Chapter 6 part 1
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Questions and Answers

What primary goal does management typically pursue when focusing on an entity's cash-to-cash cycle?

  • Increasing financing requirements by extending the cash-to-cash cycle.
  • Minimizing the time it takes to convert inventory purchases into customer cash receipts. (correct)
  • Maximizing the time it takes to convert inventory purchases into customer cash receipts.
  • Maintaining a consistent cash-to-cash cycle regardless of business type.

Which of the following is primarily responsible for ensuring processes are in place to maintain the integrity of a company's accounting system and financial reporting?

  • Board of Directors (correct)
  • Management team
  • External auditors
  • Internal audit department

Which of the following is NOT typically considered a primary objective of internal controls?

  • Maximizing employee compensation (correct)
  • Ensuring efficient use of company assets
  • Complying with applicable laws and regulations
  • Maintaining the integrity of the accounting system

Why is segregating incompatible duties considered a critical principle of effective internal control?

<p>It prevents any single individual from controlling all aspects of a transaction, reducing fraud risk. (C)</p> Signup and view all the answers

A company's internal controls dictate that all payments exceeding $5,000 must be authorized by a manager. Which internal control principle does this best exemplify?

<p>Assignment of responsibilities (B)</p> Signup and view all the answers

What potential consequence arises when one person has complete responsibility for all aspects of a transaction (initiation, processing, accounting, and payment)?

<p>Greater opportunity for the individual to commit fraud (C)</p> Signup and view all the answers

Which scenario illustrates a failure in independent verification of transactions?

<p>No one reviews the work of the accounting clerk responsible for processing invoices. (C)</p> Signup and view all the answers

Why is documentation a vital component of an effective internal control system?

<p>It creates an audit trail that enables verification and accountability. (B)</p> Signup and view all the answers

Which of the following is a limitation of internal controls?

<p>Their potential to be overridden by management. (A)</p> Signup and view all the answers

Which scenario exemplifies the limitation of 'collusion' in internal controls?

<p>Two employees working together to misappropriate funds. (C)</p> Signup and view all the answers

Why is segregation of duties particularly important in the handling of cash?

<p>To protect cash, a valuable and liquid asset, from misappropriation. (A)</p> Signup and view all the answers

A company requires two signatures on each cheque. Which internal control principle does this reflect?

<p>Segregation of duties. (D)</p> Signup and view all the answers

Why is a periodic bank reconciliation an important internal control for cash?

<p>It helps detect errors and timing differences between the company's records and the bank's records. (A)</p> Signup and view all the answers

A company prepares and records a cheque on December 29, 2022, but it is processed by the bank on January 2, 2023. What type of difference will this cause in a bank reconciliation?

<p>A timing difference. (C)</p> Signup and view all the answers

Which action would NOT be considered a basic principle of internal control as applied to cash?

<p>Maintaining petty cash funds for small, undocumented expenses. (A)</p> Signup and view all the answers

If a company and its bank have each recorded all transactions simultaneously and without error, what should be true of their cash balances?

<p>The balances should always agree. (C)</p> Signup and view all the answers

An outstanding deposit is best described as:

<p>A deposit recorded by the entity but not yet processed by the bank. (B)</p> Signup and view all the answers

Which of the following errors discovered during a bank reconciliation would require the entity to make an adjusting journal entry?

<p>A cheque written by the entity for $150 was incorrectly recorded in the entity's cash records as $510. (D)</p> Signup and view all the answers

An NSF cheque included with the bank statement requires which of the following actions by the company?

<p>A journal entry to decrease the cash balance. (B)</p> Signup and view all the answers

Which of the following items would not cause a difference between the balance per bank statement and the balance per the company's accounting records?

<p>Errors made by another company that affect the entity's bank statement. (B)</p> Signup and view all the answers

Which item requires a journal entry by the company to correct the cash balance?

<p>An error in the company's cash records. (B)</p> Signup and view all the answers

What is the primary purpose of performing a bank reconciliation?

<p>To identify and explain the differences between the bank balance and the book balance of cash. (A)</p> Signup and view all the answers

The bank reconciliation is essential to internal control primarily because:

<p>It matches entity accounting records to the bank statement, thus exposing errors and potential fraud. (C)</p> Signup and view all the answers

Which of the following is an example of a bank error that would require the bank to correct its records?

<p>A cheque of another customer charged to the entity's bank account. (B)</p> Signup and view all the answers

Which task is most crucial for maintaining strong internal controls over cash?

<p>Assigning the responsibility of preparing bank reconciliations to someone independent of cash handling and recording duties. (D)</p> Signup and view all the answers

According to the bank reconciliation template, what is the correct treatment of outstanding cheques?

<p>Deducted from the bank balance. (B)</p> Signup and view all the answers

Which of the following items would require a journal entry after preparing a bank reconciliation?

<p>NSF cheques. (A)</p> Signup and view all the answers

A company's bank reconciliation reveals a deposit listed on the bank statement that the company hasn't recorded. Which journal entry is required?

<p>Debit Cash, Credit Revenue (C)</p> Signup and view all the answers

If a bank reconciliation identifies an error where the entity's accounting records mistakenly reduced the cash balance, how should this error be corrected in the reconciliation?

<p>Add it to the balance per accounting records. (A)</p> Signup and view all the answers

What type of error should be corrected by making the following journal entry: Dr. Accounts Receivable, Cr. Cash?

<p>An NSF cheque from a customer. (B)</p> Signup and view all the answers

A company discovers a payment listed on the bank statement that they haven't recorded. How should this item be treated on the bank reconciliation and what type of journal entry is required?

<p>Deducted from the accounting records balance; debit Expense, credit Cash. (A)</p> Signup and view all the answers

Why is it essential to review bank statements regularly, even with a robust bank reconciliation process?

<p>To identify errors or unusual transactions promptly. (D)</p> Signup and view all the answers

Flashcards

Cash-to-Cash Cycle

The time between paying suppliers and receiving cash from customers.

Goal of the Cash-to-Cash Cycle

To minimize the duration of the cycle for better cash flow.

Impact of Business Type

Different businesses have varying cash-to-cash cycle lengths.

Internal Controls

Processes ensuring reliable financial reporting and asset protection.

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Principles of Effective Internal Control

Key rules like adequate physical controls and independent verification.

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Segregation of Duties

Assigning different people to different parts of a transaction.

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Consequences of Poor Controls

Increased risk of fraud and financial inaccuracies.

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Management's Responsibility

To prepare timely and reliable financial information.

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Limitations of Internal Controls

Internal controls have constraints like cost-efficiency, human error, and management override.

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Cost Efficiency

Internal controls should be designed to be affordable and practical.

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Human Error

Internal controls are vulnerable to mistakes made by people.

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Management Override

Management can bypass internal controls, posing a risk to integrity.

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Collusion in Circumvention

Two or more employees may work together to bypass controls.

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Unusual Transactions

Internal controls may not address infrequent or unexpected transactions effectively.

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Bank Reconciliation

A process comparing accounting records with bank records to identify discrepancies.

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Outstanding Deposit

A deposit recorded by the entity but not yet processed by the bank.

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Outstanding Cheque

A cheque written and recorded by the entity but not yet processed by the bank.

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Timing Difference

A discrepancy in timing for transactions recorded by the entity and bank.

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Bank Error

A misstatement by the bank affecting the entity’s account records.

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Entity Error

Mistakes made by the entity in recording transactions.

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NSF Cheques

Cheques received by the entity that are worthless due to insufficient funds.

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Journal Entries

Entries made to record corrections in accounting records.

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Deposits in Transit

Deposits made but not yet reflected in the bank's records.

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Adjusted Bank Balance

The corrected balance after accounting for deposits and withdrawals.

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Deposits Found

Deposits discovered on the bank statement but not recorded in the entity’s books.

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Errors in Accounting Records

Mistakes in financial entries that affect the cash balance.

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Study Notes

Chapter Six: Cash and Accounts Receivable (Part 1)

  • Cash-to-Cash Cycle: The time period between a business paying suppliers and receiving cash from customers. Used to estimate cash needed for operations and minimize financing requirements. The cycle length depends on business type (e.g., fruit store vs. winery).

Internal Controls

  • Management Responsibility: Management is responsible for the preparation of timely, reliable and complete financial information. The Board of Directors ensures proper processes and maintains the integrity of the company's accounting system.

  • Objectives of Internal Controls: Key objectives include maintaining integrity, preparing and reporting financial statements, efficient use of company assets, and compliance with laws and regulations.

  • Importance of Controls: Larger entities require more robust internal controls because overseeing all aspects is more complex.

Effective Internal Control Principles

  • Physical Controls: Adequate physical controls are essential.
  • Assignment of Responsibilities: Roles and responsibilities must be clearly defined.
  • Segregation of Incompatible Duties: Duties requiring different skills and knowledge should be segregated.
  • Independent Verification: Transactions should be independently reviewed and verified.
  • Documentation: Proper documentation of all transactions is important.

Internal Control Limitations

  • Cost-Efficiency: Controls must be cost-effective.
  • Human Error: Controls are carried out by humans, therefore prone to errors.
  • Management Override: Controls can be overridden by management.
  • Collusion: Two or more employees working together can circumvent controls.
  • Inability to Anticipate all Transactions: Controls might be ineffective for uncommon or novel transactions.

Cash Management

  • Generating Sufficient Cash: Companies need sufficient cash to pay employees and suppliers.

  • Cash Protection: Cash, a valuable asset, must be properly protected.

  • Segregation of Duties: Important for handling and recording cash transactions.

  • Daily Depositing: Cash and cheques should be deposited daily.

  • Restricted Access: Access to cash should be restricted.

  • Management Approval: All invoices must be approved by management before payment.

  • Payment by Cheque: Payments should be made by cheque.

  • Dual Signatures: Two signatures required for cheques.

  • Ongoing Cash Verification: Cash balances must be verified regularly.

  • Bank Reconciliation: Comparing entity's cash records with bank records.

Bank Reconciliation

  • Timing Differences: Differences due to time lags between recording events and when the bank processes them.
  • Errors: Errors in either entity or bank records.
  • Outstanding Deposits: Deposits made by entity but not yet processed by bank.
  • Outstanding Cheques: Cheques written by entity but not yet processed by bank.
  • Bank Errors: Errors in bank records.

Journal Entries from Bank Reconciliation

  • Deposit Recorded on Bank Statement but Not Entity Records: Entity must record the deposit.
  • NSF Cheques (Non-Sufficient Funds): Entity must recognize the worthless cheque and reduce cash balance.
  • Entity Errors: Accurately reflecting transactions (e.g., incorrect amounts).

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Chapter 6 Notes (Part 1) COMM 320 PDF

Description

Cash-to-cash cycle measures time between paying suppliers and receiving cash from customers. Management ensures financial information integrity via internal controls. Larger entities need more robust controls.

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