Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
CHAPTER 7
Internal Control and Cash
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Brief
Problems Problems
Questions Exercises Exercises Set A
Set B
1. Explain the activities that help 1, 2, 3, 4,
achieve internal control.
5, 6, 7
1
1
1, 2, 3
1, 2, 3
2. Apply control activities to cash 8, 9, 10,
receipts.
11, 12
2, 3
2, 3,
1, 3, 4,
10
1, 2, 3, 4,
10
3. Apply control activities to cash 5, 13, 14,
disbursements.
15
4
4
2, 3, 4, 5, 2, 3, 4, 5,
10
10
4. Operate and account for a
petty cash fund.
5, 6
5, 6
4, 5
16
5. Describe the control features 17
of a bank account.
4, 5
7
6. Prepare a bank reconciliation. 18, 19, 20, 8, 9, 10,
21
11, 12
7. Report cash on the balance 22, 23
13, 14
sheet.
7, 8, 9, 10, 6, 7, 8, 9, 6, 7, 8, 9,
11, 12
10
10
13
11
11
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ASSIGNMENT CHARACTERISTICS TABLE
Problem
Description
Number
1A
Identify internal control weaknesses over cash receipts.
Difficulty
Level
Time
Allotted (min.)
Moderate
25-35
2A
Identify internal controls over cash disbursements.
Moderate
25-35
3A
Identify internal controls for cash receipts and cash
disbursements.
Simple
25-35
4A
Record debit and bank credit card and petty cash
transactions and identify internal controls.
Moderate
25-35
5A
Record and post petty cash transactions and identify
internal controls.
Moderate
20-30
6A
Prepare back reconciliation and related entries.
Moderate
25-35
7A
Prepare bank reconciliation and related entries.
Moderate
40-50
8A
Prepare bank reconciliation and related entries.
Moderate
40-50
9A
Prepare bank reconciliation and related entries.
Moderate
40-50
10A
Prepare bank reconciliation and identify internal controls. Moderate
30-40
11A
Calculate cash balance.
Moderate
20-30
1B
Identify internal control activities related to cash receipts. Moderate
25-35
2B
Identify internal control weaknesses over cash receipts
and cash disbursements.
Moderate
25-35
3B
Identify internal controls for cash receipts and cash
disbursements.
Simple
25-35
4B
Record debit and bank credit card and petty cash
transactions and identify internal controls.
Moderate
25-35
5B
Record and post petty cash transactions and identify
internal controls.
Moderate
20-30
6B
Prepare bank reconciliation and related entries.
Moderate
25-35
7B
Prepare bank reconciliation and related entries.
Moderate
40-50
8B
Prepare bank reconciliation and related entries.
Moderate
40-50
9B
Prepare bank reconciliation and related entries.
Moderate
40-50
10B
Prepare bank reconciliation and identify internal control
weakness.
Moderate
30-40
11B
Calculate cash balance.
Moderate
20-30
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BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-ofChapter Material
1.
Study Objective
Explain the activities that
help achieve internal
control.
Knowledge Comprehension
Q7-2
Q7-1
P7-1A
Q7-5
Q7-3
P7-2A
Q7-4
P7-3A
Q7-6
P7-1B
Q7-7
P7-2B
BE7-1 P7-3B
E7-1
BE7-2
Q7-8
P7-1A
Q7-9
P7-3A
Q7-10 P7-1B
Q7-11 P7-2B
Q7-12 P7-3B
E7-2
Q7-5
Q7-13
BE7-4
Q7-14
Q7-15
P7-2A
P7-3A
P7-2B
P7-3B
2.
Apply control activities to
cash receipts.
3.
Apply control activities to
cash disbursements.
4.
Operate and account for a
petty cash fund.
Q7-16
5.
Describe the control
features of a bank account.
Prepare a bank
reconciliation.
Q7-17
BE7-7
Q7-18
Q7-19
Q7-20
Q7-21
BE7-9
Report cash on the balance
sheet.
Q7-22
Q7-23
BE7-14
6.
7.
Broadening Your Perspective
Application
Analysis
BE7-3
E7-3
P7-4A
P7-4B
P7-10A
P7-10B
P7-4A
P7-5A
P7-4B
P7-5B
P7-10A
P7-10B
BE7-5
BE7-6
E7-5
E7-6
P7-4A
P7-5A
P7-4B
P7-5B
BE7-8
BE7-10
BE7-11
BE7-12
E7-7
E7-8
E7-9
E7-10
E7-11
BE7-13
E7-13
E7-12
P7-10A
P7-6A P7-10B
P7-7A
P7-8A
P7-9A
P7-6B
P7-7B
P7-8B
P7-9B
P7-11A
P7-11B
BYP7-1
BYP7-2
BYP7-3
BYP7-4
Synthesis Evaluation
E7-4
Continuing
Cookie
Chronicle
BYP7-5
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ANSWERS TO QUESTIONS
01.
Disagree. Internal control is the process designed and implemented by
management to help an organization achieve (1) reliable financial
reporting, (2) effective and efficient operations, and (3) compliance with
relevant laws and regulations. Thus improving the accuracy of the
accounting records is only one of the objectives of internal control.
02.
An essential control activity is to make specific employees responsible for
specific tasks. When all clerks make change out of the same cash register
drawer this is a violation of establishing responsibility. In this case, each
sales clerk should have a separate cash register, cash drawer, or
password with pre- and post-shift counts.
03.
Two applications of segregation of duties are:
(1) The responsibility for related activities should be assigned to different
individuals.
(2) The responsibility for establishing the accountability for an asset
should be separate from the physical custody of that asset.
04.
Documentation procedures contribute to good internal control by providing
evidence of the occurrence of transactions and events. When signatures
(or initials) are added, the documents establish responsibility for the
transactions. The prompt transmittal of documents to accounting
contributes to recording transactions in the proper period. And, the
prenumbering of documents helps to ensure that a transaction is not
recorded more than once or not at all.
05.
Physical controls include safes, vaults, electronic burglary systems and
sensors, and locked warehouses. These controls help safeguard a
company’s assets. Other controls such as cash registers and
computerized accounting equipment contribute to the accuracy and
reliability of the accounting records.
Physical controls apply to cash disbursements when (a) blank cheques
are stored in a safe, and access to the safe is restricted to authorized
personnel, and (b) electronic means are used to imprint amounts on
cheques. Other controls apply when the approved invoice is stamped
PAID after payment.
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QUESTIONS (Continued)
06.
Segregating the physical custody of assets from accounting record
keeping is not enough to ensure that nothing has been stolen. A
performance review still needs to be done. In such a review, the
accounting records are compared with existing assets or with external
sources of information.
07.
A company’s system of internal control can only give reasonable
assurance that assets are properly safeguarded and that accounting
records are reliable. The concept of reasonable assurance is based on
the belief that the cost of control activities should not be more than their
expected benefit. Ordinarily, a system of internal control provides
reasonable but not absolute, assurance. 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.
08.
Cash registers are readily visible to the customer. Thus, they prevent the
sales clerk from ringing up or scanning in a lower amount and pocketing
the difference. In addition, the customer receives an itemized receipt, and
the store’s cash register tape is locked into the register for further
verification.
9.
At the end of a day (or shift) the cashier should count the cash in the
cash register, record the amount, and turn over the cash and the record
of the amount to either a supervisor or the person responsible for making
the bank deposit. Exact procedures will be different in every company,
but the basic principles should be the same. The person or persons who
handle the cash and make the bank deposit should not have access to
the cash register tapes or the accounting records. The cash register
tapes should be used in creating the journal entries in the accounting
records. An independent person who does not handle the cash should
make sure that the amount deposited at the bank agrees with the cash
register tapes and the accounting records.
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QUESTIONS (Continued)
10.
Debit cards allow customers to spend only what is in their bank account
whereas a bank credit card gives the customer access to money made
available by a bank or other financial institution (similar to a short term
loan).
Sales using debit cards and bank credit cards are both considered cash
transactions to retailers. Banks usually charge the retailer a transaction
fee for each debit card and a fee that averages 3.5% of the credit card
sale. In both types of transaction the retailer’s bank will wait until the end
of the day and make a deposit for the full day’s transactions. Fees for
bank credit cards are generally higher than debit card fees.
11.
Two mail clerks contribute to a more accurate listing of mail receipts. In
addition, two clerks reduce the likelihood of mail receipts being diverted to
personal use or other fraud, as collusion would be required.
12.
From a company’s perspective there are not significant differences
between customers using EFT and on-line banking and EFT and
automatic pre-authorized monthly payments. The main difference is that
with EFT and automatic pre-authorized monthly payments, the company
begins the transaction and electronically request the funds. As a result the
company knows the transaction is happening and can journalize it. With
EFT and on-line banking, the company cannot anticipate in advance when
and how much it will collect in cash. Therefore the company will record the
cash collection after the funds have been deposited in the bank account
and the company has received notification from the bank.
13.
Payment by cheque or electronic funds transfer contributes to effective
internal control over cash disbursements. Prenumbered cheques help to
ensure that all disbursements are accounted for. In addition, the bank
provides a double record of the cash disbursements, and safekeeping of
the cash until paid. However, effective control is also possible when small
payments are made from an imprest petty cash fund.
14.
The procedure and related control activity are:
Procedures
Activities
(1) Controller signs cheques
Establishment of responsibility
(2) Cheques imprinted
Documentation; physical controls
(3) Comparing cheques with
Performance review; segregation
approved invoices before signing
of duties
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QUESTIONS (Continued)
15.
Wanda could potentially commit a fraud by:
(1) falsifying a receiving report and approving payment for a nonexistent
supplier. She could open a bank account in the name of the
nonexistent supplier and deposit the payments in this account
allowing her to steal cash from Walter’s Watches.
(2) ordering merchandise and stealing the inventory. She could cover her
theft by then falsifying the receiving reports and approving the
payment to the supplier even though the goods are not in the store.
Instructors note: These are only two examples. Students may develop
other valid examples.
16.
This could be a problem for the company as Olga may start taking longer
and longer to repay the cash and may eventually end up stealing cash
from the petty cash fund for personal expenses. Another problem is that
there may not be cash in the petty cash fund when needed to pay for
expenses depending on the amount Olga is borrowing.
To strengthen the system the company could implement the following
controls:
 Management should not allow the fund to be used for certain types of
transactions (such as making short-term loans to employees).
 Each payment from the fund must be documented on a prenumbered
petty cash receipt, signed by both the custodian and the person who
receives the payment.
 Management should periodically conduct a surprise check of the petty
cash fund and ensure the cash on hand plus receipts are equal to the
petty cash fund balance—they should make sure there are no
unexplained shortages and all payments have been in accordance
with company policies.
17.
(a) A signature card shows the signatures of authorized cheque signers.
It is used by the bank to validate signatures on cheques. Thus, the
card should prevent unauthorized persons from signing cheques.
(b) A cheque provides documentary evidence of the payment of a
specified sum of money to a designated payee.
(c) A bank statement provides a double independent record of a
depositor's bank transactions. It also is used in making periodic
independent bank reconciliations.
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QUESTIONS (Continued)
18.
An employee who has no other responsibilities that relate to cash should
prepare the bank reconciliation. If a person had responsibility for handling
cash and also prepared the bank reconciliation, they could use the bank
reconciliation to hide fraud with cash receipts or cash disbursements.
19.
Paul should not rely on on-line banking to give him an accurate balance in
his bank account. On-line banking can provide an up to date balance but
the balance will not be accurate if there are any deposits in transit or
outstanding cheques. The balance will also not be accurate if the bank
has made an error.
Paul should keep his own records and reconcile his calculation of the
bank balance with what the bank has reported. This is the only way to
know if there are any deposits in transit, outstanding cheques or bank
errors and thus have accurate information on his bank account balance.
20.
Anah is incorrect, since the March cheque has still not cleared the bank at
April 30 it must be included in the April 30 th bank reconciliation as an
outstanding cheque because it is still outstanding on April 30 th.
21.
(a) An NSF cheque occurs when the customer's bank balance is less
than the amount of the cheque.
(b) In a bank reconciliation a customer's NSF cheque is deducted from
the balance per books.
(c) An NSF cheque results in an adjusting entry in the company's books,
as a debit to Accounts Receivable and a credit to Cash.
22.
Yes, I agree that cash equivalents are basically the same as cash. Cash
equivalents are highly liquid investments that may be converted to a
specific amount of cash, with maturities of three months or less when
purchased. Because of their liquidity, cash equivalents are considered to
be “near cash” and are often combined with cash for reporting purposes in
the current assets section of the balance sheet.
23.
A company may have cash that is not available for general use because it
is restricted for a special purpose. If the restricted cash is expected to be
used within the next year, the amount should be reported as a current
asset. When restricted funds will not be used in that time, they should be
reported as a noncurrent asset.
A compensating balance is a minimum cash balance that a company is
required to keep in its bank account as support for a bank loan. These are
similar to restricted funds and are reported as noncurrent assets.
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7-1
The three things that internal control processes are designed to
help an organization achieve are:
(1) reliable financial reporting
(2) effective and efficient operations
(3) compliance with relevant laws and regulations.
Management is responsible for the design and implementation
of internal control. One example of each of these three things
for Liberty Parking follows:
1.
The use of a bank account and preparation of monthly bank
reconciliations will enhance the accuracy and reliability of
a company's accounting records.
2.
An application of effective and efficient operations for
Liberty Parking is to have electronic, timed ticket
dispensers coordinated with the entry gate so that an
attendant is not required to hand out tickets when cars
enter the parking garage. This also facilitates
documentation procedures.
3.
Liberty Parking must comply with relevant laws and
regulations such as collecting and paying GST. By
segregating handling cash from record keeping the
company can ensure all revenues are properly recorded
and GST payable is calculated based on the correct
amount.
Note to instructor: Students may have different examples.
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BRIEF EXERCISE 7-2
1.
2.
3.
4.
5.
6.
Physical controls
Other controls
Performance reviews
Segregation of duties
Establishment of responsibility
Other controls
BRIEF EXERCISE 7-3
Credit Card (Visa)
July 27
Cash ...................................................
Credit Card Expense ($100 x 4%) ....
Sales ..............................................
96
4
Petro Shop Credit Card
July 27
Accounts Receivable ........................
Sales ..............................................
100
Debit Card
July 27
Cash ...................................................
Debit Card Expense ..........................
Sales ..............................................
99
1
100
100
100
BRIEF EXERCISE 7-4
1.
2.
3.
4.
5.
6.
Documentation procedures
Performance reviews
Physical controls
Establishment of responsibility
Segregation of duties
Documentation procedures
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BRIEF EXERCISE 7-5
March 2
20
Petty Cash ..........................................
Cash ...............................................
100
Postage Expense ..............................
Freight Out .........................................
Supplies Expense .............................
Cash ($100 - $8) ............................
52
28
12
100
92
BRIEF EXERCISE 7-6
Nov. 17
Petty cash ($200 - $150) ...................
Printing Expense ...............................
Supplies Expense .............................
Postage Expense ..............................
Delivery Expense ..............................
Cash Over and Short ........................
Cash ($200 - $10) ..........................
50
34
58
19
26
3
190
BRIEF EXERCISE 7-7
1.
2.
3.
4.
5.
T
T
F
T
T
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BRIEF EXERCISE 7-8
1.
2.
3.
4.
(d)
(c)
(b)
(b)
5. (e)
6. (a)
7. (c)
8. (d)
9. (d)
10. (a)
11. (c)
12. (b)
Bank debit memorandum for service charges
EFT payment made by a customer
Outstanding cheques from the current month
Outstanding cheques from the prior month that are still
outstanding
Outstanding cheques from the prior month that are no
longer outstanding
Bank error in recording a company cheque made out for
$200 as $290
Bank credit memorandum for interest revenue
Company error in recording a deposit of $1,280 as
$1,680
Bank debit memorandum for an NSF cheque
Deposit in transit from the current month
Company error in recording cheque made out for $360
as $630
Bank error in recording a $2,575 deposit as $2,755
BRIEF EXERCISE 7-9
(a)
Items that will result in an adjustment to the companies
records:
1. Bank debit memorandum for service charges
2. EFT payment
7. Bank credit memorandum for interest expense
8. Company error in recording a deposit of $1,280 as $1,680
9. Bank debit memorandum for an NSF cheque
11. Company error in recording cheque made out for $360 as $630
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BRIEF EXERCISE 7-9 (Continued)
(b) Why the other items do not require an adjustment:
3. Outstanding cheques from the current month need to be
deducted from the bank balance to determine the adjusted
bank balance. Since the company has already recorded the
cheques the company does not need to record an
adjustment.
4. Outstanding cheques from the previous month that are still
outstanding need to be deducted from the bank balance
because they are still outstanding.
5. Outstanding cheques from the previous month that are no
longer outstanding will not appear on the bank
reconciliation. These cheques have now been deducted
from both the company’s cash balance and the bank
account and so neither balance needs adjusting.
6. Bank error in recording a company cheque made out for
$200 as $290 creates a $90 ($290 - $200) adjustment to the
bank balance. The company has not made an error and so
does not need to make an adjustment.
10. Deposit in transit from the current month will be added to
the bank balance to calculate the adjusted bank balance. It
has already been recorded by the company so no
adjustment is required.
12. Bank error in recording a $2,575 deposit as $2,755 creates
a $180 ($2,755 - $2,575) adjustment to the bank balance.
The company has not made an error and so does not need
to make an adjustment.
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BRIEF EXERCISE 7-10
November:
Cheques written and recorded in books in Nov.
Less: Cheques paid by bank in Nov.
Outstanding cheques at Nov. 30
$9,520
8,677
$ 843
December:
Cheques written and recorded in books in Dec.
Plus: Outstanding cheques at Nov. 30
Total cheques that could be paid by bank in Dec.
Less: Cheques paid by bank in Dec.
Outstanding cheques at Dec. 31
$12,617
843
13,460
10,949
$ 2,511
BRIEF EXERCISE 7-11
Manuliak Company
Bank Reconciliation
July 31
Cash balance per bank .....................................................
Add: Deposits in transit ..................................................
Less: Outstanding cheques ............................................
Adjusted cash balance per bank ......................................
$7,920
2,152
10,072
1,144
$8,928
Cash balance per books ...................................................
Add: Interest earned ........................................................
$9,100
25
9,125
Less: NSF cheque ............................................................
162
Service charge........................................................ 00
35
Adjusted cash balance per books ...................................
$8,928
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BRIEF EXERCISE 7-12
July 31
31
31
Accounts Receivable ........................
Cash ...............................................
162
Bank Charges Expense ....................
Cash ...............................................
35
Cash ...................................................
Interest Revenue ..........................
25
162
35
25
BRIEF EXERCISE 7-13
Cash should be reported at $18,850 ($6,000 + $850 + $12,000).
The postage stamps are prepaid expenses. The cash refund due
from CRA is a receivable. Postdated cheques are also
receivables until they can be cashed on their valid date.
The Treasury bill is a short-term investment that could be
considered a cash equivalent.
BRIEF EXERCISE 7-14
Current Assets:
Dupré Company should report the Cash in Bank, Payroll Bank,
Store Cash Floats and Short-term investments accounts as
cash and cash equivalents which are current assets.
Noncurrent Assets:
The Plant Expansion Fund Cash should be reported as a
noncurrent asset, assuming the fund is not expected to be used
during the next year. The compensating balance should be
reported as a noncurrent asset.
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SOLUTIONS TO EXERCISES
EXERCISE 7-1
(a) Weakness or Strength
1. No establishment of
responsibility over the cash—
weakness
(b) Suggested Improvements
The employees should use
separate cash drawers.
Cash counts not performed
independently—weakness
Cash counts should be performed
by a supervisor at the end of the
shift and the totals compared to
the cash register tape.
2.
Improper segregation of duties
could result in the
misappropriation of cash—
weakness
Different individuals should
receive cash, record cash receipts
and deposit the cash. In a small
business this may be impossible;
therefore, it is imperative that
management take an active role in
the operations of the business so
to be able to detect any
accounting irregularities.
3.
The lack of documentation
procedures—weakness.
Control documents around
purchasing and shipping ensure
that the records are accurate and
reliable and help prevent the
misappropriation (loss) of assets.
4.
Repair of physical controls—
strength.
5.
External reviews completed
regularly and issues resolved—
strength.
6.
Other controls over employees’
duties including vacations—
strength.
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EXERCISE 7-2
(a)
Procedure Weakness
(b)
Principle
Violated
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 the
bank.
4.
Cash is not
independently
counted.
Performance
reviews
A supervisor
should count the
cash.
5.
The accountant
should not
handle cash.
Segregation
of duties
The cashier's
department
should make the
deposits.
6.
All sales are not
rung through
the cash
register.
Documentation
All sales should
be rung through
the cash register
to ensure sales
are complete.
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Accounting Principles, Third Canadian Edition
EXERCISE 7-3
(a)
Dec. 20 Cash ($2,550 - $30) ....................
Debit Card Expense
($0.75 x 40) ..................................
Sales .......................................
2,520
(b) Nov. 15 Cash ($1,300 - $39) ....................
Credit Card Expense
($1,300 x 3%)...............................
Sales .......................................
1,261
30
2,550
39
1,300
Dec. 10 No entry
(c)
Apr.
May
2 Accounts Receivable—Zachos
Sales .......................................
1,450
1 Cash ............................................ 1,450
Accounts Receivable—Zachos
1,450
1,450
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Chapter 7
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
EXERCISE 7-4
(a)
Weaknesses
1. Cheques are not prenumbered
(b)
Suggested Improvements
Use prenumbered cheques
2. The purchasing agent signs
cheques
Only the controller's department
personnel should sign cheques
Two signatures should be required
3. Unissued cheques are stored in
unlocked file cabinet
Unissued cheques should be
stored in a locked file cabinet with
access restricted to authorized
personnel
4. Purchasing agent verifies that
the goods have been received
An independent party should verify
receipt of goods
5. Purchasing agent approves and Purchasing should approve bills
pays for goods purchased
for payment by the controller
6. After payment, the invoice is
simply filed.
The invoice should be stamped
PAID, to prevent it from being
processed again
7. The purchasing agent records
payments in the cash
disbursements journal
Only accounting department
personnel should record cash
disbursements
8. The controller records the
cheques in cash
disbursements journal
Only accounting department
personnel should record cash
disbursements
9. The controller reconciles the
bank statement
An internal auditor or other
independent party should
reconcile the bank statement
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Accounting Principles, Third Canadian Edition
EXERCISE 7-4 (Continued)
(b) (Continued)
INTEROFFICE MEMORANDUM
TO:
CONTROLLER, ABEKAH COMPANY
FROM:
ACCOUNTING STUDENT
SUBJECT:
INTERNAL CONTROL OVER CASH
DISBURSEMENTS
DATE:
I have reviewed your cash disbursements system and suggest
that you make the following improvements:
1. Abekah Company should use prenumbered cheques.
These should be stored in a locked file cabinet or safe with
access restricted to authorized personnel.
2. The purchasing department should approve bills for
payment. The controller’s department should prepare and
sign the cheques. Two signatures should be required on
every cheque. The invoices should be stamped paid so
that they cannot be paid twice.
3. Only the accounting department personnel should record
cash disbursements.
4. An internal auditor or other independent party should
reconcile the bank statement.
5. An independent party should verify receipt of goods.
If you have any questions
suggestions, please contact me.
about
implementing
these
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Chapter 7
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Accounting Principles, Third Canadian Edition
EXERCISE 7-5
(a)
Mar. 10
(b)
Mar. 25
(c)
Mar. 25
Petty Cash ..........................................
Cash ...............................................
Petty Cash ($125 - $100) ...................
Merchandise Inventory .....................
Miscellaneous Expense ($14 + $12 + $5)
Delivery Expense ..............................
Cash ($125 - $4) ............................
Cash Over and Short ....................
100
100
25
29
31
38
Merchandise Inventory .....................
29
Miscellaneous Expense ($14 + $12 + $5) 31
Delivery Expense ..............................
38
Cash ($75 - $4) ..............................
Cash Over and Short ....................
Petty Cash ($100 - $25) ................
121
2
71
2
25
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
EXERCISE 7-6
(a)
May
1
(b)
May 31
(c)
May 31
Petty Cash ..........................................
Cash ...............................................
250
Newspaper Advertising Expense ....
Coffee Supplies Expense .................
Drawings ............................................
Postage Expense ..............................
Cash Over and Short ........................
Cash ($200 - $78) ..........................
Petty Cash ($250 - $200) ..............
62
46
50
10
4
Newspaper Advertising Expense ....
Coffee Supplies Expense .................
Drawings ............................................
Postage Expense ..............................
Cash Over and Short ........................
Cash ($200 - $83) ..........................
Petty Cash ($250 - $200) ..............
62
46
50
10
250
122
50
1
117
50
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Accounting Principles, Third Canadian Edition
EXERCISE 7-7
(a)
VERWEY COMPANY
Bank Reconciliation
November 30
Cash balance per bank statement ...................................
Add: Deposits in transit ..................................................
Less: Outstanding cheques ............................................
Adjusted cash balance per bank ......................................
Cash balance per books .....................................
Add: Correction of error in cheque No. 373 ....
EFT deposits .............................................
$8,509
01,575
10,084
0 2,449
$7,635
$7,005
$ 90
883
Less: Bank service charge ................................
$ 24
NSF cheque ..............................................
319
Adjusted cash balance per books ...................................
(b) Nov. 30 Cash ............................................
Office Supplies ......................
Accounts Receivable ............
973
30 Bank Charges Expense .............
Account Receivable ...................
Cash ........................................
24
319
973
7,978
343
$7,635
90
883
343
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Accounting Principles, Third Canadian Edition
EXERCISE 7-8
(a)
Deposit in transit on May 31: $1,353
(b) Other adjustments:
 Interest earned of $32 must be added to the balance per
books.
 EFT deposit of $849 must be added to the balance per
books
 The error in the May 20th deposit must be corrected on
the books; therefore the balance per books must
decrease by $9 ($954 - $945).
EXERCISE 7-9
(a)
Outstanding cheques on May 31st:
No.
255
$ 262
No.
261
867
No.
264
650
$1,779
(b) Other adjustments:
 Decrease balance per books $54 for service charges
recorded by bank.
 Increase balance per books $450 for error in cheque
260—should be $50 not $500.
 Decrease balance per books for NSF cheque of $395.
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Accounting Principles, Third Canadian Edition
EXERCISE 7-10
(a)
HIDDEN VALLEY COMPANY
Bank Reconciliation
May 31
Cash balance per bank statement ...................................
Add: Deposits in transit ..................................................
Less: Outstanding cheques ............................................
Adjusted cash balance per bank ......................................
Cash balance per books ...................................................
Add: Interest earned .......................................................
Error correction: Cheque # 260 ............................
EFT Deposit ............................................................
Less: Bank service charge ................................
Error correction: May 20 deposit ($954 - $945)
NSF cheque ............................................................
Adjusted cash balance per books .....................
(b) May. 31 Cash ($32 + $450 + $849)............
Interest Revenue.....................
Accounts Payable ...................
Accounts Receivable (EFT) ...
1,331
31 Bank Charges Expense ..............
Accounts Receivable (error) ......
Accounts Receivable (NSF) .......
Cash ($54 + $9 + $395) ...........
54
9
395
$7,664
, 1,353
9,017
1,779
$7,238
$6,365
32
450
849
7,696
54
9
395
$7,238
32
450
849
458
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
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 ....................
Deposits in transit: August 31
Deposits per books in August ...............
Less: Deposits per bank in August .......
Deposits in transit, July 31...........
August receipts deposited in August ...
Deposits in transit, August 31 ...............
(b) Outstanding cheques: July 31
Cheques per books in July ....................
Add: Outstanding cheques, June 30 ....
Total that could be cleared in July ........
Less: Cheques clearing bank in July....
Outstanding cheques, July 31 ...............
Outstanding cheques: August 31
Cheques per books in August ...............
Add: Outstanding cheques, July 31 ......
Total that could be cleared in August ...
Less: Cheques clearing bank in August
Outstanding cheques, August 31 ..........
$15,750
$15,820
(1,050)
14,770
$ 980
$22,900
$23,500
(980)
22,520
$ 380
$17,200
970
18,170
(16,660)
$ 1,510
$21,700
1,510
23,210
(22,250)
$ 960
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Chapter 7
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
EXERCISE 7-12
(a)
September 1 adjusted balance.................................
Add: Cash receipts (deposits) ................................
Less: Cash payments (cheques) .............................
September 30 unadjusted balance per company...
(b) September 1 balance per bank ................................
Add: Deposits cleared..............................................
EFT Collections ...............................................
Interest earned ................................................
Less: Cheques cleared ............................... $65,787
NSF cheque: J. Hower ......................
410
Bank service charge .........................
30
September 30 unadjusted bank balance .................
$17,350
64,329
(63,746)
$17,933
$20,860
62,789
1,825
45
85,519
66,227
$19,292
(c) Deposits in transit: September 30
Deposits per books in September.................
$64,329
Less: Deposits per bank in September ........ $62,789
Deposits in transit: August 31 ............ (3,370)
September receipts deposited in September
59,419
Deposits in transit: September 30.................
$ 4,910
(d) Outstanding cheques: September 30
Cheques recorded per books in September ........
Add: Outstanding cheques, August 31 ................
Total cheques that could be cleared in Sept. ......
Less: Cheques clearing bank in September ........
Outstanding cheques: September 30 ...................
$63,746
6,880
70,626
(65,787)
$ 4,839
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Chapter 7
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
EXERCISE 7-12 (continued)
(e)
Unadjusted bank balance, September 30 ...............
Add: Deposits in transit ...........................................
Less: Outstanding cheques .....................................
Adjusted bank balance, September 30 ...................
$19,292
4,910
(4,839)
$19,363
(f)
Unadjusted cash balance, September 30 ...............
Add: EFT Collections ...............................................
Interest earned ................................................
Less: NSF cheque: J. Hower ....................................
Bank service charge .......................................
Adjusted cash balance, September 30 ....................
$17,933
1,825
45
(410)
(30)
$19,363
EXERCISE 7-13
(a)
Cash and cash equivalents
1. Currency and coin ...............................................
2. Guaranteed investment certificate ....................
3. April cheques .......................................................
5. Royal Bank chequing account ...........................
6. Royal Bank savings account ..............................
9. Cash register floats .............................................
10. Over-the-counter cash receipts for April 30:
Currency and coin...........................................
Cheques from customers ..............................
Debit card slips ...............................................
Bank credit card slips.....................................
Total ......................................................................
$
87
10,000
300
2,575
4,000
250
550
185
685
755
$19,387
(b) 4. Postdated cheque—Balance sheet (accounts
receivable)
7. Prepaid postage in postage meter—Balance sheet
(prepaid expense)
8. IOU from company receptionist—Balance sheet
(accounts receivable)
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Chapter 7
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third 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.
(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.
(5) All cheques should be made payable in the church’s
name.
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Accounting Principles, Third Canadian Edition
PROBLEM 7-1A (Continued)
(b) (Continued)
(6) A petty cash fund should be set up for small
expenditures. All amounts collected at weekly services
should be deposited.
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Accounting Principles, Third Canadian Edition
PROBLEM 7-2A
A
Internal Controls p
Application to Cash Disbursements
Establishment
Only the controller and assistant controller are
of responsibility authorized to sign cheques.
Segregation of
duties
Invoices must be approved by both the purchasing
agent and the receiving department supervisor.
Payment can only be made by the controller or
assistant controller, and the cheque signers do not
record the cash disbursement transactions.
Documentation
procedures
Cheques are prenumbered. Paid invoices have
payment details noted on them.
Physical
Controls
Blank cheques are kept in a safe in the controller's
office. Only the controller and assistant controller
have access to the safe. A cheque-writer is used in
writing cheques.
Performance
reviews
The cheque signer compares the cheque with the
approved invoice prior to issue. Bank and book
balances are reconciled monthly by the assistant
chief accountant.
Other controls
Following payment, invoices are stamped PAID to
prevent duplicate payments.
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Accounting Principles, Third Canadian Edition
PROBLEM 7-3A
(a) Weaknesses & (b) Problems
1. Cash is collected and kept in the
car. This could result in theft.
(c) Suggested Improvements
Cash should be deposited in the
bank each day.
2. The person purchasing the
merchandise is the same person
that verifies receipt of the goods
and approves invoices for
payment. Because this person is
responsible for all activities related
to purchasing, errors and theft
could occur.
An independent person should
verify the receipt of goods. The
purchaser should approve bills
for payment by the controller.
3. All three cashiers use the same
cash drawer. This could result in
difficulty establishing
responsibility for errors.
Each employee should use a
separate cash drawer.
4. The office manager deposits the
cheques and posts the entry in the
accounting records. This could
result in the office manager
depositing cheques in his/her own
account, taking the cash and not
posting the entry for accounting
purposes.
Mail should be opened by two
individuals. The reconciliation of
daily cash receipts should be
forwarded to the accounting
department and used as a basis
for entering the receipt
information into the accounting
records.
5. The custodian creates receipts for
employees when they don’t have
them. He could create fictitious
receipts and take cash himself or
give it to friends.
Prenumbered petty cash receipts
must be signed by the custodian
and the individual receiving
payment for each payment from
the fund. Surprise counts can be
made at any time to determine
whether the fund is intact.
Employees should be required to
take vacation.
Larry never takes a vacation.
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Accounting Principles, Third Canadian Edition
PROBLEM 7-4A
(a)
June 1 Petty Cash ...................................
Cash ........................................
150
150
8 Cash ............................................ 15,548
Debit Card Expense (52 X $0.50)
26
Credit Card Expense
($6,400 x 2.75%) .....................
176
Sales .......................................
8 Freight Out ..................................
Postage Expense .......................
Advertising Expense..................
Miscellaneous Expense ............
Cash Over and Short .................
Cash ($150 - $9) .....................
42
28
57
10
4
141
15 Cash ............................................ 17,941
Debit Card Expense (78 X $0.50)
39
Credit Card Expense
($8,000 x 2.75%) .....................
220
Sales .......................................
15 Petty Cash ($250 - $150) ............
Drawings .....................................
Office Supplies Expense ...........
Coffee Supplies Expense ..........
Cash Over And Short .................
Cash ($250 - $4) .....................
15,750
18,200
100
50
77
20
1
246
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Accounting Principles, Third Canadian Edition
PROBLEM 7-4A (Continued)
(b) The advantage of accepting debit and bank credit card
transactions as opposed to accepting only cash and
personal cheques from customers is that the company
knows immediately if the customer has enough money in
the bank to pay for their purchases. A second advantage is
that it will likely increase sales if customers can use debit or
credit cards. The disadvantage is that the bank charges a
fee on all transactions using debit and credit cards.
(c)
The benefit of having a petty cash fund is that it can be
used to pay relatively small amounts, while still maintaining
control. Some expenses are best made by cash rather than
by cheque because of the nature of the expense–there are
some instances where either a cheque is not accepted or it
is not practical to issue a cheque. The cost-benefit
principle justifies paying some expenses with cash rather
than issuing a cheque.
There are a number of internal controls over the petty cash
fund that Gamba should follow:
 One person should be appointed the petty cash
custodian and will be responsible for the fund.
 A prenumbered petty cash receipt should be signed by
the custodian and the individual receiving payment for
each payment from the fund.
 The treasurer’s office should examine all payments and
stamps supporting documents to indicate they were
paid when the fund is replenished.
 Surprise counts should be made at any time to
determine whether the fund is intact.
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Accounting Principles, Third Canadian Edition
PROBLEM 7-5A
(a)
Jan.
Feb.
2 Petty Cash ...................................
Cash ........................................
200
15 Freight Out ..................................
Postage Expense .......................
Office Supplies Expense ...........
Miscellaneous Expense ............
Cash Over and Short .................
Cash ($200 - $13) ...................
84
42
47
12
2
31 Freight Out ..................................
Charitable Contributions Expense
Postage Expense .......................
Miscellaneous Expense ............
Cash Over and Short.............
Cash ($200 - $5) .....................
86
40
28
44
200
187
3
195
1 Petty Cash ...................................
Cash ........................................
100
15 Freight Out ..................................
Entertainment Expense .............
Postage Expense .......................
Merchandise Inventory ..............
Miscellaneous Expense ............
Cash Over and Short .................
Cash ($300 - $58) ...................
36
53
33
60
54
6
28 Postage Expense .......................
Travel Expense ...........................
Freight Out ..................................
Office Supplies Expense ...........
Cash Over and Short.............
Cash ($250 - $63) ...................
Petty Cash ($300 - $250) .......
95
46
44
57
100
242
5
187
50
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Accounting Principles, Third Canadian Edition
PROBLEM 7-5A (Continued)
(b)
Date
Jan. 2
Feb. 1
28
(c)
Explanation
Petty Cash
Ref. Debit
Credit Balance
200
100
50
200
300
250
Some expenses are made from petty cash rather than by
cheque because of the nature of the expense–there are
some instances where either a cheque is not accepted or it
is not practical to issue a cheque. The cost-benefit
principle justifies paying some expenses with cash rather
than issuing a cheque.
There are internal controls over payments from petty cash.
A custodian is responsible for the fund. A prenumbered
petty cash receipt signed by the custodian and the
individual receiving payment is required for each payment
from the fund. The treasurer’s office examines all payments
and stamps supporting documents to indicate they were
paid when the fund is replenished. Surprise counts can be
made at any time to determine whether the fund is intact.
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Accounting Principles, Third Canadian Edition
PROBLEM 7-6A
(a)
AGRICULTURAL GENETICS COMPANY
Bank Reconciliation
May 31, 2008
Cash balance per bank statement ...................................
Add: Deposit in transit ...................................... $1,141
Bank error, May 12 deposit ($638 - $386)
252
Less: Outstanding cheques
[($233 + $732 + $813 + $401)] ................................
Adjusted cash balance per bank ......................................
Cash balance per books ...................................................
Add: Error in recording cheque No. 1151
($855 - $585) ............................................. $ 270
EFT collections......................................... 2,382
Interest revenue .......................................
24
Less: NSF cheque and service charge .............
$820
Error in recording cheque No. 1192
($1,387 - $1,738) .......................................
351
Bank service charge ................................
50
Adjusted cash balance per books ...................................
$11,689
1,393
13,082
2,179
$10,903
$ 9,448
2,676
12,124
1,221
$10,903
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Accounting Principles, Third Canadian Edition
PROBLEM 7-6A (Continued)
(b) May 31 Cash ............................................
270
Accounts Payable—L. Kingston
31 Cash ............................................
Accounts Receivable ............
2,382
31 Cash ............................................
Interest Revenue ...................
24
31 Accounts Receivable—P. Dell ..
Cash ........................................
820
31 Computer Equipment ................
Cash ........................................
351
31 Bank Charges Expense .............
Cash ........................................
50
270
2,382
24
820
351
50
Check: $9,448 + $270 + $2,382 + $24 - $820 - $351 - $50 =
$10,903 adjusted cash balance
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
PROBLEM 7-7A
(a)
Cash balance per books, November 30, 2008
(from Nov. 30 bank reconciliation) ....................
Add: Cash receipts ................................................
Less: Cash payments ............................................
Unadjusted cash balance per books,
December 31, 2008 ..............................................
$10,216
16,830
14,816
$12,230
(b)
HUANG COMPANY
Bank Reconciliation
December 31, 2008
Cash balance per bank statement ................................
Add: Deposits in transit ...............................................
Less: Outstanding cheques
No. 3470 ......................................
$1,100
No. 3474 ......................................
1,050
No. 3478 ......................................
538
No. 3481 ......................................
807
No. 3484 ......................................
1,274
No. 3486 ......................................
1,390
Adjusted cash balance per bank ..................................
Cash balance per books ...............................................
Add: EFT collected by bank ........................................
Less: NSF cheque .....................................
$1,027
Error in recording cheque No. 3485
($541 - $441) .................................
100
Bank service charges ....................
45
st
Error in Dec. 21 deposit
($2,954 - $2,945) ...........................
9
Adjusted cash balance per books ................................
$19,155
1,198
20,353
6,159
$14,194
$12,230
3,145
15,375
1,181
$14,194
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Accounting Principles, Third Canadian Edition
PROBLEM 7-7A (Continued)
(c)
Dec. 31 Cash ............................................
Accounts Receivable ............
Interest Revenue ...................
31 Accounts Receivable
—Hilo Holdings ..........................
Cash ........................................
3,145
3,080
65
1,027
1,027
31 Accounts Payable ......................
Cash ........................................
100
31 Bank Charges Expense .............
Cash ........................................
45
31 Accounts Receivable .................
Cash ........................................
9
100
45
9
Check: $12,230 + $3,145 - $1,027 - $100 - $45 - $9 = $14,194
adjusted cash balance
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Chapter 7
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
PROBLEM 7-8A
(a) Book balance, May 1 (per Apr. 30 bank reconciliation) $ 7,776
Add: Cash receipts .....................................................
6,825
Less: Cash payments ..................................................
13,526
Unadjusted cash balance, May 31 .............................
$ 1,075
(b)
RIVER ADVENTURES COMPANY
Bank Reconciliation
May 31, 2008
Cash balance per bank statement ...................................
Add: Deposits in transit ...............................
$1,286
Error in cheque 564 ($603 - $306).......
297
Less: Outstanding cheques
No. 533 ..............................................
$279
No. 555 ..............................................
79
No. 558 ..............................................
943
No. 560 ..............................................
890
No. 566 ..............................................
950
Adjusted cash balance per bank ......................................
Cash balance per books ...................................................
Add: EFT proceeds ($1,615 + $35) ...............
$1,650
th
Error in May 26 deposit
($980 - $890) .....................................
90
Error in cheque #563
($2,887 - $2,487) ...............................
400
Less: NSF cheque ..........................................
$ 440
Bank service charges ..........................
25
Adjusted cash balance per books ...................................
$4,308
1,583
5,891
3,141
$2,750
$1,075
2,140
3,215
465
$2,750
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Accounting Principles, Third Canadian Edition
PROBLEM 7-8A (Continued)
(b) May 31 Cash ...........................................
Accounts Receivable ............
Interest Revenue ...................
1,650
31 Cash ...........................................
Accounts Receivable ............
90
31 Cash ............................................
Accounts Payable .................
400
31 Accounts Receivable—R. King.
Cash ........................................
440
31 Bank Charges Expense .............
Cash ........................................
25
1,615
35
90
400
440
25
Check: $1,075 + $1,650 + $90 + $400- $440 - $25
= $2,750 adjusted cash balance
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
PROBLEM 7-9A
(a)
Balance per Bank Statement
Balance September 30, 2008 ....................................
Add: Deposits ............................................ $11,579
Interest ..............................................
27
Less: Cheques cleared .............................. $7,253
NSF cheques ....................................
790
Service charge .................................
43
Balance, October 31, 2008 ........................................
$ 6,469
11,606
18,075
8,086
$9,989
Balance Per Books
Reconciled Balance, (per Sept. 30 bank reconciliation)
($6,469 + $1,084 - $628 - $553 - $159) ......................
$ 6,213
Add: Cash receipts ...................................................
11,736
Less: Cash payments................................................ (10,922)
Unadjusted cash balance, October 31, 2008 ..........
$ 7,027
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Accounting Principles, Third Canadian Edition
PROBLEM 7-9A (Continued)
(b)
HAWORTH’S MARINE CENTRE
Bank Reconciliation
October 31, 2008
Balance per bank statement .............................................
Add: Deposits in transit ..................................................
.................................................................................
Less: Outstanding cheques
No. 391 .................................................. $ 159
No. 408 .................................................. 3,266
No. 411 .................................................. 1,984
Adjusted cash balance per bank ......................................
Balance per books .............................................................
Add: Interest .....................................................
$ 27
th
Error in Oct. 12 deposit ($3,818 - $3,118) 700
Less: NSF cheque ..............................................
$790
Error in cheque No. 409 ($1,848 - $1,448)
400
Bank service charges ..............................
43
Adjusted cash balance ......................................................
(c)
Oct. 31 Cash ...........................................
Accounts Receivable ............
Interest Revenue ...................
727
31 Accounts Receivable—Y. Fujii .
Office Equipment ......................
Bank Charges Expense .............
Cash ........................................
790
400
43
$ 9,989
1,941
11,930
5,409
$6,521
$7,027
727
7,754
1,233
$6,521
700
27
1,233
Check: $7,027 + $727 - $1,233
= $6,521 adjusted cash balance
(d) The reported cash balance on the October 31, 2008 balance
sheet is $6,521.
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Accounting Principles, Third Canadian Edition
PROBLEM 7-10A
(a)
CAREFREE COMPANY
Bank Reconciliation
March 31, 2008
Balance per bank statement .............................................
Add: Deposit in transit ....................................................
.................................................................
Less: Outstanding cheques .............................. $1,650
Bank error deposit Careless Company . 1,100
Adjusted cash balance per bank ......................................
$7,350
750
8,100
Balance per books .............................................................
Add: Error in cheque No. 173 ($294 - $249) .... $ 45
Interest earned .........................................
15
Proceeds of EFT ....................................... 2,645
$3,125
Less: Service charge ..........................................
$ 40
Hydro .........................................................
120
Telephone .................................................
85
NSF cheque ($220 + $15 service charge)
235
Adjusted cash balance per books ...................................
(b) Mar. 31 Cash ............................................
Accounts Payable .................
Interest Revenue ...................
Accounts Receivable ............
2,705
31 Bank Charges Expense .............
Hydro Expense ...........................
Telephone Expense ...................
Accounts Receivable ................
Cash ........................................
40
120
85
235
2,750
$5,350
2,705
5,830
480
$5,350
45
15
2,645
480
Check: $3,125 + $2,705 - $480 = $5,350 adjusted cash balance
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
PROBLEM 7-10A (Continued)
(c)
Internal control features added by the bank reconciliation
process:
 Performance review: Allows for an independent check
on accounting records
But having a bank account also assists with internal
control as follows:
 Safeguards assets: Safeguards cash
 Documentation: Creates a double record of all bank
transactions
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
PROBLEM 7-11A
(a)
Cash and Cash Equivalents balance:
1.
2.
3.
4.
6.
7.
Cash on hand .......................................................
Petty cash fund ....................................................
Bank chequing account ......................................
BMO money market fund ....................................
US Dollar Account ...............................................
American Express credit card slips*
[$500 - ($500 x 4%)] .........................................
Total ..................................................................
$ 1,600
43
7,460
5,000
2,241
480
$16,824
*American Express credit card slips are effectively a
deposit in transit because the funds will be deposited in
the bank account in two days.
(b) 2. The petty cash fund should have been replenished at
year-end. Since this has not happened, the company
must record:

Accounts receivable of $100 for the IOU

Expenses of $55 ($155 - $100 IOU)

Cash shortage of $2

and a reduction of petty cash of $157 ($200 $43)
4. The 6-month term deposit should be recorded as a
short-term investment, and reported as a current asset
on the balance sheet.
5. The cash due from the customer should be recorded as
an account receivable, and reported as a current asset
on the balance sheet. The remainder of the entry should
update merchandise inventory (current asset), sales
(revenue), and cost of goods sold (expense).
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
PROBLEM 7-11A (Continued)
(b) (Continued)
8. The cash received from the property sale is restricted
and should be reported as either a current or
noncurrent asset depending on when the property sale
will be completed.
9. The deposit with Ontario Hydro should be recorded as
an advance or deposit in the current assets section of
the balance sheet.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
PROBLEM 7-1B
(a)
Activities
Application to Cash Receipts
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 usher. The
manager maintains custody of the
cash, and the company accountant
records the cash.
Documentation
procedures
Tickets are prenumbered. Cash
count sheets are prepared. Deposit
slips are prepared. Copies are used
for verification and recording.
Physical controls
A safe is used for the storage of
cash and a machine is used to issue
tickets.
Performance
reviews
Cash counts are made by the
manager at the end of each cashier's
shift. Daily comparisons are made
by the company controller.
Other controls
Cashiers are bonded.
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Accounting Principles, Third Canadian Edition
PROBLEM 7-1B (Continued)
(b) Actions by the usher and cashier to misappropriate cash
could include:
(1) Instead of tearing the tickets, the usher could return the
tickets to the cashier who could resell them, and the
two could divide the cash.
(2) The cashier could issue a less expensive ticket than
paid for, and the usher would admit the customer. The
difference between the ticket issued and the cash
received could be divided between the usher and
cashier.
(3) The cashier and usher could agree to let friends into the
theatre at no cost (or in exchange for an "under the
table" payment).
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Accounting Principles, Third 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.
Establishment of responsibility

2.
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.
Segregation of duties

Freda Stevens counted the funds, made out the deposit
slip, and took the funds to the bank. This made it
possible for Freda to take some of the money and
deposit the rest since there was no external check on
her work. Roger should have counted the funds, with
someone observing him. Then he could have made out
the deposit slip and had Freda deposit the funds.

Sara Billings was collecting tickets and receiving cash
for additional tickets sold. Instead, there should have
been one person selling tickets at the door and a
second person collecting tickets.
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Accounting Principles, Third Canadian Edition
PROBLEM 7-2B (Continued)
3.
4.
Documentation procedures

The tickets were unnumbered. By numbering the
tickets, the students could have been held more
accountable for the tickets.

No record was kept of which students took tickets to
sell or how many they took. In combination with items 1
and 2 above, the student assigned control over the
tickets should have kept a record of which tickets were
issued to each student for resale. (Note: This problem
could have been largely avoided if the tickets had been
sold at the door on the day of the dance.)

There was no control over unsold tickets. This
deficiency made it possible for students to sell tickets,
keep the cash, and tell Roger that they had disposed of
the unsold tickets. Instead, students should have been
required to return the unsold tickets to the student
maintaining control over tickets, and the cash to Roger.
In each case, the students should have been issued a
receipt for the cash they turned in and the tickets they
returned.

Instead of receipts, students simply wrote notes saying
how they used the funds. Instead, it should have been
required that they provided a valid receipt.

A receipt was not received 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.
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.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
PROBLEM 7-3B
(a) Weaknesses & (b) Problems
1. No separation of duties between
receiving the cash and admitting
students to the lessons. The
teachers could admit students for
free or charge extra and pocket the
difference or report fewer students
and pocket the extra money.
(c) Suggested Improvements
The duties of receiving cash and
admitting students should be
assigned to separate individuals.
2. There is no segregation of duties
in the accounting function. The
general manager could prepare
fictitious invoices for payment and
it would not be detected.
An independent person should
approve the invoices for
payment and prepare the bank
reconciliations.
3. Each sales person is responsible
for determining credit policies and
they receive a commission based
on sales. They could provide
credit to an bad credit risk in order
to receive the commission on the
sale.
An independent person should
be responsible for providing
credit to customers.
4. All programmers have access to
the accounting software which
could provide unauthorized
changes to the accounting
records.
Access to the accounting
records should be restricted and
protected with password or
biometric restrictions.
5. Receiving and purchase orders
have been eliminated which could
result in unauthorized purchases
and/or receipts or fictitious
invoices being paid as no support
is required. An employee could set
up a bank account and collect the
payment.
Receiving reports and purchase
orders should be reinstated.
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Accounting Principles, Third Canadian Edition
PROBLEM 7-4B
(a)
Apr.
1 Petty Cash ...................................
Cash ........................................
200
200
8 Cash ............................................ 30,997
Debit Card Expense (116 X $0.75)
87
Credit Card Expense
($12,800 X 3.25%) ..................
416
Sales .......................................
8 Freight Out ..................................
Office Supplies Expense ...........
Advertising Expense..................
Drawings .....................................
Cash Over and Short .................
Cash ($200 - $56) ...................
44
34
50
20
4
144
15 Cash ............................................ 35,760
Debit Card Expense (160 X $0.75) 120
Credit Card Expense
($16,000 X 3.25%) ..................
520
Sales .......................................
15 Postage Expense .......................
Advertising Expense..................
Cleaning Supplies Expense ......
Cash Over and Short .................
Petty Cash ($200 - $175) .......
Cash ($175 - $55) ...................
31,500
36,400
53
39
48
5
25
120
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Accounting Principles, Third Canadian Edition
PROBLEM 7-4B (Continued)
(b) The advantage of accepting debit and bank credit card
transactions as opposed to accepting only cash and
personal cheques from customers is that the company
knows immediately if the customer has enough money in
the bank to pay for their purchases. A second advantage is
that it will likely increase sales if customers can use debit or
credit cards. The disadvantage is that the bank charges a
fee on all transactions using debit and credit cards.
(c)
The benefit of having a petty cash fund is that it can be
used to pay relatively small amounts, while still maintaining
control. Some expenses are best made by cash rather than
by cheque because of the nature of the expense–there are
some instances where either a cheque is not accepted or it
is not practical to issue a cheque. The cost-benefit
principle justifies paying some expenses with cash rather
than issuing a cheque.
There are a number of internal controls over the petty cash
fund that Rossi should follow:
 One person should be appointed the petty cash
custodian and will be responsible for the fund.
 A prenumbered petty cash receipt should be signed by
the custodian and the individual receiving payment for
each payment from the fund.
 The treasurer’s office should examine all payments and
stamps supporting documents to indicate they were
paid when the fund is replenished.
 Surprise counts should be made at any time to
determine whether the fund is intact.
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Weygandt, Kieso, Kimmel, Trenholm, Kinnear
Accounting Principles, Third Canadian Edition
PROBLEM 7-5B
(a)
July
Aug.
1 Petty Cash ...................................
Cash ........................................
250
15 Freight Out ..................................
Postage Expense .......................
Entertainment Expense .............
Miscellaneous Expense ............
Cash Over and Short .................
Cash ($250 - $12) ...................
94
42
47
51
4
31 Freight Out ..................................
Charitable Contributions Expense
Postage Expense .......................
Miscellaneous Expense ............
Cash over and Short .............
Cash ($250 - $10) ...................
82
50
68
42
250
238
2
240
1 Petty Cash...................................
Cash ........................................
100
15 Freight Out ..................................
Entertainment Expense .............
Postage Expense .......................
Supplies Expense ......................
Cash Over and Short .................
Cash ($350 - $57) ...................
90
77
63
59
4
31 Postage Expense .......................
Entertainment Expense .............
Freight Out ..................................
Cash Over and Short .................
Petty Cash ($350 - $300) .......
Cash ($300 - $65) ...................
122
91
73
100
293
1
50
235
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Accounting Principles, Third Canadian Edition
PROBLEM 7-5B (Continued)
(b)
Date
July
Aug.
(c)
Explanation
1
1
31
Petty Cash
Ref. Debit
Credit Balance
250
100
50
250
350
300
If the petty cash fund had not been replenished at year-end
the company must record the petty cash expenses and an
accounts payable (to petty cash) of $285 ($122 + $91 + $73 $1). Only $65 is actually cash at this point in time not $350
as in the petty cash account prior to the August 31
transaction.
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Accounting Principles, Third Canadian Edition
PROBLEM 7-6B
(a)
LISIK COMPANY
Bank Reconciliation
October 31, 2008
Cash balance per bank statement ...................................
Add: Deposit in transit ......................................
$963
Bank error—Lasik cheque ......................
600
Less: Outstanding cheques
($330 + $466 + $587 + $293) ................................
Adjusted cash balance per bank ......................................
Cash balance per books ...................................................
Add: Collection of EFT ....................................... $2,055
Interest revenue .......................................
39
Less: NSF cheque...............................................
$715
Error in Oct. 12 deposit ($856 - $836) .....
20
Error in recording cheque No. 1181
($685 - $568) ...........................................
117
Bank service charge
35
Cheque printing charge ...........................
40
Adjusted cash balance per books ...................................
$10,973
1,563
12,536
1,676
$10,860
$ 9,693
2,094
11,787
927
$10,860
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Accounting Principles, Third Canadian Edition
PROBLEM 7-6B (Continued)
(b) May 31 Cash .............................................
Accounts Receivable .............
Interest Revenue ....................
2,094
31 Accounts Receivable—W. Hoad
715
Sales .............................................
20
Accounts Payable—Helms & Co.
117
Bank Charges Expense ($35 + $40) 75
Cash .........................................
2,055
39
927
Check: $9,693 + $2,094 - $927 = $10,860 adjusted cash
balance
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Accounting Principles, Third Canadian Edition
PROBLEM 7-7B
(a)
General Ledger Cash Balance:
Book balance, February 29
(Adjusted cash balance per bank reconciliation)
Add: Cash receipts ...................................................
Less: Cash payments ................................................
Unadjusted cash balance, March 31 .......................
$12,258
10,673
(11,821)
$11,110
(b)
YAP CO.
Bank Reconciliation
March 31, 2008
Cash balance per bank statement ...................................
Add: Deposits in transit ..................................................
$12,500
1,025
13,525
Less: Outstanding cheques
No. 3470 ................................................ $1,535
No. 3479 ................................................
159
No. 3481 ................................................
862
No. 3482 ................................................ 1,126
Bank error—cheque #3474 .......................
200
Adjusted cash balance per bank ......................................
3,882
$9,643
Solutions Manual
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PROBLEM 7-7B (Continued)
(b) (Continued)
Cash balance per books ...................................................
Add: Correction to cheque #3473
($1,641 – $1,461)...................................................
Interest revenue .....................................................
Less: Loan payment—principal ........................ $1,000
Loan payment—interest ..........................
62
NSF cheque Mr. Jordan ...........................
550
Service charge..........................................
49
Correction in recording cash receipts
March 20 ($1,823 - $1,832) .....................
9
Adjusted cash balance per books ...................................
(c)
Mar. 31 Cash ............................................
Accounts Payable .................
Interest Revenue ...................
203
31 Note Payable...............................
Interest Expense ........................
Accounts Receivable .................
Bank Charges Expense .............
Sales ............................................
Cash ........................................
1,000
62
550
49
9
$11,110
180
23
11,313
1,670
$9,643
180
23
1,670
Check: $11,110 + $203 - $1,670 = $9,643 adjusted cash balance
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PROBLEM 7-8B
(a)
Book balance, October 31 (from Oct. 31 bank
reconciliation) .......................................................
Add: Cash receipts per journal ............................
Less: Cash payments per journal .........................
Unadjusted cash balance, November 30 .............
$ 8,496
15,690
(14,026)
$10,160
(b)
MALONEY COMPANY
Bank Reconciliation
November 30, 2008
Cash balance per bank statement ..................................
Add: Deposits in transit .................................................
Less: Outstanding cheques
No. 2451 ...........................................
$1,260
No. 2472 ...........................................
504
No. 2478 ...........................................
538
No. 2482 ...........................................
612
No. 2484 ...........................................
830
No. 2485 ...........................................
975
No. 2487 ...........................................
1,200
Adjusted cash balance per bank .....................................
Cash balance per books ..................................................
Add: EFT collected by Bank ........................
$2,479
Error in Nov. 20 deposit ($2,966 - $2,699)
267
Less: NSF cheque – Pendray Holdings .......
$ 260
Error in recording cheque No. 2476
($2,830 - $2,380) ................................
450
Loan payment ......................................
2,250
Adjusted cash balance per books ..................................
$14,527
1,338
15,865
5,919
$ 9,946
$10,160
2,746
12,906
2,960
$ 9,946
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PROBLEM 7-8B (Continued)
(c)
Nov. 30 Cash ............................................
Accounts Receivable ............
Interest Revenue ...................
Accounts Receivable ............
2,746
30 Accounts Receivable .................
Accounts Payable ......................
Note Payable...............................
Interest Expense ........................
Cash ........................................
260
450
2,000
250
2,430
49
267
2,960
Check: $10,160 + $2,746 - $2,960 = $9,946 adjusted cash balance
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PROBLEM 7-9B
(a)
Balance per Bank Statement
Balance April 30, 2008...............................................
Add: Deposits ............................................. $10,528
Interest ...............................................
12
Less: Cheques cleared ............................... $5,608
NSF cheques .....................................
280
Service charge...................................
28
Unadjusted bank balance, May 31, 2008 .............
$ 4,261
10,540
14,801
5,916
$8,885
Balance Per Books
Reconciled balance, (per April 30 bank reconciliation)
($4,261 – $217 – $326 – $105) .................................
$ 3,613
Add: Cash receipts ...................................................
11,172
Less: Cash payments ................................................
10,776
Unadjusted cash balance, May 31, 2008 .................
$ 4,009
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PROBLEM 7-9B (Continued)
(b)
KURJI’S APPLIANCES
Bank Reconciliation
May 31, 2008
Unadjusted bank balance .................................................
Add: Deposits in transit ..................................................
Less: Outstanding cheques
No. 290 .................................................. $ 105
No. 307 .................................................. 3,266
No. 310 .................................................. 2,400
Adjusted bank balance......................................................
Unadjusted cash balance .................................................
Add: Interest .....................................................
$ 12
Error in cheque # 306 ($150 - $105)........
45
th
Error in May 5 deposit ($2,620 – $2,260)
360
Less: NSF cheque ..............................................
$280
Bank service charges ..............................
28
Adjusted cash balance ......................................................
$8,885
1,004
9,889
5,771
$4,118
$4,009
417
4,426
308
$4,118
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PROBLEM 7-9B (Continued)
(c)
May 31 Cash ...........................................
Interest Revenue ...................
Telephone Expense...............
Accounts Receivable ............
417
31 Accounts Receivable—M. Rafique 280
Bank Charges Expense .............
28
Cash ........................................
12
45
360
308
Check: $4,009 + $417 - $308 = $4,118 adjusted cash balance
(d) The reported cash balance on the May 31, 2008 balance
sheet is $4,118.
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PROBLEM 7-10B
AURA WHOLE FOODS
Bank Reconciliation
October 31, 2008
(a)
Cash balance per bank statement
Less: Outstanding cheques
No.
Amount
762
$514
783
160
784
267
862
171
863
325
864
173
Adjusted cash balance per bank
$19,460
Cash balance per books
Add: Credit memo (collection of EFT)
Adjusted balance per books (before theft)
Less: Amount of theft
Adjusted cash balance per books
$19,641
750
20,391
2,541
$17,850
1,610
$17,850
(b) The cashier attempted to cover the theft of $2,541 by:
1. Not including three outstanding cheques totalling $941
(No. 762, $514; No. 783, $160; and No. 784, $267) in the
list of outstanding cheques.
2.
Added the outstanding cheques to the cash balance
per books incorrectly. The total should have been $100
higher ($20,310 not $20,210).
3. Subtracted the $750 credit memo from the bank
balance. It should be added to the book balance. This
concealed $1,500 ($750 x 2) of the theft.
Check: $941 + $100 + (2 x $750) = $2,541
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PROBLEM 7-10B (Continued)
(c)
Combining the duties of cashier and bookkeeper is not a
correct application of these internal control activities:

Performance reviews have not been properly conducted
because the cashier/bookkeeper prepared the bank
reconciliation.

Segregation of duties has not been properly followed
because the cashier had access to the accounting
records and also prepared the bank reconciliation.
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PROBLEM 7-11B
(a)
Cash balance:
1. Cash on hand ...................................................... $ 5,000
2. Petty cash fund ...................................................
125
3. Commercial bank savings account .................. 100,000
Commercial bank chequing account ...........
25,000
US bank account ............................................
48,000
10. Special bank account–customer cash deposits
9,250
Total................................................................. $187,375
(b) If the company combined its cash and cash equivalents,
the money market fund of $32,000 and the treasury bills of
$75,000 would also be included.
(c)
2.
The petty cash fund should have been replenished at
year-end. Since this has not happened, the company
must record the petty cash expenses and reduce petty
cash by $375. Only $125 is actually cash at this point in
time. Once the petty cash fund is reimbursed, $500
cash will be available once again.
4.
Restricted cash of $150,000 would be reported as a
current or noncurrent asset, depending on the
intended period of use.
5. An unused line of credit would not be reported on the
balance sheet. It may be disclosed in the notes.
6. Amounts due from employees (travel advances) would
be included in Accounts Receivable.
7. Short-term investments (money market fund, treasury
bills and shares) would be listed separately in the
current asset section (unless combined as the money
market fund and t-bills were in (b)).
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PROBLEM 7-11B (Continued)
(c) (Continued)
8. Unused postage stamps would be included in prepaid
expenses or supplies.
9. NSF cheques would be included in Accounts
Receivable, assuming the company expects collection.
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CONTINUING COOKIE CHRONICLE
Part 1
The weaknesses in internal accounting controls in the system
recommended by John are:
(1)
(2)
(3)
(4)
The cash could be stolen from John’s vehicle before it is
deposited in the bank.
John could potentially steal from the company and then
cover the theft because of a lack of segregation of duties
between the handling of cash, bank reconciling process
and recording of transactions in the accounting records.
The accounting information for the business could be lost
or stolen if it is all stored on John’s laptop.
John should not be able to write cheques to himself as this
leaves the company vulnerable to theft.
Improvements should include the following:
(1)
(2)
(3)
Cash should be deposited in the bank daily. At a minimum
the cash should be locked in a safe until such as time as it
can be deposited.
John should be responsible for the accounting function
only. Natalie (or some other independent person) should
sign all cheques and make all deposits. Cheques should
only be signed when there is documentation present to
support the payment. All invoices should be stamped
“PAID” to avoid duplicate payment.
Bank reconciliations should be prepared by a person
independent of the handling and recording of cash.
However, this may not be possible in a small organization
such as Cookie Creations. At a minimum, Natalie and not
John should prepare bank reconciliations monthly.
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CONTINUING COOKIE CHRONICLE (Continued)
Part 1 (Continued)
(4)
(5)
The accounting records should be maintained on site and
regular back-ups should be prepared. It would be best if
John used a computer at Cookie Creations to prepare the
accounting information; however, if he is going to use his
laptop, Natalie should ensure that she is provided with a
regular back-up of all the accounting records. This ensures
that if John should ever lose his laptop or decide to no
longer perform Cookie Creation’s accounting, Natalie
would still have access to the company’s accounting
records.
John should submit a monthly invoice to Natalie for her
approval. Natalie should then write and sign the cheque.
Part 2
(a)
COOKIE CREATIONS
Bank Reconciliation
June 30, 2008
Cash balance per bank statement ...................................
Add: Deposit in transit .....................................
$110
Bank error Cheque No. 603 ($452 - $425)
27
Less: Outstanding cheques ($238 + $247) ....................
Adjusted cash balance per bank .........................
Cash balance per books ...................................................
Less: Service charge ..........................................
$ 13
th
Error in deposit June 20 ($155 - $125) .
30
Telus ..........................................................
85
NSF cheque ($100 + $35 service charge)
135
Adjusted cash balance per books ...................................
$3,359
137
3,496
485
$3,011
$3,274
263
$3,011
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CONTINUING COOKIE CHRONICLE (Continued)
Part 2 (Continued)
(b) June 30 Bank Charge Expense ...............
Teaching Revenue .....................
Telephone Expense ...................
Accounts Receivable—Ron Black
Cash ........................................
13
30
85
135
263
Check: $3,274 - $263 = $3,011 adjusted cash balance
(c)
If a balance sheet were prepared, cash at June 30 th, 2008
would be $3,011.
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BYP 7-1 FINANCIAL REPORTING AND ANALYSIS
(a)
Regarding the company’s system of internal control, the
Management’s Responsibilities for Financial Reporting
states that “such systems are designed to provide
reasonable assurance that the financial information is
accurate, relevant and reliable, and that the Company’s
assets are appropriately accounted for and adequately
safeguarded.
The Auditor’s Report does not comment on the company’s
system of internal controls.
(b) According
to
the
Statement
of
Management’s
Responsibility for Financial Reporting, management is
responsible for the financial statements. Management has
responsibility for preparing the statements and ensuring
the company maintains an adequate system of internal
controls.
(c)
The Company’s external auditors are Ernst & Young LLP.
(d) In 2006, cash decreased by $6,752,000.
(e)
(1)
(2)
(3)
(4)
$19,266,000
2.95% ($19,266,000  $653,206,000)
5.22% ($19,266,000  $368,842,000)
7.72% ($19,266,000  $249,428,000)
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BYP 7-2 INTERPRETING FINANCIAL STATEMENTS
(a)
Cash equivalents are highly liquid investments, with
maturities of three months or less when purchased, that
can be converted into specific amounts of cash. They
include money market funds, money market savings
certificates, bank certificates of deposit, and treasury bills
and notes. Cash equivalents differ from other types of
short-term investments in that they are very liquid (that is,
easily turned into cash) and have a low risk of declining in
value while held.
(b)
Working
Capital
Current
Ratio
2005
2004
$80,089 - $7,688 =
$72,401
$72,804 - $7,271 =
$65,533
$80,089
 10.4 : 1
$7,688
$72,804
 10.0 : 1
$7,271
The company’s current ratio has remained fairly constant
over 2005 whereas the industry average has decreased.
The company’s current ratio is significantly above the
industry average in both 2005 and 2004.
(c)
Having cash and cash equivalents available provides a
company with flexibility; however, uninvested cash does
not earn a very high return. Therefore a company will want
to carefully monitor the amount of cash it keeps on hand to
provide a balance between flexibility and return.
(d) Restricted cash is cash that is not available for general use
because it is restricted for a special purpose.
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BYP 7-3 COLLABORATIVE LEARNING ACTIVITY
All of the material supplementing the collaborative learning
activity, including a suggested solution, can be found in the
Collaborative Learning section of the Instructor Resources site
accompanying this textbook.
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BYP 7-4 COMMUNICATION ACTIVITY
Ms. L.S. Osman
Tenacity Corporation
Dear Ms. Osman:
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
ordering parts, taking delivery, authorizing payments and
signing cheques it is possible that the clerk could pay himself
as a payee. Also, without segregating the signing process from
the bank reconciliation process, any misappropriation of funds
could proceed undetected.
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BYP 7-4 (Continued)
To minimize the risk of misappropriation of cash the following
segregation of duties should be implemented:
1.
There should be segregation between the individuals
who order parts, take delivery of the auto parts,
authorize the payments and then sign the cheques for
the payments of the auto parts.
2.
Different individuals should sign cheques and prepare
the monthly bank reconciliation.
3.
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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BYP 7-5 ETHICS CASE
(a)
The stakeholders in this situation are the clients of the
banks and the bank’s managers, employees, and
shareholders.
(b) The amount of revenue depending on order of processing
would be:
(1)
(2)
(3)
(c)
Largest to smallest:
5 bounced cheques x $35 = $175
Smallest to largest:
1 bounced cheque x $35 = $35
In order of cheque number:
4 bounced cheques x $35 = $140
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 $35 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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