8-1

CHAPTER 8
Internal Control and Cash



ASSIGNMENT CLASSIFICATION TABLE


Study Objectives


Questions
Brief
Exercises

Exercises
Problems
Set A
Problems
Set B
1. Describe internal control.

1 1
2. Explain the principles of internal
control and be able to identify
weaknesses and suggest
improvements in their
application.

2, 3, 4, 5,
6, 7, 8
2 1, 2, 3, 4 1, 2, 3, 8 1, 2, 3, 8
3. Explain and critique the
application of internal control
principles to cash receipts.

9, 10, 11, 12 3 1, 2 1, 2, 8 1, 8
4. Explain and critique the
application of internal control
principles to cash
disbursements.

13, 14, 15 4 3, 4 2, 8 2, 8
5. Demonstrate the operation of a
petty cash fund.

16 5 5, 6 3 3
6. Describe the control features of a
bank account.

17, 18 6
7. Prepare a bank reconciliation.

19, 20, 21 7, 8, 9, 10,
11
6, 7, 8, 9,
10, 11
4, 5, 6, 7, 8 4, 5, 6, 7, 8
8. Explain the reporting of cash. 22 12 12 9 9


8-2
ASSIGNMENT CHARACTERISTICS TABLE


Problem
Number

Description
Difficulty
Level
Time
Allotted (min.)

1A Identify internal control weaknesses over cash receipts.

Moderate 25-35
2A Identify internal control weaknesses over cash receipts and
cash disbursements.

Moderate 25-35
3A Journalize and post petty cash fund transactions and identify
internal control features.

Simple 30-40
4A Prepare bank reconciliation and related entries.

Moderate 25-35
5A Prepare bank reconciliation and related entries
.
Moderate 40-50
6A Prepare bank reconciliation and related entries.

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

Moderate 40-50
8A Prepare bank reconciliation, and identify internal control
deficiencies.

Complex 50-60
9A Calculate cash balance.

Simple 15-25
1B Identify internal control weaknesses over cash receipts.

Moderate 25-35
2B Identify internal control weaknesses over cash disbursements.

Moderate 25-35
3B Journalize and post petty cash fund transactions and identify
internal control features.

Simple 30-40
4B Prepare bank reconciliation and related entries.

Moderate 25-35
5B Prepare bank reconciliation and related entries
.
Moderate 40-50
6A Prepare bank reconciliation and related entries.

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

Moderate 40-50
8B Prepare bank reconciliation, and identify internal control
features.

Complex 50-60
9B Calculate cash balance. Moderate 15-25


8-3
BLOOMS TAXONOMY TABLE
Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Material

Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation
1. Describe internal control.

Q8-1
BE8-1

2. Identify the principles of
internal control and be able to
identify weaknesses and
suggest improvements in their
application.
Q8-5
BE8-2
Q8-2
Q8-3
Q8-4
Q8-6
Q8-7
E8-1

Q8-8
P8-3A
P8-3B
P8-8B

E8-2
E8-3
P8-1A
P8-2A
P8-8A
P8-1B
P8-2B
E8-4





3. Explain and critique the
application of internal control
principles to cash receipts.
BE8-3

Q8-11
Q8-12
E8-1

P8-8B Q8-9
Q8-10
E8-2
P8-1A
P8-2A
P8-8A
P8-1B




4. Explain and critique the
application of internal control
principles to cash
disbursements.

BE8-4 Q8-13
Q8-14
Q8-15


P8-8B
E8-3
P8-2A
P8-8A
P8-2B

E8-4


5. Demonstrate the operation of a
petty cash fund.


Q8-16

BE8-5
E8-5
E8-6
P8-3A
P8-3B






6. Describe the control features of
a bank account.

Q8-17 Q8-18
BE8-6








7. Prepare a bank reconciliation.

Q8-20
BE8-7
Q8-19
Q8-21
BE8-8
BE8-9
BE8-10
BE8-11
E8-6
E8-7
E8-8
E8-9
E8-10
E8-11
P8-4A
P8-5A
P8-6A
P8-7A
P8-4B
P8-5B
P8-6B
P8-7B
P8-8B
P8-8A


8. Explain the reporting of cash.



Q8-22
BE8-12
E8-12
P8-9A
P8-9B






Broadening Your Perspective


BYP8-1 BYP8-2
BYP8-3
BYP8-4
BYP8-5
BYP8-6 BYP8-7


8-4
ANSWERS TO QUESTIONS

01. Disagree. Internal control is also concerned with (1) optimizing the use
of resources to reduce inefficiencies and waste, (2) preventing and
detecting errors and irregularities, and (3) safeguarding of company
assets from theft, robbery, and unauthorized use.

02. The principles of internal control are: (1) authorization of transactions
and activities, (2) segregation of duties, (3) documentation procedures,
(4) safeguard of assets and records, (5) independent verification, and
(6) other controls.

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, and locked warehouses. These
controls help safeguard company assets and records. Mechanical and
electronic controls include cash registers and computerized
accounting equipment that contribute to the accuracy and reliability of
the accounting records. These controls also include electronic
burglary systems and sensors that help to safeguard assets.

8-5
Questions Chapter 8 (Continued)


06. (a) Independent verification involves the review, comparison, and
reconciliation of data prepared by one or several employees.

(b) Maximum benefit is obtained from independent verification when:
(1) The verification is made periodically or on a surprise basis.
(2) The verification is done by an employee who is independent of
the personnel responsible for the information.
(3) Discrepancies and exceptions are reported to a management
level that can take appropriate corrective action.

07. (a) The concept of reasonable assurance means that the costs of
establishing control procedures should not exceed their expected
benefit. Ordinarily, a system of internal control provides
reasonable but not absolute, assurance. Absolute assurance would
be too costly.

(b) 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 should be reported at $18,850 ($6,000 + $850 + $12,000). The
other items are receivables.

09. This is a violation of the internal control principle of authorization.
Establishing responsibility is key to effective control. In this case, each
sales clerk should have a separate cash register, cash drawer, or
password with pre- and post-shift counts.

10. Daily cash counts pertain primarily to the principles of segregation of
duties and independent verification. It also involves the establishment
of responsibility for performing the counts, and for any discrepancies.

11. 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 stores cash register tape is locked into the
register for further verification.

8-6
Questions Chapter 8 (Continued)


12. 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.

13. Payment by cheque 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 principle are:
Procedures Principles

(1) Controller signs cheques Authorization

(2) Cheques imprinted Documentation;
safeguarding assets and
records

(3) Comparing cheques with Independent verification;
approved invoices before signing segregation of duties


15. Physical, mechanical, and electronic 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 is used to imprint amounts on cheques. Other
controls apply when the approved invoice is stamped PAID after
payment.

8-7
Questions Chapter 8 (Continued)


16. The activities in a petty cash system and the related principles are:

(a) (1) Establishing fund

Authorization, to establish responsibility
for the custody of the fund

(2) Making payments
from fund
Documentation procedures, because the
custodian must use prenumbered petty
cash receipts

(3) Replenishing fund Independent verification, because the re-
quest for replenishment must be
approved before the cheque is written

(b) Journal entries are required for a petty cash fund when it is
established and replenished. Entries are also required when
the size of the fund is increased or decreased.

17. Electronic funds transfer is a cash disbursement system that uses
wire, telephone, or computers to make payments and transfer cash
from one location to another.

18. Yes, a bank contributes significantly to internal control over cash
because it: (1) safeguards cash on deposit, (2) minimizes the amount
of cash that must be kept on hand, and (3) provides a double record of
all bank transactionsindependent verification.

8-8
Questions Chapter 8 (Continued)


19. The lack of agreement between the balances may be due to either:

(1) Time lags: Deposits in transit or outstanding chequesfor
example, a cheque written in July does not clear the bank until
August.

Unrecorded bank memoranda: NSF chequesfor example, a
deposited cheque does not clear the originating bank account.
Unrecorded bank transactionsfor example, service charges
which the bank deducts from the account.

(2) Errors: Bank or book errorfor example, a cheque for $110 is
recorded by the depositor at $101.

20. The four steps are: (1) determine deposits in transit, (2) determine
outstanding cheques, (3) discover any errors made, and (4) trace bank
memoranda.

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. (a) Yes, I agree that cash equivalents are similar to 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 asset section of the balance
sheet.
(b) Cash restricted for a special purpose should be reported
separately as a current or noncurrent asset, depending on when
the cash is expected to be used.

8-9
SOLUTIONS TO BRIEF EXERCISES


BRIEF EXERCISE 8-1

The purposes of internal control are to:

1. Optimize the use of resources, so as to reduce inefficiencies and
waste. An application for Liberty Parking is to have an electronic,
timed ticket dispenser 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.

2. Prevent and detect errors (unintentional mistakes) and irregularities
(intentional mistakes and misrepresentations) in the accounting
process. An application for Liberty Parking is the use of the ticket
dispenser, mentioned in (1) above. An electronic ticket dispenser
reduces the risk of errors (recording the wrong time) or irregularities
(letting friends in).

3. Safeguard a company's assets from employee theft, robbery, and un-
authorized use. An application for Liberty Parking is the use of a cash
register to safeguard assets.

4. Maintain reliable control systems to enhance the accuracy and
reliability of a company's accounting records. An application for
Liberty Parking is the preparation of a bank reconciliation.


BRIEF EXERCISE 8-2

1. Segregation of duties
2. Independent verification
3. Documentation procedures


8-10
BRIEF EXERCISE 8-3

1. Safeguard assets and records
2. Other controls
3. Independent verification
4. Segregation of duties
5. Authorization
6. Documentation procedures


BRIEF EXERCISE 8-4

1. Documentation procedures
2. Independent verification
3. Safeguard assets
4. Authorization
5. Segregation of duties
6. Documentation procedures

BRIEF EXERCISE 8-5

March 20 Postage Expense ......................................................... 52
Freight Out .................................................................... 26
Travel Expense............................................................. 10
Cash Over and Short.................................................... 1
Cash....................................................................... 89
To record replenishment of petty cash fund.


8-11
BRIEF EXERCISE 8-6

(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 record of a depositor's bank
transactions. It also is used in making periodic independent bank
reconciliations.


BRIEF EXERCISE 8-7

(1) Outstanding cheques from the current monthdeducted from cash
balance per bank.
(2) Outstanding cheques from the prior month that are still outstanding
deducted from cash balance per bank.
(3) Outstanding cheques from the prior month that have cleared the
banknot shown on the bank reconciliation.
(4) Bank service charge (debit memo)deducted from cash balance per
books.
(5) Collection of note by bank (credit memo)added to cash balance per
books.
(6) Deposit in transitadded to cash balance per bank.


BRIEF EXERCISE 8-8

(a) The reconciling items per the books, items (4) and (5) above, will
require adjustment on the books of the depositor.

(b) The other reconciling items, outstanding cheques and the deposit in
transit, do not require adjustment by the bank because they result
from timing differences only. When these items reach the bank and are
processed, the bank balance will automatically adjust itself.

8-12
BRIEF EXERCISE 8-9

November:

Cheques recorded by books $9,250
Cheques recorded by bank 8,578
Outstanding cheques $ 672

December:

Cheques recorded by books $12,716
Cheques recorded by bank 10,217*
Outstanding cheques $ 2,499


$10,889 $ 672 November cheques that cleared in December = $10,217


BRIEF EXERCISE 8-10

Cash balance per bank......................................................................... $7,920
Add: Deposits in transit ..................................................................... 1,700
9,620
Less: Outstanding cheques................................................................ 762
Adjusted cash balance per bank......................................................... $8,858

Note that the bank service charge has already been deducted from the cash
balance per the bank.


BRIEF EXERCISE 8-11

Cash balance per books ...................................................................... $9,100
Add: Interest earned........................................................................... 25
9,125
Less: Charge for printing company cheques.................................... 00 35
Adjusted cash balance per books....................................................... $9,090

Note that the outstanding cheques have already been deducted from the
cash balance per the books.

8-13

BRIEF EXERCISE 8-12

Current Assets:

Dupr Company should report Cash in Bank and Payroll Bank Account as
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.

8-14
SOLUTIONS TO EXERCISES


EXERCISE 8-1

1. Authorization. Responsibility is established. The counter clerk is
responsible for handling cash. Other employees are responsible for
making the pizzas.

2. Segregation of duties. Employees who make the pizzas do not handle
cash.

3. Documentation procedures. The counter clerk uses your order invoice
(ticket) in registering the sale on the cash register. The cash register
produces a tape of all sales.

4. Safeguard assets and records. A cash register is used to record the
sale.

5. Independent verification. The counter clerk, in handling the pizza,
compares the size of the pizza with the size indicated on the order.



8-15
EXERCISE 8-2




(a)



(b)

Procedure



Weakness



Principle Violated



Recommended Change

1.



Cashiers are
not bonded.




Other controls



All cashiers should be
bonded.
2. Inability to establish
responsibility for
cash on a specific
clerk.
Authorization There should be
separate cash drawers
and register codes for
each clerk.

3.



Cash is not
adequately protected
from theft.




Safeguard assets
and records




Cash should be stored
in a safe until it is
deposited in the bank.
4. Cash is not
independently
counted.

Independent
verification
A supervisor should
count the cash.
5. The accountant
should not handle
cash.
Segregation
of duties
The cashier's
department should
make the deposits.

8-16
EXERCISE 8-3




(a)



(b)


Procedure




Weakness




Principle Violated



Recommended
Change

1.



Cheques are not
stored in a secure
area.




Safeguard assets
and records




Cheques should be
stored in a safe or
locked drawer.
2. The approval and
payment of bills is
done by the same
individual.
Segregation
of duties
The store manager
should approve
invoices for payment
and someone else
should sign and issue
cheques. Alternatively
some one else could
approve the invoices
for payment.

3. Cheques are
presigned.
Authorization The store manager (as
identified above) should
not be both signing
cheques and approving
invoices. Regardless,
under no
circumstances should
the store manager
presign cheques in
advance. Someone else
should be authorized to
sign cheques in the
absence of the
approved signatory.

4. Cheques are not
prenumbered.
Documentation
procedures
Cheques should
be prenumbered
and subsequently
accounted for.

8-17
EXERCISE 8-3 (Continued)





(a)



(b)

Procedure



Weakness



Principle



Recommended Change

5.



Filing does not
prevent a bill from
being paid more
than once.




Safeguard assets
and records;
documentation
procedures



Bills should be stamped
PAID after payment.
6. The bank
reconciliation is
not independently
prepared.
Independent
verification
Someone else should
prepare the bank
reconciliation.

8-18

EXERCISE 8-4

(a) Weaknesses (b) 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.

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 disburse-
ments journal
Only accounting department
personnel should record cash
disbursements.

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

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


8-19
EXERCISE 8-4 (Continued)

(b)

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
controllers department should prepare and sign the cheques. 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 should reconcile the bank statement.

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



8-20
EXERCISE 8-5

Mar. 1 Petty Cash..................................................................... 100
Cash....................................................................... 100

15 Postage Expense ......................................................... 38
Merchandise Inventory ................................................ 19
Miscellaneous Expense............................................... 17
Travel Expense............................................................. 24
Cash....................................................................... 96
Cash Over and Short............................................ 2

20 Petty Cash..................................................................... 50
Cash....................................................................... 50

EXERCISE 8-6

(a)
Item Bank Side Book Side
1. Outstanding deposit Addition
2. Credit memo Addition
3. Outstanding cheques Subtraction
4. Debit memo Subtraction
5. NSF cheque Subtraction
6. Credit memo Addition

(b) Items that require a journal entry:
2. Credit memo, for collection of note and interest
4. Debit memo for bank service charges
5. NSF cheque to reinstate accounts receivable
6. Credit memo for interest on monthly balance

(c) May 31 Transportation Charges Expense....................... 15
Postage Expense.................................................. 8
Printing Expense .................................................. 27
Entertainment Expense........................................ 24
Cash Over and Short* .......................................... 8
Cash .............................................................. 82

* $100 ($15 + $8 + $27 + $24) - $18 balance on hand = $8

8-21
EXERCISE 8-7

(a) BANSAL COMPANY
Bank Reconciliation
January 31

Cash balance per bank statement ......................................... $3,660.20
Add: Deposits in transit ....................................................... 00,490.00
4,150.20
Less: Outstanding cheques.................................................. 00,930.00
Adjusted cash balance per bank ........................................... $3,220.20

Cash balance per books......................................................... $3,875.20
Less: NSF cheque.................................................... $630.00
Bank service charge...................................... 0 25.00 00,655.00
Adjusted cash balance per books......................................... $3,220.20


(b) Jan. 31 Accounts Receivable .............................................. 630
Cash ..................................................................... 630

31 Bank Charges Expense........................................... 25
Cash ..................................................................... 25

Check: $3,875.20 - $630 - $25 = $3,220.20 adjusted cash balance


EXERCISE 8-8

The outstanding cheques are as follows:




No.



Amount





255
260
264





Total

$0,820
0,0925
560
$2,305




8-22
EXERCISE 8-9

(a) ALAA COMPANY
Bank Reconciliation
July 31

Cash balance per bank statement ............................................. $7,263
Add: Deposits in transit ........................................................... 01,500
8,763
Less: Outstanding cheques...................................................... 0,0 772
Adjusted cash balance per bank ............................................... $7,991

Cash balance per books............................................................. $7,190
Add: Collection of note receivable ($800 plus accrued
interest $36, less collection fee $20) .............................. 0 816
8,006
Less: Bank service charge........................................................ 0,00 15
Adjusted cash balance per books............................................. $7,991


(b) July 31 Cash......................................................................... 816
Bank Charges Expense.......................................... 20
Notes Receivable............................................ 800
Interest Revenue............................................. 36

31 Bank Charges Expense.......................................... 15
Cash................................................................. 15

Check: $7,190 + $816 - $15 = $7,991 adjusted cash balance


8-23
EXERCISE 8-10

(a) September 1 balance ....................................................... $17,150
Add: Cash receipts (deposits) ......................................... 64,000
Less: Cash payments (cheques) ...................................... 63,746
September 30 balance....................................................... $17,404

(b) SHARAF COMPANY
Bank Reconciliation
September 30

Cash balance per bank statement .................................... $16,422
Add: Deposits in transit .................................................. 0 4,800
21,222
Less: Outstanding cheques............................................. 002,383
Adjusted cash balance per bank ...................................... $18,839

Cash balance per books.................................................... $17,404
Add: Collection of note receivable ($1,800 + $30) ........ $1,830
Interest earned ........................................................ , 0045 001,875
19,279
Less: NSF cheque............................................................. $410
Safety deposit box rent........................................... 00,0300 440
Adjusted cash balance per books.................................... $18,839


(c) Sept. 30 Cash.................................................................... 1,830
Notes Receivable....................................... 1,800
Interest Revenue........................................ 30

30 Cash.................................................................... 45
Interest Revenue........................................ 45

30 Bank Charges Expense..................................... 30
Cash............................................................ 30

30 Accounts ReceivableJ. Hower...................... 410
Cash............................................................ 410

Check: $17,404 + $1,830 + $45 - $30 - $410 = $18,839

8-24

EXERCISE 8-11

(a) Deposits in transit:
Deposits per books in July................................... $15,750
Less: Deposits per bank in July ......................... $15,600
Deposits in transit, June 30 ...................... 0 (950)
July receipts deposited in July............................ 14,650
Deposits in transit, July 31................................... $ 1,100

(b) Outstanding cheques:
Cheques per books in July.................................. $17,200
Less: Cheques clearing bank in July ................ $16,400
Outstanding cheques, June 30................ 0 (920)
July cheques cleared in July............................... 0 15,480
Outstanding cheques, July 31 ............................ $ 1,720

(c) Deposits in transit:
Deposits per books in September....................... $26,700
Add: Deposits in transit, September 30............ 0 2,600
Total deposits to be accounted for..................... 29,300
Less: Deposits per books................................... 025,400
Deposits in transit, August 31............................. $ 3,900

(d) Outstanding cheques:
Cheques clearing bank in September ................ $25,000
Add: Outstanding cheques, September 30...... 0 2,100
Total cheques to be accounted for..................... 27,100
Less: Cash disbursements per books .............. 023,700
Outstanding cheques, August 31 ....................... $ 3,400


8-25
EXERCISE 8-12

(a) Cash and cash equivalents
1. Currency and coin $ 57
2. Guaranteed investment certificate 10,000
3. April cheques 300
5. Royal Bank chequing account 2,500
6. Royal Bank savings account 4,000
Total $16,857

(b) 4. Postdated chequeBalance sheet (accounts receivable)
7. Prepaid postage in postage meterBalance sheet (prepaid
expense)
8. IOU from company receptionistBalance sheet (accounts
receivable)


8-26
SOLUTIONS TO PROBLEMS




PROBLEM 8-1A



(a) Principles Application to Cash Receipts

Authorization Only cashiers are authorized to sell
tickets. Only the manager and cash-
ier 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.

Safeguard assets and records A safe is used for the storage of
cash and a machine is used to issue
tickets.

Independent verification Cash counts are made by the man-
ager at the end of each cashier's
shift. Daily comparisons are made
by the company controller.

Other controls Cashiers are bonded.



8-27
PROBLEM 8-1A (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).

8-28




PROBLEM 8-2A



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. Authorization

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.


8-29
PROBLEM 8-2A (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.
Did not receive a receipt 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. Safeguard assets and records and authorization

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.


8-30



PROBLEM 8-3A



(a) July 1 Petty Cash.................................................... 200.00
Cash...................................................... 200.00

15 Freight Out................................................... 94.00
Postage Expense ........................................ 42.40
Entertainment Expense .............................. 46.60
Miscellaneous Expense.............................. 10.70
Cash Over and Short .................................. 2.60
Cash...................................................... 196.30

31 Freight Out................................................... 82.10
Charitable Contributions Expense ............ 30.00
Postage Expense ........................................ 47.80
Miscellaneous Expense.............................. 32.10
Cash...................................................... 192.00

Aug. 15 Freight Out................................................... 74.40
Entertainment Expense .............................. 43.00
Postage Expense ........................................ 33.00
Supplies Expense ....................................... 38.00
Cash Over and Short........................... 0.40
Cash...................................................... 188.00

16 Petty Cash.................................................... 100.00
Cash...................................................... 100.00

31 Postage Expense ........................................ 145.00
Entertainment Expense .............................. 90.60
Freight Out................................................... 45.40
Cash Over and Short .................................. 2.00
Cash...................................................... 283.00


8-31
PROBLEM 8-3A (Continued)

(b)
Petty Cash

Date

Explanation

Ref.

Debit

Credit

Balance

July 1
Aug. 16




200
100



200
300


(c) The internal control features of a petty cash fund include:

(1) A custodian is responsible for the fund.

(2) A petty cash receipt, signed by the custodian and the individual
receiving payment, is required for each payment from the fund.

(3) The controller'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.


8-32




PROBLEM 8-4A


(a)
LISIK COMPANY
Bank Reconciliation
May 31, 2003

Cash balance per bank statement ..................... $7,804.60
Add: Deposit in transit...................................... $936.15
Bank errorLisik cheque......................... 600.00 1,536.15
9,340.75
Less: Outstanding cheques .............................. 1,276.25
Adjusted cash balance per bank ....................... $8,064.50

Cash balance per books..................................... $6,781.50
Add: Collection of note receivable
($2,000 + $80 - $20).............................. 02,060.00
8,841.50
Less: NSF cheque .............................................. $700.00
Error in May 12 deposit ($846.15 - $836.15) 10.00
Error in recording cheque No. 1181
($685 - $658) ........................................ 27.00
Cheque printing charge........................... 0040.00 00,777.00
Adjusted cash balance per books ..................... $8,064.50

8-33
PROBLEM 8-4A (Continued)


(b) May 31 Cash............................................................ 2,060
Bank Charges Expense............................. 20
Notes Receivable ............................... 2,000
Interest Revenue ................................ 80

31 Accounts ReceivableW. Hoad............... 700
Cash .................................................... 700

31 Sales ........................................................... 10
Cash .................................................... 10

31 Accounts PayableM. Helms................... 27
Cash .................................................... 27

31 Bank Charges Expense............................. 40
Cash .................................................... 40


Check: $6,781.50 + $2,060 - $700 - $10 - $27 - $40 = $8,064.50
adjusted cash balance

8-34



PROBLEM 8-5A



(a) Book balance, October 31 (from Oct. 31 bank
reconciliation) ........................................................... $ 9,596.30
Add: Cash receipts per journal ....................................... 15,831.70
Less: Cash payments per journal .................................... 14,694.10
Unadjusted cash balance, November 30......................... $10,733.90


(b) MCISAAC COMPANY
Bank Reconciliation
November 30, 2003

Balance per bank statement ................................. $17,614.60
Add: Deposits in transit ...................................... 0 1,225.00
18,839.60
Less: Outstanding cheques
No. 2451.................................................. $1,260.40
No. 2472.................................................. 426.80
No. 2478.................................................. 538.20
No. 2482.................................................. 612.00
No. 2484.................................................. 829.50
No. 2485.................................................. 974.80
No. 2487.................................................. 398.00
No. 2488.................................................. 1,200.00 0 6,239.70
Adjusted cash balance per bank ................. $12,599.90


Balance per books................................................ $10,733.90
Add: Note collected by bank ($2,000 + $120 - $15) 0 2,105.00
12,838.90
Less: Cheque printing charge ............................. $ 50.00
Error in recording cheque No. 2479
($1,750 - $1,570)..................................... 180.00
Error in 11-21 deposit ($2,954 - $2,945).... 9.00 00,0239.00
Adjusted cash balance per books........................ $12,599.90


8-35
PROBLEM 8-5A (Continued)

(c) Nov. 30 Cash.................................................................... 2,105
Bank Charges Expense..................................... 15
Notes Receivable....................................... 2,000
Interest Revenue........................................ 120

30 Bank Charges Expense..................................... 50
Cash............................................................ 50

30 Accounts Payable.............................................. 180
Cash............................................................ 180

30 Accounts Receivable ........................................ 9
Cash............................................................ 9

Check: $10,733.90 + $2,105 - $50 - $180 - $9 = $12,599.90 adjusted cash
balance


8-36



PROBLEM 8-6A


(a)
VIDEOSOFT COMPANY
Bank Reconciliation
July 31, 2003

Cash balance per bank statement .......................... $24,930
Add: Deposits in transit (1) ................................... 8,000

32,930
Less: Outstanding cheques (2).............................. $8,610
Bank error in cheque to employee
($255 - $155) .............................................. 100 8,710

Adjusted cash balance per bank ........................... $24,220

Cash balance per books......................................... $22,700
Add: Collection of note receivable by bank
($1,400 + $70) ........................................... $1,470
Book error in cheque to creditor
($320 - $230) ..............................................00,0 090 1,560
24,260
Less: Cheque printing charge................................ 000,0 40

Adjusted cash balance per books ......................... $24,220

(1) July receipts per books.................................... $82,000
July deposits per bank..................................... $79,000
Less: Deposits in transit, June 30.................. 5,000 74,000
Deposits in transit, July 31 .............................. $ 8,000

(2) Disbursements per books in July ................... $76,900
Less: Book error in cheque to creditor ......... 90
Total disbursements to be accounted for ..... 76,810

Cheques clearing bank in July........................ $74,700
Add: Bank error .............................................. 100
Less: June 30 outstanding cheques.............. 6,600 68,200
Outstanding cheques, July 31......................... $ 8,610

8-38
PROBLEM 8-6A (Continued)


(b) July 31 Cash............................................................ 1,470
Notes Receivable................................. 1,400
Interest Receivable.............................. 70

31 Cash............................................................ 90
Accounts Payable................................ 90

31 Bank Charges Expense............................. 40
Cash...................................................... 40

Check: $22,700 + $1,470 + $90 - $40 = $24,220 adjusted cash
balance



8-39

PROBLEM 8-7A

(a) General Ledger Cash Balance:

Book balance, February 28
(Adjusted cash balance per bank reconciliation) $13,073
Add: Cash receipts.................................................. 4,813
Less: Cash payments............................................... 5,798
Unadjusted cash balance, March 31....................... $12,088

(b) Deposits in transit:

March 30, $1,025

(c) Outstanding cheques:
#3470 $ 720 (from February bank rec.)
#3475 600 (dated March 29)
$1,320

(d)
YAP CO.
Bank Reconciliation
March 31, 2003

Balance per bank statement ................................... $11,775
Add: Deposits in transit ........................................ 1,025
12,800
Less: Outstanding cheques
No. 3470..................................................... $720
No. 3475..................................................... 600 1,320
Adjusted cash balance per bank ............................ $11,480

Balance per books................................................... $12,088

Less: Service charge.............................................. $ 49
NSF chequeYJordan ................................... 550
Correction in recording cash
receipts, March 4 ($1,221 - $1,212)............ 9 608
Adjusted cash balance............................................ $11,480


8-40
PROBLEM 8-7A (Continued)

(e) Mar. 31 Sales........................................................ 9
Cash.................................................. 9

31 Bank Charges Expense ......................... 49
Cash.................................................. 49

31 Accounts Receivable ............................. 550
Cash.................................................. 550

Check: $12,088 - $9 - $49 - $550 = $11,480 adjusted cash balance



8-41



PROBLEM 8-8A



AURA WHOLE FOODS
Bank Reconciliation
October 31, 2003



(a) Balance per bank statement $22,075.51
Less: Outstanding cheques
No.



Amount

No.



Amount





062
183
284



$326.75
0150.00
0253.25
862
863
864

$190.71
0226.80
0165.28




1,312.79
Adjusted balance per bank $20,762.72

Cash balance per books $21,892.72
Add: Credit memo (collection of note receivable) 300.00
Adjusted balance per books (before theft) 22,192.72
Less: Amount of theft 001,430.00
Adjusted balance per books $20,762.72

(b) The cashier attempted to cover the theft of $1,430.00 by:

1. Not listing as outstanding three cheques totalling $730.00 (No. 62,
$326.75; No. 183, $150.00; and No. 284, $253.25).

2. Under-adding the outstanding cheques listed by $100. (The
correct total is $582.79.)

3. Subtracting the $300 credit from the bank balance instead of
adding it to the book balance, thereby concealing $600 of the theft.


8-42
PROBLEM 8-8A (Continued)

(c) Combining the duties of cashier and bookkeeper violate several
internal control principles:

Independent verification has been violated because the
cashier/bookkeeper prepared the bank reconciliation.

Segregation of duties has been violated because the cashier had
access to the accounting records and also prepared the bank
reconciliation.

8-43

PROBLEM 8-9A

(a) Cash balance:

1. Cash on hand........................................................ $ 5,000
2. Petty cash fund..................................................... 500
3. Commercial bank savings account..................... 100,000
Commercial bank chequing account .................. 25,000
US bank account................................................... 45,000
10. Special bank accountcustomer cash deposits 7,500
Total ................................................................ $183,000

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

(c) 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. Temporary investments (money market fund, shares, and bonds)
would be listed separately in the current asset section (unless
combined as the money market fund was in (b)).

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, If collection is doubtful they would
also be recorded as a Bad Debt Expense or be written off.


8-44

PROBLEM 8-1B


(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 ushers 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 banks night
deposit vault.
(4) At the end of each month, a member of the finance committee
should prepare the bank reconciliation.

(c) The policies that should be changed are:
(1) Members should make cheques payable to the church.
(2) A petty cash fund should be established for the financial secretary
to be used for weekly cash expenditures and requests for
replenishment of the fund should be sent to the chairperson of the
finance committee for approval.
(3) The financial secretary should be bonded.
(4) The financial secretary should be required to take an annual
vacation.


8-45




PROBLEM 8-2B





Principles




Application to Cash Disbursements
Authorization 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 dis-
bursement transactions.

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

Safeguard assets and records 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.

Independent verification 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.

8-46

PROBLEM 8-3B

(a) Jan. 1 Petty Cash................................................ 250.00
Cash.................................................. 250.00

15 Freight Out............................................... 94.00
Postage Expense .................................... 42.40
Office Supplies Expense ........................ 46.60
Miscellaneous Expense.......................... 11.90
Cash Over and Short .............................. 0.10
Cash.................................................. 195.00

31 Freight Out............................................... 82.10
Charitable Contributions Expense ........ 40.00
Postage Expense .................................... 27.80
Miscellaneous Expense.......................... 42.10
Cash.................................................. 192.00

Feb. 15 Freight Out............................................... 74.60
Entertainment Expense .......................... 43.00
Postage Expense .................................... 33.00
Merchandise Inventory........................... 60.00
Miscellaneous Expense.......................... 37.00
Cash Over and Short....................... 0.60
Cash.................................................. 247.00

16 Petty Cash................................................ 150.00
Cash.................................................. 150.00

28 Postage Expense .................................... 140.00
Travel Expense........................................ 95.60
Freight Out............................................... 46.40
Office Supplies........................................ 55.00
Cash.................................................. 337.00


8-47
PROBLEM 8-3B (Continued)

(b)

Petty Cash
Date Explanation Ref. Debit Credit Balance
Jan. 1
Feb.16
250
150
250
400


(c) Some expenses are made from petty cash rather than by cheque
because of the nature of the expensethere are some instances where
either cheques are 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 treasurers 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.


8-48

PROBLEM 8-4B


(a) AGRICULTURAL GENETICS COMPANY
Bank Reconciliation
May 31, 2003

Cash balance per bank statement ..................... $8,161.50
Add: Deposit in transit ..................................... 936.00
9,097.50
Less: Outstanding cheques.............................. $276.00
Bank error, May 12 deposit ($836 - $638) 198.00 474.00
Adjusted cash balance per bank ....................... $8,623.50

Cash balance per books..................................... $7,393.50
Add: Collection of note receivable
($2,000 + $80
1
$20) ............................ 2,060.00
9,453.50
Less: NSF cheque.............................................. $700.00
Error in recording cheque No. 1181
($585 - $505) ......................................... 80.00
Bank service charge................................ 50.00 830.00
Adjusted cash balance per books..................... $8,623.50


1
$2,000 x 8% x 6/12 mos. = $80 interest

8-49
PROBLEM 8-4B (Continued)


(b) May 31 Cash................................................................ 2,060
Bank Charges Expense................................. 20
Notes Receivable ................................... 2,000
Interest Revenue .................................... 80

31 Accounts ReceivableP. Dell ...................... 700
Cash ........................................................ 700

31 Accounts PayableL. Kingston................... 80
Cash ........................................................ 80

31 Bank Charges Expense................................. 50
Cash ........................................................ 50

Check: $7,393.50 + $2,060 - $700 - $80 - $50 = $8,623.50 adjusted cash
balance


8-50





PROBLEM 8-5B



(a) Cash balance per books, November 30, 2003
(from Nov. 30 bank reconciliation) ................................. $10,596.30
Add: Cash receipts.......................................................... 16,822.10
Less: Cash payments....................................................... 14,384.10
Unadjusted cash balance per books,
December 31, 2003 .......................................................... $13,034.30

(b) HILO COMPANY
Bank Reconciliation
December 31, 2003

Cash balance per bank statement ........................ $18,632.10
Add: Deposits in transit............................... 1,190.40
19,822.50
Less: Outstanding cheques
No. 3470.......................................... $0,720.10
No. 3474.......................................... 1,050.00
No. 3478.......................................... 538.20
No. 3481.......................................... 807.40
No. 3484.......................................... 832.00
No. 3486.......................................... 1,389.50 0 5,337.20
Adjusted cash balance per bank ................. $14,485.30

Cash balance per books............................... $13,034.30
Add: Note collected by bank
($2,000 + $160 - $15)...................... 0 2,145.00
15,179.30
Less: NSF cheque ......................................... $550.00
Error in recording cheque No. 3485
($540.80 - $450.80) ......................... 90.00
Bank service charges.......................... 45.00
Error in 12-21 deposit ($2,954 - $2,945) 009.00 000,694.00
Adjusted cash balance per books ............... $14,485.30


8-51
PROBLEM 8-5B (Continued)

(c) Dec. 31 Cash.......................................................... 2,145
Bank Charges Expense........................... 15
Notes Receivable ............................. 2,000
Interest Receivable .......................... 160

31 Accounts Receivable A. Shoaib.......... 550
Cash .................................................. 550

31 Accounts Payable.................................... 90
Cash .................................................. 90

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

31 Bank Charges Expense........................... 45
Cash .................................................. 45

Check: $13,034.30 + $2,145 - $550 - $90 - $9 - $45 = $14,485.30
adjusted cash balance


8-52

PROBLEM 8-6B

(a) Cash balance per books, August 1, 2003............................... $16,900
Add: Cash receipts................................................................. 77,000
Less: Cash payments.............................................................. 73,570
Unadjusted cash balance per books, August 31, 2003......... $20,330


(b) BETTERDORF COMPANY
Bank Reconciliation
August 31, 2003

Cash balance per bank statement ........................ $24,850
Add: Deposits in transit (1)................................. $9,000
Bank error ($572 - $275) ............................. 297 9,297
34,147
Less: Outstanding cheques (2)............................ 9,067
Adjusted cash balance per bank .......................... $25,080

Cash balance per books........................................ $20,330
Add: Collection of note receivable by bank
($5,000 + $90) ......................................... $5,090
Interest earned............................................ 45 5,135
25,465
Less: Safety deposit box rent .............................. $ 25
Book error ($400 - $40)............................... 360 385
Adjusted cash balance per books........................ $25,080

8-53
PROBLEM 8-6B (Continued)

(1) August receipts per books.................. $77,000
August deposits per bank ................... $72,000
Less: Deposits in transit, July 31 ...... 4,000 68,000
Deposits in transit, August 31............. $ 9,000

(2) Disbursements per books in August.. $73,570
Add: Book error................................... 360
Total disbursements to be accounted for 73,930
Cheques clearing bank in August ...... $69,660
Less: Bank error.................................. $ 297
July 31 outstanding cheques... 4,500 4,797 64,863
Outstanding cheques, August 31 ....... $ 9,067


(c) Aug. 31 Cash................................................................ 5,090
Notes Receivable................................... 5,000
Interest Receivable................................ 90

31 Cash................................................................ 45
Interest Revenue.................................... 45

31 Bank Charges Expense ................................ 25
Cash........................................................ 25

31 Accounts Payable ......................................... 360
Cash........................................................ 360


Check: $20,330 + $5,090 + $45 - $25 - $360 = $25,080 adjusted cash
balance

8-54

PROBLEM 8-7B

(a) Book balance, May 1 (per April 30 bank reconciliation).... $ 6,964.83
Add: Cash receipts.............................................................. 6,715.00
Less: Cash payments........................................................... 13,223.46
Unadjusted cash balance, May 31....................................... $ 456.37


(b)
EXPLOITS RIVER ADVENTURES
Bank Reconciliation
May 31, 2003

Balance per bank statement .............................. $3,746.97
Add: Deposits in transit ................................... 1,086.00
4,832.97
Less: Outstanding cheques
No. 533.................................................. $ 89.78
No. 555.................................................. 78.82
No. 558.................................................. 943.00
No. 560.................................................. 890.00
No. 566.................................................. 750.00 2,751.60
Adjusted cash balance per bank ....................... $2,081.37

Balance per books............................................. $ 456.37
Add: Proceeds of note collected ($1,500 + $150) 1,650.00
2,106.37
Less: Service charge........................................ 25.00
Adjusted cash balance...................................... $2,081.37


May 31 Cash .................................................... 1,650
Note Receivable.......................... 1,500
Interest Revenue......................... 150

31 Bank Charges Expense...................... 25
Cash............................................. 25


Check: $456.37 + $1,650 - $25 = $2,081.37 adjusted cash balance

8-55

PROBLEM 8-8B

(a)
CAREFREE COMPANY
Bank Reconciliation
March 31, 2003

Balance per bank statement ............................... $5,630
Add: Deposit in transit ...................................... 750
6,380
Less: Outstanding cheques............................... $1,650
Bank error deposit Careless Company .. 1,100 2,750
Adjusted cash balance per bank ........................ $3,630

Balance per books............................................... $1,405
Add: Error in cheque No. 173 ($294 - $249)..... $ 45
Proceeds of note collected...................... 2,650 2,695
4,100
Less: Service charge.......................................... $ 25
Hydro ......................................................... 120
Telephone.................................................. 85
NSF cheque ($220 + $20 service charge) 240 470
Adjusted cash balance per books...................... $3,630

(b) March 31 Cash .................................................. 45
Accounts Payable................... 45

31 Cash .................................................. 2,650
Note Receivable...................... 2,500
Interest Revenue..................... 150

31 Bank Charges Expense................... 25
Hydro Expense................................. 120
Telephone Expense ......................... 85
Accounts Receivable ($220 + $20) . 240
Cash......................................... 470


Check: $1,405 + $45 + $2,650 - $470 = $3,630 adjusted cash balance

8-56
PROBLEM 8-8B (Continued)

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

1. Safeguards assets: Safeguards cash
2. Documentation: Creates a double record of all bank transactions
3. Independent verification: Allows for a check on accounting
records

8-57

PROBLEM 8-9B

(a) Cash and Cash Equivalents balance:

1. Cash on hand.......................................................... $ 1,600
2. Petty cash fund....................................................... 43
3. Bank chequing account ......................................... 4,900
4. BMO money market fund........................................ 5,000
6. Debit card slips....................................................... 890
Total.................................................................... $12,433

(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 an accounts payable (to petty cash) of $157.
Only $43 is actually cash at this point in time. Once the petty cash
fund is reimbursed, $200 cash will be available once again.

4. The 6-month term deposit should be recorded as a temporary
invesment, 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).

7. Diners Club (nonbank) credit card receipts are an accounts
receivable (current asset) until the receipts are paid by Diners
Club.

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.



8-58


BYP 8-1 FINANCIAL REPORTING AND ANAYLSIS


(a) The Company maintains systems of internal control which have been
designed to provide reasonable assurance that accounting records are
reliable and assets are safeguarded (from Managements
Responsibility for Financial Reporting page 13).

(b) The audit committee is referred to in the section regarding
Managements Responsibility for Financial Reporting. The Board of
Directors oversees managements responsibility for financial reporting
primarily through its Audit Committee. The majority of its members are
outside directors (i.e., not officers of the company), and the
independent auditors have access to them.

(c) The Balance Sheet discloses the total amount of cash and cash
equivalents. The summary of significant accounting polices describes
what is included in cash and cash equivalents and how some of the
items are recorded. The short-term investments are recorded at cost
and represent highly liquid instruments with a maturity of three months
or less at the time of purchase.

(d) The summary of significant accounting polices states they are highly
liquid.

(e) They increased by $624,000 during the 2000 fiscal year. This was an
increase of approximately 769% over the beginning balance.

(f) 1. $1,466,000
2. 8% ($1,466,000 $18,565,000)
3. 27% ($1,466,000 $5,416,000)
4. 23% ($1,466,000 $6,405,000)



8-59

BYP 8-2 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 temporary
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) Restricted cash is presented as a current asset which indicates it will
be used in the next year.

(c) Corel (in thousands) Microsoft (in millions)


Current Ratio

1 : 91 . 2
$55,943
$162,605
=

1 : 11 . 3
$9,755
$30,308
=


(d) Having cash and cash equivalents available provides a company with
flexibility, However, uninvested cash does not earn a very high return.
Microsofts investors are accustomed to high returns on their
investment. Thus, Microsofts large amount of liquid assets may
eventually create a drag on its ability to meet investor expectations.


8-60

BYP 8-3 INTERPRETING FINANCIAL STATEMENTS


Feature How it strengthens internal control
1. Written policies and procedures Establishes authority and
responsibility
2. Organizational structure that
segregates duties
Segregation of duties provides
control
3. Comprehensive program of
periodic audits by the internal
auditor
Provides independent verification
that other controls are working
4. Policies and guidelines requiring
employees to maintain the
highest ethical standards
Provides other controls in that
ethical behaviour, if adhered, to will
eliminate fraud and other illegal acts
5. Establishment and operation of
an Audit Committee composed
entirely of outside directors
Provides independent verification
that other controls are working


8-61


BYP8-4 ACCOUNTING ON THE WEB


Due to the frequency of change with regard to information available on the
world wide web, the Accounting on the Web cases are updated as required,
Their suggested solutions are also updated whenever necessary, and can
be found on-line in the Instructor Resources section of our home page
[www.wiley.com/canada/weygandt2].


8-62


BYP8-5 COLLABORATIVE LEARNING ACTIVITY


No solution provided, because of the personal nature of the question. The
answers will be based upon each groups experiences.

8-63

BYP 8-6 COMMUNICATION ACTIVITY

Mr. L. S. Osman
Avalon Company

Dear Mr. Osman:

During our audit of your financial statements, we reviewed the internal
controls over cash receipts. The weaknesses we discovered and our
suggested improvements are listed below.

Weaknesses Suggested Improvement

1. A list of cheques received is
not prepared by the person who
opens the mail.
This list should be prepared so
that it can later be compared with
the daily cash summary. While
this procedure does not assure
that all cheques will be listed, it
does allow the company to verify
that all cheques on the list were
deposited.

2. Mail is opened by only one
person.
When this occurs, there is no
assurance that all incoming
cheques are forwarded to the
cashiers department.

3. The cashier is allowed to open
the mail.
Under this arrangement, it is pos-
sible for the cashier to open the
mail, prepare the cash summary
and make the bank deposit. This
involves no segregation of duties
as the cashier controls the cash
from the time it is received until it
is deposited in the bank.

4. The accounts receivable clerk
is allowed to open the mail.
Again, there is poor segregation
of duties. In this case, the clerk
could write off a customers
account as uncollectible and
then misappropriate the
collection when its received.


8-64
BYP 8-6 (Continued)

Weaknesses Suggested Improvement

5. Mail receipts are deposited
weekly.
This makes the receipts
vulnerable to robbery and to
misappropriation. The receipts
should be deposited intact
daily.

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

Yours sincerely,




Rawls, Keoto, and Landry
Chartered Accountants


8-65


BYP 8-7 ETHICS CASE


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

(1) Largest to smallest: 5 bounced cheques X $25 = $125
(2) Smallest to largest: 1 bounced cheque X $25 = $25
(3) In order of cheque number: 4 bounced cheques X $25 = $100

(b) 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 $25 for something
that has a cost to the bank of $1.50 is gougingthat is, taking unfair
advantage of the customer.

(c) 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 dont have the spare time to change banks unless they really
need to.

(d) Answer will vary depending on students opinion.