Accounting Principles, Third Canadian Edition



CHAPTER 7

Internal Control and Cash

ASSIGNMENT CLASSIFICATION TABLE

| | |Brief | |Problems |Problems |

|Study Objectives |Questions |Exercises |Exercises |Set A |Set B |

|Explain the activities that help achieve internal|1, 2, 3, 4, 5, |1 |1 |1, 2, 3 |1, 2, 3 |

|control. |6, 7 | | | | |

|Apply control activities to cash receipts. |8, 9, 10, 11, 12|2, 3 |2, 3, |1, 3, 4, 10 |1, 2, 3, 4, 10 |

|Apply control activities to cash disbursements. |5, 13, 14, 15 |4 |4 |2, 3, 4, 5, 10|2, 3, 4, 5, 10 |

|Operate and account for a petty cash fund. |16 |5, 6 |5, 6 |4, 5 |4, 5 |

|Describe the control features of a bank account. |17 |7 | | | |

|Prepare a bank reconciliation. |18, 19, 20, 21 |8, 9, 10, 11, 12|7, 8, 9, 10, |6, 7, 8, 9, 10|6, 7, 8, 9, 10 |

| | | |11, 12 | | |

|Report cash on the balance sheet. |22, 23 |13, 14 |13 |11 |11 |

| | | | | | |

ASSIGNMENT CHARACTERISTICS TABLE

|Problem | |Difficulty |Time |

|Number |Description |Level |Allotted (min.) |

|1A |Identify internal control weaknesses over cash receipts. |Moderate |25-35 |

|2A |Identify internal controls over cash disbursements. |Moderate |25-35 |

|3A |Identify internal controls for cash receipts and cash disbursements. |Simple |25-35 |

|4A |Record debit and bank credit card and petty cash transactions and identify|Moderate |25-35 |

| |internal controls. | | |

|5A |Record and post petty cash transactions and identify internal controls. |Moderate |20-30 |

|6A |Prepare back reconciliation and related entries. |Moderate |25-35 |

|7A |Prepare bank reconciliation and related entries. |Moderate |40-50 |

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

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

|10A |Prepare bank reconciliation and identify internal controls. |Moderate |30-40 |

|11A |Calculate cash balance. |Moderate |20-30 |

|1B |Identify internal control activities related to cash receipts. |Moderate |25-35 |

|2B |Identify internal control weaknesses over cash receipts and cash |Moderate |25-35 |

| |disbursements. | | |

|3B |Identify internal controls for cash receipts and cash disbursements. |Simple |25-35 |

|4B |Record debit and bank credit card and petty cash transactions and identify|Moderate |25-35 |

| |internal controls. | | |

|5B |Record and post petty cash transactions and identify internal controls. |Moderate |20-30 |

|6B |Prepare bank reconciliation and related entries. |Moderate |25-35 |

|7B |Prepare bank reconciliation and related entries. |Moderate |40-50 |

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

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

|10B |Prepare bank reconciliation and identify internal control weakness. |Moderate |30-40 |

|11B |Calculate cash balance. |Moderate |20-30 |

BLOOM’S TAXONOMY TABLE

Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material

|Study Objective |Knowledge |Comprehens|Applicatio|Analysis |Synthesis |Evaluation | |

| | |ion |n | | | | |

|2. Apply control activities to cash |BE7-2 |Q7-8 |P7-1A |BE7-3 |P7-10A | | |

|receipts. | |Q7-9 |P7-3A |E7-3 |P7-10B | | |

| | |Q7-10 |P7-1B |P7-4A | | | |

| | |Q7-11 |P7-2B |P7-4B | | | |

| | |Q7-12 |P7-3B | | | | |

| | |E7-2 | | | | | |

|3. Apply control activities to cash |Q7-5 |Q7-13 |P7-4A |P7-10A |E7-4 | |

|disbursements. |BE7-4 |Q7-14 |P7-5A |P7-10B | | |

| | |Q7-15 |P7-4B | | | |

| | |P7-2A |P7-5B | | | |

| | |P7-3A | | | | |

| | |P7-2B | | | | |

| | |P7-3B | | | | |

|Operate and account for a petty cash | |Q7-16 |BE7-5 |P7-4A | | | |

|fund. | | |BE7-6 |P7-5A | | | |

| | | |E7-5 |P7-4B | | | |

| | | |E7-6 |P7-5B | | | |

|5. Describe the control features of a | |Q7-17 | | | | |

|bank account. | |BE7-7 | | | | |

|Prepare a bank reconciliation. | |Q7-18 |BE7-8 |E7-12 |P7-10A | | |

| | |Q7-19 |BE7-10 |P7-6A |P7-10B | | |

| | |Q7-20 |BE7-11 |P7-7A | | | |

| | |Q7-21 |BE7-12 |P7-8A | | | |

| | |BE7-9 |E7-7 |P7-9A | | | |

| | | |E7-8 |P7-6B | | | |

| | | |E7-9 |P7-7B | | | |

| | | |E7-10 |P7-8B | | | |

| | | |E7-11 |P7-9B | | | |

|Report cash on the balance sheet. | |Q7-22 |BE7-13 |P7-11A | | | |

| | |Q7-23 |E7-13 |P7-11B | | | |

| | |BE7-14 | | | | | |

|Broadening Your Perspective | | |BYP7-1 |Continuing | | |

| | | |BYP7-2 |Cookie | | |

| | | |BYP7-3 |Chronicle | | |

| | | |BYP7-4 |BYP7-5 | | |

ANSWERS TO QUESTIONS

01. Disagree. Internal control is the process designed and implemented by management to help an organization achieve (1) reliable financial reporting, (2) effective and efficient operations, and (3) compliance with relevant laws and regulations. Thus improving the accuracy of the accounting records is only one of the objectives of internal control.

02. An essential control activity is to make specific employees responsible for specific tasks. When all clerks make change out of the same cash register drawer this is a violation of establishing responsibility. In this case, each sales clerk should have a separate cash register, cash drawer, or password with pre- and post-shift counts.

03. Two applications of segregation of duties are:

(1) The responsibility for related activities should be assigned to different individuals.

(2) The responsibility for establishing the accountability for an asset should be separate from the physical custody of that asset.

04. Documentation procedures contribute to good internal control by providing evidence of the occurrence of transactions and events. When signatures (or initials) are added, the documents establish responsibility for the transactions. The prompt transmittal of documents to accounting contributes to recording transactions in the proper period. And, the prenumbering of documents helps to ensure that a transaction is not recorded more than once or not at all.

05. Physical controls include safes, vaults, electronic burglary systems and sensors, and locked warehouses. These controls help safeguard a company’s assets. Other controls such as cash registers and computerized accounting equipment contribute to the accuracy and reliability of the accounting records.

Physical controls apply to cash disbursements when (a) blank cheques are stored in a safe, and access to the safe is restricted to authorized personnel, and (b) electronic means are used to imprint amounts on cheques. Other controls apply when the approved invoice is stamped PAID after payment.

QUESTIONS (Continued)

06. Segregating the physical custody of assets from accounting record keeping is not enough to ensure that nothing has been stolen. A performance review still needs to be done. In such a review, the accounting records are compared with existing assets or with external sources of information.

07. A company’s system of internal control can only give reasonable assurance that assets are properly safeguarded and that accounting records are reliable. The concept of reasonable assurance is based on the belief that the cost of control activities should not be more than their expected benefit. Ordinarily, a system of internal control provides reasonable but not absolute, assurance. Absolute assurance would be too costly.

The human element is an important factor in a system of internal control. A good system may become ineffective through employee fatigue, carelessness, and indifference. Moreover, internal control may become ineffective as a result of collusion.

08. Cash registers are readily visible to the customer. Thus, they prevent the sales clerk from ringing up or scanning in a lower amount and pocketing the difference. In addition, the customer receives an itemized receipt, and the store’s cash register tape is locked into the register for further verification.

9. At the end of a day (or shift) the cashier should count the cash in the cash register, record the amount, and turn over the cash and the record of the amount to either a supervisor or the person responsible for making the bank deposit. Exact procedures will be different in every company, but the basic principles should be the same. The person or persons who handle the cash and make the bank deposit should not have access to the cash register tapes or the accounting records. The cash register tapes should be used in creating the journal entries in the accounting records. An independent person who does not handle the cash should make sure that the amount deposited at the bank agrees with the cash register tapes and the accounting records.

QUESTIONS (Continued)

10. Debit cards allow customers to spend only what is in their bank account whereas a bank credit card gives the customer access to money made available by a bank or other financial institution (similar to a short term loan).

Sales using debit cards and bank credit cards are both considered cash transactions to retailers. Banks usually charge the retailer a transaction fee for each debit card and a fee that averages 3.5% of the credit card sale. In both types of transaction the retailer’s bank will wait until the end of the day and make a deposit for the full day’s transactions. Fees for bank credit cards are generally higher than debit card fees.

11. Two mail clerks contribute to a more accurate listing of mail receipts. In addition, two clerks reduce the likelihood of mail receipts being diverted to personal use or other fraud, as collusion would be required.

12. From a company’s perspective there are not significant differences between customers using EFT and on-line banking and EFT and automatic pre-authorized monthly payments. The main difference is that with EFT and automatic pre-authorized monthly payments, the company begins the transaction and electronically request the funds. As a result the company knows the transaction is happening and can journalize it. With EFT and on-line banking, the company cannot anticipate in advance when and how much it will collect in cash. Therefore the company will record the cash collection after the funds have been deposited in the bank account and the company has received notification from the bank.

13. Payment by cheque or electronic funds transfer contributes to effective internal control over cash disbursements. Prenumbered cheques help to ensure that all disbursements are accounted for. In addition, the bank provides a double record of the cash disbursements, and safekeeping of the cash until paid. However, effective control is also possible when small payments are made from an imprest petty cash fund.

14. The procedure and related control activity are:

Procedures Activities

(1) Controller signs cheques Establishment of responsibility

(2) Cheques imprinted Documentation; physical controls

(3) Comparing cheques with Performance review; segregation

approved invoices before signing of duties

QUESTIONS (Continued)

15. Wanda could potentially commit a fraud by:

(1) falsifying a receiving report and approving payment for a nonexistent supplier. She could open a bank account in the name of the nonexistent supplier and deposit the payments in this account allowing her to steal cash from Walter’s Watches.

(2) ordering merchandise and stealing the inventory. She could cover her theft by then falsifying the receiving reports and approving the payment to the supplier even though the goods are not in the store.

Instructors note: These are only two examples. Students may develop other valid examples.

16. This could be a problem for the company as Olga may start taking longer and longer to repay the cash and may eventually end up stealing cash from the petty cash fund for personal expenses. Another problem is that there may not be cash in the petty cash fund when needed to pay for expenses depending on the amount Olga is borrowing.

To strengthen the system the company could implement the following controls:

• Management should not allow the fund to be used for certain types of transactions (such as making short-term loans to employees).

• Each payment from the fund must be documented on a prenumbered petty cash receipt, signed by both the custodian and the person who receives the payment.

• Management should periodically conduct a surprise check of the petty cash fund and ensure the cash on hand plus receipts are equal to the petty cash fund balance—they should make sure there are no unexplained shortages and all payments have been in accordance with company policies.

17. (a) A signature card shows the signatures of authorized cheque signers. It is used by the bank to validate signatures on cheques. Thus, the card should prevent unauthorized persons from signing cheques.

(b) A cheque provides documentary evidence of the payment of a specified sum of money to a designated payee.

(c) A bank statement provides a double independent record of a depositor's bank transactions. It also is used in making periodic independent bank reconciliations.

QUESTIONS (Continued)

18. An employee who has no other responsibilities that relate to cash should prepare the bank reconciliation. If a person had responsibility for handling cash and also prepared the bank reconciliation, they could use the bank reconciliation to hide fraud with cash receipts or cash disbursements.

19. Paul should not rely on on-line banking to give him an accurate balance in his bank account. On-line banking can provide an up to date balance but the balance will not be accurate if there are any deposits in transit or outstanding cheques. The balance will also not be accurate if the bank has made an error.

Paul should keep his own records and reconcile his calculation of the bank balance with what the bank has reported. This is the only way to know if there are any deposits in transit, outstanding cheques or bank errors and thus have accurate information on his bank account balance.

20. Anah is incorrect, since the March cheque has still not cleared the bank at April 30 it must be included in the April 30th bank reconciliation as an outstanding cheque because it is still outstanding on April 30th.

21. (a) An NSF cheque occurs when the customer's bank balance is less than the amount of the cheque.

(b) In a bank reconciliation a customer's NSF cheque is deducted from the balance per books.

(c) An NSF cheque results in an adjusting entry in the company's books, as a debit to Accounts Receivable and a credit to Cash.

22. Yes, I agree that cash equivalents are basically the same as cash. Cash equivalents are highly liquid investments that may be converted to a specific amount of cash, with maturities of three months or less when purchased. Because of their liquidity, cash equivalents are considered to be “near cash” and are often combined with cash for reporting purposes in the current assets section of the balance sheet.

23. A company may have cash that is not available for general use because it is restricted for a special purpose. If the restricted cash is expected to be used within the next year, the amount should be reported as a current asset. When restricted funds will not be used in that time, they should be reported as a noncurrent asset.

A compensating balance is a minimum cash balance that a company is required to keep in its bank account as support for a bank loan. These are similar to restricted funds and are reported as noncurrent assets.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 7-1

The three things that internal control processes are designed to help an organization achieve are:

(1) reliable financial reporting

(2) effective and efficient operations

(3) compliance with relevant laws and regulations.

Management is responsible for the design and implementation of internal control. One example of each of these three things for Liberty Parking follows:

1. The use of a bank account and preparation of monthly bank reconciliations will enhance the accuracy and reliability of a company's accounting records.

1. An application of effective and efficient operations for Liberty Parking is to have electronic, timed ticket dispensers coordinated with the entry gate so that an attendant is not required to hand out tickets when cars enter the parking garage. This also facilitates documentation procedures.

3. Liberty Parking must comply with relevant laws and regulations such as collecting and paying GST. By segregating handling cash from record keeping the company can ensure all revenues are properly recorded and GST payable is calculated based on the correct amount.

Note to instructor: Students may have different examples.

BRIEF EXERCISE 7-2

1. Physical controls

2. Other controls

3. Performance reviews

4. Segregation of duties

5. Establishment of responsibility

6. Other controls

BRIEF EXERCISE 7-3

Credit Card (Visa)

July 27 Cash 96

Credit Card Expense ($100 x 4%) 4

Sales 100

Petro Shop Credit Card

July 27 Accounts Receivable 100

Sales 100

Debit Card

July 27 Cash 99

Debit Card Expense 1

Sales 100

BRIEF EXERCISE 7-4

1. Documentation procedures

2. Performance reviews

3. Physical controls

4. Establishment of responsibility

5. Segregation of duties

6. Documentation procedures

BRIEF EXERCISE 7-5

March 2 Petty Cash 100

Cash 100

20 Postage Expense 52

Freight Out 28

Supplies Expense 12

Cash ($100 - $8) 92

BRIEF EXERCISE 7-6

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

Printing Expense 34

Supplies Expense 58

Postage Expense 19

Delivery Expense 26

Cash Over and Short 3

Cash ($200 - $10) 190

BRIEF EXERCISE 7-7

1. T

2. T

3. F

4. T

5. T

BRIEF EXERCISE 7-8

1. (d) Bank debit memorandum for service charges

2. (c) EFT payment made by a customer

3. (b) Outstanding cheques from the current month

4. (b) Outstanding cheques from the prior month that are still outstanding

5. (e) Outstanding cheques from the prior month that are no longer outstanding

6. (a) Bank error in recording a company cheque made out for $200 as $290

7. (c) Bank credit memorandum for interest revenue

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

9. (d) Bank debit memorandum for an NSF cheque

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

11. (c) Company error in recording cheque made out for $360 as $630

12. (b) Bank error in recording a $2,575 deposit as $2,755

BRIEF EXERCISE 7-9

(a) Items that will result in an adjustment to the companies records:

1. Bank debit memorandum for service charges

2. EFT payment

7. Bank credit memorandum for interest expense

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

9. Bank debit memorandum for an NSF cheque

11. Company error in recording cheque made out for $360 as $630

BRIEF EXERCISE 7-9 (Continued)

(b) Why the other items do not require an adjustment:

3. Outstanding cheques from the current month need to be deducted from the bank balance to determine the adjusted bank balance. Since the company has already recorded the cheques the company does not need to record an adjustment.

4. Outstanding cheques from the previous month that are still outstanding need to be deducted from the bank balance because they are still outstanding.

5. Outstanding cheques from the previous month that are no longer outstanding will not appear on the bank reconciliation. These cheques have now been deducted from both the company’s cash balance and the bank account and so neither balance needs adjusting.

6. Bank error in recording a company cheque made out for $200 as $290 creates a $90 ($290 - $200) adjustment to the bank balance. The company has not made an error and so does not need to make an adjustment.

10. Deposit in transit from the current month will be added to the bank balance to calculate the adjusted bank balance. It has already been recorded by the company so no adjustment is required.

12. Bank error in recording a $2,575 deposit as $2,755 creates a $180 ($2,755 - $2,575) adjustment to the bank balance. The company has not made an error and so does not need to make an adjustment.

BRIEF EXERCISE 7-10

November:

Cheques written and recorded in books in Nov. $9,520

Less: Cheques paid by bank in Nov. 8,677

Outstanding cheques at Nov. 30 $ 843

December:

Cheques written and recorded in books in Dec. $12,617

Plus: Outstanding cheques at Nov. 30 843

Total cheques that could be paid by bank in Dec. 13,460

Less: Cheques paid by bank in Dec. 10,949

Outstanding cheques at Dec. 31 $ 2,511

BRIEF EXERCISE 7-11

Manuliak Company

Bank Reconciliation

July 31

Cash balance per bank $7,920

Add: Deposits in transit 2,152

10,072

Less: Outstanding cheques 1,144

Adjusted cash balance per bank $8,928

Cash balance per books $9,100

Add: Interest earned 25

9,125

Less: NSF cheque 162

Service charge 00 35

Adjusted cash balance per books $8,928

BRIEF EXERCISE 7-12

July 31 Accounts Receivable 162

Cash 162

31 Bank Charges Expense 35

Cash 35

31 Cash 25

Interest Revenue 25

BRIEF EXERCISE 7-13

Cash should be reported at $18,850 ($6,000 + $850 + $12,000).

The postage stamps are prepaid expenses. The cash refund due from CRA is a receivable. Postdated cheques are also receivables until they can be cashed on their valid date.

The Treasury bill is a short-term investment that could be considered a cash equivalent.

BRIEF EXERCISE 7-14

Current Assets:

Dupré Company should report the Cash in Bank, Payroll Bank, Store Cash Floats and Short-term investments accounts as cash and cash equivalents which are current assets.

Noncurrent Assets:

The Plant Expansion Fund Cash should be reported as a noncurrent asset, assuming the fund is not expected to be used during the next year. The compensating balance should be reported as a noncurrent asset.

SOLUTIONS TO EXERCISES

EXERCISE 7-1

|(a) Weakness or Strength | |(b) Suggested Improvements |

|1. No establishment of responsibility over the cash—weakness | |The employees should use separate cash drawers. |

| | | |

|Cash counts not performed independently—weakness | | |

| | |Cash counts should be performed by a supervisor at the end of the |

| | |shift and the totals compared to the cash register tape. |

| | | |

|2. Improper segregation of duties could result in the misappropriation | |Different individuals should receive cash, record cash receipts and|

|of cash—weakness | |deposit the cash. In a small business this may be impossible; |

| | |therefore, it is imperative that management take an active role in |

| | |the operations of the business so to be able to detect any |

| | |accounting irregularities. |

| | | |

|3. The lack of documentation procedures—weakness. | |Control documents around purchasing and shipping ensure that the |

| | |records are accurate and reliable and help prevent the |

| | |misappropriation (loss) of assets. |

|4. Repair of physical controls—strength. | | |

| | | |

|5. External reviews completed regularly and issues resolved—strength. | | |

| | | |

|6. Other controls over employees’ duties including vacations—strength. | | |

EXERCISE 7-2

| | | | | |

| | |(a) | |(b) |

| | | | | | | |

|Procedure | |Weakness | |Principle Violated | |Recommended Change |

| | | | | | | |

|1. | |Cashiers are | |Other controls | |All cashiers should be bonded. |

| | |not bonded. | | | | |

| 2. | |Inability to establish | |Establishment of | |There should be separate cash drawers|

| | |responsibility for cash on a | |responsibility | |and register codes for each clerk. |

| | |specific clerk. | | | | |

| | | | | | | |

|3. | |Cash is not adequately protected| |Physical controls | |Cash should be stored in a safe until|

| | |from theft. | | | |it is deposited in the bank. |

| | | | | | | |

| 4. | |Cash is not independently | |Performance reviews | |A supervisor should count the cash. |

| | |counted. | | | | |

| 5. | |The accountant should not handle| |Segregation | |The cashier's department should make |

| | |cash. | |of duties | |the deposits. |

| | | | | | | |

| | | | | | |All sales should be rung through the |

| | |All sales are not rung through | | | |cash register to ensure sales are |

|6. | |the cash register. | |Documentation | |complete. |

EXERCISE 7-3

(a) Dec. 20 Cash ($2,550 - $30) 2,520

Debit Card Expense

($0.75 x 40) 30

Sales 2,550

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

Credit Card Expense

($1,300 x 3%) 39

Sales 1,300

Dec. 10 No entry

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

Sales 1,450

May 1 Cash 1,450

Accounts Receivable—Zachos 1,450

EXERCISE 7-4

|(a) | |(b) |

|Weaknesses | |Suggested Improvements |

|1. Cheques are not prenumbered | |Use prenumbered cheques |

| | | |

|2. The purchasing agent signs cheques | |Only the controller's department personnel should sign cheques |

| | |Two signatures should be required |

| | | |

|3. Unissued cheques are stored in unlocked file cabinet | |Unissued cheques should be stored in a locked file cabinet with |

| | |access restricted to authorized personnel |

| | | |

|4. Purchasing agent verifies that the goods have been received | |An independent party should verify receipt of goods |

| | | |

|5. Purchasing agent approves and pays for goods purchased | |Purchasing should approve bills for payment by the controller |

| | | |

|6. After payment, the invoice is simply filed. | |The invoice should be stamped PAID, to prevent it from being |

| | |processed again |

| | | |

|7. The purchasing agent records payments in the cash disbursements | |Only accounting department personnel should record cash disbursements|

|journal | | |

| | | |

|8. The controller records the cheques in cash disbursements journal| |Only accounting department personnel should record cash disbursements|

| | | |

|9. The controller reconciles the bank statement | |An internal auditor or other independent party should reconcile the |

| | |bank statement |

EXERCISE 7-4 (Continued)

(b) (Continued)

interoffice memorandum

to: Controller, abekah company

FROM: ACCOUNTING STUDENT

SUBJECT: INTERNAL CONTROL OVER CASH DISBURSEMENTS

DATE:

I HAVE REVIEWED YOUR CASH DISBURSEMENTS SYSTEM AND SUGGEST THAT YOU MAKE THE FOLLOWING IMPROVEMENTS:

1. Abekah Company should use prenumbered cheques. These should be stored in a locked file cabinet or safe with access restricted to authorized personnel.

2. The purchasing department should approve bills for payment. The controller’s department should prepare and sign the cheques. Two signatures should be required on every cheque. The invoices should be stamped paid so that they cannot be paid twice.

3. Only the accounting department personnel should record cash disbursements.

4. An internal auditor or other independent party should reconcile the bank statement.

5. An independent party should verify receipt of goods.

If you have any questions about implementing these suggestions, please contact me.

EXERCISE 7-5

(a)

Mar. 10 Petty Cash 100

Cash 100

(b)

Mar. 25 Petty Cash ($125 - $100) 25

Merchandise Inventory 29

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

Delivery Expense 38

Cash ($125 - $4) 121

Cash Over and Short 2

(c)

Mar. 25 Merchandise Inventory 29

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

Delivery Expense 38

Cash ($75 - $4) 71

Cash Over and Short 2

Petty Cash ($100 - $25) 25

EXERCISE 7-6

(a)

May 1 Petty Cash 250

Cash 250

(b)

May 31 Newspaper Advertising Expense 62

Coffee Supplies Expense 46

Drawings 50

Postage Expense 10

Cash Over and Short 4

Cash ($200 - $78) 122

Petty Cash ($250 - $200) 50

(c)

May 31 Newspaper Advertising Expense 62

Coffee Supplies Expense 46

Drawings 50

Postage Expense 10

Cash Over and Short 1

Cash ($200 - $83) 117

Petty Cash ($250 - $200) 50

EXERCISE 7-7

(a)

VERWEY COMPANY

Bank Reconciliation

November 30

Cash balance per bank statement $8,509

Add: Deposits in transit 01,575

10,084

Less: Outstanding cheques 0 2,449

Adjusted cash balance per bank $7,635

Cash balance per books $7,005

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

EFT deposits 883 973

7,978

Less: Bank service charge $ 24

NSF cheque 319 343

Adjusted cash balance per books $7,635

(b) Nov. 30 Cash 973

Office Supplies 90

Accounts Receivable 883

30 Bank Charges Expense 24

Account Receivable 319

Cash 343

EXERCISE 7-8

(a) Deposit in transit on May 31: $1,353

(b) Other adjustments:

• Interest earned of $32 must be added to the balance per books.

EFT deposit of $849 must be added to the balance per books

• The error in the May 20th deposit must be corrected on the books; therefore the balance per books must decrease by $9 ($954 - $945).

EXERCISE 7-9

(a) Outstanding cheques on May 31st:

No. 255 $ 262

No. 261 867

No. 264 650

$1,779

(b) Other adjustments:

Decrease balance per books $54 for service charges recorded by bank.

Increase balance per books $450 for error in cheque 260—should be $50 not $500.

• Decrease balance per books for NSF cheque of $395.

EXERCISE 7-10

(a)

HIDDEN VALLEY COMPANY

Bank Reconciliation

May 31

Cash balance per bank statement $7,664

Add: Deposits in transit , 1,353

9,017

Less: Outstanding cheques 1,779

Adjusted cash balance per bank $7,238

Cash balance per books $6,365

Add: Interest earned 32

Error correction: Cheque # 260 450

EFT Deposit 849

7,696

Less: Bank service charge 54

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

NSF cheque 395

Adjusted cash balance per books $7,238

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

Interest Revenue 32

Accounts Payable 450

Accounts Receivable (EFT) 849

31 Bank Charges Expense 54

Accounts Receivable (error) 9

Accounts Receivable (NSF) 395

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

EXERCISE 7-11

(a) Deposits in transit: July 31

Deposits per books in July $15,750

Less: Deposits per bank in July $15,820

Deposits in transit, June 30 (1,050)

July receipts deposited in July 14,770

Deposits in transit, July 31 $ 980

Deposits in transit: August 31

Deposits per books in August $22,900

Less: Deposits per bank in August $23,500

Deposits in transit, July 31 (980)

August receipts deposited in August 22,520

Deposits in transit, August 31 $ 380

(b) Outstanding cheques: July 31

Cheques per books in July $17,200

Add: Outstanding cheques, June 30 970

Total that could be cleared in July 18,170

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

Outstanding cheques, July 31 $ 1,510

Outstanding cheques: August 31

Cheques per books in August $21,700

Add: Outstanding cheques, July 31 1,510

Total that could be cleared in August 23,210

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

Outstanding cheques, August 31 $ 960

EXERCISE 7-12

(a) September 1 adjusted balance $17,350

Add: Cash receipts (deposits) 64,329

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

September 30 unadjusted balance per company $17,933

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

Add: Deposits cleared 62,789

EFT Collections 1,825

Interest earned 45

85,519

Less: Cheques cleared $65,787

NSF cheque: J. Hower 410

Bank service charge 30 66,227

September 30 unadjusted bank balance $19,292

(c) Deposits in transit: September 30

Deposits per books in September $64,329

Less: Deposits per bank in September $62,789

Deposits in transit: August 31 (3,370)

September receipts deposited in September 59,419

Deposits in transit: September 30 $ 4,910

(d) Outstanding cheques: September 30

Cheques recorded per books in September $63,746

Add: Outstanding cheques, August 31 6,880

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

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

Outstanding cheques: September 30 $ 4,839

EXERCISE 7-12 (continued)

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

Add: Deposits in transit 4,910

Less: Outstanding cheques (4,839)

Adjusted bank balance, September 30 $19,363

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

Add: EFT Collections 1,825

Interest earned 45

Less: NSF cheque: J. Hower (410)

Bank service charge (30)

Adjusted cash balance, September 30 $19,363

EXERCISE 7-13

a) Cash and cash equivalents

1. Currency and coin $ 87

2. Guaranteed investment certificate 10,000

3. April cheques 300

5. Royal Bank chequing account 2,575

6. Royal Bank savings account 4,000

9. Cash register floats 250

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

Currency and coin 550

Cheques from customers 185

Debit card slips 685

Bank credit card slips 755

Total $19,387

b) 4. Postdated cheque—Balance sheet (accounts receivable)

7. Prepaid postage in postage meter—Balance sheet (prepaid expense)

8. IOU from company receptionist—Balance sheet (accounts receivable)

SOLUTIONS TO PROBLEMS

|PROBLEM 7-1A |

(a) The weaknesses in internal accounting control over collections are:

(1) Each usher could take cash from the collection plates en route to the basement office.

(2) The head usher counts the cash alone.

(3) The head usher’s notation of the count is left in the safe.

(4) The financial secretary counts the cash alone.

(5) The financial secretary withholds $150 to $200 per week.

(6) The cash is vulnerable to robbery when kept in the safe overnight.

(7) Cheques are made payable to “cash.”

(8) The financial secretary has custody of the cash, maintains church records, and prepares the bank reconciliation.

(b) The improvements should include the following:

(1) The ushers should transfer their cash collections to a cash pouch (or bag) held by the head usher. The transfer should be witnessed by a member of the finance committee.

(2) The head usher and finance committee member should take the cash to the office. The cash should be counted by the head usher and the financial secretary in the presence of the finance committee member.

(3) Following the count, the financial secretary should prepare a deposit slip in duplicate for the total cash received, and the secretary should immediately deposit the cash in the bank’s night deposit vault.

(4) At the end of each month, a member of the finance committee should prepare the bank reconciliation.

(5) All cheques should be made payable in the church’s name.

PROBLEM 7-1A (Continued)

(b) (Continued)

(6) A petty cash fund should be set up for small expenditures. All amounts collected at weekly services should be deposited.

|PROBLEM 7-2A |

| |A| |

|Internal Controls |p|Application to Cash Disbursements |

| | | |

|Establishment of responsibility | |Only the controller and assistant controller are authorized to sign cheques. |

|Segregation of duties | |Invoices must be approved by both the purchasing agent and the receiving department supervisor. |

| | |Payment can only be made by the controller or assistant controller, and the cheque signers do not |

| | |record the cash disbursement transactions. |

|Documentation procedures | |Cheques are prenumbered. Paid invoices have payment details noted on them. |

|Physical Controls | |Blank cheques are kept in a safe in the controller's office. Only the controller and assistant |

| | |controller have access to the safe. A cheque-writer is used in writing cheques. |

|Performance reviews | |The cheque signer compares the cheque with the approved invoice prior to issue. Bank and book balances|

| | |are reconciled monthly by the assistant chief accountant. |

|Other controls | |Following payment, invoices are stamped PAID to prevent duplicate payments. |

|PROBLEM 7-3A |

|(a) Weaknesses & (b) Problems | |(c) Suggested Improvements |

|Cash is collected and kept in the car. This could result in theft. | |Cash should be deposited in the bank each day. |

| | | |

|2. The person purchasing the merchandise is the same person that verifies | |An independent person should verify the receipt of goods. The |

|receipt of the goods and approves invoices for payment. Because this | |purchaser should approve bills for payment by the controller. |

|person is responsible for all activities related to purchasing, errors and| | |

|theft could occur. | | |

| | | |

|3. All three cashiers use the same cash drawer. This could result in | |Each employee should use a separate cash drawer. |

|difficulty establishing responsibility for errors. | | |

| | | |

|4. The office manager deposits the cheques and posts the entry in the | |Mail should be opened by two individuals. The reconciliation of |

|accounting records. This could result in the office manager depositing | |daily cash receipts should be forwarded to the accounting |

|cheques in his/her own account, taking the cash and not posting the entry | |department and used as a basis for entering the receipt |

|for accounting purposes. | |information into the accounting records. |

| | | |

|5. The custodian creates receipts for employees when they don’t have them.| |Prenumbered petty cash receipts must be signed by the custodian |

|He could create fictitious receipts and take cash himself or give it to | |and the individual receiving payment for each payment from the |

|friends. | |fund. Surprise counts can be made at any time to determine |

| | |whether the fund is intact. |

| | |Employees should be required to take vacation. |

|Larry never takes a vacation. | | |

|PROBLEM 7-4A |

(a) June 1 Petty Cash 150

Cash 150

8 Cash 15,548

Debit Card Expense (52 X $0.50) 26

Credit Card Expense

($6,400 x 2.75%) 176

Sales 15,750

8 Freight Out 42

Postage Expense 28

Advertising Expense 57

Miscellaneous Expense 10

Cash Over and Short 4

Cash ($150 - $9) 141

15 Cash 17,941

Debit Card Expense (78 X $0.50) 39

Credit Card Expense

($8,000 x 2.75%) 220

Sales 18,200

15 Petty Cash ($250 - $150) 100

Drawings 50

Office Supplies Expense 77

Coffee Supplies Expense 20

Cash Over And Short 1

Cash ($250 - $4) 246

PROBLEM 7-4A (Continued)

(b) The advantage of accepting debit and bank credit card transactions as opposed to accepting only cash and personal cheques from customers is that the company knows immediately if the customer has enough money in the bank to pay for their purchases. A second advantage is that it will likely increase sales if customers can use debit or credit cards. The disadvantage is that the bank charges a fee on all transactions using debit and credit cards.

(c) The benefit of having a petty cash fund is that it can be used to pay relatively small amounts, while still maintaining control. Some expenses are best made by cash rather than by cheque because of the nature of the expense–there are some instances where either a cheque is not accepted or it is not practical to issue a cheque. The cost-benefit principle justifies paying some expenses with cash rather than issuing a cheque.

There are a number of internal controls over the petty cash fund that Gamba should follow:

• One person should be appointed the petty cash custodian and will be responsible for the fund.

• A prenumbered petty cash receipt should be signed by the custodian and the individual receiving payment for each payment from the fund.

• The treasurer’s office should examine all payments and stamps supporting documents to indicate they were paid when the fund is replenished.

• Surprise counts should be made at any time to determine whether the fund is intact.

|PROBLEM 7-5A |

(a) Jan. 2 Petty Cash 200

Cash 200

15 Freight Out 84

Postage Expense 42

Office Supplies Expense 47

Miscellaneous Expense 12

Cash Over and Short 2

Cash ($200 - $13) 187

31 Freight Out 86

Charitable Contributions Expense 40

Postage Expense 28

Miscellaneous Expense 44

Cash Over and Short 3

Cash ($200 - $5) 195

Feb. 1 Petty Cash 100

Cash 100

15 Freight Out 36

Entertainment Expense 53

Postage Expense 33

Merchandise Inventory 60

Miscellaneous Expense 54

Cash Over and Short 6

Cash ($300 - $58) 242

28 Postage Expense 95

Travel Expense 46

Freight Out 44

Office Supplies Expense 57

Cash Over and Short 5

Cash ($250 - $63) 187

Petty Cash ($300 - $250) 50

PROBLEM 7-5A (Continued)

(b)

| |

|Petty Cash |

|Date |Explanation |Ref. |Debit |Credit |Balance |

Jan. 2 200 200

Feb. 1 100 300

28 50 250

(c) Some expenses are made from petty cash rather than by cheque because of the nature of the expense–there are some instances where either a cheque is not accepted or it is not practical to issue a cheque. The cost-benefit principle justifies paying some expenses with cash rather than issuing a cheque.

There are internal controls over payments from petty cash. A custodian is responsible for the fund. A prenumbered petty cash receipt signed by the custodian and the individual receiving payment is required for each payment from the fund. The treasurer’s office examines all payments and stamps supporting documents to indicate they were paid when the fund is replenished. Surprise counts can be made at any time to determine whether the fund is intact.

|PROBLEM 7-6A |

(a)

AGRICULTURAL GENETICS COMPANY

Bank Reconciliation

May 31, 2008

Cash balance per bank statement $11,689

Add: Deposit in transit $1,141

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

13,082

Less: Outstanding cheques

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

Adjusted cash balance per bank $10,903

Cash balance per books $ 9,448

Add: Error in recording cheque No. 1151

($855 - $585) $ 270

EFT collections 2,382

Interest revenue 24 2,676

12,124

Less: NSF cheque and service charge $820

Error in recording cheque No. 1192

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

Bank service charge 50 1,221

Adjusted cash balance per books $10,903

PROBLEM 7-6A (Continued)

(b) May 31 Cash 270

Accounts Payable—L. Kingston 270

31 Cash 2,382

Accounts Receivable 2,382

31 Cash 24

Interest Revenue 24

31 Accounts Receivable—P. Dell 820

Cash 820

31 Computer Equipment 351

Cash 351

31 Bank Charges Expense 50

Cash 50

Check: $9,448 + $270 + $2,382 + $24 - $820 - $351 - $50 = $10,903 adjusted cash balance

|PROBLEM 7-7A |

(a) Cash balance per books, November 30, 2008

(from Nov. 30 bank reconciliation) $10,216

Add: Cash receipts 16,830

Less: Cash payments 14,816

Unadjusted cash balance per books,

December 31, 2008 $12,230

(b)

HUANG COMPANY

Bank Reconciliation

December 31, 2008

Cash balance per bank statement $19,155

Add: Deposits in transit 1,198

20,353

Less: Outstanding cheques

No. 3470 $1,100

No. 3474 1,050

No. 3478 538

No. 3481 807

No. 3484 1,274

No. 3486 1,390 6,159

Adjusted cash balance per bank $14,194

Cash balance per books $12,230

Add: EFT collected by bank 3,145

15,375

Less: NSF cheque $1,027

Error in recording cheque No. 3485

($541 - $441) 100

Bank service charges 45

Error in Dec. 21st deposit

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

Adjusted cash balance per books $14,194

PROBLEM 7-7A (Continued)

(c) Dec. 31 Cash 3,145

Accounts Receivable 3,080

Interest Revenue 65

31 Accounts Receivable

—Hilo Holdings 1,027

Cash 1,027

31 Accounts Payable 100

Cash 100

31 Bank Charges Expense 45

Cash 45

31 Accounts Receivable 9

Cash 9

Check: $12,230 + $3,145 - $1,027 - $100 - $45 - $9 = $14,194 adjusted cash balance

|PROBLEM 7-8A |

a) Book balance, May 1 (per Apr. 30 bank reconciliation) $ 7,776

Add: Cash receipts 6,825

Less: Cash payments 13,526

Unadjusted cash balance, May 31 $ 1,075

b)

RIVER ADVENTURES COMPANY

Bank Reconciliation

May 31, 2008

Cash balance per bank statement $4,308

Add: Deposits in transit $1,286

Error in cheque 564 ($603 - $306) 297 1,583

  5,891

Less: Outstanding cheques

No. 533 $279

No. 555 79

No. 558 943

No. 560 890

No. 566 950 3,141

Adjusted cash balance per bank $2,750

Cash balance per books $1,075

Add: EFT proceeds ($1,615 + $35) $1,650

Error in May 26th deposit

($980 - $890) 90

Error in cheque #563

($2,887 - $2,487) 400 2,140

3,215

Less: NSF cheque $ 440

Bank service charges 25 465

Adjusted cash balance per books $2,750

PROBLEM 7-8A (Continued)

(b) May 31 Cash 1,650

Accounts Receivable 1,615

Interest Revenue 35

31 Cash 90

Accounts Receivable 90

31 Cash 400

Accounts Payable 400

31 Accounts Receivable—R. King 440

Cash 440

31 Bank Charges Expense 25

Cash 25

Check: $1,075 + $1,650 + $90 + $400- $440 - $25

= $2,750 adjusted cash balance

|PROBLEM 7-9A |

(a) Balance per Bank Statement

Balance September 30, 2008 $ 6,469

Add: Deposits $11,579

Interest 27 11,606

18,075

Less: Cheques cleared $7,253

NSF cheques 790

Service charge 43 8,086

Balance, October 31, 2008 $9,989

Balance Per Books

Reconciled Balance, (per Sept. 30 bank reconciliation)

($6,469 + $1,084 - $628 - $553 - $159) $ 6,213

Add: Cash receipts 11,736

Less: Cash payments (10,922)

Unadjusted cash balance, October 31, 2008 $ 7,027

PROBLEM 7-9A (Continued)

(b)

HAWORTH’S MARINE CENTRE

Bank Reconciliation

October 31, 2008

Balance per bank statement $ 9,989

Add: Deposits in transit 1,941

11,930

Less: Outstanding cheques

No. 391 $ 159

No. 408 3,266

No. 411 1,984 5,409

Adjusted cash balance per bank $6,521

Balance per books $7,027

Add: Interest $ 27

Error in Oct. 12th deposit ($3,818 - $3,118) 700 727

7,754

Less: NSF cheque $790

Error in cheque No. 409 ($1,848 - $1,448) 400

Bank service charges 43 1,233

Adjusted cash balance $6,521

(c) Oct. 31 Cash 727

Accounts Receivable 700

Interest Revenue 27

31 Accounts Receivable—Y. Fujii 790

Office Equipment 400

Bank Charges Expense 43

Cash 1,233

Check: $7,027 + $727 - $1,233

= $6,521 adjusted cash balance

(d) The reported cash balance on the October 31, 2008 balance sheet is $6,521.

|PROBLEM 7-10A |

(a)

CAREFREE COMPANY

Bank Reconciliation

March 31, 2008

Balance per bank statement $7,350

Add: Deposit in transit    750

  8,100

Less: Outstanding cheques $1,650

Bank error deposit Careless Company 1,100  2,750

Adjusted cash balance per bank $5,350

Balance per books $3,125

Add: Error in cheque No. 173 ($294 - $249) $ 45

Interest earned 15

Proceeds of EFT 2,645 2,705

5,830

Less: Service charge $ 40

Hydro 120

Telephone 85

NSF cheque ($220 + $15 service charge) 235 480

Adjusted cash balance per books $5,350

(b) Mar. 31 Cash 2,705

Accounts Payable 45

Interest Revenue 15

Accounts Receivable 2,645

31 Bank Charges Expense 40

Hydro Expense 120

Telephone Expense 85

Accounts Receivable 235

Cash 480

Check: $3,125 + $2,705 - $480 = $5,350 adjusted cash balance

PROBLEM 7-10A (Continued)

(c) Internal control features added by the bank reconciliation process:

• Performance review: Allows for an independent check on accounting records

But having a bank account also assists with internal control as follows:

• Safeguards assets: Safeguards cash

• Documentation: Creates a double record of all bank transactions

|PROBLEM 7-11A |

(a) Cash and Cash Equivalents balance:

1. Cash on hand $ 1,600

2. Petty cash fund 43

3. Bank chequing account 7,460

4. BMO money market fund 5,000

6. US Dollar Account 2,241

7. American Express credit card slips*

[$500 - ($500 x 4%)] 480

Total $16,824

*American Express credit card slips are effectively a deposit in transit because the funds will be deposited in the bank account in two days.

(b) 2. The petty cash fund should have been replenished at year-end. Since this has not happened, the company must record:

• Accounts receivable of $100 for the IOU

• Expenses of $55 ($155 - $100 IOU)

• Cash shortage of $2

• and a reduction of petty cash of $157 ($200 - $43)

4. The 6-month term deposit should be recorded as a short-term investment, and reported as a current asset on the balance sheet.

5. The cash due from the customer should be recorded as an account receivable, and reported as a current asset on the balance sheet. The remainder of the entry should update merchandise inventory (current asset), sales (revenue), and cost of goods sold (expense).

PROBLEM 7-11A (Continued)

(b) (Continued)

8. The cash received from the property sale is restricted and should be reported as either a current or noncurrent asset depending on when the property sale will be completed.

9. The deposit with Ontario Hydro should be recorded as an advance or deposit in the current assets section of the balance sheet.

|PROBLEM 7-1B |

|(a) Activities | |Application to Cash Receipts |

| | | |

|Establishment of responsibility | |Only cashiers are authorized to sell tickets. Only the manager and |

| | |cashier can handle cash. |

| | | |

|Segregation of duties | |The duties of receiving cash and admitting customers are assigned to the|

| | |cashier and to the usher. The manager maintains custody of the cash, and|

| | |the company accountant records the cash. |

| | | |

|Documentation procedures | |Tickets are prenumbered. Cash count sheets are prepared. Deposit slips |

| | |are prepared. Copies are used for verification and recording. |

| | | |

|Physical controls | |A safe is used for the storage of cash and a machine is used to issue |

| | |tickets. |

| | | |

|Performance reviews | |Cash counts are made by the manager at the end of each cashier's shift. |

| | |Daily comparisons are made by the company controller. |

| | | |

|Other controls | |Cashiers are bonded. |

PROBLEM 7-1B (Continued)

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

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

(2) The cashier could issue a less expensive ticket than paid for, and the usher would admit the customer. The difference between the ticket issued and the cash received could be divided between the usher and cashier.

(3) The cashier and usher could agree to let friends into the theatre at no cost (or in exchange for an "under the table" payment).

|PROBLEM 7-2B |

Roger has created a situation that leaves many opportunities for undetected theft. Here is a list of some of the deficiencies in internal control. You may find others.

1. Establishment of responsibility

• Inadequate control over the cash box. In effect, it was operated like a petty cash fund, but too many people had the key. Instead, Roger should have had the key and dispersed funds when necessary for purchases.

2. Segregation of duties

• Freda Stevens counted the funds, made out the deposit slip, and took the funds to the bank. This made it possible for Freda to take some of the money and deposit the rest since there was no external check on her work. Roger should have counted the funds, with someone observing him. Then he could have made out the deposit slip and had Freda deposit the funds.

• Sara Billings was collecting tickets and receiving cash for additional tickets sold. Instead, there should have been one person selling tickets at the door and a second person collecting tickets.

PROBLEM 7-2B (Continued)

3. Documentation procedures

• The tickets were unnumbered. By numbering the tickets, the students could have been held more accountable for the tickets.

• No record was kept of which students took tickets to sell or how many they took. In combination with items 1 and 2 above, the student assigned control over the tickets should have kept a record of which tickets were issued to each student for resale. (Note: This problem could have been largely avoided if the tickets had been sold at the door on the day of the dance.)

• There was no control over unsold tickets. This deficiency made it possible for students to sell tickets, keep the cash, and tell Roger that they had disposed of the unsold tickets. Instead, students should have been required to return the unsold tickets to the student maintaining control over tickets, and the cash to Roger. In each case, the students should have been issued a receipt for the cash they turned in and the tickets they returned.

• Instead of receipts, students simply wrote notes saying how they used the funds. Instead, it should have been required that they provided a valid receipt.

• A receipt was not received from Obnoxious Al. Without a receipt, there is no way to verify how much Obnoxious Al was actually paid. For example, it is possible that he was only paid $100 and that Roger took the rest.

4. Physical controls and establishment of responsibility

• The tickets were left in an unlocked box on his desk. Instead, Roger should have assigned control of the tickets to one individual, in a locked box which that student alone had control over.

|PROBLEM 7-3B |

|(a) Weaknesses & (b) Problems | |(c) Suggested Improvements |

|No separation of duties between receiving the cash and admitting students | |The duties of receiving cash and admitting students should be |

|to the lessons. The teachers could admit students for free or charge | |assigned to separate individuals. |

|extra and pocket the difference or report fewer students and pocket the | | |

|extra money. | | |

| | | |

|2. There is no segregation of duties in the accounting function. The | |An independent person should approve the invoices for payment and|

|general manager could prepare fictitious invoices for payment and it would| |prepare the bank reconciliations. |

|not be detected. | | |

| | | |

|3. Each sales person is responsible for determining credit policies and | |An independent person should be responsible for providing credit |

|they receive a commission based on sales. They could provide credit to an| |to customers. |

|bad credit risk in order to receive the commission on the sale. | | |

| | | |

|4. All programmers have access to the accounting software which could | |Access to the accounting records should be restricted and |

|provide unauthorized changes to the accounting records. | |protected with password or biometric restrictions. |

| | | |

|5. Receiving and purchase orders have been eliminated which could result | |Receiving reports and purchase orders should be reinstated. |

|in unauthorized purchases and/or receipts or fictitious invoices being | | |

|paid as no support is required. An employee could set up a bank account | | |

|and collect the payment. | | |

|PROBLEM 7-4B |

(a) Apr. 1 Petty Cash 200

Cash 200

8 Cash 30,997

Debit Card Expense (116 X $0.75) 87

Credit Card Expense

($12,800 X 3.25%) 416

Sales 31,500

8 Freight Out 44

Office Supplies Expense 34

Advertising Expense 50

Drawings 20

Cash Over and Short 4

Cash ($200 - $56) 144

15 Cash 35,760

Debit Card Expense (160 X $0.75) 120

Credit Card Expense

($16,000 X 3.25%) 520

Sales 36,400

15 Postage Expense 53

Advertising Expense 39

Cleaning Supplies Expense 48

Cash Over and Short 5

Petty Cash ($200 - $175) 25

Cash ($175 - $55) 120

PROBLEM 7-4B (Continued)

(b) The advantage of accepting debit and bank credit card transactions as opposed to accepting only cash and personal cheques from customers is that the company knows immediately if the customer has enough money in the bank to pay for their purchases. A second advantage is that it will likely increase sales if customers can use debit or credit cards. The disadvantage is that the bank charges a fee on all transactions using debit and credit cards.

(c) The benefit of having a petty cash fund is that it can be used to pay relatively small amounts, while still maintaining control. Some expenses are best made by cash rather than by cheque because of the nature of the expense–there are some instances where either a cheque is not accepted or it is not practical to issue a cheque. The cost-benefit principle justifies paying some expenses with cash rather than issuing a cheque.

There are a number of internal controls over the petty cash fund that Rossi should follow:

• One person should be appointed the petty cash custodian and will be responsible for the fund.

• A prenumbered petty cash receipt should be signed by the custodian and the individual receiving payment for each payment from the fund.

• The treasurer’s office should examine all payments and stamps supporting documents to indicate they were paid when the fund is replenished.

• Surprise counts should be made at any time to determine whether the fund is intact.

|PROBLEM 7-5B |

(a) July 1 Petty Cash 250

Cash 250

15 Freight Out 94

Postage Expense 42

Entertainment Expense 47

Miscellaneous Expense 51

Cash Over and Short 4

Cash ($250 - $12) 238

31 Freight Out 82

Charitable Contributions Expense 50

Postage Expense 68

Miscellaneous Expense 42

Cash over and Short 2

Cash ($250 - $10) 240

Aug. 1 Petty Cash 100

Cash 100

15 Freight Out 90

Entertainment Expense 77

Postage Expense 63

Supplies Expense 59

Cash Over and Short 4

Cash ($350 - $57) 293

31 Postage Expense 122

Entertainment Expense 91

Freight Out 73

Cash Over and Short 1

Petty Cash ($350 - $300) 50

Cash ($300 - $65) 235

PROBLEM 7-5B (Continued)

(b)

| |

|Petty Cash |

|Date |Explanation |Ref. |Debit |Credit |Balance |

July 1 250 250

Aug. 1 100 350

31 50 300

(c) If the petty cash fund had not been replenished at year-end the company must record the petty cash expenses and an accounts payable (to petty cash) of $285 ($122 + $91 + $73 - $1). Only $65 is actually cash at this point in time not $350 as in the petty cash account prior to the August 31 transaction.

|PROBLEM 7-6B |

(a)

LISIK COMPANY

Bank Reconciliation

October 31, 2008

Cash balance per bank statement $10,973

Add: Deposit in transit $963

Bank error—Lasik cheque 600 1,563

12,536

Less: Outstanding cheques

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

Adjusted cash balance per bank $10,860

Cash balance per books $ 9,693

Add: Collection of EFT $2,055

Interest revenue 39 2,094

11,787

Less: NSF cheque $715

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

Error in recording cheque No. 1181

($685 - $568) 117

Bank service charge 35

Cheque printing charge 40 927

Adjusted cash balance per books $10,860

PROBLEM 7-6B (Continued)

(b) May 31 Cash 2,094

Accounts Receivable 2,055

Interest Revenue 39

31 Accounts Receivable—W. Hoad 715

Sales 20

Accounts Payable—Helms & Co. 117

Bank Charges Expense ($35 + $40) 75

Cash 927

Check: $9,693 + $2,094 - $927 = $10,860 adjusted cash balance

|PROBLEM 7-7B |

a) General Ledger Cash Balance:

Book balance, February 29

(Adjusted cash balance per bank reconciliation) $12,258

Add: Cash receipts 10,673

Less: Cash payments (11,821)

Unadjusted cash balance, March 31 $11,110

b)

YAP CO.

Bank Reconciliation

March 31, 2008

Cash balance per bank statement $12,500

Add: Deposits in transit 1,025

13,525

Less: Outstanding cheques

No. 3470 $1,535

No. 3479 159

No. 3481 862

No. 3482 1,126

Bank error—cheque #3474 200

3,882

Adjusted cash balance per bank $9,643

PROBLEM 7-7B (Continued)

(b) (Continued)

Cash balance per books $11,110

Add: Correction to cheque #3473

($1,641 – $1,461) 180

Interest revenue 23

11,313

Less: Loan payment—principal $1,000

Loan payment—interest 62

NSF cheque Mr. Jordan 550

Service charge 49

Correction in recording cash receipts

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

Adjusted cash balance per books $9,643

(c) Mar. 31 Cash 203

Accounts Payable 180

Interest Revenue 23

31 Note Payable 1,000

Interest Expense 62

Accounts Receivable 550

Bank Charges Expense 49

Sales 9

Cash 1,670

Check: $11,110 + $203 - $1,670 = $9,643 adjusted cash balance

|PROBLEM 7-8B |

(a) Book balance, October 31 (from Oct. 31 bank

reconciliation) $ 8,496

Add: Cash receipts per journal 15,690

Less: Cash payments per journal (14,026)

Unadjusted cash balance, November 30 $10,160

(b)

MALONEY COMPANY

Bank Reconciliation

November 30, 2008

Cash balance per bank statement $14,527

Add: Deposits in transit 1,338

15,865

Less: Outstanding cheques

No. 2451 $1,260

No. 2472 504

No. 2478 538

No. 2482 612

No. 2484 830

No. 2485 975

No. 2487 1,200 5,919

Adjusted cash balance per bank $ 9,946

Cash balance per books $10,160

Add: EFT collected by Bank $2,479

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

12,906

Less: NSF cheque – Pendray Holdings $ 260

Error in recording cheque No. 2476

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

Loan payment 2,250 2,960

Adjusted cash balance per books $ 9,946

PROBLEM 7-8B (Continued)

(c) Nov. 30 Cash 2,746

Accounts Receivable 2,430

Interest Revenue 49

Accounts Receivable 267

30 Accounts Receivable 260

Accounts Payable 450

Note Payable 2,000

Interest Expense 250

Cash 2,960

Check: $10,160 + $2,746 - $2,960 = $9,946 adjusted cash balance

|PROBLEM 7-9B |

(a) Balance per Bank Statement

Balance April 30, 2008 $ 4,261

Add: Deposits $10,528

Interest 12 10,540

14,801

Less: Cheques cleared $5,608

NSF cheques 280

Service charge 28 5,916

Unadjusted bank balance, May 31, 2008 $8,885

Balance Per Books

Reconciled balance, (per April 30 bank reconciliation)

($4,261 – $217 – $326 – $105) $ 3,613

Add: Cash receipts 11,172

Less: Cash payments 10,776

Unadjusted cash balance, May 31, 2008 $ 4,009

PROBLEM 7-9B (Continued)

(b)

KURJI’S APPLIANCES

Bank Reconciliation

May 31, 2008

Unadjusted bank balance $8,885

Add: Deposits in transit 1,004

9,889

Less: Outstanding cheques

No. 290 $ 105

No. 307 3,266

No. 310 2,400 5,771

Adjusted bank balance $4,118

Unadjusted cash balance $4,009

Add: Interest $ 12

Error in cheque # 306 ($150 - $105) 45

Error in May 5th deposit ($2,620 – $2,260) 360 417

4,426

Less: NSF cheque $280

Bank service charges 28 308

Adjusted cash balance $4,118

PROBLEM 7-9B (Continued)

(c) May 31 Cash 417

Interest Revenue 12

Telephone Expense 45

Accounts Receivable 360

31 Accounts Receivable—M. Rafique 280

Bank Charges Expense 28

Cash 308

Check: $4,009 + $417 - $308 = $4,118 adjusted cash balance

(d) The reported cash balance on the May 31, 2008 balance sheet is $4,118.

|PROBLEM 7-10B |

AURA WHOLE FOODS

Bank Reconciliation

October 31, 2008

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

Less: Outstanding cheques

No. Amount

762 $514

783 160

784 267

862 171

863 325

864 173 1,610

Adjusted cash balance per bank $17,850

Cash balance per books $19,641

Add: Credit memo (collection of EFT) 750

Adjusted balance per books (before theft) 20,391

Less: Amount of theft 2,541

Adjusted cash balance per books $17,850

(b) The cashier attempted to cover the theft of $2,541 by:

1. Not including three outstanding cheques totalling $941 (No. 762, $514; No. 783, $160; and No. 784, $267) in the list of outstanding cheques.

2. Added the outstanding cheques to the cash balance per books incorrectly. The total should have been $100 higher ($20,310 not $20,210).

3. Subtracted the $750 credit memo from the bank balance. It should be added to the book balance. This concealed $1,500 ($750 x 2) of the theft.

Check: $941 + $100 + (2 x $750) = $2,541

PROBLEM 7-10B (Continued)

(c) Combining the duties of cashier and bookkeeper is not a correct application of these internal control activities:

• Performance reviews have not been properly conducted because the cashier/bookkeeper prepared the bank reconciliation.

• Segregation of duties has not been properly followed because the cashier had access to the accounting records and also prepared the bank reconciliation.

|PROBLEM 7-11B |

a) Cash balance:

1. Cash on hand $ 5,000

2. Petty cash fund 125

3. Commercial bank savings account 100,000

Commercial bank chequing account 25,000

US bank account 48,000

10. Special bank account–customer cash deposits 9,250

Total $187,375

b) If the company combined its cash and cash equivalents, the money market fund of $32,000 and the treasury bills of $75,000 would also be included.

(c) 2. The petty cash fund should have been replenished at year-end. Since this has not happened, the company must record the petty cash expenses and reduce petty cash by $375. Only $125 is actually cash at this point in time. Once the petty cash fund is reimbursed, $500 cash will be available once again.

4. Restricted cash of $150,000 would be reported as a current or noncurrent asset, depending on the intended period of use.

5. An unused line of credit would not be reported on the balance sheet. It may be disclosed in the notes.

6. Amounts due from employees (travel advances) would be included in Accounts Receivable.

7. Short-term investments (money market fund, treasury bills and shares) would be listed separately in the current asset section (unless combined as the money market fund and t-bills were in (b)).

PROBLEM 7-11B (Continued)

(c) (Continued)

8. Unused postage stamps would be included in prepaid expenses or supplies.

9. NSF cheques would be included in Accounts Receivable, assuming the company expects collection.

|CONTINUING COOKIE CHRONICLE |

Part 1

The weaknesses in internal accounting controls in the system recommended by John are:

(1) The cash could be stolen from John’s vehicle before it is deposited in the bank.

(2) John could potentially steal from the company and then cover the theft because of a lack of segregation of duties between the handling of cash, bank reconciling process and recording of transactions in the accounting records.

(3) The accounting information for the business could be lost or stolen if it is all stored on John’s laptop.

(4) John should not be able to write cheques to himself as this leaves the company vulnerable to theft.

Improvements should include the following:

(1) Cash should be deposited in the bank daily. At a minimum the cash should be locked in a safe until such as time as it can be deposited.

(2) John should be responsible for the accounting function only. Natalie (or some other independent person) should sign all cheques and make all deposits. Cheques should only be signed when there is documentation present to support the payment. All invoices should be stamped “PAID” to avoid duplicate payment.

(3) Bank reconciliations should be prepared by a person independent of the handling and recording of cash. However, this may not be possible in a small organization such as Cookie Creations. At a minimum, Natalie and not John should prepare bank reconciliations monthly.

CONTINUING COOKIE CHRONICLE (Continued)

Part 1 (Continued)

(4) The accounting records should be maintained on site and regular back-ups should be prepared. It would be best if John used a computer at Cookie Creations to prepare the accounting information; however, if he is going to use his laptop, Natalie should ensure that she is provided with a regular back-up of all the accounting records. This ensures that if John should ever lose his laptop or decide to no longer perform Cookie Creation’s accounting, Natalie would still have access to the company’s accounting records.

(5) John should submit a monthly invoice to Natalie for her approval. Natalie should then write and sign the cheque.

Part 2

(a)

COOKIE CREATIONS

Bank Reconciliation

June 30, 2008

Cash balance per bank statement $3,359

Add: Deposit in transit $110

Bank error Cheque No. 603 ($452 - $425) 27 137

3,496

Less: Outstanding cheques ($238 + $247) 485

Adjusted cash balance per bank $3,011

Cash balance per books $3,274

Less: Service charge $ 13

Error in deposit June 20th ($155 - $125) 30

Telus 85

NSF cheque ($100 + $35 service charge) 135 263

Adjusted cash balance per books $3,011

CONTINUING COOKIE CHRONICLE (Continued)

Part 2 (Continued)

(b) June 30 Bank Charge Expense 13

Teaching Revenue 30

Telephone Expense 85

Accounts Receivable—Ron Black 135

Cash 263

Check: $3,274 - $263 = $3,011 adjusted cash balance

c) If a balance sheet were prepared, cash at June 30th, 2008 would be $3,011.

|BYP 7-1 FINANCIAL REPORTING AND ANALYSIS |

(a) Regarding the company’s system of internal control, the Management’s Responsibilities for Financial Reporting states that “such systems are designed to provide reasonable assurance that the financial information is accurate, relevant and reliable, and that the Company’s assets are appropriately accounted for and adequately safeguarded.

The Auditor’s Report does not comment on the company’s system of internal controls.

(b) According to the Statement of Management’s Responsibility for Financial Reporting, management is responsible for the financial statements. Management has responsibility for preparing the statements and ensuring the company maintains an adequate system of internal controls.

(c) The Company’s external auditors are Ernst & Young LLP.

(d) In 2006, cash decreased by $6,752,000.

(e) (1) $19,266,000

(2) 2.95% ($19,266,000 ( $653,206,000)

(3) 5.22% ($19,266,000 ( $368,842,000)

(4) 7.72% ($19,266,000 ( $249,428,000)

|BYP 7-2 INTERPRETING FINANCIAL STATEMENTS |

(a) Cash equivalents are highly liquid investments, with maturities of three months or less when purchased, that can be converted into specific amounts of cash. They include money market funds, money market savings certificates, bank certificates of deposit, and treasury bills and notes. Cash equivalents differ from other types of short-term investments in that they are very liquid (that is, easily turned into cash) and have a low risk of declining in value while held.

|(b) | | |2005 | |2004 |

| | | | | | |

| |Working | | | | |

| |Capital | |$80,089 - $7,688 = $72,401 | |$72,804 - $7,271 = $65,533 |

| | | | | | |

| |Current | |[pic] | |[pic] |

| |Ratio | | | | |

The company’s current ratio has remained fairly constant over 2005 whereas the industry average has decreased. The company’s current ratio is significantly above the industry average in both 2005 and 2004.

(c) Having cash and cash equivalents available provides a company with flexibility; however, uninvested cash does not earn a very high return. Therefore a company will want to carefully monitor the amount of cash it keeps on hand to provide a balance between flexibility and return.

d) Restricted cash is cash that is not available for general use because it is restricted for a special purpose.

|BYP 7-3 COLLABORATIVE LEARNING ACTIVITY |

All of the material supplementing the collaborative learning activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resources site accompanying this textbook.

|BYP 7-4 COMMUNICATION ACTIVITY |

Ms. L.S. Osman

Tenacity Corporation

Dear Ms. Osman:

During our audit of your financial statements, we reviewed the internal controls over cash. Based on our review we offer the following recommendation.

Your company has grown significantly over the past several years to the point where controls over cash must be implemented. The most significant weakness we identified was the lack of segregation of duties in the accounting department. In the past, operations were small enough that one person could perform the accounting and the owners could review almost all transactions. However, this is no longer the situation and the lack of segregation of duties could have adverse consequences for your business.

For example, because the same person is responsible for ordering parts, taking delivery, authorizing payments and signing cheques it is possible that the clerk could pay himself as a payee. Also, without segregating the signing process from the bank reconciliation process, any misappropriation of funds could proceed undetected.

BYP 7-4 (Continued)

To minimize the risk of misappropriation of cash the following segregation of duties should be implemented:

1. There should be segregation between the individuals who order parts, take delivery of the auto parts, authorize the payments and then sign the cheques for the payments of the auto parts.

2. Different individuals should sign cheques and prepare the monthly bank reconciliation.

3. Monthly bank reconciliations should be performed / reviewed by a person independent of the recording process.

We would be pleased to discuss the weaknesses and our recommended improvements with you, at your convenience.

Yours sincerely,

|BYP 7-5 ETHICS CASE |

(a) The stakeholders in this situation are the clients of the banks and the bank’s managers, employees, and shareholders.

(b) The amount of revenue depending on order of processing would be:

(1) Largest to smallest:

5 bounced cheques x $35 = $175

(2) Smallest to largest:

1 bounced cheque x $35 = $35

(3) In order of cheque number:

4 bounced cheques x $35 = $140

(c) Whether this is ethical is subject to debate. On the one hand, it can be argued that customers have a responsibility to maintain an adequate balance in their accounts. Some customers are frequently overdrawn; thus only severe penalties will persuade them to maintain an adequate balance. However, it could be argued that charging $35 for something that has a cost to the bank of $1.50 is “gouging”—that is, taking unfair advantage of the customer.

(d) In deciding what approach to take, the bank must consider its relationship with the customer. Clearly, by adopting a “largest to smallest” approach, it is going to anger some customers, who may well decide to leave the bank and go to a more customer-friendly bank. However, it could be argued that some of the customers the bank may lose are customers that are frequently overdrawn and therefore costly to the bank. Also, it can be time-consuming to change banks, and most people don’t have the spare time to change banks unless they really need to.

(e) Answer will vary depending on student’s opinion.

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