Accounting Principles, Third Canadian Edition · 10 2, 3, 4, 5, 10 4. Operate and ... Trenholm, Kinnear Accounting Principles, Third Canadian Edition ... Broadening Your Perspective

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

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

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CHAPTER 7

Internal Control and Cash

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives

Questions

Brief Exercises

Exercises

Problems Set A

Problems Set 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




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 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


Moderate 40-50


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


Moderate 40-50


Moderate 40-50

9B Prepare bank reconciliation and related entries. Moderate 40-50

10B Prepare bank reconciliation and identify internal control weakness.

Moderate 30-40

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 Evaluation

1. Explain the activities that help achieve internal control.

Q7-2

Q7-5

Q7-1

Q7-3

Q7-4

Q7-6

Q7-7

BE7-1

E7-1

P7-1A

P7-2A

P7-3A

P7-1B

P7-2B

P7-3B

2. Apply control activities to cash receipts.

BE7-2 Q7-8

Q7-9

Q7-10

Q7-11

Q7-12

E7-2

P7-1A

P7-3A

P7-1B

P7-2B

P7-3B

BE7-3

E7-3

P7-4A

P7-4B

P7-10A

P7-10B

3. Apply control activities to cash disbursements.

Q7-5

BE7-4

Q7-13

Q7-14

Q7-15

P7-2A

P7-3A

P7-2B

P7-3B

P7-4A

P7-5A

P7-4B

P7-5B

P7-10A

P7-10B

E7-4

4. Operate and account for a petty cash fund.

Q7-16 BE7-5

BE7-6

E7-5

E7-6

P7-4A

P7-5A

P7-4B

P7-5B

5. Describe the control features of a bank account.

Q7-17

BE7-7

6. Prepare a bank reconciliation.

Q7-18

Q7-19

Q7-20

Q7-21

BE7-9

BE7-8

BE7-10

BE7-11

BE7-12

E7-7

E7-8

E7-9

E7-10

E7-11

E7-12

P7-6A

P7-7A

P7-8A

P7-9A

P7-6B

P7-7B

P7-8B

P7-9B

P7-10A

P7-10B

7. Report cash on the balance sheet.

Q7-22

Q7-23

BE7-14

BE7-13

E7-13

P7-11A

P7-11B

Broadening Your Perspective

BYP7-1

BYP7-2

BYP7-3

BYP7-4

Continuing Cookie Chronicle

BYP7-5




ANSWERS TO QUESTIONS

01. 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.




QUESTIONS (Continued)

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; segregation approved invoices before signing of duties




QUESTIONS (Continued) 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.




QUESTIONS (Continued) 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 30th.

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 controls

2. Other controls

3. Performance reviews

4. Segregation of duties

5. Establishment of responsibility

6. Other controls

BRIEF EXERCISE 7-3

Credit Card (Visa)

July 27 Cash ................................................... 96

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

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

Petro Shop Credit Card

July 27 Accounts Receivable ........................ 100

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

Debit Card

July 27 Cash ................................................... 99

Debit Card Expense .......................... 1

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

BRIEF EXERCISE 7-4

1. Documentation procedures

2. Performance reviews

3. Physical controls

4. Establishment of responsibility






BRIEF EXERCISE 7-5

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

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

20 Postage Expense .............................. 52

Freight Out ......................................... 28

Supplies Expense ............................. 12

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

BRIEF EXERCISE 7-6

Nov. 17 Petty cash ($200 - $150) ................... 50

Printing Expense ............................... 34

Supplies Expense ............................. 58

Postage Expense .............................. 19

Delivery Expense .............................. 26

Cash Over and Short ........................ 3

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

BRIEF EXERCISE 7-7

1. T

2. T

3. F

4. T

5. 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 cheque

10. (a) Deposit in transit from the current month

11. (c) Company error in recording cheque made out for $360

as $630

12. (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 charges

2. EFT payment

7. Bank credit memorandum for interest expense

8. Company error in recording a deposit of $1,280 as $1,680

9. 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 7-10

November: Cheques written and recorded in books in Nov. $9,520 Less: Cheques paid by bank in Nov. 8,677 Outstanding cheques at Nov. 30 $ 843 December: Cheques written and recorded in books in Dec. $12,617 Plus: Outstanding cheques at Nov. 30 843 Total cheques that could be paid by bank in Dec. 13,460 Less: Cheques paid by bank in Dec. 10,949 Outstanding cheques at Dec. 31 $ 2,511

BRIEF EXERCISE 7-11

Manuliak Company

Bank Reconciliation

July 31

Cash balance per bank ..................................................... $7,920

Add: Deposits in transit .................................................. 2,152

10,072

Less: Outstanding cheques ............................................ 1,144

Adjusted cash balance per bank ...................................... $8,928

Cash balance per books ................................................... $9,100

Add: Interest earned ........................................................ 25

9,125

Less: NSF cheque ............................................................ 162

Service charge ........................................................ 00 35

Adjusted cash balance per books ................................... $8,928




BRIEF EXERCISE 7-12

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

Cash ............................................... 162

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

Cash ............................................... 35

31 Cash ................................................... 25

Interest 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 Improvements

1. 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 are

not 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.

Segregation

of 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) .................... 2,520

Debit Card Expense

($0.75 x 40) .................................. 30

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

(b) Nov. 15 Cash ($1,300 - $39) .................... 1,261

Credit Card Expense

($1,300 x 3%) ............................... 39

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

Dec. 10 No entry

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

Sales ....................................... 1,450

May 1 Cash ............................................ 1,450

Accounts 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 cheques

Two 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 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. 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 ..................... 29

Miscellaneous Expense ($14 + $12 + $5) 31


Cash ($125 - $4) ............................ 121

Cash Over and Short .................... 2

(c)

Mar. 25 Merchandise Inventory ..................... 29

Miscellaneous Expense ($14 + $12 + $5) 31


Cash ($75 - $4) .............................. 71

Cash Over and Short .................... 2

Petty 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 ................. 46

Drawings ............................................ 50

Postage Expense .............................. 10


Cash ($200 - $78) .......................... 122

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

(c)

May 31 Newspaper Advertising Expense .... 62

Coffee Supplies Expense ................. 46

Drawings ............................................ 50

Postage Expense .............................. 10


Cash ($200 - $83) .......................... 117

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




EXERCISE 7-7

(a)

VERWEY COMPANY

Bank Reconciliation

November 30

Cash balance per bank statement ................................... $8,509


10,084

Less: Outstanding cheques ............................................ 0 2,449


Cash balance per books ..................................... $7,005

Add: Correction of error in cheque No. 373 .... $ 90

EFT deposits ............................................. 883 973

7,978

Less: Bank service charge ................................ $ 24

NSF cheque .............................................. 319 343


(b) Nov. 30 Cash ............................................ 973

Office Supplies ...................... 90

Accounts Receivable ............ 883

30 Bank Charges Expense ............. 24

Account 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 $ 262

No. 261 867

No. 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 Reconciliation

May 31


Add: Deposits in transit .................................................. , 1,353

9,017

Less: Outstanding cheques ............................................ 1,779



Add: Interest earned ....................................................... 32

Error correction: Cheque # 260 ............................ 450

EFT Deposit ............................................................ 849

7,696

Less: Bank service charge ................................ 54

Error correction: May 20 deposit ($954 - $945) 9

NSF cheque ............................................................ 395

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

(b) May. 31 Cash ($32 + $450 + $849)............ 1,331

Interest Revenue..................... 32

Accounts Payable ................... 450

Accounts Receivable (EFT) ... 849

31 Bank Charges Expense .............. 54

Accounts Receivable (error) ...... 9

Accounts Receivable (NSF) ....... 395

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




EXERCISE 7-11

(a) Deposits in transit: July 31

Deposits per books in July .................... $15,750

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

Deposits in transit, June 30 ........ (1,050)

July receipts deposited in July .............. 14,770

Deposits in transit, July 31 .................... $ 980

Deposits in transit: August 31

Deposits per books in August ............... $22,900

Less: Deposits per bank in August ....... $23,500

Deposits in transit, July 31 ........... (980)

August receipts deposited in August ... 22,520

Deposits in transit, August 31 ............... $ 380

(b) Outstanding cheques: July 31

Cheques per books in July .................... $17,200

Add: Outstanding cheques, June 30 .... 970

Total that could be cleared in July ........ 18,170

Less: Cheques clearing bank in July .... (16,660)

Outstanding cheques, July 31 ............... $ 1,510

Outstanding cheques: August 31

Cheques per books in August ............... $21,700

Add: Outstanding cheques, July 31 ...... 1,510

Total that could be cleared in August ... 23,210

Less: Cheques clearing bank in August (22,250)

Outstanding cheques, August 31 .......... $ 960




EXERCISE 7-12

(a) September 1 adjusted balance................................. $17,350

Add: Cash receipts (deposits) ................................ 64,329

Less: Cash payments (cheques) ............................. (63,746)

September 30 unadjusted balance per company ... $17,933

(b) September 1 balance per bank ................................ $20,860

Add: Deposits cleared .............................................. 62,789

EFT Collections ............................................... 1,825

Interest earned ................................................ 45

85,519

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

NSF cheque: J. Hower ...................... 410

Bank service charge ......................... 30 66,227

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

(c) Deposits in transit: September 30

Deposits per books in September................. $64,329

Less: Deposits per bank in September ........ $62,789

Deposits in transit: August 31 ............ (3,370)

September receipts deposited in September 59,419

Deposits in transit: September 30................. $ 4,910

(d) Outstanding cheques: September 30

Cheques recorded per books in September ........ $63,746

Add: Outstanding cheques, August 31 ................ 6,880

Total cheques that could be cleared in Sept. ...... 70,626

Less: Cheques clearing bank in September ........ (65,787)

Outstanding cheques: September 30 ................... $ 4,839




EXERCISE 7-12 (continued)

(e) Unadjusted bank balance, September 30 ............... $19,292

Add: Deposits in transit ........................................... 4,910

Less: Outstanding cheques ..................................... (4,839)

Adjusted bank balance, September 30 ................... $19,363

(f) Unadjusted cash balance, September 30 ............... $17,933

Add: EFT Collections ............................................... 1,825

Interest earned ................................................ 45

Less: NSF cheque: J. Hower .................................... (410)

Bank service charge ....................................... (30)

Adjusted cash balance, September 30 .................... $19,363

EXERCISE 7-13

(a) Cash and cash equivalents

1. Currency and coin ............................................... $ 87

2. Guaranteed investment certificate .................... 10,000

3. April cheques ....................................................... 300

5. Royal Bank chequing account ........................... 2,575

6. Royal Bank savings account .............................. 4,000

9. Cash register floats ............................................. 250

10. Over-the-counter cash receipts for April 30:

Currency and coin ........................................... 550

Cheques from customers .............................. 185

Debit card slips ............................................... 685

Bank 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

Establishment

of responsibility

A

p

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 Improvements

1. 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 ................................... 150 Cash ........................................ 150 8 Cash ............................................ 15,548 Debit Card Expense (52 X $0.50) 26 Credit Card Expense ($6,400 x 2.75%) ..................... 176 Sales ....................................... 15,750 8 Freight Out .................................. 42 Postage Expense ....................... 28 Advertising Expense.................. 57 Miscellaneous Expense ............ 10 Cash Over and Short ................. 4 Cash ($150 - $9) ..................... 141 15 Cash ............................................ 17,941 Debit Card Expense (78 X $0.50) 39 Credit Card Expense ($8,000 x 2.75%) ..................... 220 Sales ....................................... 18,200 15 Petty Cash ($250 - $150) ............ 100 Drawings ..................................... 50 Office Supplies Expense ........... 77 Coffee Supplies Expense .......... 20 Cash Over And Short ................. 1 Cash ($250 - $4) ..................... 246




PROBLEM 7-4A (Continued)

(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 ................................... 200 Cash ........................................ 200 15 Freight Out .................................. 84 Postage Expense ....................... 42 Office Supplies Expense ........... 47 Miscellaneous Expense ............ 12 Cash Over and Short ................. 2 Cash ($200 - $13) ................... 187 31 Freight Out .................................. 86 Charitable Contributions Expense 40 Postage Expense ....................... 28 Miscellaneous Expense ............ 44 Cash Over and Short ............. 3 Cash ($200 - $5) ..................... 195 Feb. 1 Petty Cash ................................... 100 Cash ........................................ 100 15 Freight Out .................................. 36 Entertainment Expense ............. 53 Postage Expense ....................... 33 Merchandise Inventory .............. 60 Miscellaneous Expense ............ 54 Cash Over and Short ................. 6 Cash ($300 - $58) ................... 242 28 Postage Expense ....................... 95 Travel Expense ........................... 46 Freight Out .................................. 44 Office Supplies Expense ........... 57 Cash Over and Short ............. 5 Cash ($250 - $63) ................... 187 Petty Cash ($300 - $250) ....... 50




PROBLEM 7-5A (Continued) (b)

Petty Cash

Date Explanation Ref. Debit Credit Balance

Jan. 2 200 200

Feb. 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 Reconciliation

May 31, 2008


Add: Deposit in transit ...................................... $1,141

Bank error, May 12 deposit ($638 - $386) 252 1,393

13,082

Less: Outstanding cheques

[($233 + $732 + $813 + $401)] ................................ 2,179


Cash balance per books ................................................... $ 9,448

Add: Error in recording cheque No. 1151

($855 - $585) ............................................. $ 270

EFT collections ......................................... 2,382

Interest revenue ....................................... 24 2,676

12,124

Less: NSF cheque and service charge ............. $820

Error in recording cheque No. 1192

($1,387 - $1,738) ....................................... 351

Bank service charge ................................ 50 1,221






(b) May 31 Cash ............................................ 270

Accounts Payable—L. Kingston 270

31 Cash ............................................ 2,382

Accounts Receivable ............ 2,382

31 Cash ............................................ 24

Interest Revenue ................... 24

31 Accounts Receivable—P. Dell .. 820

Cash ........................................ 820

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

Cash ........................................ 351


Cash ........................................ 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) .................... $10,216 Add: Cash receipts ................................................ 16,830 Less: Cash payments ............................................ 14,816 Unadjusted cash balance per books, December 31, 2008 .............................................. $12,230

(b)

HUANG COMPANY

Bank Reconciliation

December 31, 2008

Cash balance per bank statement ................................ $19,155

Add: Deposits in transit ............................................... 1,198

20,353


No. 3470 ...................................... $1,100

No. 3474 ...................................... 1,050

No. 3478 ...................................... 538

No. 3481 ...................................... 807

No. 3484 ...................................... 1,274

No. 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

15,375

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


($541 - $441) ................................. 100

Bank service charges .................... 45

Error in Dec. 21st deposit

($2,954 - $2,945) ........................... 9 1,181

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





(c) Dec. 31 Cash ............................................ 3,145



31 Accounts Receivable

—Hilo Holdings .......................... 1,027

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

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

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


Cash ........................................ 45

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

Cash ........................................ 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) $ 7,776 Add: Cash receipts ..................................................... 6,825 Less: Cash payments .................................................. 13,526 Unadjusted cash balance, May 31 ............................. $ 1,075 (b)

RIVER ADVENTURES COMPANY Bank Reconciliation

May 31, 2008 Cash balance per bank statement ................................... $4,308 Add: Deposits in transit ............................... $1,286 Error in cheque 564 ($603 - $306) ....... 297 1,583 5,891 Less: Outstanding cheques No. 533 .............................................. $279 No. 555 .............................................. 79 No. 558 .............................................. 943 No. 560 .............................................. 890 No. 566 .............................................. 950 3,141 Adjusted cash balance per bank ...................................... $2,750 Cash balance per books ................................................... $1,075 Add: 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 3,215 Less: NSF cheque .......................................... $ 440

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




PROBLEM 7-8A (Continued) (b) May 31 Cash ........................................... 1,650 Accounts Receivable ............ 1,615 Interest Revenue ................... 35 31 Cash ........................................... 90 Accounts Receivable ............ 90 31 Cash ............................................ 400 Accounts Payable ................. 400 31 Accounts Receivable—R. King . 440 Cash ........................................ 440 31 Bank Charges Expense ............. 25 Cash ........................................ 25

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




PROBLEM 7-9A

(a) Balance per Bank Statement Balance September 30, 2008 .................................... $ 6,469 Add: Deposits ............................................ $11,579 Interest .............................................. 27 11,606 18,075 Less: Cheques cleared .............................. $7,253 NSF cheques .................................... 790 Service charge ................................. 43 8,086 Balance, October 31, 2008 ........................................ $9,989 Balance Per Books Reconciled Balance, (per Sept. 30 bank reconciliation) ($6,469 + $1,084 - $628 - $553 - $159) ...................... $ 6,213 Add: Cash receipts ................................................... 11,736 Less: Cash payments ................................................ (10,922) Unadjusted cash balance, October 31, 2008 .......... $ 7,027




PROBLEM 7-9A (Continued) (b)

HAWORTH’S MARINE CENTRE Bank Reconciliation

October 31, 2008 Balance per bank statement ............................................. $ 9,989 Add: Deposits in transit .................................................. 1,941 ................................................................................. 11,930 Less: Outstanding cheques No. 391 .................................................. $ 159 No. 408 .................................................. 3,266 No. 411 .................................................. 1,984 5,409 Adjusted cash balance per bank ...................................... $6,521 Balance per books ............................................................. $7,027 Add: Interest ..................................................... $ 27 Error in Oct. 12th deposit ($3,818 - $3,118) 700 727 7,754 Less: NSF cheque .............................................. $790 Error in cheque No. 409 ($1,848 - $1,448) 400

Bank service charges .............................. 43 1,233 Adjusted cash balance ...................................................... $6,521 (c) Oct. 31 Cash ........................................... 727 Accounts Receivable ............ 700 Interest Revenue ................... 27 31 Accounts Receivable—Y. Fujii . 790 Office Equipment ...................... 400 Bank Charges Expense ............. 43 Cash ........................................ 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 COMPANY

Bank Reconciliation March 31, 2008

Balance per bank statement ............................................. $7,350 Add: Deposit in transit .................................................... 750 ................................................................. 8,100 Less: Outstanding cheques .............................. $1,650 Bank error deposit Careless Company . 1,100 2,750 Adjusted cash balance per bank ...................................... $5,350 Balance per books ............................................................. $3,125 Add: Error in cheque No. 173 ($294 - $249) .... $ 45 Interest earned ......................................... 15 Proceeds of EFT ....................................... 2,645 2,705 5,830 Less: Service charge .......................................... $ 40 Hydro ......................................................... 120 Telephone ................................................. 85 NSF cheque ($220 + $15 service charge) 235 480 Adjusted cash balance per books ................................... $5,350 (b) Mar. 31 Cash ............................................ 2,705 Accounts Payable ................. 45 Interest Revenue ................... 15 Accounts Receivable ............ 2,645 31 Bank Charges Expense ............. 40 Hydro Expense ........................... 120 Telephone Expense ................... 85 Accounts 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 ....................................................... $ 1,600 2. Petty cash fund .................................................... 43 3. Bank chequing account ...................................... 7,460 4. BMO money market fund .................................... 5,000 6. US Dollar Account ............................................... 2,241 7. American Express credit card slips* [$500 - ($500 x 4%)] ......................................... 480 Total .................................................................. $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).




PROBLEM 7-11A (Continued) (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

Establishment of

responsibility

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.


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.






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 Improvements 1. 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.


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.


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 ................................... 200

Cash ........................................ 200

8 Cash ............................................ 30,997 Debit Card Expense (116 X $0.75) 87 Credit Card Expense ($12,800 X 3.25%) .................. 416 Sales ....................................... 31,500

8 Freight Out .................................. 44

Office Supplies Expense ........... 34

Advertising Expense.................. 50

Drawings ..................................... 20

Cash Over and Short ................. 4

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

15 Cash ............................................ 35,760 Debit Card Expense (160 X $0.75) 120 Credit Card Expense ($16,000 X 3.25%) .................. 520 Sales ....................................... 36,400

15 Postage Expense ....................... 53

Advertising Expense.................. 39

Cleaning Supplies Expense ...... 48


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

Cash ($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 ................................... 250

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

15 Freight Out .................................. 94

Postage Expense ....................... 42

Entertainment Expense ............. 47

Miscellaneous Expense ............ 51


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

31 Freight Out .................................. 82

Charitable Contributions Expense 50

Postage Expense ....................... 68

Miscellaneous Expense ............ 42

Cash over and Short ............. 2

Cash ($250 - $10) ................... 240

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

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

15 Freight Out .................................. 90


Postage Expense ....................... 63

Supplies Expense ...................... 59


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

31 Postage Expense ....................... 122


Freight Out .................................. 73


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

Cash ($300 - $65) ................... 235





(b)

Petty Cash

Date Explanation Ref. Debit Credit Balance

July 1 250 250

Aug. 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 Reconciliation

October 31, 2008


Add: Deposit in transit ...................................... $963

Bank error—Lasik cheque ...................... 600 1,563

12,536


($330 + $466 + $587 + $293) ................................ 1,676


Cash balance per books ................................................... $ 9,693

Add: Collection of EFT ....................................... $2,055

Interest revenue ....................................... 39 2,094

11,787

Less: NSF cheque ............................................... $715

Error in Oct. 12 deposit ($856 - $836) ..... 20


($685 - $568) ........................................... 117

Bank service charge 35

Cheque printing charge ........................... 40 927






(b) May 31 Cash ............................................. 2,094

Accounts Receivable ............. 2,055

Interest Revenue .................... 39

31 Accounts Receivable—W. Hoad 715

Sales ............................................. 20

Accounts Payable—Helms & Co. 117

Bank 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) $12,258 Add: Cash receipts ................................................... 10,673 Less: Cash payments ................................................ (11,821) Unadjusted cash balance, March 31 ....................... $11,110

(b)

YAP CO.

Bank Reconciliation

March 31, 2008



13,525


No. 3470 ................................................ $1,535

No. 3479 ................................................ 159

No. 3481 ................................................ 862

No. 3482 ................................................ 1,126

Bank error—cheque #3474 ....................... 200

3,882






(b) (Continued)


Add: Correction to cheque #3473

($1,641 – $1,461) ................................................... 180

Interest revenue ..................................................... 23

11,313

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

Loan payment—interest .......................... 62

NSF cheque Mr. Jordan ........................... 550

Service charge .......................................... 49

Correction in recording cash receipts

March 20 ($1,823 - $1,832) ..................... 9 1,670


(c) Mar. 31 Cash ............................................ 203

Accounts Payable ................. 180


31 Note Payable ............................... 1,000

Interest Expense ........................ 62

Accounts Receivable ................. 550

Bank Charges Expense ............. 49

Sales ............................................ 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) ....................................................... $ 8,496

Add: Cash receipts per journal ............................ 15,690

Less: Cash payments per journal ......................... (14,026)

Unadjusted cash balance, November 30 ............. $10,160

(b)

MALONEY COMPANY

Bank Reconciliation

November 30, 2008

Cash balance per bank statement .................................. $14,527

Add: Deposits in transit ................................................. 1,338

15,865


No. 2451 ........................................... $1,260

No. 2472 ........................................... 504

No. 2478 ........................................... 538

No. 2482 ........................................... 612

No. 2484 ........................................... 830

No. 2485 ........................................... 975

No. 2487 ........................................... 1,200 5,919

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

Cash balance per books .................................................. $10,160

Add: EFT collected by Bank ........................ $2,479

Error in Nov. 20 deposit ($2,966 - $2,699) 267 2,746

12,906

Less: NSF cheque – Pendray Holdings ....... $ 260


($2,830 - $2,380) ................................ 450

Loan payment ...................................... 2,250 2,960

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





(c) Nov. 30 Cash ............................................ 2,746



Accounts Receivable ............ 267

30 Accounts Receivable ................. 260

Accounts Payable ...................... 450

Note Payable ............................... 2,000

Interest 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 ............................................... $ 4,261 Add: Deposits ............................................. $10,528 Interest ............................................... 12 10,540 14,801 Less: Cheques cleared ............................... $5,608 NSF cheques ..................................... 280 Service charge ................................... 28 5,916 Unadjusted bank balance, May 31, 2008 ............. $8,885 Balance Per Books Reconciled balance, (per April 30 bank reconciliation) ($4,261 – $217 – $326 – $105) ................................. $ 3,613 Add: Cash receipts ................................................... 11,172 Less: Cash payments ................................................ 10,776 Unadjusted cash balance, May 31, 2008 ................. $ 4,009




PROBLEM 7-9B (Continued) (b)

KURJI’S APPLIANCES Bank Reconciliation

May 31, 2008 Unadjusted bank balance ................................................. $8,885 Add: Deposits in transit .................................................. 1,004 9,889 Less: Outstanding cheques No. 290 .................................................. $ 105 No. 307 .................................................. 3,266 No. 310 .................................................. 2,400 5,771 Adjusted bank balance ...................................................... $4,118 Unadjusted cash balance ................................................. $4,009 Add: Interest ..................................................... $ 12 Error in cheque # 306 ($150 - $105)........ 45 Error in May 5th deposit ($2,620 – $2,260) 360 417 4,426 Less: NSF cheque .............................................. $280

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




PROBLEM 7-9B (Continued) (c) May 31 Cash ........................................... 417 Interest Revenue ................... 12 Telephone Expense............... 45 Accounts Receivable ............ 360 31 Accounts Receivable—M. Rafique 280 Bank 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 FOODS

Bank Reconciliation

October 31, 2008

(a) Cash balance per bank statement $19,460


No. Amount

762 $514

783 160

784 267

862 171

863 325

864 173 1,610

Adjusted cash balance per bank $17,850

Cash balance per books $19,641

Add: Credit memo (collection of EFT) 750

Adjusted balance per books (before theft) 20,391

Less: Amount of theft 2,541

Adjusted 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 ........... 25,000 US bank account ............................................ 48,000 10. Special bank account–customer cash deposits 9,250 Total................................................................. $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)).




PROBLEM 7-11B (Continued) (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 CREATIONS Bank Reconciliation

June 30, 2008 Cash balance per bank statement ................................... $3,359 Add: Deposit in transit ..................................... $110 Bank error Cheque No. 603 ($452 - $425) 27 137 3,496 Less: Outstanding cheques ($238 + $247) .................... 485 Adjusted cash balance per bank ......................... $3,011 Cash balance per books ................................................... $3,274 Less: Service charge .......................................... $ 13 Error in deposit June 20th ($155 - $125) . 30 Telus .......................................................... 85 NSF cheque ($100 + $35 service charge) 135 263 Adjusted cash balance per books ................................... $3,011




CONTINUING COOKIE CHRONICLE (Continued) Part 2 (Continued) (b) June 30 Bank Charge Expense ............... 13 Teaching Revenue ..................... 30 Telephone Expense ................... 85 Accounts 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

1:10.4$7,688

$80,089

$72,804 - $7,271 =

$65,533

1:10.0$7,271

$72,804

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. Osman

Tenacity 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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