Accounting Principles Chapter 7 Solution Manual

Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Eighth Canadian Edition
CHAPTER 7
Internal Control and Cash
Learning Objectives
1. Define cash and internal control.
2. Apply control activities to cash receipts and cash payments.
3. Describe the operation of a petty cash fund.
4. Describe the control features of a bank account and prepare
a bank reconciliation.
5. Report cash on the balance sheet.
Solutions Manual 7.1

Chapter 7
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Summary of Questions by Learning Objectives and Bloom’s Taxonomy
Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

Questions
1. 1 K 6. 1 C 11. 2 C 16. 4 K 21. 4 C
2. 1 C 7. 2 K 12. 2 C 17. 4 C 22. 5 C
3. 1 K 8. 2 C 13. 2 C 18. 4 K 23. 5 K
4. 1 C 9. 2 C 14. 3 K 19. 4 K
5. 1 K 10. 2 C 15. 3 K 20. 4 K
Brief Exercises
1. 1 C 6. 2 AP 11. 4 C 16. 4 AP 21. 5 AP
2. 1 C 7. 3 AP 12. 4 C 17. 4 AP 22. 5 C
3. 2 C 8. 3 AP 13. 4 AP 18. 4 AP
4. 2 C 9. 4 K 14. 4 AP 19. 4 AP
5. 2 AP 10. 4 K 15. 4 AP 20. 4 AP
Exercises
1. 1 C 5. 3 AP 9. 4 AP 13. 4 AP 17. 5 AP
2. 1,2 C 6. 3 AP 10. 4 AP 14. 4 AP
3. 2 AP 7. 3 AP 11. 4 AP 15. 4 AP
4. 1,2 C 8. 4 AP 12. 4 AP 16. 5 AP
Problems
1. 1,2 C 4. 1,2,3 AP 7. 4 AP 10. 4 AP 13. 5 AP
2. 1,2 C 5. 1,2,3 AP 8. 4 AP 11. 4 AP
3. 1,2 C 6. 3,4 AP 9. 4 AP 12. 4 AP

Chapter 7
Legend: The following abbreviations will appear throughout the

solutions manual file.
LO Learning objective
Bloom's
BT Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to complete in minutes
AACSB Association to Advance Collegiate Schools of Business
Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency Map
Ethics Professional and Ethical Behaviour
PS and DM Problem-Solving and Decision-Making
Comm. Communication
Self-Mgt. Self-Management
Team & Lead Teamwork and Leadership
Reporting Financial Reporting
Stat. & Gov. Strategy and Governance
Mgt. Accounting Management Accounting
Audit Audit and Assurance
Finance Finance
Tax Taxation

Chapter 7
ASSIGNMENT CLASSIFICATION TABLE

Brief Problems Problems
Learning Objectives Questions Exercises Exercises Set A Set B
1. Define cash and internal 1, 2, 3, 4, 1, 2 1, 2, 4 1, 2, 3, 4, 1, 2, 3, 4,

control. 5, 6 5 5
2. Apply control activities to 7, 8, 9, 10, 3, 4, 5, 6 2, 3, 4 1, 2, 3, 4, 1, 2, 3, 4,

cash receipts and cash 11, 12 5 5
payments.
3. Describe the operation of a 13, 14, 15 7, 8 5, 6, 7 4, 5, 6 4, 5, 6

petty cash fund.
4. Describe the control features 16, 17, 18, 9, 10, 11, 8, 9, 10, 6, 7, 8, 9, 6, 7, 8, 9,
of a bank account and 19, 20, 21 12, 13, 14, 11, 12, 10, 11, 10, 11, 12
prepare a bank reconciliation. 15, 16, 17, 13, 14, 15 12
18, 19, 20
5. Report cash on the balance 22, 23 21, 22 16, 17 13 13
sheet.

Chapter 7
ASSIGNMENT CHARACTERISTICS TABLE

Problem Difficulty Time
Number Description Level Allotted (min.)
1A Identify internal control activities related to cash Moderate 25-35
payments.
2A Identify internal control weaknesses for cash receipts Moderate 25-35

and cash payments.
3A Identify internal control weaknesses over cash receipts Simple 25-35

and cash payments and suggest improvements.
4A Record petty cash transactions and identify internal Simple 25-35

controls.
5A Record debit and bank credit card and petty cash Moderate 25-35
transactions, and identify internal controls.
6A Record petty cash transactions, and identify impact on Moderate 20-30

financial statements.
7A Prepare bank reconciliation and related entries. Moderate 25-35
8A Prepare back reconciliation and related entries. Moderate 25-35
9A Prepare back reconciliation and related entries. Moderate 25-35
12A Prepare bank reconciliation and adjusting entries. Moderate 30-40
13A Calculate cash balance and report other items. Moderate 20-30
1B Identify internal control activities. Moderate 25-35

2B Identify internal control weaknesses over cash receipts Moderate 25-35
and suggest improvements.
3B Identify internal controls for cash receipts and cash Simple 25-35
payments.
4B Record petty cash transactions and identify internal Moderate 25-35

controls.
5B Record debit and bank credit card and petty cash Moderate 20-30
transactions and identify internal controls.
6B Record petty cash transactions, and identify impact on Moderate 20-30

financial statements.
7B Prepare bank reconciliation and related entries. Moderate 25-35

Chapter 7
ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Problem Difficulty Time

Number Description Level Allotted (min.)
10B Prepare bank reconciliation and related entries. Complex 40-50

12B Prepare bank reconciliation and adjusting entries. Moderate 30-40
13B Calculate cash balance and report other items. Moderate 20-30

Chapter 7
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-

Chapter Material
Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

1. Define cash and internal Q7.1 Q7.2 P7.1A E7.4
control. Q7.3 Q7.4 P7.2A P7.4A
Q7.5 P7.3A P7.5A
Q7.6 P7.1B P7.4B
BE7.1 P7.2B P7.5B
BE7.2 P7.3B
E7.1
E7.2
2. Apply control activities to Q7.7 BE7.4 BE7.5 P7.4A

cash receipts and cash Q7.8 E7.2 BE7.6 P7.5A
payments. Q7.9 P7.1A E7.3 P7.4B
Q7.10 P7.2A E7.4 P7.5B
Q7.11 P7.3A
Q7.12 P7.1B
Q7.13 P7.2B
BE7.3 P7.3B
3. Describe the operation of a BE7.4 Q7.14 BE7.7 P7.5A

petty cash fund. Q7.15 BE7.8 P7.4B
E7.5 P7.5B
E7.6 P7.6A
E7.7 P7.6B
P7.4A
4. Describe the control Q7.16 Q7.17 BE7.13 E7.15

features of a bank account Q7.18 Q7.21 BE7.14 P7.6A
and prepare a bank Q7.19 BE7.11 BE7.15 P7.7A
reconciliation. Q7.20 BE7.12 BE7.16 P7.8A
BE7.9 BE7.17 P7.9A
BE7.10 BE7.18 P7.10A
BE7.19 P7.11A
BE7.20 P7.12A
E7.8 P7.6B
E7.9 P7.7B
E7.10 P7.8B
E7.11 P7.9B
E7.12 P7.10B
E7.13 P7.11B
E7.14 P7.12B
5. Report cash on the balance Q7.22 BE7.21 P7.13A
sheet. Q7.23 E7.16 P7.13B
BE7.22 E7.17
Broadening Your Perspective BYP7.1 Santé
BYP7.2 Saga
BYP7.3 BYP7.5
BYP7.4

Chapter 7
ANSWERS TO QUESTIONS
1. Cash is cash on hand and in bank accounts. It includes coins, currency,
cheques, money orders, and travellers’ cheques. Cash equivalents are
short-term highly liquid (easily sold) investments that are not subject to
significant changes in value and with maturities of three months or less
when purchased. Cash would include cash and coins kept on hand to
make change at cash registers and cash equivalents would include a term
deposit for 60 days.
LO 1 BT: K Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
2. Agree. 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. Through the implementation of internal
control, the efficiency of the operations will be improved.
LO 1 BT: C Difficulty: M Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
3. This is a violation of internal control. 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, and do pre- and post-
shift counts.
4. Independent checks of performance are necessary even if proper

segregation of duties is in place. This procedure is used to ensure that the
segregation of duties, and other control procedures are being correctly
followed and are working effectively. For example, the accounting records
are compared with existing assets or with external sources of information.
Problems or changes can be addressed immediately to restore the proper
controls and ensure the compliance with the business’ policies and
procedures.
5. Documentation procedures provide evidence of the occurrence of

transactions and events. Many documents used in an organization require
pre-numbering and accounting for the numerical sequence of these
documents. An example is the use of pre-numbered cheques used for
payments. Checking the numerical sequence of used and recorded pre-
numbered documents helps to ensure that a transaction is not recorded
more than once or not at all.

Chapter 7

Chapter 7
QUESTIONS (Continued)
6. 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.
7. Sales using debit cards and bank credit cards are similar in that they are
both considered cash transactions to retailers. Banks usually charge the
retailer a transaction fee for each debit card transaction and a fee that is a
percentage of the credit card sale. In both types of transactions, 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.
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).
8. Exact procedures will be different in every company, but the basic

principles should be the same. 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. 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.

Chapter 7
9. Cash registers with scanners 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.
LO 2 BT: C Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
10. Mail-in receipts in the form of cheques are generally accompanied by a

remittance slip. The envelopes should be opened in the presence of two
mail clerks. The amount of the remittance slip and the amount of the
cheque should be compared to establish any discrepancies. Each cheque
should be promptly stamped “For Deposit Only.” The remittance slips are
sent to the accounting department for recording and the cheques are sent
to the person responsible for making the bank deposits. Persons handling
the cheques must not be able to alter the accounting records. An
independent person should compare the deposit recorded by the bank
with the amount recorded in the accounting records. In a small company,
where it is not possible to have the necessary segregation of duties, the
owner should be responsible for cash receipts.
11. Sanjeet is incorrect. Although internal controls for handling electronic

funds transfers (EFTs) are different from those for handling cash and
cheques, they nevertheless include proper authorization and segregation
of duties to ensure an employee cannot divert a customer payment to a
personal bank account and then cover it up through fraudulent accounting
entries.
12. Incorrect. Payment by cheque or electronic funds transfer contributes to

effective internal control over cash payments. Pre-numbered cheques help
to ensure that all payments are accounted for. In addition, the bank
provides another record of the cash payments, and safekeeping of the
cash. However, effective control is also possible when small payments are
made from a petty cash fund.

Chapter 7
13. Wanda could potentially commit a fraud by:
(1) shipping merchandise to herself and creating a false sale on account;

therefore, the inventory account will balance. She can then omit to
record a cash sale and take the cash from the cash sale and use it to
settle the false accounts receivable that was created as a result of the
false sale.
(2) when invoicing customers, Wanda could charge significantly lower

prices for sales to friends.
Instructor’s note: These are only two examples. Students may develop
other valid examples.
14. The three activities that pertain to a petty cash fund and the related
internal control principles are:
(1) Establishing the fund. *

Establishment of responsibility for
custody of fund.
* Documentation procedures by
having the custodian cash the cheque
used to establish the fund.
(2) Making payments
from the fund. * Documentation
procedures because the custodian must
obtain receipts from cash registers or
invoices before the cash is paid out of the
petty cash fund.
(3) Replenishing the fund. * Segregation

of duties because individuals responsible
for the fund do not write or sign cheques.
* Documentation procedures.
Receipts or invoices must be provided to
justify the payment of the funds.
* Independent checks of
performance from the internal verification
because the request for replenishment
must be approved before the cheque is
issued.

Chapter 7
15. 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. Replenishment usually takes place before the
financial statements are prepared.
LO 3 BT: K Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
16. A company’s internal control is improved with the use of a bank account in
the following ways:
a. Physical control and restricted access over cash is more easily

maintained through the security and access controls provided by the
banking system.
b. The banking system provides a duplicate record of the transactions
affecting cash that are recorded in the company’s accounting records.
c. Endorsements of cheques by the payees provide proof of payment
that is invaluable in the case of disputes.
d. Most banks offer overnight deposit facilities that secure cash until the
deposits are processed, thereby discouraging robberies at the
company locations and providing for better security for company
employees.
e. Fast and efficient updates of cash transactions provide management
with real time information that avoids mistakes and clears up inquiries
through online access to banking activity.
f. Based on the company policies, the bank will enforce company policy
by allowing only authorized employees to sign cheques or have
access to banking information.
17. The purpose of the bank reconciliation is to establish the accuracy of the
amount reported as cash in the accounting records and to provide
effective internal control over cash. The employee that is assigned to
prepare the bank reconciliation should be someone who has no other
responsibilities that relate to cash. 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 payments.
If the division of the duties does not allow this segregation (handling of
cash and record keeping), then the owner of the business should prepare
the bank reconciliation.

Chapter 7
18. The four steps are: (1) determine deposits in transit, (2) determine
outstanding cheques, (3) discover any errors made (by the bank or by the
business), and (4) trace bank memoranda and other receipts and
payments.
19. a. An NSF cheque occurs when the cheque writer’s bank balance is less
than the amount of the cheque issued in payment.
b. In a bank reconciliation, a customer’s NSF cheque is deducted from
the balance per books. The bank has record of the NSF, but the
business does not.
c. An NSF cheque results in a journal entry in the company’s books,
as a debit to Accounts Receivable and a credit to Cash.
20. Paul should not rely on online banking to give him an accurate balance in
his bank account. Online 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 might also have made an EFT payment to a
supplier and post-dated the payment date to the due date of an invoice.
When looking at the balance online, he may have lost track of this pending
payment that does not yet appear on his bank account.
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. This
is the only way to have accurate information on his bank account balance.
21. Jayne should include the monthly interest of $32 in the book section of her
bank reconciliation and not the bank section as is being suggested. The
bank has correctly reflected this transaction on the bank statement, while
the accounting records have not yet been updated for this transaction. The
bank has charged Jayne $32 in interest and she needs to update her
books to capture this. If the interest is not included, Jayne will be unable to
reconcile the bank and book balances.

Chapter 7
22. Disagree. The credit balance in the cash account does not mean there is
an error in the account. It is possible for the cash account to have a credit
balance to reflect a cash deficit or negative position. This situation can
occur assuming the business’ bank allows an overdraft position which is,
in effect, a temporary bank loan.
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 non-current asset.

Chapter 7
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7.1

Cash in bank savings account $8,000
Cash on hand 850
Chequing account balance 14,000
Cash $22,850
BRIEF EXERCISE 7.2

The six control activities include:
1. Establishment of responsibility: This control activity

involves assigning a task to one employee and making that
employee accountable for the task assigned. An example
would be assigning the responsibility to a cashier who is in
charge of taking in cash, using a cash register, and making
change when collecting parking fees.
2. Segregation of duties: This activity involves assigning tasks

to different individuals to prevent fraud or errors. An
example would be to separate the responsibility of
handling the cash from the record keeping of the parking
fee revenue.
3. Documentation procedures: This control activity provides

evidence of the transactions and events that have taken
place. This is particularly important when an employee is
handling cash. For Liberty Parking, when parking tickets
are issued giving customers parking access, the tickets
should be pre-numbered, and time and date stamped.
4. Physical and IT controls: These include mechanical and

electronic controls to safeguard (protect) assets and
improve the accuracy and reliability of the accounting
records. An example for the parking garage would be
barriers or gates for entering and exiting the parking lot.
Chapter 7
BRIEF EXERCISE 7.2 (Continued)
5. Independent checks of performance: This control involves

the verification by an independent person that the control
activities are being followed. An example would be to have
a supervisor observe how the cashier is handling the
collection and recording of the cash using the cash
register.
6. Human resource controls: These controls involve protection

against employee fraudulent behaviour. The parking
garage should conduct thorough background checks
before hiring the parking lot cashier. Background checks
may include criminal records and reference checks,
verification of credentials, and credit checks.
BRIEF EXERCISE 7.3
1. Human resource controls

2. Physical and IT controls
3. Independent checks of performance
4. Segregation of duties
5. Documentation procedures
6. Establishment of responsibility

Chapter 7
BRIEF EXERCISE 7.4
BRIEF EXERCISE 7.5
Sept. 12 Cash..................................................... 496.50

Debit Card Expense (5 X $0.70)......... 3.50
Sales.............................................. 500.00
To record sales using debit cards.
LO 2 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting
BRIEF EXERCISE 7.6
April 16 Cash..................................................... 9,750

Credit Card Expense ($10,000 × 2.5%) 250
Sales.............................................. 10,000
To record sales using credit cards.

Chapter 7
BRIEF EXERCISE 7.7
March 2 Petty Cash......................................... 100

Cash.............................................. 100
To establish petty cash fund.
March 27 Supplies ............................................ 20

Postage Expense.............................. 27
Repairs Expense............................... 35
Cash.............................................. 82
To replenish petty cash fund.
BRIEF EXERCISE 7.8
Nov. 30 Postage Expense.............................. 31

Supplies............................................. 42
Travel Expense................................. 16
Cash Over and Short........................ 1
....................................Cash ($100 − $10)
90

Chapter 7
BRIEF EXERCISE 7.9

a. A cheque is a written order to the bank to pay a specific
amount to a specific person. Control benefits of a
cheque include: 1) proper support for the payment is
provided before the cheque is issued and as subsequent
evidence of the payment; 2) pre-numbering, which
avoids unrecorded transactions; 3) dual signatures, to
ensure proper authorization of payments.
b. A bank statement shows a company’s bank transactions

and balance. Control benefits of a bank statement: The
bank statement is a document prepared by an entity
external to the business and it could highlight
unauthorized payments. It is used in the bank
reconciliation process, which is a key internal control
procedure for the business.
BRIEF EXERCISE 7.10
1. c. EFT payment made by a customer

2. d. Bank debit memorandum for service charges
3. b. Outstanding cheques from the current month
4. b. Bank error in recording a $1,779 deposit as $1,977
5. b. Outstanding cheques from the previous month that are
still outstanding
6. e. Outstanding cheques from the previous month that are
no longer outstanding
7. a. Bank error in recording a company cheque made out
for $160 as $610
8. c. Bank credit memorandum for interest revenue
9. d. Company error in recording a deposit of $160 as $1,600
10. d. Bank debit memorandum for a customer’s NSF cheque
11. a. Deposit in transit from the current month
12. d. Company error in recording a cheque made out for $630
as $360

Chapter 7
BRIEF EXERCISE 7.11
a. Outstanding cheques 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.
b. A bank debit memorandum for service changes will result

in an adjustment to the accounting records. In this case,
the adjustment will be a deduction from the unadjusted
cash balance per books.
c. An EFT payment made by a customer will result in an

adjustment to the accounting records. In this case the
adjustment will be an added to the unadjusted cash
balance per books.
d. Deposits in transit will need to be added to the unadjusted

bank balance to calculate the adjusted bank balance.
Since the company has already recorded the deposit, the
company does not need to record an adjustment.
e. A company error in recording cheque made out for $880

as $808 will result in an adjustment to the accounting
records. In this case the adjustment will be a deduction
from the unadjusted cash balance per books.
f. A bank error in clearing a cheque against Ellington

Company’s bank account when the cheque was written by
Wellington Company will be an adjustment to the bank
balance to calculate the adjusted bank balance. In this
case, the adjustment will be added to the unadjusted cash
balance per bank. The company has not made an error
and so does not need to make an adjustment.

Chapter 7
BRIEF EXERCISE 7.12

a. Outstanding cheques of $1,200 – Deducted from the
unadjusted bank balance.
b. Deposits in transit of $5,250 – Added to the unadjusted
bank balance.
c. Debit memorandum for bank service charge of $25 –

Deducted from the unadjusted cash balance per books.
d. EFT of $1,970 from a customer for goods received – Added

to the unadjusted cash balance per books.
BRIEF EXERCISE 7.13
Randolph Electric
Bank Reconciliation
December 31
Cash balance per bank..................................................... $6,653

Add: Deposits in transit................................................. 5,250
11,903
Less: Outstanding cheques............................................ 1,200
Adjusted cash balance per bank..................................... $10,703
Cash balance per books................................................... $8,758

Add: EFT from customer for goods received................ 1,970
10,728
Less: Service charge....................................................... 25
Adjusted cash balance per books................................... $10,703
LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7
BRIEF EXERCISE 7.14
a. Bank Charges Expense.................... 35

...................................................Cash
35
To record bank service charge expense.
b. Cash................................................... 40
Interest Revenue.......................... 40
To record interest earned.
c. Cash................................................... 500
..................................................Sales
500
To record bank cash sale.
BRIEF EXERCISE 7.15

9,040
Less: Outstanding cheques............................................ 762
BRIEF EXERCISE 7.16

Add: Interest earned........................................................ 40
9,540
Less: Charge for printing company cheques................ 35

Chapter 7

Chapter 7
BRIEF EXERCISE 7.17
Howel Company
Bank Reconciliation
August 31

11,375

Add: Interest earned....................................................... 22
10,072
Less: NSF cheque............................................................ 280
Service charge....................................................... 00 40
BRIEF EXERCISE 7.18
(a)Bank Charges Expense............................. 50

...................................................Cash
50
(b)Accounts Receivable................................. 440

...................................................Cash
440
To record NSF cheque.
(c)Cash ($500 - $50)........................................ 450

Supplies........................................ 450
To correct error recording payment.

Chapter 7
BRIEF EXERCISE 7.19
1. a. The amount of the payment of an account payable

has been recorded in the books as $2,270 when the
correct amount is $1,270. The reconciling item of
$1,000 ($2,270 − $1,270) will appear as an increase to
the book cash balance.
b.
March 31 Cash................................................... 1,000
.............................Accounts Payable
1,000
To correct error recording payment on account.
2. a. The amount of the collection on account has been

recorded in the books as $2,450 when the correct
amount is $4,250. This is a transposition error. The
reconciling item of $1,800 ($2,450 − $4,250) will
appear as an increase to the book cash balance.
b.
March 31 Cash................................................... 1,800
.......................Accounts Receivable
1,800
To correct for error in recording deposit.
3. a. The amount of the deposit was recorded by the bank

as $5,750 when the correct amount is $2,720. The
reconciling item of $3,030 ($5,750 − $2,720) will
appear as a decrease to the bank cash balance.
b. No entry needed as this is a bank error.

Chapter 7
BRIEF EXERCISE 7.20
1. a. The amount of the payment of an account payable

has been recorded in the books as $2,810 when the
correct amount is $1,810. The reconciling item of
$1,000 ($2,810 − $1,810) will appear as an increase to
the book cash balance.
b.
June 30 Cash................................................... 1,000
.............................Accounts Payable
1,000
To correct for error in recording payment.
2. a. The amount of the collection on account has been

recorded in the books as $2,222 when the correct
amount is $3,333. The reconciling item of $1,111
($2,222 − $3,333) will appear as an increase to the
book cash balance.
b.
June 30 Cash................................................... 1,111
.......................Accounts Receivable
1,111
To correct for error in recording deposit.
3. a. The amount of the incorrect charge for the cheque

clearing was recorded by the bank as $825 when no
charge should have been recorded. This is a bank
error. The reconciling item of $825 will appear as an
increase to the bank cash balance.
b. No entry needed as this is a bank error.

Chapter 7
BRIEF EXERCISE 7.21
Cash and cash equivalents should be reported at $19,750

($5,500 + $750 + $10,000 + $3,500).
The cash refund due from CRA is a receivable. Stale-dated

cheques cannot be used, so the corresponding accounts
receivable remains outstanding. Postdated cheques are
receivables until they can be cashed on their valid date.
The treasury bill is a short-term investment of less than 90 days

and may be considered a cash equivalent.
BRIEF EXERCISE 7.22
Current Assets:
Dupré Company should report the cash in bank, payroll bank

account, store cash floats, and petty cash as cash on its
balance sheet. The investments with original maturity dates of
fewer than 90 days may be grouped with cash as cash and cash
equivalents.
The short-term investments with maturity dates of 100 to 365

days should be reported as a separate item.
Non-current Assets:
The plant expansion fund cash should be reported as a non-

current asset because the fund is not expected to be used
during the next year.

Chapter 7
SOLUTIONS TO EXERCISES
EXERCISE 7.1
a. Weakness or Strength b. Suggested Improvements
1. No establishment of The employees should use
responsibility over the cash separate cash drawers.
—weakness
Cash counts not performed Cash counts should be performed
independently—weakness by a supervisor at the end of the
shift and the totals compared to the
cash register tape.
2. Improper segregation of Different individuals should receive
duties could result in the cash, record cash receipts, and
misappropriation of cash— deposit the cash. In a small
weakness business this may be impossible;
therefore, it is imperative that
management take an active role in
the operations of the business to
be able to detect any accounting
irregularities.
3. Improper segregation of The same individual could omit the

duties—weakness documentation of a purchase
order, receive a shipment, and take
the merchandise, all without a
trace. Implement segregation of
duties to prevent the
misappropriation (loss) of assets.
4. Repair of physical control—
strength
5. Internal reviews completed
regularly, and issues
resolved—strength
6. Human resources control Apply the policy of replacing the
over employees’ duties position during vacations to the
including vacations— controller position.
strength except for the
controller position

Chapter 7
LO 1 BT: C Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7
EXERCISE 7.2
1. a. Access to cash is not restricted. Cash is not placed

in a secure device until deposited. The locked metal
box being used is likely portable and not secure. The
control activity that is being violated is the physical
and IT control.
b. The excess cash should be stored in a secure

storage device such as a safe with no access
possible by the employees.
2. a. The responsibility for the cash drawer is not

assigned to a single employee. Follow up and control
over cash shortages is compromised. The control
activity that is being violated is the establishment of
responsibilities.
b. If several employees need to share the same cash

drawer to ring up sales, each employee should be
assigned an access code that is tracked by the cash
register for each transaction. Any cash shortages or
entry errors can be narrowed down to a particular
employee, by using the access code.
3. a. All employees handling cash should be bonded.

Failing to do so violates the human resource control.
Cash shortages through fraud may not be
recoverable from insurance.
b. Bond all employees handling cash.
4. a. Improper segregation of duties has been established,

leaving the possibility of the misappropriation of
company assets by the assistant controller. The
control activity violated is the segregation of duties.
b. Reassign the duties such that anyone having access

to cash does not also have access to the accounting
records.

Chapter 7
EXERCISE 7.2 (Continued)
5. a. Destroying the remittance advices and credit card

sales receipts weekly exposes the business to the
risk of not being able to substantiate a claim against
a customer. The control activity violated is the
documentation procedures.
b. Obtain adequate storage space and eliminate the

weekly destruction of the documents.
LO 1,2 BT: C Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 7.3
a. Mar. 15 Cash ($8,740 − $54)................... 8,686

Debit Card Expense
($1.35 × 40)............................. 54
Sales....................................... 8,740
To record debit card sales.
b. June 21 Cash ($2,000 − $80)................... 1,920

Credit Card Expense
($2,000 × 4%)......................... 80
Sales....................................... 2,000
To record credit card sales.
July 17 No entry
c. Oct. 7 Accounts Receivable—Ramos. 550

Sales....................................... 550
To record sales using company credit card.
Nov. 10 Cash............................................ 550

Accounts Receivable—Ramos 550
Collection on account.

Chapter 7
EXERCISE 7.4
1. a. Company cheques are not pre-numbered and access

to blank cheques is not restricted, leaving the
possibility for someone to make an unauthorized
payment from the business bank account, which may
go undetected. Payment transactions may also
remain unrecorded in the accounting records. The
control activities that are being violated are
documentation and physical and IT controls.
b. Obtain pre-numbered cheques and account for their

numerical sequence. Store the unused cheques in a
secure area.
2. a. Improper segregation of duties, because only one

employee is signing cheques.
b. Require two employees to sign each cheque. It would

be appropriate to have only one person sign the
cheques, only if it was the owner.
3. a. Improper segregation of duties, leaving the

possibility of the misappropriation of company
assets as a result of having suppliers paid for goods
that have not been ordered or received. As well, the
purchasing agent can direct merchandise to be
delivered to a location other than the company’s
place of business. The control activities violated are
establishment of responsibility and the segregation
of duties.
b. Reassign the duties such that anyone having access

to inventory is not assigned the duty of authorizing
payments. As well, purchasing agents should be
restricted from having access to the inventory.

Chapter 7
4. a. Improper segregation of duties, leaving the

possibility of the misappropriation of company
assets through an unsupported payment or a
payment that is not a business expense. Duplicate
payments can be achieved by failing to stamp the
invoice as having been paid. The control activities
violated are establishment of responsibility and the
segregation of duties.
b. Reassign the duties such that anyone having signing

authority on the bank account does not have record
keeping duties or the task of stamping invoices paid.
5. a. The control activities violated is independent checks

of performance. The control achieved by verification
of the bank reconciliation has failed. The controller
prepares and signs all cheques, records all the
journal entries, and prepares the bank reconciliation
which would provide the controller the opportunity to
commit and conceal a fraud.
b. Have the owner properly scrutinize and approve the

bank reconciliation. Also, consider assigning
responsibility for the bank reconciliation to another
individual.
6. a. The control activity violated is human resource

controls. Individuals placed in a position of trust
could misappropriate company assets.
b. Perform thorough background checks.

Chapter 7
7. a. The control activity violated is human resource

controls. The purchasing agent may be
misappropriating company assets.
b. Insist that all personnel take scheduled vacation and

have their positions staffed during their absence.
LO 1,2 BT: C Difficulty: C Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 7.5
a.
Feb. 14 Petty Cash......................................... 100
Cash.............................................. 100
b.
Feb. 28 Supplies ($10 + $13 + $23)............... 46
Postage Expense.............................. 8
Merchandise Inventory.................... 30
Freight Out........................................ 17
Cash ($100 − $5)........................... 95
Cash Over and Short................... 6

Chapter 7
EXERCISE 7.6
a.
Sept. 4 Petty Cash......................................... 200
Cash.............................................. 200
b.
Sept. 30 Merchandise Inventory
($25 + $30 + $40).......................... 95
Freight Out ($15 + $20)..................... 35
Supplies............................................. 10
Cash Over and Short........................ 10
Petty Cash ($200 − $150)............. 50
Cash ($150 − $50)......................... 100
To replenish and decrease petty cash fund.
EXERCISE 7.7
May 1 Petty Cash......................................... 150.00

Cash.............................................. 150.00
June 1 Delivery Expense.............................. 31.25

Postage Expense.............................. 39.00
Travel Expense................................. 62.00
Cash Over and Short........................ 13.00
Cash ($150.00 – $4.75)................. 145.25
July 1 Delivery Expense.............................. 31.00

Entertainment Expense.................... 71.00
Supplies............................................. 44.75
Cash ($150.00 – $3.25)................. 146.75
July 10 Petty Cash......................................... 50.00

Cash.............................................. 50.00
To increase petty cash fund.

Chapter 7

Chapter 7
EXERCISE 7.8
a.
TINDALL COMPANY
Bank Reconciliation
September 30, 2021
Cash balance per bank statement................................... $7,100

8,480
Cash balance per books..................................... $5,470

Add: Error in cheque No. 212: Supplies......... $ 54
EFT collection of Accounts Receivable 78 132
5,602
Less: Bank service charge................................ 22
NSF cheque.............................................. 220 242
b. Sept. 30 Cash............................................ 132

Supplies ($482 – $428).......... 54
Accounts Receivable............ 78
To record bank reconciliation items.
30 Bank Charges Expense............. 22

Accounts Receivable................ 220
Cash....................................... 242

Chapter 7
EXERCISE 7.9
a.
Bank Reconciliation
January 31
Cash balance per bank statement................. $3,560.20

Add: Deposits in transit................................ 530.00
4,090.20
Less: Outstanding cheques.......................... 730.00
Adjusted cash balance per bank................... $3,360.20
Cash balance per books................................. $3,875.20

Less: NSF cheque.......................................... $490.00
Bank service charge............................ 25.00 515.00
Adjusted cash balance per books................. $3,360.20
b. Jan. 31 Accounts Receivable................ 490

Bank Charges Expense............. 25
Cash....................................... 515

Chapter 7
EXERCISE 7.10
a.
CRANE VIDEO COMPANY
Bank Reconciliation
July 31
Cash balance per bank statement................. $7,263

Add: Deposits in transit................................ 1,300
8,563
Less: Outstanding cheques.......................... 591
Adjusted cash balance per bank................... $7,972
Cash balance per books................................. $7,284

Add: Collection of note receivable............... $700
Collection of interest revenue.............. 36 736
8,020
Less: Bank service charges ($28+ $20)...... 48
Adjusted cash balance per books................. $7,972
b. July 31 Bank Charges Expense............. 48

Cash....................................... 48
31 Cash............................................ 736
Note Receivable.................... 700
Interest Revenue................... 36

Chapter 7
EXERCISE 7.11
a.
BRAD’S BURGER COMPANY
Bank Reconciliation
July 31
Cash balance per bank statement................. $7,363

Add: Bank error............................................... $700
Deposits in transit.................................. 2,200 2,900
10,263
Less: Outstanding cheques.......................... 594
Adjusted cash balance per bank................... $9,669
Cash balance per books................................. $8,784

Add: Collection of note receivable............... $1,250
Collection of interest revenue.............. 36 1,286
10,070
Less: NSF cheque........................................... 350
Error on cash sales ($32 - $23)............ 9
................................................................
Bank service charges ($22 + $20)........ 42 401
Adjusted cash balance per books................. $9,669
b. July 31 Bank Charges Expense............. 42

Sales........................................... 9
Cash....................................... 401
31 Cash............................................ 1,286
Note Receivable.................... 1,250

Chapter 7
EXERCISE 7.12
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 $956 must be added to the balance per
books
 The error in the May 9 deposit must be corrected on the
books; therefore, the balance per books must increase
by $63 ($3,281 − $3,218).
EXERCISE 7.13
a. Outstanding cheques on May 31:

No. 255 $ 262
No. 261 786
No. 264 680
$1,728
b. Other adjustments:
 Decrease balance per books $54 for service charges
recorded by bank.
 Decrease balance per books $450 for error in cheque
260—should be $500 not $50.
 Decrease balance per books for NSF cheque of $395.

Chapter 7
EXERCISE 7.14
1. a. The amount of $40 ($2,090 – $2,050) needs to be added

to the company cash balance.
b. July 9 Cash....................................... 40
Accounts Receivable...... 40
To correct error recording deposit.
2. a. The amount of $450 ($1,060 – $610) needs to be added

to the company cash balance.
b. July 14 Cash....................................... 450

Accounts Payable........... 450
To correct error recording payment
on account.
3. a. The amount of $270 ($630 – $360) needs to be deducted

from the company cash balance.
b. July 16 Supplies................................. 270

Cash................................. 270
To correct recording purchase of supplies.
4. a. Nothing is recorded on the bank reconciliation. This was

a bank error and it was corrected by the bank on July
23.
b. No entry needed as this was a bank error.
5. a. The amount of $300 ($970 – $670) needs to be added to

the company cash balance.
b. July 31 Cash....................................... 300

Accounts Receivable...... 300
To correct for error recording deposit.
6. a. The amount of $200 needs to be added to the bank

balance.
b. No entry needed as this was a bank error.

Chapter 7
LO 4 BT: AP Difficulty: C Time: 25 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7
EXERCISE 7.15
a.
CLARESVIEW COMPANY
Bank Reconciliation
August 31, 2021

Add: Error cheque# 705 ($198 – $189).... $ 9
Deposits in transit............................ 17,050 17,059
34,159
Less: Outstanding cheques
# 673................................................. 1,490
# 710.................................................. 2,550
# 712.................................................. 2,480 6,520

Add: EFT deposits of Accounts Receivable................ 2,050
28,080
Less: Bank service charge........................ $ 25
NSF cheque...................................... 416 441
b. Aug. 31 Cash............................................ 2,050

Accounts Receivable............ 2,050
To record EFT collection on account.
31 Bank Charges Expense............. 25

Cash....................................... 441

Chapter 7
EXERCISE 7.16
(a) Cash and cash equivalents balance June 30, 2021

1. Currency and coins............................................ $ 76
2. Guaranteed investment certificate ................... 12,900
3. June cheques...................................................... 375
5. Royal Bank chequing account........................... 2,360
6. Royal Bank savings account............................. 4,160
9. Cash register floats............................................ 330
10. Over-the-counter cash receipts for June 30:
Currency and coins........................................ 540
Cheques from customers.............................. 90
Debit card slips............................................... 550
Bank credit card slips.................................... 740
Total cash and cash equivalents....................... $22,121
b.
2. Note: The Guaranteed investment certificate in the
amount of $12,900 could be reported as a short-term
investment on the balance sheet instead of as a cash
equivalent. If it was reported as a short-term
investment, then the balance sheet would show Cash of
$9,221.
4. Postdated cheque—Balance sheet (accounts receivable)
7. Prepaid postage in postage meter—Balance sheet
(prepaid expense)
8. IOU from company receptionist—Balance sheet (other
receivables)
LO 5 BT: AP Difficulty: C Time: 20 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7
EXERCISE 7.17
(a) Cash and cash equivalents balance:

Cash in bank............................................ $42,000
Cash on hand.......................................... 12,000
Highly liquid investments...................... 34,000
Petty cash................................................ 500
Total cash and cash equivalents........... $88,500
b. The “Cash in plant expansion fund” should be reported as

part of long-term investments (a non-current asset).
“Receivables from customers” should be reported as accounts
receivable in the current assets. “Stock investments” should
also be reported in the current assets.

Chapter 7
SOLUTIONS TO PROBLEMS
PROBLEM 7.1A
1. a. The same employee is responsible for purchasing and

receiving goods as well as matching the purchase
order to the receiving report and the supplier’s invoice.
This employee also approves the invoice for payment.
b. The following duties should be divided among the staff:
(1) Purchasing, (2) Receiving and preparing receiving
reports, (3) Matching receiving reports to invoices, and
(4) Approving the invoice for payment. The
responsibility for the matching of the purchase order
with the receiving report and the invoice should be
assigned to the assistant controller.
2. a. The numerical sequence of cheques is not tracked.

b. The numerical sequence of cheques should be tracked.
Checking the numerical sequence of used and
recorded pre-numbered cheques helps to ensure that a
payment is not recorded more than once, or not at all.
3. a. The controller is responsible for stamping the invoice

paid.
b. The owner, Stephanie Seegall, who is the cheque
signer, should be assigned the responsibility for
stamping the invoices paid, to prevent reuse.
4. a. The controller is responsible for preparing all the

cheques.
b. The responsibility for the preparation of the cheques,
along with the accompanying supporting documents
(invoices matched to receiving reports), should be
assigned to the assistant controller, as stated in item 1
above and the assistant should also check the
invoice’s accuracy and pricing.

Chapter 7
PROBLEM 7.1A (Continued)
5. a. The controller is responsible for the preparation of all

the journal entries.
b. The journal entries should be prepared by the assistant
controller and the controller should approve the
entries.
6. a. The assistant controller posts the journal entries.

b. The task of posting approved journal entries should be
assigned to the bookkeeper or accountant in charge of
entering other business transactions.
7. a. Pre-signed cheques are left in the safe for the

controller to use in the owner’s absence.
b. During the absence of the owner, payments should be
postponed until the owner’s return, or signing authority
for reduced amounts of payments delegated to the
controller. Upon the owner’s return, the cheque
duplicates or journals of the cheques signed by the
controller should be approved by the owner.
8. a. Unrecorded cheques are charged to the owner’s

drawings account and there currently is no approval of
b. All entries relating to the owner’s account should be
approved by the owner. The owner should review and
approve the bank reconciliation monthly.
Taking It Further:
Designing and implementing a strong system of internal control
can help employees from being falsely accused of fraud. Any
errors in the purchasing and recording of payment transactions
could lead to false fraud accusations directed to anyone
involved in these activities.
LO 1,2 BT: C Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7
PROBLEM 7.2A
Taking It Further:
a. Weaknesses & b. Problems Suggested Improvements
1. No segregation of duties The duties of receiving cash and
between receiving the cash admitting students should be
and admitting students to the assigned to separate individuals.
lessons. The teachers could
admit students for free or
charge extra and pocket the
difference or report fewer
students and pocket the extra
money.
2. No segregation of duties in An independent person should

the accounting functions. The approve the invoices for payment
general manager could pre- and prepare the bank
pare fictitious invoices for reconciliations.
payment and it would not be
detected.
3. No segregation of duties. An independent person should

Sales persons are responsible be responsible for providing
for determining credit policies credit to customers.
and they receive a Alternatively, a policy could be
commission based on sales. implemented where salespeople
They could provide credit to a are only paid a commission on
bad credit risk customer to sales that are collected. This
receive the commission on would reduce motivation to make
the sale. sales to financially weak
customers.
4. No establishment of Access to the accounting

responsibility. No individual is records should be restricted and
solely responsible for the protected with password or
accounting software. All biometric restrictions.
programmers have access to
the accounting software,
which could provide
unauthorized changes to the
accounting records.
Chapter 7
5. Documentation is lacking. Receiving reports and purchase

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

Chapter 7
PROBLEM 7.3A
Roger has created a situation that leaves many opportunities

for undetected fraud. Here is a list of some of the deficiencies in
internal control. You may find others.
a. Inadequate control over the cash box. In effect, it was

operated like a petty cash fund, but too many people had
the key.
b. Roger should have had the key and disbursed funds
when necessary for purchases.
a. 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.
b. 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.
a. Sara Billings was collecting tickets and receiving cash for

additional tickets sold.
b. There should have been one person selling tickets at the
door and a second person collecting tickets.

Chapter 7
a. The tickets were unnumbered.

b. By numbering the tickets, the students could have been
held more accountable for the tickets.
a. No record was kept of which students took tickets to sell

or how many they took.
b. 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.)
a. 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.
b. 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.
a. Instead of receipts, students simply wrote notes saying

how they used the funds.
b. A requirement to provide a valid receipt should have
been put in place.
a. 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.
b. If the payment has to be made in cash, Obnoxious Al
should be required to sign a receipt, confirming that he
has received the payment.

Chapter 7
a. The tickets were left in an unlocked box on his desk.

b. Roger should have assigned control of the tickets to one
individual and kept the tickets in a locked box over which
that student alone had control.
a. No verification of the number of students attending the

event was established.
b. A count of the number of people attending the event
should have taken place when admission was granted.
This total could then have been compared to the sales
proceeds to determine that all ticket sales have been
properly accounted for and cash obtained.

None apply in this case
Taking It Further:
Designing and implementing a strong system of internal control

can help protect students and their teacher from being falsely
accused of fraud. The instincts of Principal Skinner are correct,
when it didn’t appear reasonable to him that only $430 in cash
would be left from an event generating roughly $2,000 in sales.
His suspicions could lead to false fraud accusations directed at
anyone involved in organizing the event. Had proof been
required to explain this unreasonable result, it would have been
very difficult for Roger or the students to defend themselves.
Bad feelings between the students and the teacher could
develop from suspicions concerning who had perpetrated the
fraud. Roger and the SRC students had done the work on a
volunteer basis and for a good cause. If they feel they have
been suspected of fraud, they will likely not volunteer in the
future.
LO 1,2 BT: C Difficulty: S Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7
PROBLEM 7.4A
a. Feb. 1 Petty Cash....................................... 200.00

Cash......................................... 200.00
15 Freight Out...................................... 82.00

Postage Expense............................ 72.50
Entertainment Expense.................. 36.60
Cash Over and Short...................... 3.90
Cash ($200.00 - $5.00)............ 195.00
28 Freight Out...................................... 42.50

Repairs Expense............................. 41.90
Supplies........................................... 45.00
Cash Over and Short......................
2.40
Cash ($200.00 – $48.00).......... 152.00
Mar. 15 Freight Out...................................... 37.60

Postage Expense............................ 33.25
Supplies........................................... 67.00
Cash Over and Short..............
4.60
Cash ($200.00 – $13.00).......... 187.00
16 Petty Cash....................................... 50.00

Cash......................................... 50.00
31 Postage Expense............................ 40.00

Travel Expense............................... 75.60
Freight Out...................................... 47.10
Cash ($250.00 – $16.00).......... 234.00
Chapter 7

Chapter 7
b. The internal control features of a petty cash fund include:
(1) A custodian is responsible for the fund.
(2) A pre-numbered petty cash receipt signed by the

custodian and the individual receiving payment is
required for each payment from the fund.
(3) The treasurer’s office examines all payments and stamps

supporting documents to indicate they were paid when
the fund is replenished.
(4) Surprise counts can be made at any time to determine

whether the fund is intact.
Taking It Further:
This could be a problem for the company as Su Ma 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 Su Ma 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
pre-numbered 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.
LO 1,2,3 BT: AP Difficulty: S Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7
PROBLEM 7.5A
a. July 1 Petty Cash.................................. 300

Cash....................................... 300
8 Cash............................................ 32,347
($32,750 − $168 − $235)
Debit Card Expense (134 × $1.25) 168
Credit Card Expense
($11,7261 × 2%)...................... 235
Sales....................................... 32,750
1
($32,750 − $12,081 − $8,943)
To record sales.
8 Freight Out................................. 69
Supplies...................................... 35
Advertising Expense................. 46
R. Malik, Drawings..................... 58
Cash Over and Short................. 5
Cash ($300 − $87).................. 213
15 Cash............................................ 28,689
($29,050 − $195 − $166)
Credit Card Expense
($8,3062 × 2%)........................ 166
Sales....................................... 29,050
2
($29,050 − $10,912 − $9,832)
To record sales.
25 Postage Expense...................... 79
Supplies...................................... 98
Petty Cash ($300 - 250)......... 50
Cash ($250 − $16).................. 234

Chapter 7
To replenish and decrease petty cash fund.

Chapter 7
b. 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.
Because of the costs involved in issuing a cheque, the
business is justified in paying for small purchases with
petty cash.
There are several internal controls over the petty cash fund
that Malik should follow:
 One person should be appointed the petty cash
custodian and made responsible for the fund.
 A pre-numbered petty cash receipt should be signed by
the custodian and the individual receiving payment for
each payment from the fund.
 The controller’s office should examine all payments and
stamp supporting documents to indicate they were paid
when the fund is replenished.
 Surprise counts should be made to determine whether
the fund is properly administered and that the sum of
the petty cash receipts and remaining cash is equal to
the petty cash fund balance.
Taking It Further:
An 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 or established
credit to pay for their purchases. Another advantage is that
sales will likely increase if customers can use debit or credit
cards. Accepting debit and credit card transactions also acts as
an internal control by limiting the amount of cash employees
are exposed to. The disadvantage is that the bank charges a fee
on all transactions using debit and credit cards.
LO 1,2,3 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7

Chapter 7
PROBLEM 7.6A
a. Nov. 1 Petty Cash.................................. 150

Cash....................................... 150
15 Repairs Expense ($16 + $26).... 42

R. Hayes, Drawings................... 38
Office Expense........................... 9
Cash Over and Short............ 1
Cash ($150 − $11).................. 139
30 Repairs Expense ($30 + $11).... 41

Supplies...................................... 44
R. Hayes, Drawings................... 44
Office Expense........................... 7
Cash ($150 − $11).................. 139
b. Had the petty cash fund not be reimbursed as at the end of

November, the financial statements would be affected as
follows:
Expenses understated:
Repairs ................................................ $41
Cash Over and Short............................ 3
Miscellaneous Expense....................... 7 $51
Profit overstated....................................... 51
R. Hayes, Drawings understated............ 44
Cash overstated....................................... 139
Supplies understated............................... 44
Total assets overstated ($139 – $44)...... 95
Total owner’s equity overstated ($51 + $44) 95

Chapter 7
Taking It Further:
To ensure that the petty cash fund is properly administered, the

owner should ensure the following internal control features:
1. Responsibility for the petty cash fund is assigned to a

single person.
2. The petty cash fund is kept in a secure location, out of

reach by other employees.
3. The petty cash custodian insists that supporting

documents or receipts are provided before any
reimbursement or payment is made from the petty cash
fund.
4. A pre-numbered petty cash receipt is signed by the

custodian and the individual receiving payment for each
payment from the fund.
5. The petty cash custodian does not accept I.O.U.s from

employees in exchange for loans.
6. The petty cash custodian prepares a schedule of the

payments that have been made and sends the schedule,
supported by petty cash receipts and other
documentation, to the controller.
7. The receipts and supporting documents are examined by

the controller to verify that they were proper payments
from the fund and that the documents are marked “Paid”
so that they cannot be submitted again for payment. The
controller’s approval is documented before a cheque is
issued to restore the fund to its established amount.

Chapter 7
Taking It Further: (Continued)
8. The cheque issued for replenishment of the fund must be

made payable to the custodian who must then endorse the
cheque to cash it and replenish the fund.
9. Check that the amounts of cash over and short are

reasonable in size.
10. Perform surprise counts to determine whether the fund is

properly administered and whether the sum of the petty
cash receipts and remaining cash is equal to the petty
cash fund.
LO 3,4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7
PROBLEM 7.7A
a.
LISIK COMPANY
Bank Reconciliation
October 31, 2021
_______________________________________________________
Add: Deposit in transit..................................... $ 960
Bank error—Lasik cheque...................... 585 1,545
11,700
($415 + $555 + $646 + $315)................................ 1,931
Adjusted cash balance per bank..................................... $ 9,769
Cash balance per books................................................... $ 8,946

Add: Collection of EFT..................................... $1,875
...........Error in recording cheque #1181 for
Accounts Payable ($574 − $457)............ 117
Interest revenue....................................... 25 2,017
10,963
Less: NSF cheque.............................................. 805
Error in Oct. 12 deposit of cash sales
($741 − $417)..................................... 324
Bank service charge................................ 30
Cheque printing charge.......................... 35 1,194

Chapter 7
b. Oct. 31 Cash............................................. 2,017

Accounts Receivable............. 1,875
Accounts Payable—Helms & Co. 117
Interest Revenue.................... 25
31 Accounts Receivable—W. Hoad 805

Sales............................................ 324
Bank Charges Expense ($35 + $30) 65
Cash........................................ 1,194
Check: $8,946 + $2,017 − $1,194 = $9,769 adj. cash balance
Taking It Further:
Any business that chooses to not follow the policy of
performing bank reconciliations on its bank accounts runs
several risks:
1. The business will be relying on a bank balance, which is

missing reconciling items. This could lead to decisions
that might cause the bank account to fall into an overdraft
position, causing issues with the bank and additional
interest charges.
2. Unauthorized payments will remain undetected. If the

perpetrator has since left the business, the amount may
not be recoverable.
3. Deposits that did not reach the bank account and have
been diverted intentionally could be permanently lost.
4. Errors in the accounting records remain undetected. If the

error is with a customer deposit, it will be embarrassing or
impossible for the business to rectify the error and obtain
additional collections from the customer. Errors made on
payments to suppliers may hurt the business’s
relationship with its suppliers.
6. Errors made by the bank will be undetected.

Chapter 7

Chapter 7
PROBLEM 7.8A
a.
FORESTER THEATRE
Bank Reconciliation
May 31, 2021

Add: Bank error Bohr Theatre cheque.......... $600
Deposits in transit................................... 1,436 2,036
8,840
Less: Outstanding cheques............................................. 515

Add: Collection of note receivable............................... 2,500
9,341
Less: Correction of cheque #1581 error for
payment on account ($685 - $658)......... $27
NSF cheque Tyler Bickell........................ 934
Service charge......................................... 45
Correction in May 12 deposit of cash
sales ($846 − $836).................................. 10 1,016
b. May 31 Cash............................................. 2,500

Notes Receivable............... 2,500
To record collection of note receivable.
31 Accounts Payable – M. Datz...... 27

Accounts Receivable—T. Bickell 934
Sales............................................ 10
Bank Charges Expense.............. 45
Cash........................................ 1,016
Check: $6,841 + $2,500 − $1,016 = $8,325 adjusted cash

balance

Chapter 7
Taking It Further:
It might be true that the cost of making payments to suppliers

using EFTs is less costly than making payments using
cheques. Sue Forester is not correct in her statement that using
EFTs is less expensive because there is a reduced need for
internal control compared to writing cheques. Internal control
activities will still be needed, but adapted to another method of
payment. Some additional controls such as password controls
will have to be implemented to protect the business against
unauthorized payments.

Chapter 7
PROBLEM 7.9A
(a)
YAP CO.
Bank Reconciliation
March 31, 2021

11,888
No. 3451............................................... $2,260
No. 3479............................................... 159
No. 3481............................................... 862
No. 3482............................................... 1,126
Bank error—cheque #3478
($1,380 – $1,080)................................ 300
4,707

Add: Correction to cheque #3473
($725 – $275).......................................... $450
Interest revenue....................................... 23 473
8,968
Less: Loan payment—principal........................ 1,000
Loan payment—interest.......................... 125
NSF cheque Mr. Jordan.......................... 595
Service charge......................................... 49
Correction in Mar. 26 cash receipts of
Accounts Receivable ($2,675−$2,657). . 18 1,787

Chapter 7
b. Mar. 31 Cash............................................ 473

Accounts Payable................. 450
31 Note Payable.............................. 1,000

Interest Expense........................ 125
Accounts Receivable—Jordan. 595
Cash....................................... 1,787
Check: $8,495 + $473 − $1,787 = $7,181 adjusted cash balance
Taking It Further:
The accountant for Yap Co. needs to notify the bank of the
details of the bank error for cheque #3478. The bank will need to
withdraw a further $300 from Yap’s bank account. Until the bank
corrects this error, the amount of $300 will remain a reconciling
item on the bank side of the bank reconciliation.

Chapter 7
PROBLEM 7.10A
a.
MALONEY COMPANY
Bank Reconciliation
November 30, 2021
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 of Accounts
Receivable ($2,966 − $2,699).......... 267 2,746
12,906
Less: NSF cheque—Pendray Holdings....... 260
Error in cheque #2476 for Accounts
Payable ($2,830 − $2,380)................. 450
Loan payment..................................... 2,250 2,960
Adjusted cash balance per books.................................. $ 9,946

Chapter 7
b. Nov. 30 Cash............................................ 2,746

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

Accounts Payable...................... 450
Notes Payable............................ 2,000
Interest Expense........................ 250
Cash....................................... 2,960
Check: $10,160 + $2,746 − $2,960 = $9,946 adjusted cash balance
Taking It Further:
When performing the bank reconciliation, it is easier to detect a

company error than an error committed by the bank. For errors
in recording transactions on the Cash account of the company,
the source documents and data supporting the entries are
readily at hand to retrace the transaction and the resulting
error. In the procedure of retracing or matching entries
appearing on the bank statement to the accounting records,
research can be performed to determine that the error was in
the recording of the transaction on the company books.
Although rare, some errors can occur that are caused by the
bank. These errors could include a transaction belonging to a
different business recorded on the bank statement of the
company. Determining that the error is a bank error is done by
process of elimination, after determining that the error is clearly
not a recording error in the books of the company. In this case,
since the transaction recorded by the bank is not supported by
source documents of the company, an inquiry needs to be
made with the bank, particularly in the case of a deposit. If the
error relates to a cheque, the paid cheque can be inspected for
some clues as to the source and nature of the error.

Chapter 7
PROBLEM 7.11A
a. Balance per Bank Statement

Balance May 31, 2021............................................... $17,690
Add: Deposits............................................ $14,052
Interest............................................... 35 14,087
31,777
Less: Cheques cleared............................... 10,748
NSF cheques..................................... 175
EFT for insurance............................. 500
Service charge.................................. 12 11,435
Unadjusted bank balance, June 30, 2021............ $20,342
Balance Per Books

Adjusted balance, May 31, 2021.............................. $ 16,940
Add: Cash receipts.................................................. 17,809
Less: Cash payments............................................... (18,491)
Unadjusted cash balance, June 30, 2021............... $ 16,258

Chapter 7
b.
TRILLO COMPANY
Bank Reconciliation
June 30, 2021
_______________________________________________________
Unadjusted bank balance $20,342

Add: Deposits in transit................................... $ 3,127
Error Trillo Co. cheque #119................... 467 3,594
23,936
No. 694................................................. 264
No. 708................................................. 2,910
No. 713................................................. 3,058
No. 714................................................. 3,860 10,092
Adjusted bank balance..................................................... $13,844
Unadjusted cash balance................................................. $16,258

Add: Interest .................................................... $ 35
Error in cheque # 712 for Equipment
($3,626 − $3,266).................................... 360 395
16,653
Less: NSF cheque.............................................. 175
Cheque # 710 for Accounts Payable
not recorded.......................................... 1,492
Error in June 17 deposit of Accounts
Receivable ($3,810 – $3,180)................ 630
EFT for insurance payment.................... 500
Bank service charges.............................. 12 2,809
Adjusted cash balance..................................................... $13,844

Chapter 7
c. June 30 Cash ........................................... 395

Equipment............................. 360
30 Accounts Receivable—Massif Co. 175

Accounts Payable...................... 1,492
Insurance Expense.................... 500
Cash....................................... 2,809
d. The reported cash balance on the June 30, 2017 balance

sheet is $13,844.
Taking It Further:
The bank officials would expect that the bank account balance
will not equal the balance on Trillo Company’s balance sheet.
Depending on the time lag between the recording of
transactions on the books and the bank, it is possible that the
difference is substantial. This is normal and should not be
alarming. The discrepancy between the two balances would be
larger for businesses that operate seven days a week. Deposits
made on the weekend would not be processed by the bank until
Monday. In that case, the bank balance would seem low until
the deposits are processed by the bank. On the other hand, if
the business mails many payments made by cheque to several
areas of the country, it is possible that large amounts of
outstanding cheques will make the bank account appear high
until the cheques are presented for payment and clear the bank
account.

Chapter 7
PROBLEM 7.12A
a.
SALLY’S SWEET SHOP
Bank Reconciliation
August 31

Bank error Cheque
#4832 Wally’s Water Works................ 795 3,325
14,460
No. 421................................................. 165
No. 485................................................. 265
No. 492................................................. 175
No. 494................................................. 1,165
1,770
Outstanding EFT—for utilities................ 245 2,015

Add: EFT collections of Accounts Receivable $1,735
Deposit error August 15 – cash sales
($4,990- $4,690)........................................ 300
Error in cheque # 490 for Accounts
Payable ($266 − $206)........................... 60 2,095
12,900
Less: NSF cheque ($385 + $25)........................ 410
Bank service charges—cheque printing 45 455

Chapter 7
b. Aug. 31 Cash ........................................... 2,095

Sales....................................... 300

Cash....................................... 455
Check: $10,805 + $2,095 − $455 = $12,445 adjusted cash balance
c. The reported cash balance on the August 31 balance sheet

is $12,445.
Taking It Further:
The appropriate segregation of duties calls for the task of

preparing the bank reconciliation to be separated from the
responsibility of signing cheques. This is to ensure that
someone who has signing authority on the business bank
account is not able to conceal the fraud of an unauthorized
payment by making false entries on the bank reconciliation.

Chapter 7
PROBLEM 7.13A
a. Cash and cash equivalents:
1. Cash on hand..................................................... $ 530

2. Petty cash fund.................................................. 125
3. Chequing account.............................................. 24,500
U.S. bank account.............................................. 16,300
7. Treasury bills..................................................... 25,000
Total................................................................ $66,455
b. 2. The petty cash fund should have been replenished at

year-end. Since this has not happened, the company
must record the petty cash expenses and reduce petty
cash by $175. Once the petty cash fund is reimbursed,
$300 cash will be available once again.
4. The overdraft protection for $10,000 on the chequing

account would not be reported on the balance sheet. It
may be disclosed in the notes to the financial
statements.
5. Access to the $4,250 is restricted to a specific purpose

and should be reported as restricted cash, reported as
a current or non-current asset, depending on the when
the leases expire.
6. Postdated cheques are not assets. The amount would

be part of the Accounts Receivable balance.
7. Short-term investments with original maturity dates

greater than 90 days (shares intended to be sold within
a year and guaranteed investment certificate) would be
listed separately in the current asset section.
8. The owner’s personal bank account is not an asset of

the business.

Chapter 7
9. NSF cheques would be included in Accounts

Receivable, assuming the company expects collection.

Chapter 7
Taking It Further:
It is important to present restricted cash separately from cash
on the balance sheet so that creditors and other users of the
financial statements realize that the restricted amounts are not
available for the everyday payments required by the business in
normal operations.

Chapter 7
PROBLEM 7.1B
Activities Application to Cash Receipts
Establishment of Only cashiers are authorized to sell

responsibility tickets. Only the manager and
cashier can handle cash. Only the
manager has access to unlocked
rolls of tickets.
Segregation of The duties of receiving cash and

duties 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 Tickets are pre-numbered. Cash

procedures count sheets are prepared. Deposit
slips are prepared. Copies are used
for verification and recording.
Physical and IT A safe is used for the storage of

controls cash and a machine is used to issue
tickets.
Performance Cash counts are made by the

reviews manager at the end of each
cashier's shift. Daily comparisons
are made by the company controller.
Other controls Cashiers are bonded.

Chapter 7
PROBLEM 7.1B (Continued)
Taking It Further:
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).

Chapter 7
PROBLEM 7.2B
(a) The weaknesses in internal accounting control over

collections are:
(1) The church employees tasked with counting and/or
depositing the money from collections should be
bonded as a form of human resources control.
(2) There is no (external) audit that would provide an
independent check of performance. In place of an audit
is trust.
(3) Each usher could take cash from the collection plates
en route to the basement office.
(4) The head usher counts the cash alone, which gives
him/her an opportunity to steal.
(5) The head usher’s notation of the count is left in the
unlocked safe. This means that someone could take
money out of the safe and redo the note stating the new
amount.
(6) The financial secretary counts the cash alone. Again,
this gives him/her an opportunity to steal.
(7) The financial secretary withholds $150 to $200 per week
without having to provide any support for how he/she
spends this cash.
(8) The cash is vulnerable to robbery when kept in the
unlocked safe overnight.
(9) Cheques are made payable to “Cash.” This means
anyone could cash the cheque.
(10) The financial secretary has custody of the cash,
maintains church records, and prepares the bank
reconciliation.

Chapter 7
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.
(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.
(6) A petty cash fund should be set up for small
expenditures.
Taking It Further:
When the opportunity, financial pressure, or rationalization
factors are present, the weaknesses in internal control can lead
to fraud.

Chapter 7
PROBLEM 7.3B
Taking It Further
1. Cash is collected and kept in the Cash should be deposited in the
car. This could result in theft. bank each day.
2. The person purchasing the An independent person should

merchandise is the same person verify the receipt of goods. The
that verifies receipt of the goods purchaser should approve bills
and approves invoices for for payment by the controller.
payment. Because this person is
responsible for all activities
related to purchasing, errors and
theft could occur.
3. All three cashiers use the same Each employee should use a
cash drawer. This could result in separate cash drawer.
difficulty establishing
responsibility for errors or missing
money.
4. The office manager deposits the Mail should be opened by two

cheques and posts the entry in the individuals. The reconciliation of
accounting records. This could daily cash receipts should be
result in the office manager forwarded to the accounting
depositing cheques in his/her own department and used as a basis
account, taking the cash, and not for entering the receipt
posting the entry for accounting information into the accounting
purposes. records.

Chapter 7
Taking It Further
5. The custodian creates receipts for Pre-numbered petty cash

employees when they don’t have receipts must be signed by the
them. Cash is given to employees custodian and the individual
without any documentation receiving payment for each
provided. Naiara could create payment from the fund. Surprise
fictitious receipts and take cash counts can be made at any time
herself or give it to friends. to determine whether the fund is
intact.
Naiara never takes a vacation. This Employees should be required

may be a technique to prevent to take vacation.
others from assisting
her accounting functions and
thereby examining her work and
discovering errors or
misappropriations.
LO 1,2 BT: C Difficulty: S Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7
PROBLEM 7.4B
a. July 1 Petty Cash....................................... 200.00

Cash......................................... 200.00
15 Freight Out...................................... 94.00

Postage Expense............................ 42.40
Supplies........................................... 10.70
Cash ($200.00 – $ 5.70)........... 194.30
31 Freight Out...................................... 82.10

Office Expense................................ 30.00
Postage Expense............................ 47.80
Repairs Expense............................. 32.10
Cash ($200.00 – $8.00)............ 192.00
Aug. 15 Freight Out...................................... 77.60

Postage Expense............................ 47.80
Supplies........................................... 32.10
Cash Over and Short...................... .50
Cash ($200.00 – $12.00).......... 188.00
16 Petty Cash....................................... 100.00

Cash......................................... 100.00
31 Postage Expense............................ 145.00

Travel Expense............................... 90.60
Freight Out...................................... 46.00
Cash ($300.00 – $17.00).......... 283.00

Chapter 7
b. The internal control features of a petty cash fund include:
(1) A custodian is responsible for the fund.
(2) A pre-numbered petty cash receipt signed by the

custodian and the individual receiving payment is
required for each payment from the fund.
(3) The treasurer’s office examines all payments and stamps

supporting documents to indicate they were paid when
the fund is replenished.
(4) Surprise counts can be made at any time to determine

whether the fund is intact.
Taking It Further:
Frank Cheema is not correct. Transactions occurring in the
petty cash fund do not get recorded into the general ledger
unless entries for the expenses are recorded when replenishing
the petty cash fund. Until the replenishment of the fund occurs,
from a general ledger stand point, the amount recorded to the
general ledger Petty Cash account represents cash. Most of the
time, the petty cash fund will have some cash and some
receipts for payments made out of the fund. This is one of the
reasons why it is a good practice to replenish the fund at the
end of the fiscal year, so that the expenses can be recorded in
the fiscal year and the amount of cash in the petty cash fund is
in fact cash that should be included on the balance sheet.
LO 1,2,3 BT: AP Difficulty: S Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7
PROBLEM 7.5B
a. May 1 Petty Cash.................................. 250

Cash....................................... 250
8 Cash............................................ 34,371
($35,000 − $128 − $501)
Credit Card Expense
($12,5301 × 4%)...................... 501
Sales....................................... 35,000
1
($35,000 − $12,912 − $9,558 = $12,530)
To record sales.
8 Freight Out................................. 60
Postage Expense....................... 30
Office Expense........................... 49
Cash ($250 − $75).................. 175
15 Cash............................................ 16,079
($16,380 − $89 − $212)
Credit Card Expense
($5,3002 × 4%)........................ 212
Sales....................................... 16,380
2
($16,380 − $3,690 − $7,390 = $5,300)
To record sales.
15 B. Ramesh, Drawings................ 98
Supplies...................................... 36
Freight Out................................. 60
Cash ($250 − $55).................. 195

Chapter 7
a. (Continued)
May 15 Petty Cash ($300 - $250)........... 50

Cash....................................... 50
b. An 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 or
established credit to pay for their purchases. Another
advantage is that sales will likely increase if customers can
use debit or credit cards. Accepting debit and credit card
transactions also acts as an internal control by limiting the
amount of cash to which employees are exposed. The
disadvantage is that the bank charges a fee on all
transactions using debit and credit cards.

Chapter 7
Taking It Further:
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 paid 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. Because of the costs involved in issuing a
cheque, the business is justified in paying small amounts of
purchases with petty cash.
There are a number of internal controls over the petty cash fund
that Ramesh should follow:
 One person should be appointed the petty cash
custodian and will be responsible for the fund.
 A pre-numbered petty cash receipt should be signed by
the custodian and the individual receiving payment for
each payment from the fund.
 The controller’s office should examine all payments and
stamp supporting documents to indicate they were paid
when the fund is replenished.
 Surprise counts should be made to determine whether
the fund is properly administered and whether the sum
of the petty cash receipts and remaining cash is equal
to the petty cash fund.
LO 1,2,3 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7
PROBLEM 7.6B
a. June 1 Petty Cash.................................. 200

Cash....................................... 200
15 Supplies...................................... 35
Repairs Expense........................ 48
E. Bender, Drawings.................. 40
Repairs Expense........................ 19
Cash ($200 − $1).................... 199
30 Freight Out................................. 10
Supplies...................................... 54
E. Bender, Drawings.................. 45
Repairs Expense........................ 18
Cash ($200 − $29).................. 171
b. Had the petty cash fund not be reimbursed as at the end of

June, the financial statements would be affected as follows:
Expenses understated:
Freight Out............................................ $10
Advertising Expense............................ 48
Cash Over and Short (Expense recovery) (4)
Repairs Expense.................................. 18 $72
Profit overstated....................................... 72
E. Bender, Drawings understated........... 45
Cash overstated....................................... 171
Supplies understated............................... 54
Total assets overstated ($171 – $54)..... 117
Total owner’s equity overstated ($72 + $45) 117

Chapter 7
Taking It Further:
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. Because of the costs involved in
issuing a cheque, the business is justified in paying for small
purchases with petty cash.
The internal controls over payments from petty cash include:
1. Responsibility for the petty cash fund is assigned to a

single person.
2. The petty cash fund is kept in a secure location, out of

reach by other employees.
3. The petty cash custodian insists that supporting

documents or receipts are provided as evidence of the
amount that has been paid before any reimbursement or
payment is made from the petty cash fund.
4. A pre-numbered petty cash receipt is signed by the

custodian and the individual receiving payment, for each
payment from the fund.
5. The petty cash custodian does not accept I.O.U.s from

employees in exchange for loans.
6. The petty cash custodian prepares a schedule or summary

of the payments that have been made and sends the
schedule, supported by petty cash receipts and other
documentation, to the controller.

Chapter 7
Taking It Further: (Continued)
7. The receipts and supporting documents are examined by

the controller to verify that they were proper payments
from the fund and stamped “Paid” so that they cannot be
submitted again for payment. The controller’s approval is
documented before a cheque is issued to restore the fund
to its established amount.
8. The cheque issued for replenishment of the fund must be

made payable to the custodian who must then endorse the
cheque to cash it and replenish the fund.
9. Check that the amounts of cash over and short are

reasonable in size.
10. Perform surprise counts to determine whether the fund is

properly administered and whether the sum of the petty
cash receipts and remaining cash is equal to the petty
cash fund.
LO 3,4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting

Chapter 7
PROBLEM 7.7B
a.
AGRICULTURAL GENETICS COMPANY
Bank Reconciliation
May 31, 2021

Add: Deposit in transit................................................... 2,416
8,821
Less: Outstanding cheques ($236 + $105 + $235) 576
Adjusted cash balance per bank $8,245

Add: EFT collections of Accounts Receivable $2,200
9,062
Less: NSF cheque Pete Dell.............................. 680
Error in deposit of May 18 for cash
sales ($886 – $836).................................. 50
Error in cheque # 1151 for payment
on account ($685 − $658)........................ 27
Bank service charge ($40 + $20)............ 60 817
b. May 31 Cash............................................ 2,280

31 Accounts Receivable—P. Dell. . 680

Sales........................................... 50
Accounts Payable—L. Kingston 27
Cash....................................... 817
Check: $6,782 + $2,280 – $817 = $8,245 adjusted cash

balance
Chapter 7
Taking It Further:
The bank manager should expect that the bank and book
balances will not be equal. Depending on the time lag between
recording of transactions on the books and the bank, it is
possible that the difference is substantial. This is normal and
should not be alarming. The discrepancy between the two
balances would be larger for businesses that operate seven
days a week. Deposits made during the weekend would not be
processed by the bank until Monday. The bank balance would
seem low until the deposits are processed by the bank. On the
other hand, if the business mails many payments made by
cheque to several areas of the country, it is possible that large
amounts of outstanding cheques will make the bank account
appear high until the cheques are presented for payment and
clear the bank account.

Chapter 7
PROBLEM 7.8B
a.
EZ FERTILIZER
Bank Reconciliation
June 30, 2021

Add: Bank error EZ Company cheque............ $ 234
Deposit in transit..................................... 1,587 1,821
8,597
Less: Outstanding cheques............................................ 946
Adjusted cash balance per bank $7,651

Add: EFT collections of note receivable........ $1,550
Error payment on account cheque #1924
D. Katz ($536 - $356)................................ 180
8,700
Less: NSF cheque A. Vallee.............................. 966
Error in deposit of June 21 for cash
sales ($642 – $624).................................. 18
Bank service charge ($40 + $25)............ 65 1,049

b. June 30 Cash............................................ 1,775

Notes Receivable.................. 1,550
Accounts Payable—D. Katz. 180
30 Accounts Receivable— A. Vallee 966

Sales........................................... 18
Cash....................................... 1,049
Check: $6,925 + $1,775 – $1,049 = $7,651 adjusted cash balance

Chapter 7
Taking It Further:
The purpose of the bank reconciliation is to ensure that the

transactions recorded in the records of the business are
authorized, complete, and accurate. Since the bank account is
used daily, it is important that the reconciliation be performed
on a monthly basis. Doing so ensures that the internal control
features of the bank reconciliation are used to protect the asset
and to provide accurate up-to-date accounting information.
Decisions concerning the availability of cash are frequent. It is
important that, when those decisions are being made,
management can rely on the accuracy of the amounts provided
by the accounting system. Should bank or accounting record
errors be detected through the process of preparing the bank
reconciliation, timely action can be taken place to correct those
errors and prevent additional errors from occurring in the
future.

Chapter 7
PROBLEM 7.9B
a.
KATSARIS COMPANY
Bank Reconciliation
September 30, 2021
Cash balance per bank statement................................ $17,930

Add: Deposits in transit............................................... 754
18,684
No. 4451.......$1,740 No. 4471 $621
No. 4464....... 620 No. 4473 1,234
No. 4469....... 600 No. 4476 1,280
6,095
Bank error on cheque No. 4475
($553 − $535)................................. 18 6,113
Adjusted cash balance per bank.................................. $12,571
Cash balance per books............................................... $10,228

Add: Error in cheque No. 4470 for Accounts
Payable ($3,400 − $3,040)............ $360
Interest revenue............................. 65
EFT collection of Accounts Receivable
($3,145 − $65)................................ 3,080 3,505
13,733
Less: NSF cheque..................................... 1,027
Error in Sept. 16 deposit of Accounts
Receivable ($2,763 − $2,673)....... 90
Bank service charges.................... 45 1,162
Adjusted cash balance per books................................ $12,571

Chapter 7
b. Sept. 30 Cash............................................ 3,505

30 Accounts Receivable
—Hopper Holdings............... 1,027
Cash....................................... 1,162
Check: $10,228 + $3,505 – $1,162 = $12,571 adjusted cash balance
Taking It Further:
The accountant for Katsaris Company needs to notify Hopper

Holdings of the NSF cheque they had given to Katsaris as a
payment on account. A replacement cheque should be
requested immediately. Hopper needs to be notified of the
additional $12 service charge that it is expected to be included
with its replacement cheque.
The accountant also needs to notify the bank of the details of

the bank error for cheque #4475. The bank will need to withdraw
a further $18 from Katsaris’s bank account. Until the bank
corrects this error, the amount of $18 will remain a reconciling
item on the bank side of the bank reconciliation

Chapter 7
PROBLEM 7.10B
(a)
RIVER ADVENTURES COMPANY
Bank Reconciliation
May 31, 2021
_______________________________________________________
Add: Deposits in transit................................ $1,286
Error in cheque #564 ($603 − $306).... 297 1,583
5,891
No. 533.............................................. 279
No. 555.............................................. 79
No. 558.............................................. 943
No. 560.............................................. 890
No. 566.............................................. 950 3,141

Add: EFT proceeds of Accounts Receivable
plus interest ($1,615 + $35)............... $1,650
Error in May 25 deposit of Accounts
Receivable ($980 − $890)................ 90
Payable ($2,887 − $2,487)............... 400 2,140
3,215
Less: NSF cheque.......................................... 440
Bank service charges.......................... 25 465

Chapter 7
b. May 31 Cash............................................ 2,140

31 Accounts Receivable—R. King 440

Cash....................................... 465
Check: $1,075 + $2,140 − $465 = $2,750 adjusted cash

balance
Taking It Further:
When performing the bank reconciliation, it is easier to detect a

company error than an error committed by the bank. For errors
in recording transactions on the Cash account of the company,
the source documents and data supporting the entries are
readily at hand to retrace the transaction and the resulting
error. During the process of matching entries appearing on the
bank statement to the accounting records, research can be
performed to determine that the error was in the recording of
the transaction on the company books.
Although rare, some errors can occur that are caused by the
bank. These errors could include a transaction belonging to a
different business recorded on the bank statement of the
company. Determining that the error is a bank error is done by
process of elimination, after determining that the error is clearly
not a recording error in the books of the company. In this case,
since the transaction recorded by the bank is not supported by
source documents of the company, an inquiry needs to be
made with the bank, particularly in the case of a deposit. If the
error relates to a cheque, the paid cheque can be inspected for
some clues as to the source and nature of the error.

Chapter 7

Chapter 7
PROBLEM 7.11B
a. Balance per Bank Statement

Balance November 30, 2021.................................... $ 7,181
Add: Deposits......................................................... 11,951
19,132
Less: Cheques cleared.............................. $8,741
NSF cheques.................................... 520
Service charge................................. 48 9,309
Balance, December 31, 2021.................................... $9,823
Balance Per Books

Adjusted cash balance, November 30, 2021.......... $ 6,968
Add: Cash receipts.................................................. 13,741
Less: Cash payments............................................... (11,548)
Unadjusted cash balance, December 31, 2021...... $9,161

Chapter 7
b.
KIRAN’S KAYAKS
Bank Reconciliation
December 31, 2021
_______________________________________________________
Balance per bank statement............................................ $ 9,823

12,041
No. 165................................................. $ 812
No. 185................................................. 1,165
No. 189................................................. 1,721 3,698
Balance per books............................................................ $9,161

Add: Error in cheque No. 186 for Equipment
($3,941 − $3,491).................................................. 450
9,611
Less: NSF cheque.............................................. $520
Error in Dec. 18 deposit of Accounts
Receivable ($3,707 − $3,007)................ 700
Bank service charges.............................. 48 1,268
c. Dec. 31 Cash ........................................... 450

Equipment............................. 450
To correct error recording payment.
31 Accounts Receivable—M. Sevigny 520

Cash....................................... 1,268
d. The reported cash balance on the December 31, 2017

balance sheet is $8,343.

Chapter 7
Taking It Further:
The bank reconciliation must be prepared before the closing

entries so that all the affected account balances are brought up-
to-date first. The bank reconciliation is a key control to ensure
all items flowing through the cash account are recorded
correctly and completely. If the bank is not reconciled, closing
entries may be posted and the books closed with no material
errors nor missing items.

Chapter 7
PROBLEM 7.12B
a.
SOUTH HAMPTON POOL SUPPLIES
Bank Reconciliation
May 31, 2021

Bank error cheque
#3723 South Hampton Pizzeria.......... 600 3,530
10,880
No. 321................................................. $ 653
No. 371................................................. 238
No. 375................................................. 281
No. 376................................................. 958
2,130
Outstanding EFT—for utilities................ 225 2,355

Add: EFT collections of Account Receivable.............. 975
9,185
Less: NSF cheque ($249 + $17)........................ $266
Payable ($488 – $408)............................ 80
Error in May 15 deposit of cash sales
($2,850 – $2,580).................................... 270
Bank service charges.............................. 44 660

Chapter 7
b. May 31 Cash ........................................... 975

To record EFT collection on account.

Accounts Payable...................... 80
Sales........................................... 270
Cash....................................... 660
Check: $8,210 + $975 − $660 = $8,525 adjusted cash balance
c. The reported cash balance on the May 31, 2017 balance

sheet is $8,525.
Taking It Further:
The prompt preparation of the bank reconciliation is a key

activity for proper internal control. Assuming the appropriate
segregation of duties have been followed in the assignment of
the responsibility of preparing the bank reconciliation, this
process allows for the detection of errors or omissions in
transactions affecting the cash account. Following the
reconciliation process, adjusting journal entries are prepared
for the correction of errors or for transactions that have
occurred in the bank account but have not yet been recorded in
the cash account in the business’s books. Once completed, an
added independent check of the preparation of the
reconciliation is performed by the individual assigned to review
and approve the bank reconciliation. Through proper
segregation of the cash handling, record keeping, and bank
reconciliation tasks, an additional layer of internal control
becomes effective in properly controlling cash and preventing
fraud.

Chapter 7
PROBLEM 7.13B
a. Cash and Cash Equivalents balance:
1. Cash on hand...................................................... $ 2,339

2. Petty cash fund................................................... 69
3. Bank chequing account..................................... 7,460
4. 60-day treasury bill............................................. 5,000
6. U.S. dollar account............................................. 8,555
Total................................................................. $23,423
b. 2. The petty cash fund should have been replenished at

year-end. Since this has not happened, the company
must record the $206 total expenses for the receipts in
the fund.
4. The 6-month, $3,000 term deposit should be reported as

short-term investments in the current assets section on
the balance sheet because its term exceeds three
months.
5. The stale-dated cheque is not an asset of the business.

The amount owed by the customer would be part of the
accounts receivable balance.
7. The $10,500 cash received from the property sale is

restricted and should be reported as either a current or
non-current asset depending on when the property sale
will be completed.
8. The $500 deposit with Ontario Hydro should be

recorded as an advance or deposit in the current assets
section of the balance sheet.

Chapter 7
Taking It Further:
Cash may be reported as a non-current asset when the cash is

not available to be used in the next 12 months. If the company
has placed cash in trust for a property sale as in item 7 above,
but the sale is not expected to occur in the next 12 months, the
amount should be classified as non-current on the balance
sheet. It would be important to classify this amount as non-
current to assist the users of the financial statements in
evaluating the liquidity of the business and measuring the
amount of cash that is available to settle liabilities in the future.

Chapter 7
BYP 7.1 FINANCIAL REPORTING AND ANALYSIS
a. 1. Cash and cash equivalents balance at:

February 25, 2018 $112,475,000
February 26, 2017 79,527,000
(These amounts appear on the statement of financial
position and the statement of cash flows)
2. Increase in the cash and cash equivalent from 2017

to 2018 $32,948,000
3. Cash provided from operating activities for the year

ended February 25, 2018 $105,358,000
b. Based on the information appearing above, we can

conclude that the increase in cash and cash equivalent is
derived by cash being generated from operating activities.
By scanning the statement of cash flows, we see that a
large portion of the cash generated from operating
activities was used to purchase property and equipment.

Chapter 7
BYP 7.2 INTERPRETING FINANCIAL STATEMENTS
a. Amount in thousands of Canadian dollars
2017
(1) Working
capital = $61,757 – $57,277 = $4,480
(2) Current $61,757

= = 1.08:1
ratio $57,277
2016
(1) Working
capital = $29,176 – $30,408 = $(1,232)
(2) Current $29,176

= = 0.96:1
ratio $30,408
New Look’s liquidity is poor with very little flexibility in

meeting accounts payable payment deadlines. A large
amount of the current assets are tied up in inventory.
b. Inventory should be excluded in the calculation of an acid-

test ratio because it is considered a slower asset to turn
over and ultimately convert to cash.

Chapter 7
BYP 7.3 COLLABORATIVE LEARNING ACTIVITY
All 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.

Chapter 7
BYP 7.4 COMMUNICATION ACTIVITY
Ms. L.S. Osman

Tenacity Corporation
Re: Internal control over your business
Dear Ms. Osman:
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 you 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 Blake Pike is responsible for ordering

parts, taking delivery, authorizing payments, and signing
cheques, it is possible that he could pay himself as a payee.
Also, without segregating the signing process from the bank
reconciliation process, any misappropriation of funds could
proceed undetected.
Because Blake is involved in all aspects of purchasing and

paying for parts, without anyone supervising or checking his
work, it is possible for Blake to take parts from your business
and cover for the shortage in the accounting records. It is also
possible for him to pay a friend for parts that have not been
received.

Chapter 7
BYP 7.4 (Continued)
To minimize the risk of misappropriation of parts and cash, the

following segregation of duties should be implemented:
1. There should be segregation between the individuals

who order parts, take delivery, authorize the payments,
and then sign the cheques for the payments. What is
essential in the assignment of duties is that those
individuals who have access to parts or cash should
not have access to the accounting records and vice-
versa.
2. Individuals other than those handling parts should be

assigned the responsibility to sign cheques once they
have checked that the parts were actually received for
orders that were authorized.
3. An individual other than the individuals handling parts

and signing cheques should be assigned the
responsibility of preparing the monthly bank
reconciliation.
4. Monthly bank reconciliations should be reviewed by a

person independent of the recording process. In your
case, the reviewer should probably be you.
I would be pleased to discuss these weaknesses and my

recommended improvements to your system of internal control
with you, at your convenience.
Yours sincerely,

Chapter 7
BYP 7.5 “ALL ABOUT YOU” ACTIVITY
a. Identity theft occurs when someone uses your personal

information without your knowledge for criminal purposes.
The key types of information that thieves use include:
1) Social insurance card
2) Driver’s licence
3) Credit cards and PINs
4) Bank cards
5) Passport
b. Identity thieves may get your personal information by:

1) Stealing your mail
2) Looking for personal documents in your trash
3) Tampering with ATMs or card machines in shops to
steal your banking information
4) Taking personal information through public sources
(e.g., telephone books and social media)
c. Some of the signs your identity might have been stolen:
1) Bills and statements don't arrive when they are

supposed to — they may have been stolen from your
mailbox or someone may have changed the mailing
address for your accounts.
2) You receive calls from collection agencies or creditors
for an account you don't have.
3) You receive notification from your bank, credit card, or
online business about a new account in your name, or
added charges.
4) Financial account statements show withdrawals or
transfers you didn't make.
5) A creditor calls to say you've been approved or denied
credit that you haven't applied for.

Chapter 7
BYP7.5 (Continued)
d.
1. and 2.
Some of the physical and IT controls that can be

implemented to safeguard your identity and some of the
checks that you can do to recognize identity theft and
prevent it from continuing include:
1. empty your mailbox daily (if you’re going away on

vacation, ask friends or trusted neighbours to pick up your
mail or you can also opt for Canada Post's "hold mail"
service)
2. store ID cards and documents, such as birth certificates,
social insurance numbers, and passports, in a secure
place such as a locked fireproof safe
3. shred any documents and items with personal information
once you no longer need them (e.g., expired ID cards,
credit card offers, and financial statements)
4. check balances on your statements from banks, credit
cards, and companies regularly
5. report any strange activities in your bills and statements,
however minor, right away (fraudsters often steal in small
amounts from many cards to evade detection)
6. check your credit report once a year for errors or strange
activities (you may also wish to consider purchasing a
credit monitoring service that alerts you when there are
changes to your credit report or score)
7. avoid giving out any personal information over the
telephone unless you've placed the call yourself or know
the business
8. avoid giving out sensitive personal information like a SIN
number or credit card number over the telephone when
you’re in a public place (you never know who may be
listening)
9. limit information on your personal cheques to no more
than your name and address

Chapter 7
BYP7.5 (Continued)
10. change your passwords often and make them strong

11. avoid posting personal information online such as your
date of birth and mailing address
12. review and understand the privacy settings on all social
media sites you use before posting any update (you
should review the privacy settings regularly as they often
change)
13. disable the “geo-tracking” option on your phone before
posting public photos on social media sites (by default,
this option is enabled on most phones and it allows
someone to figure out exactly where your photos were
taken)
14. remove all the information from your hard drive before you
sell or dispose of your computer, phone, or tablet, or
alternatively have the device destroyed
15. set up email alerts that notify you each time your name is
used somewhere online
16. avoid online shopping and banking when using public Wi-
Fi as the connection may not be secure
17. verify the security of a website before giving your credit
card number or other financial information to a business
(look for a lock symbol located somewhere on the web
page or make sure the URL begins with "https”)
18. sign out of the website after completing a financial
transaction online, and clear your browser’s cookies and
cache
19. ensure your computer’s anti-virus and other security
features to detect malware are up-to-date
20. avoid downloading apps or software on your phone or
tablet unless they’re from official app stores or libraries
21. understand that government organizations, financial
institutions, and police will never email or text to ask for
your passwords or PINs
22. never click on a link from a spam message, especially
when it promises rewards, prizes, or any exclusive
information

Chapter 7
BYP 7.6 Santé Smoothie Saga
Divisions of duty to strengthen internal accounting control are

limited as the situation allows the involvement of only two
individuals: Natalie and John.
a.
1. Natalie and not John should perform the procedure of

making deposits. If performed by John, the cash could be
stolen before it is deposited in the bank. The frequency of
the deposits should be increased from once a week to on
an as-needed basis instead of being kept in Natalie’s
house, particularly if the receipts are in cash. If John was
allowed to have control over the cash, he could avoid
making a cash deposit and keep the cash. Later on, in the
record keeping for the deposits, he could cover up the
fraud.
2. John should be assigned the task of preparing cheques

with the accompanying supporting documents only when
the payments are due. Natalie should be the sole signing
authority on the business bank account. She should review
the supporting documents and write “paid” on the invoices
to avoid duplicating the payment. Natalie should mail the
payments and not John. In Natalie’s absence, no payments
should be made directly by John and all payments should
be postponed until Natalie’s return. If John was allowed to
sign cheques, he could make unauthorized payments and
cover the fraud in the record keeping of the transaction.
3. John can record the deposits in the accounting records.
4. John can record the cheques in the accounting records.

Chapter 7
BYP7.6 (Continued)
5. Natalie should prepare the monthly bank reconciliation. In

Natalie’s absence the procedure should be postponed until
her return because John could potentially cover up a
mistake in the recording of transactions when preparing
6. The accounting information for the business could be lost

or stolen if it is all stored on John’s laptop. The accounting
records should be under the care and custody of Natalie.
Regular back-ups should be prepared.
7. John can be assigned the duty to prepare financial

statements on the condition that any journal entries are
approved by Natalie before they are entered in the
accounting system.
8. John should not be able to write cheques to himself as this

leaves the company vulnerable to theft. John should
submit a monthly invoice to Natalie for her approval.
Natalie should then write and sign the cheque.
Having John perform a lot of the bookkeeping functions

relating to the accounting system has the advantage of
giving Natalie more time to do other tasks for her business.
On the other hand, it opens up the possibility for some
errors in accounting. Natalie will need to devote time for
the review and approval of the accounting transactions
initiated by John.
To get better assurance that the work performed by John is

proper and timely, Natalie can do spot checks on key
accounts in the accounting system. She can also access
the bank records online regularly to review the activity in
the business bank account and satisfy herself that all of
the cash received by the business reaches the bank
account and that payments out of the account are valid.
This would strengthen the component of internal control
for independent check for performance.

Chapter 7
BYP7.6 (Continued)
b.
Santé Smoothie
Bank Reconciliation
October 31, 2021

Add: Deposits in transit – Oct. 28................................. 110
Correction of cheque #603 ($452 - $425)............. 27
3,496
No. 595................................................. $238
No. 604................................................. 297
535
Less: EFT for Telus........................................... $85

NSF cheque Ron Black........................... 100
NSF fee..................................................... 35
Bank service charges.............................. 13
Correction in Oct. 20 deposit of cash
Sales ($125 −$155)................................... 30 263
Oct. 30 Telephone Expense................... 85

Accounts Receivable—Black. . . 135
Sales........................................... 30
Cash....................................... 263

Chapter 7
Legal Notice
Copyright
Copyright © 2019 by John Wiley & Sons Canada, Ltd. or related companies. All
rights reserved.
The data contained in these files are protected by copyright. This manual is
furnished under licence and may be used only in accordance with the terms of
such licence.
The material provided herein may not be downloaded, reproduced, stored in a

retrieval system, modified, made available on a network, used to create
derivative works, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, scanning, or otherwise without the prior
written permission of John Wiley & Sons Canada, Ltd.
MMXVIII x F1

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Weygandt, Kieso, Kimmel, Trenholm, Warren, Novak Accounting Principles, Eighth Canadian Edition

Solutions Manual 7.1

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

Item LO BT Item LO BT Item LO BT Item LO BT Item LO BT

Solutions Manual 7.2

Legend: The following abbreviations will appear throughout the

Solutions Manual 7.3

ASSIGNMENT CLASSIFICATION TABLE

1. Define cash and internal 1, 2, 3, 4, 1, 2 1, 2, 4 1, 2, 3, 4, 1, 2, 3, 4,

2. Apply control activities to 7, 8, 9, 10, 3, 4, 5, 6 2, 3, 4 1, 2, 3, 4, 1, 2, 3, 4,

3. Describe the operation of a 13, 14, 15 7, 8 5, 6, 7 4, 5, 6 4, 5, 6

Solutions Manual 7.4

ASSIGNMENT CHARACTERISTICS TABLE

2A Identify internal control weaknesses for cash receipts Moderate 25-35

3A Identify internal control weaknesses over cash receipts Simple 25-35

4A Record petty cash transactions and identify internal Simple 25-35

6A Record petty cash transactions, and identify impact on Moderate 20-30

7A Prepare bank reconciliation and related entries. Moderate 25-35

8A Prepare back reconciliation and related entries. Moderate 25-35

9A Prepare back reconciliation and related entries. Moderate 25-35

10A Prepare bank reconciliation and related entries. Moderate 40-50

11A Prepare bank reconciliation and related entries. Moderate 40-50

12A Prepare bank reconciliation and adjusting entries. Moderate 30-40

1B Identify internal control activities. Moderate 25-35

4B Record petty cash transactions and identify internal Moderate 25-35

6B Record petty cash transactions, and identify impact on Moderate 20-30

8B Prepare bank reconciliation and related entries. Moderate 40-50

Solutions Manual 7.5

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Difficulty Time

10B Prepare bank reconciliation and related entries. Complex 40-50

Solutions Manual 7.6

BLOOM’S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Learning Objectives and End-of-

Learning Objective Knowledge Comprehension Application Analysis Synthesis Evaluation

2. Apply control activities to Q7.7 BE7.4 BE7.5 P7.4A

3. Describe the operation of a BE7.4 Q7.14 BE7.7 P7.5A

4. Describe the control Q7.16 Q7.17 BE7.13 E7.15

Solutions Manual 7.7

2. Agree. Internal control is the process designed and implemented by

3. This is a violation of internal control. An essential control activity is to

4. Independent checks of performance are necessary even if proper

5. Documentation procedures provide evidence of the occurrence of

Solutions Manual 7.8

Solutions Manual 7.9

6. A company’s system of internal control can only give reasonable

The human element is an important factor in a system of internal control.

8. Exact procedures will be different in every company, but the basic

Solutions Manual 7.10

10. Mail-in receipts in the form of cheques are generally accompanied by a

11. Sanjeet is incorrect. Although internal controls for handling electronic

12. Incorrect. Payment by cheque or electronic funds transfer contributes to

Solutions Manual 7.11

(1) shipping merchandise to herself and creating a false sale on account;

(2) when invoicing customers, Wanda could charge significantly lower

(1) Establishing the fund. *

(3) Replenishing the fund. * Segregation

Solutions Manual 7.12

a. Physical control and restricted access over cash is more easily

Solutions Manual 7.13

Solutions Manual 7.14

Solutions Manual 7.15

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 7.1