Accounting Chapter 11e Homework Identify The Stakeholders The Auditor The Bank

(30-45 min.) P 4-53B

Carvel Wireless

Cash Budget

2017

Cash balance, beginning

$ 7,900

Budgeted cash receipts:

Collections from customers ($65,000 × 1.12)

72,800

Receipt of interest

300

81,000

Budgeted cash payments:

Cash paid for inventory ($44,000 × 1.20)

$52,800

Cash paid for operating expenses

13,900

Purchase of equipment

Purchases of investments

Payment of dividends

Payments of long-term debt

Cash available (needed) before financing

Budgeted cash balance, ending

Cash available for additional investments, or

(New financing needed)

Challenge Exercises and Problem

(15-25 min.) E 4-54

Wood could be:

Brown could investigate by:

1.

Writing business checks to

herself.

1.

Performing the bank

reconciliation and examining all

checks written by the business.

2.

duplicate invoice and sending

Calling the suppliers directly to

inquire about any questionable

invoices.

Submitting purchase invoices a

second time for duplicate

2.

Examining purchase invoices for

authenticity and comparing

3.

Paying suppliers excess

amounts and arranging for

suppliers to kick back part of

the excess to Wood.

3.

items needed by the business.

Comparing the business’s ratio

of cost of goods sold to retail

selling price to the cost-to-retail

ratio in the past. A kickback

Student responses may vary.

(20-30 min.) E 4-55

Req. 1

Dollar Depot, Inc.

Cash Budget

Year Ended December 31, 2017

Thousands

Cash balance, December 31, 2016

$ 100

Budgeted cash receipts:

Collections from customers

Issuance of stock

647

21,147

Budgeted cash payments:

Purchases of inventory items

$14,445

Payment of operating expenses

2,349

Purchase of property and equipment

Payment of dividends

Cash available (shortage) before financing

Budgeted cash balance, December 31, 2017

Cash available for additional investments

Req. 2

Current ratio

=

Total current assets

=

$7,476

=

1.57

Total current liabilities

$4,760

$11,588

(20-30 min.) P 4-56

The Parkview Company

Bank Reconciliation

December 31

BANK:

Balance, December 31

$ 3,936

Add: Deposit in transit

Actual amount of December 30 deposit

670

Subtotal

4,606

Less: Outstanding checks

Check No.

1560

$184

Adjusted bank balance, December 31

BOOKS:

Balance, December 31

$10,747

Add: Checks #1880, #1882, and #1883 recorded

in both November and December

$1,138

EFT receipt from customer

55

Interest revenue

13

1,206

Subtotal

11,953

Less: NSF check

$ 155

EFT payment of utility bill

755

deposit)

Unexplained difference

3,638*

Adjusted book balance, December 31

(continued) P 4-56

Checks No. 1880, 1882, and 1883 were outstanding in November so

should not also be deducted from Cash in December. The unexplained

difference of $3,638* consists of: $1,138 erroneous November

Decision Cases

(20-30 min.) Decision Case 1

Environmental Concerns, Inc.

Bank Reconciliation

September 30

BANK:

Balance, September 30

$ 8,224

Add: Deposit of September 30 in transit

3,794

Subtotal

Less: Outstanding checks ($116 + $150 +

$853 + $990 + $206 + $145)

(2,460)

Adjusted bank balance, September 30

$ 9,558

BOOKS:

Balance, September 30

Add: Bank collection

200

Subtotal

Less: Service charge

$ 8

NSF check

36

(44)

Adjusted book balance, September 30

$10,558

(continued) Decision Case 1

Benz should assign an employee with no cash-handling duties to

prepare the bank reconciliation. The bookkeeper should not perform this

duty, because a person who handles cash and also prepares the

reconciliation can steal cash and manipulate the reconciliation to cover

the theft. Perhaps Benz should prepare the reconciliation himself.

Other internal control deficiencies:

(15-30 min.) Decision Case 2

The internal control weakness in this case is a lack of separation of

duties. The foreman performs too many duties.

1. The foreman hires the workers.

2. The foreman controls workers’ employment documents.

3. The foreman fills out workers’ time sheets and transmits all

documents to the home office.

The foreman could steal from the company as follows:

1. The foreman could enter a fictitious worker into the payroll system

and fill out bogus time sheets for the fictitious employee. Then the

foreman could pocket the pay check written to the employee.

The following actions will correct the internal control weakness:

1. The home office could have the construction workers come to the

office for processing their employee documents. Then the home

office would at least know that all the workers exist.

(continued) Decision Case 2

3. Don’t allow Pickins to pass out paychecks. Have employees pick up

paychecks at corporate office or have another corporate employee go

5. Occasionally — or always — have a home-office employee go to the

construction site to pass out paychecks.

6. Have a home-office employee go to the construction site occasionally

to “take attendance” of workers on duty that day. Then match the

names of workers on duty to the time sheets turned in at the end of

the week.

7. Have employees deliver or mail time sheets to home office.

Ethical Issues

Ethical Issue 1

1. Identify the ethical issue. You must decide whether it is ethical for the

auditor not to require the bank to record the loss.

2. What are the alternatives? Require the client to record the loss, or

permit the client not to record the loss.

3. Identify the stakeholders. The auditor, the bank, and the public at

large can be affected. The auditor’s reputation is on the line. The

Assess the possible outcomes. If the auditors require the bank to

record the loss, the auditor will keep his or her reputation intact. But

the auditor will lose the client and also lose the revenue from this

large audit. The accounting firm may then be unable to expand the

firm as it had hoped to do.

(continued) Ethical Issue 1

4. Make the decision. The auditor should require the bank to record the

loss even if that means losing the bank as a client. By sticking to his

or her belief that the bank should record the loss, the auditors’

Ethical Issue 2

1. Identify the ethical issue. Galvin’s ethical issue is whether to use his

knowledge of The Salvation Army’s plans and of Nadar’s situation to

either party’s advantage (or disadvantage). Should Galvin help The

Salvation Army buy the land at the lowest price? Should he help

Nadar sell the land at the highest price? Galvin’s position presents

him with a conflict of interest.

2. What are the alternatives? There are several:

(a) Let other members of the Salvation Army board of directors

know of Nadar’s situation in order to help The Salvation Army

buy the land at a bargain price.

3. Identify the stakeholders involved. Galvin, The Salvation Army,

Nadar, and Community Banks.

Assess the possible consequences. Disclosing Nadar’s weakened

condition to The Salvation Army board may help The Salvation Army

buy the land at a low price, depending on the ethical bearing of

(continued) Ethical Issue 2

fellow board members. This would help The Salvation Army and hurt

Nadar, relative to her ability to sell the land at market value of $3.6

million. Insisting that The Salvation Army offer market price for the

Making Nadar aware of The Salvation Army’s plans may help Nadar

get a higher price for the land than she would get otherwise. This

would betray the trust of other members of The Salvation Army’s

board.

Remaining silent would preserve Galvin’s integrity. However, if either

The Salvation Army or Nadar ever learned of Galvin’s relationship

Taking a temporary leave of absence would preserve Galvin’s

integrity and remove him from the conflict of interest. It would also

preserve Galvin’s reputation for fairness and the reputation of

Community Bank for keeping depositor information confidential.

4. Make the decision. The authors would take the leave of absence and

Ethical Issue 3

1. Identify the ethical issue. French’s ethical issue is whether to tell IMS

personnel about Snicker Foods’ possible bankruptcy.

2. What are the alternatives?

(a) Keep quiet and let nature take its course, or

(b) Tell IMS’s top managers of Snicker’s possible

bankruptcy.

3. Identify the stakeholders involved. IMS, Snicker Foods, Community

Bank, and everyone connected to these organizations — owners,

employees, creditors, depositors, and their communities.

4. Make the decision. French should not tell IMS of Snicker’s financial

difficulties (after all, Snicker isn’t bankrupt yet). French should let

nature take its course. Then she will protect the bank’s (and her own)

Focus on Financials: Apple Inc.

(20-30 min.)

Req. 1

Cash equivalents include assets that are slightly less liquid than cash,

but similar enough to be reported together. Cash equivalents must be

Req. 2

Apple Inc. includes in its cash equivalents highly liquid instruments with

an original maturity of three months or less at the time of purchase.

Req.3

Yes, Note 2 – Financial Instruments (Cash, Cash Equivalents, and

Marketable Securities) contains more detail about cash equivalents. The

categories are described in two levels. For 2014 and 2013 fiscal year

Focus on Analysis: Under Armour, Inc.

(20-30 min.)

Req. 1

1. Proceeds from a term loan, which provided $250 million, in the

financing section.

2. Net income of $208 million, in the operating section.

3. Capital spending for property and equipment, which used $141

million, in the investing section.

Req. 2

The following items from the report are also mentioned in the chapter:

• “Management is responsible for establishing and maintaining

adequate internal control over financial reporting”. Management

Group Project

Student responses will vary.