978-0077862275 Chapter 8 Solution Manual Part 1

Chapter 08 – Cash and Internal Controls

Chapter 8

Cash and Internal Controls

QUESTIONS

1. The seven broad principles are: Establish responsibilities; Maintain adequate records;

2. Internal control procedures become especially critical when the manager of a business

4. Separation of custody from recordkeeping of an asset encourages the asset custodian to

5. If individual departments were permitted to deal directly with suppliers, the amount of

8. A petty cash receipt is a document stating that a payment has been made from petty

9. Depositing all receipts on the day of receipt (1) creates an independent record of the

10. During the year ended September 28, 2013, cash (and equivalents) of $33,774 million is

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Chapter 08 – Cash and Internal Controls

11. Google’s net income for 2013 was $12,920 million. Further, it reported a net increase in

cash (and equivalents) of $4,120 million. These two figures are different because (1) net

12. Samsung’s cash (liquid assets) at December 31, 2013, equals 16,284,780 (all in KRW₩

Its cash (liquid assets) decreased from ₩18,791,460 at December 31, 2012, to

13. Samsung’s cash and equivalents decreased by 2,506,680 million during 2013;₩

specifically, from 18,791,460 to 16,284,780 (all in KRW millions). Its statement of₩ ₩

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Chapter 08 – Cash and Internal Controls

QUICK STUDIES

Quick Study 8-1 (10 minutes)

1. True

Quick Study 8-2 (10 minutes)

1. a (cash)

Quick Study 8-3 (10 minutes)

a. False

Quick Study 8-4 (10 minutes)

1. (a) Petty Cash………………………………………………… 150

(b) Entertainment Expense……………………………… 70

2. Answers: a and c. The Petty Cash account is credited when:

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Chapter 08 – Cash and Internal Controls

Quick Study 8-5 (15 minutes)

Bank or Book Side Add or Subtract Adjusting Entry or Not

a. (1) Book (2) Add (3) Adjusting entry required

b. (1) Book (2) Subtract (3) Adjusting entry required

Quick Study 8-6 (25 minutes)

NOLAN COMPANY

Bank Reconciliation

June 30, 2015

Bank statement balance…. $21,332 Book balance………………………………………………………………………….$22,352

Add: Add:

Interest earned……………………………………………………………………… 23

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Chapter 08 – Cash and Internal Controls

Quick Study 8-7 (15 minutes)

a. A bank reconciliation is a formal review process that requires the person to

precisely identify all transactions and events, and their amounts, that

b. A bank reconciliation has the potential to uncover several kinds of frauds

or errors that an online review is unlikely to reveal. Those include the

following:

A company makes a deposit to its account but that deposit is incorrectly

added to another company’s account. A bank reconciliation would

The bank incorrectly pays a common vendor’s bill from the company’s

cash account, when that vendor should have been paid from some other

The bank incorrectly pays a larger amount to a payee than what is written

on the company’s check to that payee. An online review would not

A company check writer incorrectly records a check to a regular vendor

for services provided at an amount larger than the bill received. A bank

Numerous other examples can be listed…

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Chapter 08 – Cash and Internal Controls

Quick Study 8-8 (15 minutes)

Days’ sales uncollected = x 365

2015 2014

Interpretation: It took the company 0.9 days less to collect on its

accounts receivable in 2015 (14.6 days) compared with 2014 (15.5

days).

The collection of accounts receivable is slightly improving according to

Quick Study 8-9A (10 minutes)

More generally, the usual documents that are prepared as part of a voucher

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Accounts receivable

Net sales

Chapter 08 – Cash and Internal Controls

Quick Study 8-10B (15 minutes)

(b) The advantage of this method is that the Discounts Lost account

highlights for management (on the income statement) the costs

Quick Study 8-11 (10 minutes)

a. The purposes and principles of internal control systems are

fundamentally the same for accounting systems reporting under IFRS

b. Internal controls for cash are fundamentally the same worldwide.

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Chapter 08 – Cash and Internal Controls

EXERCISES

Exercise 8-1 (10 minutes)

Evaluation

The company’s internal control system failed to require separation of asset

custody from asset recordkeeping.

Principles Ignored

(1) The recordkeeper should not have been allowed to sign the company’s

checks.

(2) Since a loss was incurred, the company apparently had not bonded its

employee. If it had, the bonding company would have insured the loss.

Exercise 8-2 (15 minutes)

1. A cash register (with a locked record) should be used at the sales stand

—it should also be anchored to the stand. If a cash register cannot be

used, the total sales value of the towels, coolers, and sunglasses given

2. The employee should sign a receipt for the total amount of cash he or

she is given each weekend. Each time the employee makes a

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Chapter 08 – Cash and Internal Controls

Exercise 8-3 (10 minutes)

1. A liquid asset refers to an asset that can be readily converted into

another type of asset or be used to satisfy an obligation. A cash

3. Effective cash management applies the following five principles:

a. Encourages collection of receivables.

Exercise 8-4 (15 minutes)

(a) Internal Control Problems

(1) A major internal control problem is that the recordkeeper (who has

(2) The recordkeeper might also delay recording a cash receipt from a

(3) The recordkeeper also could pocket cash and claim that a payment was

never received and apparently lost in the mail.

(b) Internal Control Recommendations

(1) If only one person is present when the mail is opened, that person may

steal cash and claim it was never received. If possible, two people

(2) It is important the recordkeeper not have physical control over cash.

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Chapter 08 – Cash and Internal Controls

(

Exercise 8-5 (20 minutes)

1.

2.

Sept. 30 Merchandise Inventory*…………………………………. 40

Cash……………………………………………………….. 246

3.

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