Fill-in-the-Blank Equations. Exercises

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1 Chapter 8 Sarbanes-Oxley, Internal Control, and Cash Study Guide Solutions 1. Liability 2. Increase; debit 3. Monthly cash expenses 4. Cash as of year-end Fill-in-the-Blank Equations Exercises 1. In Poletti Co. s financial statements, the management makes an assessment of the company s internal controls. The company produces the assessment every year in its annual financial statements. Who else must make a report on the effectiveness of internal controls? Independent auditor 2. The passing of Sarbanes-Oxley caused companies to strengthen their internal controls. Which of the following relate to internal controls? a. Yes b. Yes c. No 3. Sarbanes-Oxley attempts to do which of the following? a. Yes b. No c. Yes Strategy: The Sarbanes-Oxley Act was passed as a result of fraud and weak internal controls as a way to restore investor confidence. The act attempts to strengthen internal controls and reporting to do so. 4. To which of the five elements of internal controls does each of the following relate? a. Monitoring b. Control procedures c. Control environment 1

2 2 Chapter 8 5. To which of the five elements of internal controls does each of the following descriptions relate? a. Risk assessment b. Control procedures c. Information and communication 6. Which of the following relate to the control procedures a business should possess? a. Yes b. Yes c. Yes Strategy: The control environment is the attitude about the company s internal controls, which is outlined by policies and the operating style. The risk assessment works to develop the internal controls by deciding which risks the company is threatened by. Control procedures are the actual processes the company should use in order to decrease the possibility of theft and fraud. A company monitors its people and accounting system for red flags that could be a sign of theft and fraud. Information and communication should be used to ensure the company is using all available information from reliable resources. 7. Stop-a-Second s cash receipt processing has adequate separation of duties among employees. However, the employee who collects the cash, the employee who records the cash receipts, and the employee preparing the deposit ticket for the day may work together to steal cash from the company. What limitation of internal control is this an example of? The human element of controls, collusion among employees 8. The purchasing director of a manufacturer works to find materials at the best prices. Although the director s responsibilities are adequately separated to avoid theft and fraud, he mistakenly writes down the wrong discount taken by a supplier. To which limitation of internal controls does this relate? The human element of controls, human error

3 Sarbanes-Oxley, Internal Control, and Cash 3 9. Stop-a-Second is preparing its assessment of internal controls for the annual financial statements. The managers verify the employees have sufficient segregation of duties and supervision. However, because the company is quite large, all lower-level employees cannot be supervised at all times to ensure that theft and fraud does not occur. To which limitation of internal controls does this relate? Cost-benefit considerations; the cost to supervise all lower-level employees at all times would exceed the benefit. Strategy: The two limitations of internal controls include the human element of controls and the cost-benefit considerations. Human element includes any weaknesses caused by the employees administering the control procedure. The cost-benefit consideration should be used to create effective internal controls without causing more harm than benefit for the business. 10. ASC requires that all cashiers receive a cash drawer with exactly $40 before each shift. During each sale, the cashier is prompted to input the type and amount of each payment. The cash register s screen is usually visible to customers, but the cashier on shift likes to face it toward him due to his bad eyesight. He also has a bad memory, which causes him to forget to give customers their receipts at times. ASC is a small store with many regular customers, so they all trust the cashier is giving them the correct change. Identify any problems in the cash receipts controls that ASC may have. The customers are unable to verify the sales amount is correct without seeing the screen or receiving a receipt. This could allow the employee to falsely charge customers for sales and take the payment. 11. After opening the mail and stamping checks For Deposit Only, an employee delivers the cash and money orders to the Cashier s Department, where he also prepares a bank deposit ticket. After preparing and delivering the bank deposit ticket, the employee also records the cash receipts and posts amounts to the customer accounts. Does the process to record the cash receipts received in the mail have any weaknesses? The duties to record the receipt of cash and handle the cash should be separated. Otherwise, an employee could conceal theft of the cash.

4 4 Chapter Since ASC is a small retail business, the supervisor on duty usually collects the cash from the registers and deposits the cash sales on his way home. The next day, he brings the deposit slips to the Accounting Department so the cash sales for the previous day can be recorded. How could ASC strengthen its cash receipts controls? ASC should separate the duty of collecting cash and preparing a deposit ticket, especially since the deposit ticket is the only source to record cash sales. The Accounting Department should receive the cash register receipts to check amounts to the deposit ticket. Strategy: To reduce the possibility of theft and fraud, internal controls should separate the duties to have possession of the cash and record the cash receipt in the accounting system. By separating these responsibilities, the company creates more difficulty to employees trying to steal the cash. 13. On October 8, 2015, a company s cash receipts from sales totaled $62,392, while the cash register total for cash sales equaled $62,379. Calculate the shortage or overage and prepare the journal entry to record the cash receipts, sales, and overage or shortage. Cash overage of $13 Oct. 8 Cash 62,392 Cash Short and Over 13 Sales 62, Williams Supply Co. s cash receipts from sales totaled $54,470 on August 12, The cash register total for cash sales for the day was $54,493. How much under or over are the company s cash receipts for the day? Prepare the journal entry to record the cash receipts, sales, and overage or shortage. Cash shortage of $23 Aug. 12 Cash 54,470 Cash Short and Over 23 Sales 54,493

5 Sarbanes-Oxley, Internal Control, and Cash On January 23, 2015, a company received $32,629 for the day s cash sales. The company s register showed total sales of $45,000, of which 73% were paid for using cash. Calculate the cash shortage or overage. Prepare the journal entry to record the cash receipts, cash sales, and overage or shortage. Cash shortage of $221 Jan. 23 Cash 32,629 Cash Short and Over 221 Sales 32,850 Strategy: The cash register total gives the amount of cash sales for the day, while the cash receipts are the cash received by the company for the day. The difference is recorded in the cash short and over account. If the sales are greater than the cash received, there is a cash shortage (debit), while a cash overage is when the cash receipts are greater than the cash sales (credit). 16. Titan Coolers creates documents that must be submitted for approval before being recorded in the accounts payable. When approving the document, the employee checks the amounts to the supplier s invoice, purchase order, and receiving report. Which type of cash payment system does Titan Coolers use? Voucher system; the document being approved is a voucher. 17. Titan Coolers makes monthly payments for its utilities. To decrease errors, Titan Coolers authorizes an electronic transfer from its bank account to the utility company s bank account. Which type of cash payment system is the company using? Electronic funds transfer (EFT) system, since the transfer is made between bank accounts electronically

6 6 Chapter A recent flood has caused Titan Coolers to lose much of its inventory and paperwork. In an attempt to resume business quickly, the company has placed many large orders with multiple suppliers. The accounting department has received the following vouchers and supporting documents for approval: o Voucher for Invoice No. 201, Ice Mania o Supplier Invoice No. 375, RediCoolers Inc. o Receiving Report for Invoice No. 201, IceMania o Voucher for Invoice No. 202, Big & Cool o Purchase Order for RediCoolers Inc. (Invoice No. 203) o Voucher for Invoice No. 375, RediCoolers Inc. Which documents are missing to approve the vouchers and record the accounts payable ledgers? Voucher for Invoice No. 201, Ice Mania, also requires a purchase order and supplier s invoice. Voucher for Invoice No. 202, Big & Cool, also requires a supplier s invoice and receiving report. Voucher for Invoice No. 375, RediCoolers Inc. also requires a purchase order and receiving report. Strategy: Since the voucher system must go through various processes, such as ordering (use a purchase order), billing (supplier s invoice), and delivery (receiving report), the voucher must be supported and verified in every step. The EFT is much simpler because the transfer is made from one bank account to another bank account. 19. Determine if each item will appear on the bank statement as a debit or credit memo. Also indicate if the item will increase or decrease the balance of the company s bank account a. Credit memo, increases the bank account b. Debit memo, decreases the bank account c. Credit memo, increases the bank account

7 Sarbanes-Oxley, Internal Control, and Cash RPL Co. s accountant is preparing the bank reconciliation for the month. The following are shown on the document. Will each be shown as a debit or credit memo to the account? By how much will each item cause the balance of RPL Co. s bank account to increase or decrease? a. Debit memo, decrease the bank account for $550 b. Debit memo, decrease the bank account for $642 c. Debit memo, decrease the bank account for $ Moe s Mowers received its bank statement for the month of July. The bank statement included the items below. Determine if each item will be a credit or debit memo and if each causes the bank account balance to increase or decrease. a. Credit memo, increase the bank account b. Credit memo, increase the bank account c. Debit memo, decrease the bank account Strategy: When determining if an item will increase or decrease the bank account, first decide if the item will give the company more money (increase the account) or cost the company money (decrease the account). If the transaction gives the company more money, it will be shown as a credit memo in the bank statement, since a credit increases a liability and the bank statement is from the bank s point of view. If the transaction decreases the company s account, it will be shown as a debit memo in the bank statement, as a debit decreases a liability.

8 8 Chapter Moe s Mowers cash ledger shows a balance of $41,200. The company currently has $9,338 of deposits in transit and $12, of checks outstanding. Using the bank statement below, prepare the bank statement for the month and prepare the journal entries to update the company s ledgers. Assume all electronic transfers received were to be applied to accounts receivable. The electronic transfer sent was to pay the company s utility bills to Bright Energy. Charles K. Bank of the Carolinas Page 1 Account number From 8/31/2015 to 9/30/2015 Date Amount Balance 9/1 Deposit $49, /5 ACH 2, , /13 Withdrawal (3,585.13) 48, /22 Check No. 232 (6,864.12) 41, /25 Deposit 5, , /25 SC (55.00) 46, /30 NSF-Joe Kyuk (1,750.19) 44, /30 ACH (1,828.80) 42, Balance 8/31 $48, Balance 9/30 $42, Cash balance according to bank $42, Add deposits in transit $ 9, Deduct outstanding checks (12,000.00) (2,662.00) Adjusted balance $40, Cash balance according to company $41, Add EFT deposits $ 2, Deduct EFT payments $(1,828.80) Service charge (55.00) NSF checks (1,750.19) (3,633.99) (1,044.00) Adjusted balance $40, Sept. 30 Cash 2, Accounts Receivable 2, Sept. 30 Accounts Payable-Bright Energy 1, Misc. Expense Accounts Receivable-Joe Kyuk 1, Cash 3,633.99

9 Sarbanes-Oxley, Internal Control, and Cash Kelby s Kibbles cash ledger shows a balance of $2, On October 31, 2015, the company made a deposit of $1, and wrote a check to suppliers for $ With the bank statement shown below, prepare a bank reconciliation for the month of October and the journal entries to adjust Kelby Kibble s cash ledger. All electronic transfers received should be applied to accounts receivable. The electronic transfers sent should be applied to the company s outstanding balance with Bright Energy. Charles K. Bank of the Carolinas Page 1 Account number From 9/30/2015 to 10/31/2015 Date Amount Balance 10/5 Loan Proceeds 1, $3, /6 SC (115.00) 3, /12 Deposit 1, , /16 Check No. 652 (1,822.70) 2, /24 Deposit 1, , /25 ACH , /29 NSF-Jim Torti (199.70) 4, /30 ACH (800.60) 3, /31 NSF-Dan Snead (47.30) 3, Balance 9/30 $1, Balance 10/31 $3, Cash balance according to bank $3, Add deposits in transit $ 1, Deduct outstanding checks (892.50) Adjusted balance $3, Cash balance according to company $2, Add EFT deposits $ Proceeds from loan 1, $ 2, Deduct EFT payments $ (800.60) Service charge (115.00) NSF checks (247.00) (1,162.60) 1, Adjusted balance $3,703.15

10 10 Chapter 8 Oct. 31 Cash 2, Accounts Receivable Notes Payable 1, Oct. 31 Accounts Payable-Bright Energy Misc. Expense Accounts Receivable-Jim Torti Accounts Receivable-Dan Snead Cash 1, Tiger Honey s cash ledger shows a balance of $2,870.20, which includes a deposit in transit of $ and outstanding checks totaling $ Prepare a bank reconciliation for the company with the given bank statement for the month of August. Record the journal entries to update the company s cash ledger to the adjusted balance. All electronic transfers received should be applied to accounts receivable while electronic transfers sent should be applied to the company s outstanding balance with Busy Bees. Charles K. Bank of the Carolinas Page 1 Account number From 7/31/2015 to 8/31/2015 Date Amount Balance 8/2 Deposit $2, /5 NSF-Dan Snead (46.49) 2, /8 ACH , /12 Check No. 545 (37.50) 2, /15 Notes Receivable , /20 ACH (312.50) 2, /24 Check No. 546 (200.12) 2, /28 NSF-Jill Jackson (124.50) 2, /31 SC (15.00) 2, /31 ACH , Balance 7/31 $2, Balance 8/31 $2,932.01

11 Sarbanes-Oxley, Internal Control, and Cash 11 Cash balance according to bank $2, Add deposits in transit $ Deduct outstanding checks (500.75) Adjusted balance $3, Cash balance according to company $2, Add EFT deposits $ Collection of notes receivable $ Deduct EFT payments $(312.50) Service charge (15.00) NSF checks (170.99) (498.49) Adjusted balance $3, Aug. 31 Cash Accounts Receivable Notes Receivable Aug. 31 Accounts Payable-Busy Bees Misc. Expense Accounts Receivable-Dan Snead Accounts Receivable-Jill Jackson Cash Strategy: Using the steps shown in the chapter, begin with the bank section. Since most of the adjustments will be made to the company s balance, the bank s adjusted balance will give a check figure for the company s adjusted balance. The journal entry to record an increase in cash should debit cash and credit the corresponding accounts. The journal entry to record a decrease in cash should credit cash and debit the corresponding accounts.

12 12 Chapter On March 1, 2015, Tiger s Honey creates a $750 petty cash fund to pay for small expenses. At the end of the month, the petty cash receipts included payments for: office supplies, $225; plumbing repair (record as a maintenance expense), $190; and shipping expenses, $60. The petty cash fund had $265 on hand at the end of the month. Prepare the journal entries to establish the fund and replenish the fund at the end of the month, recording any shortage or overage in the account. Mar. 1 Petty Cash 750 Cash 750 Mar. 31 Office Supplies 225 Maintenance Expense 190 Shipping Expense 60 Cash Short and Over 10 Cash Lily s Doodles creates a petty cash fund of $300 at the beginning of April. During the month, the company used the petty cash fund to pay for the following: office supplies, $80; miscellaneous administrative expenses, $55; and delivery fees, $24. The company had $146 of petty cash on hand at the end of the month. Prepare the journal entries to establish the fund and replenish the fund at the end of the month, recording any cash short or over. April 1 Petty Cash 300 Cash 300 April 30 Office Supplies 80 Misc. Administrative Expense 55 Delivery Expense 24 Cash Short and Over 5 Cash 154

13 Sarbanes-Oxley, Internal Control, and Cash At the beginning of June, Lily s Doodles creates a petty cash fund of $400. On June 30, 2015, the remaining amount of cash in the petty cash fund is $95. The company replenished the fund based on the following receipts from the petty cash fund: office supplies, $175; store supplies, $65; and delivery fees, $55. Record the journal entry to establish the fund and replenish the fund at the end of the month. Any missing funds should be recorded in the cash short and over account. June 1 Petty Cash 400 Cash 400 June 30 Office Supplies 175 Store Supplies 65 Delivery Expense 55 Cash Short and Over 10 Cash 305 Strategy: The petty cash fund is established once and replenished afterwards for the amounts used. Since it is a way for a business to easily pay for small expenses, the company replenishes the fund at the end of the period, using the expenditure receipts paid for the petty cash fund. The company records these expenditures in a journal entry, which is the total amount of petty cash used for the period and also the amount the business must put back into the fund to restore it to its normal balance. 28. Tiny Treats has a cash balance of $3,700 at the beginning of August To earn interest on excess cash, the company invests $400 in U.S. Treasury bills and $900 in commercial paper. How much excess cash is invested in cash equivalents? Prepare the portion of the balance sheet that shows how these will be reported. $1,300 in cash equivalents ($400 + $900) Tiny Treats Balance Sheet August 1, 2015 Assets Current assets: Cash and cash equivalents $3,700

14 14 Chapter On December 31, 2015, Tiny Treats has a balance of $890 in its bank account. The company also has $500 invested in U.S. Treasury bills and long-term investments that total $1,560. How much in cash and cash equivalents will the company s balance sheet present? $1,390; ($890 + $500) Long-term investments are not considered a cash equivalent 30. Tiny Treats bank statement on September 30, 2015, has a balance of $1,475. The only discrepancy between the bank statement and cash ledger is an outstanding check for $90. The company also has the following investments: U.S. Treasury bills, $590; commercial paper, $320; and long-term notes receivable, $1,300. Prepare the portion of the company s quarterly balance sheet that presents the cash and cash equivalents. Tiny Treats Balance Sheet September 30, 2015 Assets Current assets: Cash and cash equivalents $2,295 Cash and cash equivalents: ($1,475 - $90) + $590 + $320 Strategy: Cash equivalents are highly liquid investments, meaning that the company can return the investment to cash easily if needed. Cash equivalents do not include long-term investments since these are much harder to restore to cash. Since the cash equivalents are easily converted back to cash, they are shown on the same line as cash. 31. Using the following information, calculate MAF Co. s ratio of cash to monthly cash expenses and interpret the results of the ratio. Round answers to two decimal places. For the year ended December 31, 2015 Cash and cash equivalents at year-end $ 14,750 Cash flow from operations (49,500) Monthly cash expenses 4,125 Ratio of cash to monthly cash expenses 3.58 months MAF Co. has 3.58 months of cash remaining to sustain operations. If the company wishes to continue operations longer, MAF Co. will need to generate positive cash flows from operations or raise additional financing.

15 Sarbanes-Oxley, Internal Control, and Cash Using the following information, calculate MAF Co. s ratio of cash to monthly cash expenses for 2015 and Interpret the results of the ratio. Round answers to two decimal places. For the years ended December 31, 2016 December 31, 2015 Cash and cash equivalents at year-end $ 4,250 $9,260 Cash flow from operations (15,355) (18,750) Monthly cash expenses 1, , Ratio of cash to monthly cash expenses 3.32 months 5.93 months As of the end of 2015, MAF Co. has enough cash to continue operations for 5.93 months. However, the company was able to raise additional financing to continue through the remainder of At the end of 2016, the company has enough cash to finance operations for 3.32 months. 33. Using the following information, calculate MAF Co. s ratio of cash to monthly cash expenses for 2015 and Interpret the results of the ratio. Round answers to two decimal places. For the years ended December 31, 2016 December 31, 2015 Cash and cash equivalents at year-end $20,470 $15,380 Cash flow from operations (26,300) (25,200) Monthly cash expenses 2, ,100 Ratio of cash to monthly cash expenses 9.34 months 7.32 months At the end of 2015, MAF Co. has 7.32 months of cash remaining. The company was able to obtain additional financing to continue through the remainder of the year. As of the 2016 year-end, MAF Co. has sufficient cash on hand to continue operations for another 9.34 months. Strategy: To calculate the ratio of cash to monthly cash expenses, first calculate the monthly cash expenses, which are the average amount of cash the company spends in a month to stay in business. Next, divide the cash and cash equivalents at year end by the monthly cash expenses to determine the ratio of cash to monthly cash expenses. The ratio gives an estimate to the number of months a company can remain in business with the cash on hand, unless the company obtains additional financing or improves its operations.