Chapter 6: Quick Study

QS 6-1: Internal Control Objectives (C1) 1. True – Separation of recordkeeping for assets from the custody of assets helps reduce fraud. 2. False – The primary objective of internal control is to safeguard assets and ensure accurate financial reporting, not to protect against theft from government agencies. 3. True – Internal control procedures should be designed to protect assets from waste and theft. 4. False – Dividing responsibilities helps prevent fraud, including the creation of fictitious invoices. QS 6-2: COSO Internal Control Components (C1) 1. 2. 3. 4. Monitoring – Independent review of controls. Control Environment – Executives’ strong ethics. Information and Communication – Reporting of control effectiveness. Risk Assessment – Analyses of fraud risk factors. QS 6-3: Applying the Fraud Triangle (C1) 1. Pressure – Employees are told to report increased income or be fired. 2. Opportunity – Several salesclerks share the same cash drawer. 3. Rationalization – A worker did not receive a bonus this year and now feels it's okay to use the company credit card for personal expenses. 4. Opportunity – Doors safeguarding valuable merchandise are not locked with a passcode. 5. Rationalization – An employee feels underpaid and believes stealing inventory is justified. QS 6-4: Cash and Equivalents (C2) 1. Cash – The category includes currency, coins, and deposits in bank accounts. 2. Liquidity – The term refers to a company’s ability to pay for its current liabilities. 3. Cash Equivalents – The category includes short-term, highly liquid investment assets that are readily convertible to a known cash amount and sufficiently close to their due dates so that their market value will not greatly change. QS 6-5: Reporting Cash and Cash Equivalents (C2) • Cash and Cash Equivalents for Anna’s Cookies: o $100 in coins held in store registers. o $1,000 cash in a safe at the store. o $4,000 cash in checking accounts. o Total Cash and Cash Equivalents = $5,100 QS 6-6: Control of Cash (C2) 1. Weakness – The same employee is in charge of recordkeeping and depositing cash receipts. 2. Strength – All large payments are made by electronic funds transfer (EFT). 3. Weakness – Cash receipts of large amounts are kept in an office drawer and deposited every six months. QS 6-7: Internal Control for Cash (P1) 1. False – Cash receipts should be deposited daily, not monthly or yearly. 2. False – A voucher system controls cash payments, not cash receipts. 3. True – Cash duties should be separated between custody of cash and recordkeeping. 4. False – Separation of duties reduces, but does not eliminate, the risk of collusion. QS 6-8: Cash Over and Short (P1) 1. Journal Entry for Cash Over: plaintext Debit: Cash Credit: Sales Credit: Cash Over and Short 2. Journal Entry for Cash Short: plaintext $430 $420 $10 Debit: Cash Debit: Cash Over and Short Credit: Sales $972 $8 $980 QS 6-9: Petty Cash Accounting (P2) 1. Establish the Fund: plaintext Debit: Petty Cash Credit: Cash $150 $150 2. Reimburse the Fund: plaintext Debit: Entertainment Expense Debit: Postage Expense Debit: Printing Expense Debit: Cash Over and Short applicable) Credit: Cash $70 $30 $22 $0 (if $122 3. Events that cause a Petty Cash account to be credited: o Fund amount is being reduced. o Fund is being eliminated. QS 6-10: Bank Reconciliation (P3) For each item, the classification is as follows: • • • • • • • Outstanding checks: Bank side, subtraction, no journal entry. Deposits in transit: Bank side, addition, no journal entry. Bank errors: Bank side, addition or subtraction, no journal entry. Book errors: Book side, addition or subtraction, requires a journal entry. Bank service charges: Book side, subtraction, requires a journal entry. Interest earned: Book side, addition, requires a journal entry. NSF check: Book side, subtraction, requires a journal entry. QS 6-11: Bank Reconciliation (P3) Bank Reconciliation for Nolan Company: 1. Bank balance: $21,332 o Add: Deposits in transit $4,724 o Subtract: Outstanding checks -$3,713 Adjusted Bank Balance: $22,343 2. Book balance: $22,352 o Subtract: Bank service charges -$41 o Add: Bank error $9 o Add: Interest earned $23 Adjusted Book Balance: $22,343 QS 6-12: Bank Reconciliation (P3) Bank Reconciliation for Organic Food Co.: 1. Bank balance: $5,160 o Add: Deposits in transit $1,240 o Subtract: Outstanding checks -$1,120 Adjusted Bank Balance: $5,280 2. Book balance: $5,500 o Subtract: NSF check -$120 o Subtract: Bank service charges -$20 o Add: Bank error $80 Adjusted Book Balance: $5,280 QS 6-13: Entries from Bank Reconciliation (P3) 1. NSF Check: plaintext Debit: Accounts Receivable Credit: Cash $120 $120 2. Bank Service Charge: plaintext Debit: Bank Service Expense Credit: Cash $20 $20 3. Bank Error Correction: plaintext Debit: Cash Credit: Accounts Payable $80 $80 QS 6-14: Preparing the Current Assets Section of Balance Sheet (C2) Lima Company's Current Assets (December 31): plaintext Current Assets: Cash and cash equivalents Accounts receivable Inventory Prepaid expenses Total Current Assets $X $X $X $X $X QS 6-15: Days’ Sales Uncollected (A1) 1. Change in Days' Sales Uncollected: Calculate for both Year 1 and Year 2: Days’ Sales Uncollected=(Accounts ReceivableNet Sales)×365 Compare the values to determine the change. 2. Analysis: o If the days' sales uncollected decreased, the company’s collection of receivables is improving. QS 6-16A: Documents in a Voucher System (P4) Documents prepared as part of a voucher system: • • • Purchase order Invoice Voucher The Outstanding check is not part of the voucher system, but relates to bank reconciliation.