internal control and cash assignment … chapter 8 internal control and cash assignment...
TRANSCRIPT
8-1
CHAPTER 8 Internal Control and Cash
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief Exercises
Exercises
Problems Set A
Problems Set B
1. Describe internal control.
1 1
2. Explain the principles of internal control and be able to identify weaknesses and suggest improvements in their application.
2, 3, 4, 5, 6, 7, 8
2 1, 2, 3, 4 1, 2, 3, 8 1, 2, 3, 8
3. Explain and critique the application of internal control principles to cash receipts.
9, 10, 11, 12 3 1, 2 1, 2, 8 1, 8
4. Explain and critique the application of internal control principles to cash disbursements.
13, 14, 15 4 3, 4 2, 8 2, 8
5. Demonstrate the operation of a petty cash fund.
16 5 5, 6 3 3
6. Describe the control features of a bank account.
17, 18 6
7. Prepare a bank reconciliation.
19, 20, 21 7, 8, 9, 10, 11
6, 7, 8, 9, 10, 11
4, 5, 6, 7, 8 4, 5, 6, 7, 8
8. Explain the reporting of cash. 22 12 12 9 9
8-2
ASSIGNMENT CHARACTERISTICS TABLE
Problem Number
Description
Difficulty Level
Time Allotted (min.)
1A Identify internal control weaknesses over cash receipts.
Moderate 25-35
2A Identify internal control weaknesses over cash receipts and cash disbursements.
Moderate 25-35
3A Journalize and post petty cash fund transactions and identify internal control features.
Simple 30-40
4A Prepare bank reconciliation and related entries.
Moderate 25-35
5A Prepare bank reconciliation and related entries .
Moderate 40-50
6A Prepare bank reconciliation and related entries.
Moderate 25-35
7A Prepare bank reconciliation and related entries.
Moderate 40-50
8A Prepare bank reconciliation, and identify internal control deficiencies.
Complex 50-60
9A Calculate cash balance.
Simple 15-25
1B Identify internal control weaknesses over cash receipts.
Moderate 25-35
2B Identify internal control weaknesses over cash disbursements.
Moderate 25-35
3B Journalize and post petty cash fund transactions and identify internal control features.
Simple 30-40
4B Prepare bank reconciliation and related entries.
Moderate 25-35
5B Prepare bank reconciliation and related entries .
Moderate 40-50
6A Prepare bank reconciliation and related entries.
Moderate 25-35
7B Prepare bank reconciliation and related entries.
Moderate 40-50
8B Prepare bank reconciliation, and identify internal control features.
Complex 50-60
9B Calculate cash balance. Moderate 15-25
8-3
BLOOM’S TAXONOMY TABLE Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation 1. Describe internal control.
Q8-1 BE8-1
2. Identify the principles of internal control and be able to
identify weaknesses and suggest improvements in their application.
Q8-5 BE8-2
Q8-2 Q8-3 Q8-4 Q8-6 Q8-7 E8-1
Q8-8 P8-3A P8-3B P8-8B
E8-2 E8-3 P8-1A P8-2A P8-8A P8-1B P8-2B
E8-4
3. Explain and critique the application of internal control principles to cash receipts.
BE8-3
Q8-11 Q8-12 E8-1
P8-8B Q8-9 Q8-10 E8-2 P8-1A P8-2A P8-8A P8-1B
4. Explain and critique the application of internal control principles to cash disbursements.
BE8-4 Q8-13 Q8-14 Q8-15
P8-8B
E8-3 P8-2A P8-8A P8-2B
E8-4
5. Demonstrate the operation of a petty cash fund.
Q8-16
BE8-5 E8-5 E8-6 P8-3A P8-3B
6. Describe the control features of a bank account.
Q8-17 Q8-18 BE8-6
7. Prepare a bank reconciliation.
Q8-20 BE8-7
Q8-19 Q8-21 BE8-8
BE8-9 BE8-10 BE8-11 E8-6 E8-7 E8-8 E8-9 E8-10 E8-11 P8-4A
P8-5A P8-6A P8-7A P8-4B P8-5B P8-6B P8-7B P8-8B
P8-8A
8. Explain the reporting of cash.
Q8-22 BE8-12
E8-12 P8-9A P8-9B
Broadening Your Perspective BYP8-1 BYP8-2
BYP8-3 BYP8-4 BYP8-5
BYP8-6 BYP8-7
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ANSWERS TO QUESTIONS
01. Disagree. Internal control is also concerned with (1) optimizing the use of resources to reduce inefficiencies and waste, (2) preventing and detecting errors and irregularities, and (3) safeguarding of company assets from theft, robbery, and unauthorized use.
02. The principles of internal control are: (1) authorization of transactions
and activities, (2) segregation of duties, (3) documentation procedures, (4) safeguard of assets and records, (5) independent verification, and (6) other controls.
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, and locked warehouses. These
controls help safeguard company assets and records. Mechanical and electronic controls include cash registers and computerized accounting equipment that contribute to the accuracy and reliability of the accounting records. These controls also include electronic burglary systems and sensors that help to safeguard assets.
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Questions Chapter 8 (Continued) 06. (a) Independent verification involves the review, comparison, and
reconciliation of data prepared by one or several employees.
(b) Maximum benefit is obtained from independent verification when: (1) The verification is made periodically or on a surprise basis. (2) The verification is done by an employee who is independent of
the personnel responsible for the information. (3) Discrepancies and exceptions are reported to a management
level that can take appropriate corrective action. 07. (a) The concept of reasonable assurance means that the costs of
establishing control procedures should not exceed their expected benefit. Ordinarily, a system of internal control provides reasonable but not absolute, assurance. Absolute assurance would be too costly.
(b) 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 should be reported at $18,850 ($6,000 + $850 + $12,000). The
other items are receivables.
09. This is a violation of the internal control principle of authorization. Establishing responsibility is key to effective control. In this case, each sales clerk should have a separate cash register, cash drawer, or password with pre- and post-shift counts.
10. Daily cash counts pertain primarily to the principles of segregation of
duties and independent verification. It also involves the establishment of responsibility for performing the counts, and for any discrepancies.
11. 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.
8-6
Questions Chapter 8 (Continued) 12. 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.
13. Payment by cheque 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 principle are: Procedures Principles
(1) Controller signs cheques Authorization (2) Cheques imprinted Documentation; safeguarding assets and records (3) Comparing cheques with Independent verification; approved invoices before signing segregation of duties
15. Physical, mechanical, and electronic 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 is used to imprint amounts on cheques. Other controls apply when the approved invoice is stamped PAID after payment.
8-7
Questions Chapter 8 (Continued) 16. The activities in a petty cash system and the related principles are:
(a) (1) Establishing fund
Authorization, to establish responsibility for the custody of the fund
(2) Making payments from fund
Documentation procedures, because the custodian must use prenumbered petty cash receipts
(3) Replenishing fund Independent verification, because the re-quest for replenishment must be approved before the cheque is written
(b) Journal entries are required for a petty cash fund when it is
established and replenished. Entries are also required when the size of the fund is increased or decreased.
17. Electronic funds transfer is a cash disbursement system that uses
wire, telephone, or computers to make payments and transfer cash from one location to another.
18. Yes, a bank contributes significantly to internal control over cash
because it: (1) safeguards cash on deposit, (2) minimizes the amount of cash that must be kept on hand, and (3) provides a double record of all bank transactions–independent verification.
8-8
Questions Chapter 8 (Continued) 19. The lack of agreement between the balances may be due to either:
(1) Time lags: Deposits in transit or outstanding cheques—for
example, a cheque written in July does not clear the bank until August.
Unrecorded bank memoranda: NSF cheques—for example, a
deposited cheque does not clear the originating bank account. Unrecorded bank transactions—for example, service charges which the bank deducts from the account.
(2) Errors: Bank or book error—for example, a cheque for $110 is
recorded by the depositor at $101. 20. The four steps are: (1) determine deposits in transit, (2) determine
outstanding cheques, (3) discover any errors made, and (4) trace bank memoranda.
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. (a) Yes, I agree that cash equivalents are similar to 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 asset section of the balance sheet.
(b) Cash restricted for a special purpose should be reported separately as a current or noncurrent asset, depending on when the cash is expected to be used.
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SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 8-1 The purposes of internal control are to: 1. Optimize the use of resources, so as to reduce inefficiencies and
waste. An application for Liberty Parking is to have an electronic, timed ticket dispenser 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.
2. Prevent and detect errors (unintentional mistakes) and irregularities
(intentional mistakes and misrepresentations) in the accounting process. An application for Liberty Parking is the use of the ticket dispenser, mentioned in (1) above. An electronic ticket dispenser reduces the risk of errors (recording the wrong time) or irregularities (letting friends in).
3. Safeguard a company's assets from employee theft, robbery, and un-
authorized use. An application for Liberty Parking is the use of a cash register to safeguard assets.
4. Maintain reliable control systems to enhance the accuracy and
reliability of a company's accounting records. An application for Liberty Parking is the preparation of a bank reconciliation.
BRIEF EXERCISE 8-2 1. Segregation of duties 2. Independent verification 3. Documentation procedures
8-10
BRIEF EXERCISE 8-3 1. Safeguard assets and records 2. Other controls 3. Independent verification 4. Segregation of duties 5. Authorization 6. Documentation procedures BRIEF EXERCISE 8-4 1. Documentation procedures 2. Independent verification 3. Safeguard assets 4. Authorization 5. Segregation of duties 6. Documentation procedures BRIEF EXERCISE 8-5 March 20 Postage Expense ......................................................... 52
Freight Out.................................................................... 26 Travel Expense............................................................. 10 Cash Over and Short.................................................... 1 Cash....................................................................... 89
To record replenishment of petty cash fund.
8-11
BRIEF EXERCISE 8-6 (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 record of a depositor's bank
transactions. It also is used in making periodic independent bank reconciliations.
BRIEF EXERCISE 8-7 (1) Outstanding cheques from the current month—deducted from cash
balance per bank. (2) Outstanding cheques from the prior month that are still outstanding—
deducted from cash balance per bank. (3) Outstanding cheques from the prior month that have cleared the
bank—not shown on the bank reconciliation. (4) Bank service charge (debit memo)—deducted from cash balance per
books. (5) Collection of note by bank (credit memo)—added to cash balance per
books. (6) Deposit in transit—added to cash balance per bank. BRIEF EXERCISE 8-8 (a) The reconciling items per the books, items (4) and (5) above, will
require adjustment on the books of the depositor. (b) The other reconciling items, outstanding cheques and the deposit in
transit, do not require adjustment by the bank because they result from timing differences only. When these items reach the bank and are processed, the bank balance will automatically adjust itself.
8-12
BRIEF EXERCISE 8-9 November: Cheques recorded by books $9,250 Cheques recorded by bank 8,578 Outstanding cheques $ 672 December: Cheques recorded by books $12,716 Cheques recorded by bank 10,217* Outstanding cheques $ 2,499 $10,889 – $ 672 November cheques that cleared in December = $10,217 BRIEF EXERCISE 8-10 Cash balance per bank......................................................................... $7,920 Add: Deposits in transit ..................................................................... 1,700 9,620 Less: Outstanding cheques................................................................ 762 Adjusted cash balance per bank......................................................... $8,858 Note that the bank service charge has already been deducted from the cash balance per the bank. BRIEF EXERCISE 8-11 Cash balance per books ...................................................................... $9,100 Add: Interest earned........................................................................... 25 9,125 Less: Charge for printing company cheques.................................... 00 35 Adjusted cash balance per books....................................................... $9,090 Note that the outstanding cheques have already been deducted from the cash balance per the books.
8-13
BRIEF EXERCISE 8-12 Current Assets: Dupré Company should report Cash in Bank and Payroll Bank Account as 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.
8-14
SOLUTIONS TO EXERCISES EXERCISE 8-1 1. Authorization. Responsibility is established. The counter clerk is
responsible for handling cash. Other employees are responsible for making the pizzas.
2. Segregation of duties. Employees who make the pizzas do not handle
cash. 3. Documentation procedures. The counter clerk uses your order invoice
(ticket) in registering the sale on the cash register. The cash register produces a tape of all sales.
4. Safeguard assets and records. A cash register is used to record the
sale. 5. Independent verification. The counter clerk, in handling the pizza,
compares the size of the pizza with the size indicated on the order.
8-15
EXERCISE 8-2
(a)
(b) Procedure
Weakness
Principle Violated
Recommended Change
1.
Cashiers are not bonded.
Other controls
All cashiers should be bonded.
2. Inability to establish responsibility for cash on a specific clerk.
Authorization There should be separate cash drawers and register codes for each clerk.
3.
Cash is not adequately protected from theft.
Safeguard assets and records
Cash should be stored in a safe until it is deposited in the bank.
4. Cash is not independently counted.
Independent verification
A supervisor should count the cash.
5. The accountant should not handle cash.
Segregation of duties
The cashier's department should make the deposits.
8-16
EXERCISE 8-3
(a)
(b) Procedure
Weakness
Principle Violated
Recommended Change
1.
Cheques are not stored in a secure area.
Safeguard assets and records
Cheques should be stored in a safe or locked drawer.
2. The approval and payment of bills is done by the same individual.
Segregation of duties
The store manager should approve invoices for payment and someone else should sign and issue cheques. Alternatively some one else could approve the invoices for payment.
3. Cheques are presigned.
Authorization The store manager (as identified above) should not be both signing cheques and approving invoices. Regardless, under no circumstances should the store manager presign cheques in advance. Someone else should be authorized to sign cheques in the absence of the approved signatory.
4. Cheques are not prenumbered.
Documentation procedures
Cheques should be prenumbered and subsequently accounted for.
8-17
EXERCISE 8-3 (Continued)
(a)
(b) Procedure
Weakness
Principle
Recommended Change
5.
Filing does not prevent a bill from being paid more than once.
Safeguard assets and records; documentation procedures
Bills should be stamped PAID after payment.
6. The bank reconciliation is not independently prepared.
Independent verification
Someone else should prepare the bank reconciliation.
8-18
EXERCISE 8-4 (a) Weaknesses (b) Suggested Improvements 1. Cheques are not prenumbered Use prenumbered cheques. 2. The purchasing agent signs
cheques Only the controller's department
personnel should sign cheques. 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 disburse-ments 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.
8-19
EXERCISE 8-4 (Continued) (b)
INTEROFFICE MEMORANDUM
TO: CONTROLLER, ABEKAH COMPANY FROM: ACCOUNTING STUDENT SUBJECT: INTERNAL CONTROL OVER CASH DISBURSEMENTS DATE:
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. 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 should reconcile the bank statement. If you have any questions about implementing these suggestions,
please contact me.
8-20
EXERCISE 8-5 Mar. 1 Petty Cash..................................................................... 100
Cash....................................................................... 100
15 Postage Expense ......................................................... 38 Merchandise Inventory ................................................ 19 Miscellaneous Expense............................................... 17 Travel Expense............................................................. 24 Cash....................................................................... 96 Cash Over and Short............................................ 2 20 Petty Cash..................................................................... 50 Cash....................................................................... 50
EXERCISE 8-6 (a)
Item Bank Side Book Side 1. Outstanding deposit Addition 2. Credit memo Addition 3. Outstanding cheques Subtraction 4. Debit memo Subtraction 5. NSF cheque Subtraction 6. Credit memo Addition
(b) Items that require a journal entry: 2. Credit memo, for collection of note and interest 4. Debit memo for bank service charges 5. NSF cheque to reinstate accounts receivable 6. Credit memo for interest on monthly balance (c) May 31 Transportation Charges Expense ....................... 15
Postage Expense.................................................. 8 Printing Expense .................................................. 27 Entertainment Expense........................................ 24 Cash Over and Short* .......................................... 8 Cash .............................................................. 82
* $100 – ($15 + $8 + $27 + $24) - $18 balance on hand = $8
8-21
EXERCISE 8-7 (a) BANSAL COMPANY Bank Reconciliation January 31 Cash balance per bank statement ......................................... $3,660.20 Add: Deposits in transit ....................................................... 00,490.00 4,150.20 Less: Outstanding cheques.................................................. 00,930.00
Adjusted cash balance per bank ........................................... $3,220.20
Cash balance per books......................................................... $3,875.20 Less: NSF cheque.................................................... $630.00
Bank service charge ...................................... 0 25.00 00,655.00 Adjusted cash balance per books......................................... $3,220.20
(b) Jan. 31 Accounts Receivable .............................................. 630 Cash ..................................................................... 630
31 Bank Charges Expense........................................... 25 Cash ..................................................................... 25 Check: $3,875.20 - $630 - $25 = $3,220.20 adjusted cash balance EXERCISE 8-8 The outstanding cheques are as follows:
No.
Amount
255 260 264
Total
$0,820 0,0925 560 $2,305
8-22
EXERCISE 8-9 (a) ALAA COMPANY
Bank Reconciliation July 31
Cash balance per bank statement ............................................. $7,263 Add: Deposits in transit ........................................................... 01,500
8,763 Less: Outstanding cheques...................................................... 0,0 772 Adjusted cash balance per bank ............................................... $7,991
Cash balance per books............................................................. $7,190 Add: Collection of note receivable ($800 plus accrued
interest $36, less collection fee $20) .............................. 0 816 8,006
Less: Bank service charge........................................................ 0,00 15 Adjusted cash balance per books............................................. $7,991
(b) July 31 Cash......................................................................... 816
Bank Charges Expense.......................................... 20 Notes Receivable ............................................ 800 Interest Revenue............................................. 36
31 Bank Charges Expense.......................................... 15 Cash................................................................. 15
Check: $7,190 + $816 - $15 = $7,991 adjusted cash balance
8-23
EXERCISE 8-10 (a) September 1 balance ....................................................... $17,150 Add: Cash receipts (deposits) ......................................... 64,000 Less: Cash payments (cheques) ...................................... 63,746 September 30 balance ....................................................... $17,404 (b) SHARAF COMPANY
Bank Reconciliation September 30
Cash balance per bank statement .................................... $16,422 Add: Deposits in transit .................................................. 0 4,800 21,222 Less: Outstanding cheques............................................. 002,383 Adjusted cash balance per bank ...................................... $18,839
Cash balance per books.................................................... $17,404 Add: Collection of note receivable ($1,800 + $30) ........ $1,830
Interest earned ........................................................ , 0045 001,875 19,279
Less: NSF cheque............................................................. $410 Safety deposit box rent........................................... 00,0300 440
Adjusted cash balance per books.................................... $18,839 (c) Sept. 30 Cash.................................................................... 1,830
Notes Receivable ....................................... 1,800 Interest Revenue........................................ 30
30 Cash.................................................................... 45 Interest Revenue........................................ 45
30 Bank Charges Expense..................................... 30 Cash............................................................ 30
30 Accounts Receivable—J. Hower...................... 410 Cash............................................................ 410 Check: $17,404 + $1,830 + $45 - $30 - $410 = $18,839
8-24
EXERCISE 8-11 (a) Deposits in transit:
Deposits per books in July................................... $15,750 Less: Deposits per bank in July ......................... $15,600
Deposits in transit, June 30 ...................... 0 (950) July receipts deposited in July ............................ 14,650 Deposits in transit, July 31................................... $ 1,100
(b) Outstanding cheques:
Cheques per books in July.................................. $17,200 Less: Cheques clearing bank in July ................ $16,400
Outstanding cheques, June 30 ................ 0 (920) July cheques cleared in July............................... 0 15,480 Outstanding cheques, July 31 ............................ $ 1,720
(c) Deposits in transit: Deposits per books in September....................... $26,700 Add: Deposits in transit, September 30............ 0 2,600
Total deposits to be accounted for..................... 29,300 Less: Deposits per books................................... 025,400 Deposits in transit, August 31............................. $ 3,900
(d) Outstanding cheques:
Cheques clearing bank in September ................ $25,000 Add: Outstanding cheques, September 30...... 0 2,100 Total cheques to be accounted for..................... 27,100 Less: Cash disbursements per books .............. 023,700 Outstanding cheques, August 31 ....................... $ 3,400
8-25
EXERCISE 8-12 (a) Cash and cash equivalents
1. Currency and coin $ 57 2. Guaranteed investment certificate 10,000 3. April cheques 300 5. Royal Bank chequing account 2,500 6. Royal Bank savings account 4,000 Total $16,857
(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)
8-26
SOLUTIONS TO PROBLEMS
PROBLEM 8-1A
(a) Principles Application to Cash Receipts
Authorization Only cashiers are authorized to sell tickets. Only the manager and cash-ier 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.
Safeguard assets and records A safe is used for the storage of
cash and a machine is used to issue tickets.
Independent verification Cash counts are made by the man-
ager at the end of each cashier's shift. Daily comparisons are made by the company controller.
Other controls Cashiers are bonded.
8-27
PROBLEM 8-1A (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).
8-28
PROBLEM 8-2A
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. Authorization
• 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.
8-29
PROBLEM 8-2A (Continued)
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.
• Did not receive a receipt 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. Safeguard assets and records and authorization
• 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.
8-30
PROBLEM 8-3A
(a) July 1 Petty Cash.................................................... 200.00
Cash...................................................... 200.00
15 Freight Out................................................... 94.00 Postage Expense ........................................ 42.40 Entertainment Expense .............................. 46.60 Miscellaneous Expense.............................. 10.70 Cash Over and Short .................................. 2.60 Cash...................................................... 196.30
31 Freight Out................................................... 82.10 Charitable Contributions Expense ............ 30.00 Postage Expense ........................................ 47.80 Miscellaneous Expense.............................. 32.10 Cash...................................................... 192.00
Aug. 15 Freight Out................................................... 74.40
Entertainment Expense .............................. 43.00 Postage Expense ........................................ 33.00 Supplies Expense ....................................... 38.00 Cash Over and Short........................... 0.40 Cash...................................................... 188.00
16 Petty Cash.................................................... 100.00 Cash...................................................... 100.00
31 Postage Expense ........................................ 145.00 Entertainment Expense .............................. 90.60 Freight Out................................................... 45.40 Cash Over and Short .................................. 2.00 Cash...................................................... 283.00
8-31
PROBLEM 8-3A (Continued) (b)
Petty Cash Date
Explanation
Ref.
Debit
Credit
Balance
July 1 Aug. 16
200 100
200 300
(c) The internal control features of a petty cash fund include:
(1) A custodian is responsible for the fund.
(2) A petty cash receipt, signed by the custodian and the individual receiving payment, is required for each payment from the fund.
(3) The controller's office examines all payments, and stamps
supporting documents to indicate they were paid, when the fund is replenished.
(4) Surprise counts can be made at any time, to determine whether
the fund is intact.
8-32
PROBLEM 8-4A
(a) LISIK COMPANY Bank Reconciliation May 31, 2003
Cash balance per bank statement ..................... $7,804.60 Add: Deposit in transit...................................... $936.15
Bank error—Lisik cheque......................... 600.00 1,536.15 9,340.75
Less: Outstanding cheques .............................. 1,276.25 Adjusted cash balance per bank ....................... $8,064.50 Cash balance per books ..................................... $6,781.50 Add: Collection of note receivable ($2,000 + $80 - $20).............................. 02,060.00
8,841.50 Less: NSF cheque .............................................. $700.00
Error in May 12 deposit ($846.15 - $836.15) 10.00 Error in recording cheque No. 1181 ($685 - $658) ........................................ 27.00 Cheque printing charge........................... 0040.00 00,777.00
Adjusted cash balance per books ..................... $8,064.50
8-33
PROBLEM 8-4A (Continued) (b) May 31 Cash............................................................ 2,060
Bank Charges Expense............................. 20 Notes Receivable ............................... 2,000 Interest Revenue ................................ 80
31 Accounts Receivable—W. Hoad............... 700 Cash .................................................... 700
31 Sales ........................................................... 10 Cash .................................................... 10
31 Accounts Payable—M. Helms................... 27 Cash .................................................... 27
31 Bank Charges Expense............................. 40 Cash .................................................... 40
Check: $6,781.50 + $2,060 - $700 - $10 - $27 - $40 = $8,064.50
adjusted cash balance
8-34
PROBLEM 8-5A
(a) Book balance, October 31 (from Oct. 31 bank reconciliation) ........................................................... $ 9,596.30 Add: Cash receipts per journal ....................................... 15,831.70 Less: Cash payments per journal .................................... 14,694.10 Unadjusted cash balance, November 30......................... $10,733.90
(b) MCISAAC COMPANY Bank Reconciliation November 30, 2003
Balance per bank statement ................................. $17,614.60 Add: Deposits in transit ...................................... 0 1,225.00
18,839.60 Less: Outstanding cheques
No. 2451.................................................. $1,260.40 No. 2472.................................................. 426.80 No. 2478.................................................. 538.20 No. 2482.................................................. 612.00 No. 2484.................................................. 829.50 No. 2485.................................................. 974.80 No. 2487.................................................. 398.00 No. 2488.................................................. 1,200.00 0 6,239.70 Adjusted cash balance per bank ................. $12,599.90
Balance per books ................................................ $10,733.90 Add: Note collected by bank ($2,000 + $120 - $15) 0 2,105.00
12,838.90 Less: Cheque printing charge ............................. $ 50.00
Error in recording cheque No. 2479 ($1,750 - $1,570)..................................... 180.00 Error in 11-21 deposit ($2,954 - $2,945).... 9.00 00,0239.00
Adjusted cash balance per books........................ $12,599.90
8-35
PROBLEM 8-5A (Continued) (c) Nov. 30 Cash.................................................................... 2,105
Bank Charges Expense..................................... 15 Notes Receivable ....................................... 2,000 Interest Revenue........................................ 120
30 Bank Charges Expense..................................... 50 Cash............................................................ 50
30 Accounts Payable.............................................. 180 Cash............................................................ 180
30 Accounts Receivable ........................................ 9 Cash............................................................ 9
Check: $10,733.90 + $2,105 - $50 - $180 - $9 = $12,599.90 adjusted cash balance
8-36
PROBLEM 8-6A
(a) VIDEOSOFT COMPANY Bank Reconciliation July 31, 2003
Cash balance per bank statement .......................... $24,930 Add: Deposits in transit (1) ................................... 8,000
32,930
Less: Outstanding cheques (2).............................. $8,610 Bank error in cheque to employee ($255 - $155) .............................................. 100 8,710
Adjusted cash balance per bank ........................... $24,220 Cash balance per books ......................................... $22,700 Add: Collection of note receivable by bank ($1,400 + $70) ........................................... $1,470
Book error in cheque to creditor ($320 - $230) ..............................................00,0 090 1,560
24,260 Less: Cheque printing charge................................ 000,0 40 Adjusted cash balance per books ......................... $24,220
(1) July receipts per books.................................... $82,000
July deposits per bank..................................... $79,000 Less: Deposits in transit, June 30.................. 5,000 74,000 Deposits in transit, July 31 .............................. $ 8,000
(2) Disbursements per books in July ................... $76,900
Less: Book error in cheque to creditor ......... 90 Total disbursements to be accounted for ..... 76,810 Cheques clearing bank in July ........................ $74,700 Add: Bank error .............................................. 100 Less: June 30 outstanding cheques.............. 6,600 68,200 Outstanding cheques, July 31......................... $ 8,610
8-38
PROBLEM 8-6A (Continued) (b) July 31 Cash............................................................ 1,470
Notes Receivable................................. 1,400 Interest Receivable.............................. 70
31 Cash............................................................ 90 Accounts Payable................................ 90 31 Bank Charges Expense............................. 40 Cash...................................................... 40
Check: $22,700 + $1,470 + $90 - $40 = $24,220 adjusted cash balance
8-39
PROBLEM 8-7A
(a) General Ledger Cash Balance:
Book balance, February 28 (Adjusted cash balance per bank reconciliation) $13,073 Add: Cash receipts .................................................. 4,813 Less: Cash payments............................................... 5,798 Unadjusted cash balance, March 31 ....................... $12,088
(b) Deposits in transit: March 30, $1,025 (c) Outstanding cheques:
#3470 $ 720 (from February bank rec.) #3475 600 (dated March 29) $1,320
(d) YAP CO. Bank Reconciliation March 31, 2003 Balance per bank statement ................................... $11,775 Add: Deposits in transit ........................................ 1,025 12,800 Less: Outstanding cheques No. 3470..................................................... $720 No. 3475..................................................... 600 1,320 Adjusted cash balance per bank ............................ $11,480 Balance per books ................................................... $12,088 Less: Service charge .............................................. $ 49 NSF chequeYJordan ................................... 550 Correction in recording cash receipts, March 4 ($1,221 - $1,212)............ 9 608 Adjusted cash balance ............................................ $11,480
8-40
PROBLEM 8-7A (Continued) (e) Mar. 31 Sales........................................................ 9 Cash.................................................. 9 31 Bank Charges Expense ......................... 49 Cash.................................................. 49 31 Accounts Receivable ............................. 550
Cash.................................................. 550
Check: $12,088 - $9 - $49 - $550 = $11,480 adjusted cash balance
8-41
PROBLEM 8-8A
AURA WHOLE FOODS Bank Reconciliation October 31, 2003
(a) Balance per bank statement $22,075.51
Less: Outstanding cheques No.
Amount
No.
Amount
062 183 284
$326.75 0150.00 0253.25
862 863 864
$190.71 0226.80 0165.28
1,312.79 Adjusted balance per bank $20,762.72
Cash balance per books $21,892.72 Add: Credit memo (collection of note receivable) 300.00 Adjusted balance per books (before theft) 22,192.72 Less: Amount of theft 001,430.00 Adjusted balance per books $20,762.72
(b) The cashier attempted to cover the theft of $1,430.00 by: 1. Not listing as outstanding three cheques totalling $730.00 (No. 62,
$326.75; No. 183, $150.00; and No. 284, $253.25). 2. Under-adding the outstanding cheques listed by $100. (The
correct total is $582.79.) 3. Subtracting the $300 credit from the bank balance instead of
adding it to the book balance, thereby concealing $600 of the theft.
8-42
PROBLEM 8-8A (Continued) (c) Combining the duties of cashier and bookkeeper violate several
internal control principles:
• Independent verification has been violated because the cashier/bookkeeper prepared the bank reconciliation.
• Segregation of duties has been violated because the cashier had
access to the accounting records and also prepared the bank reconciliation.
8-43
PROBLEM 8-9A
(a) Cash balance:
1. Cash on hand........................................................ $ 5,000 2. Petty cash fund ..................................................... 500 3. Commercial bank savings account..................... 100,000 Commercial bank chequing account .................. 25,000 US bank account................................................... 45,000 10. Special bank account–customer cash deposits 7,500 Total ................................................................ $183,000
(b) If the company combined its cash and cash equivalents, the money market fund of $32,000 would also be included.
(c) 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. Temporary investments (money market fund, shares, and bonds)
would be listed separately in the current asset section (unless combined as the money market fund was in (b)).
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, If collection is doubtful they would also be recorded as a Bad Debt Expense or be written off.
8-44
PROBLEM 8-1B
(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.
(c) The policies that should be changed are: (1) Members should make cheques payable to the church. (2) A petty cash fund should be established for the financial secretary
to be used for weekly cash expenditures and requests for replenishment of the fund should be sent to the chairperson of the finance committee for approval.
(3) The financial secretary should be bonded. (4) The financial secretary should be required to take an annual
vacation.
8-45
PROBLEM 8-2B
Principles
Application to Cash Disbursements
Authorization 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 dis-bursement transactions.
Documentation procedures Cheques are prenumbered. Paid invoices have payment details noted on them.
Safeguard assets and records 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.
Independent verification 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.
8-46
PROBLEM 8-3B (a) Jan. 1 Petty Cash................................................ 250.00 Cash.................................................. 250.00 15 Freight Out............................................... 94.00 Postage Expense .................................... 42.40 Office Supplies Expense ........................ 46.60 Miscellaneous Expense.......................... 11.90 Cash Over and Short .............................. 0.10 Cash.................................................. 195.00 31 Freight Out............................................... 82.10 Charitable Contributions Expense ........ 40.00 Postage Expense .................................... 27.80 Miscellaneous Expense.......................... 42.10 Cash.................................................. 192.00 Feb. 15 Freight Out............................................... 74.60 Entertainment Expense .......................... 43.00 Postage Expense .................................... 33.00 Merchandise Inventory........................... 60.00 Miscellaneous Expense.......................... 37.00 Cash Over and Short....................... 0.60 Cash.................................................. 247.00 16 Petty Cash................................................ 150.00 Cash.................................................. 150.00 28 Postage Expense .................................... 140.00 Travel Expense........................................ 95.60 Freight Out............................................... 46.40 Office Supplies........................................ 55.00 Cash.................................................. 337.00
8-47
PROBLEM 8-3B (Continued) (b)
Petty Cash Date Explanation Ref. Debit Credit Balance Jan. 1 Feb.16
250 150
250 400
(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 cheques are 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.
8-48
PROBLEM 8-4B (a) AGRICULTURAL GENETICS COMPANY Bank Reconciliation May 31, 2003 Cash balance per bank statement ..................... $8,161.50 Add: Deposit in transit ..................................... 936.00 9,097.50 Less: Outstanding cheques.............................. $276.00 Bank error, May 12 deposit ($836 - $638) 198.00 474.00 Adjusted cash balance per bank ....................... $8,623.50 Cash balance per books..................................... $7,393.50 Add: Collection of note receivable ($2,000 + $801 – $20) ............................ 2,060.00 9,453.50 Less: NSF cheque.............................................. $700.00 Error in recording cheque No. 1181 ($585 - $505) ......................................... 80.00 Bank service charge................................ 50.00 830.00 Adjusted cash balance per books..................... $8,623.50
1 $2,000 x 8% x 6/12 mos. = $80 interest
8-49
PROBLEM 8-4B (Continued)
(b) May 31 Cash ................................................................ 2,060 Bank Charges Expense................................. 20 Notes Receivable ................................... 2,000 Interest Revenue .................................... 80 31 Accounts Receivable—P. Dell ...................... 700 Cash ........................................................ 700 31 Accounts Payable—L. Kingston................... 80 Cash ........................................................ 80 31 Bank Charges Expense................................. 50 Cash ........................................................ 50
Check: $7,393.50 + $2,060 - $700 - $80 - $50 = $8,623.50 adjusted cash balance
8-50
PROBLEM 8-5B
(a) Cash balance per books, November 30, 2003
(from Nov. 30 bank reconciliation) ................................. $10,596.30 Add: Cash receipts.......................................................... 16,822.10 Less: Cash payments....................................................... 14,384.10 Unadjusted cash balance per books, December 31, 2003 .......................................................... $13,034.30
(b) HILO COMPANY
Bank Reconciliation December 31, 2003
Cash balance per bank statement ........................ $18,632.10 Add: Deposits in transit............................... 1,190.40
19,822.50 Less: Outstanding cheques
No. 3470 .......................................... $0,720.10 No. 3474 .......................................... 1,050.00 No. 3478 .......................................... 538.20 No. 3481 .......................................... 807.40 No. 3484 .......................................... 832.00 No. 3486 .......................................... 1,389.50 0 5,337.20
Adjusted cash balance per bank ................. $14,485.30
Cash balance per books ............................... $13,034.30 Add: Note collected by bank ($2,000 + $160 - $15)...................... 0 2,145.00
15,179.30 Less: NSF cheque ......................................... $550.00
Error in recording cheque No. 3485 ($540.80 - $450.80) ......................... 90.00 Bank service charges.......................... 45.00 Error in 12-21 deposit ($2,954 - $2,945) 009.00 000,694.00
Adjusted cash balance per books ............... $14,485.30
8-51
PROBLEM 8-5B (Continued) (c) Dec. 31 Cash.......................................................... 2,145
Bank Charges Expense........................... 15 Notes Receivable ............................. 2,000 Interest Receivable .......................... 160 31 Accounts Receivable – A. Shoaib .......... 550 Cash .................................................. 550 31 Accounts Payable.................................... 90 Cash .................................................. 90
31 Accounts Receivable............................... 9 Cash .................................................. 9 31 Bank Charges Expense........................... 45 Cash .................................................. 45
Check: $13,034.30 + $2,145 - $550 - $90 - $9 - $45 = $14,485.30 adjusted cash balance
8-52
PROBLEM 8-6B (a) Cash balance per books, August 1, 2003............................... $16,900 Add: Cash receipts................................................................. 77,000 Less: Cash payments.............................................................. 73,570 Unadjusted cash balance per books, August 31, 2003......... $20,330 (b) BETTERDORF COMPANY Bank Reconciliation August 31, 2003 Cash balance per bank statement ........................ $24,850 Add: Deposits in transit (1)................................. $9,000 Bank error ($572 - $275)............................. 297 9,297 34,147 Less: Outstanding cheques (2)............................ 9,067 Adjusted cash balance per bank .......................... $25,080 Cash balance per books........................................ $20,330 Add: Collection of note receivable by bank ($5,000 + $90) ......................................... $5,090 Interest earned............................................ 45 5,135 25,465 Less: Safety deposit box rent .............................. $ 25 Book error ($400 - $40)............................... 360 385 Adjusted cash balance per books........................ $25,080
8-53
PROBLEM 8-6B (Continued) (1) August receipts per books .................. $77,000 August deposits per bank ................... $72,000 Less: Deposits in transit, July 31 ...... 4,000 68,000 Deposits in transit, August 31............. $ 9,000 (2) Disbursements per books in August.. $73,570 Add: Book error................................... 360 Total disbursements to be accounted for 73,930 Cheques clearing bank in August ...... $69,660 Less: Bank error.................................. $ 297 July 31 outstanding cheques... 4,500 4,797 64,863 Outstanding cheques, August 31 ....... $ 9,067 (c) Aug. 31 Cash................................................................ 5,090 Notes Receivable................................... 5,000 Interest Receivable................................ 90 31 Cash................................................................ 45 Interest Revenue.................................... 45 31 Bank Charges Expense ................................ 25 Cash........................................................ 25 31 Accounts Payable ......................................... 360 Cash........................................................ 360
Check: $20,330 + $5,090 + $45 - $25 - $360 = $25,080 adjusted cash balance
8-54
PROBLEM 8-7B
(a) Book balance, May 1 (per April 30 bank reconciliation).... $ 6,964.83
Add: Cash receipts .............................................................. 6,715.00 Less: Cash payments........................................................... 13,223.46 Unadjusted cash balance, May 31....................................... $ 456.37
(b) EXPLOITS RIVER ADVENTURES Bank Reconciliation May 31, 2003 Balance per bank statement .............................. $3,746.97 Add: Deposits in transit ................................... 1,086.00 4,832.97 Less: Outstanding cheques No. 533.................................................. $ 89.78 No. 555.................................................. 78.82 No. 558.................................................. 943.00 No. 560.................................................. 890.00 No. 566.................................................. 750.00 2,751.60 Adjusted cash balance per bank ....................... $2,081.37 Balance per books ............................................. $ 456.37 Add: Proceeds of note collected ($1,500 + $150) 1,650.00 2,106.37 Less: Service charge ........................................ 25.00 Adjusted cash balance ...................................... $2,081.37 May 31 Cash .................................................... 1,650 Note Receivable.......................... 1,500 Interest Revenue......................... 150 31 Bank Charges Expense...................... 25 Cash............................................. 25
Check: $456.37 + $1,650 - $25 = $2,081.37 adjusted cash balance
8-55
PROBLEM 8-8B
(a) CAREFREE COMPANY Bank Reconciliation March 31, 2003 Balance per bank statement ............................... $5,630 Add: Deposit in transit ...................................... 750 6,380 Less: Outstanding cheques............................... $1,650 Bank error deposit Careless Company .. 1,100 2,750 Adjusted cash balance per bank ........................ $3,630 Balance per books ............................................... $1,405 Add: Error in cheque No. 173 ($294 - $249)..... $ 45 Proceeds of note collected...................... 2,650 2,695 4,100 Less: Service charge .......................................... $ 25 Hydro ......................................................... 120 Telephone.................................................. 85 NSF cheque ($220 + $20 service charge) 240 470 Adjusted cash balance per books...................... $3,630 (b) March 31 Cash .................................................. 45 Accounts Payable................... 45 31 Cash .................................................. 2,650 Note Receivable ...................... 2,500 Interest Revenue..................... 150 31 Bank Charges Expense ................... 25 Hydro Expense................................. 120 Telephone Expense ......................... 85 Accounts Receivable ($220 + $20) . 240 Cash......................................... 470
Check: $1,405 + $45 + $2,650 - $470 = $3,630 adjusted cash balance
8-56
PROBLEM 8-8B (Continued) (c) Internal control features added by the bank reconciliation process: 1. Safeguards assets: Safeguards cash 2. Documentation: Creates a double record of all bank transactions
3. Independent verification: Allows for a check on accounting records
8-57
PROBLEM 8-9B
(a) Cash and Cash Equivalents balance:
1. Cash on hand .......................................................... $ 1,600 2. Petty cash fund ....................................................... 43 3. Bank chequing account ......................................... 4,900 4. BMO money market fund........................................ 5,000 6. Debit card slips....................................................... 890 Total.................................................................... $12,433
(b) 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 an accounts payable (to petty cash) of $157. Only $43 is actually cash at this point in time. Once the petty cash fund is reimbursed, $200 cash will be available once again.
4. The 6-month term deposit should be recorded as a temporary
invesment, 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).
7. Diner’s Club (nonbank) credit card receipts are an accounts
receivable (current asset) until the receipts are paid by Diner’s Club.
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.
8-58
BYP 8-1 FINANCIAL REPORTING AND ANAYLSIS
(a) The Company maintains systems of internal control which have been
designed to provide reasonable assurance that accounting records are reliable and assets are safeguarded (from Management’s Responsibility for Financial Reporting page 13).
(b) The audit committee is referred to in the section regarding
Management’s Responsibility for Financial Reporting. The Board of Directors oversees management’s responsibility for financial reporting primarily through its Audit Committee. The majority of its members are outside directors (i.e., not officers of the company), and the independent auditors have access to them.
(c) The Balance Sheet discloses the total amount of cash and cash
equivalents. The summary of significant accounting polices describes what is included in cash and cash equivalents and how some of the items are recorded. The short-term investments are recorded at cost and represent highly liquid instruments with a maturity of three months or less at the time of purchase.
(d) The summary of significant accounting polices states they are highly
liquid. (e) They increased by $624,000 during the 2000 fiscal year. This was an
increase of approximately 769% over the beginning balance. (f) 1. $1,466,000
2. 8% ($1,466,000 ÷ $18,565,000) 3. 27% ($1,466,000 ÷ $5,416,000) 4. 23% ($1,466,000 ÷ $6,405,000)
8-59
BYP 8-2 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 temporary 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) Restricted cash is presented as a current asset which indicates it will
be used in the next year. (c) Corel (in thousands) Microsoft (in millions)
Current Ratio
1:91.2$55,943
$162,605=
1:11.3
$9,755$30,308
= (d) Having cash and cash equivalents available provides a company with
flexibility, However, uninvested cash does not earn a very high return. Microsoft’s investors are accustomed to high returns on their investment. Thus, Microsoft’s large amount of liquid assets may eventually create a drag on its ability to meet investor expectations.
8-60
BYP 8-3 INTERPRETING FINANCIAL STATEMENTS
Feature How it strengthens internal control 1. Written policies and procedures Establishes authority and
responsibility 2. Organizational structure that
segregates duties Segregation of duties provides control
3. Comprehensive program of periodic audits by the internal auditor
Provides independent verification that other controls are working
4. Policies and guidelines requiring employees to maintain the highest ethical standards
Provides ‘other controls’ in that ethical behaviour, if adhered, to will eliminate fraud and other illegal acts
5. Establishment and operation of an Audit Committee composed entirely of outside directors
Provides independent verification that other controls are working
8-61
BYP8-4 ACCOUNTING ON THE WEB
Due to the frequency of change with regard to information available on the world wide web, the Accounting on the Web cases are updated as required, Their suggested solutions are also updated whenever necessary, and can be found on-line in the Instructor Resources section of our home page [www.wiley.com/canada/weygandt2].
8-62
BYP8-5 COLLABORATIVE LEARNING ACTIVITY
No solution provided, because of the personal nature of the question. The answers will be based upon each group’s experiences.
8-63
BYP 8-6 COMMUNICATION ACTIVITY
Mr. L. S. Osman Avalon Company Dear Mr. Osman: During our audit of your financial statements, we reviewed the internal controls over cash receipts. The weaknesses we discovered and our suggested improvements are listed below. Weaknesses Suggested Improvement 1. A list of cheques received is
not prepared by the person who opens the mail.
This list should be prepared so that it can later be compared with the daily cash summary. While this procedure does not assure that all cheques will be listed, it does allow the company to verify that all cheques on the list were deposited.
2. Mail is opened by only one
person. When this occurs, there is no
assurance that all incoming cheques are forwarded to the cashier’s department.
3. The cashier is allowed to open
the mail. Under this arrangement, it is pos-
sible for the cashier to open the mail, prepare the cash summary and make the bank deposit. This involves no segregation of duties as the cashier controls the cash from the time it is received until it is deposited in the bank.
4. The accounts receivable clerk
is allowed to open the mail. Again, there is poor segregation
of duties. In this case, the clerk could write off a customer’s account as uncollectible and then misappropriate the collection when it’s received.
8-64
BYP 8-6 (Continued) Weaknesses Suggested Improvement 5. Mail receipts are deposited
weekly. This makes the receipts
vulnerable to robbery and to misappropriation. The receipts should be deposited intact daily.
We would be pleased to discuss the weaknesses and our recommended improvements with you, at your convenience. Yours sincerely, Rawls, Keoto, and Landry Chartered Accountants
8-65
BYP 8-7 ETHICS CASE (a) The amount of revenue depending on order of processing would be: (1) Largest to smallest: 5 bounced cheques X $25 = $125 (2) Smallest to largest: 1 bounced cheque X $25 = $25 (3) In order of cheque number: 4 bounced cheques X $25 = $100 (b) 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 $25 for something that has a cost to the bank of $1.50 is “gouging”—that is, taking unfair advantage of the customer.
(c) 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.
(d) Answer will vary depending on student’s opinion.