CHAPTER
8
Sarbanes-Oxley, Internal Control,
and Cash
Q UIZ AND T EST H INTS
The following hints may be helpful to you in preparing for a quiz or a test over
the material covered in Chapter 8.
1. You may expect some general terminology questions (usually true/false or
multiple-choice) related to Sarbanes-Oxley, internal controls, and cash. Review the “Key Terms” section at the end of the chapter and be sure you understand each term. Do the Matching and Fill-in-the-Blank exercises included in this Study Guide.
2. You should be able to prepare a bank reconciliation of the type illustrated in
the chapter. Instructors often include short bank reconciliations of the type
shown in the Illustrative Problem of the text and in Problem 8-1 of this Study
Guide. Attempt to work the Illustrative Problem and the Study Guide Problem 8-1 without looking at the solution.
3. Be able to identify in which section of the bank reconciliation different types
of reconciling items would be included. The form of the reconciliation illustrated on page 368 may be a helpful study aid. Have a friend read off the reconciling items from the chapter illustration of the bank reconciliation on
page 370, and identify whether the item would appear in the section of the
reconciliation beginning with “Cash balance according to bank statement” or
the section beginning with “Cash balance according to company’s records.”
Note that sometimes instructors may refer to the “Cash balance according to
bank statement” as the “Balance per bank” and “Cash balance according to
company’s records” as “Balance per books.”
4. You should be able to prepare journal entries to establish and replenish cash
funds, including cash change funds and petty cash. In replenishing such funds,
the cash short and over account may need to be debited (short) or credited
(over).
5. You should read over and be generally familiar with the presentation of cash
on the balance sheet.
119
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120
Chapter 8
6. Review the GPS graphic at the beginning of the chapter and the “At A
Glance” section at the end of the chapter. Read and review each of the Key
Points and related Learning Outcomes. For each Learning Outcome that has
an Example Exercise, locate the Example Exercise in the chapter and be
sure that you understand the solution and can work a similar item on a test.
If you have any questions about an Example Exercise, read the section of
the chapter immediately preceding the Example Exercise.
7. If your instructor covers the Financial Analysis and Interpretation item at the
end of the chapter, you should know how to compute and interpret changes
in the ratio of cash to monthly cash expenses.
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Chapter 8
121
M ATCHING
Instructions: Match each of the statements below with its proper term. Some
terms may not be used.
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
bank reconciliation
bank statement
cash
cash equivalents
cash receipts journal
cash short and over account
Clinton-Gore Act of 2002
compensating balance
doomsday ratio
electronic funds transfer (EFT)
K.
L.
M.
N.
O.
P.
Q.
R.
S.
elements of internal control
employee fraud
internal control
notes receivable
petty cash fund
ratio of cash to monthly cash
expenses
Sarbanes-Oxley Act of 2002
voucher
voucher system
___
1. A law passed by Congress in response to the financial frauds and
scandals of the early 2000s.
___
2. Provides assurance that assets are safeguarded, business information is accurate, and employees comply with laws.
___
3. The control environment, risk assessment, control activities, information and communication, and monitoring.
___
4. An intentional act of deceiving an employer for personal gain.
___
5. Coins, currency (paper money), checks, money orders, and money
on deposit that is available for unrestricted withdrawal from banks
and other financial institutions.
___
6. A set of procedures for authorizing and recording liabilities and cash
payments.
___
7. A special form for recording relevant data about a liability and the
details of its payment.
___
8. A system in which computers rather than paper (money, checks, etc.)
are used to effect cash transactions.
___
9. The analysis that details the items responsible for the difference
between the cash balance reported in the bank statement and the
balance of the cash account in the ledger.
___ 10. A special cash fund to pay relatively small amounts.
___ 11. Highly liquid investments that are usually reported with cash on the
balance sheet.
___ 12. A minimum balance that banks require companies to maintain in
their bank accounts.
___ 13. A ratio that is useful for assessing how long a company can continue to operate without additional financing or without generating
positive cash flows from operations.
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122
Chapter 8
F ILL IN THE B LANK —P ART A
Instructions: Answer the following questions or complete the statements by
writing the appropriate words or amounts in the answer blanks.
1. Coins, currency (paper money), checks, money orders, and money on
deposit that are available for unrestricted withdrawal from banks and
other financial institutions are reported in the financial statements as
______________.
2. Most companies’ invoices are designed so that customers return a portion
of the invoice called a(n) _____________________ ______________.
3. A(n) _________________ system is a set of procedures for authorizing and
recording liabilities and cash payments.
4. Vouchers are ordinarily filed in the unpaid voucher file in order of _________
date.
5. A(n) ____________________ _________ ________________ system
uses computers rather than paper (money, checks, etc.) to effect cash transactions.
6. A(n) __________ _______________________ details the items responsible for the difference between the cash balance reported in the bank statement and the balance of the cash account in the ledger.
7. In a bank reconciliation, a bank debit memorandum for a customer’s check
returned because of insufficient funds is __________________ ________
the cash balance according to the company’s records.
8. In a bank reconciliation, checks outstanding are ___________________
________ the cash balance according to the bank statement.
9. A company erroneously recorded a check issued for $180 as $810. On the
bank reconciliation, the difference of $630 would be added to the cash balance according to the ____________________ _________________.
10. Minimum cash balances that banks require companies to maintain in their
bank accounts are called ____________ balances.
F ILL IN THE B LANK —P ART B
Instructions: Answer the following questions or complete the statements by
writing the appropriate words or amounts in the answer blanks.
1. The control environment is an ___________________ of internal control.
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Chapter 8
123
2. At the beginning of a work shift, each cash register clerk is given a cash
drawer that contains a predetermined amount of cash. The amount of cash
in each drawer is called a(n) _______________ fund.
3. If Cash Short and Over has a credit balance at the end of the period, the
balance would be reported on the income statement in the section entitled
_____________ _______________.
4. A(n) ________________ is a special form for recording relevant data about
a liability and the details of its payment.
5. A voucher for the purchase of goods is normally supported by the supplier’s
invoice, a purchase order, and a(n) _________________ ______________.
6. A(n) ___________ _________ fund is used to pay relatively small amounts.
7. In a bank reconciliation, a bank credit memorandum for a note receivable
collected by the bank is __________________ ________ the cash balance
according to the company’s records.
8. In a bank reconciliation, deposits in transit are __________________
________ the cash balance according to the bank statement.
9. In a bank reconciliation, a bank debit memorandum for service charges is
__________________ ________ the cash balance according to the company’s records.
10. A company may invest excess cash in highly liquid investments called
__________ ____________ to earn interest.
M ULTIPLE C HOICE
Instructions: Circle the best answer for each of the following questions.
1. For good internal control over cash receipts, remittance advices should be
separated from cash received by mail and sent directly to the:
a. treasurer
b. cashier’s department
c. accounting department
d. voucher clerk
2.
An important characteristic of the voucher system is the requirement that:
a. vouchers be prepared by the treasurer
b. vouchers be paid immediately after they are prepared
c. paid vouchers are filed by due date
d. a voucher be prepared for each major expenditure
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124
Chapter 8
3. In a bank reconciliation, an NSF (not-sufficient-funds) check is:
a. added to the balance according to the bank statement
b. deducted from the balance according to the bank statement
c. added to the balance according to the company’s records
d. deducted from the balance according to the company’s records
4. In a bank reconciliation, deposits not recorded by the bank are:
a. added to the balance according to the bank statement
b. deducted from the balance according to the bank statement
c. added to the balance according to the company’s records
d. deducted from the balance according to the company’s records
5. The amount of the outstanding checks is included on the bank reconciliation as:
a. an addition to the balance per bank statement
b. a deduction from the balance per bank statement
c. an addition to the balance per company’s records
d. a deduction from the balance per company’s records
6. Receipts from cash sales of $7,500 were recorded incorrectly as $5,700.
What entry is required in the depositor’s accounts?
a. debit Cash; credit Accounts Receivable
b. debit Cash; credit Sales
c. debit Accounts Receivable; credit Cash
d. debit Sales; credit Cash
7. Accompanying the bank statement was a credit memorandum for a shortterm, non-interest-bearing note collected by the bank. What entry is required
in the company’s accounts?
a. debit Cash; credit Miscellaneous Income
b. debit Cash; credit Notes Receivable
c. debit Accounts Receivable; credit Cash
d. debit Notes Receivable; credit Cash
8. What entry is required in the company’s accounts to record outstanding
checks?
a. debit Cash; credit Accounts Payable
b. debit Accounts Receivable; credit Cash
c. debit Accounts Payable; credit Cash
d. No entry is required.
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Chapter 8
125
9. Journal entries based on the bank reconciliation are required on the company’s books for:
a. additions to the balance according to the company’s records
b. deductions from the balance according to the company’s records
c. both a and b
d. both additions to and deductions from the balance according to the
bank’s records
10. The entry to record the replenishment of the petty cash fund includes a debit to various expense and asset accounts and a credit to:
a. Cash
b. Petty Cash
c. Accounts Receivable
d. various liability accounts
T RUE /F ALSE
Instructions: Indicate whether each of the following statements is true or false
by placing a check mark in the appropriate column.
True
False
1. The Sarbanes-Oxley Act of 2002 was passed by Congress
because of a public outcry related to financial frauds and
scandals...............................................................................
____
____
2. Internal controls are guaranteed to prevent employee theft
and misuse of assets. ..........................................................
____
____
3. In a bank reconciliation, checks issued that have not been
paid by the bank are added to the balance according to
the bank statement. .............................................................
____
____
4. Bank memorandums not recorded by the company require
entries in the company’s accounts. .....................................
____
____
5. For a greater degree of internal control, the bank reconciliation should be prepared by an employee who does not
engage in or record cash transactions with the bank. .........
____
____
6. If there is a debit balance in the cash short and over account at the end of the fiscal period, this represents income to be included in “Miscellaneous general income” in
the income statement. .........................................................
____
____
7. It is common practice for businesses to require that every
payment of cash be evidenced by a check signed by the
owner. ..................................................................................
____
____
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126
Chapter 8
8. After vouchers are paid, it is customary to file them in numerical sequence in the paid voucher file............................
____
____
9. Petty Cash should be debited when the petty cash fund is
replenished...........................................................................
____
____
10. A voucher system is a set of methods and procedures for
authorizing and recording liabilities and cash payments. ....
____
____
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Chapter 8
127
E XERCISE 8-1
A comparison of the bank statement and the accompanying canceled checks
and memorandums with the records of Pearl Co. for the month of September of
the current year revealed the following reconciling items:
(1) A check drawn for $25 had been erroneously charged by the bank for
$250.
(2) The bank collected $1,920 on a note left for collection. The face of the note
was $1,800.
(3) Bank service charges for September totaled $28.
(4) Check No. 231, written to Stanley Optical Warehouse for $2,500, and Check
No. 236, written to Stella’s Janitorial Service for $100, were outstanding.
(5) A deposit of $5,250 made on September 30 was not recorded on the bank
statement.
(6) A canceled check for $1,100, returned with the bank statement, had been
recorded erroneously in the check register as $1,000. The check was a
payment on account to Charlie’s Optical Supply.
Instructions: In the following general journal, prepare any necessary entries
that Pearl Co. should make as a result of these reconciling items. The accounts
have not been closed.
JOURNAL
DATE
DESCRIPTION
PAGE
POST.
REF.
DEBIT
CREDIT
1
1
2
2
3
3
4
4
5
5
6
6
7
7
8
8
9
9
10
10
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12
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17
17
18
18
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128
Chapter 8
E XERCISE 8-2
Instructions: In the general journal provided below, prepare the entries to
record the following transactions:
(1) Established a petty cash fund of $400.
(2) Replenished the fund, based on the following summary of petty cash receipts.
(The amount of cash in the fund is now $128.34.)
Office supplies, $80.25
Miscellaneous selling expense, $115.33
Miscellaneous administrative expense, $78.05
JOURNAL
DATE
DESCRIPTION
PAGE
POST.
REF.
DEBIT
CREDIT
1
1
2
2
3
3
4
4
5
5
6
6
7
7
8
8
9
9
10
10
11
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12
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13
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17
17
18
18
19
19
20
20
21
21
22
22
23
23
24
24
25
25
26
26
27
27
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Chapter 8
129
P ROBLEM 8-1
On September 30 of the current year, Dumont Co.’s checkbook showed a balance of $7,540, and the bank statement showed a balance of $8,510. A comparison of the bank statement and Dumont’s records as of September 30 revealed the following:
(a) A deposit of $1,900, mailed to the bank by Dumont on September 29, was
not included in the bank statement of September 30.
(b) The following checks were outstanding: Check No. 255 for $325, Check
No. 280 for $100, Check No. 295 for $700.
(c) Check No. 289 in payment of a voucher had been written for $140 and had
been recorded at that amount by the bank. However, Dumont had recorded
it in the check register as $410.
(d) A check for $910 received from a customer was deposited in the bank. The
bank recorded it at the correct amount, but Dumont recorded it at $190.
(e) Included with the bank statement was a credit memorandum for $780, representing the proceeds of a $700 note receivable left at the bank for collection. This had not been recorded on Dumont’s books.
(f) Included with the bank statement was a debit memorandum for $25 for
service charges that had not been recorded on Dumont’s books.
Instructions:
(1) Complete the bank reconciliation below.
(2) In the general journal on the following page, prepare the entry or entries that
Dumont should make as a result of the bank reconciliation.
Dumont Co.
Bank Reconciliation
September 30, 20-Balance according to bank statement ..............................
Add:
$
Deduct:
Adjusted balance ..............................................................
$
Balance according to company’s records ........................
Add:
$
Deduct:
Adjusted balance ..............................................................
$
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130
Chapter 8
(2)
JOURNAL
DATE
DESCRIPTION
PAGE
POST.
REF.
DEBIT
CREDIT
1
1
2
2
3
3
4
4
5
5
6
6
7
7
8
8
9
9
10
10
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34
34
35
35
36
36
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