accounting principles, third canadian...

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition

CHAPTER 7Internal Control and Cash

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives QuestionsBrief

Exercises ExercisesProblem

sSet A

ProblemsSet B

1. Explain the activities that help achieve internal control.

1, 2, 3, 4, 5, 6, 7

1 1 1, 2, 3 1, 2, 3

2. Apply control activities to cash receipts.

8, 9, 10, 11, 12

2, 3 2, 3, 1, 3, 4, 10

1, 2, 3, 4, 10

3. Apply control activities to cash disbursements.

5, 13, 14, 15

4 4 2, 3, 4, 5, 10

2, 3, 4, 5, 10

4. Operate and account for a petty cash fund.

16 5, 6 5, 6 4, 5 4, 5

5. Describe the control features of a bank account.

17 7

6. Prepare a bank reconciliation.

18, 19, 20, 21

8, 9, 10, 11, 12

7, 8, 9, 10, 11, 12

6, 7, 8, 9, 10

6, 7, 8, 9, 10

7. Report cash on the balance sheet.

22, 23 13, 14 13 11 11

Solutions Manual 7-1 Chapter 7Copyright © 2009 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of

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ASSIGNMENT CHARACTERISTICS TABLEProblemNumber Description

DifficultyLevel

TimeAllotted (min.)

1A Identify internal control weaknesses over cash receipts. Moderate 25-35

2A Identify internal controls over cash disbursements. Moderate 25-35

3A Identify internal controls for cash receipts and cash disbursements.

Simple 25-35

4A Record debit and bank credit card and petty cash transactions and identify internal controls.

Moderate 25-35

5A Record and post petty cash transactions and identify internal controls.

Moderate 20-30

6A Prepare back reconciliation and related entries. Moderate 25-35

7A Prepare bank reconciliation and related entries. Moderate 40-50



10A Prepare bank reconciliation and identify internal controls.

Moderate 30-40

11A Calculate cash balance. Moderate 20-30

1B Identify internal control activities related to cash receipts.

Moderate 25-35

2B Identify internal control weaknesses over cash receipts and cash disbursements.

Moderate 25-35

3B Identify internal controls for cash receipts and cash disbursements.

Simple 25-35

4B Record debit and bank credit card and petty cash transactions and identify internal controls.

Moderate 25-35

5B Record and post petty cash transactions and identify internal controls.

Moderate 20-30

6B Prepare bank reconciliation and related entries. Moderate 25-35



9B Prepare bank reconciliation and related entries. Moderate 40-5010B Prepare bank reconciliation and identify internal control

weakness.Moderate 30-40




ProblemNumber Description

DifficultyLevel

TimeAllotted (min.)

11B Calculate cash balance. Moderate 20-30




BLOOM’S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material

Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation1. Explain the activities that

help achieve internal control.

Q7-2Q7-5

Q7-1Q7-3Q7-4Q7-6Q7-7BE7-1E7-1

P7-1AP7-2AP7-3AP7-1BP7-2BP7-3B

2. Apply control activities to cash receipts.

BE7-2 Q7-8Q7-9Q7-10Q7-11Q7-12E7-2

P7-1AP7-3AP7-1BP7-2BP7-3B

BE7-3E7-3P7-4AP7-4B

P7-10AP7-10B

3. Apply control activities to cash disbursements.

Q7-5BE7-4

Q7-13Q7-14Q7-15P7-2AP7-3AP7-2BP7-3B

P7-4AP7-5AP7-4BP7-5B

P7-10AP7-10B

E7-4

4. Operate and account for a petty cash fund.

Q7-16 BE7-5BE7-6E7-5E7-6

P7-4AP7-5AP7-4BP7-5B

5. Describe the control features of a bank account.

Q7-17BE7-7

6. Prepare a bank reconciliation.

Q7-18Q7-19Q7-20Q7-21BE7-9

BE7-8BE7-10BE7-11BE7-12E7-7E7-8E7-9E7-10E7-11

E7-12P7-6AP7-7AP7-8AP7-9A P7-6BP7-7BP7-8BP7-9B

P7-10AP7-10B

7. Report cash on the balance sheet.

Q7-22Q7-23BE7-14

BE7-13E7-13

P7-11AP7-11B

Broadening Your Perspective BYP7-1BYP7-2BYP7-3BYP7-4

Continuing Cookie ChronicleBYP7-5




ANSWERS TO QUESTIONS01. Disagree. Internal control is the process designed and implemented by

management to help an organization achieve (1) reliable financial reporting, (2) effective and efficient operations, and (3) compliance with relevant laws and regulations. Thus improving the accuracy of the accounting records is only one of the objectives of internal control.

02. An essential control activity is to make specific employees responsible for specific tasks. When all clerks make change out of the same cash register drawer this is a violation of establishing responsibility. In this case, each sales clerk should have a separate cash register, cash drawer, or password with pre- and post-shift counts.

03. Two applications of segregation of duties are:

(1) The responsibility for related activities should be assigned to different individuals.

(2) The responsibility for establishing the accountability for an asset should be separate from the physical custody of that asset.

04. Documentation procedures contribute to good internal control by providing evidence of the occurrence of transactions and events. When signatures (or initials) are added, the documents establish responsibility for the transactions. The prompt transmittal of documents to accounting contributes to recording transactions in the proper period. And, the prenumbering of documents helps to ensure that a transaction is not recorded more than once or not at all.

05. Physical controls include safes, vaults, electronic burglary systems and sensors, and locked warehouses. These controls help safeguard a company’s assets. Other controls such as cash registers and computerized accounting equipment contribute to the accuracy and reliability of the accounting records.

Physical controls apply to cash disbursements when (a) blank cheques are stored in a safe, and access to the safe is restricted to authorized personnel, and (b) electronic means are used to imprint amounts on cheques. Other controls apply when the approved invoice is stamped PAID after payment.




QUESTIONS (Continued)

06. Segregating the physical custody of assets from accounting record keeping is not enough to ensure that nothing has been stolen. A performance review still needs to be done. In such a review, the accounting records are compared with existing assets or with external sources of information.

07. A company’s system of internal control can only give reasonable assurance that assets are properly safeguarded and that accounting records are reliable. The concept of reasonable assurance is based on the belief that the cost of control activities should not be more than their expected benefit. Ordinarily, a system of internal control provides reasonable but not absolute, assurance. Absolute assurance would be too costly.

The human element is an important factor in a system of internal control. A good system may become ineffective through employee fatigue, carelessness, and indifference. Moreover, internal control may become ineffective as a result of collusion.

08. Cash registers are readily visible to the customer. Thus, they prevent the sales clerk from ringing up or scanning in a lower amount and pocketing the difference. In addition, the customer receives an itemized receipt, and the store’s cash register tape is locked into the register for further verification.

9. At the end of a day (or shift) the cashier should count the cash in the cash register, record the amount, and turn over the cash and the record of the amount to either a supervisor or the person responsible for making the bank deposit. Exact procedures will be different in every company, but the basic principles should be the same. The person or persons who handle the cash and make the bank deposit should not have access to the cash register tapes or the accounting records. The cash register tapes should be used in creating the journal entries in the accounting records. An independent person who does not handle the cash should make sure that the amount deposited at the bank agrees with the cash register tapes and the accounting records.





10. Debit cards allow customers to spend only what is in their bank account whereas a bank credit card gives the customer access to money made available by a bank or other financial institution (similar to a short term loan).

Sales using debit cards and bank credit cards are both considered cash transactions to retailers. Banks usually charge the retailer a transaction fee for each debit card and a fee that averages 3.5% of the credit card sale. In both types of transaction the retailer’s bank will wait until the end of the day and make a deposit for the full day’s transactions. Fees for bank credit cards are generally higher than debit card fees.

11. Two mail clerks contribute to a more accurate listing of mail receipts. In addition, two clerks reduce the likelihood of mail receipts being diverted to personal use or other fraud, as collusion would be required.

12. From a company’s perspective there are not significant differences between customers using EFT and on-line banking and EFT and automatic pre-authorized monthly payments. The main difference is that with EFT and automatic pre-authorized monthly payments, the company begins the transaction and electronically request the funds. As a result the company knows the transaction is happening and can journalize it. With EFT and on-line banking, the company cannot anticipate in advance when and how much it will collect in cash. Therefore the company will record the cash collection after the funds have been deposited in the bank account and the company has received notification from the bank.

13. Payment by cheque or electronic funds transfer contributes to effective internal control over cash disbursements. Prenumbered cheques help to ensure that all disbursements are accounted for. In addition, the bank provides a double record of the cash disbursements, and safekeeping of the cash until paid. However, effective control is also possible when small payments are made from an imprest petty cash fund.

14. The procedure and related control activity are:Procedures Activities

(1) Controller signs cheques Establishment of responsibility

(2) Cheques imprinted Documentation; physical controls

(3) Comparing cheques with Performance review; segregationapproved invoices before signing of duties





15. Wanda could potentially commit a fraud by:

(1) falsifying a receiving report and approving payment for a nonexistent supplier. She could open a bank account in the name of the nonexistent supplier and deposit the payments in this account allowing her to steal cash from Walter’s Watches.

(2) ordering merchandise and stealing the inventory. She could cover her theft by then falsifying the receiving reports and approving the payment to the supplier even though the goods are not in the store.

Instructors note: These are only two examples. Students may develop other valid examples.

16. This could be a problem for the company as Olga may start taking longer and longer to repay the cash and may eventually end up stealing cash from the petty cash fund for personal expenses. Another problem is that there may not be cash in the petty cash fund when needed to pay for expenses depending on the amount Olga is borrowing.

To strengthen the system the company could implement the following controls:

Management should not allow the fund to be used for certain types of transactions (such as making short-term loans to employees).

Each payment from the fund must be documented on a prenumbered petty cash receipt, signed by both the custodian and the person who receives the payment.

Management should periodically conduct a surprise check of the petty cash fund and ensure the cash on hand plus receipts are equal to the petty cash fund balance—they should make sure there are no unexplained shortages and all payments have been in accordance with company policies.

17. (a) A signature card shows the signatures of authorized cheque signers. It is used by the bank to validate signatures on cheques. Thus, the card should prevent unauthorized persons from signing cheques.

(b) A cheque provides documentary evidence of the payment of a specified sum of money to a designated payee.

(c) A bank statement provides a double independent record of a depositor's bank transactions. It also is used in making periodic independent bank reconciliations.





18. An employee who has no other responsibilities that relate to cash should prepare the bank reconciliation. If a person had responsibility for handling cash and also prepared the bank reconciliation, they could use the bank reconciliation to hide fraud with cash receipts or cash disbursements.

19. Paul should not rely on on-line banking to give him an accurate balance in his bank account. On-line banking can provide an up to date balance but the balance will not be accurate if there are any deposits in transit or outstanding cheques. The balance will also not be accurate if the bank has made an error.

Paul should keep his own records and reconcile his calculation of the bank balance with what the bank has reported. This is the only way to know if there are any deposits in transit, outstanding cheques or bank errors and thus have accurate information on his bank account balance.

20. Anah is incorrect, since the March cheque has still not cleared the bank at April 30 it must be included in the April 30 th bank reconciliation as an outstanding cheque because it is still outstanding on April 30 th.

21. (a) An NSF cheque occurs when the customer's bank balance is less than the amount of the cheque.

(b) In a bank reconciliation a customer's NSF cheque is deducted from the balance per books.

(c) An NSF cheque results in an adjusting entry in the company's books, as a debit to Accounts Receivable and a credit to Cash.

22. Yes, I agree that cash equivalents are basically the same as cash. Cash equivalents are highly liquid investments that may be converted to a specific amount of cash, with maturities of three months or less when purchased. Because of their liquidity, cash equivalents are considered to be “near cash” and are often combined with cash for reporting purposes in the current assets section of the balance sheet.

23. A company may have cash that is not available for general use because it is restricted for a special purpose. If the restricted cash is expected to be used within the next year, the amount should be reported as a current asset. When restricted funds will not be used in that time, they should be reported as a noncurrent asset.

A compensating balance is a minimum cash balance that a company is required to keep in its bank account as support for a bank loan. These are similar to restricted funds and are reported as noncurrent assets.




SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 7-1

The three things that internal control processes are designed to help an organization achieve are:

(1) reliable financial reporting(2) effective and efficient operations(3) compliance with relevant laws and regulations.

Management is responsible for the design and implementation of internal control. One example of each of these three things for Liberty Parking follows:

1. The use of a bank account and preparation of monthly bank reconciliations will enhance the accuracy and reliability of a company's accounting records.

2. An application of effective and efficient operations for Liberty Parking is to have electronic, timed ticket dispensers coordinated with the entry gate so that an attendant is not required to hand out tickets when cars enter the parking garage. This also facilitates documentation procedures.

3. Liberty Parking must comply with relevant laws and regulations such as collecting and paying GST. By segregating handling cash from record keeping the company can ensure all revenues are properly recorded and GST payable is calculated based on the correct amount.

Note to instructor: Students may have different examples.




BRIEF EXERCISE 7-2

1. Physical controls2. Other controls3. Performance reviews4. Segregation of duties5. Establishment of responsibility6. Other controls

BRIEF EXERCISE 7-3

Credit Card (Visa)July 27 Cash................................................... 96

Credit Card Expense ($100 x 4%).... 4Sales.............................................. 100

Petro Shop Credit CardJuly 27 Accounts Receivable........................ 100

Sales.............................................. 100

Debit CardJuly 27 Cash................................................... 99

Debit Card Expense.......................... 1Sales.............................................. 100

BRIEF EXERCISE 7-4

1. Documentation procedures2. Performance reviews3. Physical controls4. Establishment of responsibility5. Segregation of duties6. Documentation procedures




BRIEF EXERCISE 7-5

March 2 Petty Cash.......................................... 100Cash............................................... 100

20 Postage Expense............................... 52Freight Out......................................... 28Supplies Expense.............................. 12

Cash ($100 - $8)............................ 92

BRIEF EXERCISE 7-6

Nov. 17 Petty cash ($200 - $150).................... 50Printing Expense............................... 34Supplies Expense.............................. 58Postage Expense............................... 19Delivery Expense.............................. 26Cash Over and Short......................... 3

Cash ($200 - $10).......................... 190

BRIEF EXERCISE 7-7

1. T2. T3. F4. T5. T




BRIEF EXERCISE 7-8

1. (d) Bank debit memorandum for service charges 2. (c) EFT payment made by a customer 3. (b) Outstanding cheques from the current month 4. (b) Outstanding cheques from the prior month that are still

outstanding 5. (e) Outstanding cheques from the prior month that are no

longer outstanding 6. (a) Bank error in recording a company cheque made out for

$200 as $290 7. (c) Bank credit memorandum for interest revenue 8. (d) Company error in recording a deposit of $1,280 as

$1,680 9. (d) Bank debit memorandum for an NSF cheque10. (a) Deposit in transit from the current month11. (c) Company error in recording cheque made out for $360

as $63012. (b) Bank error in recording a $2,575 deposit as $2,755

BRIEF EXERCISE 7-9

(a) Items that will result in an adjustment to the companies records:

1. Bank debit memorandum for service charges2. EFT payment7. Bank credit memorandum for interest expense8. Company error in recording a deposit of $1,280 as $1,6809. Bank debit memorandum for an NSF cheque

11. Company error in recording cheque made out for $360 as $630




BRIEF EXERCISE 7-9 (Continued)

(b) Why the other items do not require an adjustment:

3. Outstanding cheques from the current month need to be deducted from the bank balance to determine the adjusted bank balance. Since the company has already recorded the cheques the company does not need to record an adjustment.

4. Outstanding cheques from the previous month that are still outstanding need to be deducted from the bank balance because they are still outstanding.

5. Outstanding cheques from the previous month that are no longer outstanding will not appear on the bank reconciliation. These cheques have now been deducted from both the company’s cash balance and the bank account and so neither balance needs adjusting.

6. Bank error in recording a company cheque made out for $200 as $290 creates a $90 ($290 - $200) adjustment to the bank balance. The company has not made an error and so does not need to make an adjustment.

10. Deposit in transit from the current month will be added to the bank balance to calculate the adjusted bank balance. It has already been recorded by the company so no adjustment is required.

12. Bank error in recording a $2,575 deposit as $2,755 creates a $180 ($2,755 - $2,575) adjustment to the bank balance. The company has not made an error and so does not need to make an adjustment.




BRIEF EXERCISE 7-10November:

Cheques written and recorded in books in Nov. $9,520Less: Cheques paid by bank in Nov. 8,677Outstanding cheques at Nov. 30 $ 843

December:

Cheques written and recorded in books in Dec. $12,617Plus: Outstanding cheques at Nov. 30 843Total cheques that could be paid by bank in Dec. 13,460Less: Cheques paid by bank in Dec. 10,949Outstanding cheques at Dec. 31 $ 2,511

BRIEF EXERCISE 7-11

Manuliak CompanyBank Reconciliation

July 31Cash balance per bank...................................................... $7,920Add: Deposits in transit................................................... 2,152

10,072Less: Outstanding cheques............................................. 1,144 Adjusted cash balance per bank...................................... $8,928

Cash balance per books.................................................... $9,100Add: Interest earned........................................................ 25

9,125Less: NSF cheque............................................................. 162

Service charge........................................................ 00 35 Adjusted cash balance per books.................................... $8,928




BRIEF EXERCISE 7-12

July 31 Accounts Receivable........................ 162Cash............................................... 162

31 Bank Charges Expense.................... 35Cash............................................... 35

31 Cash................................................... 25Interest Revenue........................... 25

BRIEF EXERCISE 7-13

Cash should be reported at $18,850 ($6,000 + $850 + $12,000).

The postage stamps are prepaid expenses. The cash refund due from CRA is a receivable. Postdated cheques are also receivables until they can be cashed on their valid date.

The Treasury bill is a short-term investment that could be considered a cash equivalent.

BRIEF EXERCISE 7-14

Current Assets:

Dupré Company should report the Cash in Bank, Payroll Bank, Store Cash Floats and Short-term investments accounts as cash and cash equivalents which are current assets.

Noncurrent Assets:

The Plant Expansion Fund Cash should be reported as a noncurrent asset, assuming the fund is not expected to be used during the next year. The compensating balance should be reported as a noncurrent asset.




SOLUTIONS TO EXERCISES

EXERCISE 7-1(a) Weakness or Strength (b) Suggested Improvements1. No establishment of

responsibility over the cash—weakness

Cash counts not performed independently—weakness

The employees should use separate cash drawers.

Cash counts should be performed by a supervisor at the end of the shift and the totals compared to the cash register tape.

2. Improper segregation of duties could result in the misappropriation of cash—weakness

Different individuals should receive cash, record cash receipts and deposit the cash. In a small business this may be impossible; therefore, it is imperative that management take an active role in the operations of the business so to be able to detect any accounting irregularities.

3. The lack of documentation procedures—weakness.

Control documents around purchasing and shipping ensure that the records are accurate and reliable and help prevent the misappropriation (loss) of assets.

4. Repair of physical controls—strength.

5. External reviews completed regularly and issues resolved—strength.

6. Other controls over employees’ duties including vacations—strength.




EXERCISE 7-2(a) (b)

Procedure Weakness Principle Violated

Recommended Change

1. Cashiers arenot bonded.

Other controls All cashiers should be bonded.

2. Inability to establish responsibility for cash on a specific clerk.

Establishment of responsibility

There should be separate cash drawers and register codes for each clerk.

3. Cash is not adequately protected from theft.

Physical controls

Cash should be stored in a safe until it is deposited in the bank.

4. Cash is not independently counted.

Performance reviews

A supervisor should count the cash.

5.

6.

The accountant should not handle cash.

All sales are not rung through the cash register.

Segregationof duties

Documentation

The cashier's department should make the deposits.

All sales should be rung through the cash register to ensure sales are complete.




EXERCISE 7-3

(a) Dec. 20 Cash ($2,550 - $30)..................... 2,520Debit Card Expense($0.75 x 40).................................. 30

Sales....................................... 2,550

(b) Nov. 15 Cash ($1,300 - $39)..................... 1,261Credit Card Expense ($1,300 x 3%)............................... 39

Sales....................................... 1,300

Dec. 10 No entry

(c) Apr. 2 Accounts Receivable—Zachos. 1,450Sales....................................... 1,450

May 1 Cash............................................ 1,450Accounts Receivable—Zachos 1,450




EXERCISE 7-4

(a) (b)Weaknesses Suggested Improvements

1. Cheques are not prenumbered Use prenumbered cheques

2. The purchasing agent signs cheques

Only the controller's department personnel should sign chequesTwo signatures should be required

3. Unissued cheques are stored in unlocked file cabinet

Unissued cheques should be stored in a locked file cabinet with access restricted to authorized personnel

4. Purchasing agent verifies that the goods have been received

An independent party should verify receipt of goods

5. Purchasing agent approves and pays for goods purchased

Purchasing should approve bills for payment by the controller

6. After payment, the invoice is simply filed.

The invoice should be stamped PAID, to prevent it from being processed again

7. The purchasing agent records payments in the cash disbursements journal

Only accounting department personnel should record cash disbursements

8. The controller records the cheques in cash disbursements journal

Only accounting department personnel should record cash disbursements

9. The controller reconciles the bank statement

An internal auditor or other independent party should reconcile the bank statement




EXERCISE 7-4 (Continued) (b) (Continued)

INTEROFFICE MEMORANDUM

TO: CONTROLLER, ABEKAH COMPANYFROM: ACCOUNTING STUDENTSUBJECT: INTERNAL CONTROL OVER CASH

DISBURSEMENTSDATE:

I have reviewed your cash disbursements system and suggest that you make the following improvements:

1. Abekah Company should use prenumbered cheques. These should be stored in a locked file cabinet or safe with access restricted to authorized personnel.

2. The purchasing department should approve bills for payment. The controller’s department should prepare and sign the cheques. Two signatures should be required on every cheque. The invoices should be stamped paid so that they cannot be paid twice.

3. Only the accounting department personnel should record cash disbursements.

4. An internal auditor or other independent party should reconcile the bank statement.

5. An independent party should verify receipt of goods.

If you have any questions about implementing these suggestions, please contact me.




EXERCISE 7-5

(a)Mar. 10 Petty Cash.......................................... 100

Cash............................................... 100

(b)Mar. 25 Petty Cash ($125 - $100)................... 25

Merchandise Inventory..................... 29Miscellaneous Expense ($14 + $12 + $5) 31Delivery Expense.............................. 38

Cash ($125 - $4)............................ 121Cash Over and Short.................... 2

(c)Mar. 25 Merchandise Inventory..................... 29

Miscellaneous Expense ($14 + $12 + $5) 31Delivery Expense.............................. 38

Cash ($75 - $4).............................. 71Cash Over and Short.................... 2Petty Cash ($100 - $25)................. 25




EXERCISE 7-6

(a)May 1 Petty Cash.......................................... 250

Cash............................................... 250

(b)May 31 Newspaper Advertising Expense..... 62

Coffee Supplies Expense................. 46Drawings............................................ 50Postage Expense............................... 10Cash Over and Short......................... 4

Cash ($200 - $78).......................... 122Petty Cash ($250 - $200)............... 50

(c) May 31 Newspaper Advertising Expense..... 62

Coffee Supplies Expense................. 46Drawings............................................ 50Postage Expense............................... 10Cash Over and Short......................... 1

Cash ($200 - $83).......................... 117Petty Cash ($250 - $200)............... 50




EXERCISE 7-7

(a)VERWEY COMPANYBank Reconciliation

November 30 Cash balance per bank statement.................................... $8,509Add: Deposits in transit................................................... 0 1,575

10,084Less: Outstanding cheques............................................. 0 2,449 Adjusted cash balance per bank...................................... $7,635

Cash balance per books...................................... $7,005Add: Correction of error in cheque No. 373.... $ 90

EFT deposits............................................. 883 9737,978

Less: Bank service charge................................. $ 24NSF cheque............................................... 319 343

Adjusted cash balance per books.................................... $7,635

(b) Nov. 30 Cash............................................ 973Office Supplies...................... 90Accounts Receivable............. 883

30 Bank Charges Expense............. 24Account Receivable................... 319

Cash........................................ 343




EXERCISE 7-8

(a) Deposit in transit on May 31: $1,353

(b) Other adjustments: Interest earned of $32 must be added to the balance per

books. EFT deposit of $849 must be added to the balance per

books The error in the May 20th deposit must be corrected on

the books; therefore the balance per books must decrease by $9 ($954 - $945).

EXERCISE 7-9

(a) Outstanding cheques on May 31st:No. 255 $ 262No. 261 867No. 264 650

$1,779

(b) Other adjustments: Decrease balance per books $54 for service charges

recorded by bank. Increase balance per books $450 for error in cheque 260

—should be $50 not $500. Decrease balance per books for NSF cheque of $395.




EXERCISE 7-10

(a)HIDDEN VALLEY COMPANY

Bank ReconciliationMay 31

Cash balance per bank statement.................................... $7,664Add: Deposits in transit................................................... , 1,353

9,017Less: Outstanding cheques............................................. 1,779Adjusted cash balance per bank...................................... $7,238

Cash balance per books.................................................... $6,365Add: Interest earned........................................................ 32

Error correction: Cheque # 260............................. 450EFT Deposit............................................................ 849

7,696Less: Bank service charge................................ 54

Error correction: May 20 deposit ($954 - $945) 9NSF cheque............................................................. 395

Adjusted cash balance per books...................... $7,238

(b) May. 31 Cash ($32 + $450 + $849)............ 1,331Interest Revenue..................... 32Accounts Payable................... 450Accounts Receivable (EFT).... 849

31 Bank Charges Expense.............. 54Accounts Receivable (error)....... 9Accounts Receivable (NSF)........ 395

Cash ($54 + $9 + $395)........... 458




EXERCISE 7-11(a) Deposits in transit: July 31

Deposits per books in July..................... $15,750Less: Deposits per bank in July............. $15,820

Deposits in transit, June 30......... (1,050)July receipts deposited in July.............. 14,770Deposits in transit, July 31..................... $ 980

Deposits in transit: August 31Deposits per books in August................ $22,900Less: Deposits per bank in August........ $23,500

Deposits in transit, July 31........... (980)August receipts deposited in August.... 22,520Deposits in transit, August 31................ $ 380

(b) Outstanding cheques: July 31Cheques per books in July..................... $17,200Add: Outstanding cheques, June 30..... 970Total that could be cleared in July......... 18,170Less: Cheques clearing bank in July..... (16,660)Outstanding cheques, July 31................ $ 1,510

Outstanding cheques: August 31Cheques per books in August................ $21,700Add: Outstanding cheques, July 31....... 1,510Total that could be cleared in August.... 23,210Less: Cheques clearing bank in August (22,250)Outstanding cheques, August 31........... $ 960




EXERCISE 7-12

(a) September 1 adjusted balance................................. $17,350Add: Cash receipts (deposits)................................. 64,329Less: Cash payments (cheques).............................. (63,746)September 30 unadjusted balance per company. . . $17,933

(b) September 1 balance per bank................................. $20,860Add: Deposits cleared.............................................. 62,789

EFT Collections............................................... 1,825Interest earned................................................. 45

85,519Less: Cheques cleared................................$65,787

NSF cheque: J. Hower...................... 410Bank service charge......................... 30 66,227

September 30 unadjusted bank balance................. $19,292

(c) Deposits in transit: September 30Deposits per books in September.................. $64,329Less: Deposits per bank in September.........$62,789

Deposits in transit: August 31............. (3,370)September receipts deposited in September 59,419Deposits in transit: September 30.................. $ 4,910

(d) Outstanding cheques: September 30Cheques recorded per books in September......... $63,746Add: Outstanding cheques, August 31................. 6,880Total cheques that could be cleared in Sept........ 70,626Less: Cheques clearing bank in September......... (65,787)Outstanding cheques: September 30.................... $ 4,839




EXERCISE 7-12 (continued)

(e) Unadjusted bank balance, September 30................ $19,292Add: Deposits in transit........................................... 4,910Less: Outstanding cheques...................................... (4,839)Adjusted bank balance, September 30.................... $19,363

(f) Unadjusted cash balance, September 30................ $17,933Add: EFT Collections............................................... 1,825

Interest earned................................................. 45Less: NSF cheque: J. Hower..................................... (410)

Bank service charge....................................... (30)Adjusted cash balance, September 30.................... $19,363

EXERCISE 7-13

(a) Cash and cash equivalents1. Currency and coin............................................... $ 872. Guaranteed investment certificate..................... 10,0003. April cheques....................................................... 3005. Royal Bank chequing account............................ 2,5756. Royal Bank savings account.............................. 4,0009. Cash register floats............................................. 25010. Over-the-counter cash receipts for April 30:

Currency and coin........................................... 550Cheques from customers............................... 185Debit card slips................................................ 685Bank credit card slips..................................... 755

Total...................................................................... $19,387

(b) 4. Postdated cheque—Balance sheet (accounts receivable)7. Prepaid postage in postage meter—Balance sheet

(prepaid expense)8. IOU from company receptionist—Balance sheet

(accounts receivable)




SOLUTIONS TO PROBLEMS

PROBLEM 7-1A

(a) The weaknesses in internal accounting control over collections are:(1) Each usher could take cash from the collection plates en

route to the basement office.(2) The head usher counts the cash alone.(3) The head usher’s notation of the count is left in the safe.(4) The financial secretary counts the cash alone.(5) The financial secretary withholds $150 to $200 per week.(6) The cash is vulnerable to robbery when kept in the safe

overnight.(7) Cheques are made payable to “cash.”(8) The financial secretary has custody of the cash,

maintains church records, and prepares the bank reconciliation.

(b) The improvements should include the following:(1) The ushers should transfer their cash collections to a

cash pouch (or bag) held by the head usher. The transfer should be witnessed by a member of the finance committee.

(2) The head usher and finance committee member should take the cash to the office. The cash should be counted by the head usher and the financial secretary in the presence of the finance committee member.

(3) Following the count, the financial secretary should prepare a deposit slip in duplicate for the total cash received, and the secretary should immediately deposit the cash in the bank’s night deposit vault.

(4) At the end of each month, a member of the finance committee should prepare the bank reconciliation.

(5) All cheques should be made payable in the church’s name.




PROBLEM 7-1A (Continued)

(b) (Continued)

(6) A petty cash fund should be set up for small expenditures. All amounts collected at weekly services should be deposited.




PROBLEM 7-2A

Internal Controls


Ap Application to Cash Disbursements

Only the controller and assistant controller are authorized to sign cheques.

Segregation of duties

Invoices must be approved by both the purchasing agent and the receiving department supervisor. Payment can only be made by the controller or assistant controller, and the cheque signers do not record the cash disbursement transactions.

Documentation procedures

Cheques are prenumbered. Paid invoices have payment details noted on them.

Physical Controls

Blank cheques are kept in a safe in the controller's office. Only the controller and assistant controller have access to the safe. A cheque-writer is used in writing cheques.

Performance reviews

The cheque signer compares the cheque with the approved invoice prior to issue. Bank and book balances are reconciled monthly by the assistant chief accountant.

Other controls Following payment, invoices are stamped PAID to prevent duplicate payments.




PROBLEM 7-3A(a) Weaknesses & (b) Problems (c) Suggested Improvements1.Cash is collected and kept in the

car. This could result in theft.Cash should be deposited in the bank each day.

2. The person purchasing the merchandise is the same person that verifies receipt of the goods and approves invoices for payment. Because this person is responsible for all activities related to purchasing, errors and theft could occur.

An independent person should verify the receipt of goods. The purchaser should approve bills for payment by the controller.

3. All three cashiers use the same cash drawer. This could result in difficulty establishing responsibility for errors.

Each employee should use a separate cash drawer.

4. The office manager deposits the cheques and posts the entry in the accounting records. This could result in the office manager depositing cheques in his/her own account, taking the cash and not posting the entry for accounting purposes.

Mail should be opened by two individuals. The reconciliation of daily cash receipts should be forwarded to the accounting department and used as a basis for entering the receipt information into the accounting records.

5. The custodian creates receipts for employees when they don’t have them. He could create fictitious receipts and take cash himself or give it to friends.

Larry never takes a vacation.

Prenumbered petty cash receipts must be signed by the custodian and the individual receiving payment for each payment from the fund. Surprise counts can be made at any time to determine whether the fund is intact.Employees should be required to take vacation.




PROBLEM 7-4A

(a) June 1 Petty Cash................................... 150Cash........................................ 150

8 Cash............................................ 15,548Debit Card Expense (52 X $0.50) 26Credit Card Expense

($6,400 x 2.75%)..................... 176Sales....................................... 15,750

8 Freight Out.................................. 42Postage Expense........................ 28Advertising Expense.................. 57Miscellaneous Expense............. 10Cash Over and Short................. 4

Cash ($150 - $9)..................... 141


($8,000 x 2.75%)..................... 220Sales....................................... 18,200

15 Petty Cash ($250 - $150)............ 100Drawings..................................... 50Office Supplies Expense........... 77Coffee Supplies Expense.......... 20Cash Over And Short................. 1

Cash ($250 - $4)..................... 246





(b) The advantage of accepting debit and bank credit card transactions as opposed to accepting only cash and personal cheques from customers is that the company knows immediately if the customer has enough money in the bank to pay for their purchases. A second advantage is that it will likely increase sales if customers can use debit or credit cards. The disadvantage is that the bank charges a fee on all transactions using debit and credit cards.

(c) The benefit of having a petty cash fund is that it can be used to pay relatively small amounts, while still maintaining control. Some expenses are best made by cash rather than by cheque because of the nature of the expense–there are some instances where either a cheque is not accepted or it is not practical to issue a cheque. The cost-benefit principle justifies paying some expenses with cash rather than issuing a cheque.

There are a number of internal controls over the petty cash fund that Gamba should follow: One person should be appointed the petty cash

custodian and will be responsible for the fund. A prenumbered petty cash receipt should be signed by

the custodian and the individual receiving payment for each payment from the fund.

The treasurer’s office should examine all payments and stamps supporting documents to indicate they were paid when the fund is replenished.

Surprise counts should be made at any time to determine whether the fund is intact.




PROBLEM 7-5A

(a) Jan. 2 Petty Cash................................... 200Cash........................................ 200

15 Freight Out.................................. 84Postage Expense........................ 42Office Supplies Expense........... 47Miscellaneous Expense............. 12Cash Over and Short................. 2

Cash ($200 - $13)................... 187

31 Freight Out.................................. 86Charitable Contributions Expense 40Postage Expense........................ 28Miscellaneous Expense............. 44

Cash Over and Short............. 3Cash ($200 - $5)..................... 195

Feb. 1 Petty Cash................................... 100Cash........................................ 100

15 Freight Out.................................. 36Entertainment Expense............. 53Postage Expense........................ 33Merchandise Inventory.............. 60Miscellaneous Expense............. 54Cash Over and Short................. 6

Cash ($300 - $58)................... 242

28 Postage Expense........................ 95Travel Expense........................... 46Freight Out.................................. 44Office Supplies Expense........... 57

Cash Over and Short............. 5Cash ($250 - $63)................... 187Petty Cash ($300 - $250)........ 50





(b)

Petty CashDate Explanation Ref. Debit Credit Balance

Jan. 2 200 200Feb. 1 100 300

28 50 250

(c) Some expenses are made from petty cash rather than by cheque because of the nature of the expense–there are some instances where either a cheque is not accepted or it is not practical to issue a cheque. The cost-benefit principle justifies paying some expenses with cash rather than issuing a cheque.

There are internal controls over payments from petty cash. A custodian is responsible for the fund. A prenumbered petty cash receipt signed by the custodian and the individual receiving payment is required for each payment from the fund. The treasurer’s office examines all payments and stamps supporting documents to indicate they were paid when the fund is replenished. Surprise counts can be made at any time to determine whether the fund is intact.




PROBLEM 7-6A

(a)AGRICULTURAL GENETICS COMPANY

Bank ReconciliationMay 31, 2008

Cash balance per bank statement.................................... $11,689Add: Deposit in transit...................................... $1,141

Bank error, May 12 deposit ($638 - $386) 252 1,39313,082

Less: Outstanding cheques[($233 + $732 + $813 + $401)]................................ 2,179

Adjusted cash balance per bank...................................... $10,903

Cash balance per books.................................................... $ 9,448Add: Error in recording cheque No. 1151

($855 - $585).............................................. $ 270EFT collections......................................... 2,382Interest revenue........................................ 24 2,676

12,124Less: NSF cheque and service charge............. $820

Error in recording cheque No. 1192($1,387 - $1,738)........................................ 351Bank service charge................................ 50 1,221






(b) May 31 Cash............................................ 270Accounts Payable—L. Kingston 270

31 Cash............................................ 2,382Accounts Receivable............. 2,382

31 Cash............................................ 24Interest Revenue.................... 24

31 Accounts Receivable—P. Dell... 820Cash........................................ 820

31 Computer Equipment................. 351Cash........................................ 351

31 Bank Charges Expense............. 50Cash........................................ 50

Check: $9,448 + $270 + $2,382 + $24 - $820 - $351 - $50 = $10,903 adjusted cash balance




PROBLEM 7-7A

(a) Cash balance per books, November 30, 2008 (from Nov. 30 bank reconciliation)..................... $10,216Add: Cash receipts................................................. 16,830Less: Cash payments............................................ 14,816Unadjusted cash balance per books, December 31, 2008............................................... $12,230

(b)HUANG COMPANYBank ReconciliationDecember 31, 2008

Cash balance per bank statement.................................. $19,155Add: Deposits in transit................................................ 1,198 20,353Less: Outstanding cheques

No. 3470...................................... $1,100No. 3474...................................... 1,050No. 3478...................................... 538No. 3481...................................... 807No. 3484...................................... 1,274No. 3486...................................... 1,390 6,159

Adjusted cash balance per bank................................... $14, 194

Cash balance per books................................................ $12,230 Add: EFT collected by bank......................................... 3,145

15,375Less: NSF cheque...................................... $1,027

Error in recording cheque No. 3485 ($541 - $441).................................. 100Bank service charges..................... 45Error in Dec. 21st deposit ($2,954 - $2,945)............................ 9 1,181

Adjusted cash balance per books.................................. $ 14,194





(c) Dec. 31 Cash............................................ 3,145Accounts Receivable............. 3,080Interest Revenue.................... 65

31 Accounts Receivable—Hilo Holdings........................... 1,027

Cash........................................ 1,027

31 Accounts Payable...................... 100Cash........................................ 100


31 Accounts Receivable................. 9Cash........................................ 9

Check: $12,230 + $3,145 - $1,027 - $100 - $45 - $9 = $14,194 adjusted cash balance




PROBLEM 7-8A

(a) Book balance, May 1 (per Apr. 30 bank reconciliation) $ 7,776Add: Cash receipts..................................................... 6,825Less: Cash payments.................................................. 13,526Unadjusted cash balance, May 31.............................. $ 1,075

(b)RIVER ADVENTURES COMPANY


Cash balance per bank statement.................................... $4,308Add: Deposits in transit................................ $1,286

Error in cheque 564 ($603 - $306)........ 297 1,583 5,891

Less: Outstanding chequesNo. 533.............................................. $279No. 555.............................................. 79No. 558.............................................. 943No. 560.............................................. 890No. 566.............................................. 950 3,141


Cash balance per books.................................................... $1,075Add: EFT proceeds ($1,615 + $35)................ $1,650

Error in May 26th deposit ($980 - $890)...................................... 90

Error in cheque #563($2,887 - $2,487)................................ 400 2,140

3,215Less: NSF cheque........................................... $ 440

Bank service charges........................... 25 465Adjusted cash balance per books.................................... $2,750





(b) May 31 Cash ........................................... 1,650Accounts Receivable............. 1,615Interest Revenue.................... 35

31 Cash ........................................... 90Accounts Receivable............. 90

31 Cash............................................ 400Accounts Payable.................. 400

31 Accounts Receivable—R. King. 440Cash........................................ 440


Check: $1,075 + $1,650 + $90 + $400- $440 - $25= $2,750 adjusted cash balance




PROBLEM 7-9A

(a) Balance per Bank StatementBalance September 30, 2008.................................... $ 6,469Add: Deposits............................................ $11,579

Interest.............................................. 27 11,60618,075

Less: Cheques cleared.............................. $7,253NSF cheques.................................... 790Service charge................................. 43 8,086

Balance, October 31, 2008........................................ $9,989

Balance Per BooksReconciled Balance, (per Sept. 30 bank reconciliation)($6,469 + $1,084 - $628 - $553 - $159)....................... $ 6,213Add: Cash receipts................................................... 11,736Less: Cash payments................................................ (10,922)Unadjusted cash balance, October 31, 2008........... $ 7,027





(b)HAWORTH’S MARINE CENTRE

Bank ReconciliationOctober 31, 2008

Balance per bank statement............................................. $ 9,989Add: Deposits in transit................................................... 1,941

................................................................................. 11,930Less: Outstanding cheques

No. 391.................................................. $ 159No. 408.................................................. 3,266No. 411.................................................. 1,984 5,409


Balance per books............................................................. $7,027Add: Interest ..................................................... $ 27

Error in Oct. 12th deposit ($3,818 - $3,118) 700 7277,754

Less: NSF cheque............................................... $790Error in cheque No. 409 ($1,848 - $1,448) 400Bank service charges.............................. 43 1,233

Adjusted cash balance...................................................... $6,521

(c) Oct. 31 Cash ........................................... 727Accounts Receivable............. 700Interest Revenue.................... 27

31 Accounts Receivable—Y. Fujii.. 790 Office Equipment ....................... 400

Bank Charges Expense............. 43Cash........................................ 1,233

Check: $7,027 + $727 - $1,233= $6,521 adjusted cash balance

(d) The reported cash balance on the October 31, 2008 balance sheet is $6,521.




PROBLEM 7-10A(a)

CAREFREE COMPANYBank Reconciliation

March 31, 2008 Balance per bank statement............................................. $7,350Add: Deposit in transit..................................................... 750

................................................................. 8,100Less: Outstanding cheques............................... $1,650

Bank error deposit Careless Company. . 1,100 2,750Adjusted cash balance per bank...................................... $5,350

Balance per books............................................................. $3,125Add: Error in cheque No. 173 ($294 - $249).... $ 45

Interest earned.......................................... 15Proceeds of EFT....................................... 2,645 2,705

5,830Less: Service charge.......................................... $ 40

Hydro......................................................... 120Telephone................................................. 85NSF cheque ($220 + $15 service charge) 235 480


(b) Mar. 31 Cash............................................ 2,705Accounts Payable.................. 45Interest Revenue.................... 15Accounts Receivable............. 2,645

31 Bank Charges Expense............. 40Hydro Expense........................... 120Telephone Expense.................... 85Accounts Receivable ................ 235

Cash........................................ 480

Check: $3,125 + $2,705 - $480 = $5,350 adjusted cash balance





(c) Internal control features added by the bank reconciliation process:

Performance review: Allows for an independent check on accounting records

But having a bank account also assists with internal control as follows:

Safeguards assets: Safeguards cash Documentation: Creates a double record of all bank

transactions




PROBLEM 7-11A

(a) Cash and Cash Equivalents balance:

1. Cash on hand....................................................... $ 1,6002. Petty cash fund.................................................... 433. Bank chequing account....................................... 7,4604. BMO money market fund.................................... 5,0006. US Dollar Account............................................... 2,2417. American Express credit card slips*

[$500 - ($500 x 4%)]......................................... 480Total.................................................................. $16,824

*American Express credit card slips are effectively a deposit in transit because the funds will be deposited in the bank account in two days.

(b) 2. The petty cash fund should have been replenished at year-end. Since this has not happened, the company must record:

Accounts receivable of $100 for the IOU Expenses of $55 ($155 - $100 IOU) Cash shortage of $2 and a reduction of petty cash of $157 ($200 -

$43)

4. The 6-month term deposit should be recorded as a short-term investment, and reported as a current asset on the balance sheet.

5. The cash due from the customer should be recorded as an account receivable, and reported as a current asset on the balance sheet. The remainder of the entry should update merchandise inventory (current asset), sales (revenue), and cost of goods sold (expense).





(b) (Continued)

8. The cash received from the property sale is restricted and should be reported as either a current or noncurrent asset depending on when the property sale will be completed.

9. The deposit with Ontario Hydro should be recorded as an advance or deposit in the current assets section of the balance sheet.




PROBLEM 7-1B

(a) Activities Application to Cash Receipts


Only cashiers are authorized to sell tickets. Only the manager and cashier can handle cash.

Segregation of duties

The duties of receiving cash and admitting customers are assigned to the cashier and to the usher. The manager maintains custody of the cash, and the company accountant records the cash.

Documentation procedures

Tickets are prenumbered. Cash count sheets are prepared. Deposit slips are prepared. Copies are used for verification and recording.

Physical controls A safe is used for the storage of cash and a machine is used to issue tickets.

Performance reviews

Cash counts are made by the manager at the end of each cashier's shift. Daily comparisons are made by the company controller.

Other controls Cashiers are bonded.




PROBLEM 7-1B (Continued)

(b) Actions by the usher and cashier to misappropriate cash could include:

(1) Instead of tearing the tickets, the usher could return the tickets to the cashier who could resell them, and the two could divide the cash.

(2) The cashier could issue a less expensive ticket than paid for, and the usher would admit the customer. The difference between the ticket issued and the cash received could be divided between the usher and cashier.

(3) The cashier and usher could agree to let friends into the theatre at no cost (or in exchange for an "under the table" payment).




PROBLEM 7-2B

Roger has created a situation that leaves many opportunities for undetected theft. Here is a list of some of the deficiencies in internal control. You may find others.

1. Establishment of responsibility

Inadequate control over the cash box. In effect, it was operated like a petty cash fund, but too many people had the key. Instead, Roger should have had the key and dispersed funds when necessary for purchases.

2. Segregation of duties

Freda Stevens counted the funds, made out the deposit slip, and took the funds to the bank. This made it possible for Freda to take some of the money and deposit the rest since there was no external check on her work. Roger should have counted the funds, with someone observing him. Then he could have made out the deposit slip and had Freda deposit the funds.

Sara Billings was collecting tickets and receiving cash for additional tickets sold. Instead, there should have been one person selling tickets at the door and a second person collecting tickets.





3. Documentation procedures The tickets were unnumbered. By numbering the tickets,

the students could have been held more accountable for the tickets.

No record was kept of which students took tickets to sell or how many they took. In combination with items 1 and 2 above, the student assigned control over the tickets should have kept a record of which tickets were issued to each student for resale. (Note: This problem could have been largely avoided if the tickets had been sold at the door on the day of the dance.)

There was no control over unsold tickets. This deficiency made it possible for students to sell tickets, keep the cash, and tell Roger that they had disposed of the unsold tickets. Instead, students should have been required to return the unsold tickets to the student maintaining control over tickets, and the cash to Roger. In each case, the students should have been issued a receipt for the cash they turned in and the tickets they returned.

Instead of receipts, students simply wrote notes saying how they used the funds. Instead, it should have been required that they provided a valid receipt.

A receipt was not received from Obnoxious Al. Without a receipt, there is no way to verify how much Obnoxious Al was actually paid. For example, it is possible that he was only paid $100 and that Roger took the rest.

4. Physical controls and establishment of responsibility

The tickets were left in an unlocked box on his desk. Instead, Roger should have assigned control of the tickets to one individual, in a locked box which that student alone had control over.




PROBLEM 7-3B(a) Weaknesses & (b) Problems (c) Suggested Improvements1. No separation of duties between

receiving the cash and admitting students to the lessons. The teachers could admit students for free or charge extra and pocket the difference or report fewer students and pocket the extra money.

The duties of receiving cash and admitting students should be assigned to separate individuals.

2. There is no segregation of duties in the accounting function. The general manager could prepare fictitious invoices for payment and it would not be detected.

An independent person should approve the invoices for payment and prepare the bank reconciliations.

3. Each sales person is responsible for determining credit policies and they receive a commission based on sales. They could provide credit to an bad credit risk in order to receive the commission on the sale.

An independent person should be responsible for providing credit to customers.

4. All programmers have access to the accounting software which could provide unauthorized changes to the accounting records.

Access to the accounting records should be restricted and protected with password or biometric restrictions.

5. Receiving and purchase orders have been eliminated which could result in unauthorized purchases and/or receipts or fictitious invoices being paid as no support is required. An employee could set up a bank account and collect the payment.

Receiving reports and purchase orders should be reinstated.




PROBLEM 7-4B

(a) Apr. 1 Petty Cash................................... 200Cash........................................ 200


($12,800 X 3.25%)................... 416Sales....................................... 31,500

8 Freight Out.................................. 44Office Supplies Expense........... 34Advertising Expense.................. 50Drawings..................................... 20Cash Over and Short................. 4

Cash ($200 - $56)................... 144


($16,000 X 3.25%)................... 520Sales....................................... 36,400

15 Postage Expense........................ 53Advertising Expense.................. 39Cleaning Supplies Expense...... 48Cash Over and Short................. 5

Petty Cash ($200 - $175)........ 25Cash ($175 - $55)................... 120





(b) The advantage of accepting debit and bank credit card transactions as opposed to accepting only cash and personal cheques from customers is that the company knows immediately if the customer has enough money in the bank to pay for their purchases. A second advantage is that it will likely increase sales if customers can use debit or credit cards. The disadvantage is that the bank charges a fee on all transactions using debit and credit cards.

(c) The benefit of having a petty cash fund is that it can be used to pay relatively small amounts, while still maintaining control. Some expenses are best made by cash rather than by cheque because of the nature of the expense–there are some instances where either a cheque is not accepted or it is not practical to issue a cheque. The cost-benefit principle justifies paying some expenses with cash rather than issuing a cheque.

There are a number of internal controls over the petty cash fund that Rossi should follow: One person should be appointed the petty cash

custodian and will be responsible for the fund. A prenumbered petty cash receipt should be signed by

the custodian and the individual receiving payment for each payment from the fund.

The treasurer’s office should examine all payments and stamps supporting documents to indicate they were paid when the fund is replenished.

Surprise counts should be made at any time to determine whether the fund is intact.




PROBLEM 7-5B

(a) July 1 Petty Cash................................... 250Cash........................................ 250

15 Freight Out.................................. 94Postage Expense........................ 42Entertainment Expense............. 47Miscellaneous Expense............. 51Cash Over and Short................. 4

Cash ($250 - $12)................... 238

31 Freight Out.................................. 82Charitable Contributions Expense 50Postage Expense........................ 68Miscellaneous Expense............. 42

Cash over and Short............. 2Cash ($250 - $10)................... 240

Aug. 1 Petty Cash................................... 100Cash........................................ 100

15 Freight Out.................................. 90Entertainment Expense............. 77Postage Expense........................ 63Supplies Expense....................... 59Cash Over and Short................. 4

Cash ($350 - $57)................... 293

31 Postage Expense........................ 122Entertainment Expense............. 91Freight Out.................................. 73Cash Over and Short................. 1

Petty Cash ($350 - $300)........ 50Cash ($300 - $65)................... 235





(b)

Petty CashDate Explanation Ref. Debit Credit Balance

July 1 250 250Aug. 1 100 350

31 50 300

(c) If the petty cash fund had not been replenished at year-end the company must record the petty cash expenses and an accounts payable (to petty cash) of $285 ($122 + $91 + $73 - $1). Only $65 is actually cash at this point in time not $350 as in the petty cash account prior to the August 31 transaction.




PROBLEM 7-6B

(a)LISIK COMPANY

Bank ReconciliationOctober 31, 2008

Cash balance per bank statement.................................... $10,973Add: Deposit in transit...................................... $963

Bank error—Lasik cheque....................... 600 1,56312,536

Less: Outstanding cheques ($330 + $466 + $587 + $293)................................. 1,676


Cash balance per books.................................................... $ 9,693Add: Collection of EFT....................................... $2,055

Interest revenue........................................ 39 2,09411,787

Less: NSF cheque............................................... $715Error in Oct. 12 deposit ($856 - $836)..... 20Error in recording cheque No. 1181 ($685 - $568)............................................ 117Bank service charge 35Cheque printing charge........................... 40 927






(b) May 31 Cash.............................................. 2,094Accounts Receivable.............. 2,055Interest Revenue..................... 39

31 Accounts Receivable—W. Hoad 715Sales............................................. 20Accounts Payable—Helms & Co. 117Bank Charges Expense ($35 + $40) 75

Cash......................................... 927

Check: $9,693 + $2,094 - $927 = $10,860 adjusted cash balance




PROBLEM 7-7B

(a) General Ledger Cash Balance:

Book balance, February 29 (Adjusted cash balance per bank reconciliation). $12,258Add: Cash receipts................................................... 10,673Less: Cash payments................................................ (11,821)Unadjusted cash balance, March 31........................ $11,110

(b)YAP CO.

Bank ReconciliationMarch 31, 2008

Cash balance per bank statement.................................... $12,500Add: Deposits in transit................................................... 1,025

13,525Less: Outstanding cheques

No. 3470................................................ $1,535No. 3479................................................ 159No. 3481................................................ 862No. 3482................................................ 1,126

Bank error—cheque #3474....................... 200 3,882






(b) (Continued)

Cash balance per books.................................................... $11,110Add: Correction to cheque #3473

($1,641 – $1,461)................................................... 180Interest revenue...................................................... 23

11,313Less: Loan payment—principal........................ $1,000

Loan payment—interest.......................... 62NSF cheque Mr. Jordan........................... 550Service charge.......................................... 49Correction in recording cash receipts March 20 ($1,823 - $1,832)..................... 9 1,670


(c) Mar. 31 Cash............................................ 203Accounts Payable.................. 180Interest Revenue.................... 23

31 Note Payable............................... 1,000Interest Expense......................... 62Accounts Receivable................. 550Bank Charges Expense............. 49Sales............................................ 9

Cash........................................ 1,670

Check: $11,110 + $203 - $1,670 = $9,643 adjusted cash balance




PROBLEM 7-8B

(a) Book balance, October 31 (from Oct. 31 bank reconciliation)........................................................ $ 8,496Add: Cash receipts per journal............................. 15,690Less: Cash payments per journal.......................... (14,026)Unadjusted cash balance, November 30............... $10,160

(b)MALONEY COMPANYBank ReconciliationNovember 30, 2008

Cash balance per bank statement................................... $14,527Add: Deposits in transit................................................. 1,338


No. 2451........................................... $1,260No. 2472........................................... 504No. 2478........................................... 538No. 2482........................................... 612No. 2484........................................... 830No. 2485........................................... 975No. 2487........................................... 1,200 5,919

Adjusted cash balance per bank..................................... $ 9,946

Cash balance per books................................................... $10,160Add: EFT collected by Bank......................... $2,479

Error in Nov. 20 deposit ($2,966 - $2,699) 267 2,74612,906

Less: NSF cheque – Pendray Holdings........ $ 260 Error in recording cheque No. 2476

($2,830 - $2,380)................................. 450Loan payment...................................... 2,250 2,960

Adjusted cash balance per books................................... $ 9,946





(c) Nov. 30 Cash............................................ 2,746Accounts Receivable............. 2,430Interest Revenue.................... 49Accounts Receivable............. 267

30 Accounts Receivable................. 260Accounts Payable...................... 450Note Payable............................... 2,000Interest Expense......................... 250

Cash........................................ 2,960

Check: $10,160 + $2,746 - $2,960 = $9,946 adjusted cash balance




PROBLEM 7-9B

(a) Balance per Bank Statement Balance April 30, 2008............................................... $ 4,261Add: Deposits............................................. $10,528

Interest............................................... 12 10,54014,801

Less: Cheques cleared................................ $5,608NSF cheques...................................... 280Service charge................................... 28 5,916

Unadjusted bank balance, May 31, 2008.............. $8,885

Balance Per BooksReconciled balance, (per April 30 bank reconciliation) ($4,261 – $217 – $326 – $105).................................. $ 3,613Add: Cash receipts................................................... 11,172Less: Cash payments................................................ 10,776Unadjusted cash balance, May 31, 2008.................. $ 4,009





(b)KURJI’S APPLIANCES


Unadjusted bank balance.................................................. $8,885Add: Deposits in transit................................................... 1,004


No. 290.................................................. $ 105No. 307.................................................. 3,266No. 310.................................................. 2,400 5,771

Adjusted bank balance...................................................... $4,118

Unadjusted cash balance.................................................. $4,009Add: Interest ..................................................... $ 12

Error in cheque # 306 ($150 - $105)........ 45Error in May 5th deposit ($2,620 – $2,260) 360 417

4,426Less: NSF cheque............................................... $280

Bank service charges.............................. 28 308Adjusted cash balance...................................................... $4,118





(c) May 31 Cash ........................................... 417Interest Revenue.................... 12Telephone Expense............... 45Accounts Receivable............. 360

31 Accounts Receivable—M. Rafique 280Bank Charges Expense............. 28

Cash........................................ 308

Check: $4,009 + $417 - $308 = $4,118 adjusted cash balance

(d) The reported cash balance on the May 31, 2008 balance sheet is $4,118.




PROBLEM 7-10B

AURA WHOLE FOODSBank Reconciliation

October 31, 2008

(a) Cash balance per bank statement $19,460Less: Outstanding cheques

No. Amount762 $514783 160784 267862 171863 325864 173 1,610

Adjusted cash balance per bank $17,850

Cash balance per books $19,641Add: Credit memo (collection of EFT) 750 Adjusted balance per books (before theft) 20,391Less: Amount of theft 2,541Adjusted cash balance per books $17,850

(b) The cashier attempted to cover the theft of $2,541 by:

1. Not including three outstanding cheques totalling $941 (No. 762, $514; No. 783, $160; and No. 784, $267) in the list of outstanding cheques.

2. Added the outstanding cheques to the cash balance per books incorrectly. The total should have been $100 higher ($20,310 not $20,210).

3. Subtracted the $750 credit memo from the bank balance. It should be added to the book balance. This concealed $1,500 ($750 x 2) of the theft.

Check: $941 + $100 + (2 x $750) = $2,541





(c) Combining the duties of cashier and bookkeeper is not a correct application of these internal control activities:

Performance reviews have not been properly conducted because the cashier/bookkeeper prepared the bank reconciliation.

Segregation of duties has not been properly followed

because the cashier had access to the accounting records and also prepared the bank reconciliation.




PROBLEM 7-11B

(a) Cash balance:

1. Cash on hand...................................................... $ 5,000 2. Petty cash fund................................................... 125 3. Commercial bank savings account................... 100,000

Commercial bank chequing account........... 25,000US bank account............................................ 48,000

10. Special bank account–customer cash deposits 9,250Total................................................................. $187,375

(b) If the company combined its cash and cash equivalents, the money market fund of $32,000 and the treasury bills of $75,000 would also be included.

(c) 2. The petty cash fund should have been replenished at year-end. Since this has not happened, the company must record the petty cash expenses and reduce petty cash by $375. Only $125 is actually cash at this point in time. Once the petty cash fund is reimbursed, $500 cash will be available once again.

4. Restricted cash of $150,000 would be reported as a current or noncurrent asset, depending on the intended period of use.

5. An unused line of credit would not be reported on the balance sheet. It may be disclosed in the notes.

6. Amounts due from employees (travel advances) would be included in Accounts Receivable.

7. Short-term investments (money market fund, treasury bills and shares) would be listed separately in the current asset section (unless combined as the money market fund and t-bills were in (b)).





(c) (Continued)

8. Unused postage stamps would be included in prepaid expenses or supplies.

9. NSF cheques would be included in Accounts Receivable, assuming the company expects collection.




CONTINUING COOKIE CHRONICLE

Part 1

The weaknesses in internal accounting controls in the system recommended by John are:

(1) The cash could be stolen from John’s vehicle before it is deposited in the bank.

(2) John could potentially steal from the company and then cover the theft because of a lack of segregation of duties between the handling of cash, bank reconciling process and recording of transactions in the accounting records.

(3) The accounting information for the business could be lost or stolen if it is all stored on John’s laptop.

(4) John should not be able to write cheques to himself as this leaves the company vulnerable to theft.

Improvements should include the following:

(1) Cash should be deposited in the bank daily. At a minimum the cash should be locked in a safe until such as time as it can be deposited.

(2) John should be responsible for the accounting function only. Natalie (or some other independent person) should sign all cheques and make all deposits. Cheques should only be signed when there is documentation present to support the payment. All invoices should be stamped “PAID” to avoid duplicate payment.

(3) Bank reconciliations should be prepared by a person independent of the handling and recording of cash. However, this may not be possible in a small organization such as Cookie Creations. At a minimum, Natalie and not John should prepare bank reconciliations monthly.




CONTINUING COOKIE CHRONICLE (Continued)

Part 1 (Continued)

(4) The accounting records should be maintained on site and regular back-ups should be prepared. It would be best if John used a computer at Cookie Creations to prepare the accounting information; however, if he is going to use his laptop, Natalie should ensure that she is provided with a regular back-up of all the accounting records. This ensures that if John should ever lose his laptop or decide to no longer perform Cookie Creation’s accounting, Natalie would still have access to the company’s accounting records.

(5) John should submit a monthly invoice to Natalie for her approval. Natalie should then write and sign the cheque.

Part 2

(a)COOKIE CREATIONSBank Reconciliation

June 30, 2008 Cash balance per bank statement.................................... $3,359Add: Deposit in transit...................................... $110

Bank error Cheque No. 603 ($452 - $425) 27 1373,496

Less: Outstanding cheques ($238 + $247).................... 485Adjusted cash balance per bank......................... $3,011

Cash balance per books.................................................... $3,274Less: Service charge.......................................... $ 13

Error in deposit June 20th ($155 - $125). . 30Telus.......................................................... 85NSF cheque ($100 + $35 service charge) 135 263





CONTINUING COOKIE CHRONICLE (Continued)

Part 2 (Continued)

(b) June 30 Bank Charge Expense............... 13Teaching Revenue...................... 30Telephone Expense.................... 85Accounts Receivable—Ron Black 135

Cash........................................ 263

Check: $3,274 - $263 = $3,011 adjusted cash balance

(c) If a balance sheet were prepared, cash at June 30th, 2008 would be $3,011.




BYP 7-1 FINANCIAL REPORTING AND ANALYSIS

(a) Regarding the company’s system of internal control, the Management’s Responsibilities for Financial Reporting states that “such systems are designed to provide reasonable assurance that the financial information is accurate, relevant and reliable, and that the Company’s assets are appropriately accounted for and adequately safeguarded.

The Auditor’s Report does not comment on the company’s system of internal controls.

(b) According to the Statement of Management’s Responsibility for Financial Reporting, management is responsible for the financial statements. Management has responsibility for preparing the statements and ensuring the company maintains an adequate system of internal controls.

(c) The Company’s external auditors are Ernst & Young LLP.

(d) In 2006, cash decreased by $6,752,000.

(e) (1) $19,266,000(2) 2.95% ($19,266,000 $653,206,000)(3) 5.22% ($19,266,000 $368,842,000)(4) 7.72% ($19,266,000 $249,428,000)




BYP 7-2 INTERPRETING FINANCIAL STATEMENTS

(a) Cash equivalents are highly liquid investments, with maturities of three months or less when purchased, that can be converted into specific amounts of cash. They include money market funds, money market savings certificates, bank certificates of deposit, and treasury bills and notes. Cash equivalents differ from other types of short-term investments in that they are very liquid (that is, easily turned into cash) and have a low risk of declining in value while held.

(b) 2005 2004

Working Capital

Current Ratio

$80,089 - $7,688 = $72,401

$72,804 - $7,271 = $65,533

The company’s current ratio has remained fairly constant over 2005 whereas the industry average has decreased. The company’s current ratio is significantly above the industry average in both 2005 and 2004.

(c) Having cash and cash equivalents available provides a company with flexibility; however, uninvested cash does not earn a very high return. Therefore a company will want to carefully monitor the amount of cash it keeps on hand to provide a balance between flexibility and return.

(d) Restricted cash is cash that is not available for general use because it is restricted for a special purpose.




BYP 7-3 COLLABORATIVE LEARNING ACTIVITY

All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.




BYP 7-4 COMMUNICATION ACTIVITY

Ms. L.S. OsmanTenacity Corporation

Dear Ms. Osman:

During our audit of your financial statements, we reviewed the internal controls over cash. Based on our review we offer the following recommendation.

Your company has grown significantly over the past several years to the point where controls over cash must be implemented. The most significant weakness we identified was the lack of segregation of duties in the accounting department. In the past, operations were small enough that one person could perform the accounting and the owners could review almost all transactions. However, this is no longer the situation and the lack of segregation of duties could have adverse consequences for your business.

For example, because the same person is responsible for ordering parts, taking delivery, authorizing payments and signing cheques it is possible that the clerk could pay himself as a payee. Also, without segregating the signing process from the bank reconciliation process, any misappropriation of funds could proceed undetected.




BYP 7-4 (Continued)

To minimize the risk of misappropriation of cash the following segregation of duties should be implemented:

1. There should be segregation between the individuals who order parts, take delivery of the auto parts, authorize the payments and then sign the cheques for the payments of the auto parts.

2. Different individuals should sign cheques and prepare the monthly bank reconciliation.

3. Monthly bank reconciliations should be performed / reviewed by a person independent of the recording process.

We would be pleased to discuss the weaknesses and our recommended improvements with you, at your convenience.

Yours sincerely,




BYP 7-5 ETHICS CASE

(a) The stakeholders in this situation are the clients of the banks and the bank’s managers, employees, and shareholders.

(b) The amount of revenue depending on order of processing would be:

(1) Largest to smallest:5 bounced cheques x $35 = $175

(2) Smallest to largest:1 bounced cheque x $35 = $35

(3) In order of cheque number:4 bounced cheques x $35 = $140

(c) Whether this is ethical is subject to debate. On the one hand, it can be argued that customers have a responsibility to maintain an adequate balance in their accounts. Some customers are frequently overdrawn; thus only severe penalties will persuade them to maintain an adequate balance. However, it could be argued that charging $35 for something that has a cost to the bank of $1.50 is “gouging”—that is, taking unfair advantage of the customer.

(d) In deciding what approach to take, the bank must consider its relationship with the customer. Clearly, by adopting a “largest to smallest” approach, it is going to anger some customers, who may well decide to leave the bank and go to a more customer-friendly bank. However, it could be argued that some of the customers the bank may lose are customers that are frequently overdrawn and therefore costly to the bank. Also, it can be time-consuming to change banks, and most people don’t have the spare time to change banks unless they really need to.

(e) Answer will vary depending on student’s opinion.




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