210 for $594 was correctly issued and paid by bank but incorrectly entered in the general journal
as a payment on account for $549.
6. Bank service charge for April was $50.
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7 - 30Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

7. A payment on account (Cheque #318) was incorrectly entered in the general journal and posted to the
general ledger as $824. However it had been correctly prepared for $284. The cheque cleared the bank in
April.
8. Electronic collections on account totalled $6,150, and have not yet been recorded by the company.

Instructions
Prepare a bank reconciliation for Smith’s Cafe Ltd. at April 30.

Solution 111 (20 min.)

SMITH’S CAFE LTD.
Bank Reconciliation
April 30, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash balance per bank......................................................................... $11,400
Add: (3) Deposit in transit.................................................................. 6,100
17,500
Less: (1) April outstanding cheques.................................................. $6,000
(2) March outstanding cheques............................................... 2,800 8,800
Reconciled cash balance per bank....................................................... $ 8,700

Cash balance per books....................................................................... $2,805

Add: (7) Error on Cheque #318 (824 – 284)..................................... $ 540
(8) Electronic collections on account....................................... 6,150 6,690
9,495
Less: (4) NSF Cheque...................................................................... $700
(5) Error on Cheque #210 (594 – 549)..................................... 45
(6) Bank service charge........................................................... 50 795
Reconciled cash balance per books..................................................... $ 8,700

Ex. 112
Using the code letters below, indicate how each of the items listed would be handled in preparing a bank
reconciliation. Enter the appropriate code letter in the space to the left of each item.
Code
A Add to cash balance per books
B Deduct from cash balance per books
C Add to cash balance per bank
D Deduct from cash balance per bank
E Does not affect the bank reconciliation

Items
______ 1. Outstanding cheques
______ 2. Bank service charge
______ 3. Cheque for $320 correctly written and paid by the bank but incorrectly entered in the general
journal for $230.
______ 4. Deposit in transit
______ 5. Bank returned a customer’s deposited cheque marked NSF.
______ 6. Interest earned on bank account
______ 7. Bank debit memorandum for cheque printing fees
______ 8. Bank charged a cheque against the company, which should have been charged to another
company.

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 Internal Control and Cash 7 - 31

______ 9. A cheque for $236 was correctly paid by the bank but was incorrectly entered in the general journal
for $263.

Solution 112 (10 min.)

1. D

2. B

3. B

4. C

5. B

6. A

7. B

8. C

9. A

Ex. 113
The reconciled cash balance per books and per bank for Maddison Ltd. at November 30, 2018 is $13,211.55.
The following cheques and receipts were recorded for the month of December, 2018:

Cheques Receipts
No. Amount No. Amount Amount Date
17 $423.22 22 $ 534.76 $ 985.5 Dec 5
18 981.23 23 1,924.43 846.52 21
19 126.00 24 876.92 722.63 27
20 622.50 25 218.05 1,328.00 31
21 342.15

In addition, the bank statement for the month of December is presented below:

Balance Amounts Deducted (Debits) Amounts Added (Credits) Balance

Last Statement No. Total Amount No. Total Amount This Statement

$7,111.98 10 $3,942.14 5 $10,339.03 $13,508.87

—————————————————————————————————————––——
Cheques and other debits Deposits Date Balance
———————————————————————
No. Amount No. Amount No. Amount
————————————————————————————————————————
14 184.81 17 423.22 22 534.76 6,284.38 Dec 1 $12,253.57
18 891.23 24 876.92 985.50 8 $11,470.92
19 126.00 25 218.05 846.52 23 $11,973.39
21 342.15 20.00 SC 722.63 29 $12,333.87
325.00 NSF 1,500.00 EFT 31 $13,508.87
————————————————————————————————————————
Symbols: NSF (Not sufficient funds) SC (Service charge) EFT (Electronic funds transfer)
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7 - 32Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

————————————————————————————————————————

Cheque #18 was correctly written for $891.23 for a payment on account. The NSF cheque was from Mrs. W.
Rask, a customer, in settlement of an account receivable. An entry had not been made for this. The EFT is for
an electronic collection of accounts receivable in the amount of $1,500, which has not yet been recorded by
the company. The bank service charge is $20.

Instructions
(a) Calculate the unadjusted cash balance per books at December 31, 2018.
(b) Prepare a bank reconciliation at December 31, 2018.
(c) Prepare any journal entries necessary as a result of the bank reconciliation.

Solution 113 (30–35 min.)

(a) Nov. 30 adjusted balance per books + receipts – cheques written = Dec. 31 unadjusted
balance per books
$13,211.55 + $3,882.65 – $6,049.26 = $11,044.94

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 Internal Control and Cash 7 - 33

(b)
MADDISON LTD.
Bank Reconciliation
December 31, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash balance per bank statement.................................................... $13,508.87
Add: Deposits in transit................................................................. 1,328.00
14,836.87
Less: Outstanding cheques
#20....................................................................................... $ 622.5
#23....................................................................................... 1,924.43 2,546.93
Reconciled cash balance per bank.................................................. $12,289.94

Cash balance per books.................................................................. $11,044.94

Add: Error in recording cheque #18 (981.23 – 891.23)................. $ 90.00
Electronic collection of accounts........................................... 1,500.00 1,590.00
12,634.94
Less: Bank service charge............................................................. $ 20.00
NSF cheque.......................................................................... 325.00 345.00
Reconciled cash balance per books................................................. $12,289.94

(c)
Dec 31 Cash................................................................................... 90
Accounts Payable........................................................ 90
(To correct recording error on cheque #18)

31 Cash................................................................................... 1,500
Accounts Receivable................................................... 1,500
(To record collection of accounts receivable)

31 Bank Charges Expense...................................................... 20

Cash............................................................................ 20
(To record bank service charge)

31 Accounts Receivable.......................................................... 325

Cash............................................................................ 325
(To record NSF cheque from W. Rask)

Ex. 114
Graham Corporation’s bank statement included two types of electronic funds transfers (EFT). One type of EFT
totalled $12,500 and was from customers paying their accounts online. Another type of EFT totalled $23,000
and was from Graham paying its accounts payable online.

Instructions
(a) How will each of these items affect Graham’s bank reconciliation, assuming the company does not record
these until it receives the bank statement?
(b) Prepare the required journal entries, if any, that Graham will make to record the above information on its
books.

Solution 114 (10 min.)

(a) Graham Corporation must add the electronic collections from customers in payment of their accounts
receivable to its cash balance per books on the bank reconciliation. It must deduct the electronic payments
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7 - 34Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

it made in payment of its accounts payable from its cash balance per books on the bank reconciliation.

(b) Cash.............................................................................................. 12,500

Accounts Receivable ............................................................. 12,500

Accounts Payable.......................................................................... 23,000

Cash....................................................................................... 23,000

Ex. 115
The cash records of Emmett Corp. show the following:
1. The January 31 bank reconciliation indicated that deposits in transit totalled $950. During February, the
general ledger account, Cash, shows deposits of $14,500, but the bank statement indicates that only
$12,000 in deposits were received during the month.
2. The January 31 bank reconciliation also reported outstanding cheques of $2,200. During February,
Emmett Corp.’s books show that $13,900 of cheques were issued, yet the bank statement showed that
$13,300 of cheques cleared the bank in February.

No errors were made by either the bank or Emmett Corp.

Instructions
(a) Calculate the amount of the deposits in transit at February 29.
(b) Calculate the amount of the outstanding cheques at February 29.

Solution 115 (10 min.)

(a) Deposits in transit:
Deposits per books in February..................................................... $14,500
Deposits per the bank in February................................................. $12,000
Less: January 31 deposits in transit............................................... 950
February receipts deposited in February....................................... 11,050
Deposits in transit, February 29..................................................... $ 3,450

(b) Outstanding cheques:

Cheques per books in February..................................................... $13,900
Cheques clearing the bank in February......................................... $13,300
Less: Outstanding cheques, January 31........................................ 2,200
February cheques clearing in February......................................... 11,100
Outstanding cheques, February 29................................................ $ 2,800

Ex. 116
The records of Western Cattle Co. Ltd. show the following:
1. In February, deposits per the bank statement totalled $18,850; deposits per books $19,500; and deposits
in transit at February 28 were $1,400.
2. In February, cheques issued per books were $17,750; cheques clearing the bank were $18,400; and
outstanding cheques at February 28 were $1,250.

No errors were made by either the bank or Western Cattle Co. Ltd.

Instructions
(a) Calculate the amount of the deposits in transit at January 31.

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 Internal Control and Cash 7 - 35

(b) Calculate the amount of the outstanding cheques at January 31.

Solution 116 (10 min.)

(a) Deposits in transit:
Deposits per bank statement in February...................................... $18,850
Add: Deposits in transit, February 28............................................. 1,400
Total deposits to be accounted for................................................. 20,250
Less: Deposits per books............................................................... 19,500
Deposits in transit, January 31....................................................... $ 750

(b) Outstanding cheques:

Cheques clearing the bank in February......................................... $18,400
Add: Outstanding cheques, February 28....................................... 1,250
Total cheques to be accounted for................................................. 19,650
Less: Cheques issued per books................................................... 17,750
Outstanding cheques, January 31................................................. $ 1,900

Ex. 117
Listed below are items that may be useful in preparing the March 2018 bank reconciliation for Kelvin Industrial.

Using the code letters below, insert in the space before each item the letter where the amount would be
located or otherwise treated in the bank reconciliation process.

Code Located or Treated

A Add to the cash balance per books
B Deduct from the cash balance per books
C Add to the cash balance per bank
D Deduct from the cash balance per bank
E Does not affect the bank reconciliation

______ 1. Included with the bank statement materials was a cheque from Angus Reeds for $65 stamped
"account closed."
______ 2. The bank statement included a bank service charge of $45 in payment of the annual safety deposit
box fee.
______ 3. The bank statement included a bank service charge of $18 for three books of blank cheques for
Kelvin Industrial.
______ 4. The bank statement contains a credit of $38.00 for interest earned on the chequing account
balance during the month.
______ 5. The deposits of March 30 and March 31, for $4,282 and $4,391 respectively, were not included on
the bank statement.
______ 6. Two cheques totalling $742.44, which were outstanding at the end of February, cleared in March
and were returned with the March statement.
______ 7. The bank statement included a credit of $85 for the monthly interest on a certificate of deposit that
the company owns.
______ 8. Four cheques, #3416, #3420, #3422, #3423, totalling $7,412.32, did not clear the bank during
March.
______ 9. On March 24, 2018, $2,600 was credited by the bank to Kelvin Industrial bank account as an
electronic funds transfer from a customer in payment of its account. This was not recorded in
advance by the company.
______10. On March 31, 2018, Kelvin Industrial paid its $650 utility bill using the bank online payment system.
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7 - 36Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

As Kelvin Industrial initiated this payment, it recorded it in advance of receiving the bank statement.

Solution 117 (10 min.)

1. B

2. B

3. B

4. A

5. C

6. E

7. A

8. D

9. A

10. E

Ex. 118
You have recently started a part time job in the accounting department of Home Energy Limited. The
accountant, Joe Kool, had prepared the company's bank reconciliation for June 2018. After completing the
reconciliation he made the following journal entry:

Jun 30 Cash....................................................................................... 2,390

Bank Charges Expense.......................................................... 124
Accounts Receivable ($3,000 collection less $500 NSF) 2,500
Interest Revenue........................................................... 14

Joe was reviewing the bank reconciliation with you when unfortunately you spilled your coffee on it. He asks
you to rewrite the reconciliation, in good form. He remembers that the only outstanding deposit was the last
deposit for the month. You check the general ledger and the bank balance at June 30 was $24,527 (credit).
You also check the bank statement and the balance was $22,314 (debit on the bank statement, that is,
overdrawn). You look up the last deposit for the month—it was for $21,789.

Instructions
Using the above information prepare, in good form, the bank reconciliation for Home Energy Limited for June.

Solution 118 (25–30 min.)

HOME ENERGY LIMITED
Bank Reconciliation
June 30, 2018
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Cash balance per bank......................................................................... $(22,314)
Add: Deposit in transit....................................................................... 21,789
(525)
Less: Outstanding cheques (see note below)..................................... 21,612
Reconciled cash per bank.................................................................... $(22,137)

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 Internal Control and Cash 7 - 37

Cash balance per books....................................................................... $(24,527)

Add: Electronic collection of account................................................. $3,000
Interest earned.......................................................................... 14 3,014
(21,513)
Less: Bank service charge.................................................................. $124
NSF cheque.............................................................................. 500 624
Reconciled cash balance per books..................................................... $(22,137)

Note: To solve, you complete the bank reconciliation with the information you know—the outstanding cheques
and the reconciled cash balance per bank will be unknown. After you arrive at the reconciled cash balance per
books, you enter this as the reconciled cash per bank and solve for the outstanding cheques.

Ex. 119
About eight months ago, your friend Minnie Minder started her own bookkeeping business. She caters to small
businesses, and has now developed a fairly large clientele. Yesterday, she called you and asked you to come
over and give her some advice. It appears that although she has lots of business, she is having serious cash
flow problems. “I can’t pay my bills!” she exclaims, “and I want to get a bank loan to get more up-to-date office
equipment, but the bank won’t lend the business any money. Please come over and help me!”

So today you went to Minnie’s office, and asked to see her general ledger and her latest financial statements.
Although the records are up to date, including the receivables and payables, Minnie admits she hasn’t had time
to prepare any financial statements yet. You ask her about the receivables, and she agrees they are rather
high but all of her revenue is on account. She also adds that “The economy still isn’t very good, and most of my
clients are self-employed tradesmen, and I hate to ask them for money when they’re having a tough time.”

You create a trial balance, based on the general ledger, which follows:

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7 - 38Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

MINNIE MINDER ENTERPRISES

Trial Balance
(date)
–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
Dr Cr
Cash............................................................................................ $ 3,375
Accounts receivable.................................................................... 56,250
Prepaid insurance........................................................................ 2,250
Supplies...................................................................................... 3,500
Equipment................................................................................... 11,250
Vehicles....................................................................................... 31,250
Accounts payable........................................................................ $ 17,625
Unearned revenue....................................................................... 10,125
Dividends declared...................................................................... 22,500
Common shares.......................................................................... 18,750
Service revenue.......................................................................... 137,500
Rent expense.............................................................................. 40,000
Utilities expense.......................................................................... 8,750
Salaries expenses....................................................................... 4,875 _______
Totals.......................................................................................... $184,000 $184,000

Notes:
The “official” credit terms for receivables and payables are n/30.

Instructions
Suggest ways that Minnie can improve her cash flows. Do not list generalities, but address her specific
situation.

Solution 119 (20 min.)

(The following are some suggestions. Students may come up with others.)
1. First of all, you must address your receivables and collect them more quickly. You have recorded
$137,500 in revenue: currently over 40% ($56,250/$137,500) of it is still uncollected. I would suggest that
you prepare an aged schedule of the receivables to find out which are the oldest receivables, and contact
your clients and pressure them to pay. You could suggest that you will not do any more work for them until
they pay up.

2. Consider offering a cash discount for early payment and shorten your credit terms, for example, 2/10,
n/20. Although you will incur a cost, this will encourage more clients to pay sooner.

3. For any new clients, you should require a deposit up front especially if this is standard industry practice. If
they are not willing to do this, you probably don’t want them as a client anyway.

4. Your rent seems very high in comparison to your revenue (nearly 30%, $40,000 / $137,500). Can you
negotiate a lower rent with the landlord? Failing this, perhaps you should consider looking for cheaper
premises.

5. As far as your “regular” payables are concerned, can you negotiate longer terms with any of them (to delay
payment as long as possible)? It’s worth a try.

6. I would suggest that you prepare a cash budget. This will show you when you will be short of cash and
when you will have excess cash available. This won’t happen for a while, but if you follow my suggestions,
it will.

7. If all else fails, you may have to approach the bank and offer personal assets as security to secure a loan.
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 Internal Control and Cash 7 - 39

MATCHING QUESTIONS

120. Match the items below by entering the appropriate code letter in the space provided.

A. Prenumbered documents
B. Custody of an asset should be kept separate from the record-keeping for that asset
C. Television monitors, garment sensors and burglar alarms are examples
D. 90-day treasury bill investment
E. Collusion
F. Electronic funds transfer
G. Invest idle cash
H. Cancelled cheques
I. NSF cheques
J. Outstanding cheques

_____ 1. Segregation of duties

_____ 2. Two or more employees circumventing prescribed procedures

_____ 3. Prevent a transaction from being recorded more than once

_____ 4. Physical controls

_____ 5. Cash equivalents

_____ 6. Transferring money electronically from one bank account to another without any paper money
changing hands

_____ 7. Cheques that have been returned by the issuer's bank for lack of funds

_____ 8. Cheques that have been paid by the depositor's bank

_____ 9. Issued cheques that have not been paid by the bank

_____10. A basic principle of cash management

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7 - 40Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

ANSWERS TO MATCHING
1. B

2. E

3. A

4. C

5. D

6. F

7. I

8. H

9. J

10. G

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 Internal Control and Cash 7 - 41

SHORT-ANSWER ESSAY QUESTIONS

S-A E 121
Important objectives of a system of internal controls are to achieve reliable financial reporting, effective and
efficient operations, and compliance with relevant laws and regulations. Briefly discuss how (1) cost-benefit
considerations, (2) the human element, and (3) the size of the business affect the implementation of a system
of internal controls.

Solution 121
The implementation of an internal control system is affected by cost-benefit considerations, the human
element, and the size of the business. A company's internal control system can provide reasonable assurance,
but not absolute assurance, that assets are properly safeguarded and that the accounting records are reliable.
The concept of reasonable assurance rests on the premise that the costs of establishing control activities
should not exceed their expected benefit. A very costly set of safeguards may produce something approaching
absolute assurance, but the value of the benefits received would not come close to outweighing the costs.

The human element can cause a good internal control system to become ineffective due to employee fatigue,
carelessness, or indifference. Additionally, collusion between two or more employees to circumvent prescribed
controls may significantly impair the effectiveness of the system.

The size of the business impacts internal controls because a smaller business may not have the necessary
resources available to effect the implementation of desirable controls.

S-A E 122
Clinix is a medical office management franchise. There are currently twenty-five medical offices managed by a
Clinix franchisee. One of the services provided to franchisees is assistance in training various staff members.

Clinix is preparing a manual for the front office staff to use as a reference guide. It will be used in training new
employees as well. One of the reasons the manual is being prepared is to stress the importance of strong
internal controls.

Instructions
Prepare a short paragraph, to be included in the training materials, describing the benefits of sound internal
control activities, from the viewpoint of the employee.

Solution 122
All the controls discussed in this manual may seem unnecessary to you. It may also seem that management
trusts no one. However, these practices and procedures actually benefit you, the employee. First, control
activities clearly outline who is to be responsible for various activities, such as making the daily deposit of cash
in the bank. If a problem arises regarding a deposit, it is very clear to whom the company should turn to resolve
the problem. If correct procedures were not followed, blame is not placed on all employees. Only those who did
not follow correct procedures are held accountable for their actions. Also, strong control activities will
discourage dishonest employees looking for opportunities to steal from the company. They will find such
opportunities extremely limited. Finally, all these systems, practices, and procedures result in a well-managed
company that is less likely to suffer unnecessary losses, and a much better place for you to work and build a
career.

S-A E 123
In business, electronic funds transfers (EFT) are very popular, with some companies, such as Sears, paying all
their bills by EFT. Most companies now also pay their employees by EFT, with the net pay being deposited
directly to the employee’s bank account. Individuals also are using EFT to pay their bills through online
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7 - 42Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

banking.

Instructions
Explain the implications of EFT payments from an internal control standpoint. Does EFT guarantee that fraud
will be eliminated?

Solution 123
EFT is a way of transferring money electronically from one bank account to another. Using EFT eliminates the
need for cheques. This generally results in better internal control, since no cash or cheques are handled by
company employees, thereby minimizing the possibility of having cheques stolen. However, they still have to
be properly recorded, and this should be done by an employee who has no access to the EFT records (for
example, the bank account numbers of the payees). Without proper authorization and segregation of duties, it
is possible an employee could redirect electronic transfers to his/her personal bank account. So, no, the use of
EFT does not guarantee that fraud will be eliminated. However, fraud is far less likely to occur than when
cheques and cash are used to make payments.

S-A E 124
Your friend Marcus is puzzled about the debits and credits on his bank statement and the lesson about debits
and credits you are both studying in accounting class. “According to our accounting instructor, a debit to cash
is an increase and a credit is a decrease” he says. “When the bank debits my account though, it is reduced,
and when they credit it, it is increased. Completely backward to what we’ve learned. Which way is right? I don’t
get it!”

Instructions
Prepare an explanation to your friend why the debits and the credits on a bank statement are not really
backward.

Solution 124
The bank statement reflects the bank’s accounting, so the debits and credits are not really backward when
they are viewed from the perspective of the bank. While Cash is an asset account for you (Marcus), to the
bank, the funds it holds for you are a liability because you can request those funds at any time. Liabilities are
increased by credits and decreased by debits. When you deposit money into your bank account, the bank’s
liability to you increases. When you write a cheque or make an electronic payment, the bank pays out this
amount and decreases (debits) its liability to you. So, what to the bank is a credit is a debit to you, and vice
versa.

S-A E 125
The preparation of a bank reconciliation is an important cash control procedure. If a company deposits cash
receipts daily and makes all cash disbursements by cheque, explain why the cash balance per books might not
agree with the cash balance shown on the bank statement. Identify specific examples that may cause
differences between the cash balance per books and the cash balance per bank.

Solution 125
The cash balance per books may not agree with the cash balance shown on the bank statement due to time
lags and errors by either party. A time lag could mean the bank records a transaction in a period later than the
company records it (outstanding cheques, deposits in transit) or the company records a transaction in a period
later than the bank records it (interest earned, NSF cheque, electronic funds transfers, and the like).

S-A E 126
You are busily working away at your new job in the accounting department of Humongous Enterprises Ltd.
Your friend from the marketing department stops by to pick you up for lunch and asks what you are doing. You
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 Internal Control and Cash 7 - 43

tell her you are preparing the bank reconciliation. She says she remembers doing that in an accounting course
she took once but didn't think it would be necessary any more—given that most things were done by
computers now and the banks and a big company like ours are both required to have internal control systems
in place to prevent errors. Surely there can't be any reconciling things left. You sigh and start to explain it to her
on your way to lunch.

Instructions
Prepare, in point form, the explanation you would give your friend.

Solution 126
 The reconciliation is part of the company's control system.
 It will identify any errors made by the bank or the company.
 Most of the processing is done by computers but mistakes can still be made.
 There will always be reconciling items because of the time lags.
 Some items are recorded earlier in the books and take time to clear the bank (for example, cheques,
deposits).
 Some items are received first by the bank and are recorded in the books from the bank reconciliation – for
example, NSF cheques, and bank service charges.

S-AE 127
You and your friend Pete are reviewing the latest financial reports from a large Canadian corporation. Although
you are studying accounting at school, he is not. On the statement of financial position, Pete notices two line
items. One is called “Cash and Cash Equivalents” and the other is called “Restricted Cash.”. Pete comments:
“That doesn’t make sense!” he exclaims. “How can you have an equivalent to cash? Cash is cash! There is no
equivalent! Also, why would a company restrict cash? What the heck does that mean?”

Instructions
Explain to Pete what “cash equivalents” and “restricted cash” are and why they are included with cash on the
statement of financial position.

Solution 127
In accounting, cash equivalents are short-term, trading investments subject to insignificant risk of changes in
value, and that are highly liquid less any bank overdrafts. Short-term, highly liquid trading investments mean
they can be converted to cash very quickly. There are limited items that fit this requirement; they are usually
short-term investments in debt instruments (for example, guaranteed investment certificates). I know they are
not “cash” in the traditional sense of coins and bills in your wallet, Pete, but for accounting purposes, these
“cash equivalents” are considered cash for financial statement presentation, so that’s why they show on the
same line as cash.

A company may have cash that is not available for general use because it is restricted for a special purpose.
For example, a company may set aside funds to pay off a debt in the future in which case these funds would
be restricted for future use. Cash that has a restricted use should be reported separately on the statement of
financial position as restricted cash so that users of the financial statements are aware that it is not available
for use by the company. Restricted cash may be reported as a current or non-current asset, depending on
when the cash will be required

S-A E 128
Managing cash is one of the most important things a company has to do.

Instructions
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7 - 44Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

(a) Identify some reasons why a company can have difficulty in managing its cash.
(b) What can be done by management to manage its cash?

Solution 128
(a) Reasons why a company can have difficulty in managing its cash:
 Too many receivables that are slow in collection
 Too much inventory that is not selling fast enough
 Significant capital expenditures required
 Too many expenses, or lack of profitability
 Insufficient access to debt or equity financing

(b) Cash management techniques:

 Establish credit and collection policies
 Reduce inventory
 Defer capital expenditures or time them to match cash flow
 Review gross margins and profit margins
 Prepare and review budgets
 Obtain additional debt or equity financing

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 Internal Control and Cash 7 - 45

OBJECTIVE FORMAT QUESTIONS

129. From the following list of activities, identify whether there is an internal control risk for Jelly Industries Ltd.,
a chain of furniture stores. If the activity presents an internal control risk, choose the control that is missing. If
the activity does not present an internal control risk, choose the control that is being properly used.

Control Risk Control

Yes or No?
(a) Deepak Sadana, the company’s purchaser, places orders for
furniture, receives the orders in the warehouse and makes
payments to vendors.
(b) When employees of the Brentwood store clock in on the store’s
point-of-sale (POS) system, they need to type in their employee
password. For simplicity’s sake, the password used for each
employee is their last name in lower case letters.
(c) The cashier of the Brentwood store receives a float of $500 at
the start of each shift. At the end the employee’s shift, the
cashier reconciles the cash in the cash register to ensure the
total in the cash register equals the total cash sales plus the
opening float. He leaves $500 in the till for the next cashier.
This is checked by the store manager.
(d) When cash collections on account are received by mail, the
mail room sends it straight to the company’s accountant, who
records the cash receipt in the accounting records and deposits
the cash in the bank.
(e) Each inventory item is recorded in the POS system at the
Arbour Lake store. When Celia Lu, a new store clerk, entered a
sale of five different picture frames, she entered the same code
for all five frames, as they were the same price and it would
take more time to enter five separate codes.
(f) The Arbour Lake store has a security system that is turned on
each night when the last employee leaves. Cash is placed in
the store safe and security cameras are used to monitor the
premises when it is closed.
(g) The company’s books are reviewed by an external auditor each
year.
(h) Internal audits are performed each month by each store’s
manager.

Solution 129
(a) Yes/Segregation of duties. There is an internal control risk in this case as the employee is ordering,
receiving and paying for goods. When the same individual is responsible for authorization, recording, and
asset custody, the potential for unintentional and intentional errors increases. For instance, the employee
could collude with a seller to sell a product for an inflated price or they could set up their own company to
send out fictitious invoices and then record purchases of goods that were never received.

(b) Yes/Physical controls. Passwords are given to employees for exclusive use only and should not be
shared with others. If passwords are known to everyone, employees could accidently/purposely change
the time records for other employees.

(c) No/Assignment of responsibility. In this case, an employee is assigned responsibility of the cash float
and reconciles the cash drawer at the end of the shift. This is then verified by the manager, confirming the
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7 - 46Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

employee has managed the cash appropriately.

(d) Yes/Segregation of duties. The employee making the bank deposit should not be the same employee
who is recording the cash receipt. Otherwise, the employee could steal the cash and cover up the theft by
understating the value of cash receipt in the journal entries.

(e) Yes/Documentation. POS systems maintain an inventory of each item held by the store. The selling price
of the frames may be the same, but the costs could be different. By typing in the incorrect code, the
inventory records will be inaccurate. Also, if a customer wishes to return a picture frame, there may be
problems if the picture frame’s code doesn’t match their receipt.

(f) No/Physical controls. Physical controls such as security systems, security cameras and safes help
safeguard the assets of the company.

(g) No/Review and reconciliation. Since they are independent from the company, an external audit of the
company’s financial statements provides a check on the internal control systems of the company.

(h) Yes/Segregation of duties. Having the store manager perform the internal audit represents a conflict of
interest. For internal audits, the employee performing the review should be independent of the personnel
responsible for the information; otherwise, there is potential for fraud or errors.

130. After reviewing ATG Company Ltd.’s bank statement for the month of September, 2018, the company
accountant noted the following:
A deposit of $550.00 was made to the bank account on September 29th
Deposits in transit
but is not yet reflected on the bank statement.
Three outstanding cheques (cheque #134, $45.45; cheque #135, $440.05
and cheque #136, $121.12) were recorded in the company's accounting
Outstanding cheques
records but not yet shown on the bank statement.

A bank charge of $50.00 is shown on the bank statement for a new

cheque printing order. The company has not ordered new cheques and is
Bank errors
planning to have this charge removed.

Unrecorded electronic receipts were identified on the bank statement.

EFT receipts
These were for $500.00 on September 2 and $120.00 on September 22.

Interest Interest charges of $57.00 were shown on the bank statement.

Unrecorded electronic payments are shown on the bank statement. These

included: $69.56 paid to the cable company for internet service on
EFT payments September 5th and $120.45 paid to the local office supply store on
September 12th.

A returned cheque plus NSF fee was shown on the bank statement
NSF cheques
(Cheque date September 19th, $560.00 plus $50.00 NSF fee).

Service fees shown on the bank statement but not recorded in the
Service fees
company accounts totalled $125.00.
The bank statement shows a payment on September 9th for utilities of
Company errors $165.85. The company books show $156.85. After investigation, $165.85
is determined as the correct payment.
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 Internal Control and Cash 7 - 47

Note: the cash balance on the bank statement is showing $7,754.48.

Instructions
Indicate all of the following statements that are correct:
(a) The cash balance per the books is not determinable from the information provided.
(b) The reconciled cash balance per the bank should be $$7,847.86.
(c) The cash balance per the books is $8,118.87.
(d) The reconciled cash balance per the books is $7,747.86.
(e) The company error of $9 should be added back to the cash balance per the books.
(f) The unrecorded EFT receipts will understate the bank balance while the unrecorded EFT payments will
overstate the bank balance.
(g) The deposit in transit understates the cash balance shown on the bank statement.
(h) The cash balance per the books is $8,100.87.

Solution 130
(c), (d), and (g) are correct; (a), (b), (e), (f), and (h) incorrect.

In order to answer this question, students will likely want to prepare a bank reconciliation for ATG Company
Ltd. as follows:

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7 - 48Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

ATG Company Ltd.

Bank Reconciliation
September 30,2018
Cash balance per bank statement $ 7,754.48
$550.0
Add: Deposits in transit 0
Error in cheque printing order 50.00 600.00
8,354.48
Less
: Outstanding cheques
No. 134 45.45
No. 135 440.05
No. 136 121.12 606.62
$7,747.8
Reconciled cash balance per bank 6

$8,118.8
Cash balance per books 7
Add: Unrecorded electronic receipts
Sept. 2: $500.00 and Sept. 22: $120.00 620.00
8,738.87
Less
: Unrecorded electronic payments
$190.0
Office supplies $120.45 Internet $69.56 1
NSF cheque plus service fee 610.00
Interest charge 57.00
Bank service charges 125.00
Sept. 9 utilities $165.85 - $156.85 9.00 991.01
Reconciled cash balance per books $ 7,747.86

Cash balance per books = Reconciled cash balance per bank $7,747.86 + $991.01 - $620.00 = $8,118.87

131. The following data has been reported for Big Game Limited for 2018:
1. The company purchased treasury bills totalling $5,500 on December 5th.
2. The company made an equity investment in Small Toys Ltd. totalling $25,000 on December 1, which it
intends to hold for the long-term.
3. Accounts receivable uncollected as of December 31 were $21,600.
4. The company wrote cheques totalling $3,500 that were not reflected in the bank balance on December 31.
5. Interest charges from the bank totalled $35 and were accrued at Dec.31, 2018.
6. Supplies on hand as of December 31 were $4,300.
7. The bank requires a compensating balance (for a non-current loan) of $35,000.
8. The inventory balance as of December 31 was $27,200.
9. The cash balance in the bank account was $55,000 on December 31.
10. A deposit of $550 was made to the bank account on December 29th but is not yet reflected on the bank
statement.
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 Internal Control and Cash 7 - 49

11. A second chequing account is in an allowed overdraft position of $10,000.

12. Total carrying amount for land on December 31 was $45,000.
13. Total book value of buildings on December 31 was $238,000.
14. Accumulated depreciation on buildings totalled $35,700.

Instructions
Indicate all of the following statements that are correct.
(a) Total cash and cash equivalents on December 31 are $57,550.
(b) Total assets for Big Games Limited for December 31, 2018 are $372,950.
(c) Total current assets on December 31 are $65,650.
(d) Total non-current assets are $272,300.
(e) Total property, plant and equipment is $318,700.
(f) Total cash and cash equivalents on December 31 are $12,515.
(g) Total non-current assets are $307,300.
(h) Total cash and cash equivalents on December 31 are $12,550.

Solution 131
(b), (c), (g), and (h) are true; (a), (d), (e), and (f) are false.

Students may want to complete a partial statement of financial position to help answer this question. The
following partial statement of financial position indicates the correct balances and classifications for Big Game
Limited:

Big Game Limited

Partial Statement of Financial Position
December 31, 2018

Assets
Current Assets
Cash and cash equivalents* $12,550
Accounts receivable 21,600
Inventory 27,200
Supplies 4,300
Total current assets 65,650
Non-current assets
Compensating cash balance $ 35,000
Long-term investments 25,000
Property, plant, and equipment
Land $ 45,000
Buildings 238,000
Less: Accumulated depreciation 35,700
Total property, plant, and equipment $247,300
Total non-current assets $307,300
Total assets $372,950

*cash and cash equivalents = $55,000 – $3,500 + $550 + $5,500 – $35,000 – $10,000 = $12,550

132. Identify from the following list all activities that help a company manage cash effectively:
(a) Using bank overdrafts when possible.

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7 - 50Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

(b) Offering terms such as 2/10, n/30 to customers.

(c) Reducing inventory levels by monitoring sales needs more closely.
(d) Paying invoices early to ensure payments are not missed.
(e) Delaying payment to employees.
(f) Paying for a major expenditure on an upgrade to the computer systems when cash reserves are high.
(g) Ensuring there is enough idle cash on hand to cover potential emergencies.
(h) Preparing a cash budget to help identify cash requirements.
(i) Making investments in short-term securities when cash is available.

Solution 132
Activities (b), (c), (f), (h), and (i) help provide strong management of cash; (a), (d), (e), and (g) do not.

(a) Bank overdrafts help a company for short-term cash shortfalls but they should not be used regularly as a
means to manage cash.

(d) By keeping track of when bills are due, a company can avoid paying bills too early. When they are offered
terms such as n/30, they should take advantage of this 30-day credit. They can invest any idle cash in
short-term investments until the bill is due. Companies need to be careful, though, not to pay late and
damage their credit ratings with suppliers.

(e) Employees are required to be paid on time regardless of cash flow.

(g) No return is earned on cash on hand. Companies who manage cash well, invest excess cash, even if it is
only overnight.

133. From the following list, select all of the items that would be included in the balance of cash and cash
equivalents at September 30, 2018 for Kelly Green Enterprises Ltd.:
(a) Treasury bills, due in 90 days
(b) Cash held in petty cash in main office
(c) Equity investment (in common shares of XYZ Company Ltd.)
(d) Cash (restricted for purchasing new sorting machine in January 2019)
(e) Money owing from customers at the end of the month
(f) Bank chequing account that is in an allowed overdraft position
(g) Compensating balance in savings account (for a non-current loan)

Solution 133
(a), (b), and (f) would be included in cash and cash equivalents; (c), (d), (e), and (g) would not.

(c) An equity investment in the shares of another company is a long term investment and not included in cash
equivalents.

(d) Restricted cash is not included in cash and cash equivalents but rather included as restricted cash under
current assets.

(e) Money owing from customers is an accounts receivable and will not be recorded as cash until collected.

(g) A compensating balance is a form of restricted cash. It provides the bank with security over a loan in case
the company fails to make payment. Compensating balances are shown as a non-current asset on the
statement of financial position.
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 Internal Control and Cash 7 - 51

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7 - 52Test Bank for Financial Accounting: Tools for Business Decision-Making, Seventh Canadian Edition

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