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Solutions Manual

to accompany

Financial
Accounting:
Recording, Analysis
and Decision Making
Fifth Edition

Prepared by

Chrisann Palm

John Wiley & Sons Australia, Ltd 2016


Chapter 7: Reporting and analysing cash and receivables

CHAPTER 7 – REPORTING AND ANALYSING CASH AND RECEIVABLES

ASSIGNMENT CLASSIFICATION TABLE

Brief
Learning Objectives Exercises Exercises Problems
1. Identify the impact of business 1 1 1A, 1B
transactions on cash.

2. Describe electronic banking processes. 2, 9 11

3. Explain the application of internal 3 2, 3 2A, 4A,


control principles for handling cash. 2B, 4B

4. Prepare a bank reconciliation. 4 4 3A, 4A, 5A,


3B, 4B, 5B

5. Discuss the basic principles of cash 6 4, 11


management.

6. Business decision making: assessing 5, 12


the adequacy of cash

7. Identify the different types of 6


receivables.

8. Valuating receivables. 7, 8 7, 10 6A, 7A, 8A,


9A, 6B, 7B,
8B, 9B

9. Describe how receivables are reported 8, 9 8 8A,8B


in financial statements. 9A,9B

10. Analysing and managing receivables. 8 9,13 10A, 10B

11. Explain the operation of a petty cash 5 6


fund.

© John Wiley and Sons Australia Ltd, 2016 7.1


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

CHAPTER 7 – REPORTING AND ANALYSING CASH AND RECEIVABLES

ANSWERS TO QUESTIONS

1. Examples of transactions that involve cash at the start-up phase of the business
include: cash injected into the business by Edward; if Edward had borrowed funds
from his parents or banks, the cash injected through these borrowings; cash used to
buy smartphone accessories inventory; cash used to pay for renovating/setting up
the shop on the campus etc.

2. Electronic banking is an electronic payment system that enables customers of a


financial institution to conduct financial transactions on a website operated by the
bank. To access online banking facility, Edward would need to register with his bank
for the service, and set up some password for verification. Once registered, Edward
can transact banking tasks through online banking, including transferring funds
between the customer’s linked accounts and paying third parties, including bill
payments through BPAY.

3. Disagree. Internal control for handling cash is also concerned with the effectiveness
and efficiency of operations, and the safeguarding of cash asset from employee theft,
and unauthorised use.

4. Cash should be reported at $38,850 ($15,000 + $1,850 + $22,000).

5. Cash registers are readily visible to the customer. Thus, they prevent the sales clerk
from ringing up a lower amount and pocketing (stealing) the difference. In addition,
the customer receives an itemised receipt, and the cash register provides a record,
on tape or electronically, for further verification.

6. The basic principles of cash management are:


(1) increase the speed of collection of receivables
(2) keep inventory levels low
(3) don’t make payments earlier than necessary
(4) plan timing of major expenditures
(5) invest idle cash.

7. (a) A dishonoured cheque occurs when the bank on which the cheque is drawn
refuses to pay the cheque, because it has been cancelled or because the
balance of the account on which it is drawn is less than the amount of the
cheque.
(b) It reduced the balance of the bank account reported on the bank statement.
The dishonoured cheque should be recorded in the Cash at Bank account. It
does not appear in the bank reconciliation statement.
(c) A dishonoured cheque should be entered into the cash receipts as a
reduction in cash receipts. The adjusting entry in the company’s ledger
accounts is a debit to Accounts Receivable and a credit to Cash.

© John Wiley and Sons Australia Ltd, 2016 7.2


Chapter 7: Reporting and analysing cash and receivables

8. The activities in a petty cash system and the related principles are:
(a) (1) Establishing the fund.
 Establishment of responsibility for custody of the fund.
(2) Making payment from the fund.
 Documentation procedures, such as the use of a pre-numbered
petty cash receipt and evidence of authorisation of payments.
(3) Replenishing the fund.
 Independent internal verification of schedule of petty cash receipts
because the request for replenishment must be approved before
the cheque is signed.
(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.

9. Accounts receivables are amounts owed by customers on account. They result from
the sale of goods and services in the normal course of business operations (i.e. in
trade). Notes receivable represent claims that are evidenced by formal instruments
of credit.

10. Soo Eng should realise that the decrease in the net amount of accounts receivable
occurs when estimated uncollectables are recognised in an adjusting entry. The
write-off of an uncollectable account reduces both accounts receivable and the
allowance for doubtful accounts by the same amount. Thus, the net amount of
accounts receivable does not change.

11. (a) $350,000 of the Trade Debtors should be classified as current receivables;
and $150,000 as non-current receivables.
(b) The 90-day promissory note is a current receivable.

12. A receivable turnover of 8 times means accounts receivable is turned into cash 8
times in a year, or it takes on average 46 days (365/8) to collect the receivable. If the
business has a credit term of 30 days, this suggests that collection policy is not very
effective. The business should promptly follow up overdue accounts.

© John Wiley and Sons Australia Ltd, 2016 7.3


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 7.1

(a) Cash flows – monthly loan payment; car loan


payment
(b) Assets – inventory; GST receivable; motor vehicle
(c) Liabilities – bank loan; car loan

BRIEF EXERCISE 7.2

Costs associated with accepting EFTPOS payments include the initial setup costs linking the
cashier and the payment terminal; training costs to staff for using the payment system; and
the on-going merchandise fees charged by the bank etc. The benefits of accepting EFTPOS
payments include the possibility of increased business from customers who don’t carry
enough cash and prefer to pay by their bank cards; reduced staffing costs for handling cash
hence reduced chance for cash misappropriation.

BRIEF EXERCISE 7.3


Franklin Office Supplies Ltd

There was weakness in the internal controls in this situation. Responsibility was not clearly
established and there was no segregation of duties as Aaron could both order and approve
his own purchase, leading to possible exploitation of the system

BRIEF EXERCISE 7.4

Ridley Pty Ltd


Cash balance per bank $8,420
Add: Outstanding deposits 2,700
11,120
Less: Unpresented cheques 862
Balance of Cash at Bank account $10,258

Note: The Bank Service Charge of $20 will have already been included in the cash balance
per bank.

BRIEF EXERCISE 7.5

Gimbal

Mar. 20 Postage Expense 32


Supplies 26
Travel Expense 22
Cash 80

© John Wiley and Sons Australia Ltd, 2016 7.4


Chapter 7: Reporting and analysing cash and receivables

BRIEF EXERCISE 7.6

(a) Other receivables.


(b) Notes receivable.
(c) Accounts receivable.

BRIEF EXERCISE 7.7

Massey Ltd

(a) Bad Debts Expense [($500,000 x 1%) - $3,000] 2,000


Allowance for Doubtful Debts 2,000

(b) Bad Debts Expense [($500,000 x 1%) + $800] 5,800


Allowance for Doubtful Debts 5,800

© John Wiley and Sons Australia Ltd, 2016 7.5


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BRIEF EXERCISE 7.8

Date Account Titles and Explanation Debit Credit


Nov 28 Allowance for doubtful debts 5,000
GST Collected 500
Accounts Receivable (subsidiary ledger 5,500
also credited)
Being the write-off of bad debt of M Waters due
to bankruptcy as per mangers decision)

Brian Bazaar

To: Manager

From: Student

Date: DD/MM/YY

RE: GST and Bad Debts

The issue has arisen where a sale in September on credit was to a debtor who has now
bankrupt and we will not be able to recover the debt from him. Accordingly on your advice
we have written the debt off. I would like to explain the effect on the GST liability for the
write-off.

If the reporting of the GST is on the cash basis, then the liability for the GST collected does
not arise until the cash is collected. Therefore M Waters transaction would not have the GST
liability recorded in our accounting records. As our business records the Sales and GST on
an accruals basis, the GST liability arises in September when the sale was made. In
November when the debt was written off we need to reverse the GST liability and record a
decreasing adjustment against the GST collected account as our business never collected
and never will collect the GST. You will note the full debt is credited against the debtors M
Waters Account in our records.

© John Wiley and Sons Australia Ltd, 2016 7.6


Chapter 7: Reporting and analysing cash and receivables

BRIEF EXERCISE 7.9

Wendy Ltd

(a) Bad Debts Expense 40,000


Allowance for Doubtful Debts 40,000

(b) Current Assets:


Cash $90,000
Accounts receivable $600,000
Less: Allowance for doubtful debts (40,000) 560,000
Inventory 130,000
Prepaid expenses 13,000
Total Current Assets $793,000

(c) $40,000
Credit risk ratio =  6 .7 %
$600,000

$3,000,000
Receivables turnover ratio =  5.7 times
$530,000

365 days
Average collection period =  64 days
5.7

BRIEF EXERCISE 7.9

(a) Cash at Bank ($200 - $8) 192


Credit Card Services Expense ($200 x 4%) 8
Sales 200

(b) Cash at Bank ($50,000 - $2,000) 48,000


Discount on Sale of Receivables ($50,000 x 4%) 2,000
Accounts Receivable 50,000

Note the discount on sale of receivables is an expense.

© John Wiley and Sons Australia Ltd, 2016 7.7


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO EXERCISES

EXERCISE 7.1

(a)
i. Cash inflows – Cash sales; Credit card sales ($18,500+$56,000 = $74,500)

ii. Cash outflows – Loan payment; Operating expenses paid; Payment to


suppliers ($5,800+$24,000+$16,000 = $45,800)

iii. Assets – Inventory; GST receivable; Cash at Bank; Accounts receivable


($28,000+$3,800+8,760+$6,800 = $47,360)

iv. Liabilities – Outstanding bank loan; Rent payable; Accounts payable


($12,000+$2,400+$8,400 = $22,800)

(b) From a cash flow’s perspective, Keitha’s fashion boutique looks like a healthy
business as it has positive cash flows, i.e. cash inflows are much higher than cash
outflows. Further, the value of assets outweighs that of liabilities which is another
good sign as a potential for investment.

EXERCISE 7.2
Gerry’s Pizza

1. Establishment of responsibility. The counter clerk is responsible for handling cash.


Other employees are responsible for making the pizzas.

2. Segregation of duties. Employees who make the pizza 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. Physical, mechanical and electronic controls. A cash register is used to record the
sale.

5. Independent internal verification. The counter clerk handling the pizza compares the
type of the pizza with the type indicated on the orders.

© John Wiley and Sons Australia Ltd, 2016 7.8


Chapter 7: Reporting and analysing cash and receivables

EXERCISE 7.3

(a) (b)

Procedure Weakness Principle Recommended change

1. Inability to establish Establishment of There should be separate


responsibility for cash. responsibility cash drawers and register
codes for each clerk.

2. Cash is not adequately Physical, mechanical, Cash should be stored in a


protected from theft. and electronic controls. safe until it is deposited in
the bank.

3. Cash is not Independent internal A cashier office supervisor


independently counted. verification. should count cash.

4. The accountant should Segregation of duties. The cashier’s department


not handle cash. should make the deposits.

EXERCISE 7.4

Shoe City Ltd

(a) Balance as per bank statement $4,392.20


Add: Outstanding deposits 708.00
5,100.20
Less: Unpresented cheques (876.00)
Balance as per Cash at Bank account (1) $4,224.20

(1) Cash balance per books $4,770.20


Less: Dishonoured cheque $516.00
Bank charges 30.00 455.00
Adjusted cash balance per books $4,224.20

(b) (In general journal form)

Accounts Receivable 516.00


Cash at Bank 516.00

Bank Charges 30.00


Cash at Bank 30.00

© John Wiley and Sons Australia Ltd, 2016 7.9


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 7.5

Green Dot Furniture

The cash to daily cash expenses ratio is calculated by first calculating average daily
cash expenses.

$92,728
 $254 thousand per day
365

Then cash on hand is divided by average daily cash expenses:

$17,312
 68.2 days
$254

Green Dot’s cash on hand is adequate. It has enough cash on hand to pay for 68 days
of expenses. This, combined with positive cash provided by operations indicates
strong liquidity.

EXERCISE 7.6

Hair Styles Pty Ltd


(In general journal form)

Date Account Titles and Explanation Debit Credit


Oct. 1 Petty Cash 130
Cash at Bank 130

31 Office Supplies 36.50


Telecommunications Expense 21.30
Postage Expense 53.70
Freight-out 8.80
Cash Short and Over 1.40
Cash at Bank 121.7

Petty Cash 130


Cash at Bank 130

© John Wiley and Sons Australia Ltd, 2016 7.10


Chapter 7: Reporting and analysing cash and receivables

EXERCISE 7.7
Marc Pty Ltd

(a) Estimated
Accounts Receivable Amount % Uncollectables

Current $65,000 2.0 $1,300


1-30 days past due 12,600 5.0 630
31-90 days past due 8,500 30.0 2,550
Over 90 days 6,400 50.0 3,200
$7,680

(b) Mar. 31 Bad Debts Expense 6,080


Allowance for Doubtful Debts 6,080
($7,680 - $1,600)

(c) The total balance of receivables increased from 2015 to 2016. However, of concern
is the fact that each of the three categories of older accounts increased substantially
during 2016. That is, customers are taking longer to pay and bad debts are likely to
increase. Management needs to investigate the causes of this change.

© John Wiley and Sons Australia Ltd, 2016 7.11


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 7.8

Date Account Titles and Explanation Debit Credit


Nov 28 Allowance for doubtful debts 5,000
GST Collected 500
Accounts Receivable (subsidiary ledger 5,500
also credited)
Being the write-off of bad debt of M Waters due
to bankruptcy as per mangers decision)

Brian Bazaar

To: Manager

From: Student

Date: DD/MM/YY

RE: GST and Bad Debts

The issue has arisen where a sale in September on credit was to a debtor who has now
bankrupt and we will not be able to recover the debt from him. Accordingly on your advice
we have written the debt off. I would like to explain the effect on the GST liability for the
write-off.

If the reporting of the GST is on the cash basis, then the liability for the GST collected does
not arise until the cash is collected. Therefore M Waters transaction would not have the GST
liability recorded in our accounting records. As our business records the Sales and GST on
an accruals basis, the GST liability arises in September when the sale was made. In
November when the debt was written off we need to reverse the GST liability and record a
decreasing adjustment against the GST collected account as our business never collected
and never will collect the GST. You will note the full debt is credited against the debtors M
Waters Account in our records.

© John Wiley and Sons Australia Ltd, 2016 7.12


Chapter 7: Reporting and analysing cash and receivables

EXERCISE 7.9
Spring & Co Ltd
Notes to the Financial Statements
as at 30 June 2015
(in millions)

Receivables:
Trade Receivables:
Notes Receivable $95
Accounts Receivable 290
Less: Allowance for Doubtful Debts 11 279
Other Receivables 22
Net Receivables $396

Note: It is assumed that Notes Receivables are part of Trade Receivables.

EXERCISE 7.10
Honey Factory Ltd
(a)
2017 2016
Receivables $1,113.0 $899.3
turnover
ratio =
(($146.6  $6.3)  ($104.3  $5.7)) / 2 (($104.3  $5.7)  ($126  $8.2)) / 2
 9.3 times =8.3 times

Average 365 days 365 days


collection  39.2 days or 39 days  43.9 days or 44 days
9.3 8.3
period =

(b)
2012 2011
Credit risk ratio = $6.3 $5.7
 4.3%  5.5%
$146.6 $104.3

(c) The credit and collection policies in Honey Factory Ltd. seemed to have worked well
in 2017. The company’s receivables turnover has improved from 8.3 times in 2017 to
9.3 times in 2017, with the corresponding average collection period shortened from
44 days to 39 days. The company’s credit risk has also improved from 5.5% to 4.3%
in 2017.

© John Wiley and Sons Australia Ltd, 2016 7.13


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

EXERCISE 7.11
Virtual Appliances

Date Account Titles and Explanation Debit Credit


Mar. 3 Cash at Bank ($900,000 - $36,000) 864,000
Discount on Sale of Receivables (1) 36,000
Accounts Receivable 900,000

(1) Note this is an expense account. The amount is calculated as 4% x $900,000.

EXERCISE 7.12
New Mark Ltd

Date Account Titles and Explanation Debit Credit


May 10 Cash at Bank ($2,400 - $36) 2,364
Credit Card Services Expense (1.5% x $2,400) 36
Sales 2,400

EXERCISE 7.13
Burleigh Heaven Miami Paradise
=[ (Cash payment to suppliers & =[ (Cash payment to suppliers &
employees) employees)
(a) +(Cash payment for interest & other +(Cash payment for interest & other
Average daily finance costs) finance costs)
cash expenses +(Cash payment for income tax) ]/365 +(Cash payment for income tax) ]/365
= ($63,905+$6,780+$17,672)/365 =($55,802+$16,383+$12,239)/365
=$88,357/365 =$84,424/365
=$242.07 =$231.30

Cash to daily
cash expenses =Cash/Average daily cash expense =Cash/Average daily cash expense
=$7,110/$242.07 =$4,289/$231.30
=29.3 days =18.5 days

(b) If the adequacy of cash is the only factor for the investment decision, Burleigh Heaven
appears to be the superior candidate it has a higher cash adequacy then Miami Paradise (29
days compared with 19 days).

© John Wiley and Sons Australia Ltd, 2016 7.14


Chapter 7: Reporting and analysing cash and receivables

EXERCISE 7.14

Advanced Lifestyle Ltd


(a) Auckland Queenstown
1.Receivable =$1,498/[($152-$7.2)+($197-$10)/2] = $1,388/[($128-$6.2)+($120-$5.2)/2]
turnover = 9 times = 11.7 times
2. Average
collection = 365/9 = 365/11.7
period = 40.6 days = 31.2 days
3. Credit risk
ratio:
=$10/$197 =$5.2/$120
2016 = 5.08% = 4.33%
=$7.2/$152 =$6.2/$128
2015 = 4.74% = 4.84%

(b) The Queenstown Division has a higher accounts receivable turnover (11.7 vs. 9
times) which means it is collecting accounts receivable 9 days faster than its
Auckland counterpart. In terms of credit risk, Queenstown not only has lower credit
risk ratios in 2016, it is also on an improving trend while Auckland’s credit risk is
deteriorating. In conclusion, Queenstown division seems to have a more effective
credit collection policy and credit risk control.

© John Wiley and Sons Australia Ltd, 2016 7.15


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

SOLUTIONS TO PROBLEM
SET A

PROBLEM SET A 7.1

(a)
i. Cash inflows – Cash sales; Credit card sales ($28,500+$56,000 = $84,500)

ii. Cash outflows – Loan payment; Operating expenses paid; Payment to


suppliers ($12,000+$18,000+$21,000 = $51,000)

iii. Assets – Food supplies; Cash at Bank; Accounts receivable; GST receivable
($29,500+$13,200+$7,200+$4,900 = $54,800)

iv. Liabilities – Outstanding bank loan; Rent payable; Accounts payable


($22,000+$14,800+$12,400 = $49,200)

(b) From a cash flow’s perspective, Toby’s café looks like a healthy business as it has
positive cash flows, i.e. cash inflows are much higher than cash outflows. Further, the
value of assets outweighs that of liabilities which is another good sign as a potential
for investment.

(c) In addition to the above figures and analysis concerning cash flows and assets and
liabilities, James should also look at non-financial information such as location of the
café, clientele, quality of the staff and relationship with food suppliers etc. which are
all important factors in influencing the continuous success of the business.

© John Wiley and Sons Australia Ltd, 2016 7.16


Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET A 7.2

Burlington Theatre
(a)

Principles Application to cash receipts

Establishment of responsibility. Only cashiers are authorised 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
doorperson. The manager maintains custody of
the cash, and the company accountant records
the cash.

Documentation procedures. Tickets are pre-numbered. Cash count sheets are


prepared. Deposit slips are prepared.

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

Independent internal verification. Cash counts are made by the manager at the end
of each cashier’s shift. Daily comparisons are
made by the company treasurer.

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

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

(2) The cashier could issue a lower priced ticket than paid for and the doorperson
would admit the customer. The difference between the ticket issued and the
cash received could be divided between the doorperson and cashier.

© John Wiley and Sons Australia Ltd, 2016 7.17


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 7.3

JONA Ltd
Bank Reconciliation Statement
31 December 2016

Balance as per bank statement 19,580.00


Add: Outstanding deposit 1,190.40
20,770.40

Less: Unpresented cheques


No. Amount
3470 720.10
3474 1,050.00
3478 538.20
3481 807.40
3484 832.00
3486 1,389.50 5,337.20

Balance as per Cash at Bank account 15,433.20

Original balance of Cash at Bank account 13,034.30


Transposition error (deposit 20/12: 2945-2954) - (9.00)
Transposition error (cheque#3485: 540.8-450.8) - (90.00)
Collection of note 3,145.00
NSF cheque (A. Jordan) (647.10)

Adjusted balance of Cash at Bank Account: 15,433.20

(b)
Dec. 31 Cash………………………………………………………………3,145.00
Miscellaneous Expense ........................................................ 15.00
Notes Receivable ................................................... 3,000.00
Interest Revenue .................................................... 160.00

31 Accounts Receivable—A. Jordan.......................................... 647.10


Cash ............................................................. 647.10

31 Accounts Payable ...................................................................... 90.00


Cash ............................................................. 90.00

Dec. 31 Accounts Receivable ................................................................. 9.00


Cash ............................................................. 9.00

© John Wiley and Sons Australia Ltd, 2016 7.18


Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET A 7.4

Delicious Pies Pty Ltd


Bank Reconciliation Statement
31 October 2017

(a)

Balance as per bank statement $25,732.00


Add: Undeposited receipts 5,313.71
31,045.71
Less: Unpresented cheques:
No. Amount
62 $177.45
183 210.00
284 354.55
862 266.99
863 317.52
864 231.39 (1,557.90)

Balance as per Cash at Bank account (1) $29,487.81

(1) Original Balance of Cash at Bank account $30,369.81


Add: Bank credit (collection of note receivable) 280.00
Adjusted balance per books (before theft) 30,649.81
Less: Theft (1,162.00)
Adjusted balance of Cash at Bank account $29,487.81

(b) The cashier attempted to cover the theft of $1,162 by:

1. Not listing as unpresented three cheques totalling $742.00 (No. 62, $177.45;
No. 183, $210.00 and No. 284, $354.55).

2. Understating the unpresented cheques listed by $140. (The correct total of


the 3 cheques listed is $815.90).

3. Did not add $280 credit note to the book balance.

(c) 1. The principle of independent internal verification has been violated because
the cashier prepared the bank reconciliation.

2. The principle of segregation of duties has been violated because the cashier
had access to the accounting records and also prepared the bank
reconciliation.

© John Wiley and Sons Australia Ltd, 2016 7.19


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 7.5

(a)
Computec Ltd
Bank Reconciliation Statement
31 May 2015

Balance as per bank statement $7,784.60


Add: Outstanding deposits $836.15
Bank error – Teller cheque 600.00 1,436.15
9,220.75
Less: Unpresented cheques (1,276.25)
Balance as per Cash at Bank account (1) $7,944.50

(1) Original Cash at Bank balance per books $5,681.50


Add: Collection of note receivable 3,060.00
8,741.50
Less: Dishonoured cheque ($700.00)
Error in 12 May receipt (10.00)
Error in recording cheque no. 1181 (27.00)
Bank cheque printing charge (60.00) (797.00)
Adjusted Cash at Bank account balance $7,944.50

(b) (In general journal form)

Date Account Titles and Explanation Debit Credit


May 31 Cash at Bank 3,060
Bank Charges 20
Note Receivable 3,000
Interest Revenue 80

31 Accounts Receivable – W Hoad 700


Cash at Bank 700

31 Sales 10
Cash at Bank 10

31 Accounts Payable – M Helms 27


Cash at Bank 27

31 Bank Charges 60
Cash at Bank 60

© John Wiley and Sons Australia Ltd, 2016 7.20


Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET A 7.6

Chin Ltd

(a) Dec. 31 Bad Debts Expense............................................ 25,450


Allowance for Doubtful Debts ................................. 25,450
($37,450 – $12,000)

(a) & (b)

Bad Debts
Expense Balance
Date Particular Dr Cr Dr Cr
31/12/2016 Allowance for Doubtful Debt $25,450 $25,450

Allowance
for Doubtful
Debt Balance
Date Particular Dr Cr Dr Cr
31/12/2016 Balance $12,000
31/12/2016 Bad Debts Expense $25,450 $37,450
Accounts Receivable
31/3/2017 (Bad Debts Write-off) $500 $36,950

Accounts Receivable
31/5/2017 (Reverse Bad Debts Write-Off) $500 $37,450

2017
(1) Mar. 31 Allowance for Doubtful Debts ........................... 500
Accounts Receivable ................................... 500

(2) May 31 Accounts Receivable........................................ 500


Allowance for Doubtful
Debts................................................... 500

31 Cash .............................................................. 500


Accounts Receivable ................................... 500

(c) 2017
Dec. 31 Bad Debts Expense............................................ 31,100
Allowance for Doubtful Debts ................................. 31,100
($30,300 + $800)

© John Wiley and Sons Australia Ltd, 2016 7.21


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 7.7


Eason Ltd

(a) $2,900.

(b) $700 [($46,000 X 5%) – $1,600].

(c) $3,450 [(46,000 X 5%) + $1,150].

(d) Under the direct write-off method, accounts receivable are overstated because future
estimated write-offs are not anticipated—write-offs are journalised as they occur. In
contrast, under the allowance method, anticipated write-offs are estimated and
reduce the ending accounts receivable balance. The resulting estimated balance of
accounts receivable then represents the best estimate of the cash flows expected to
be derived from the receivable.

PROBLEM SET A 7.8


Lexington Pty Ltd

(a) The allowance method. Since the balance in the allowance for doubtful debts is given,
it must be using this method because the account would not exist if it were using the
direct write-off method.

(b) Dec 31 Bad Debts Expense……………………………………….10,750


($11,750 – $1,000)
Allowance for Doubtful
Debts................................................... 10,750

(c) Dec. 31 Bad Debts Expense............................................ 12,750


($11,750 + $1,000)
Allowance for Doubtful
Debts................................................... 12,750

(d) Allowance for Doubtful Debts …………………………………….5,000


Accounts Receivable ............................................................ 5,000

(e) Bad Debts Expense .................................................................. 5,000


Accounts Receivable ................................................................ 5,000

(f) The allowance for doubtful debt is a contra-asset account. It is subtracted from the
gross amount of accounts receivable so that the net accounts receivable is reported
in the statement of financial position.

© John Wiley and Sons Australia Ltd, 2016 7.22


Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET A 7.9

Diego Ltd

Jan. 5 Accounts Receivable—George Company ............................. 16,000


Sales............................................................ 16,000

20 Notes Receivable…………………………………………16,000
Accounts Receivable—George
Company ............................................................... 16,000

Feb. 18 Notes Receivable ................................................. 8,000


Sales ...................................................................... 8,000

Apr. 20 Cash ($16,000 + $360) ............................................... 16,360


Notes Receivable .......................................................... 16,000
Interest Revenue ........................................................... 360
($16,000 X 9% X 3/12)

30 Cash ($15,000 + $600) ............................................... 15,600


Notes Receivable .......................................................... 15,000
Interest Revenue ........................................................... 600
($15,000 X 12% X 4/12)

May 25 Notes Receivable 6,000


Accounts Receivable—Avery Inc................................... 6,000

Aug. 18 Cash ($8,000 + $400) ................................................... 8,400


Notes Receivable .......................................................... 8,000
Interest Revenue ........................................................... 400
($8,000 X 10% X 6/12)

25 Accounts Receivable—Avery Inc. ................................. 6,120


($6,000 + $120)
Notes Receivable ................................................... 6,000
Interest Revenue .................................................... 120
($6,000 X 8% X 3/12)

Sept. 1 Notes Receivable ................................................. 10,000


Sales ............................................................................. 10,000

© John Wiley and Sons Australia Ltd, 2016 7.23


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET A 7.10


Qantas and Air New Zealand

(a)
Qantas Air New Zealand
A$ million NZ$ million

Receivables $13,772 $4,046


turnover ratio ($1,054  $27  $1,088  $6)/2 ($274  $2  $322  $3)/2
13.06 times 13.69 times

Average collection 365 365


period  28 days  26.7 days or 27 days
13.06 13.69

Qantas and Air New Zealand appeared to have very similar collection experiences in the
latest financial period, as shown by the receivable turnover ratio of 13.06 times and 13.60
times, and the corresponding collection period of 28 days and 27 days.

(b) Ratio of allowance for doubtful debts to gross accounts receivable (credit risk ratio):

Qantas Air New Zealand

Start $27 ÷ $1,054= 2.56% $2 ÷ $274 = 0.73%


End $6÷ $1,088 = 0.55% $3 ÷ $322 = 0.93%

Qantas appeared to have tightened its credit-granting practices as the allowance for doubtful
debt has decreased substantially and the corresponding credit risk ratio has improved from
the start to the end of the year.

On the other hand, Air New Zealand appeared to have continued with the same credit-
granting practices over the year as both the allowance for doubtful debt and the associated
credit risk ratio are maintained.

© John Wiley and Sons Australia Ltd, 2016 7.24


Chapter 7: Reporting and analysing cash and receivables

SOLUTIONS TO PROBLEM
SET B

PROBLEM SET B 7.1

(a)
i. Cash inflows – Cash sales; Credit card sales ($22,500+$46,000 = $68,500)

ii. Cash outflows – Loan payment; Operating expenses paid; Payment to


suppliers ($4,000+$22,000+$18,000 = $44,000)

iii. Assets – Food supplies; Cash at Bank; Accounts receivable; GST receivable
($18,500+$9,200+$7,200+$2,900 = $37,800)

iv. Liabilities – Outstanding bank loan; Rent payable; Accounts payable


($15,000+$4,800+$14,400 = $34,200)

(b) From a cash flow’s perspective, Caylie’s bakery looks like a healthy business as it
has positive cash flows, i.e. cash inflows are much higher than cash outflows.
Further, the value of assets is slightly higher than that of liabilities which is another
good sign as a potential for investment.

(c) In addition to the above figures and analysis concerning cash flows and assets and
liabilities, Samantha should also look at non-financial information such as location of
the café, clientele, quality of the staff and relationship with food suppliers etc. which
are all important factors in influencing the continuous success of the business.

© John Wiley and Sons Australia Ltd, 2016 7.25


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 7.2

Rabbit Ears Pet Food Ltd

Principles Application to Cash Disbursements

Establishment of responsibility. Only the accountant and assistant accountant are


authorised to sign cheques.

Segregation of duties. Invoices must be approved by both the purchasing


manager and the receiving department supervisor.
Payment can only be made by the accountant or
assistant accountant, and the cheque signatories
do not record the cash disbursement transactions.

Documentation procedures. Cheques are pre-numbered.

Physical, mechanical, and electronic Blank cheques are kept in a safe in the treasurer’s
controls. office. Only the accountant and assistant
accountant have access to the safe.

Independent internal verification. The cheque signatory compares the check with the
approved invoice prior to issue. Bank and book
balances are reconciled monthly by the assistant
accountant.

Other controls. Following payment, the invoices are stamped PAID.

© John Wiley and Sons Australia Ltd, 2016 7.26


Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET B 7.3

Watson Pty Ltd


Bank Reconciliation Statement
30 November 2015
(a)

Balance as per bank statement $17,394.60


Add: Outstanding deposits 1,225.00
18,619.60
Less: Unpresented 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 800.00
(5,839.70)
Balance as per Cash at Bank account (1) $12,779.90

(1) Original Balance of Cash at Bank account $11,133.90


Add: Note collected by bank 1,905.00
13,038.90
Less: Cheque printing charge (70.00)
Error in recording cheque no. 2479
($1,750 - $1,570) (180.00)
Error in 20-11 receipt
($2,954 - $2,945) (9.00) (259.00)
Adjusted balance of Cash at Bank account $12,779.90

(b) (In general journal form)

Date Account Titles and Explanation Debit Credit


Nov. 30 Cash at Bank 1,905
Bank Charges 15
Note Receivable 1,800
Interest Revenue 120

30 Bank Charges 70
Cash at Bank 70

30 Accounts Payable 180


Cash at Bank 180

30 Accounts Receivable 9
Cash at Bank 9

© John Wiley and Sons Australia Ltd, 2016 7.27


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 7.4


(a)
Wizards and Dragons Pty Ltd
Bank Reconciliation Statement
31 October 2016

Balance as per bank statement $18,380.00


Add: Undeposited receipts 3,795.51
22,175.51
Less: Unpresented cheques:
No. Amount
62 $126.75
183 150.00
284 253.25
862 190.71
863 226.80
864 165.28 (1,112.79)

Balance as per Cash at Bank account (1) $21,062.72

(1) Original Balance of Cash at Bank account $21,892.72


Add: Bank credit (collec’n of note receivable) 200.00
Adjusted balance per books (before theft) 22,092.72
Less: Theft (1,030.00)
Adjusted balance of Cash at Bank account $21,062.72

(b) The cashier attempted to cover the theft of $1,030.00 by:

1. Not listing as unpresented three cheques totalling $530.00 (No. 62, $126.75’
No. 183, $150.00 and No. 284, $253.25).

2. Understating the unpresented cheques listed by $100. (The correct total is


$582.79).

3. Subtracting the $200 credit from the bank balance instead of adding it to the
book balance, thereby concealing $400 of the theft.

(c) 1. The principle of independent internal verification has been violated because
the cashier prepared the bank reconciliation.

2. The principle of segregation of duties has been violated because the cashier
had access to the accounting records and also prepared the bank
reconciliation.

© John Wiley and Sons Australia Ltd, 2016 7.28


Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET B 7.5

(a)
Interactive Ltd
Bank Reconciliation Statement
31 May 2016

Balance as per bank statement $15,569.20


Add: Outstanding deposits $1,672.30
Bank error – Teller cheque 1,200.00 2,872.30
18,441.50
Less: Unpresented cheques (2,552.50)
Balance as per Cash at Bank account (1) $15,889.00

Adjustment to bank account balance

(1) Original Cash at Bank balance per books $10,949.00


Add: Error in recording cheque no. 360.00
1181
Add: Collection of note receivable 6,120.00
17,429.00
Less: Dishonoured cheque ($1,400.00)
Error in 12 May receipt (20.00)

Bank cheque printing charge (120.00) (1,540.00)


Adjusted Cash at Bank account balance $15,889.00

(b) (In general journal form)

Date Account Titles and Explanation Debit Credit


May 31 Cash at Bank 6,120
Bank Charges 40
Note Receivable 6,000
Interest Revenue 160

31 Accounts Receivable – W Hoad 1,400


Cash at Bank 1,400

31 Sales 20
Cash at Bank 20

31 Cash at bank 360


Accounts Payable – M Helms 360

31 Bank Charges 120


Cash at Bank 120

© John Wiley and Sons Australia Ltd, 2016 7.29


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 7.6


(a) & (b)

Cain Ltd
(a)
Date Account Titles and Explanation Debit Credit
Dec. 31 Bad Debts Expense 24,930
Allowance for Doubtful Debts ($34,930 – 10,000) 24,930

(a) & (b)

Bad Debts
Expense Balance
Date Particular Dr Cr Dr Cr
31/12/2016 Allowance for Doubtful Debt $24,930 $24,930

Allowance
for Doubtful
Debt Balance
Date Particular Dr Cr Dr Cr
31/12/2016 Balance $10,000
31/12/2016 Bad Debts Expense $24,930 $34,930
Accounts Receivable
31/3/2017 (Bad Debts Write-off) $600 $34,330

Accounts Receivable
31/5/2017 (Reverse Bad Debts Write-Off) $600 $34,930

(b)
2017
(1) Mar. 1 Allowance for Doubtful Debts 600
Accounts Receivable 600

(2) May 1 Accounts Receivable 600


Allowance for Doubtful Debts 600

1 Cash at Bank 600


Accounts Receivable 600

(c)
Dec. 31 Bad Debts Expense 30,200
Allowance for Doubtful Debts ($29,100 + $1,100) 30,200

© John Wiley and Sons Australia Ltd, 2016 7.30


Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET B 7.7

Benson Ltd

(a) $3,625.

(b) $875 [($57,500 X 5%) – $2,000].

(c) $2,876 [($57,500 X 5%) + $1,438].

(d) Under the direct write-off method, accounts receivable are overstated because future
estimated write-offs are not anticipated—write-offs are journalized as they occur. In
contrast, under the allowance method, anticipated write-offs are estimated and reduce
the ending accounts receivable balance. The resulting estimated balance of accounts
receivable, stated at recoverable amount, then represents the present value of the cash
flows expected to be derived from the receivable.

PROBLEM SET B 7.8

Shine Ltd

(a) The allowance method. Since the balance in the allowance for doubtful debts is given,
it must be using this method because the account would not exist if it were using the
direct write-off method.

(b) Dec. 31 Bad Debts Expense ($16,750 - $1,500) 15,250


Allowance for Doubtful Debts 15,250

(c) Dec. 31 Bad Debts Expense ($16,750 + $1,500) 18,250


Allowance for Doubtful Debts 18,250

(d) Allowance for Doubtful Debts 4,500


Accounts Receivable 4,500

(e) Bad Debts Expense 4,500


Accounts Receivable 4,500

(f) The allowance for doubtful debt is a contra-asset account. It is subtracted from the
gross amount of accounts receivable so that net accounts receivable is reported in
the statement of financial position.

© John Wiley and Sons Australia Ltd, 2016 7.31


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

PROBLEM SET B 7.9


Elam Ltd
General Journal

Date Account Titles and Explanation Debit Credit


Jan. 5 Accounts Receivable 6,000
Sales 6,000

Feb. 2 Notes Receivable 6,000


Accounts Receivable 6,000

12 Notes Receivable 7,800


Sales 7,800

26 Accounts Receivable 4,000


Sales 4,000

Apr. 12 Cash at Bank 7,800


Notes Receivable 7,800

June 2 Cash at Bank 6,000


Notes Receivable 6,000

July 15 Notes Receivable 3,000


Sales 3,000

Aug. 15 Cash at Bank 2,940


Interest Expense 60
Notes Receivable 3,000

© John Wiley and Sons Australia Ltd, 2016 7.32


Chapter 7: Reporting and analysing cash and receivables

PROBLEM SET B 7.10

CSR and CCA

(a)
CSR CCA
$M $M

Receivables turnover $3,754.9 $4,546.8


ratio ($562.1 $9  $491.9  $7.5) / 2 ($671 $7.8  $777.6  $9) / 2
 7.24 times  6.35 times

Average collection 365 365


period  50.4 days  57.5days
7.24 6.35

CSR’s receivable turnover ratio was slightly higher than CCA’s, which means on
average, CSR was more efficient than CCA in turning receivables into cash in that
year. This may reflect differences in the terms allowed to customers and the types of
customers (retail versus business customers).

(b) Ratio of allowance for doubtful debts to gross accounts receivable (credit risk ratio):

CSR CCA

Start $9 ÷ $562.1 = 1.6% $7.8 ÷ $671 = 1.2%


End $7.5 ÷ $491.9 = 1.5% $9 ÷ $777.6 = 1.2%

Both companies did not appear to have changed their credit-granting practices over
the year as the credit risk ratios are maintained from the start to the end of the year.

© John Wiley and Sons Australia Ltd, 2016 7.33


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS

FINANCIAL REPORTING AND


ANALYSIS

BUILDING BUSINESS SKILLS 7.1 FINANCIAL REPORTING PROBLEM

Domino’s Pizza

(a) The consolidated statement of financial position in 2013 shows cash and cash
equivalents as $18,691 (in thousands) as at 30 June 2013. The cash balance was
$40,340 (in thousands) at the start of the 2012/13 financial year.

(b) Cash is defined as including cash on hand and in banks net of outstanding bank
overdrafts. Cash comprises cash on hand and demand deposits. Cash equivalents
are short-term, highly liquid investments that are readily convertible to known
amounts of cash, which are subject to an insignificant risk of changes in value and
have a maturity of three months or less at the date of acquisition.

(c) The consolidated statement of cash flows indicates net cash provided by operations
was $33,180 (in thousands) during 2012/13.

(d) The ratio of cash to daily cash expenses for 2013 was:
Cash balance reported in the Balance sheet is (in thousands) $18,691
Cash payments for operation (in thousands) $282,864+$405+$11,796 = $295,065
Daily cash expenses (in thousands) $295,065 /365 = $808.40 per day
$18,691/$808.40 = 23.1 days

BUILDING BUSINESS SKILLS 7.2 COMPARATIVE ANALYSIS PROBLEM

Domino’s Pizza

(a) Dollars are in $’000


2013 2012

Cash/cash equivalents balance $18,691 $40,340


Cash expenses $295,065 $259,206
Average daily cash expenses $808.40 $710.15
Ratio of cash to daily cash expenses 23.1 days 56.8 days

(b) 2012 has a stronger cash position as indicated by the ratio of cash to daily cash
expenses.

© John Wiley and Sons Australia Ltd, 2016 7.34


Chapter 7: Reporting and analysing cash and receivables

CRITICAL THINKING

BUILDING BUSINESS SKILLS 7.3 GROUP DECISION CASE

Campus Fashions

(a) 2017 2016 2015

Net credit sales $600,000 $720,000 $480,000

Credit and collection expenses:


Collection agency fees $2,940 $3,000 $1,920
Salary of accounts receivable clerk 4,560 4,560 4,560
Uncollectible accounts 9,600 11,520 7,680
Invoicing and mailing costs 3,000 3,600 2,400
Credit investigation fees 900 1,080 720
Total $21,000 $23,760 $17,280
Total expenses as a percentage of net credit sales 3.5% 3.3% 3.6%

(b) Average accounts receivable (5%) $30,000 $36,000 $24,000

Investment earnings (10%) $3,000 $3,600 $2,400

Total credit and collection expense per above $21,000 $23,760 $17,280
Add: Investment earnings* 3,000 3,600 2,400
Net credit and collection expense $24,000 $27,360 $19,680
Net expense as a percentage of net sales 4.0% 3.8% 4.1%

*The investment earnings on the cash tied up in accounts receivables is an additional


expense of continuing the existing cash policies.

(c) The analysis shows that the credit card fee of 4% of net credit sales will be higher than
the percentage cost of credit and collection expenses in each year before considering
the effect of earnings from other investment opportunities. However, after considering
investment earnings, the credit card fee of 4% will be less than the company’s
percentage cost if annual net credit sales are less than $600,000.

Finally, the decision hinges on:


(1) the accuracy of investment earnings
(2) the expected trend in credit sales
(3) the effect the new policy will have on sales.

Non-financial factors include the effects on customer relationships of the alternative


credit policies and whether the Berkvoms want to continue with the handling of their
own accounts receivable.

© John Wiley and Sons Australia Ltd, 2016 7.35


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 7.4 ETHICS CASE

Shirts Galore Ltd

(a) The stakeholders in this situation are:


The managing director of Shirts Galore Ltd
The chief accountant of Shirts Galore Ltd
The shareholders of Shirts Galore Ltd
Any other users of the financial statements of Shirts Galore Ltd.

(b) Yes. The chief accountant is posed with an ethical dilemma – should he/she follow
the managing director’s ‘suggestion’ and prepare misleading financial statements
(understated net profit and assets) or should he/she attempt to stand up to and
possibly anger the managing director by preparing true and fair financial statements.

(c) Shirts Galore’s growth rate should be a product of the change in profit resulting from
the application of generally accepted accounting principles in the preparation of
financial statements, not vice versa. That is, one should not prepare financial
statements with the objective of achieving or sustaining a predetermined growth rate.
The growth rate should be a product of management and operating results, not of
creative accounting.

© John Wiley and Sons Australia Ltd, 2016 7.36


Chapter 7: Reporting and analysing cash and receivables

BUILDING BUSINESS SKILLS 7.5 COMMUNICATION ACTIVITY

Ms I Rich
Manager
Aardvark Pty Ltd

Dear Ms Rich

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.

1. Weaknesses Suggested Improvement


A list of cheques received is This list should be prepared so that it can later be
not prepared by the person compared with the daily cash summary. While this
who opens the mail. 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 When this occurs, there is no assurance that all
person. incoming cheques are forwarded to the cashier’s
department.

3. The cashier is allowed to Under this arrangement it is possible for the cashier to
open the mail. 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 Again, there is poor segregation of duties. In this


clerk is allowed to open the case, the clerk could write off a customer’s account as
mail. uncollectible and then misappropriate the collection
when it is received.

5. Mail receipts are deposited This makes the receipts vulnerable to robbery and to
weekly. 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

Farmers, Chartered Accountants

© John Wiley and Sons Australia Ltd, 2016 7.37


Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e

BUILDING BUSINESS SKILLS 7.6 COMMUNICATION ACTIVITY

“Trail of guilt”

(a) The demand for forensic accountants has been increasing over the past decade
because of the increase of investigation in the number of corporate fraud cases being
committed by unscrupulous staff in the wake of the global financial crisis. Demand is
also driven by the number of corporate collapses being investigated by regulators
and creditors.
(b) Some of the emerging areas of forensic investigation include:
 Consulting-style of work
 Helping companies with their risk-management programs
 Data mining

(c) Some of the forensic accounting work against high-tech corporate crimes include:
 Investigating stealing by setting up “ghost” employees on the payroll;
 Detecting inconsistencies in funds transfers and non-existent tax-file numbers.
 Interrogating very complex and large databases to match bank account details for
payments

(d) Discussion question on whether students will consider taking on forensic accounting
work.

© John Wiley and Sons Australia Ltd, 2016 7.38