Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
CHAPTER 7
Internal Control and Cash
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
Exercises
A
Problems
B
Problems
1. Identify the principles of
internal control.
1, 2, 3, 4,
5, 6, 7
1, 2
1, 2, 3
8B
2. Explain the applications
of internal control to
cash receipts.
8, 9, 10
3
4
1A, 3A
1B, 2B, 3B
3. Explain the applications
of internal control to
cash disbursements.
11, 12,13
4
5, 6
2A, 3A
2B, 3B
4. Prepare a bank
reconciliation.
14, 15, 16,
5, 6, 7, 8,
9, 10
7, 8,
9, 10, 11
3A, 4A,
5A, 6A,
7A, 8A
3B, 4B,
5B, 6B, 7B
5. Explain the reporting of
cash.
17, 18
11
8A
8B
6. Discuss the basic principles of cash
management.
19, 20
12
12
7. Identify the primary
elements of a cash
budget.
21
13
13
9A, 10A
9B, 10B
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ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Identify internal control weaknesses for cash receipts.
Simple
20-30
2A
Identify internal control principles for cash
disbursements.
Simple
20-30
3A
Prepare a bank reconciliation and identify internal
control deficiencies.
Complex
40-50
4A
Prepare bank reconciliation and adjusting entries.
Moderate
40-50
5A
Prepare bank reconciliation and adjusting entries.
Moderate
30-40
6A
Prepare bank reconciliation and adjusting entries.
Moderate
40-50
7A
Prepare bank reconciliation and adjusting entries.
Moderate
40-50
8A
Calculate cash balance; prepare bank reconciliation
and adjusting entries.
Moderate
40-50
9A
Prepare cash budget.
Simple
20-30
10A
Prepare cash budget.
Moderate
30-40
1B
Identify internal control weaknesses for cash receipts.
Simple
20-30
2B
Identify internal control weaknesses for cash receipts
and cash disbursements.
Simple
20-30
3B
Prepare bank reconciliation and identify internal
control deficiencies.
Complex
40-50
4B
Prepare bank reconciliation and adjusting entries.
Moderate
40-50
5B
Prepare bank reconciliation and adjusting entries.
Moderate
30-40
6B
Prepare bank reconciliation and adjusting entries.
Moderate
40-50
7B
Prepare bank reconciliation and adjusting entries.
Moderate
40-50
8B
Calculate cash balance.
Moderate
20-30
9B
Prepare cash budget.
Simple
20-30
10B
Prepare cash budget.
Moderate
30-40
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Kimmel, Weygandt, Kieso, Trenholm
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ANSWERS TO QUESTIONS
1.
Disagree. Internal control is also concerned with optimizing the use of resources to reduce
inefficiencies and waste; preventing and detecting errors and irregularities in the accounting
process, and safeguarding assets from employee theft, robbery, and unauthorized use.
2.
This is a violation of the internal control principle of establishing responsibility. In this case,
each sales clerk should have a separate cash register or cash register drawer.
3.
The 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.
4.
Documentation procedures contribute to good internal control by providing evidence of the
occurrence of transactions and events and, 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.
5.
Physical controls include safes, vaults, locked warehouses, and electronic burglary systems
and sensors that help to safeguard assets. Physical controls also include cash registers and
computerized accounting equipment that contribute to the accuracy and reliability of the
accounting records.
6.
(a)
(b)
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, since absolute assurance
would be too costly.
The human element is an important factor in a system of internal control. A good
system may become ineffective through employee fatigue, carelessness, and
indifference. Moreover, internal control may become ineffective as a result of
collusion.
7.
Cash should be reported at $17,100 ($5,000 + $100 + $12,000). The cash refund and the
post-dated cheques are receivables not cash.
8.
Daily cash counts and deposits of over-the-counter receipts pertain primarily to the principles
of segregation of duties and independent internal verification. Daily cash counts also involve
the establishment of responsibility for performing the counts.
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Questions (Continued)
9.
Cash registers are readily visible to the customer. Thus, they prevent the sales clerk from
ringing up a lower amount and pocketing the difference. In addition, the customer receives
an itemized receipt, and the cash register tape is locked into the register for further
verification. Having scanners reduces the chance of error in entering the price of an item.
10.
Two mail clerks contribute to a more accurate listing of mail receipts and to the endorsement
of all cheques “For Deposit Only.” In addition, two clerks reduce the likelihood of mail
receipts being diverted to personal use.
11.
Segregating the duties surrounding the receipt, disbursement and recording of cash reduces
the risk that employees could divert cash for personal use and cover up the theft by
manipulating cash payments or by hiding any discrepancies through “creative” bookkeeping.
12.
Payment by cheque contributes to effective internal control over cash disbursements.
13.
The procedure and related principle are:
Procedure
(1) Treasurer signs cheques
(2) Cheques imprinted by a computer
(3) Comparing cheque with approved
invoice before signing
Principle
Establishment of responsibility
Physical controls
Independent internal verification
14.
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.
15.
The lack of agreement between the cash balances may be due to either:
(1) Time lags–a cheque written in July does not clear the bank until August.
(2) Errors–a cheque for $110 is recorded by the depositor at $101.
16.
(a) An NSF cheque occurs when the cheque writer’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.
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Questions (Continued)
17.
Cash equivalents are considered to be “near” 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. Cash equivalents are often reported with cash in the
current asset section of the balance sheet.
18.
Compensating balances are minimum cash balances which lenders specify that a
borrower must maintain in the borrower’s bank account to provide support for a loan. A
compensating balance should be reported as a noncurrent asset and disclosed in the
notes to the financial statements.
19.
The basic principles of cash management are: (1) increase collection of receivables, (2)
keep inventory low, (3) delay payment of liabilities, (4) plan timing of major expenditures,
and (5) invest idle cash.
20.
The company will have to ensure that any excess cash, due to the increase in cash
flows, is properly invested and not sitting idle in a bank account.
21.
(a)
(b)
A cash budget is a tool used to help planning for the company’s cash needs. It shows
anticipated cash flows.
A cash budget contributes to effective cash management by enabling a company to
plan ahead to cover possible shortfalls and invest idle funds.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7-1
The four purposes of internal control are to:
1.
2.
3.
4.
Optimize the use of resources to reduce inefficiencies and waste. An application for Plenty
Parking is the use of automatic ticket dispensers at the entry gates and time clocks to
determine how long vehicles have been parked.
Prevent and detect errors and irregularities in the accounting process. An application for
Plenty Parking is to segregate responsibilities. For example, a different person (a manager or
Gina as the owner) than the person who collects and deposits the cash should prepare the
bank reconciliation.
Safeguard assets from theft, robbery, and unauthorized use. An application for Plenty
Parking is the use of a cash register to safeguard assets.
Maintain reliable control systems to enhance the accuracy and reliability of its accounting
records. An application for Plenty Parking is the comparison of the daily cash receipts to the
cash register tape.
All four purposes are important to the success of any business endeavour.
BRIEF EXERCISE 7-2
(a)
(b)
(c)
Segregation of duties
Independent internal verification
Documentation procedures
BRIEF EXERCISE 7-3
(a)
(b)
(c)
(d)
(e)
(f)
Physical controls
Other controls
Independent internal verification
Segregation of duties
Establishment of responsibility
Other controls
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BRIEF EXERCISE 7-4
(a)
(b)
(c)
(d)
(e)
(f)
Documentation procedures
Independent internal verification
Physical controls
Establishment of responsibility
Segregation of duties
Establishment of responsibility, segregation of duties and independent internal verification
BRIEF EXERCISE 7-5
(a)
(b)
(c)
(d)
(e)
Outstanding cheques–deducted from cash balance per bank
Bank service charge–deducted from cash balance per books
Interest paid by bank–added to cash balance per books
Deposit in transit–added to cash balance per bank
Bank error (deposit recorded twice) – deducted from cash per bank
BRIEF EXERCISE 7-6
(a)
(b)
The reconciling items per the books, items (b) and (c) above, will require adjustment on the
books of the depositor.
The other reconciling items, deposits in transit, outstanding cheques and bank errors do not
require adjustment because they have already been correctly recorded on the depositor’s
books.
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BRIEF EXERCISE 7-7
Cash balance per bank ..........................................................................................
Add: Deposits in transit.........................................................................................
Less: Outstanding cheques ...................................................................................
Adjusted cash balance per bank ............................................................................
$7,800
1,700
9,500
760
$8,740
Cash balance per books .........................................................................................
Less: Bank service charge ....................................................................................
Adjusted cash balance per books...........................................................................
$8,760
20
$8,740
BRIEF EXERCISE 7-8
July 31
Bank Charges ....................................................................
Cash.......................................................................
20
BRIEF EXERCISE 7-9
January outstanding deposits:
Cash deposits per books, January
Less: Cash deposits per bank
Outstanding deposits
$2,500
(2,300)
$ 200
February outstanding deposits:
Cash deposits per books, February
Less: Cash deposits per bank
Add: January outstanding deposits
Outstanding deposits
$2,800
(2,000)
200
$1,000
BRIEF EXERCISE 7-10
November $650 ($9,250 - $8,600)
December $2,450 ($650 + $12,700 - $10,900)
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BRIEF EXERCISE 7-11
Ouellette Ltée should report cash in bank and payroll bank account as current assets. 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 also be reported
as a noncurrent asset and disclosed in the notes.
BRIEF EXERCISE 7-12
(a)
The Toronto Maple Leafs hockey team are likely to want to focus on how to invest idle
cash. The hockey club likely sells tickets in advance and will want to invest the cash shortterm until such a time as it is needed to pay expenses such as players’ salaries.
(b)
Imperial Tobacco will likely want to keep inventory levels low to minimize the amount of
cash tied up at any given time.
(c)
Intrawest Corporation has undergone major growth in its resorts over the past several
years. Intrawest will likely want to plan the timing of major expenditures to ensure it has
sufficient resources available to finance the expenditures.
(d)
WestJet Airlines has also undergone significant growth and is likely to need to plan the
timing of major expenditures such as new planes. As well, the company may try to delay
the payment of liabilities to ensure that large bills for items such as jet fuel and catering are
not paid early and that when possible, all discounts are taken.
(e)
The McMaster University Bookstore is likely to manage cash by delaying the payment of
liabilities to publishing companies until the bills are due. As well, the bookstore probably
generates most of its cash at the beginning of the semester and will want to invest any idle
cash.
(f)
Tim Hortons will likely want to keep inventory levels low to minimize the amount of cash
tied up in perishable products.
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BRIEF EXERCISE 7-13
MARAIS LIMITED
Cash Budget
Month Ended January
Beginning cash balance .......................................................................................
Add: Cash receipts .............................................................................................
Total available cash ..............................................................................................
Less: Cash disbursements ..................................................................................
Excess of available cash over cash disbursements .............................................
Financing needed .................................................................................................
Ending cash balance ............................................................................................
$ 2,000
60,000
62,000
65,000
(3,000)
8,000
$ 5,000
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Financial Accounting, Second Canadian Edition
SOLUTIONS TO EXERCISES
EXERCISE 7-1
(a) Cash and Cash Equivalents
1.
2.
3.
5.
6.
(b)
4.
7.
8.
Currency
Guaranteed Investment certificate
April cheques
Royal Bank chequing account
Royal Bank savings account
Total
$
60
10,000
300
2,500
4,000
$16,860
Post-dated cheque – Accounts Receivable; Balance Sheet
Prepaid postage in postage meter–Prepaid Postage Expense; Balance Sheet,
or Postage Expense; Statement of Earnings
IOU from company receptionist–Accounts Receivable; Balance Sheet
EXERCISE 7-2
The principles of internal control inherent in the “maker-checker” procedure are:
1.
2.
Segregation of duties. The employees make the transaction. The supervisors post the
transactions.
Physical controls. Access to the computer system is password protected and task specific.
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EXERCISE 7-3
1.
Establishment of responsibility. 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.
Physical controls. A cash register is used to record the sale.
5.
Independent internal verification. The counter clerk, in handling the pizza, compares the
size of the pizza with the size indicated on the order.
6.
Other controls. No visible application possible.
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EXERCISE 7-4
(a)
Weakness
(b)
Principle
Recommended
Change
1.
Cashiers are not bonded.
Other controls.
All cashiers should be
bonded.
2.
Inability to establish
responsibility for cash on a
specific clerk.
Establishment of
responsibility.
There should be separate
cash drawers and register
codes for each clerk.
3.
Cash is not adequately
protected from theft.
Physical controls.
Cash should be stored in a
safe until it is deposited in
bank.
4.
Cash is not independently
counted.
Independent internal
verification.
A cashier office supervisor
should count cash.
5.
The accountant should not
handle cash.
Segregation of
duties.
The cashier’s department
should make the deposits.
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Kimmel, Weygandt, Kieso, Trenholm
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EXERCISE 7-5
(a)
Weakness
(b)
Principle
Recommended
Change
1.
Cheques are not stored in a
secure area.
Physical
controls.
Cheques should be stored in a
safe or locked file drawer.
2.
The approval and payment
of bills is done by the same
individual.
Segregation of duties.
The store manager should
approve bills for payment and
the treasurer should sign and
issue cheques.
3.
Blank cheques are signed.
Establishment of
responsibility.
Establish a second signing
authority on the bank.
4.
Cheques are not
prenumbered.
Documentation
procedures.
Cheques should be
prenumbered and
subsequently accounted for.
5.
Filing does not prevent a bill
from being paid more than
once.
Other controls.
Bills should be stamped PAID
after payment.
6.
The bank reconciliation is
not independently prepared.
Independent internal
verification.
An independent person
should prepare the bank
reconciliation.
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Kimmel, Weygandt, Kieso, Trenholm
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EXERCISE 7-6
(a)
Weaknesses
1.
Cheques are not prenumbered.
2.
The purchasing agent signs cheques.
3.
Unissued cheques are stored in unlocked file cabinet.
4.
Purchasing agent approves and pays for goods purchased.
5.
After payment, the invoice is filed.
6.
The purchasing agent records payments in cash disbursements journal.
7.
The treasurer records the cheques in cash disbursements journal.
8.
The treasurer reconciles the bank statement.
(b)
Memo
Date:
To:
From:
Re:
Chief Financial Officer
Recommendations for improving company procedures
In order to improve control over cheque disbursements, the company should take the
following steps:
1.
2.
3.
4.
5.
6.
7.
Use prenumbered cheques.
Only the treasurer’s department personnel should sign cheques.
Unissued cheques should be stored in a locked file cabinet with access restricted to
authorized personnel.
Purchasing should approve bills for payment by the treasurer.
After payment the invoice should be stamped PAID before being filed.
Only accounting department personnel should record cash disbursements.
An internal auditor should reconcile the bank statement.
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EXERCISE 7-7
(a)
LOKO LTD.
Bank Reconciliation
January 31
Cash balance per bank statement ...................................
Add: Deposits in transit..................................................
$3,660.20
590.00
4,250.20
730.00
$3,520.20
Less: Outstanding cheques ............................................
Adjusted cash balance per bank .....................................
Cash balance per books ..................................................
Less: NSF cheque .........................................................
Bank service charge .............................................
Adjusted cash balance per books ....................................
(b)
$3,975.20
$430.00
25.00
455.00
$3,520.20
Accounts Receivable ..................................................................
Cash ..................................................................................
430
Bank Charges Expense ..............................................................
Cash ..................................................................................
25
430
EXERCISE 7-8
The outstanding cheques are as follows:
No.
255
260
264
Amount
$ 800
0925
360
Total $2,085
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
EXERCISE 7-9
(a)
MOHAMMED LTD.
Bank Reconciliation
July 31
Cash balance per bank statement .................................................................
Add: Deposits in transit................................................................................
Less: Outstanding cheques ..........................................................................
Adjusted cash balance per bank ...................................................................
Cash balance per books ................................................................................
Add: Electronic payment on account received by bank ...............................
Less: Bank service charge ...........................................................................
Adjusted cash balance per books ..................................................................
(b)
July 31
31
Cash ............................................................................
Accounts Receivable ..........................................
1,216
Bank Charges Expense ...............................................
Cash ...................................................................
40
$7,238
1,700
8,938
772
$8,166
$6,990
1,216
8,206
40
$8,166
1,216
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Financial Accounting, Second Canadian Edition
EXERCISE 7-10
(a)
RESTON LTD.
Bank Reconciliation
September 30
Cash balance per bank statement ..........................................
Add: Deposits in transit.........................................................
$16,422
4,996
21,418
2,383
$19,035
Less: Outstanding cheques ...................................................
Adjusted cash balance per bank ............................................
Cash balance per books .........................................................
Add: Interest earned .............................................................
Less:
NSF cheque ..............................................................
Safety deposit box rent ..............................................
Adjusted cash balance per books ...........................................
(b)
Sept.
30
30
30
$19,430
45
19,475
$410
30
440
$19,035
Cash ..........................................................................
Interest Revenue ..............................................
45
Bank Charges Expense .............................................
Cash .................................................................
30
Accounts Receivable–Hower Corp. ...........................
Cash .................................................................
410
45
30
410
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EXERCISE 7-11
(a)
Deposits in transit: July 31
Deposits per books in July ...........................................
Less: Deposits per bank in July ..................................
Deposits in transit, June 30 ...............................
July receipts deposited in July .....................................
Deposits in transit, July 31 ...........................................
$16,200
$15,600
(750)
14,850
$ 1,350
Deposits in transit: August 31
Deposits per bank statement in September ................
Add: Deposits in transit, September 30 .....................
Total deposits to be accounted for ..............................
Less: Deposits per books ...........................................
Deposits in transit, August 31 ......................................
(b)
Outstanding cheques: July 31
Cheques per books in July ..........................................
Less: Cheques clearing bank in July ..........................
Outstanding cheques, June 30 ..........................
July cheques cleared in July ........................................
Outstanding cheques, July 31 .....................................
Outstanding cheques: August 31
Cheques clearing bank in September..........................
Add: Outstanding cheques, September 30 ................
Total cheques to be accounted for ..............................
Less: Cash disbursements per books.........................
Outstanding cheques, August 31.................................
$25,900
2,400
28,300
25,400
$ 2,900
$17,200
$16,400
(920)
15,480
$ 1,720
$25,000
2,100
27,100
23,700
$ 3,400
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EXERCISE 7-12
Suggestions to improve cash management practices for Tory, Hachey and Wedunn:
1.
2.
3.
4.
Prepare a cash budget.
Bill clients as work progresses.
Establish a working capital loan.
Arrange a long-term loan for renovations and equipment.
EXERCISE 7-13
HANOVER LIMITED
Cash Budget
Two Months Ending February 28, 2005
January
February
Beginning cash balance ............................................................
Add: Receipts
Collections from customers ..........................................
Sale of securities ..........................................................
Total receipts ................................................................
Total available cash ...................................................................
Less: Disbursements
Payments to suppliers ..................................................
Wages ..........................................................................
Operating expenses .....................................................
Total disbursements .....................................................
$ 36,000
$ 12,000
70,000
10,000
80,000
116,000
150,000
0
150,000
162,000
40,000
30,000
34,000
104,000
75,000
40,000
49,000
164,000
Excess (deficiency) of available cash over disbursements ........
Financing
Borrowings ........................................................................
Repayments .....................................................................
Ending cash balance .................................................................
12,000
(2,000)
0
0
$ 12,000
12,000
0
$ 10,000
Solutions Manual
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Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
SOLUTIONS TO PROBLEMS
PROBLEM 7-1A
(a) The weaknesses in internal accounting control over collections are:
(1) Each usher could take cash from the collection plates en route to the
basement office.
(2) The head usher counts the cash alone.
(3) The head usher’s notation of the count is left in the safe, with the cash.
(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 annual vacations.
(5) Annual audits should be performed.
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Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-2A
Principles
Application to Cash Disbursements
Establishment of responsibility
Only the treasurer and assistant
treasurer 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
treasurer or assistant treasurer, and
the cheque signers do not record
the cash disbursement transactions.
Documentation procedures
Cheques are prenumbered.
Physical controls
Blank cheques are kept in a safe in
the treasurer’s office. Only the
treasurer and assistant treasurer
have access to the safe. A computer
is used in writing cheques.
Independent internal 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, the invoices are
stamped PAID.
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Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-3A
(a)
GIANT INC.
Bank Reconciliation
November 30, 2004
Balance per bank statement .................................................
$19,460.00
Less: Outstanding cheques
No.
Amount
No.
Amount
762
$113.90
862
$170.73
783
, 160.00
863
0325.40
784
, 266.90
864
0173.10 .....................
Adjusted balance per bank ...................................................
1,210.03
$18,249.97
Cash balance per books .......................................................
Add: Bank credit (collection of account receivable) .............
Adjusted balance per books (before theft) ............................
Theft .....................................................................................
Adjusted balance per books..................................................
$19,640.77
750.00
20,390.77
2,140.80
$18,249.97
(b) The cashier attempted to cover the theft of $2,140.80 by:
1.
2.
3.
Not listing as outstanding three cheques totalling $540.80 (No. 762,
$113.90; No. 783, $160.00; and No. 784, $266.90).
Underfooting the outstanding cheques listed by $100. (The correct total is
$669.23.)
Subtracting the $750 credit from the bank balance instead of adding it to
the book balance, thereby concealing $1,500 of the theft.
(c) The principle of independent internal verification has been violated because
the cashier prepared the bank reconciliation. The principle of segregation of
duties has been violated because the cashier had access to the accounting
records and also prepared the bank reconciliation.
Solutions Manual
7-23
Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-4A
(a)
MALONEY INC.
Bank Reconciliation
May 31, 2004
Cash balance per bank statement .......................
Add: Deposits in transit......................................
Bank error–Baloney Inc. cheque ...............
$6,804.60
$936.15
600.00
Less: Outstanding cheques ................................
Adjusted cash balance per bank ..........................
Cash balance per books ......................................
Add: Interest earned ..........................................
Less: NSF cheque..............................................
Error in May 12 deposit .............................
Error in recording cheque No. 1181 ..........
Cheque printing charge ............................
Adjusted cash balance per books ........................
(b) May 31
31
31
31
31
1,536.15
8,340.75
276.25
$8,064.50
$8,821.50
20.00
8,841.50
$700.00
10.00
27.00
40.00
777.00
$8,064.50
Accounts Receivable–W. Hoad.......................
Cash ........................................................
700
Sales ...............................................................
Cash ........................................................
10
Accounts Payable–Helms Corporation............
Cash ........................................................
27
Bank Charges Expense ..................................
Cash ........................................................
40
Cash ...............................................................
Interest Revenue .....................................
20
700
10
27
40
20
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Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-5A
(a) General Ledger Cash Balance
April 30 .........................................................................
$ 7,964.83
Cash receipts ................................................................
6,915.00
Cash disbursements ..................................................... 000 (13,423.46)
Unadjusted balance May 31 .........................................
$ 1, 456.37
(b)
RIVER ADVENTURES LTD.
Bank Reconciliation
May 31, 2004
Balance per bank statement ...............................
Add: Deposits in transit .....................................
Less: Outstanding cheques
No. 533 ..................................................
No. 555 ..................................................
No. 558 ..................................................
No. 560 ..................................................
No. 566 ..................................................
Adjusted cash balance per bank .........................
$4,746.97
1,286.00
6,032.97
$ 89.78
78.82
943.00
890.00
950.00
Balance per books ..............................................
Add: Proceeds account receivable collected .....
2,951.60
$3,081.37
$1,456.37
1,650.00
3,106.37
25.00
$3,081.37
Less: Service charge .........................................
Adjusted cash balance ........................................
(c) Bank Charges Expense ..................................
Cash ....................................................
25
Cash ..............................................................
Accounts Receivable ...........................
1,650
25
1,650
Solutions Manual
7-25
Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-6A
(a)
(b)
General Ledger Cash Balance
November 30 ................................................................
$10,216.40
Cash receipts ................................................................
16,822.10
Cash disbursements ..................................................... 000(14,384.10)
Unadjusted balance December 31 ................................
$12,654.40
RACINE LIMITED
Bank Reconciliation
December 31, 2004
Cash balance per bank statement ..................
Add: Deposits in transit .................................
Less: Outstanding cheques
No. 3470 ............................................
No. 3474 ............................................
No. 3478 ............................................
No. 3481 ............................................
No. 3484 ............................................
No. 3486 ............................................
Adjusted cash balance per bank .....................
$19,155.00
1,190.40
20,345.40
$ 1,100.00
1,050.00
538.20
807.40
832.00
1,389.50
Cash balance per books .................................
Add: Accounts receivable collected by bank .
Less: NSF cheque.........................................
Bank charges.......................................
Error in recording cheque No. 3485 .....
Error in 12-21 deposit ($2,954 - $2,945)
Adjusted cash balance per books ...................
5,717.10
$14,628.30
$12,654.40
3,145.00
15,799.40
$1,027.10
45.00
……90.00*
9.00
1,171.10
$14,628.30
*$540.80 - $450.80 = $90.00
Solutions Manual
7-26
Chapter 7
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Financial Accounting, Second Canadian Edition
PROBLEM 7-6A (Continued)
(c) Dec. 31
31
31
31
31
Cash ......................................................
Accounts Receivable .....................
3,145.00
Accounts Receivable–A. Shoaib ...........
Cash ..............................................
1,027.10
Accounts Payable..................................
Cash ..............................................
90.00
Accounts Receivable .............................
Cash ..............................................
9.00
Bank Charges Expense .........................
Cash ..............................................
45.00
3,145.00
1,027.10
90.00
9.00
45.00
Solutions Manual
7-27
Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-7A
(a)
PALMEIRO LTD.
Bank Reconciliation
July 31
Cash balance per bank statement .......................
Add: Deposits in transit ......................................
Less: Outstanding cheques ................................
Bank error–Salary cheque.........................
Adjusted cash balance per bank ..........................
Cash balance per books ......................................
Add: Interest earned ..........................................
Error in recording cheque .........................
$24,530
6,9601
31,490
$8,4302
100
8,530
$22,960
$22,700
$ 30
270
300
23,000
40
$22,960
Less: Cheque printing charge .............................
Adjusted cash balance per books ........................
1
2
Deposits in transit = $82,000 - ($80,040 - $5,000) = $6,960
Outstanding cheques = ($76,900 - $270 cheque error) – ($74,700 + $100
cheque error - $6,600) = $8,430
(b) July 31
Cash ...............................................................
Bank Charges Expense ..................................
Accounts Payable ....................................
Interest Revenue .....................................
260
40
270
30
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7-28
Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-8A
(a)
DUBLIN LTD.
Bank Reconciliation
August 31, 2004
Balance per bank statement ...........................................
$1,523.47
Add: Deposit in transit .................................................
2,607.61
.............................................................................2,607.61
Bank error ($1,957 - $1,597) ................................
360.00
4,491.08
Less: Outstanding cheques
No. 628 ................................................
$ 781.25
No. 635 ................................................
1,333.33
No. 636 ................................................
250.00
No. 637 ................................................
. 224.53
2,589.11
Adjusted cash balance per bank .....................
$1,901.97
Balance per general ledger .............................................
Add: Interest earned .....................................................
Less: Travellers’ cheques ($150 + $16) .........................
Bank service charges ...........................................
Adjusted balance ............................................................
(b)
Bank Charges Expense ($16 + $50) ...............
Travel Expense ...............................................
Cash ....................................................
66.00
150.00
Cash ..............................................................
Interest Revenue .................................
5.00
$2,112.97
5.00
2,117.97
166.00
50.00
$1,901.97
216.00
5.00
(c) Dublin would report $1,902 as Cash in the current assets section of its
balance sheet on August 31.
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Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-9A
(a) Cash collections in April
March.................................
April ..................................
(b) Cash disbursements in April
Purchases March ...............
Purchases April..................
$20,000
36,000
$56,000
40% of $50,000
60% of $60,000
$21,750
26,100
$47,850
50% of $43,500
50% of $52,200
(c)
NEW BAY INC.
Cash Budget
Month Ending April 30, 2004
Beginning cash balance .................................
Add: Receipts
Cash sales ........................................
Collections from customers ...............
Total receipts
Total available cash .......................................
Less: Disbursements
Payment of March purchases ..........
Cash purchases April .......................
Cash operating expenses ................
Equipment purchase ........................
Total disbursements......................................
Excess (deficiency) of available cash over
disbursements ............................................
Financing
Borrowings ..........................................
Repayments ........................................
Ending cash balance......................................
$ 8,000
.36,000
.20,000
. 56,000
.64,000
.21,750
50% of $43,500
.26,100
50% of $60,000
.13,300
. ”2,500
.63,650
00”. 350
0.4,650
0
$ 5,000
Solutions Manual
7-30
Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-10A
(a) (1) Expected Collections from Customers
November ($260,000) ............................
December ($300,000) ............................
January ($350,000) ................................
February ($400,000) ...............................
Totals .....................................................
January
February
$ 26,000
0120,000
0175,000
00000 00
$321,000
$
0
0.30,000
.140,000
. 200,000
$370,000
January
February
$ 50,000
0.60,000
00000 00
$110,000
$
0
0.60,000
0. 65,000
$125,000
(2) Expected Payments for Purchases
December ($100,000) ............................
January ($120,000) ................................
February ($130,000) ...............................
Totals .....................................................
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7-31
Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-10A (Continued)
(b)
BADGER CORPORATION
Cash Budget
Two Months Ending February 28, 2005
Beginning cash balance .....................................
Add: Receipts:
Collections from customers [See (a) (1)]
Notes receivable ..................................
Total receipts .....................................................
Total available cash ...........................................
Less: Disbursements:
Purchases [See (a) (2)] .........................
Operating expenses ..............................
Purchase of investment .........................
Purchase of equipment .........................
Dividends ..............................................
Total disbursements ...........................................
Excess (deficiency) of available cash over
disbursements ..................................................
Financing
Borrowings.................................................
Repayments ..............................................
Ending cash balance ..........................................
January
February
$ 55,000
$ 30,000
321,000
15,000
336,000
391,000
370,000
0000000
370,000
400,000
110,000
179,000
27,000
125,000
199,000
26,000
0
0 25,000
375,000
0
25,000
3,000
0
$ 30,000
5,000
0
$ 30,000
050,000
25,000
364,000
Solutions Manual
7-32
Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-1B
(a)
(b)
Principles
Application to Red River Theatre
Establishment of responsibility
Only cashiers are authorized to sell
tickets. Only the manager and
cashier can handle cash.
Segregation of duties
The duties of receiving cash and
admitting customers are assigned to
the cashier and to the doorperson.
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.
Physical controls
Cash is deposited in a bank vault
nightly and a machine is used to
issue tickets.
Independent internal verification
Cash counts are made by the manager at the end of each cashier’s
shift. Daily comparisons are made
by the company treasurer.
Other controls
Cashiers are bonded.
Actions by the doorperson and cashier to misappropriate cash include:
1.
Instead of tearing the tickets, the doorperson could return the tickets to
the cashier who could resell them, and the two could divide the cash.
2.
The cashier could issue a lower price ticket than paid for and the
doorperson would admit the customer. The difference between the ticket
issued and the cash received could be divided between the doorperson
and cashier.
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Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-2B
Roger has created a situation that leaves many opportunities for undetected theft.
Here is a list of some of the deficiencies in internal control. You may find others.
1.
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. 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.
Solutions Manual
7-34
Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-2B (Continued)
2.
Physical controls and establishment of responsibility
 The tickets were left in an unlocked box on his desk. Instead, Roger
should have assigned control of the tickets to one individual, in a locked
box which that student alone had control over.
 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.
3.
Segregation of duties
 Steve Stevens counted the funds, made out the deposit slip, and took the
funds to the bank. This made it possible for Steve Stevens to take some of
the money and deposit the rest since there was no external check on his
work. Roger should have counted the funds, with someone observing him.
Then he could have made out the deposit slip and had Steve Stevens
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.
Solutions Manual
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Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-3B
(a)
(b)
(c)
TARIKA LTD.
Bank Reconciliation
October 31, 2004
Balance per bank statement .................................................
$18,480.00
Less: Outstanding cheques
No.
Amount
No.
Amount
801
$126.75
900
$190.71
883
150.00
901
226.80
884
253.25
902
165.28 .....................
Adjusted balance per bank ...................................................
1,112.79
$17,367.21
Cash balance per books .......................................................
Add: Bank credit (interest earned) ......................................
Adjusted balance per books (before theft) ............................
Theft .....................................................................................
Adjusted balance per books..................................................
$18,042.21
45.00
18,087.21
720.00
$17,367.21
The cashier attempted to cover the theft of $720.00 by:
1.
Not listing as outstanding, three cheques totalling $530.00 (No. 801,
$126.75; No. 883, $150.00; and No. 884, $253.25).
2.
Underfooting the outstanding cheques listed by $100. (The correct
total is $582.79.)
3.
Subtracting the $45 credit from the bank balance instead of adding it
to the book balance, thereby concealing $90 of the theft.
1.
The principle of independent internal verification has been violated
because the cashier prepared the bank reconciliation.
2.
The principle of segregation of duties has been violated because the
cashier had access to the accounting records and also prepared the
bank reconciliation.
Solutions Manual
7-36
Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-4B
(a)
DUBEAU LTD.
Bank Reconciliation
July 31, 2004
Cash balance per bank statement .......................
Add: Deposits in transit ......................................
$7,695.80
1,824.30
9,520.10
1,480.10
$8,040.00
Less: Outstanding cheques ................................
Adjusted cash balance per bank ..........................
Cash balance per books ......................................
Add: Collection of accounts receivable ..............
Less: NSF cheque..............................................
Error in recording cheque No. 2480 ..........
Bank service charge .................................
Adjusted cash balance per books ........................
(b)
July 31
31
31
31
$7,380.00
1,238.00
8,618.00
$490.00
63.00
25.00
578.00
$8,040.00
Cash ...............................................................
Accounts Receivable ...............................
1,238
Accounts Receivable–R. Chiasson .................
Cash ........................................................
490
Accounts Payable–J. Brokaw..........................
Cash ........................................................
63
Bank Charges Expense ..................................
Cash ........................................................
25
1,238
490
63
25
Solutions Manual
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Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-5B
(a) General Ledger Cash Balance:
February 28 (Adjusted cash balance per bank rec.) ........ $13,073
Cash receipts ...................................................................
5,713
Cash disbursements ........................................................ (5,798)
Unadjusted balance March 31 ......................................... $12,988
(b) Deposits in transit March 31 $1,025 (dated March 30).
(c) Outstanding cheques March 31:
#3470
$ 720 (from February bank rec.)
#3475
600 (dated March 29)
$1,320
(d)
YAP LTD.
Bank Reconciliation
March 31, 2004
Balance per bank statement ...................................
Add: Deposits in transit .........................................
Less: Outstanding cheques
No. 3470 ....................................................
No. 3475 ....................................................
Adjusted cash balance per bank .............................
$11,775
1,025
12,800
$720
600
Balance per books ..................................................
Less: Service charge .............................................
NSF cheque–Jordan ....................................
Correction in recording cash
receipts March 4 ........................................
Adjusted cash balance ............................................
1,320
$11,480
$12,988
$ 49
550
909
1,508
$11,480
Solutions Manual
7-38
Chapter 7
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Financial Accounting, Second Canadian Edition
PROBLEM 7-5B (Continued)
(e) Sales ...............................................................
Cash ....................................................
909
Bank Charges Expense ..................................
Cash ....................................................
49
Accounts Receivable ......................................
Cash ....................................................
550
909
49
550
Solutions Manual
7-39
Chapter 7
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
PROBLEM 7-6B
(a) General Ledger Cash Balance:
October 31, 2004 (Adjusted cash balance per bank rec.)
Cash receipts ................................................................
Cash disbursements ........................................................
Unadjusted balance November 30 ...................................
(b)
$ 9,596.30
15,831.70
(14,694.10)
$10,733.90
LONDON INC.
Bank Reconciliation
November 30, 2004
Balance per bank statement ...........................
Add: Deposits in transit .................................
Less: Outstanding cheques
No. 2451 ............................................
No. 2472 ............................................
No. 2478 ............................................
No. 2482 ............................................
No. 2484 ............................................
No. 2485 ............................................
No. 2487 ............................................
No. 2488 ............................................
Adjusted cash balance per bank .....................
$17,554.60
1,225.00
18,779.60
$1,260.40
426.80
538.20
612.00
829.50
974.80
398.00
1,200.00
Balance per books ..........................................
Add: Account receivable collected by bank ...
Less: Cheque printing charge ........................
Error in recording cheque
No. 2479 ($1,750 - $1,570)................
Error in 11-21 deposit
($2,954 - $2,945) ...............................
Adjusted cash balance per books ...................
6,239.70
$12,539.90
$10,733.90
2,105.00
12,838.90
$110.00
180.00
9.00
299.00
$12,539.90
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Financial Accounting, Second Canadian Edition
PROBLEM 7-6B (Continued)
(c) Nov. 30
30
30
30
Cash ...............................................................
Accounts Receivable ..............................
2,105
Bank Charges Expense ..................................
Cash .......................................................
110
Accounts Payable............................................
Cash ........................................................
180
Accounts Receivable .......................................
Cash ........................................................
9
2,105
110
180
9
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Financial Accounting, Second Canadian Edition
PROBLEM 7-7B
(a)
MAYO LTD.
Bank Reconciliation
August 31, 2004
Cash balance per bank statement .......................
Add: Deposits in transit ......................................
Less: Bank error–Salary cheque ($275 - $257) ..
Outstanding cheques ...........................................
Adjusted cash balance per bank ..........................
$20,710
9,0001
29,710
$ 18
9,7522
Cash balance per books ......................................
Add: Interest earned .........................................
000000
Less: Service charge..........................................
Error in recording cheque ($400 - $40) .....
Safety deposit box rent .............................
Adjusted cash balance per books ........................
$ 50
360
25
9,770
$19,940
$20,330
45
20,375
435
$19,940
Proof of cash balance per bank statement: $16,400 + $73,000 - $68,660 + $45 $25 - $50 = $20,710
1
Deposits in transit = $77,000 - ($73,000 - $5,000) = $9,000
Errata Note
Advise students to see errata sheet. The July
31 deposit in transit should be $5,000 not
$4,000.
2
Outstanding cheques = ($73,570 + $360) - ($68,660 - $4,500 + $18) = $9,752
Proof of cash balance per books: $16,900 + $77,000 - $73,570 = $20,330
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Financial Accounting, Second Canadian Edition
PROBLEM 7-7B (Continued)
(b)
May 31
Bank Charges Expense ..................................
Accounts Payable ...........................................
Cash ........................................................
Interest Revenue .....................................
75
360
390
45
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Financial Accounting, Second Canadian Edition
PROBLEM 7-8B
(a)
Cash balance
Cash on hand ...........................................................
Commercial bank savings account ...........................
Commercial bank chequing account ........................
US bank account ......................................................
Special bank account–customer cash deposits ........
Total .........................................................................
$
5,000
100,000
25,000
45,000
7,500
.$182,500
Restricted cash ........................................................
$150,000
(b)
If the company combined its cash and cash equivalents the money market
fund of $32,000 and the Treasury bill fund of $75,000 would also be
included.
(c)
4.
An unused line of credit would not be reported on the balance sheet. It
may be disclosed in the notes.
5.
Amounts due from employees (travel advances) would be included in
Accounts Receivable.
6.
Short term investments would be listed separately in the current asset
section (unless combined as in (b)).
7.
Unused postage stamps would be included in prepaid expenses or
supplies.
8.
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.
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Financial Accounting, Second Canadian Edition
PROBLEM 7-9B
HANOVER LTD.
Cash Budget
Two Months Ending February 28, 2005
(a)
January
Beginning cash balance ...................................
Add: Receipts
Collections from customers ...............
Sale of short term investments ..........
Total receipts ...................................................
Total available cash .........................................
Less: Disbursements
Payments to suppliers .......................
Salaries .............................................
Operating expenses...........................
Total disbursements.........................................
Excess (deficiency) of available cash over
disbursements ...............................................
Financing
Borrowings ...............................................
Repayments .............................................
Ending cash balance........................................
February
$ 36,000
$ 12,000
70,000
10,000
80,000
116,000
150,000
..
0
150,000
162,000
0.40,000
0.30,000
34,000
104,000
.75,000
0 40,000
49,000
164,000
0.12,000
0 (2,000)
00000, 0
0.
0
.$ 12,000
012,000
.
0
$ 10,000
(b) A cash budget is a key business activity, which contributes to effective
management. The preparation of a cash budget allows management to
anticipate shortages and surpluses of cash and make plans for dealing with
them before they occur.
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Financial Accounting, Second Canadian Edition
PROBLEM 7-10B
(a) (1) Expected Collections from Customers
November ($200,000) ............................
December ($280,000) ............................
January ($360,000) ................................
February ($400,000) ...............................
Totals .....................................................
January
February
$ 40,000
084,000
180,000
00 00000
$304,000
$
January
February
, $54,000
, 40,000
00 0000
$94,000
$
0
, 56,000
,108,000
, 200,000
$364,000
(2) Expected Payments for Purchases
December ($90,000) ..............................
January ($100,000) ................................
February ($110,000) ...............................
Totals .....................................................
0
060,000
44,000
$104,000
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Financial Accounting, Second Canadian Edition
`PROBLEM 7-10B (Continued)
(b)
JOPLIN INC.
Cash Budget
Two Months Ending February 28, 2005
Beginning cash balance .................................
Add: Receipts
Collections from customers [See (a) (1)]
Interest revenue receipts ..................
Sale of investments ..........................
Total receipts .................................................
Total available cash .......................................
Less: Disbursements
Purchases [See (a) (2)] ..........................
Operating expenses ...............................
Purchase of land ....................................
Total disbursements............................................
Excess (deficiency) of available cash over
disbursements ..................................................
Financing
Borrowings ................................................
Repayments ..............................................
Ending cash balance...........................................
January
February
$ 20,000
$ 18,000
304,000
03,000
000 ,000
307,000
327,000
364,000
094,000
215,000
_______
309,000
,104,000
255,000
20,000
379,000
18,000
, 8,000
0
,
0
$ 18,000
,2,000
.
0
$ 10,000
5,000
369,000
387,000
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Chapter 7
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Financial Accounting, Second Canadian Edition
BYP 7-1 FINANCIAL REPORTING PROBLEM
(a)
Management’s Statement of Responsibility comments on internal control in the second and
third paragraphs. In the second paragraph, management states “to provide reasonable
assurance that assets are safeguarded ... management maintains a system of internal
control.” In the third paragraph, management explains the role of the audit committee,
including its responsibility for financial controls of operation and internal control.
The Auditor’s Report does not make any reference to internal control.
(b)
The management statement explains the role of internal auditors in the internal control
function. The audit report does not refer to the internal auditors.
(c)
Loblaws has made a decision not to net it cash balances with its bank indebtedness. It is
possible that the cash balance represents cash held by the company while bank
indebtedness may be operating lines of credit currently being used. The two represent
different accounts and can therefore be reported separately on the financial statements.
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Financial Accounting, Second Canadian Edition
BYP 7-2 COMPARATIVE ANALYSIS PROBLEM
(In millions)
(a)
(b)
1
Cash and cash equivalents balance
Cash provided by operating activities
Loblaw
Sobeys
$8231
981
$123.11
348.1
Loblaw defines cash as cash and cash equivalents and short-term investments. Sobeys
defines its cash as cash and cash equivalents.
(c)
Neither company has any recorded compensating balances.
(d)
Both companies appear to have strong cash balances and appear to be having no problem
generating cash from operations. The fact that excess cash is invested in short-term and
temporary investments indicates the company is investing idle cash to generate some
returns.
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Financial Accounting, Second Canadian Edition
BYP 7-3 RESEARCH CASE
(a)
The tech companies were able to amass so much cash with cost cutting measures and
loyal accounts bringing in cash.
(b)
The market does not reflect the full value of cash holdings in their company’s share prices
because there is concern that the companies may not make optimum use of the money.
(c)
To use the cash tech companies have a variety of options:
1.
they cold increase spending on research and development,
2.
they could acquire other companies,
3.
they could build sales and marketing partnerships with outside consultants and
vendors, or
4.
they could return cash to the shareholders by buying back shares or paying a
dividend.
(d)
No, traditionally tech companies have reinvested earnings into the business to finance
future growth rather than pay dividends.
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Financial Accounting, Second Canadian Edition
BYP 7-4 INTERPRETING FINANCIAL STATEMENTS
(a)
Cash equivalents are highly liquid investments. They have maturities of three months or
less when purchased, that can be converted into specific amounts of cash. They include
money market funds, money market savings certificates, bank certificates of deposit, and
treasury bills and notes. Cash equivalents differ from other types of short-term investments
in that they are extremely liquid (that is, easily turned into cash). They also have very low
risk of declining in value while held.
(b)
Working Capital
2002:
$1,127 - $932 =
$195
2001:
$1,290 - $1,186 =
$104
Current Ratio
2002:
$1,127
 1.21 : 1
$932
2001:
$1,290
 1.09 : 1
$1,186
The company’s current ratio increased in 2002 indicating the company’s liquidity position
has improved. However, much of the increase in working capital is due to an increase in
trade and other accounts receivable, which may indicate the company is experiencing
collection problems. As well, the increase in Imperial’s current ratio of 11% was much
lower than the increase in the industry average of 52%.
(c)
Having cash available provides a company with flexibility. However, cash does not earn a
very high return. Therefore if a company holds too much cash it could adversely affect their
share price, as investors may perceive that the company is not generating a sufficient
return on their investment.
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Financial Accounting, Second Canadian Edition
BYP 7-5 A GLOBAL FOCUS
(Note that all dollar figures are stated in millions of Swiss francs.)
(a)
Working Capital
2002:
CHF 35,342 – CHF 33,737 = CHF 1,605
2001:
CHF 39,045 – CHF 41,492 = CHF (2,447)
Current Ratio
2002:
CHF 35,342
 1.05 : 1
CHF 33,737
2001:
CHF 39,045
 0.94 : 1
CHF 41,492
The company’s liquidity position improved during 2002. Currently, the company has
sufficient current assets to repay their currently maturing liabilities. Even though the
company’s cash balances declined in 2002 the company has been better able to generate
cash from operating activities.
(b)
Nestlé’s sales and collections are in a foreign currency. When it converts the foreign
currency to Swiss francs the value amount it receives depends on the exchange rate. When
the currency devalues Nestlé receives less of its domestic currency on the conversion.
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 7-6 FINANCIAL ANALYSIS ON THE WEB
Due to the frequency of change with regard to information available on the World Wide Web,
the Accounting on the Web cases are updated as required. Their suggested solutions are also
updated whenever necessary, and can be found online in the Instructor Resources section of
our home page <www.wiley.com/canada/kimmel>.
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Financial Accounting, Second Canadian Edition
BYP 7-7 COLLABORATIVE LEARNING ACTIVITY
(a)
The material weaknesses and the related principle(s) of internal control that were violated
are as follows:
Material Weakness
Internal Control Principle
Non-timely deposit of cash
receipts
Other controls–cash should be deposited
in total daily
Excessive past due accounts receivable
Establishment of responsibility
Disregard of advantages
offered by vendors for prompt payment of
invoices
Establishment of responsibility
Absence of segregation of
duties
Segregation of duties
Inadequate procedures for
applying accounting principles
Documentation procedures
Lack of qualified management personnel
Establishment of responsibility
Lack of supervision by outside board of
directors
Establishment of responsibility;
independent internal verification
Overall poor recordkeeping
Documentation procedures
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Financial Accounting, Second Canadian Edition
BYP 7-7 (Continued)
(b)
Memo
To:
From:
Re:
Date:
Manager, Alternative Distributor Corp.
Accounting Students
Internal Control
We have reviewed information from your company’s audit and identified that principles of
internal control were violated. Outlined below are the principles that have been violated,
the reason the controls are important and steps that can be taken to improve the
situation.
1.
Establishment of responsibility–Excessive past due accounts receivable, disregard of
advantages offered by vendors for prompt payment of invoices, lack of qualified
management personnel, lack of supervision by outside board of directors.
Lack of responsibility in these areas could lead to bad debt losses and financial
losses.
To improve this situation the Board should review its procedures and provide
supervision to management. It should review the qualifications of management and
hire appropriate management personnel as required. Control of collections of
receivables and payment of vendors should be established.
2.
Segregation of duties–Absence of segregation of duties.
When one person is responsible for related activities the possibility of error and
irregularity increase.
A review of related activities should be undertaken and incompatible functions
assigned to different staff.
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Financial Accounting, Second Canadian Edition
BYP 7-7 (Continued)
(b) (Continued)
3.
Documentation procedures–Inadequate
principles, overall poor record-keeping.
procedures
for
applying
accounting
Documentation provides evidence of transactions and helps establish responsibility.
Procedures should be reviewed and proper documentation established.
4.
Independent internal verification–Lack of supervision by outside Board of Directors.
Independent verification helps ensure that controls are working as they are intended.
The Board should provide proper supervision.
5.
Other controls–Non-timely deposit of cash receipts.
The non-timely deposits of cash increases the possibility of the cash being
misappropriated.
Cash should be deposited daily.
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Financial Accounting, Second Canadian Edition
BYP 7-8 COMMUNICATION ACTIVITY
Ms. Lucette Landry
Landry Corporation.
Dear Ms. Landry:
During our audit of your financial statements, we reviewed the internal controls over cash. Based
on our review we offer the following recommendation.
Your company has grown significantly over the past several years to the point where controls over
cash must be implemented. The most significant weakness we identified was the lack of
segregation of duties in the accounting department. In the past, operations were small enough
that one person could perform the accounting and the owners could review almost all
transactions. However, this is no longer the situation and the lack of segregation of duties could
have adverse consequences for your business.
For example, because the same person is responsible for recording and depositing cash receipts
it would be possible for the clerk to misappropriate funds and cover the theft by manipulating the
accounting records. By recording transactions and paying the bills, it is possible that the clerk
could pay herself as a payee and then bury the transaction in the accounting records. Finally,
without segregating the recording process from the bank reconciliation process, any
misappropriation of funds could proceed undetected.
To minimize the risk of misappropriation of cash the following segregation of duties should be
implemented:
1.
2.
3.
There should be segregation between the individuals who receive, record and deposit
cash receipts.
Different individuals should approve and make payments and cheque signers should
not record disbursements.
Monthly bank reconciliations should be performed/reviewed by a person independent of
the recording process.
We would be pleased to discuss the weaknesses and our recommended improvements with you,
at your convenience.
Yours sincerely,
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Kimmel, Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
BYP 7-9 ETHICS CASE
(a)
The stakeholders are the customers affected by the policy, the shareholders of the banks
who want to see higher profits and the management of the banks who make the decisions
regarding fees and cheque processing policies.
(b)
The amount of fee revenue depending on order of processing would be:
(1)
(2)
(3)
Largest to smallest:
Smallest to largest:
In order of cheque number:
3 bounced cheques X $25 = $75
1 bounced cheque X $25 = $25
2 bounced cheques X $25 = $50
(c)
Whether this is ethical is subject to debate. On the one hand, it can be argued that
customers have a responsibility to maintain an adequate balance in their accounts. Some
customers are frequently overdrawn; thus only severe penalties will persuade them to
maintain an adequate balance. However, it could be argued that charging $25 for something
that has a cost to the bank of $1.50 is “gouging”–that is, taking unfair advantage of the
customer.
(d)
In deciding what approach to take, the bank must consider its relationship with the customer.
Clearly, by adopting a “largest to smallest” approach, it is going to anger some customers,
who may well decide to leave the bank and go to a more customer-friendly bank. However, it
could be argued that some of the customers the bank may lose are customers that are
frequently overdrawn and therefore costly to the bank. Also, it can be time consuming to
change banks, and most people don’t have the spare time to change banks unless they
really need to.
(e)
Answer will vary depending on student’s opinion.
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