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Bank Reconciliation and Internal Controls – Step-by-Step Study Guide

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Q1. Which characteristic is NOT part of an effective system of internal control?

Background

Topic: Internal Controls

This question tests your understanding of the essential features of internal control systems in accounting, which help safeguard assets and ensure reliable financial reporting.

Key Terms:

  • Separation of duties: Dividing responsibilities among different people to reduce risk of error or fraud.

  • Competent, reliable, and ethical personnel: Ensuring employees are trustworthy and capable.

  • Documents and records: Keeping accurate and complete records.

  • Combination of duties: Allowing one person to handle multiple tasks, which can weaken controls.

Step-by-Step Guidance

  1. Review the characteristics listed and recall the purpose of internal controls: to prevent errors and fraud.

  2. Identify which characteristics strengthen internal controls (e.g., separation of duties, reliable personnel).

  3. Consider which characteristic would actually weaken internal controls.

  4. Think about why combining duties might be problematic in an accounting environment.

Try solving on your own before revealing the answer!

Final Answer: B. combination of duties

Combining duties allows one person to control multiple aspects of a transaction, increasing the risk of errors or fraud.

Q2. Which item does NOT require a journal entry for a bank reconciliation?

Background

Topic: Bank Reconciliation

This question tests your knowledge of which items on a bank reconciliation affect the accounting records and require journal entries.

Key Terms:

  • Bank reconciliation: The process of matching the company's cash records with the bank statement.

  • Journal entry: An accounting record of a transaction.

  • Outstanding checks: Checks written but not yet cleared by the bank.

  • NSF check: A check returned due to insufficient funds.

Step-by-Step Guidance

  1. List which items typically require adjustments to the books (journal entries) after a bank reconciliation.

  2. Recall that items like bank service charges and NSF checks affect the book balance and need entries.

  3. Consider whether outstanding checks require a journal entry or are simply timing differences.

  4. Think about the nature of each item and whether it changes the company's records.

Try solving on your own before revealing the answer!

Final Answer: C. outstanding checks

Outstanding checks are already recorded in the books; they are just not yet cleared by the bank, so no journal entry is needed.

Q3. How should a debit memo (NSF check) be reported on a bank reconciliation?

Background

Topic: Bank Reconciliation Adjustments

This question tests your ability to classify items on a bank reconciliation as adjustments to either the bank or book balance.

Key Terms:

  • Debit memo: A deduction from the bank account, such as an NSF check.

  • NSF check: A check returned due to insufficient funds.

  • Book balance: The company's recorded cash balance.

Step-by-Step Guidance

  1. Identify what an NSF check represents: a reduction in cash that the company must record.

  2. Determine whether this adjustment affects the bank's records or the company's books.

  3. Recall that the company must reduce its book balance to reflect the returned check.

  4. Choose the correct code letter for a deduction from the book balance.

Try solving on your own before revealing the answer!

Final Answer: D. subtract from book balance

The company must deduct the NSF check from its book balance to match the bank's records.

Q4. How should a debit memo (service charge) be reported on a bank reconciliation?

Background

Topic: Bank Reconciliation Adjustments

This question tests your understanding of how bank service charges are handled in the reconciliation process.

Key Terms:

  • Service charge: A fee charged by the bank, reducing the account balance.

  • Book balance: The company's recorded cash balance.

Step-by-Step Guidance

  1. Recognize that service charges are deducted by the bank but may not be recorded in the company's books yet.

  2. Determine which balance needs to be adjusted: bank or book?

  3. Recall that the company must record the service charge as a deduction from its book balance.

  4. Choose the code letter for a deduction from the book balance.

Try solving on your own before revealing the answer!

Final Answer: D. subtract from book balance

Bank service charges are deducted from the book balance to match the bank statement.

Q5. How should a credit memo (note collection) be reported on a bank reconciliation?

Background

Topic: Bank Reconciliation Adjustments

This question tests your ability to classify increases to the company's cash balance from items collected by the bank.

Key Terms:

  • Credit memo: An addition to the bank account, such as a note collected by the bank.

  • Book balance: The company's recorded cash balance.

Step-by-Step Guidance

  1. Identify what a note collection represents: an increase in cash that the company may not have recorded yet.

  2. Determine which balance needs to be adjusted: bank or book?

  3. Recall that the company must add the note collection to its book balance.

  4. Choose the code letter for an addition to the book balance.

Try solving on your own before revealing the answer!

Final Answer: C. add to book balance

The company adds the note collection to its book balance to match the bank statement.

Q6. How should a deposit in transit (8/31) be reported on a bank reconciliation?

Background

Topic: Bank Reconciliation Adjustments

This question tests your understanding of timing differences between the company's records and the bank statement.

Key Terms:

  • Deposit in transit: A deposit recorded by the company but not yet reflected on the bank statement.

  • Bank balance: The balance shown on the bank statement.

Step-by-Step Guidance

  1. Recognize that deposits in transit are already recorded in the books but not yet by the bank.

  2. Determine which balance needs to be adjusted: bank or book?

  3. Recall that the bank balance must be increased to account for deposits in transit.

  4. Choose the code letter for an addition to the bank balance.

Try solving on your own before revealing the answer!

Final Answer: A. add to bank balance

Deposits in transit are added to the bank balance to reconcile with the company's records.

Q7. How should a deposit in transit (8/1, cleared 8/2) be reported on a bank reconciliation?

Background

Topic: Bank Reconciliation Adjustments

This question tests your understanding of which items are relevant for the current reconciliation period.

Key Terms:

  • Deposit in transit: A deposit not yet reflected on the bank statement.

  • Cleared deposit: A deposit that has already appeared on the bank statement.

Step-by-Step Guidance

  1. Determine whether the deposit in transit has already cleared the bank.

  2. Recall that only deposits not yet cleared should be included in the reconciliation.

  3. Decide if this item should appear on the current bank reconciliation.

  4. Choose the code letter for items that do not belong on the reconciliation.

Try solving on your own before revealing the answer!

Final Answer: E. would not appear on a bank reconciliation

This deposit has already cleared, so it does not affect the current reconciliation.

Q8. How should outstanding checks (8/31) be reported on a bank reconciliation?

Background

Topic: Bank Reconciliation Adjustments

This question tests your understanding of how outstanding checks affect the reconciliation process.

Key Terms:

  • Outstanding checks: Checks written but not yet cleared by the bank.

  • Bank balance: The balance shown on the bank statement.

Step-by-Step Guidance

  1. Recognize that outstanding checks are already recorded in the books but not yet by the bank.

  2. Determine which balance needs to be adjusted: bank or book?

  3. Recall that the bank balance must be decreased to account for outstanding checks.

  4. Choose the code letter for a deduction from the bank balance.

Try solving on your own before revealing the answer!

Final Answer: B. subtract from bank balance

Outstanding checks are subtracted from the bank balance to reconcile with the company's records.

Q9. How should an error in recording check #102 (recorded as $223, appears as $232) be reported on a bank reconciliation?

Background

Topic: Bank Reconciliation Adjustments

This question tests your ability to identify and correct errors in recording transactions.

Key Terms:

  • Recording error: A mistake in the amount recorded in the books.

  • Book balance: The company's recorded cash balance.

Step-by-Step Guidance

  1. Compare the amount recorded in the books to the amount on the bank statement.

  2. Calculate the difference between the two amounts.

  3. Determine which balance needs to be adjusted: bank or book?

  4. Choose the code letter for an addition or deduction to the appropriate balance.

Try solving on your own before revealing the answer!

Final Answer: A. add to bank balance

The error is corrected by adjusting the bank balance to match the company's records.

Q10. What is the adjusted cash balance after the bank reconciliation?

Background

Topic: Bank Reconciliation Calculation

This question tests your ability to calculate the adjusted cash balance by combining all reconciliation items.

Key Formula:

Step-by-Step Guidance

  1. List all items that need to be added or subtracted from the bank and book balances.

  2. Calculate the adjusted bank balance by adding deposits in transit and subtracting outstanding checks.

  3. Calculate the adjusted book balance by adding note collections and subtracting service charges and NSF checks.

  4. Compare the adjusted balances to ensure they match.

Try solving on your own before revealing the answer!

Final Answer: A. $11,093

After adjusting for all items, the reconciled cash balance is $11,093.

Q11. How is a deposit error ($530 recorded as $350) shown on the bank reconciliation?

Background

Topic: Bank Reconciliation Errors

This question tests your ability to identify and correct errors in recording deposits.

Key Terms:

  • Deposit error: A mistake in the amount recorded in the books.

  • Book balance: The company's recorded cash balance.

Step-by-Step Guidance

  1. Calculate the difference between the actual deposit and the amount recorded.

  2. Determine which balance needs to be adjusted: bank or book?

  3. Recall that the company must correct its book balance for the error.

  4. Choose the code letter for an addition to the book balance.

Try solving on your own before revealing the answer!

Final Answer: B. $180 addition to the book balance

The company adds $180 to its book balance to correct the deposit error.

Q12. What internal control characteristic is missing in Susan Bingham's scenario?

Background

Topic: Internal Controls

This question tests your understanding of the principles of internal control, especially separation of duties.

Key Terms:

  • Separation of duties: Dividing responsibilities among different people.

  • Assignment of responsibilities: Clearly defining roles.

Step-by-Step Guidance

  1. Identify all tasks Susan is responsible for.

  2. Determine whether these tasks should be separated among different employees.

  3. Recall the risks of having one person control multiple aspects of a process.

  4. Choose the internal control characteristic that is missing.

Try solving on your own before revealing the answer!

Final Answer: C. separation of duties

Susan controls purchasing, storage, distribution, and reporting, which violates separation of duties.

Q13. How should a check for $435 recorded as $354 be reported on a bank reconciliation?

Background

Topic: Bank Reconciliation Errors

This question tests your ability to identify and correct errors in recording checks.

Key Terms:

  • Check recording error: A mistake in the amount recorded in the books.

  • Book balance: The company's recorded cash balance.

Step-by-Step Guidance

  1. Calculate the difference between the actual check amount and the amount recorded.

  2. Determine which balance needs to be adjusted: bank or book?

  3. Recall that the company must correct its book balance for the error.

  4. Choose the code letter for a deduction from the book balance.

Try solving on your own before revealing the answer!

Final Answer: D. Deduct from the book balance

The company must deduct the difference from its book balance to correct the error.

Q14. How should a $250 deposit made on the last day of the month but not on the bank statement be reported?

Background

Topic: Bank Reconciliation Timing Differences

This question tests your understanding of deposits in transit.

Key Terms:

  • Deposit in transit: A deposit recorded by the company but not yet reflected on the bank statement.

  • Bank balance: The balance shown on the bank statement.

Step-by-Step Guidance

  1. Recognize that deposits in transit are already recorded in the books but not yet by the bank.

  2. Determine which balance needs to be adjusted: bank or book?

  3. Recall that the bank balance must be increased to account for deposits in transit.

  4. Choose the code letter for an addition to the bank balance.

Try solving on your own before revealing the answer!

Final Answer: A. Add to the bank statement balance

Deposits in transit are added to the bank balance to reconcile with the company's records.

Q15. How should interest earned of $45 shown on the bank statement be reported?

Background

Topic: Bank Reconciliation Adjustments

This question tests your understanding of how interest earned is handled in the reconciliation process.

Key Terms:

  • Interest earned: Income credited to the company's bank account.

  • Book balance: The company's recorded cash balance.

Step-by-Step Guidance

  1. Recognize that interest earned may not be recorded in the company's books yet.

  2. Determine which balance needs to be adjusted: bank or book?

  3. Recall that the company must add the interest earned to its book balance.

  4. Choose the code letter for an addition to the book balance.

Try solving on your own before revealing the answer!

Final Answer: C. Add to the book balance

The company adds the interest earned to its book balance to match the bank statement.

Q16. How should an NSF check from a customer be reported on the bank reconciliation?

Background

Topic: Bank Reconciliation Adjustments

This question tests your understanding of how returned checks are handled in the reconciliation process.

Key Terms:

  • NSF check: A check returned due to insufficient funds.

  • Book balance: The company's recorded cash balance.

Step-by-Step Guidance

  1. Recognize that an NSF check reduces the company's cash balance.

  2. Determine which balance needs to be adjusted: bank or book?

  3. Recall that the company must deduct the NSF check from its book balance.

  4. Choose the code letter for a deduction from the book balance.

Try solving on your own before revealing the answer!

Final Answer: D. Deduct from the book balance

The company must deduct the NSF check from its book balance to match the bank statement.

Q17. How should a $600 deposit credited to Overture's account by mistake be reported?

Background

Topic: Bank Reconciliation Errors

This question tests your ability to identify and correct errors made by the bank.

Key Terms:

  • Bank error: A mistake made by the bank in recording transactions.

  • Bank balance: The balance shown on the bank statement.

Step-by-Step Guidance

  1. Recognize that the deposit was credited to the company's account by mistake.

  2. Determine which balance needs to be adjusted: bank or book?

  3. Recall that the bank balance must be reduced to correct the error.

  4. Choose the code letter for a deduction from the bank balance.

Try solving on your own before revealing the answer!

Final Answer: B. Deduct from the bank statement balance

The bank balance is reduced to correct the error.

Q18. Which items are additions to the book balance of cash?

Background

Topic: Bank Reconciliation Adjustments

This question tests your ability to identify which items increase the company's book balance.

Key Terms:

  • Book balance: The company's recorded cash balance.

  • Deposit error: A mistake in recording the deposit amount.

Step-by-Step Guidance

  1. Review each scenario and determine if it increases the book balance.

  2. Identify errors where the company recorded less than the actual amount.

  3. Recall that correcting such errors requires adding the difference to the book balance.

  4. Choose all applicable options.

Try solving on your own before revealing the answer!

Final Answer: E. Both B and C

Both scenarios involve adding to the book balance to correct errors.

Q19. Which is NOT a control procedure?

Background

Topic: Internal Controls

This question tests your understanding of what constitutes a control procedure in accounting.

Key Terms:

  • Control procedure: Policies and practices to safeguard assets and ensure reliable accounting.

  • Marketing plan: A strategy for promoting sales, not a control procedure.

Step-by-Step Guidance

  1. Review each option and determine if it relates to safeguarding assets or ensuring reliable records.

  2. Identify which option is unrelated to internal controls.

  3. Recall the purpose of control procedures.

  4. Choose the option that does not fit.

Try solving on your own before revealing the answer!

Final Answer: D. a sound marketing plan

A marketing plan is not a control procedure.

Q20. Which is an example of poor internal control?

Background

Topic: Internal Controls

This question tests your ability to identify practices that weaken internal controls.

Key Terms:

  • Poor internal control: Practices that increase risk of error or fraud.

Step-by-Step Guidance

  1. Review each option and determine if it strengthens or weakens internal controls.

  2. Identify practices that concentrate responsibilities or bypass checks.

  3. Recall the importance of separation of duties and checks.

  4. Choose the option that represents poor internal control.

Try solving on your own before revealing the answer!

Final Answer: C. Requiring the mailroom clerk to immediately record daily cash receipts in the cash receipts journal

This concentrates responsibility and increases risk.

Q21. Which is NOT a purpose of internal control?

Background

Topic: Internal Controls

This question tests your understanding of the objectives of internal control systems.

Key Terms:

  • Internal control: Policies and procedures to safeguard assets, promote efficiency, and ensure reliable records.

Step-by-Step Guidance

  1. Review each option and determine if it aligns with the objectives of internal control.

  2. Recall that internal controls do not directly ensure sales targets are met.

  3. Choose the option that does not fit the purposes of internal control.

Try solving on your own before revealing the answer!

Final Answer: C. to ensure company sales targets are met

Internal controls do not directly ensure sales targets are met.

Q22. Which is NOT an element of internal control over cash disbursements?

Background

Topic: Internal Controls over Cash Disbursements

This question tests your understanding of proper procedures for handling cash payments.

Key Terms:

  • Cash disbursement: Payment of cash for goods or services.

  • Internal control: Procedures to ensure payments are authorized and recorded properly.

Step-by-Step Guidance

  1. Review each option and determine if it strengthens control over cash disbursements.

  2. Identify practices that concentrate responsibilities or bypass checks.

  3. Recall that the person approving payment should not also make the payment.

  4. Choose the option that is NOT an element of internal control.

Try solving on your own before revealing the answer!

Final Answer: D. The person responsible for approving a cash payment should also be responsible for payment.

This violates separation of duties and is not a proper control.

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