ASSIGNMENT CLASSIFICATION TABLE

Transcription

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 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. 4. Explain and critique the application of internal control principles to cash disbursements. 5. Demonstrate the operation of a petty cash fund. 9, 10, 11, , 2 1, 2, 8 1, 8 13, 14, , 4 2, 8 2, , Describe the control features of a bank account. 17, 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

2 ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted (min.) 1A Identify internal control weaknesses over cash receipts. Moderate A 3A Identify internal control weaknesses over cash receipts and cash disbursements. Journalize and post petty cash fund transactions and identify internal control features. Moderate Simple A Prepare bank reconciliation and related entries. Moderate A Prepare bank reconciliation and related entries Moderate A Prepare bank reconciliation and related entries. Moderate A Prepare bank reconciliation and related entries. Moderate A Prepare bank reconciliation, and identify internal control deficiencies. Complex A Calculate cash balance. Simple B Identify internal control weaknesses over cash receipts. Moderate B Identify internal control weaknesses over cash disbursements. Moderate B Journalize and post petty cash fund transactions and identify internal control features. Simple B Prepare bank reconciliation and related entries. Moderate B Prepare bank reconciliation and related entries Moderate A Prepare bank reconciliation and related entries. Moderate B Prepare bank reconciliation and related entries. Moderate B Prepare bank reconciliation, and identify internal control features. Complex B Calculate cash balance. Moderate

3 BLOOM S TAXONOMY TABLE Correlation Chart between Bloom s Taxonomy, Study Objectives and End-of-Chapter Material Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation 1. Describe internal control. Q8-1 BE Identify the principles of internal control and be able to identify weaknesses and suggest improvements in their application. 3. Explain and critique the application of internal control principles to cash receipts. 4. Explain and critique the application of internal control principles to cash disbursements. Q8-5 BE8-2 Q8-2 Q8-3 Q8-4 Q8-6 Q8-7 E8-1 BE8-3 Q8-11 Q8-12 E8-1 BE8-4 Q8-13 Q8-14 Q8-15 Q8-8 P8-3A P8-3B P8-8B E8-2 E8-3 P8-1A P8-2A P8-8A P8-1B P8-2B P8-8B Q8-9 Q8-10 E8-2 P8-1A P8-2A P8-8A P8-1B E8-3 P8-8B P8-2A P8-8A P8-2B E8-4 E Demonstrate the operation of a petty cash fund. 6. Describe the control features of a bank account. Q8-16 BE8-5 E8-5 E8-6 P8-3A P8-3B Q8-17 Q8-18 BE Prepare a bank reconciliation. Q8-20 BE8-7 Q8-19 Q8-21 BE Explain the reporting of cash. Q8-22 BE8-12 BE8-9 BE8-10 BE8-11 E8-6 E8-7 E8-8 E8-9 E8-10 E8-11 P8-4A E8-12 P8-9A P8-9B P8-5A P8-6A P8-7A P8-4B P8-5B P8-6B P8-7B P8-8B P8-8A Broadening Your Perspective BYP8-1 BYP8-2 BYP8-3 BYP8-4 BYP8-5 BYP8-6 BYP

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. 8-4

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 store s cash register tape is locked into the register for further verification. 8-5

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. 8-6

7 Questions Chapter 8 (Continued) 16. The activities in a petty cash system and the related principles are: (a) (1) Establishing fund (2) Making payments from fund Authorization, to establish responsibility for the custody of the fund Documentation procedures, because the custodian must use prenumbered petty cash receipts (3) Replenishing fund Independent verification, because the request 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 transactions independent verification. 8-7

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 cheques for example, a cheque written in July does not clear the bank until August. Unrecorded bank memoranda: NSF cheques for example, a deposited cheque does not clear the originating bank account. Unrecorded bank transactions for example, service charges which the bank deducts from the account. (2) Errors: Bank or book error for example, a cheque for $110 is recorded by the depositor at $ 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. 8-8

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 unauthorized 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 Segregation of duties 2. Independent verification 3. Documentation procedures 8-9

10 BRIEF EXERCISE Safeguard assets and records 2. Other controls 3. Independent verification 4. Segregation of duties 5. Authorization 6. Documentation procedures BRIEF EXERCISE 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 Freight Out Travel Expense Cash Over and Short... 1 Cash To record replenishment of petty cash fund. 8-10

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 month deducted 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 bank not 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 transit added 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. 8-11

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 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 ,125 Less: Charge for printing company cheques Adjusted cash balance per books... $9,090 Note that the outstanding cheques have already been deducted from the cash balance per the books. 8-12

13 BRIEF EXERCISE 8-12 Current Assets: Dupré 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. 8-13

14 SOLUTIONS TO EXERCISES EXERCISE 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. 8-14

15 EXERCISE 8-2 (a) (b) Procedure Weakness Principle Violated Recommended Change 1. Cashiers are not bonded. 2. Inability to establish responsibility for cash on a specific clerk. 3. Cash is not adequately protected from theft. 4. Cash is not independently counted. 5. The accountant should not handle cash. Other controls Authorization Safeguard assets and records Independent verification Segregation of duties All cashiers should be bonded. There should be separate cash drawers and register codes for each clerk. Cash should be stored in a safe until it is deposited in the bank. A supervisor should count the cash. The cashier's department should make the deposits. 8-15

16 EXERCISE 8-3 (a) (b) Procedure Weakness Principle Violated Recommended Change 1. Cheques are not stored in a secure area. 2. The approval and payment of bills is done by the same individual. 3. Cheques are presigned. 4. Cheques are not prenumbered. Safeguard assets and records Segregation of duties Authorization Documentation procedures Cheques should be stored in a safe or locked drawer. 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. 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. Cheques should be prenumbered and subsequently accounted for. 8-16

17 EXERCISE 8-3 (Continued) (a) Procedure Weakness Principle Recommended Change (b) 5. Filing does not prevent a bill from being paid more than once. 6. The bank reconciliation is not independently prepared. Safeguard assets and records; documentation procedures Independent verification Bills should be stamped PAID after payment. Someone else should prepare the bank reconciliation. 8-17

18 EXERCISE 8-4 (a) Weaknesses (b) Suggested Improvements 1. Cheques are not prenumbered Use prenumbered cheques. 2. The purchasing agent signs cheques 3. Unissued cheques are stored in unlocked file cabinet 4. Purchasing agent verifies that the goods have been received 5. Purchasing agent approves and pays for goods purchased 6. After payment, the invoice is simply filed 7. The purchasing agent records payments in the cash disbursements journal 8. The controller records the cheques in cash disbursements journal 9. The controller reconciles the bank statement Only the controller's department personnel should sign cheques. Unissued cheques should be stored in a locked file cabinet with access restricted to authorized personnel. An independent party should verify receipt of goods. Purchasing should approve bills for payment by the controller. The invoice should be stamped PAID, to prevent it from being processed again. Only accounting department personnel should record cash disbursements. Only accounting department personnel should record cash disbursements. An internal auditor or other independent party should reconcile the bank statement. 8-18

19 EXERCISE 8-4 (Continued) (b) INTEROFFICE MEMORANDUM TO: FROM: SUBJECT: DATE: CONTROLLER, ABEKAH COMPANY ACCOUNTING STUDENT INTERNAL CONTROL OVER CASH DISBURSEMENTS 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. 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. 8-19

20 EXERCISE 8-5 Mar. 1 Petty Cash Cash Postage Expense Merchandise Inventory Miscellaneous Expense Travel Expense Cash Cash Over and Short Petty Cash Cash 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 Postage Expense... 8 Printing Expense Entertainment Expense Cash Over and Short*... 8 Cash * $100 ($15 + $8 + $27 + $24) - $18 balance on hand = $8 8-20

21 EXERCISE 8-7 (a) BANSAL COMPANY Bank Reconciliation January 31 Cash balance per bank statement... $3, Add: Deposits in transit... 00, , Less: Outstanding cheques... 00, Adjusted cash balance per bank... $3, Cash balance per books... $3, Less: NSF cheque... $ Bank service charge , Adjusted cash balance per books... $3, (b) Jan. 31 Accounts Receivable Cash Bank Charges Expense Cash Check: $3, $630 - $25 = $3, adjusted cash balance EXERCISE 8-8 The outstanding cheques are as follows: No Total Amount $0,820 0, $2,

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) ,006 Less: Bank service charge... 0,00 15 Adjusted cash balance per books... $7,991 (b) July 31 Cash Bank Charges Expense Notes Receivable Interest Revenue Bank Charges Expense Cash Check: $7,190 + $816 - $15 = $7,991 adjusted cash balance 8-22

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 ,800 21,222 Less: Outstanding cheques ,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..., ,875 19,279 Less: NSF cheque... $410 Safety deposit box rent... 00, Adjusted cash balance per books... $18,839 (c) Sept. 30 Cash... 1,830 Notes Receivable... 1,800 Interest Revenue Cash Interest Revenue Bank Charges Expense Cash Accounts Receivable J. Hower Cash Check: $17,404 + $1,830 + $45 - $30 - $410 = $18,

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 (950) July receipts deposited in July... 14,650 Deposits in transit, July $ 1,100 (b) Outstanding cheques: Cheques per books in July... $17,200 Less: Cheques clearing bank in July... $16,400 Outstanding cheques, June (920) July cheques cleared in July ,480 Outstanding cheques, July $ 1,720 (c) Deposits in transit: Deposits per books in September... $26,700 Add: Deposits in transit, September ,600 Total deposits to be accounted for... 29,300 Less: Deposits per books ,400 Deposits in transit, August $ 3,900 (d) Outstanding cheques: Cheques clearing bank in September... $25,000 Add: Outstanding cheques, September ,100 Total cheques to be accounted for... 27,100 Less: Cash disbursements per books ,700 Outstanding cheques, August $ 3,

25 EXERCISE 8-12 (a) Cash and cash equivalents 1. Currency and coin $ Guaranteed investment certificate 10, April cheques Royal Bank chequing account 2, Royal Bank savings account 4,000 Total $16,857 (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) 8-25

26 SOLUTIONS TO PROBLEMS PROBLEM 8-1A (a) Principles Authorization Segregation of duties Application to Cash Receipts Only cashiers are authorized to sell tickets. Only the manager and cashier can handle cash. 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 Independent verification Other controls A safe is used for the storage of cash and a machine is used to issue tickets. Cash counts are made by the manager at the end of each cashier's shift. Daily comparisons are made by the company controller. Cashiers are bonded. 8-26

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). 8-27

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. 8-28

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. 8-29

30 PROBLEM 8-3A (a) July 1 Petty Cash Cash Freight Out Postage Expense Entertainment Expense Miscellaneous Expense Cash Over and Short Cash Freight Out Charitable Contributions Expense Postage Expense Miscellaneous Expense Cash Aug. 15 Freight Out Entertainment Expense Postage Expense Supplies Expense Cash Over and Short Cash Petty Cash Cash Postage Expense Entertainment Expense Freight Out Cash Over and Short Cash

31 PROBLEM 8-3A (Continued) (b) Petty Cash Date Explanation Ref. Debit Credit Balance July 1 Aug (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. 8-31

32 (a) PROBLEM 8-4A LISIK COMPANY Bank Reconciliation May 31, 2003 Cash balance per bank statement... $7, Add: Deposit in transit... $ Bank error Lisik cheque , , Less: Outstanding cheques... 1, Adjusted cash balance per bank... $8, Cash balance per books... $6, Add: Collection of note receivable ($2,000 + $80 - $20)... 02, , Less: NSF cheque... $ Error in May 12 deposit ($ $836.15) Error in recording cheque No ($685 - $658) Cheque printing charge , Adjusted cash balance per books... $8,

33 PROBLEM 8-4A (Continued) (b) May 31 Cash... 2,060 Bank Charges Expense Notes Receivable... 2,000 Interest Revenue Accounts Receivable W. Hoad Cash Sales Cash Accounts Payable M. Helms Cash Bank Charges Expense Cash Check: $6, $2,060 - $700 - $10 - $27 - $40 = $8, adjusted cash balance 8-33

34 PROBLEM 8-5A (a) Book balance, October 31 (from Oct. 31 bank reconciliation)... $ 9, Add: Cash receipts per journal... 15, Less: Cash payments per journal... 14, Unadjusted cash balance, November $10, (b) MCISAAC COMPANY Bank Reconciliation November 30, 2003 Balance per bank statement... $17, Add: Deposits in transit , , Less: Outstanding cheques No $1, No No No No No No No , , Adjusted cash balance per bank... $12, Balance per books... $10, Add: Note collected by bank ($2,000 + $120 - $15) 0 2, , Less: Cheque printing charge... $ Error in recording cheque No ($1,750 - $1,570) Error in deposit ($2,954 - $2,945) , Adjusted cash balance per books... $12,

35 PROBLEM 8-5A (Continued) (c) Nov. 30 Cash... 2,105 Bank Charges Expense Notes Receivable... 2,000 Interest Revenue Bank Charges Expense Cash Accounts Payable Cash Accounts Receivable... 9 Cash... 9 Check: $10, $2,105 - $50 - $180 - $9 = $12, adjusted cash balance 8-35

36 (a) PROBLEM 8-6A 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) ,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, ,560 24,260 Less: Cheque printing charge ,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 ,000 74,000 Deposits in transit, July $ 8,000 (2) Disbursements per books in July... $76,900 Less: Book error in cheque to creditor Total disbursements to be accounted for... 76,810 Cheques clearing bank in July... $74,700 Add: Bank error Less: June 30 outstanding cheques... 6,600 68,200 Outstanding cheques, July $ 8,

37 PROBLEM 8-6A (Continued) (b) July 31 Cash... 1,470 Notes Receivable... 1,400 Interest Receivable Cash Accounts Payable Bank Charges Expense Cash Check: $22,700 + $1,470 + $90 - $40 = $24,220 adjusted cash balance 8-38

38 (a) General Ledger Cash Balance: PROBLEM 8-7A 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 $12,088 (b) Deposits in transit: March 30, $1,025 (c) Outstanding cheques: #3470 $ 720 (from February bank rec.) # (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 $720 No ,320 Adjusted cash balance per bank... $11,480 Balance per books... $12,088 Less: Service charge... $ 49 NSF chequeyjordan Correction in recording cash receipts, March 4 ($1,221 - $1,212) Adjusted cash balance... $11,

39 PROBLEM 8-7A (Continued) (e) Mar. 31 Sales... 9 Cash Bank Charges Expense Cash Accounts Receivable Cash Check: $12,088 - $9 - $49 - $550 = $11,480 adjusted cash balance 8-40

40 PROBLEM 8-8A AURA WHOLE FOODS Bank Reconciliation October 31, 2003 (a) Balance per bank statement $22, Less: Outstanding cheques No. Amount No. Amount $ $ , Adjusted balance per bank $20, Cash balance per books $21, Add: Credit memo (collection of note receivable) Adjusted balance per books (before theft) 22, Less: Amount of theft 001, Adjusted balance per books $20, (b) The cashier attempted to cover the theft of $1, by: 1. Not listing as outstanding three cheques totalling $ (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 $ ) 3. Subtracting the $300 credit from the bank balance instead of adding it to the book balance, thereby concealing $600 of the theft. 8-41

41 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. 8-42

42 PROBLEM 8-9A (a) Cash balance: 1. Cash on hand... $ 5, Petty cash fund Commercial bank savings account ,000 Commercial bank chequing account... 25,000 US bank account... 45, Special bank account customer 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. 8-43

43 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 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. (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. 8-44

44 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 disbursement 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. 8-45

45 PROBLEM 8-3B (a) Jan. 1 Petty Cash Cash Freight Out Postage Expense Office Supplies Expense Miscellaneous Expense Cash Over and Short Cash Freight Out Charitable Contributions Expense Postage Expense Miscellaneous Expense Cash Feb. 15 Freight Out Entertainment Expense Postage Expense Merchandise Inventory Miscellaneous Expense Cash Over and Short Cash Petty Cash Cash Postage Expense Travel Expense Freight Out Office Supplies Cash

46 PROBLEM 8-3B (Continued) (b) Petty Cash Date Explanation Ref. Debit Credit Balance Jan. 1 Feb (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 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 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. 8-47

47 PROBLEM 8-4B (a) AGRICULTURAL GENETICS COMPANY Bank Reconciliation May 31, 2003 Cash balance per bank statement... $8, Add: Deposit in transit , Less: Outstanding cheques... $ Bank error, May 12 deposit ($836 - $638) Adjusted cash balance per bank... $8, Cash balance per books... $7, Add: Collection of note receivable ($2,000 + $80 1 $20)... 2, , Less: NSF cheque... $ Error in recording cheque No ($585 - $505) Bank service charge Adjusted cash balance per books... $8, $2,000 x 8% x 6/12 mos. = $80 interest 8-48

48 PROBLEM 8-4B (Continued) (b) May 31 Cash... 2,060 Bank Charges Expense Notes Receivable... 2,000 Interest Revenue Accounts Receivable P. Dell Cash Accounts Payable L. Kingston Cash Bank Charges Expense Cash Check: $7, $2,060 - $700 - $80 - $50 = $8, adjusted cash balance 8-49

49 PROBLEM 8-5B (a) Cash balance per books, November 30, 2003 (from Nov. 30 bank reconciliation)... $10, Add: Cash receipts... 16, Less: Cash payments... 14, Unadjusted cash balance per books, December 31, $13, (b) HILO COMPANY Bank Reconciliation December 31, 2003 Cash balance per bank statement... $18, Add: Deposits in transit... 1, , Less: Outstanding cheques No $0, No , No No No No , , Adjusted cash balance per bank... $14, Cash balance per books... $13, Add: Note collected by bank ($2,000 + $160 - $15) , , Less: NSF cheque... $ Error in recording cheque No ($ $450.80) Bank service charges Error in deposit ($2,954 - $2,945) , Adjusted cash balance per books... $14,

50 PROBLEM 8-5B (Continued) (c) Dec. 31 Cash... 2,145 Bank Charges Expense Notes Receivable... 2,000 Interest Receivable Accounts Receivable A. Shoaib Cash Accounts Payable Cash Accounts Receivable... 9 Cash Bank Charges Expense Cash Check: $13, $2,145 - $550 - $90 - $9 - $45 = $14, adjusted cash balance 8-51

51 PROBLEM 8-6B (a) Cash balance per books, August 1, $16,900 Add: Cash receipts... 77,000 Less: Cash payments... 73,570 Unadjusted cash balance per books, August 31, $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 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 ,135 25,465 Less: Safety deposit box rent... $ 25 Book error ($400 - $40) Adjusted cash balance per books... $25,

52 PROBLEM 8-6B (Continued) (1) August receipts per books... $77,000 August deposits per bank... $72,000 Less: Deposits in transit, July ,000 68,000 Deposits in transit, August $ 9,000 (2) Disbursements per books in August.. $73,570 Add: Book error 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 $ 9,067 (c) Aug. 31 Cash... 5,090 Notes Receivable... 5,000 Interest Receivable Cash Interest Revenue Bank Charges Expense Cash Accounts Payable Cash Check: $20,330 + $5,090 + $45 - $25 - $360 = $25,080 adjusted cash balance 8-53

53 PROBLEM 8-7B (a) Book balance, May 1 (per April 30 bank reconciliation)... $ 6, Add: Cash receipts... 6, Less: Cash payments... 13, Unadjusted cash balance, May $ (b) EXPLOITS RIVER ADVENTURES Bank Reconciliation May 31, 2003 Balance per bank statement... $3, Add: Deposits in transit... 1, , Less: Outstanding cheques No $ No No No No , Adjusted cash balance per bank... $2, Balance per books... $ Add: Proceeds of note collected ($1,500 + $150) 1, , Less: Service charge Adjusted cash balance... $2, May 31 Cash... 1,650 Note Receivable... 1,500 Interest Revenue Bank Charges Expense Cash Check: $ $1,650 - $25 = $2, adjusted cash balance 8-54

54 PROBLEM 8-8B (a) CAREFREE COMPANY Bank Reconciliation March 31, 2003 Balance per bank statement... $5,630 Add: Deposit in transit ,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 Telephone NSF cheque ($220 + $20 service charge) Adjusted cash balance per books... $3,630 (b) March 31 Cash Accounts Payable Cash... 2,650 Note Receivable... 2,500 Interest Revenue Bank Charges Expense Hydro Expense Telephone Expense Accounts Receivable ($220 + $20). 240 Cash Check: $1,405 + $45 + $2,650 - $470 = $3,630 adjusted cash balance 8-55

55 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 8-56

56 PROBLEM 8-9B (a) Cash and Cash Equivalents balance: 1. Cash on hand... $ 1, Petty cash fund Bank chequing account... 4, BMO money market fund... 5, Debit card slips 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. Diner s Club (nonbank) credit card receipts are an accounts receivable (current asset) until the receipts are paid by Diner s 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. 8-57

57 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 Management s Responsibility for Financial Reporting page 13). (b) The audit committee is referred to in the section regarding Management s Responsibility for Financial Reporting. The Board of Directors oversees management s 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, % ($1,466,000 $18,565,000) 3. 27% ($1,466,000 $5,416,000) 4. 23% ($1,466,000 $6,405,000) 8-58

58 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 $162,605 $30,308 = 2.91: 1 = 3.11: 1 $55,943 $9,755 (d) Having cash and cash equivalents available provides a company with flexibility, However, uninvested cash does not earn a very high return. Microsoft s investors are accustomed to high returns on their investment. Thus, Microsoft s large amount of liquid assets may eventually create a drag on its ability to meet investor expectations. 8-59