CHAPTER 7 Internal Control and Cash
7–18
PROBLEMS
Prob. 7–1A
Weaknesses:
c. Employees should not be allowed to use the petty cash fund to cash personal checks. In
any case, postdated checks should not be accepted. In effect, postdated checks represent
a receivable from the employees.
d. Requiring cash register clerks to make up any cash shortages from their own funds gives
the clerks an incentive to shortchange customers. That is, the clerks will want to make
Prob. 7–2A
20Y1
July
1
Petty Cash
1,100
Cash
1,100
12
Cash
8,220
Cash Short and Over
28
Sales
8,192
31
Store Supplies
580
Delivery Expense
225
Office Supplies
140
Miscellaneous Administrative Expense
88
Cash Short and Over
20
Cash
1,053
31
Cash
10,232
Cash Short and Over
9
Sales
10,241
31
Cash
150
Petty Cash
150
CHAPTER 7 Internal Control and Cash
7–19
Prob. 7–3A
1.
Pala Medical Co.
Bank Reconciliation
June 30, 20Y1
Cash balance according to bank statement
$195,688
Add: Deposit in transit on June 30
Bank error in charging check as $915 instead
of $195
Total additions
13,020
Deduct: Outstanding checks
(19,427)
Adjusted balance
$189,281
Cash balance according to company’s records
$166,436
Add: Note collected by bank, including $1,500 interest
26,500
Deduct: Error in recording check
Bank service charges
Total deductions
(3,655)
Adjusted balance
$189,281
2.
20Y1
June
30
Cash
26,500
Notes Receivable
25,000
Interest Revenue
1,500
30
Accounts Payable—Skyline Supply Co.
3,600
Miscellaneous Expense
55
Cash
3,655
3. $189,281; the adjusted balance from the bank reconciliation should be reported as cash
on the June 30, 20Y1, balance sheet for Pala Medical Co.
CHAPTER 7 Internal Control and Cash
7–20
Prob. 7–4A
1.
Coastal Bike Co.
Bank Reconciliation
October 31, 20Y9
Cash balance according to bank statement
$ 8,980
Add: Deposit in transit on October 31
$1,050
Bank error in charging check as $730 instead of $370
360
Total additions
1,410
Deduct: Outstanding checks
(5,560)
Adjusted balance
$ 4,830
Cash balance according to company’s records*
$ 3,795
Add: Note collected by bank, including $120 interest
2,120
Deduct: Check returned because of insufficient funds
$ 880
Bank service charges
25
Error in recording check
180
Total deductions
(1,085)
Adjusted balance
$ 4,830
2.
20Y9
Oct.
31
Cash
2,120
Notes Receivable
2,000
Interest Revenue
120
31
Accounts Payable—Rack Pro Co.
180
Accounts Receivable—Bay View Condos
880
Miscellaneous Expense
25
Cash
1,085
CHAPTER 7 Internal Control and Cash
7–21
Prob. 7–5A
1.
Beeler Furniture Company
Bank Reconciliation
June 30, 20Y2
Cash balance according to bank statement
$13,624.71
Add: Deposit in transit on June 30
1,117.74
Deduct: Outstanding Check No. 738
$ 251.40
Outstanding Check No. 756
113.95
Outstanding Check No. 758
259.60
Outstanding Check No. 759
901.50
Total deductions
(1,526.45)
Adjusted balance
$13,216.00
Cash balance according to company’s records*
$10,145.50
Add: Note collected by bank, including $210 interest
$3,710.00
Error in recording Check No. 743
90.00
Total additions
3,800.00
Deduct: Check returned because of insufficient funds
$ 550.00
Error in recording June 10 deposit
100.00
Error in recording June 24 deposit
4.50
Bank service charges
75.00
Total deductions
(729.50)
Adjusted balance
$13,216.00
* Cash balance per company’s records, June 1 ………………. $ 9,317.40
CHAPTER 7 Internal Control and Cash
7–22
Prob. 7–5A (Concluded)
2.
20Y2
June
30
Cash
3,800.00
Notes Receivable
3,500.00
Interest Revenue
210.00
Accounts Payable
90.00
30
Sales ($100.00 + $4.50)
104.50
Accounts Receivable
550.00
Miscellaneous Expense
75.00
Cash
729.50
4. The error of $540 ($930 – $390) in the canceled check should be added to the
CHAPTER 7 Internal Control and Cash
7–23
Prob. 7–1B
Weaknesses:
c. An independent person (for example, a supervisor) should count the cash in each
CHAPTER 7 Internal Control and Cash
7–24
Prob. 7–2B
20Y3
June
1
Petty Cash
Cash
1,000
12
Cash
Cash Short and Over
66
Sales
9,440
30
Store Supplies
Inventory
Office Supplies
Miscellaneous Administrative Expense
Cash Short and Over
Cash
954
30
Cash
Cash Short and Over
Sales
13,390
30
Petty Cash
Cash
200
CHAPTER 7 Internal Control and Cash
7–25
Prob. 7–3B
1.
Stone Systems
Bank Reconciliation
July 31, 20Y5
Cash balance according to bank statement
$ 33,650
Add: Deposit in transit on July 31
9,150
Deduct: Outstanding checks
$17,865
Bank error in charging check as $1,180 instead
of $1,810
630
Total deductions
(18,495)
Adjusted balance
$ 24,305
Cash balance according to company’s records
$ 17,750
Add: Note collected by bank, including $345 interest
$ 6,095
Error in recording check
540
Total additions
6,635
Deduct: Bank service charges
(80)
Adjusted balance
$ 24,305
2.
20Y5
July
31
Cash
6,635
Notes Receivable
5,750
Interest Revenue
345
Accounts Payable—Holland Co.
540
31
Miscellaneous Expense
80
Cash
80
CHAPTER 7 Internal Control and Cash
7–26
Prob. 7–4B
1.
Collegiate Sports Co.
Bank Reconciliation
November 30, 20Y9
Cash balance according to bank statement
$112,675
Add: Deposit in transit on November 30
12,200
Deduct: Outstanding checks
$41,840
Bank error in charging check as $7,250 instead
of $2,750
4,500
Total deductions
(46,340)
Adjusted balance
$ 78,535
Cash balance according to company’s records*
$ 66,935
Add: Note collected by bank, including $385 interest
$ 7,385
Error in recording check as $7,600 instead of $760
6,840
Total additions
14,225
Deduct: Check returned because of insufficient funds
$ 2,500
Bank service charges
125
Total deductions
(2,625)
Adjusted balance
$ 78,535
* Cash balance per company’s records, November 1 …….. $ 81,145
2.
20Y9
Nov.
30
Cash
14,225
Notes Receivable
7,000
Interest Revenue
385
Accounts Payable—Ramirez Co.
6,840
30
Accounts Receivable—Hallen Academy
2,500
Miscellaneous Expense
125
Cash
2,625
CHAPTER 7 Internal Control and Cash
7–27
Prob. 7–5B
1.
Sunshine Interiors
Bank Reconciliation
July 31, 20Y0
Cash balance according to bank statement
$11,601.41
Add: Deposit in transit on July 31
1,177.87
Deduct: Outstanding Check No. 613
$ 137.50
Outstanding Check No. 628
837.70
Outstanding Check No. 633
310.08
Total deductions
(1,285.28)
Adjusted balance
$11,494.00
Cash balance according to company’s records*
$ 7,664.00
Add: Note collected by bank, including $160.00 interest
$4,160.00
Error in recording July deposit
18.00
Error in recording Check No. 627
63.00
Total additions
4,241.00
Deduct: Check returned because of insufficient funds
$ 375.00
Bank service charges
36.00
Total deductions
(411.00)
Adjusted balance
$11,494.00
CHAPTER 7 Internal Control and Cash
7–28
Prob. 7–5B (Concluded)
2.
20Y0
July
31
Cash
4,241.00
Notes Receivable
4,000.00
Interest Revenue
160.00
Sales
18.00
Accounts Payable
63.00
31
Accounts Receivable
375.00
Miscellaneous Expense
36.00
Cash
411.00
CHAPTER 7 Internal Control and Cash
MAKE A DECISION
MAD 7–1
a.
$25,981
$6,647$19,334
Days 365 Expense) onDepreciati – Expenses (Operating
sInvestment Term–Short and Cash
Hand on Cash Days’
+
=
7–31
MAD 7–5
a. Using total revenues as a measure of business size, Nike is clearly the largest company of
b.
Days 365 Expense) onDepreciati – Expenses (Operating
sInvestment Term–Short and Cash
Hand on Cash Days’
=
days 54.3
$4.6
$250
days 365 $145) – ($1,823
$250
: ArmourUnder
days 334.0
$1.5
$501
days 365$73)($628
:lululemon
days 202.9
$26.9
$5,457
days 365$649)($10,469
$2,319$3,138
:Nike
$501
==
==
−
==
−
+
c. The days’ cash on hand exceeds 200 days for Nike and lululemon, which is
considered very strong. Under Armour has 54.3 days’ cash on hand, which, while still
CHAPTER 7 Internal Control and Cash
7–32
TAKE IT FURTHER
TIF 7–1
Both Tehra and her supervisor are acting in an unethical manner. While Tehra’s
disappointment at not receiving a raise may be justified, it is not appropriate for Tehra to
TIF 7–2
TIF 7–3
A sample solution based on eBay’s Form 10-K for the fiscal year ended December 31,
2016, follows:
of total current assets has decreased.
2. Management’s Annual Report on Internal Control Over Financial Reporting is included in
the annual report as item 9A in the Form 10-K.
a. Management, including the principal executive officer and principal financial officer
b. Internal control is not explicitly defined in the annual report; however, the report does
reference SEC rules. According to these rules, internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of
CHAPTER 7 Internal Control and Cash
TIF 7–3 (Concluded)
c. A material weakness is a deficiency in internal control such that there is a reasonable
TIF 7–4
MEMO
TIF 7–5
Several control procedures could be implemented to prevent or detect the theft of cash from
fictitious returns.
One procedure would be to establish a policy of “no cash refunds.” That is, returns could