Fundamental Accounting Principles

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 Chapter 08 Cash and Internal Controls

MULTIPLE CHOICE QUESTIONS

1) A properly designed internal control system is a key part of systems design, analysis, and
performance.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Remember
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

2) The use of internal controls provides a guarantee against losses due to operating activities.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Remember
AACSB: Technology
AICPA: BB Industry; FN Leveraging Technology

3) Maintaining adequate records is an important internal control principle.

A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Remember
AACSB: Technology
AICPA: BB Industry; FN Leveraging Technology

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 4) Clearly establishing responsibilities and assigning all accounting activities to one person is an
important principle of internal control.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Industry; FN Leveraging Technology

5) Cash registers, time clocks, and personal identification scanners are examples of technologies that
can improve internal control.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Remember
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

6) An internal control system consists of the policies and procedures companies use to protect assets,
ensure reliable accounting, promote efficient operations, and uphold company policies.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Remember
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 7) Insuring assets and requiring all accounting personnel to have CPA licenses are two important
principles of internal control.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Remember
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

8) Because employees know that bonding is an insurance policy against loss from theft, bonding does
not generally discourage loss from theft.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Communication
AICPA: BB Industry; FN Risk Analysis

9) According to good internal control policies, a person who controls an asset also maintains that
asset's accounting records.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Industry; FN Risk Analysis

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 10) Technologically advanced accounting systems rarely need monitoring for errors because computers
always process transactions correctly.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

11) Internal control in technologically advanced accounting systems depends less on the design and
operation of the information system and more on the analysis of its resulting documents.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Remember
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

12) Internal control systems are subject to limitations that usually arise from either (1) human error or
human fraud, or (2) the cost-benefit principle.
A) True
B) False
Answer: A
Explanation:
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 13) Collusion is a form of fraud where individuals collaborate to thwart separation of duties.
A) True
B) False
Answer: A
Explanation:
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

14) Separation of duties involves dividing responsibility for a transaction or a series of related
transactions between two or more individuals or departments.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

15) The Sarbanes-Oxley Act (SOX) requires managers and auditors of companies whose stock is
traded on an exchange to document and certify the system of internal controls.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 16) Harsh penalties exist for violators of the Sarbanes-Oxley Act (SOX) – sentences up to 25 years in
prison with severe fines.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

17) Human fraud is driven by the triple-threat of fraud: Opportunity, collusion, and rationalization.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

18) Cash equivalents are short-term highly liquid investment assets that are readily converted to a
known cash amount, and have maturities of one year.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Cash, Cash Equivalents, and Liquidity
Learning Objective: 08-C2 Define cash and cash equivalents and explain how to report them.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 19) Liquidity refers to a company's ability to pay its long-term obligations.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Cash, Cash Equivalents, and Liquidity
Learning Objective: 08-C2 Define cash and cash equivalents and explain how to report them.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement

20) Money orders, cashier's checks, and certified checks are all examples of cash.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Cash, Cash Equivalents, and Liquidity
Learning Objective: 08-C2 Define cash and cash equivalents and explain how to report them.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement

21) Basic bank services such as bank accounts, bank deposits, and checking contribute to the control of
cash.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 22) The payee is the person who signs a check, authorizing its payment.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Communication
AICPA: BB Legal; FN Decision Making

23) Electronic funds transfers (EFTs) are decreasingly used by companies due to the inconvenience and
high cost.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

24) Canceled checks are checks the bank has paid and deducted from the customer's account during the
period.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Communication
AICPA: BB Legal; FN Decision Making

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 25) A check involves 3 parties: a maker who signs the check, a payee who is the recipient, and a bank
on which the check is drawn.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Communication
AICPA: BB Legal; FN Decision Making

26) Signature cards, deposit tickets, checks, and bank statements are all examples of internal control
devices for banking activities.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

27) On a bank statement, deposits are listed as credits because the bank increases its liability to the
depositor when the deposit is made.
A) True
B) False
Answer: A
Explanation:
Diff: 2
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Understand
AACSB: Technology
AICPA: FN Measurement; BB Legal

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 28) The days' sales uncollected ratio measures a company's ability to manage its debt.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Days' Sales Uncollected
Learning Objective: 08-A1 Compute the days' sales uncollected ratio and use it to assess liquidity.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Risk Analysis

29) The days' sales uncollected ratio measures the liquidity of accounts receivable.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Days' Sales Uncollected
Learning Objective: 08-A1 Compute the days' sales uncollected ratio and use it to assess liquidity.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Risk Analysis

30) When evaluating the days' sales uncollected ratio, generally the higher the receivables balance, the
better the ratio.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Days' Sales Uncollected
Learning Objective: 08-A1 Compute the days' sales uncollected ratio and use it to assess liquidity.
Bloom's: Understand
AACSB: Communication
AICPA: BB Industry; FN Risk Analysis

10

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 31) Internal control of cash receipts aims to ensure that all cash received is properly recorded and
deposited.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

32) A voucher system is a set of procedures and approvals designed to control cash disbursements and
the acceptance of obligations.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

33) Most large thefts occur from payment of fictitious invoices, which makes control of cash
disbursements especially important for companies.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Control of Cash Disbursements
Learning Objective: 08-P2 Explain and record petty cash fund transactions.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

11

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 34) If the Cash Over and Short account has a credit balance at the end of the period, the amount is
commonly reported as miscellaneous revenue.
A) True
B) False
Answer: A
Explanation:
Diff: 2
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement

35) The clerk who has access to the cash in the cash register should also have access to the cash
register tape or file.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

36) A voucher system's control over cash disbursements begins when a company incurs an obligation
that will result in eventual payment of cash.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

12

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 37) A voucher system establishes procedures for verifying, approving, and recording obligations for
eventual cash disbursement.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

38) Assigning purchasing, receiving, and paying for merchandise to one department or individual is a
way to streamline a voucher system.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

39) A voucher is an external document used to accumulate information to control cash disbursements
and to ensure that a transaction is properly recorded.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

13

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 40) Vouchers should be used for purchases of inventory and all other expenditures made within a
company.
A) True
B) False
Answer: A
Explanation:
Diff: 2
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Understand
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

41) A debit balance in the Cash Over and Short account reflects an expense and is reported on the
income statement as part of selling, general and administrative expenses.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Reporting

42) The Petty Cash account is a separate bank account used for small amounts.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Control of Cash Disbursements
Learning Objective: 08-P2 Explain and record petty cash fund transactions.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement

14

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 43) Since petty cash is concerned with such small amounts of cash, it is not necessary to document all
transactions with a petty cash receipt.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Control of Cash Disbursements
Learning Objective: 08-P2 Explain and record petty cash fund transactions.
Bloom's: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement

44) Petty cash reimbursement requires a journal entry that involves a debit to the appropriate expenses
and a credit to Cash.
A) True
B) False
Answer: A
Explanation:
Diff: 2
Topic: Control of Cash Disbursements
Learning Objective: 08-P2 Explain and record petty cash fund transactions.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement

45) The petty cash fund should be reimbursed when it is nearing zero and at the end of the accounting
period when financial statements are prepared.
A) True
B) False
Answer: A
Explanation:
Diff: 2
Topic: Control of Cash Disbursements
Learning Objective: 08-P2 Explain and record petty cash fund transactions.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement

15

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 46) The entry to increase the balance in petty cash from $50 to $75 would include a credit to Petty
Cash of $25.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Control of Cash Disbursements
Learning Objective: 08-P2 Explain and record petty cash fund transactions.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement

47) A bank reconciliation explains any differences between the balance of a checking account on the
depositor's records and the balance reported on the bank statement.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Technology
AICPA: BB Industry; FN Leveraging Technology

48) Outstanding checks are checks the bank has paid and deducted from the customer's account during
the month.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Technology
AICPA: BB Industry; FN Leveraging Technology

16

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 49) Deposits in transit are deposits made and recorded by the depositor but not yet recorded on the
bank statement.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Technology
AICPA: BB Industry; FN Leveraging Technology

50) It is generally not necessary for businesses to reconcile their checking accounts since banks keep
accurate records and provide internal control support for cash.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Technology
AICPA: BB Industry; FN Leveraging Technology

51) After preparing a bank reconciliation, adjustments must be made for items reconciling the book
balance.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement

17

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 52) Outstanding checks, deposits in transit, deductions for bank fees, additions for interest, and errors
are all factors that can cause the bank statement balance for a checking account to be different from
the company's checking account balance.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement

53) Outstanding checks, deposits in transit, and bank service charges are added to the beginning
balance of the bank statement to determine the adjusted bank balance.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement

54) Proper internal control would require that a department manager inform the purchasing department
of its needs for additional merchandise by preparing and signing a purchase requisition which lists
the merchandise needed and requests that it be purchased.
A) True
B) False
Answer: A
Explanation:
Diff: 2
Topic: Documentation and Verification
Learning Objective: 08-P4 Appendix 8A-Describe use of documentation and verification to control cash disbursements.
Bloom's: Understand
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

18

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 55) An invoice is an itemized statement of goods prepared by the customer listing the customer's name,
items sold, sales prices, and terms of sale.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Documentation and Verification
Learning Objective: 08-P4 Appendix 8A-Describe use of documentation and verification to control cash disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

56) Approved vouchers are recorded in a journal called the voucher register.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Documentation and Verification
Learning Objective: 08-P4 Appendix 8A-Describe use of documentation and verification to control cash disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

57) A receiving report is a document used within a company to notify the appropriate persons that
ordered goods have been received and to describe the quantities and condition of the goods.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Documentation and Verification
Learning Objective: 08-P4 Appendix 8A-Describe use of documentation and verification to control cash disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

19

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 58) When a voucher system is used, an invoice approval is not needed as long as the purchase is
evidenced by an invoice and purchase order.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Documentation and Verification
Learning Objective: 08-P4 Appendix 8A-Describe use of documentation and verification to control cash disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

59) In order to streamline the purchasing process, department managers should place orders directly
with suppliers.
A) True
B) False
Answer: B
Explanation:
Diff: 1
Topic: Documentation and Verification
Learning Objective: 08-P4 Appendix 8A-Describe use of documentation and verification to control cash disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

60) A purchase order is a document the purchasing department sends to the vendor to place an order.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Documentation and Verification
Learning Objective: 08-P4 Appendix 8A-Describe use of documentation and verification to control cash disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

20

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 61) Which of the following is not one of the policies and procedures that make up an internal control
system?
A) Guarantee a return to investors.
B) Promote efficient operations.
C) Urge adherence to company policies.
D) Protect assets.
E) Ensure reliable accounting.
Answer: A
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

62) Managers place a high priority on internal control systems because the systems assist managers in
all of the following except:
A) Upholding company policies.
B) Assuring that no loss will occur.
C) Promoting efficient operations.
D) Ensuring reliable accounting.
E) Protecting assets.
Answer: B
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

21

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 63) The principles of internal control include:
A) Maintain minimal records.
B) Bond all employees.
C) Separate recordkeeping from custody of assets.
D) Use only computerized systems.
E) Require automated sales systems.
Answer: C
Explanation: A)
B)
C)
D)
E)
Diff: 1
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Remember
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

64) Principles of internal control include all of the following except:

A) Apply technological controls.
B) Maintaining security by having one person track and record assets.
C) Divide responsibilities for related transactions.
D) Separate recordkeeping from custody of assets.
E) Perform regular and independent reviews.
Answer: B
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

22

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 65) A properly designed internal control system:
A) Requires the use of non-computerized systems.
B) Lowers the company's risk of loss.
C) Eliminates the need for an audit.
D) Insures profitable operations.
E) Is not necessary if the company uses a computerized system.
Answer: B
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

66) A company's internal control system:

A) Eliminates the need for audits.
B) Eliminates the need for managers' certification of controls.
C) Monitors company and employee performance.
D) Eliminates the company's risk of loss.
E) Eliminates human error.
Answer: C
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

23

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 67) Two clerks sharing the same cash register is a violation of which internal control principle?
A) Maintain adequate records.
B) Establish responsibilities.
C) Apply technological controls.
D) Bond key employees.
E) Insure assets.
Answer: B
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

68) Which internal control principle prescribes the use of pre-numbered printed checks?
A) Technological controls.
B) Divide responsibility for related transactions.
C) Establish responsibilities.
D) Perform regular and independent reviews.
E) Maintain adequate records.
Answer: E
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

24

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 69) The impact of technology on internal controls includes:
A) Elimination of the need for regular audits.
B) Reduced processing errors.
C) Elimination of separation of duties.
D) Elimination of fraud.
E) Elimination of the need to bond employees.
Answer: B
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

70) Internal control policies and procedures have limitations not including:
A) Establishing responsibilities.
B) Human error.
C) Collusion.
D) Cost-benefit principle.
E) Human fraud.
Answer: A
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

25

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 71) Internal control systems are:
A) Developed by the Securities and Exchange Commission for public companies.
B) Developed by the Small Business Administration for non-public companies.
C) Required only if a company plans to engage in interstate commerce.
D) Developed by the Internal Revenue Service for all U.S. companies.
E) Required by Sarbanes-Oxley (SOX) to be documented and certified if the company's stock is
traded on an exchange (a public company).
Answer: E
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Internal Control
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.
Bloom's: Understand
AACSB: Technology
AICPA: BB Industry; BB Leveraging Technology; FN Leveraging Technology

72) Cash, not including cash equivalents, includes:

A) Customer checks, cashier checks, and money orders.
B) Two-year certificates of deposit.
C) Postage stamps.
D) IOUs.
E) Money market funds.
Answer: A
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Cash, Cash Equivalents, and Liquidity
Learning Objective: 08-C2 Define cash and cash equivalents and explain how to report them.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement

26

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 73) Cash equivalents:
A) Are recorded in petty cash.
B) Include checking accounts.
C) Include money orders.
D) Are short-term, highly liquid investment assets.
E) Include 6-month certificates of deposit.
Answer: D
Explanation: A)
B)
C)
D)
E)
Diff: 1
Topic: Cash, Cash Equivalents, and Liquidity
Learning Objective: 08-C2 Define cash and cash equivalents and explain how to report them.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement

74) Cash equivalents:

A) Are readily converted to a known cash amount.
B) Include checking accounts.
C) Have no immediate value.
D) Include savings accounts.
E) Include time deposits.
Answer: A
Explanation: A)
B)
C)
D)
E)
Diff: 1
Topic: Cash, Cash Equivalents, and Liquidity
Learning Objective: 08-C2 Define cash and cash equivalents and explain how to report them.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement

27

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 75) Cash equivalents meet all of the following criteria except:
A) Have a market value that is not sensitive to interest rate changes.
B) More liquid than cash.
C) Short-term investments purchased within 3 months of their maturity dates.
D) Readily convertible to a known cash amount.
E) Short-term U.S. treasury bills.
Answer: B
Explanation: A)
B)
C)
D)
E)
Diff: 1
Topic: Cash, Cash Equivalents, and Liquidity
Learning Objective: 08-C2 Define cash and cash equivalents and explain how to report them.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement

76) The following information is available for Birch Company at December 31:

Money market fund balance $2,790

Certificate of deposit maturing June 30 of next year $10,000
Postdated checks from customers $1,475
Cash in bank account $21,430
NSF checks from customers returned by bank $650
Cash in petty cash fund $200
Inventory of postage stamps $24
U.S. Treasury bill purchased on December 15 and maturing on February $5,000
28 of following year

Based on this information, Birch Company should report Cash and Cash Equivalents on December
31 of:
A) $38,770 B) $29,420 C) $41,345 D) $31,345 E) $39,420
Answer: B
Explanation: A) Add $2,790 in money market fund + $21,430 of cash in bank + $200 of cash in
petty cash fund + $5,000 of U.S. Treasury bill with maturity of less than three
months on date of purchase = $29,420.
B) Add $2,790 in money market fund + $21,430 of cash in bank + $200 of cash in
petty cash fund + $5,000 of U.S. Treasury bill with maturity of less than three
months on date of purchase = $29,420.

28

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 C) Add $2,790 in money market fund + $21,430 of cash in bank + $200 of cash in
petty cash fund + $5,000 of U.S. Treasury bill with maturity of less than three
months on date of purchase = $29,420.
D) Add $2,790 in money market fund + $21,430 of cash in bank + $200 of cash in
petty cash fund + $5,000 of U.S. Treasury bill with maturity of less than three
months on date of purchase = $29,420.
E) Add $2,790 in money market fund + $21,430 of cash in bank + $200 of cash in
petty cash fund + $5,000 of U.S. Treasury bill with maturity of less than three
months on date of purchase = $29,420.
Diff: 3
Topic: Cash, Cash Equivalents, and Liquidity
Learning Objective: 08-C2 Define cash and cash equivalents and explain how to report them.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement

29

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 77) The following information is available for Fenton Manufacturing Company at June 30:

Cash in bank account $11,455

Inventory of postage stamps $74
Money market fund balance $10,400
Petty cash balance $350
NSF checks from customers returned by bank $867
Postdated checks received from customers $791
Money orders $290
A nine-month certificate of deposit maturing on December 31 of $6,000
current year

Based on this information, Fenton Manufacturing Company should report Cash and Cash
Equivalents on June 30 of:
A) $12,095 B) $22,495 C) $28,495 D) $23,286 E) $29,286
Answer: B
Explanation: A) Add $11,455 of cash in bank + $10,400 of money market fund + $350 of petty
cash balance + $290 of money orders = $22,495.
B) Add $11,455 of cash in bank + $10,400 of money market fund + $350 of petty
cash balance + $290 of money orders = $22,495.
C) Add $11,455 of cash in bank + $10,400 of money market fund + $350 of petty
cash balance + $290 of money orders = $22,495.
D) Add $11,455 of cash in bank + $10,400 of money market fund + $350 of petty
cash balance + $290 of money orders = $22,495.
E) Add $11,455 of cash in bank + $10,400 of money market fund + $350 of petty
cash balance + $290 of money orders = $22,495.
Diff: 3
Topic: Cash, Cash Equivalents, and Liquidity
Learning Objective: 08-C2 Define cash and cash equivalents and explain how to report them.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement

78) The following information is available for Montrose Company at December 31:

Cash in bank account $8,540

Petty cash 250
Money market fund balance $10,400
Checks from customers $1,350
NSF checks from customers returned by bank $805
Treasury bill maturing in 60 days $10,000
Money orders $290
A nine-month certificate of deposit maturing on June 30 of $6,000

30

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 $6,000
next year

Based on this information, the amounts considered Cash and Cash Equivalents, respectively on
December 31 are:
A) Cash $19,190; Cash equivalents $16,000
B) Cash $8,540; Cash equivalents $22,290
C) Cash $8,790; Cash equivalents $26,400
D) Cash $10,430; Cash equivalents $20,400
E) Cash $11,235; Cash equivalents $26,400
Answer: D
Explanation: A) Cash = Cash in bank account $8,540 + Petty cash $250 + Checks from customers
$1,350 + Money orders $290 = $10,430
Cash equivalents = Money market fund $10,400 + Treasury bills $10,000 =
$20,400
B) Cash = Cash in bank account $8,540 + Petty cash $250 + Checks from customers
$1,350 + Money orders $290 = $10,430
Cash equivalents = Money market fund $10,400 + Treasury bills $10,000 =
$20,400
C) Cash = Cash in bank account $8,540 + Petty cash $250 + Checks from customers
$1,350 + Money orders $290 = $10,430
Cash equivalents = Money market fund $10,400 + Treasury bills $10,000 =
$20,400
D) Cash = Cash in bank account $8,540 + Petty cash $250 + Checks from customers
$1,350 + Money orders $290 = $10,430
Cash equivalents = Money market fund $10,400 + Treasury bills $10,000 =
$20,400
E) Cash = Cash in bank account $8,540 + Petty cash $250 + Checks from customers
$1,350 + Money orders $290 = $10,430
Cash equivalents = Money market fund $10,400 + Treasury bills $10,000 =
$20,400
Diff: 3
Topic: Cash, Cash Equivalents, and Liquidity
Learning Objective: 08-C2 Define cash and cash equivalents and explain how to report them.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement

31

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 79) Basic bank services do not include:
A) Petty cash management.
B) Bank accounts.
C) Bank deposits.
D) Electronic funds transfer.
E) Checking.
Answer: A
Explanation: A)
B)
C)
D)
E)
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making

80) The three parties involved with a check are:

A) The maker, the manager, and the payee.
B) The writer, the cashier, and the bank.
C) The bookkeeper, the payee, and the bank.
D) The signer, the cashier, and the company.
E) The maker, the payee, and the bank.
Answer: E
Explanation: A)
B)
C)
D)
E)
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making

32

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 81) A remittance advice is a(n):
A) Explanation for a payment by check.
B) Bank statement.
C) Electronic funds transfer.
D) Cancelled check.
E) Internal voucher.
Answer: A
Explanation: A)
B)
C)
D)
E)
Diff: 1
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Decision Making

82) A bank statement provided by the bank includes:

A) A list of outstanding checks.
B) A list of petty cash amounts.
C) A listing of deposits in transit.
D) A reconciliation to the depositor cash account.
E) The beginning and the ending balance of the depositor's account.
Answer: E
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Understand
AACSB: Communication
AICPA: BB Industry; FN Decision Making

33

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 83) A bank does not issue a debit memorandum to notify the depositor of which of the following?
A) An uncollectible check.
B) A deposit to their account.
C) A fee assessed to the depositor's account.
D) Periodic payments arranged in advance, by a depositor.
E) All withdrawals through an ATM.
Answer: B
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Understand
AACSB: Communication
AICPA: BB Industry; FN Decision Making

84) Preparing a bank reconciliation on a monthly basis is an example of:

A) A technological control.
B) Poor internal control.
C) Separation of duties.
D) Protecting assets by proving the accuracy of cash records.
E) Establishing responsibility.
Answer: D
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Bank Reconciliation
Learning Objective: 08-P3 Prepare a bank reconciliation.
Bloom's: Understand
AACSB: Communication
AICPA: BB Industry; FN Decision Making

34

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 85) The number of days' sales uncollected:
A) Is calculated by dividing sales by accounts receivable.
B) Measures a company's ability to pay its bills on time.
C) Is used to evaluate the liquidity of receivables.
D) Measures a company's debt to income.
E) Is calculated by dividing accounts receivable by sales.
Answer: C
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Days' Sales Uncollected
Learning Objective: 08-A1 Compute the days' sales uncollected ratio and use it to assess liquidity.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis

86) The number of days' sales uncollected is used to:

A) Measure the amount of cash sales during a period.
B) Identify the likelihood of collecting sales on account.
C) Estimate how much time is likely to pass before the current amount of accounts receivable is
received in cash.
D) Measure how many days of sales remain until the end of the year.
E) Determine the number of days that have passed without collecting on accounts receivable.
Answer: C
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Days' Sales Uncollected
Learning Objective: 08-A1 Compute the days' sales uncollected ratio and use it to assess liquidity.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis

35

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 87) The number of days' sales uncollected is calculated by:
A) Dividing accounts receivable by net sales and multiplying by 365.
B) Dividing accounts receivable by net sales.
C) Multiplying net sales by accounts receivable and dividing by 365.
D) Dividing net sales by accounts receivable.
E) Dividing net sales by accounts receivable and multiplying by 365.
Answer: A
Explanation: A)
B)
C)
D)
E)
Diff: 1
Topic: Days' Sales Uncollected
Learning Objective: 08-A1 Compute the days' sales uncollected ratio and use it to assess liquidity.
Bloom's: Remember
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis

88) All of the following are true of the number of days' sales uncollected ratio except:
A) Can be used for comparisons to other companies in the same industry.
B) Is most effective in evaluating the cash sales of a company.
C) Can be used for comparisons between current and prior periods.
D) Reflects the liquidity of receivables.
E) Measures how much time is likely to pass before the current amount of accounts receivable is
received in cash.
Answer: B
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Days' Sales Uncollected
Learning Objective: 08-A1 Compute the days' sales uncollected ratio and use it to assess liquidity.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis

36

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 89) A company had net sales of $21,500 and ending accounts receivable of $2,700 for the current
period. Its days' sales uncollected equals: (Use 365 days a year.)
A) 8.0 days. B) 7.4 days. C) 45.8 days. D) 58.9 days. E) 45.2 days.
Answer: C
Explanation: A) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $2,700/$21,500 * 365 = 45.8 days
B) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $2,700/$21,500 * 365 = 45.8 days
C) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $2,700/$21,500 * 365 = 45.8 days
D) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $2,700/$21,500 * 365 = 45.8 days
E) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $2,700/$21,500 * 365 = 45.8 days
Diff: 2
Topic: Days' Sales Uncollected
Learning Objective: 08-A1 Compute the days' sales uncollected ratio and use it to assess liquidity.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis

90) Freeman Co. had net sales of $4.2 million and ending accounts receivable of $0.8 million. Its days'
sales uncollected equals:
A) 11.5 days. B) 69.5 days. C) 19.2 days. D) 5.3 days. E) 292 days.
Answer: B
Explanation: A) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $0.8 million/$4.2 million * 365 = 69.5 days
B) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $0.8 million/$4.2 million * 365 = 69.5 days
C) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $0.8 million/$4.2 million * 365 = 69.5 days
D) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $0.8 million/$4.2 million * 365 = 69.5 days
E) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $0.8 million/$4.2 million * 365 = 69.5 days
Diff: 2
Topic: Days' Sales Uncollected
Learning Objective: 08-A1 Compute the days' sales uncollected ratio and use it to assess liquidity.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis

37

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 91) The following information is taken from Reagan Company's December 31 balance sheet:

Cash and cash equivalents $8,419

Accounts receivable 70,422
Merchandise inventories 60,362
Prepaid expenses 4,100
Accounts payable $14,950
Notes payable 86,638
Other current liabilities 9,500

If net credit sales for the current year were $612,000, the firm's days' sales uncollected for the year
is: (Use 365 days a year.)
A) 60 days B) 85 days C) 154 days D) 42 days E) 70 days
Answer: D
Explanation: A) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $70,422/$612,000 * 365 = 42 days
B) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $70,422/$612,000 * 365 = 42 days
C) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $70,422/$612,000 * 365 = 42 days
D) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $70,422/$612,000 * 365 = 42 days
E) Days' Sales Uncollected Ratio = Ending Accounts Receivable/Net Sales * 365
Days' Sales Uncollected Ratio = $70,422/$612,000 * 365 = 42 days
Diff: 2
Topic: Days' Sales Uncollected
Learning Objective: 08-A1 Compute the days' sales uncollected ratio and use it to assess liquidity.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Risk Analysis

38

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 92) An income statement account that is used to record cash overages and cash shortages arising from
petty cash transactions or from errors in making change is titled:
A) Bank Reconciliation.
B) Cash Receivable.
C) Cash Lost.
D) Petty Cash.
E) Cash Over and Short.
Answer: E
Explanation: A)
B)
C)
D)
E)
Diff: 1
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Remember
AACSB: Communication
AICPA: BB Industry; FN Measurement

93) A set of procedures and approvals for verifying, approving, and recording obligations for eventual
cash disbursement, and for issuing checks for payment only of verified, approved, and recorded
obligations is referred to as a(n):
A) Cash disbursement system.
B) Cash control system.
C) Internal cash system.
D) Petty cash system.
E) Voucher system.
Answer: E
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Remember
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

39

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 94) Internal control procedures for cash receipts do not require that:
A) Cash sales should be recorded on a cash register at the time of each sale.
B) Custody over cash is kept separate from its recordkeeping.
C) An employee with no access to cash receipts should compare the total cash recorded by the
register with the record of cash receipts reported by the cashier.
D) All collections for sales are received immediately upon making the sales.
E) Clerks having access to cash in a cash register should not have access to the register tape or
file.
Answer: D
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Understand
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

95) The Cash Over and Short account:

A) Is used to record the income effects of errors in making change and/or processing petty cash
transactions.
B) Can never have a debit balance.
C) Can never have a credit balance.
D) Is not necessary in a computerized accounting system.
E) Is used when the cash account reports a credit balance.
Answer: A
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Understand
AACSB: Communication
AICPA: BB Industry; FN Measurement

40

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 96) The voucher system of control:
A) Is a set of procedures and approvals designed to control cash receipts and the acceptance of
obligations.
B) Applies only when multiple purchases are made from the same supplier.
C) Establishes procedures for verifying, approving, and recording obligations for eventual cash
disbursement.
D) Is required in large companies but not beneficial for small to mid-sized companies.
E) Establishes procedures for receiving checks for the sale of verified, approved, and recorded
activities.
Answer: C
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Understand
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

97) A voucher is an internal document or file:

A) Used to accumulate information needed to control cash disbursements and to ensure that
transactions are properly recorded.
B) Used as a substitute for an invoice if the supplier fails to send one.
C) Takes the place of a bank check.
D) Prepared after an invoice is received.
E) Prepared before the company orders goods to make sure that all goods are being ordered from
an approved vendor list.
Answer: A
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Understand
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

41

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 98) Which of the following procedures would weaken control over cash receipts that arrive through the
mail?
A) The employees handling the cash receipts are bonded.
B) For safety, only one person should open the mail, and that person should immediately deposit
the cash received in the bank.
C) The cashier deposits the money in the bank and the recordkeeper records the amounts
received in the accounting records.
D) After the mail is opened, a list (in triplicate) of the money received is prepared with a record
of the sender's name, the amount, and an explanation of why the money is sent.
E) The bank reconciliation is prepared by a person who does not handle cash or record cash
receipts.
Answer: B
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Internal Control; Control of Cash Receipts
Learning Objective: 08-C1 Define internal control and identify its purpose and principles.; 08-P1 Apply internal control to cash
receipts and disbursements.
Bloom's: Understand
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

99) At the end of the day, the cash register's record shows $2,050, but the count of cash in the cash
register is $2,058. The correct entry to record the cash sales is
A) Debit Cash $2,058; credit Sales $2,058.
B) Debit Cash $2,050; debit Cash Over and Short $8; credit Sales $2,058.
C) Debit Cash Over and Short $8, credit Sales $8.
D) Debit Cash $2,058; credit Cash Over and Short $8; credit Sales $2,050.
E) Debit Cash $2,050; credit Sales $2,050.
Answer: D
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement

42

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 100) At the end of the day, the cash register tape shows $1,000 in cash sales but the count of cash in the
register is $1,010. The proper entry to account for this excess is:
A) Debit Cash $1,010; credit Sales $1,000; credit Cash Over and Short $10.
B) Debit Cash Over and Short $10; credit Cash $10.
C) Debit Cash $1,010; credit Sales $1,010.
D) Debit Cash $1,000; credit Sales $1,000.
E) Debit Cash $1,000; debit Cash Over and Short for $10; credit Sales $1,010.
Answer: A
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement

101) A key factor in a voucher system includes all of the following except:
A) It is applied to purchases of merchandise inventory and all other expenses.
B) Procedures for purchasing, receiving, and paying for merchandise are divided among several
departments.
C) It is not necessary if the supplier provides both receiving report and invoice with the
merchandise shipped.
D) The system limits the individuals that can incur cash payment obligations for a company.
E) Only approved departments and individuals are authorized to incur an obligation that will
result in the payment of cash.
Answer: C
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Control of Cash Receipts
Learning Objective: 08-P1 Apply internal control to cash receipts and disbursements.
Bloom's: Understand
AACSB: Technology
AICPA: BB Leveraging Technology; FN Leveraging Technology

43

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 102) The entry to establish a petty cash fund includes:
A) A debit to Petty Cash and a credit to Accounts Receivable.
B) A debit to Petty Cash and a credit to Cash.
C) A debit to Cash and a credit to Petty Cash.
D) A debit to Cash and a credit to Petty Cash Over and Short.
E) A debit to Cash and a credit to Cash Over and Short.
Answer: B
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Control of Cash Disbursements
Learning Objective: 08-P2 Explain and record petty cash fund transactions.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement

103) Spencer Co. decides to establish a petty cash fund with a beginning balance of $200. The company
decides that any purchase under $25 can be processed through petty cash instead of the voucher
system. The journal entry to record establishing the account is:
A) Debit Petty Cash $200 and credit Cash $200.
B) Debit Cash $200 and credit Cash Over and Short $200.
C) Debit Cash $200 and credit Petty Cash Over and Short $200.
D) Debit Cash $200 and credit Petty Cash $200.
E) Debit Petty Cash $200; credit Cash $175; and credit Cash Over and Short $25.
Answer: A
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Control of Cash Disbursements
Learning Objective: 08-P2 Explain and record petty cash fund transactions.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement

44

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
 104) The entry to record reimbursement of the petty cash fund for postage expense should include:
A) A debit to Petty Cash.
B) A debit to Cash Short and Over.
C) A debit to Supplies.
D) A debit to Postage Expense.
E) A debit to Cash.
Answer: D
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Control of Cash Disbursements
Learning Objective: 08-P2 Explain and record petty cash fund transactions.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement

105) Spencer Co. has a $200 petty cash fund. At the end of the first month the accumulated receipts
represent $43 for delivery expenses, $127 for merchandise inventory, and $12 for miscellaneous
expenses. The fund has a balance of $18. The journal entry to record the reimbursement of the
account includes a:
A) Credit to Inventory for $127.
B) Credit to Cash for $182.
C) Debit to Cash Over and Short for $18.
D) Debit to Petty Cash for $200.
E) Credit to Cash Over and Short for $18.
Answer: B
Explanation: A)
B)
C)
D)
E)
Diff: 2
Topic: Control of Cash Disbursements
Learning Objective: 08-P2 Explain and record petty cash fund transactions.
Bloom's: Understand
AACSB: Analytical Thinking
AICPA: BB Industry; FN Measurement

45

Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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