Professional Documents
Culture Documents
6-1
6-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Problems Estimated
and Time in
Learning Outcomes Alternates Minutes Level
1. Identify and describe the various forms of cash reported 4* 20 Mod
on a balance sheet.
Estimated
Time in
Learning Outcomes Cases Minutes Level
1. Identify and describe the various forms of cash reported 1 20 Mod
on a balance sheet. 3 30 Mod
QUESTIONS
8. This misuse of corporate assets could have been prevented by having a procedure
in place for segregation of duties. A single employee should not be allowed to order
merchandise, receive it, and initiate payment for it.
9. There are a number of limitations on the efficiency of internal control. First, a system
of internal control is not cost free. For example, the segregation of duties may
require a larger staff than would otherwise be necessary. An internal audit staff may
be too costly for a small company. Second, no system of internal control can prevent
collusion by two or more employees. Third, the lack of support from upper
management may weaken an otherwise strong commitment to a system of internal
control. Finally, the element of human error can never be eliminated in any
operation, regardless of how big or small.
10. Two basic procedures are essential to good internal control over cash. First, all cash
receipts should be deposited intact in a bank on a daily basis. That is, no
disbursements should be made from any amounts received prior to their deposit in
the bank. Second, all cash disbursements should be made by check. The use of
serially numbered checks results in a clear record of all payments.
11. There may be a benefit in terms of good customer relations to positioning a cash
register so that customers can read the display. However, it is equally important for
control purposes. If the customer can read the display, the sales clerk is less likely to
ring up a sale for less than the amount received and pocket the difference. This
control feature is certainly not foolproof in preventing this from happening, but it will
act as a deterrent.
12. An invoice rather than a purchase order is the basis for recording a purchase and a
corresponding liability (accounts payable). From a legal viewpoint, the purchase
order is merely an offer by the company to purchase and does not constitute by itself
a legally binding contract. The receipt of an invoice from the supplier is evidence that
this outside party has accepted the offer and agreed to sell the merchandise under a
particular set of terms and conditions.
13. A receiving report is a document used by the receiving department to indicate the
arrival of inventory from a supplier. In a computerized system, the same software
program that generates the purchase order also generates a receiving report,
showing the various items ordered, the terms of payment, the shipper, and other
important information. On a blind receiving report, the columns for the quantities of
each item are intentionally left blank. Rather than being allowed to just check off that
the number ordered were all received, the clerk must count the number actually
received.
14. A purchase invoice is compared with a purchase order to ensure that the goods
were in fact ordered. The comparison of a receiving report with an invoice ensures
that all goods that a company is being billed for were in fact received.
6-6 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISES
1. D—Bank 4. D—Book 7. NA
2. D—Book 5. A—Book 8. A—Book
3. A—Book 6. A—Bank 9. A—Book
2007
Jan. 2 Petty Cash Fund 300.00
Cash 300.00
To record establishment of petty cash fund.
Assets = Liabilities + Owners’ Equity
+300.00
–300.00
1. Students’ answers to this question will vary. Among the possible guidelines the club
should follow:
a. Prenumbered tickets
b. Segregation of duties for collecting cash, counting and recording cash, and
depositing cash in a bank account
c. Payment by check of any expenses associated with the raffle
2. The president would like verification that all money is collected and recorded. It
would be difficult, if not impossible, to be completely sure that this happens. For
example, human errors in counting and handling the cash may result in not all of the
cash being collected (such as errors in making change). Also, it is impossible to
prevent collusion from occurring if two or more individuals work together to misdirect
any of the cash.
Many possible combinations are possible. One appropriate way to segregate the duties
would be as follows:
Employee
Task Mary Sue John
Prepare invoices X
Mail invoices X
Pick up mail from post office X
Open mail, separate checks X* X*
List checks on deposit slip in triplicate X
Post payment to customer’s account X
Deposit checks X
Prepare monthly schedule of
accounts receivable X
Reconcile bank statements X
*Two employees should be present to open mail and separate checks.
6-8 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
MULTI-CONCEPT EXERCISE
PROBLEMS
1. CALICO CORNERS
BANK RECONCILIATION
MAY 31, 2007
Balance per bank statement, May 31 $ 8,432.11
Add: Deposit-in-transit $1,250.00
Bank error: deposit credited to
wrong account 123.45 1,373.45
Deduct: Outstanding checks:
#123 $ 23.40
#127 145.00
#128 210.80
#130 67.32 (446.52)
Adjusted balance, May 31 $ 9,359.04
Balance per books, May 31 $ 9,965.34
Add: Interest earned on bonds $ 465.00
Interest earned on account 54.60 519.60
Deduct: Bank service charges $ 50.00
NSF check 166.00
Book error: Deposit of $101.10
recorded as $1,011.00 909.90 (1,125.90)
Adjusted balance, May 31 $ 9,359.04
CHAPTER 6 • CASH AND INTERNAL CONTROL 6-9
2. The fallacy in the friend’s reasoning is that only the company, not the bank, can
make errors. A bank reconciliation is needed to detect errors and omissions on both
the books and the bank’s records.
3. The primary concern in this operation is control over cash, because all sales are
cash. This concern was addressed by using a cash register, having the lead person
check the cash, and depositing it intact daily.
6-10 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
1. The old system of allowing each motel to buy supplies from local distributors offered
very little internal control. For example, the corporate office had no control over the
amount paid by each individual operation for its supplies. The new system will allow
the company to buy in larger quantities, hopefully at better prices. Also, with the old
system, there was no physical control over the supplies. Dishonest employees at a
particular motel could steal supplies much more easily than under the new system.
2. The purchase requisition form should be in triplicate, with the original filled out by the
requesting department and copies to the purchasing and accounting departments.
The form should show
a. requesting department
b. date requested
c. preferred vendor
d. date needed
e. complete description of items requested
f. quantity of each item requested
g. blank for signature of person requesting
h. blank for signature of supervisor for approval
i. sequential numbering of the forms
The receiving report should be in duplicate, with the original filled out by the
receiving department with a copy to the accounting department. It should show
a. purchase order number
b. vendor
c. carrier/shipper
d. credit terms
e. dates requested, ordered, and received
f. shipping instructions
g. items ordered and quantity of each ordered
h. quantities received of each item
i. blank for signature of person receiving
j. blank for approvals
CHAPTER 6 • CASH AND INTERNAL CONTROL 6-11
MULTI-CONCEPT PROBLEMS
LO 1,2 PROBLEM 6-4 CASH AND LIQUID ASSETS ON THE BALANCE SHEET
1. Morris Mart suffers from a lack of segregation of duties. Mary handles all tasks
associated with collection of customer accounts.
2. Mary should not handle all aspects of accounts receivable, billing, and collection.
Two different employees should mail invoices and record the amounts billed. Two
employees should be present when the mail is opened. Another employee should be
responsible for recording collections from customers. Finally, all employees should
be required to take vacations, and there should be rotation of job duties among
employees.
3. Someone should explain to Mary that she personally is not the problem but that a
good system of internal control requires certain changes to be made. This could be
explained to her not in the context of fraud but rather in the context of the necessity
to verify and check the work performed by all employees.
6-12 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ALTERNATE PROBLEMS
1. The bank and regulatory agency are concerned with these documents because
without proper documentation the legal agreement could be invalid. For example,
without a valid title, the bank has no recourse if the customer defaults on the loan. A
valid insurance policy is necessary in case the motorist should have an accident.
The regulatory agency is empowered by the government to protect the interests of
the public.
2. Internal control procedures to ensure that the documents are obtained and
safeguarded:
a. The accuracy and completeness of all information on the note, insurance policy,
and title should be verified and reviewed.
b. The note and insurance policy should be reviewed periodically for expiration
dates.
c. Each of the documents should be kept in locked compartments with limited
access.
2. The shipping form should be in duplicate, with the original filled out by the shipping
department and a copy to the accounting department. It should include
a. authorizations
b. dates ordered and shipped, and expected delivery date
c. customer name, address
d. customer contact person
e. description of titles to be shipped
f. quantity of each title to be shipped
6-14 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 1,2 PROBLEM 6-4A CASH AND LIQUID ASSETS ON THE BALANCE SHEET
1. Cash in the checking account and the petty cash fund are cash. The three-month
certificates of deposit and the money market fund are both cash equivalents.
2. Accounts receivable and marketable securities should be classified on the balance
sheet as current assets and listed in the order of their liquidity (marketable securities
are more liquid than accounts receivable).
3. Increase
Cash and Cash Equivalents 12/31/07 12/31/06 (Decrease)
Certificates of deposit $10,000 $10,000 $ 0
Petty cash fund 1,200 1,500 (300)
Money market fund 25,800 28,000 (2,200)
Cash in checking account 6,000 6,000 0
Totals $43,000 $45,500 $ (2,500)
The company is not as liquid at the end of 2007 as it was at the end of 2006.
Although the decrease in liquidity is not large, it is due to the decreases in the
balances in the petty cash fund and the money market fund.
1. There are two major problems with the proposed personnel arrangements. First,
regardless of how ethical and honest the two individuals might be, from the
viewpoint of appearances alone, it is not healthy to have two relatives working this
closely together in a business. The potential for collusion is very high in this
situation. Also, it is not fair for either party to have Barbara doing a performance
review for her cousin.
2. Regardless of how effective a system of internal control, it can be easily
circumvented by collusion, that is, two or more employees working together to
perpetrate a fraud. The potential for this to develop can be lessened by not having
one relative reporting to another. Also, Barbara should not do the performance
evaluation for Cheryl.
3. The above should be explained to the two individuals. They personally are not the
problem. Any two or more persons in this situation would face a conflict and weaken
the company’s system of internal control.
CHAPTER 6 • CASH AND INTERNAL CONTROL 6-15
DECISION CASES
1. The balance in Cash and cash equivalents on the company’s December 31, 2004,
balance sheet is $10,211,000. The balance on December 31, 2003, was
$18,446,000; thus, cash and cash equivalents decreased during 2004 by
$8,235,000.
2. The decrease in cash and cash equivalents of $8,235,000 appears on the
company’s statement of cash flows. The statement of cash flows summarizes a
company’s operating, investing and financing activities for the year and the net
increase or decrease in these activities appears towards the bottom of the
statement.
3. According to Note 2 to the financial statements, the company includes “all
unrestricted cash accounts and highly liquid debt instruments purchased with
original maturities of three months or less” as cash and cash equivalents (page 36 of
the 2004 annual report).
I have reviewed the loan proposals recently submitted by R. Montague and J. Capulet
and would like to summarize for you my findings. Because of limited resources available
for short-term loans, my recommendation is that we make a six-month $10 million loan
to J. Capulet only.
The total current asset positions of the two companies are identical. Each has $33
million in current assets. However, the composition of the current assets differs
considerably between the two companies. On the surface, R. Montague may appear to
be stronger because it has twice the amount of cash on hand that J. Capulet does.
However, cash is essentially a non-earning asset, and I am skeptical as to why R.
Montague feels it necessary to maintain that much cash on hand, and consequently,
why it feels as if it needs to borrow an additional $10 million.
The accounts receivable for J. Capulet is significantly larger than that for R.
Montague. Assuming that the estimates of bad debts are reasonably reliable, R.
Montague has a bigger problem with uncollectibles than does J. Capulet. R. Montague
has an allowance that is 1/15, or 6.67% of accounts receivable, while J. Capulet’s
percentage is only 1/23, or 4.35%.
In summary, I feel that J. Capulet is a better candidate at the present time for a loan.
I recommend that we make a six-month $10 million loan to J. Capulet at the current
market rate of interest. Please call if you need any further details in connection with
these two loan requests.
CHAPTER 6 • CASH AND INTERNAL CONTROL 6-17
Thank you for the opportunity to spend a week at one of our stores and learn more
about the bookstore business. During my training I received valuable experience that
will benefit me as I begin working for the company. I am concerned, however, about one
procedure related to the receipt of cash. The current system for handling cash
shortages and overages is not effective from an internal control viewpoint.
A fundamental principle of internal control over cash is that all cash receipts should
be deposited intact. I know that you can appreciate that the current system does not
allow us to keep an accurate record of all receipts. For this reason, I recommend that
we keep a daily record of all cash shortages and overages. Under the proposed system,
we would record a debit for any shortages in cash and a credit when there is a cash
overage at the end of the day. If these amounts are material, they should be
investigated immediately. Under no circumstances should we keep a separate cash
fund to make up the differences. Aside from the obvious concerns over physical custody
of the cash, the present system of simply keeping a cash-over and -short envelope
results in a lack of important information to us.
I am sure you share my concerns over this critical part of our business. Please call
me if I can provide any further information to you.
According to the note on page 36 of the 2004 annual report, Life Time Fitness’s cash
and cash equivalents include “all unrestricted cash accounts and highly liquid debt
instruments purchased with original maturities of three months or less.”
There are a total of six members on Life Time Fitness’s Board of Directors. Five
members are outsiders and the other is part of Life Time Fitness’s management team
(the company’s President and CEO).