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Chapter 8
Internal Control and Cash
Excel Application Exercise
Solution
- Additional issues: The starter list is included on the instructor’s solution spreadsheet, but be sure to let students discuss any additional considerations they have included.
- The sample instructor’s solution spreadsheet indicates that the “do nothing” alternative is the best choice. Students may have different answers, depending on how they scored each of their issues. You may wish to ask students if truly “doing nothing” is a viable option, even though we always include it in such an analysis.
- Students will have different answers for Van Allen’s (and the board’s) response, depending both on (a) their spreadsheet solutions and (b) novice “gut feel” for such ethics-based decisions. Be sure to encourage all viewpoints so students can appreciate the ethical positions held by class members. Chapter 8 Internal Control and Cash 535
Quick Check
Answers:
- d 3. b 5. b 7. c 9. a
- a 4. d 6. d 8. c 10. c Explanations:
- c. Adjusted cash balance is $680 ($800 – Service charge $20 – NSF check $100) 536 Accounting 6/e Solutions Manual
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Differences:
- External auditors are entirely independent of the business. Internal auditors are employees of the business.
- External audits are designed to determine whether the company’s financial statements are prepared in accordance with generally accepted accounting principles. Internal audits are designed to ensure that employees follow company policies and that operations run efficiently. Similarities:
- Both types of auditors are independent of the operations they examine.
- Both types of auditors suggest improvements that help the business run more efficiently. 538 Accounting 6/e Solutions Manual
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Merrill Lynch could have:
- Kept all accounting duties away from the cashier. This would have kept the cashier from covering her theft with entries in the accounting records.
- Required employees to take vacations and rotated employees from job to job. These measures would have placed another person in the cashier’s job and probably would have brought the theft to light earlier.
- Used an internal auditor. Darlyne Lopez would be less likely to steal and manipulate customer accounts if she knew her work would be audited. Only two measures are required. Chapter 8 Internal Control and Cash 539
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Good Times Video Productions Bank Reconciliation May 31, 20XX BANK BOOKS Balance, May 31 $3,600 Balance, May 31 $2, Add: Add: Deposit in transit 200 Bank collection 630 3,800 Interest revenue 10 2, Less: Less: Outstanding checks (900) Service charge (20) Adjusted bank balance $2,900 Adjusted book balance $2, Amounts agree Chapter 8 Internal Control and Cash 541
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May 30 Cash……………………………………………. 630 Accounts Receivable—Kelly Brooks….. 630 Collection on account. 31 Cash……………………………………………. 10 Interest Revenue………………………….. 10 Interest earned on bank balance. 31 Miscellaneous Expense…………………….. 20 Cash…………………………………………. 20 Bank service charge.
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Lane will notice a gap in the sequence of sales receipts for the receipt Albrecht destroyed. This knowledge will lead Lane to investigate what happened to the missing sales receipt and what happened to the related cash. 542 Accounting 6/e Solutions Manual
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- A dishonest purchasing agent could: Purchase goods and have them delivered to his home or other location that he controls, or otherwise take the goods for personal use. Approve payment by the company for goods that he used for personal gain. Companies avoid this internal control weakness by separating the following duties: purchasing goods receiving goods approving and paying for goods
- Two controls over cash resulting from payment by check: Each check acts as a source document. To be valid, the check must be signed by an authorized official, so each payment by check draws the attention of management. 544 Accounting 6/e Solutions Manual
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Journal
DATE ACCOUNTS AND EXPLANATIONS POST. REF. DEBIT CREDIT Apr. 1 Petty Cash 200 Cash 200 30 Office Supplies 111 Delivery Expense 33 Entertainment Expense 37 Cash 181
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Allen should report the errors to Kwan because Kwan is Allen’s supervisor, and Kwan is responsible for the errors. If Kwan fails to take action, then Allen should report the errors to the owner of the business. In any event, outsiders who are relying on Chinatown’s financial statements must be made aware of the need to correct the reported net income figure. Chapter 8 Internal Control and Cash 545
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a. Weakness. The control environment will not be as effective as it would be if top management led in establishing internal controls. b. Weakness. The accounting department should not be allowed to order merchandise. An accountant could have goods sent to a location he or she controls, then approve payment for the goods. c. Strength. The computer operator cannot steal cash because he or she does not handle the cash of the business. d. Weakness. The sales clerk should not have access to the control tape because he or she could steal cash and delete a cash receipt from the tape. e. Weakness. The officer should examine the payment packet to ensure that the payment is for the correct amount. Chapter 8 Internal Control and Cash 547
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The missing internal control characteristic in each situation is: a. Other controls (no job rotation). b. Other controls (documents and records—no receiving report). c. Other controls (not depositing cash frequently enough for adequate security). d. Separation of duties (same person ordering merchandise and approving payment). e. Separation of duties (same person selling tickets and taking tickets).
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a. 2 e. 1 b. 3 f. 2 c. 2 g. 4 d. 1 h. 3 548 Accounting 6/e Solutions Manual
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Zane Grey Bank Reconciliation October 31, 20XX BANK: Balance, October 31 $2, Add: Deposit in transit 1, 3, Less: Outstanding checks: (467) Adjusted bank balance $3, BOOKS: Balance, October 31 $3, Add: EFT collection—rent 400 3, Less: Service charge $ (12) NSF checks (74) Charge for printed checks (9) Correction of book error— Recorded $290 check as $29 (261) (356) Adjusted book balance $3, 550 Accounting 6/e Solutions Manual
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Journal
DATE ACCOUNTS AND EXPLANATIONS POST. REF. DEBIT CREDIT Oct. 31 Cash 400 Rent Revenue 400 EFT collection of rent. 31 Miscellaneous Expense ($12 + $9) 21 Cash 21 Bank service charge and charge for printed checks. 31 Accounts Receivable 74 Cash 74 NSF checks returned by bank. 31 Salary Expense ($290 – $29) 261 Cash 261 Correction of book error.
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The adjusted bank balance shows the company’s true cash balance , which is $2,300. It appears that the employee has stolen $1,000 ($3,300 on the books – $2,300 in the bank). Chapter 8 Internal Control and Cash 551
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Req. 1
Journal
DATE ACCOUNTS AND EXPLANATIONS POST. REF. DEBIT CREDIT Petty Cash 300 Cash in Bank 300 To set up the petty cash fund. Delivery Expense 22 Postage Expense 52 Supplies Expense ($34 + $85) 119 Miscellaneous Expense ($3 + $13) 16 Cash in Bank 209 To replenish the petty cash fund. Req. 2 Before replenishment: Petty cash tickets totaling……………………... $ Currency and coins totaling…………………… 91 Imprest total………………………………………. $ After replenishment: Currency and coins totaling…………………… $ Chapter 8 Internal Control and Cash 553
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- An imprest petty cash system maintains the Petty Cash account at the prescribed balance at all times. The account balance equals the sum of (a) cash still in the fund plus (b) petty cash tickets for payments that have been made from the fund. The main control feature of an imprest system is that it clearly identifies the amount of cash for which the custodian is responsible.
Journal
DATE ACCOUNTS AND EXPLANATIONS POST. REF. DEBIT CREDIT Nov. 1 Petty Cash 400 Cash in Bank 400 To open the petty cash fund. 30 Travel Expense 80 Office Supplies 60 Delivery Expense 40 Cash in Bank 180 To replenish the petty cash fund.
Petty Cash Nov. 1 400 Petty Cash balance at all times……………………… $ 554 Accounting 6/e Solutions Manual
