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
3. Responsibility for related transactions should be divided so that the work of one
department or individual acts as a check on that of another.
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
6. The limitations of internal control arise from two sources: the human element (human
error or human fraud) and the cost-benefit principle.
7. Cash is most liquid; and least liquid is a building. The four assets ordered from most to
least liquid are: cash, accounts receivable, inventory, and building.
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 December 31, 2011, cash (and equivalents) of $141,145 thousand
11. Arctic Cat’s net income for 2011 was $13,007 thousand. Further, it reported a net
decrease in cash (and equivalents) of $17,111 thousand. These two figures are different
12. KTM’s cash (liquid assets) at December 31, 2011, equals €14,962 (all in EUR thousands).
It is the third largest current asset and makes up about 7.7% of its current assets.
13. Piaggio’s cash and equivalents decreased by €2,956 thousand during 2011; specifically,
from €154,758 thousand to €151,802 thousand (Instructor note: these cash numbers are
QUICK STUDIES
Quick Study 8-1 (10 minutes)
1. The main objective of internal control procedures is to safeguard the
assets of the business. This objective is best accomplished by designing
2. Separation of recordkeeping for assets from the custody over assets is
3. The responsibility for a transaction should be divided between two or more
Quick Study 8-2 (10 minutes)
1. The cash category includes currency and coins along with amounts on
deposit in bank accounts, checking accounts, and savings accounts.
orders.
2. The cash equivalents category includes short-term, highly liquid
investment assets meeting two criteria: (1) readily convertible to a known
money market funds.
3. Liquidity refers to a company’s ability to pay for its near-term obligations.
Quick Study 8-3 (10 minutes)
1. The three basic guidelines for safeguarding cash are:
(a) Separate the duties of those who handle (have custody of) cash from
those that keep cash records.
2. (a) Voucher system of control, and (b) Petty cash system of control.
Quick Study 8-4 (15 minutes)
(1)
(2)
a. (i) Book (ii) Addition Adjusting entry required
b. (i) Book (ii) Subtraction Adjusting entry required
Quick Study 8-5 (10 minutes)
1. (a) Petty Cash …………………………………………………. 150
Cash ……………………………………………………. 150
To establish the petty cash fund.
2. The Petty Cash account is credited when either (1) the dollar amount of
Quick Study 8-6 (25 minutes)
NOLAN COMPANY
Bank Reconciliation
June 30, 2013
Bank statement balance ……….
$21,332
Book balance …………………………..
$22,352
Add:
Add:
Deposit of June 30 ……………...
4,724
Recording error on check….……………………….
9
Interest earned …………………….…….
23
26,056
22,384
Deduct:
Deduct:
Outstanding checks …………...
3,713
Bank service charge …………..………………
41
$22,343
Adjusted book balance ………..…………………
$22,343
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
immediately identify this bank error. However, an online review would
not identify this error as nothing would “jump out” as unusual; the only
potential way of uncovering this would be if the person doing the review
remembered each and every deposit throughout the period of the bank
statement (not likely).
bank reconciliation would readily identify this bank error.
• 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
reconciliation would identify this error as the check amount in the bank
statement would differ from the amount recorded by the bookkeeper. An
online review would not identify this error as nothing unusual would
Quick Study 8-8 (15 minutes)
Days’ sales uncollected = x 365
Interpretation: The collection of accounts receivable seems to be
Quick Study 8-9A (10 minutes)
The documents in a voucher system are:
Purchase requisition, Purchase order, Invoice, Receiving report,
Invoice approval, and Voucher.
Accounts receivable
Net sales
Quick Study 8-10B (15 minutes)
(a) A Discounts Lost account is employed with the Net Method of
recording purchases of inventory.
Quick Study 8-11 (10 minutes)
a. The purposes and principles of internal control systems are
principles do not change.
b. Internal controls for cash are fundamentally the same worldwide.
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.
Exercise 8-2 (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
customer until more cash comes in at a later date from a second
(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
Exercise 8-3 (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
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
purchase, he or she should obtain a signed sales receipt for the
Exercise 8-4 (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
2. Companies usually invest idle cash in cash equivalents to earn a higher
return on these assets.
3. Effective cash management applies the following five principles:
a. Encourages collection of receivables.
Exercise 8-5 (20 minutes)
1.
Jan. 1
Petty Cash ………………………………………………………
200
Cash ……………………………………………………….
200
To establish a petty cash fund.
2.
Jan. 8
Postage Expense ………………………………………….…
74
Merchandise Inventory* ………………………………..…
29
Delivery Expense ………………………………………….…
16
Miscellaneous Expenses …………………………..….…
43
Cash ……………………………………………………….
162
To reimburse the petty cash fund.
* Transportation-in costs are included in Merchandise
Inventory under a perpetual system.
3.
Jan. 8
Postage Expense ………………………………………….…
74
Merchandise Inventory ……………………………………
29
Delivery Expense ………………………………………….…
16
Miscellaneous Expenses …………………………..….…
43
Cash ……………………………………………………….
162
To reimburse the petty cash fund.**
Jan. 8
Petty Cash ………………………………………………………
250
Cash ……………………………………………………….
250
To increase the petty cash fund.**
** The two January 8 entries can be combined into one entry.
Exercise 8-6 (20 minutes)
1.
Sept. 9
Petty Cash ………………………………………………………
350
Cash ……………………………………………………….
350
To establish a $350 petty cash fund.
2.
Sept. 30
Merchandise Inventory* ………………………………..…
40
Postage Expenses ………………………………………..…
123
Miscellaneous Expenses …………………………..….…
80
Cash Short and Over …………………………………….…
3
Cash ……………………………………………………….
246
To reimburse the petty cash fund.
3.
Oct. 1
Petty Cash ………………………………………………………
50
Cash ……………………………………………………….
50
To increase the petty cash fund to $400.
Exercise 8-7 (20 minutes)
Bank Balance
Book Balance
Not Shown on
Add
Deduct
Add
Deduct
Adjust
Reconciliation
1.
NSF check from customer returned on Sept.
25 but not recorded by this company.
x
Cr.
2.
Interest earned on the account.
x
Dr.
3.
Deposit made on September 5 and
processed by bank on September 6.
x
4.
Check written by another depositor but
charged against this company‘s account.
x
5.
Bank service charge.
x
Cr.
6.
Checks outstanding on August 31 that
cleared the bank in September.
x
7.
Check written against the company account
and cleared by the bank; erroneously not
recorded by the company recordkeeper.
x
Cr.
8.
Principal and interest on a note receivable to
this company is collected by the bank but not
yet recorded by the company.
x
Dr.
9.
Checks written and mailed to payees on
October 2.
x
10.
Checks written by the company and mailed
to payees on September 30.
x
11.
Deposit made on September 30 after the
bank closed.
x
12.
Special bank charge for collection of note in
No. 8 on company‘s behalf.
x
Cr.
Exercise 8-8 (10 minutes)
1. The voucher system of control establishes procedures for: (a) Verifying,
2. All expenditures should be overseen by a voucher system of control
(not only the purchase of merchandise).
3. The voucher is initially prepared by the accounting department when it
Exercise 8-9 (25 minutes)
WRIGHT COMPANY
Bank Reconciliation
May 31, 2013
Bank statement balance ……..
$25,800
Book balance …………………………..
$27,500
Add
Deposit of May 31 ………………
6,200
Bank error …………………………..
400
32,400
Deduct
Deduct
Outstanding checks ………….
5,600
Bank service charge …………..………………
100
______
NSF check ……………………………………………………….
600
$26,800
Adjusted book balance ………..…………………
$26,800
Exercise 8-10 (25 minutes)
DEL GATO CLINIC
Bank Reconciliation
June 30, 2013
Bank statement balance ……..
$10,555
Book balance …………………………..
$11,589
Add
Add
Deposit of June 30 …………….
2,856
Error on Ck. No. 919 …………………………..
9
13,411
11,598
Deduct
Deduct
Outstanding checks ………….
1,829
Bank service charge …………..………………
16
$11,582
Adjusted book balance ………..…………………
$11,582
Exercise 8-11 (10 minutes)
June 30
Cash …………………………………………………………..
9
Utilities Expense …………………………………...
9
To correct a journal entry error.
30
Miscellaneous Expenses …………………………..
16
Cash ……………………………………………………..
16
To record bank service charge.
Exercise 8-12 (15 minutes)
(a) Days’ sales uncollected on December 31, 2012:
Days’ sales uncollected on December 31, 2013:
(b) Evaluation: The change from 33.5 to 45.4 days’ sales uncollected
indicates that the receivables have become less liquid. While the
$747,000
Exercise 8-13A (10 minutes)
Exercise 8-14B (25 minutes)
a.
Recording inventory at gross amounts
Oct. 2
Merchandise Inventory …………………………………….…..
3,000
Accounts Payable …………………………………………..
3,000
To record merchandise purchases.
10
Accounts Payable ………………………………………………..
500
Merchandise Inventory …………………………………..
500
To record credit memo for returns.
17
Merchandise Inventory …………………………………….…..
5,400
Accounts Payable …………………………………………..
5,400
To record merchandise purchases.
26
Accounts Payable ………………………………………………..
5,400
Merchandise Inventory* ……………………………..…..
108
Cash ………………………………………………………….…..
5,292
To record payment for merchandise less the
discount. *($5,400 x .02)
31
Accounts Payable ………………………………………………..
2,500
Cash ………………………………………………………….…..
2,500
To record payment for merchandise less the returns
($3,000 – $500).