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Title: Problem 8-3B
Part 1
Jan. 3 Petty Cash......................................................................................................... 150.00
Cash............................................................................................................ 150.00
To establish the petty cash fund.
Jan. 14 Office Supplies Expense................................................................................... 14.29
Merchandise Inventory*.................................................................................... 19.60
Repairs Expense—Computer............................................................................ 38.57
Miscellaneous Expenses.................................................................................... 12.82
Cash Over and Short......................................................................................... 2.44
Cash............................................................................................................ 87.72
To reimburse the petty cash fund.
* Transportation-in costs are included in Merchandise Inventory under a
perpetual system.
Jan. 15 Petty Cash......................................................................................................... 50.00
Cash............................................................................................................ 50.00
To increase the petty cash fund.
Jan. 31 Advertising Expense......................................................................................... 50.00
Postage Expenses.............................................................................................. 48.19
Delivery Expense.............................................................................................. 78.00
Cash Over and Short......................................................................................... 6.46
Cash............................................................................................................ 182.65
To reimburse the petty cash fund.**
Jan. 31 Petty Cash......................................................................................................... 50.00
Cash............................................................................................................ 50.00
To increase the petty cash fund.**
**The Jan. 31 entries can be combined into one entry.
Part 2
QA_Ori: If the January 31 reimbursement is not made and no entry is recorded, then the expenses would not be
recognized and both net income and equity would be overstated by $182.65 ($50.00 + $48.19 + $78.00 + $6.46).
Also, the petty cash asset and total assets would be overstated by $182.65.
Title: Problem 8-4B
Part 1
SEVERINO CO.
Bank Reconciliation
December 31, 2013
Bank statement balance.................................... $46,822.40 Book balance.......................................................................................................................................$32,878.30
Add Add
Deposit of Dec. 31........................................ 9,583.10
Error (Ck 1267)................ $ 9.00
56,405.50 Proceeds of note
less $20 fee.................... 18,980.00 18,989.00
51,867.30
Deduct Deduct
Checks No. 1242......... $ 410.40 NSF check...................... $ 762.50
1273......... 4,589.30 Printing fee...................... 99.00
1282......... 400.00 5,399.70
861.50
Adjusted bank balance.................................... $51,005.80
Adjusted book balance............................................................................................................................$51,005.80
Part 2
Dec. 31 Cash.................................................................................................................. 9.00
Office Supplies............................................................................................ 9.00
To correct an entry error.
31 Cash..................................................................................................................18,980.00
Collection Expense...........................................................................................20.00
Notes Receivable......................................................................................... 19,000.00
To record note collection less fees.
31 Accounts Receivable—Titus Industries.............................................................762.50
Cash............................................................................................................ 762.50
To charge account for NSF check plus fees.
31 Miscellaneous Expenses....................................................................................99.00
Cash............................................................................................................ 99.00
To record check printing charge.
Part 3
QA_Ori: In a banking context, a debit memo is notification from the bank that it has debited the depositor's account.
Since the depositor's account is a liability of the bank (a credit balance account), the debit notification means the
bank has reduced the depositor's account balance. Conversely, a credit memo is a notification that the depositor's
account has been credited, which means the bank has increased the depositor’s cash balance.
Title: Problem 8-5B
Part 1
SHAMARA SYSTEMS
Bank Reconciliation
May 31, 2013
Bank statement balance...................................... $21,762.70 Book balance ......................................................................................................................................$15,177.30
Add Add
Deposit of May 31.......................................... 2,727.30
24,490.00
Proceeds of note less
$50 fee........................................................................................................................................... 7,350.00
22,527.30
Deduct Deduct
Checks No. 1780................$1,425.90 NSF check..........................$431.80
1786................ 353.10 Service charge....................... 14.00
1789................ 639.50 2,418.50
Error (Ck 1788)..................... 10.00 455.80
Adjusted bank balance....................................... $22,071.50
Adjusted book balance............................................................................................................................$22,071.50
Part 2
May 31 Cash..................................................................................................................7,350.00
Collection Expense...........................................................................................50.00
Notes Receivable......................................................................................... 7,400.00
To record note collection less fee.
31 Accounts Receivable—W. Sox..........................................................................431.80
Cash............................................................................................................ 431.80
To charge account for NSF check plus fee.
31 Miscellaneous Expenses....................................................................................14.00
Cash............................................................................................................ 14.00
To record bank service fee.
31 Utilities Expense...............................................................................................10.00
Cash............................................................................................................ 10.00
To correct an entry error.
Title: Problem 8-5B
Part 3
QA_Ori: There are several possible reasons why some prenumbered checks are missing from the sequence of
canceled checks returned with a bank statement. Reasons include:
(1) QA_Ori: Some of the checks in the numbered sequence may have cleared the bank in a previous period
and were returned with the bank statement in that previous period.
(2) QA_Ori: Some of the checks in the numbered sequence may remain outstanding. If so, they will be
returned with the bank statement in a later period when they clear the bank.
(3) QA_Ori: The issuer of the checks may have voided one or more of the checks in the numbered sequence,
perhaps because of making an error in writing the checks.
(4) QA_Ori: Occasionally, a check will reach the bank but the bank will incorrectly charge the check to the
wrong account. When the bank detects the error, it will return the check separately with a note of
explanation to the depositor.
(5) Title: Serial Problem — SP 8, Success Systems
Part 1
SUCCESS SYSTEMS
Bank Reconciliation
March 31, 2014
Bank statement balance................................. $77,354 Book balance.......................................................................................................................................$77,845
Add Add
Bank error................................................
Deposits in Transit.......................................
500
0
Bank interest......................................................................................................................................
33
______
77,854 77,878
Deduct Deduct
Outstanding Check 128 Safety deposit rental...................... $ 50
______ Charge for checks............................ 102 152
Adjusted bank balance.................................. $77,726
Adjusted book balance............................................................................................................................$77,726
Part 2
Mar. 25 Miscellaneous Expenses....................................................................................677 50
Cash............................................................................................................101 50
To record safety deposit box rental.
26 Miscellaneous Expenses....................................................................................677 102
Cash............................................................................................................101 102
To record charge for printing checks
31 Cash..................................................................................................................101 33
Interest Revenue.........................................................................................404 33
To record interest earned.
Title: Reporting 1
($ in thousands)
Balance
December 31,
2011
Cash and
equivalents as %
of:
Balance
December 31,
2010
Cash and
equivalents as %
of:
Cash and cash
equivalents................................ $ 325,336 — $ 393,927 —
Current assets............................. 878,676 37.0% 808,145 48.7%
Current liabilities........................ 615,531 52.9 584,210 67.4
Stockholders’ equity................... 500,056 65.1 370,991 106.2
Total assets................................. 1,228,024 26.5 1,061,647 37.1
Analysis comment: Cash and cash equivalents have decreased as a percent of the various bases over this
period. Looking just at this measure, it is probably safe to say that Polaris’s liquidity position has slightly
deteriorated.
Title: Reporting 2
QA_Ori:
Per the statement of cash flows for year ended December 31, 2011 ($ thousands):
Cash and equivalents, beginning-year......................................................... $393,927
Cash and equivalents, year-end....................................................................$325,336
Percent change*.........................................................................................................17.4% decrease
*[($325,336 - $393,927) / $393,927]
Per the statement of cash flows for year ended December 31, 2010
($ thousands):
Cash and equivalents, beginning-year..........................................................$140,240
Cash and equivalents, year-end....................................................................$393,927
Percent change*....................................................................................................... 180.9% increase
*[($393,927 – $140,240) / $140,240]
Title: Reporting 3
QA_Ori:
Days' Sales Uncollected ($ thousands)
Days’ sales uncollected = x 365
December 31, 2011: $115,302/ $2,656,949 x 365 = 15.84 days
December 31, 2010: $89,294/ $1,991,139 x 365 = 16.37 days
QA_Ori: The number of days of uncollected sales in accounts receivable has decreased from 16.37 days to
15.84 days. This decrease of 0.53 days indicates that the company’s assets are tied up in receivables for a
shorter period of time.
QA_Ori: Polaris’s accounts receivable for 2011 represent 13.1% ($115,302 / $878,676) of its current assets and
9.4% ($115,302/ $1,228,024) of its total assets. Polaris's receivables are historically low because much of their
sales are made to an intermediary finance company that extends longer-term credit to their end customers.
Title: Reporting 4
QA_Ori: Solution depends on the annual report information obtained.
Title: Comparative Analysis
Days’ sales uncollected = x 365
Polaris ($ thousands)
Current Year: $115,302/ $2,656,949 x 365 = 15.84 days
Prior Year: $89,294/ $1,991,139 x 365 = 16.37 days
Accounts receivable
Net sales
Accounts receivable
Net sales
Polaris’s days’ sales uncollected has decreased by 0.53 days. The percent decrease is: (15.84 – 16.37) /
16.37 = (3.24)%.
Arctic Cat ($ millions)
Current Year: $23,732/$363,015 x 365 = 23.86 days
Prior Year: $29,227/$350,871 x 365 = 30.40 days
Arctic Cat’s days’ sales uncollected has decreased by 6.54 days. The percent increase is: (23.86 – 30.40) /
30.40 = (21.51)%.
QA_Ori: Comparative Analysis: Arctic Cat’s decrease in days’ sales uncollected is 21.51%, which is a marked
favorable trend. Polaris’s days’ sales uncollectible also favorably declined, but its decrease was much less
meaningful at 3.24%. Overall, for the current period, both companies have successfully managed the number of
days’ sales that are uncollected relative to the prior year.
Title: Ethics Challenge 1
QA_Ori: In a small business office it is very important that the owner of the business become involved with control
and oversight. In this medical office it would greatly enhance the internal control environment if Dr. Conrad
reconciles the bank statements.
Title: Ethics Challenge 2
QA_Ori: Unfortunately, due to collusion of the employees, the bank reconciliation will not detect this fraud. The
cash deposits per the books will reconcile to the cash deposits per the bank.
Title: Ethics Challenge 3
QA_Ori: Despite the collusion, the scheme is not foolproof. For example, some ways in which the scheme might be
uncovered or prevented include the following:
may become suspicious and call Dr. Conrad and ask if she is aware that occasionally her employees cash
patient checks for cash.
QA_Ori: An astute patient might notice that his/her statement contains a miscellaneous credit rather than a
cash payment notation. If the patient is aware of accounting practices, then Dr. Conrad might be advised.
QA_Ori: Dr. Conrad might be able to detect the fraud herself if she reviews the daily posting log generated
by most computers in that she might see the batch totals for miscellaneous credits are posted at times
different from all cash payment credits.
QA_Ori: Dr. Conrad could require approval for each miscellaneous credit.
QA_Ori: As a control, Dr. Conrad could require all checks be stamped ‘For Deposit Only’ when they are
received.
Title: Ethics Challenge 3
QA_Ori: Dr. Conrad should review her salary schedules for employees to make sure that she is at least offering
market pay. She may want to consider bonding her employees to insure herself against material losses. Dr. Conrad
should probably reconcile the bank statement herself as well as make it a practice to review the daily posting log for
miscellaneous credits. Also, she should implement a policy whereby she is the only one to authorize any
miscellaneous credits to patient accounts.
Title: Communicating in Practice:
Memorandum
To: “Owner”
From: “Consultant”
Date: __________
Subject: Advice on monitoring purchase discounts
[Instructor’s Note: The response should acknowledge the owner’s concern and recommend the net method of
recording purchases. It should explain how this method results in the recording of “Discounts Lost,” which will flow
through to the income statement, thus providing the information desired. The memo might look something like the
following.]
The net method gives management an advantage in controlling and monitoring purchase discounts. When invoices
are recorded at gross amounts, the amount of discounts taken is deducted from the balance of the Merchandise
Inventory account.
This means that the amount of any discounts lost is not reported in any account or on the income statement.
Consequently, discounts lost are unlikely to come to the attention of management. However, when purchases are
recorded at net amounts, a discounts lost expense is brought to management’s attention as an operating expense on
the income statement. Management can then seek to identify the reason for discounts lost, such as oversight,
carelessness, or unfavorable terms.
This practice gives management better control over persons responsible for paying bills on time to take advantage of
favorable discounts. This also means it’s less likely that favorable discounts are lost.
Title: Taking It to the Net
[Instructor Note: These answers were taken from the 2010 Report to the Nation.]
Title: Taking It to the Net 1
QA_Ori: The median loss caused by occupational frauds was $160,000.
Title: Taking It to the Net 2
QA_Ori: Nearly one-quarter of fraud cases involved losses of at least $1 million in losses.
Title: Taking It to the Net 3
QA_Ori: Companies lose 5% of their annual revenues to fraud; this 5% figure translates to a potential total fraud
loss of more than $2.9 trillion.
Title: Taking It to the Net 4
QA_Ori: The typical length of fraud schemes was 18 months from the time the fraud began until it was detected.
Title: Taking It to the Net 5
QA_Ori: Less than 30% of victim organizations conducted surprise audits, however these organizations have lower
fraud losses and detect fraud more quickly than those without surprise audits.
Title: Taking It to the Net 6
QA_Ori: Asset misappropriation schemes were most common at 90% of cases with a median loss of $135,000.
Title: Taking It to the Net 7
QA_Ori: Financial statement fraud schemes made up less than 5% of cases with a median loss of more than $4
million.
Title: Taking It to the Net 8
QA_Ori: Corruption schemes comprised 33% of cases with a median loss of $250,000.
Title: Taking It to the Net 9
QA_Ori: Less than 15% of the perpetrators had convictions prior to committing their frauds.
Title: Teamwork in Action
Common internal controls visible in a typical retail store include:
1. Door locks and roll-down screens for after-hours lock-up.
2. Electronic detection devices stationed at entrances or anti-theft devices on merchandise that must be removed
by cashier with special equipment.
3. Security cameras.
4. Security guards.
5. Cash registers.
6. Separate cash drawers or transaction codes to identify clerks at registers.
7. Bar coding on merchandise.
8. Limited number of apparel items allowed in a dressing room.
9. Dressing room attendants.
10. A security safe on the premises.
11. Timeclocks.
Title: Entrepreneurial Decision
1. Seven principles of internal control along with examples are:
a. QA_Ori: Establish responsibilities. The clerks at the counter should be responsible for handling cash.
The other employees should be responsible for preparing the orders and helping customers. There also
should be employees assigned responsibilities such as maintaining inventories, cleaning premises,
clerical duties, locking doors, etc.
b. QA_Ori: Maintain adequate records. The clerks at the counter should enter all sales on the cash
registers. The cash registers should include a locked record of all sales rung up for subsequent
verification procedures. Other records should include those for inventories, supplies, payroll time
records, and so on.
c. QA_Ori: Insure assets and bond key employees. The owner should acquire insurance for the employees
and the physical facilities. Insurance should also be acquired for potential casualties such as a customer
slipping on the floor.
d. QA_Ori: Separate recordkeeping from custody of assets. The employee who is responsible for food
preparation and inventory should not be in control of the recordkeeping for the inventory. Similar
separation should exist for all important assets.
e. QA_Ori: Divide responsibility for related transactions. The employee responsible for ordering
inventory should be separate from the employee controlling inventory who should also be separate
from the employee who pays for inventory.
f. QA_Ori: Apply technological controls. The owner should invest in technological controls such as cash
registers, time clocks, security cameras, and other devices to reduce the risk of fraud or theft.
g. QA_Ori: Perform regular and independent reviews. The owner should implement regular reviews of
all operating and control procedures.
1. QA_Ori: As the business grows, controls will become more important. The owner will have more
employees and will have to delegate more responsibilities. Strong controls will be important to make sure
that the business is not a victim of fraud or employee errors.
Title: Hitting the Road
No formal solution exists for this activity. It is usually interesting for the class to exchange their discoveries via
class discussion. This is particularly the case with respect to popular college service/product centers. Common
controls found in college units include:
1. Door locks and roll-down screens for after-hours lock-up.
2. Electronic detection devices stationed at entrances or anti-theft devices on merchandise that must be removed
by a cashier.
3. Security cameras.
4. Security guards.
5. Cash registers.
6. Bar coding on products and assets.
7. A security safe on the premises.
Title: Global Decision
1.
(EUR thousands)
Current year
balance
Cash as
percent of:
Prior year
balance
Cash as percent
of:
Cash (and equivalents).................................151,887 — 154,859 —
Current assets...............................................509,708 29.8% 575,897 26.9%
Total assets...................................................1,520,184 10.0 1,545,722 10.0
Current liabilities.........................................644,277 23.6 616,166 25.1
Shareholders’ equity.....................................446,218 34.0 442,890 35.0
QA_Ori: Analysis comment: Cash has increased as a percent of current assets compared to the prior year.
Cash has decreased as a percent of current liabilities and stockholders’ equity as compared to the prior year.
Cash as a percent of total assets has remained constant compared to the prior year. All changes were nominal
and suggest that Piaggio’s liquidity (cash) position has not changed drastically from the prior year.
Global Decision (Concluded)
QA_Ori:
2. Cash, beginning-year (EUR thousands)................................................................................................. 154,859
Cash, year-end (EUR thousands)........................................................................................................... 151,887
Percent change*......................................................................................................................... (1.9)% decrease
*[(151,887 – 154,859) / 154,859]
3. Days' Sales Uncollected Formula (EUR thousands)
QA_Ori:
Days’ sales uncollected = x 365
Current Year: x 365 = 15.8 days
Prior year: x 365 = 22.2 days
QA_Ori: The number of days of uncollected sales in accounts receivable has decreased from the prior year to
the current year. Piaggio is collecting its receivables more efficiently this year as compared to its prior year.
Accounts receivable
Net sales
65,560
1,516,463
90,421
1,485,351
