of persuading another party to act in such a way that causes injury or damage to that party.

Transcription

1 Financial Accounting, 10th Edition Solutions Manual Harrison Completed downloadable package SOLUTIONS MANUAL for Financial Accounting, 10th Edition by Walter T. Harrison, Charles T. Horngren, C. William Thomas. Solutions Manual, Answer key, Instructor's Resource Manual for all chapters are included. Download link: Chapter 4 Internal Control & Cash Short Exercises (5 min.) S 4-1 Fraud is an intentional misrepresentation of facts, made for the purpose of persuading another party to act in such a way that causes injury or damage to that party. The Three Components of the Fraud Triangle 1. Motive Fraud generally results from either critical need or greed on the part of the perpetrator. Regardless of whether the driving force is need or greed most perpetrators are driven to attempt to acquire something that belongs to others. 2. Opportunity The opportunity to commit fraud usually arises through weak internal controls. 3. Rationalization The perpetrator(s) is (are) convinced, in their own minds, that they deserve the object of the fraudulent behavior. They may Chapter 4 Internal Control & Cash 4-1

2 believe no one else will ever know or even that everybody else is engaging in fraudulent behavior 4-2 Financial Accounting 10/e Solutions Manual

3 (5 min.) S 4-2 Clyde should report the errors to Lusk because Lusk is Clyde s supervisor, and Lusk is responsible for the errors. If Lusk fails to take action, then Clyde should report the errors to Lusk s supervisor in the organization. Clyde should keep going up the chain of command until the errors are corrected. In any event, outsiders who are relying on Otto Brothers Limited s financial statements must be made aware of the need to correct the reported net income figure. (10 min.) S4-3 A computer virus enters program code without your consent and performs destructive action to your computer files or programs. A Trojan Horse is a malicious computer program that hides inside a legitimate program and works like a virus to corrupt your computer files or programs. A phishing expedition can be a Web site that attracts visitors who may be tricked into revealing their account numbers, social security numbers, passwords, or other valuable data. The creator of the Web site then uses the unsuspecting Web-site visitors data to steal from them and for other illicit purposes. Chapter 4 Internal Control & Cash 4-3

4 (5-10 min.) S 4-4 COMPONENTS OF INTERNAL CONTROL 1. Control environment Top managers must set the tone at the top to establish a control environment. 2. Risk assessment Each company must identify its own risks, based upon its particular line of business, and establish procedures to minimize the risks. 3. Control procedures Specific procedures are needed for a good system of internal control. 4. Monitoring of controls Auditors can monitor a company s actions and its financial statements. Controls can also be programmed into the information system. 5. Information system Accurate information is essential for success in business. Accounting information enters and exits through the information system. Student responses may vary for the descriptions. (5-10 min.) S 4-5 Separation of duties is essential for safeguarding assets. The person who has custody of an asset should not also account for the asset. A person who performs both duties can steal the asset and hide the theft by making a false entry in the accounting records. Student responses may vary. 4-4 Financial Accounting 10/e Solutions Manual

5 (5-10 min.) S 4-6 There are several major internal control procedures as discussed in the chapter besides separation of duties: 1. Smart hiring practices. The company should be careful to hire both competent and honest personnel. Smart hiring practices involve conducting background checks on job applicants, as well as training and supervision on the job. 2. Comparisons and compliance monitoring. No person or department should be allowed to completely process a transaction from beginning to end without being checked by another person or a computer program. Examples of comparisons and compliance monitoring are the use of operating and cash budgets. Also, in key functions, one employee (or a computer program) double checks the work of another for accuracy. 3. Adequate records help to assure that sufficient hard copy documents or electronic information is kept by the entity to support the validity of transactions that were processed. Examples include sales invoices, purchase orders, shipping records, and customer remittance advices. Among the benefits of adequate records is the ability to provide an audit trail later for internal or external auditors to follow in auditing the entity s financial statements. 4. Limited access goes hand in hand with separation of duties to assure that only authorized individuals are allowed access to (a) the assets of Chapter 4 Internal Control & Cash 4-5

6 (continued) S 4-6 the company, such as cash or inventory; and (b) the records. Generally, only people with custodial responsibilities (such as the cashier or the warehouse personnel) should be allowed access to assets (such as cash or inventory). Only people with recordkeeping responsibilities (such as accountants) should have access to the company s journals and ledgers. 5. Proper approvals. No transaction should be processed without management s general or specific approval. Generally, the larger the transaction, the higher the organizational level of approval necessary. Notice that the first letters of these attributes spell the acronym SCALP. That s an easy and comprehensive way to remember the control procedures involved in internal controls. (20-30 min.) S 4-7 Cash is important not because of its amount as reported on the balance sheet, but because of its effect on a business. All transactions ultimately affect cash. Businesses purchase assets and must pay cash. They make sales and collect cash. All expenses ultimately require cash. Also, cash is susceptible to theft because it is a medium of exchange. These factors combine to give cash more importance than its account balance would suggest. Student responses may vary. 4-6 Financial Accounting 10/e Solutions Manual

7 (20-30 min.) S 4-8 Punching a hole through supporting documents reduces the opportunity for fraud. Without this control procedure, a dishonest employee could resubmit documents for payment a second time. The employee could change the payee s address and have the check sent to an address the employee controls. Or the employee could arrange to have the second payee split the payment with the employee. Canceling the documents makes it difficult to get approval for a duplicate payment. Student responses may vary. Chapter 4 Internal Control & Cash 4-7

8 BANK Vincente Corp. Bank Reconciliation August 31, 2014 BOOKS (10 min.) S 4-9 Balance, August 31 $4,775 Balance, August 31 $3,640 Add: Deposit in transit 300 Add: Bank collection 685 Less: 5,075 Interest revenue 20 Less: 4,345 Outstanding checks (800) Service charge (15) NSF check (55) Adjusted bank balance $4,275 Adjusted book balance $4,275 Vincente has cash of $4,275. Journal (5 min.) S 4-10 DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Aug. 31 Cash Accounts Receivable Collection on account. 31 Cash.. 20 Interest Revenue Interest earned on bank balance. 31 Miscellaneous Expense Cash. 15 Bank service charge. 31 Accounts Receivable 55 Cash.. 55 NSF check. 4-8 Financial Accounting 10/e Solutions Manual

9 (5 min.) S 4-11 It appears that the employee has stolen $710 (adjusted book balance, $3,300 adjusted bank balance, $2,590). The adjusted bank balance is the company s true cash balance, and the company books show more cash on hand. Therefore, the books must be incorrect. (5 min.) S 4-12 Sims will notice a gap in the sequence of sales receipts for the receipt that Young destroyed. This knowledge will lead Sims to investigate what happened to the missing receipt and what happened to the related cash. (10 min.) S Paying by check carries three controls over cash: The check provides a record of the payment. The check must be signed by an authorized official. Before signing the check, the official should study the evidence supporting the payment. 2. A dishonest purchasing agent could: Purchase goods and have them delivered to his home or other location that he controls. Approve payment by the company for goods that he spent too much on, and then split the excess with the supplier. Companies avoid this internal control weakness by separating the following duties related to the purchase of, and payment for, goods: purchasing goods receiving goods approving and paying for goods Chapter 4 Internal Control & Cash 4-9

10 Farm-to-Market (FM) Cash Budget Year 2015 (5-10 min.) S 4-14 Millions Cash balance, beginning $ 7 Estimated cash receipts total Estimated cash payments total (97) Cash available (needed) before new financing 13 Budgeted cash balance needed (11) Cash available for additional investments $ 2 (5 min.) S 4-15 Cash and cash equivalents includes liquid assets such as time deposits, certificates of deposit, and high-grade U.S. or foreign government securities that are very close to maturity (three months or less at the time of purchase). Besides cash, all of these listed are considered to be cash equivalents items quickly and easily converted to cash Financial Accounting 10/e Solutions Manual

11 Exercises (5-20 min.) E 4-16A a. Higaredo has access to the cash collected, and he also prepares the cash report. With access to both items, Higaredo can steal cash and falsify his cash report to conceal his theft. b. Valdez prepares the purchase order and also receives the goods. She can add some items to the purchase order and have these extra items shipped to a location she controls. When the goods come in, she checks the incoming shipment, so there s no outside party to learn of her dishonesty. Student responses may vary. (10 min.) E 4-17A Cash payments: a. Strong internal control. There is a good separation of duties. Supervisors request equipment, and the home office purchases the equipment. b. Weak internal control. Supervisors request, purchase, and pay for equipment with little oversight by the home office. Cash receipts: a. Weak internal control. There is not a good separation of duties. The accountant both handles cash and accounts for cash. b. Strong internal control. There is a good separation of duties. Different people handle cash and account for cash. Chapter 4 Internal Control & Cash 4-11

12 (10 min.) E 4-18A To prevent Munson s embezzlement, Downtown Columbia s board of directors could have: a. Not permitted Munson to write checks for Downtown Columbia. Instead, appoint a board member to write the checks. b. Not permitted Munson to receive cash that came to Downtown Columbia. Have subscriber checks sent to a post office box belonging to a bank and have the bank collect the checks. c. Supervised Munson s work by examining Downtown Columbia s documents such as paid checks. d. Had an audit of Downtown Columbia s transactions and financial statements. Student responses may vary Financial Accounting 10/e Solutions Manual

13 (10-20 min.) E 4-19A BANK: F.L. Callan Bank Reconciliation March 31, 2015 Balance, March 31 $ 409 Add: Deposit in transit 1,325 Less: Outstanding checks: Check No. 626 $ (360) Adjusted bank balance $1,374 BOOKS: Balance, March 31 $1,472 Less: Correction of book error Recorded $81 check as $18 $ 63 NSF check 28 Service charge 7 (98) Adjusted book balance $1,374 Chapter 4 Internal Control & Cash 4-13

14 (10-20 min.) E 4-20A BANK: Ryan Patrick Bank Reconciliation June 30, 2014 Balance, June 30 $ 750 Add: Deposit in transit 1,765 2,515 Less: Outstanding checks (610) Adjusted bank balance $1,905 BOOKS: Balance, June 30 $1,876 Add: EFT collection rent 409 2,285 Less: Service charge $ 7 NSF checks 120 Charge for printed checks 10 Correction of book error recorded $270 check as $ (380) Adjusted book balance $1,905 Patrick s actual cash balance is $1, Financial Accounting 10/e Solutions Manual

15 (10-15 min.) E 4-21A Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT June 30 Cash Rent Revenue EFT collection of rent. 30 Miscellaneous Expense ($7 + $10) Cash Bank service charge and charge for printed checks. 30 Accounts Receivable Cash NSF checks returned by bank. 30 Salary Expense ($270 $27) Cash Correction of book error. Chapter 4 Internal Control & Cash 4-15

16 (10-15 min.) E 4-22A TO: FROM: SUBJECT: Store Manager Student Evaluation of internal control and plan for improvement There is a weakness in internal control over cash receipts. The cash registers do not keep a record of sales. With no record, there is no way to determine how much cash should be in the cash drawer. This omission makes it easy for the cashier to steal cash and not get caught. To improve internal control, the company should use cash registers that record each sale, and tabulate total cash sales each day. The manager can prove the amount of cash in the cash drawer against this recorded amount Financial Accounting 10/e Solutions Manual

17 (10-15 min.) E 4-23A The main internal control weakness is that the payroll department both prepares and distributes the paychecks. With both duties, a dishonest person in the payroll department can create a time sheet for a fictitious employee and then keep the related paycheck after the treasurer returns the signed checks to the payroll department. To correct this weakness, Blue Manufacturing should have someone other than the payroll department or the shop foreman distribute paychecks to employees. For example, the human resources department, which has no control over the time sheets or the paychecks, could distribute paychecks to the workers. Chapter 4 Internal Control & Cash 4-17

18 (20-30 min.) E 4-24A Dexter Communications, Inc. Cash Budget Year Ended December 31, 2015 Millions Cash balance, December 31, 2014 $ 68 Budgeted cash receipts: Collections from customers 11,325 Sale of assets ,550 Budgeted cash payments: Payments for cost of services and products $6,196 Payments of operating expenses 2,553 Investment in equipment 1,822 Payment of debt 538 Payment of dividends ,457 Cash available (needed) before financing 93 Budgeted cash balance, December 31, 2015 (70) Cash available for additional investments, or (New financing needed) $ 23 Dexter Communications expects to have cash available for additional investments of $23 million during Financial Accounting 10/e Solutions Manual

19 (5-20 min.) E 4-25B a. Kennedy has access to the cash collected, and he also prepares the cash report. With access to both items, Kennedy can steal cash and falsify his cash report to conceal his theft. b. Morales prepares the purchase order and also receives the goods. She can add some items to the purchase order and have these extra items shipped to a location she controls. When the goods come in, she checks the incoming shipment, so there s no outside party to learn of her dishonesty. Student responses may vary. (10 min.) E 4-26B Cash payments: a. Strong internal control. There is a good separation of duties. Supervisors request equipment, and the home office purchases the equipment. b. Weak internal control. Supervisors both request, purchase, and pay for equipment with little oversight by the home office. Cash receipts: a. Weak internal control. There is not good separation of duties. The accountant both handles cash and accounts for cash. b. Strong internal control. There is a good separation of duties. Different people handle cash and account for cash. Chapter 4 Internal Control & Cash 4-19

20 (10 min.) E 4-27B To prevent Henry s embezzlement, Downtown Huntsville s board of directors could have: a. Not permitted Henry to write checks for Downtown Huntsville. Instead, appoint a board member to write the checks. b. Not permitted Henry to receive cash that came to Downtown Huntsville. Have customer checks sent to a lock box belonging to the bank and allow the bank to get the checks from the lock box. c. Supervised Henry s work by examining Downtown Huntsville s documents such as paid checks. d. Had an audit of Downtown Huntsville s transactions and financial statements. Student responses may vary Financial Accounting 10/e Solutions Manual

21 (10-20 min.) E 4-28B BANK: A.C. Mazanek Bank Reconciliation May 31, 2014 Balance, May 31 $ 405 Add: Deposit in transit 1,320 Less: Outstanding checks: Check No. 626 $ (340) Adjusted bank balance $1,385 BOOKS: Balance, May 31 $1,452 Less: Correction of book error Recorded $85 check as $58 $ 27 NSF check 37 Service charge 3 (67) Adjusted book balance $1,385 Chapter 4 Internal Control & Cash 4-21

22 (10-20 min.) E 4-29B BANK: Joe Donney Bank Reconciliation August 31, 2014 Balance, August 31 $ 638 Add: Deposit in transit 1,695 2,333 Less: Outstanding checks (756) Adjusted bank balance $1,577 BOOKS: Balance, August 31 $1,620 Add: EFT collection rent 375 1,995 Less: Service charge $ 9 NSF checks 137 Charge for printed checks 20 Correction of book error recorded $280 check as $ (418) Adjusted book balance $1,577 Donney s actual cash balance is $1, Financial Accounting 10/e Solutions Manual

23 (10-15 min.) E 4-30B Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Aug 31 Cash Rent Revenue EFT collection of rent. 31 Miscellaneous Expense ($9 + $20) Cash Bank service charge and charge for printed checks. 31 Accounts Receivable Cash NSF checks returned by bank. 31 Salary Expense ($280 $28) Cash Correction of book error. Chapter 4 Internal Control & Cash 4-23

24 (10-15 min.) E 4-31B TO: Store Manager FROM: Student SUBJECT: Evaluation of internal control and plan for improvement There is a weakness in internal control over cash receipts. The cash registers do not keep a record of sales. With no record, there is no way to determine how much cash should be in the cash drawer. This omission makes it easy for the cashier to steal cash and not get caught. To improve internal control, the company should use cash registers that record each sale and tabulate total cash sales each day. The manager can prove the amount of cash in the cash drawer against this recorded amount Financial Accounting 10/e Solutions Manual

25 (10-15 min.) E 4-32B The main internal control weakness is that the payroll department both prepares and distributes the paychecks. With both duties, a dishonest person in the payroll department can create a time sheet for a fictitious employee and then keep the related paycheck after the treasurer returns the signed checks to the payroll department. To correct this weakness, Quick Kick should have someone other than the payroll department or the shop foreman distribute paychecks to employees. For example, the human resources department, which has no control over the time sheets or the paychecks, could distribute paychecks to the workers. Chapter 4 Internal Control & Cash 4-25

26 (20-30 min.) E 4-33B Carron Communications, Inc. Cash Budget Year Ended December 31, 2015 Millions Cash balance, December 31, 2014 $ 72 Budgeted cash receipts: Collections from customers 11,233 Sale of assets ,413 Budgeted cash payments: Payments for cost of services and products $6,129 Payments of operating expenses 2,756 Investment in equipment 1,543 Payment of debt 611 Payment of dividends ,355 Cash available (needed) before financing 58 Budgeted cash balance, December 31, 2015 (65) Cash available for additional investments, or (New financing needed) $ (7) Carron expects to need new financing of $7 million during Financial Accounting 10/e Solutions Manual

27 Quiz Q4-34 c Q4-35 a Q4-36 b Q4-37 d Q4-38 b Q4-39 c Q4-40 c Q4-41 d Q4-42 a Q4-43 d Q4-44 Q4-45 c e [$14,000 + $81,000 $44,000 $34,000 $25,000 $13,000 = ($21,000); arrange financing for this amount.] Chapter 4 Internal Control & Cash 4-27

28 Problems (15-20 min.) P 4-46A The internal control weaknesses in English Imports system are: 1. O Hara controls the content of the invoices. With no supervision of her work, O Hara could have the suppliers overstate their prices and then arrange to have them split the excess with her after English Imports pays the invoices. 2. Luck has both cash handling and accounting duties. With both responsibilities, Luck could steal incoming cash and cover her theft by manipulating the accounting records. As with all small businesses, the key to effective internal control is more owner involvement. Kregg could: 1. Make the purchase and pay arrangements with the English artisans who supply English Imports products. Let O Hara keep locating new products, but don t let her arrange for the purchases and payment. 2. Kregg could assign either cash handling or accounting duties to Luck and then hire someone else to do the other (accounting or cashhandling) duties. Also Kregg needs to perform the bank reconciliation to keep her eye on cash receipts and cash payments Financial Accounting 10/e Solutions Manual

29 (10-20 min.) P 4-47A Requirement 1 Requirement 2 Requirement 3 Missing Internal Control Characteristic Possible Problem Solution a. Separation of duties b. Assignment of responsibility c. Separation of duties Theft of diamonds the purchasing agent could have diamonds sent to a location he controls. Lost revenue, because too many employees are managing the office and neglecting their duties. Theft of cash. Separate purchasing, approval, and check-signing duties. Assign a single employee to manage the office when the owner is absent. Separate accounting and cash-handling duties. Chapter 4 Internal Control & Cash 4-29

30 Req. 1 (20-30 min.) P 4-48A Richmond Automotive Bank Reconciliation June 30, 2014 BANK: Balance, June 30, 2014 $ 9,142 Add: Deposits in transit ($982 + $2,804) 3,786 12,928 Less: Outstanding checks Check No $ ,406 (4,212) Adjusted bank balance, June 30, 2014 $ 8,716 BOOKS: Balance, June 30, 2014 $ 7,298 Add: EFT collection of rent $ 525 Bank collection of note receivable 1,375 Book error $1,380 check recorded as $1, ,350 9,648 Less: EFT payment of insurance $ 467 Unauthorized signature check 455 Service charge 10 (932) Adjusted book balance, June 30, 2014 $ 8, Financial Accounting 10/e Solutions Manual

31 (continued) P 4-48A Req. 2 (entries based on the reconciliation) Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT June 30 Cash Rent Revenue EFT deposit for rent revenue earned. 30 Cash... 1,375 Note Receivable... 1,375 Note receivable collected by bank. 30 Cash Accounts Payable Correction for check #3115 recorded incorrectly. 30 Insurance Expense Cash EFT for payment of insurance. 30 Accounts Receivable Cash US customer check returned by bank. 30 Miscellaneous Expense Cash Bank service charge. Chapter 4 Internal Control & Cash 4-31

32 (continued) P 4-48A Req. 3 A bank account helps control cash by providing a place for safekeeping. The bank also provides a detailed list of the company s cash transactions that managers can compare to the company s own cash records and thereby correct any book errors quickly. The bank reconciliation helps control cash by ensuring that the company accounts for its cash transactions correctly and that the bank and book records of cash are correct. Also, the bank reconciliation establishes the balance of cash to report on the balance sheet Financial Accounting 10/e Solutions Manual

33 (30-45 min.) P 4-49A Dallas Wireless Cash Budget 2015 Thousands Cash balance, beginning $ 1,600 Budgeted cash receipts: Collections from customers ($61, ) 76,250 Receipt of interest ,250 Budgeted cash payments: Cash paid for inventory ($46, ) $57,960 Cash paid for operating expenses 13,200 Purchases of equipment 4,500 Purchases of investments 800 Payment of dividends 500 Payment of long-term debt 200 (77,160) Cash available (needed) before financing 1,090 Budgeted cash balance, ending (4,675) Cash available for additional investments, or (New financing needed) $ (3,585) Chapter 4 Internal Control & Cash 4-33

34 (15-20 min.) P 4-50B The internal control weaknesses in Finnish Imports system are: 1. Martin controls the content of the invoices. With no supervision of her work, Martin could have the suppliers overstate their prices and then arrange to have them split the excess with her after Finnish Imports pays the invoices. 2. Moore has both cash handling and accounting duties. With both responsibilities, Moore could steal incoming cash and cover her theft by manipulating the accounting records. As with all small businesses, the key to effective internal controls is more owner involvement. Ferguson could: 1. Make the purchase and pay arrangements with the artisans who supply Finnish Imports products. Let Martin keep locating new products, but don t let her arrange for the purchases and payment. 2. Ferguson could assign either cash handling or accounting duties to Moore and then hire someone else to do the other (accounting or cashhandling) duties. Also Ferguson needs to perform the bank reconciliation to keep her eye on cash receipts and cash payments Financial Accounting 10/e Solutions Manual

35 (10-20 min.) P 4-51B Requirement 1 Requirement 2 Requirement 3 Missing Internal Control Characteristic Possible Problem Solution a. Separation of duties Theft of cash or diamonds by the purchasing agent. Have a manager, not the purchasing agent, approve invoices for payment and sign the checks. b. Assignment of responsibilities Lost revenue due to delay of architectural drawings. Assign one senior architect to fulfill management duties while Klepper is absent. Other senior architect should focus on producing architectural drawings. c. Separation of duties Theft of cash. Keep accounting and cash handling duties separate. Chapter 4 Internal Control & Cash 4-35

36 (20-30 min.) P 4-52B Req. 1 Big City Automotive Bank Reconciliation July 31, 2014 BANK: Balance, July 31, 2014 $ 9,693 Add: Deposits in transit ($986 + $2,801) 3,787 13,480 Less: Outstanding checks Check No $ ,831 (4,631) Adjusted bank balance, July 31, 2014 $ 8,849 BOOKS: Balance, July 31, 2014 $ 6,958 Add: EFT collection of rent $ 850 Bank collection of note receivable 1,350 Book error $1,390 check recorded as $1, ,740 9,698 Less: Unauthorized signature check $ 417 EFT payment of insurance 407 Service charge 25 (849) Adjusted book balance, July 31, 2014 $ 8, Financial Accounting 10/e Solutions Manual

37 (continued) P 4-52B Req. 2 (entries based on the reconciliation) Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT July 31 Cash Rent Revenue EFT deposit for rent revenue. 31 Cash... 1,350 Note Receivable... 1,350 Note receivable collected by bank. 31 Cash Accounts Payable Correction for check #3115 recorded incorrectly. 31 Accounts Receivable Cash US customer check returned by bank. 31 Insurance Expense Cash EFT for payment of insurance. 31 Miscellaneous Expense Cash Bank service charge. Chapter 4 Internal Control & Cash 4-37

38 (continued) P 4-52B Req. 3 A bank account helps control cash by providing a place for safekeeping. The bank also provides a detailed list of the company s cash transactions that Big City Automotive managers can compare to the company s own cash records and thus correct any book errors quickly. The bank reconciliation helps control cash by ensuring that the company accounts for its cash transactions correctly and that the bank and book records of cash are correct. Also, the bank reconciliation establishes the balance of cash to report on the balance sheet Financial Accounting 10/e Solutions Manual

39 (30-45 min.) P 4-53B Tampa Wireless Cash Budget 2015 Cash balance, beginning $ 1,500 Budgeted cash receipts: Collections from customers ($66, ) 82,500 Receipt of interest ,100 Budgeted cash payments: Cash paid for inventory ($50, ) $62,000 Cash paid for operating expenses 13,400 Purchase of equipment 4,800 Purchases of investments 400 Payment of dividends 200 Payments of long-term debt 600 (81,400) Cash available (needed) before financing 2,700 Budgeted cash balance, ending (4,750) Cash available for additional investments, or (New financing needed) $ (2,050) Chapter 4 Internal Control & Cash 4-39

40 Challenge Exercises and Problem (15-25 min.) E 4-54 Wood could be: 1. Writing business checks to herself. 2. Submitting purchase invoices a second time for duplicate payment, perhaps altering the mailing address on the duplicate invoice and sending the check to a post office box that Wood controls. Brown could investigate by: 1. Performing the bank reconciliation and examining all checks written by the business. 2. Examining purchase invoices for authenticity and comparing invoices to receiving reports to determine that the business received all goods it paid for. Any invoice with a hole indicates it was paid earlier. Calling the suppliers directly to inquire about any questionable invoices. 3. Paying suppliers excess amounts and arranging for suppliers to kick back part of the excess to Wood. 4. Making small cash payments to herself. 3. Comparing the business s ratio of cost of goods sold to retail selling price to the cost-to-retail ratio in the past. A kickback scheme would show up in higher cost figures and a lower profit percentage. 4. Examining all cash records and comparing the records to actual quantities of supplies and other items needed by the business. Student responses may vary Financial Accounting 10/e Solutions Manual

41 Req. 1 Gateway Golf, Inc. Cash Budget Year Ended December 31, 2015 (20-30 min.) E 4-55 Thousands Cash balance, December 31, 2014 $ 145 Budgeted cash receipts: Collections from customers 20,400 Issuance of stock ,177 Budgeted cash payments: Purchases of inventory items $14,245 Payment of operating expenses 2,849 Purchase of property and equipment 1,588 Payment of long-term and short-term debt 990 Payment of dividends 307 (19,979) Cash available (shortage) before financing 1,198 Budgeted cash balance, December 31, 2015 (135) Cash available for additional investments $ 1,063 Req. 2 Current ratio = Total current assets $7,576 = Total current liabilities $4,360 = 1.74 Debt ratio = Total liabilities $11,588 = Total assets $22,677 = 0.51 I would lend $95 thousand to Gateway Golf because the company s ratio values are strong. Also, the cash budget indicates strong cash flows during Chapter 4 Internal Control & Cash 4-41

42 P 4-56 BANK: The Pembrook Company Bank Reconciliation December 31 Balance, December 31 (corrected for erroneous November outstanding checks) $ 3,668 Add: Deposit in transit Actual amount of December 30 deposit 650 Less: Outstanding checks Check No $ , (1,195) Adjusted bank balance, December 31 $ 3,123 BOOKS: Balance, December 31 $ 9,455 Add: Checks #1880, #1882, and #1883 recorded in both November and December $1,155 EFT receipt from customer 52 Interest revenue 6 1,213 Less: NSF check $ 135 EFT payment of utility bill 755 Book error (overstatement of Dec. 24 deposit) 3,000 10,668 Unexplained difference 3,655 (7,545) Adjusted book balance, December 31 $ 3, Financial Accounting 10/e Solutions Manual

43 (continued) P 4-56 Checks No. 1880, 1882, and 1883 were outstanding in November so should not also be deducted from Cash in December. The unexplained difference of $3,655 consists of $1,155 erroneous November outstanding checks and the $2,500 difference between deposit in transit listed on the original reconciliation and the amount of the deposit in transit listed on the books. It is possible that the $3,000 difference between the December 23 deposit on the books and the December 24 receipt on the bank statement was intentional and used to cover up the missing cash. Chapter 4 Internal Control & Cash 4-43

44 Decision Cases BANK: Environmental Concerns, Inc. Bank Reconciliation September 30 (20-30 min.) Decision Case 1 Balance, September 30 $ 8,224 Add: Deposit of September 30 in transit 3,794 Less: Outstanding checks ($116 + $ ,018 $853 + $990 + $206 + $145) (2,460) Adjusted bank balance, September 30 $ 9,558 BOOKS: Balance, September 30 $10,402 Add: Bank collection ,602 Less: Service charge $ 8 NSF check 36 (44) Adjusted book balance, September 30 $10,558 Adjusted balances do not agree. Based on the above reconciliation, it appears the bookkeeper has stolen $1,000, the difference between the adjusted bank and book amounts ($9,558 $10,558). He understated the total of outstanding checks by $1,000 to cover his theft Financial Accounting 10/e Solutions Manual

45 (continued) Decision Case 1 Benz should assign an employee with no cash-handling duties to prepare the bank reconciliation. The bookkeeper should not perform this duty, because a person who handles cash and also prepares the reconciliation can steal cash and manipulate the reconciliation to cover the theft. Perhaps Benz should prepare the reconciliation himself. Chapter 4 Internal Control & Cash 4-45

46 (15-30 min.) Decision Case 2 The internal control weakness in this case is a lack of separation of duties. The foreman performs too many duties. 1. The foreman hires the workers. 2. The foreman controls workers employment documents. 3. The foreman fills out workers time sheets and transmits all documents to the home office. 4. The foreman passes out paychecks to workers. 5. The workers never go to the home office, so home-office personnel do not even know whether all workers exist. The foreman could steal from the company as follows: 1. The foreman could enter a fictitious worker into the payroll system and fill out bogus time sheets for the fictitious employee. Then the foreman could pocket the pay check written to the employee. 2. The foreman could enter more time than actually worked by an employee and arrange to split the extra pay received by the worker. 3. The foreman could pad his own hours to receive pay for time that he did not work. The following actions will correct the internal control weakness: 1. The home office could have the construction workers come to the office for processing their employee documents. Then the home office would at least know that all the workers exist. 2. Have employees sign their own time sheets Financial Accounting 10/e Solutions Manual

47 (continued) Decision Case 2 3. Don t allow Pickins to pass out paychecks. Have employees pick up paychecks at corporate office or have another corporate employee go and pass out paychecks. The check distributor should ask for a picture identification. 4. Have a home-office employee compare signatures on the workers time sheets to their signatures on file and, occasionally, to their endorsements on the backs of their paychecks. 5. Occasionally or always have a home-office employee go to the construction site to pass out paychecks. 6. Have a home-office employee go to the construction site occasionally to take attendance of workers on duty that day. Then match the names of workers on duty to the time sheets turned in at the end of the week. Chapter 4 Internal Control & Cash 4-47

48 Ethical Issues Ethical Issue 1 1. Identify the ethical issue. You must decide whether it is ethical for the auditor not to require the bank to record the loss. 2. What are the alternatives? Require the client to record the loss, or permit the client not to record the loss. 3. Identify the stakeholders. The auditor, the bank, and the public at large can be affected. The auditor s reputation is on the line. The bank s financial statements are in question. The public can be affected if the bank issues financial statements that include erroneous amounts. Assess the possible outcomes. If the auditors require the bank to record the loss, the auditor will keep his or her reputation intact. But the auditor will lose the client and also lose the revenue from this large audit. The accounting firm may then be unable to expand the firm as it had hoped to do. If the auditors okay the bank s financial statements even after the bank did not record the loss, the auditor would keep the bank as a client, earn the audit revenue, and be able to expand the firm as planned. But the bank s financial statements would report erroneous amounts for the notes receivable. People relying on the bank s financial statements may suffer losses as a result. The accounting firm s reputation would be hurt. (continued) Ethical Issue Financial Accounting 10/e Solutions Manual

49 4. Make the decision. The auditor should require the bank to record the loss even if that means losing the bank as a client. By sticking to its belief that the bank should record the loss, the auditors reputation will not be harmed as it would by okaying financial statements that include errors. It s far better to lose a client than to lose your reputation. Chapter 4 Internal Control & Cash 4-49

50 Ethical Issue 2 1. Identify the ethical issue. Galvin s ethical issue is whether to use his knowledge of The Salvation Army s plans and of Nadar s situation to either party s advantage (or disadvantage). Should Galvin help The Salvation Army buy the land at the lowest price? Should he help Nadar sell the land at the highest price? Galvin s position presents him with a conflict of interest. 2. What are the alternatives? There are several: (a) Let other members of the Salvation Army board of directors know of Nadar s situation in order to help The Salvation Army buy the land at a bargain price. (b) Disclose Nadar s situation to fellow board members and insist that The Salvation Army pay market price ($3.6 million) for the land. (c) Advise Nadar of The Salvation Army s plans and encourage her to hold out for a high price on the sale of the land. (d) Reveal nothing to The Salvation Army s board or to Nadar and take no part in the negotiation between the two parties. (e) Take a temporary leave of absence from The Salvation Army board for unspecified personal reasons. 3. Identify the stakeholders involved. Galvin, The Salvation Army, Nadar, and Community Banks. Assess the possible consequences. Disclosing Nadar s weakened condition to The Salvation Army board may help The Salvation Army buy the land at a low price, depending on the ethical bearing of 4-50 Financial Accounting 10/e Solutions Manual

51 (continued) Ethical Issue 2 fellow board members. This would help The Salvation Army and hurt Nadar, relative to her ability to sell the land at market value of $3.6 million. Insisting that The Salvation Army offer market price for the land would seem fair to both parties, but that would betray the trust of Nadar. And it may or may not sway the board to go along with a $3.6 million offer for the land. Making Nadar aware of The Salvation Army s plans may help Nadar get a higher price for the land than she would get otherwise. This would betray the trust of other members of The Salvation Army s board. Remaining silent would preserve Galvin s integrity. However, if either The Salvation Army or Nadar ever learned of Galvin s relationship with the other party, they would wonder whether Galvin used the information against them. Taking a temporary leave of absence would preserve Galvin s integrity and remove him from the conflict of interest. It would also preserve Galvin s reputation for fairness and the reputation of Community Bank for keeping depositor information confidential. 4. Make the decision. The authors would take the leave of absence and hope other Salvation Army board members do not probe Galvin s personal reasons. This way neither The Salvation Army nor Nadar can accuse Galvin of using inside information to the advantage of the other party. Ethical Issue 3 Chapter 4 Internal Control & Cash 4-51

52 1. Identify the ethical issue. French s ethical issue is whether to tell IMS personnel about Snicker Foods possible bankruptcy. 2. What are the alternatives? (a) Keep quiet and let nature take its course, or (b) Tell IMS s top managers of Snicker s possible bankruptcy. 3. Identify the stakeholders involved. IMS, Snicker Foods, Community Bank, and everyone connected to these organizations owners, employees, creditors, depositors, and their communities. Assess the possible consequences. Telling IMS about Snicker s possible bankruptcy may help IMS avoid wasted effort on Snicker. This may enable IMS to seek more profitable ventures and aid IMS s recovery. In turn, this may help IMS pay its loan to Community Bank. 4. Make the decision. French should not tell IMS of Snicker s financial difficulties (after all, Snicker isn t bankrupt yet). French should let nature take its course. Then she will protect the bank s (and her own) reputation for keeping client information confidential. In her aiding IMS through the loan-restructuring process, French may try to help IMS find other customers that can take up the slack if the sale to Snicker doesn t go through Financial Accounting 10/e Solutions Manual

53 Focus on Financials: Amazon.com, Inc. (20-30 min.) Req. 1 Cash equivalents include assets that are slightly less liquid than cash, but similar enough to be reported together. Cash equivalents must be readily convertible to known amounts of cash and close to maturity (with an original maturity of three months or less at the time of purchase). Req. 2 Amazon.com, Inc. includes in its cash equivalents highly liquid instruments with an original maturity of three months or less at the time of purchase. Req. 3 Yes, Note 2- CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES Cash equivalents and marketable securities include money market funds and equity securities, foreign government and agency securities, U.S. government and agency securities, corporate debt securities, assetbacked securities, and other fixed income securities. Note 2 provides this list of cash equivalents and marketable securities. The company does not separately identify the cash equivalents. Req. 4 Yes, this is cash or cash equivalents required to be restricted as collateral for debt and other agreements. Stockholders should be aware of what cash is actually available to the company and which cash is restricted. Restricted cash is less liquid. From Note 2, restricted cash, cash equivalents, and marketable securities equal $99 million at December 31, Chapter 4 Internal Control & Cash 4-53

54 Focus on Analysis: YUM! Brands, Inc. (20-30 min.) Req Net income of $1,608 million, in the operating section. 2. Capital spending, which used $1,099 million, in the investing section. 3. Repurchase of shares of common stock, which used $965 million, in the financing section. 4. Depreciation and amortization, which provided $645 million. Actually, these are expenses that do not use cash, so they are added back to income to arrive at cash provided by operations. 5. Dividends paid on common stock, which used $544 million, in the financing section. 6. Acquisitions, which used $543 million, in the investing section. 7. Proceeds from refranchising of restaurants, which provided $364 million, in the investing section. Req. 2 The following items mentioned in Item 9A (following the footnotes), are also mentioned in the chapter: Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management concluded that internal control over financial reporting was effective as of the end of the year. An accounting firm evaluated the internal controls and reported on their effectiveness. Student responses will vary Financial Accounting 10/e Solutions Manual

55 Group Project Student responses will vary. Reference download links: financial accounting 10th edition solutions financial accounting 10th edition pdf financial accounting 10th edition harrison pdf financial accounting harrison 10th edition financial accounting harrison pdf financial accounting 10th edition solutions manual financial accounting 10th edition harrison horngren and thomas pdf harrison financial accounting 11e Chapter 4 Internal Control & Cash 4-55