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Kimmel,
Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Solutions Manual
7
3
Chapter 7
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly
prohibi
ted.
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 irregular
ities 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 ca
sh 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 ass
et should be separate
from the physical custody of that asset.
4.
Documentation procedures contribute to good internal control by providing evidence of the
oc
currence of transactions and events and, when signatures (or initials) are added, the
documents
es
tablish responsibility for the transactions. The prompt transmittal of documents
to accounting
contributes to recording transactions in the proper period, and the pre
numbering 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 contri
bute to the accuracy and reliability of the
accounting records.
6.
(a)
The concept of reasonable assurance means that the costs of establishing control
procedures should not exceed their expected benefit. Ordinarily, a system of internal
control provides
reasonable but not absolute assurance, since absolute assurance
would be too costly.
(b)
The human element is an important factor in a system of internal control. A good
system may become ineffective through employee fatigue, carelessness, and
indifferenc
e. Moreover, in
ternal 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 in
ternal verification. Daily cash counts also involve
the establishment of responsibility for performing the counts.
Kimmel,
Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Solutions Manual
7
4
Chapter 7
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly
prohibi
ted.
Questions (Continued)
9.
Cash re
gisters 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 fo
r 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 cle
rks 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
Principle
(1
)
Treasurer signs cheques
Establishment of responsibility
(2)
Cheques imprinted by a computer
Physical controls
(3)
Comparing cheque with approved
Independent internal verification
invoice before signing
14.
A bank contributes significantly to inte
rnal 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 eit
her:
(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.
Kimmel,
Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Solutions Manual
7
5
Chapter 7
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly
prohibi
ted.
Questions (
C
ontinued)
17.
Cash equivalents ar
e 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 sec
tion 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 as
set and disclosed in the
notes to the financial statements.
19.
The basic principles of cash management are: (1) increase collection of receivables, (2)
keep in
ventory 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)
A cash budget is a tool used to help planning for the company’s cash ne
eds. It shows
anticipated cash flows.
(b)
A cash budget contributes to effective cash management by enabling a company to
plan ahead to cover possible shortfalls and invest idle funds.
Kimmel,
Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Solutions Manual
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Chapter 7
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly
prohibi
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SOLUTIONS TO BRIEF E
XERCISES
BRIEF EXERCISE 7
1
The four purposes
of internal control are to:
1.
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.
2.
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.
3.
Safeguard assets from theft, robbery, and un
authorized use. An application for Plenty
Parking is the use of a cash register to safeguard assets.
4.
Maintain reliable control systems to enhance the accuracy and reliabi
lity 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)
Segregation of du
ties
(b)
Independent internal verification
(c)
Documentation procedures
BRIEF EXERCISE 7
3
(a)
Physical controls
(b)
Other controls
(c)
Independent internal verification
(d)
Segregation of duties
(e)
Establishment of responsibility
(f)
Other controls
Kimmel,
Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Solutions Manual
7
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Chapter 7
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly
prohibi
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BRIEF EXERCISE 7
4
(a)
Documentation procedures
(b)
Independent internal verification
(c)
Physical controls
(d)
Establishment of responsibility
(e)
Segregation of duties
(f)
Establishment of responsibility, segregation of duties and independent internal
verification
BRIEF EXERCISE 7
5
(a)
Outstanding cheques
–
deducted from cash balance per bank
(b)
Bank service charge
–
deducted from cash balance per books
(c)
Interest paid by bank
–
added to cash balance per books
(d)
Deposit in transit
–
added to cash balan
ce per bank
(e)
Bank error (deposit recorded twice)
–
deducted from cash per bank
BRIEF EXERCISE 7
6
(a)
The reconciling items per the books, items (b) and (c) above, will require adjustment on the
books of the depositor.
(b)
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.
Kimmel,
Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Solutions Manual
7
8
Chapter 7
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly
prohibi
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BRIEF EXERCISE 7
7
Cash balance per bank
................................
................................
..........................
$7,800
Add:
Deposits in transit
................................
................................
.........................
1,700
9,500
Less: Outstanding cheques
................................
................................
...................
760
Adjusted cash balance per bank
................................
................................
............
$8,740
Cash balance per books
................................
................................
.........................
$8,760
Less:
Bank service charge
................................
................................
....................
20
Adjusted cash balance per books
................................
................................
...........
$8,740
BRIEF EXERCISE 7
8
July 31
Bank Charges
................................
................................
....
20
C
ash
................................
................................
.......
20
BRIEF EXERCISE 7
9
January outstanding deposits
:
Cash deposits per books, January
$2,500
Less: Cash deposits per bank
(2,300
)
Outstanding deposits
$ 200
February outstanding deposits:
Cash deposits per books, February
$2,800
Less: Cash d
eposits per bank
(2,000)
Add: January outstanding deposits
200
Outstanding deposits
$1,000
BRIEF EXERCISE 7
10
November $650 ($9,250
$8,600)
December $2,450 ($650 + $12,700
$10,900)
Kimmel,
Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Solutions Manual
7
9
Chapter 7
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly
prohibi
ted.
BRIEF EXERCISE 7
11
Ouellette Ltée should report cash i
n 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 asse
t 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 short
term until such a ti
me 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 t
aken.
(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 wi
ll 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.
Kimmel,
Weygandt, Kieso, Trenholm
Financial Accounting, Second Canadian Edition
Solutions Manual
7
10
Chapter 7
Copyright © 2004 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly
prohibi
ted.
BRIEF EXERCISE 7
13
MARAIS LIMITED
Cash Budget
Month Ended January
Beginning cash balance
................................
................................
.......................
$
2,000
Add:
Cash receipts
................................
................................
.............................
60,000
Total available cash
................................
................................
..............................
62,000
Less: Cash disbursements
................................
................................
..................
65,000
Excess of available cash over cash disbursements
................................
.............
(3,000)
Financing needed
................................
................................
................................
.
8,000
Ending cash balance
................................
................................
............................
$ 5,000