Chapter 5 internal control and cash

Which of the following is the purpose of the Sarbanes-Oxley Act?

To restore public confidence and trust in the financial reporting of companies

The Sarbanes-Oxley Act applies only to _____.

publicly held companies

A _____ provides reasonable assurance that business goals can be achieved.

control procedure

Which of the following is true of monitoring?

Monitoring evaluates the internal control system, locates weaknesses, and improves it.

When the clerk enters the amount of a sale in the cash register, the amount of cash in the clerk's drawer should equal the:

beginning amount of cash plus cash sales.

A positive balance in the cash short and over account is reported as _____.

other revenue

Control of cash payments should provide reasonable assurance that:

cash is used effectively and efficiently.

Consider the following example and determine the amount to be recorded under the cash short and over account:

Cash register total for cash sales $25,000

Cash receipts from cash sales $24,975

($25)

The depositor's checking account balance in the bank records is a(n) _____.

liability

Which of the following is a reason for differences between the cash balance according to a bank statement and the cash balance according to the company's records?

Time lag between the date a check is written and the date that it is paid by the bank

Which of the following is deducted from cash balance according to the bank statement while calculating the adjusted balance?

Outstanding checks

Which of the following statements is true of a bank reconciliation statement?

The company's records do need to be updated for any items in the company section of the bank reconciliation.

In a bank reconciliation statement, deposits in transit at the end of the period:

are added to the cash balance in the bank section.

From the information given below, calculate the adjusted balance in the company section.

Cash balance according to the bank statement $5,600

Cash balance according to the company's records 4,480

Deposit in transit 950

Outstanding checks 1,250

Note receivable of $800 plus interest of $20 collected by bank, but

not recorded by the company as indicated by a credit memo

$5,300

A special cash fund called a petty cash fund is used for _____.

purchasing office supplies

Which of the following is an effect on financial statements if a petty cash fund of $800 is established?

Cash will decrease by $800 and petty cash will increase by $800 on the balance sheet.

Generally, cash is listed _____ on the balance sheet.

as the first item in the Current Assets section

A(n) _____ is a preapproved amount the bank is willing to lend to a customer upon request.

line of credit

Which of the following is true of the ratio of cash to monthly cash expenses?

It is especially used when assessing the ability of new companies to operate.

_____ is computed by dividing net cash flows from operations by 12.

Monthly cash burn

The ratio of cash to monthly cash expenses at the end of Year 1 is 7.5 months. What does this statement indicate?

The company has enough cash to continue operating for 7.5 months in Year 2.

Compute the ratio of cash to monthly cash expenses from the information given below.

Cash in hand $500

Cash at bank 1,500

U.S. Treasury bills 2,000

Short-term investment 725

Equity investment 1,250

Net cash flows from operations for the year 12,600

4.50 months

Feedback: Correct. Ratio of Cash to Monthly Cash Expenses = Cash and Cash Equivalents / Monthly Cash Expense = (Cash in hand + Cash at bank + U.S. Treasury bills + Short-term investment) / (Net cash flows from operations / 12) = ($500 + $1,500 + $2,000 + $725) / ($12,600 / 12) = 4.50 months