FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P4-51B
(10-20 min.)
Requirements
Solution:
Requirement 1 Requirement 2 Requirement 3
a. Separation of duties
1. Identify the missing internal control characteristic in each situation.
2. Identify each firm’s possible problem.
3. Propose a solution to the problem.
Theft of cash or diamonds
by the purchasing agent.
Have a manager, not the
purchasing agent,
Missing Internal Control
Characteristic
Possible Problem
Solution
Chapter 4: Internal Control and Cash Page 41 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P4-52B
(20-30 min.)
Requirements
Solution:
Req. 1
BANK:
Balance, July 31, 2016 9,652$
Add: Deposits in transit ($986 + $2,801) 3,291
12,943
Less: Outstanding checks
BOOKS:
Balance, July 31, 2016 7,258$
Add: EFT collection of rent 800$
Less: Unauthorized signature check 430
1. Prepare the Duffy Automotive bank reconciliation at July 31, 2016.
2. Prepare the necessary journal entries at July 31, 2016.
3. Describe how a bank account and the bank reconciliation help the general
manager control Duffy Automotives’ cash.
Duffy Automotive
Bank Reconciliation
July 31, 2016
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FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2 (entries based on the reconciliation)
DATE DEBIT CREDIT
July 31 Cash 800
Rent Revenue 800
EFT deposit for rent revenue.
Req. 3
bank also provides a detailed list of the company’s cash transactions that Duffy
Automotive managers can compare to the company’s own cash records and thus
correct any book errors quickly.
Journal
Chapter 4: Internal Control and Cash Page 43 of 59
Note Receivable 1,275
Note receivable collected by bank.
Accounts Payable 450
Correction for check #3115 recorded incorrectly.
Cash 430
US customer check returned by bank.
Cash 351
EFT for payment of insurance.
Cash 10
Bank service charge.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P4-53B
(30-45 min.)
Requirements
Solution:
Cash balance, beginning 7,900$
Budgeted cash receipts:
Collections from customers ($65,000 × 1.12) 72,800
1. Prepare the Carvel Wireless cash budget for 2017. Date the budget simply
“2017,” and denote the beginning and ending cash balances as “beginning” and
“ending.” Assume the company expects 2017 to be the same as 2016, but with the
following changes:
a. In 2017, the company expects a 12% increase in collections from customers and
a 20% increase in purchases of inventory.
b. There will be no sales of investments in 2017.
c. Carvel Wireless plans to issue no stock in 2017.
d Carvel Wireless plans to end the year with a cash balance of $3,500
Carvel Wireless
Cash Budget
2017
Chapter 4: Internal Control and Cash Page 44 of 59
Budgeted cash payments:
Cash paid for inventory ($44,000 × 1.20) 52,800$
Cash paid for operating expenses 13,900
Purchases of investments 400
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E4-54
(15-25 min.)
Solution:
Wood could be: Brown could investigate by:
11
List at least three ways Wood could be defrauding Brown of cash. In each instance,
also identify how Brown can determine whether Wood’s actions are ethical. Limit your
answers to the store’s cash payments. The business pays all suppliers by check (no
EFTs).
Performing the bank reconciliation and
examining all checks written by the
Writing business checks to
herself.
Chapter 4: Internal Control and Cash Page 45 of 59
22
33
44
Making small cash payments to
Examining purchase invoices for
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E4 -55
(20-30 min.)
Requirements
Solution:
Req. 1
Cash balance, December 31, 2016 100$
Budgeted cash receipts:
Collections from customers 20,400
Req. 2
= = $ 7,476 = 1.57
$ 4,760
= = $ 11,588 = 0.52
Req. 3
ratio
1. Construct the cash budget of Dollar Depot, Inc.
2. Compute Dollar Depot’s budgeted current ratio and debt ratio at December 31,
2017.
3. Williams plans to end the year with a cash balance of $175,000. Determine whether
Dollar Depot, Inc.
Cash Budget
Year Ended December 31, 2017
Total current liabilities
Current
ratio
Thousands
Total current assets
Chapter 4: Internal Control and Cash Page 46 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P4 -56
Requirement
Solution:
BANK:
Balance, December 31 3,936$
Add: Deposit in transit
Actual amount of December 30 deposit 670
Subtotal 4,606
The Parkview Company
Bank Reconciliation
December 31
1. Prepare a corrected bank reconciliation. Show the unexplained difference as
an adjustment to the book balance. Include in your analysis the amount of the
theft and how the bookkeeper attempted to conceal the theft.
Chapter 4: Internal Control and Cash Page 47 of 59
Less: Outstanding checks
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Checks No. 1880, 1882, and 1883 were outstanding in November so should not
also be deducted from Cash in December. The unexplained difference of $3,638*
Chapter 4: Internal Control and Cash Page 48 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Decision Cases 1
(20-30 min.)
Requirement
Solution:
BANK:
Balance, September 30 8,224$
Add: Deposit of September 30 in transit 3,794
1. Benz has requested that you determine whether the bookkeeper has stolen
cash from the business and, if so, how much. He also asks you to explain how
the bookkeeper attempted to conceal the theft. To make this determination, you
perform a proper bank reconciliation. There are no bank or book errors. Benz also
asks you to evaluate the internal controls and to recommend any changes
needed to improve them.
Environmental Concerns, Inc.
Bank Reconciliation
September 30
Chapter 4: Internal Control and Cash Page 49 of 59
Less: Outstanding checks ($116 + $150 +
Balance, September 30 10,402$
Less: Service charge 8$
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
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
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FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Decision Cases 2
(15-30 min.)
Solution:
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.
a. Describe in detail the internal control weakness in this situation. Specify what
negative result could occur because of the internal control weakness.
b. Describe what you would do to correct the internal control weakness.
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FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
The following actions will correct the internal control weakness:
1. The home office could have the construction workers come to the office for
Chapter 4: Internal Control and Cash Page 52 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Ethical Issue 1
Solution:
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.
1. What is the ethical issue in this situation?
2. What are the alternatives?
3. Who are the stakeholders? What are the possible consequences to each?
Analyze from the following standpoints: (a) economic, (b) legal, and (c) ethical.
4. Place yourself in the role of the decision maker. What would you do? How would
you justify your decision?
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FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Ethical Issue 2
Solution:
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.
1. What is the ethical issue in this situation?
2. What are the alternatives?
3. Who are the stakeholders? What are the possible consequences to each?
Analyze from the following standpoints: (a) economic, (b) legal, and (c) ethical.
4. Place yourself in the role of the decision maker. What would you do? How would
you justify your decision?
Chapter 4: Internal Control and Cash Page 54 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
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.
Chapter 4: Internal Control and Cash Page 55 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Ethical Issue 3
Solution:
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?
1. What is the ethical issue in this situation?
2. What are the alternatives?
3. Who are the stakeholders? What are the possible consequences to each?
Analyze from the following standpoints: (a) economic, (b) legal, and (c) ethical.
4. Place yourself in the role of the decision maker. What would you do? How would
you justify your decision?
Chapter 4: Internal Control and Cash Page 56 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Apple, Inc.
(20-30 min.)
Requirement 1
Requirement 2
Requirement 3
What are the general criteria for an asset to be classified as a “cash equivalent”?
Cash equivalents include assets that are slightly less liquid than cash, but similar
Refer to the Financial Instruments section of Note 1––Summary of Significant
Accounting
Policies. What types of assets does the company generally include in the category of
Does the company include any more detailed description of “cash equivalents”?
Where? Describe the categories.
Yes, Note 2 – Financial Instruments (Cash, Cash Equivalents, and Marketable
Securities) contains more detail about cash equivalents. The categories are described
Chapter 4: Internal Control and Cash Page 57 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Under Armour, Inc.
(20-30 min.)
Requirement 1
Requirement 2
Focus on cash and cash equivalents. Why did cash and cash equivalents change
during 2014? The statement of cash flows holds the answer to this question. Analyze
the seven largest individual items on the statement of cash flows (not the summary
subtotals such as “net cash provided by operating activities”). For each of the seven
individual items, state how Under Armour’s actions affected cash. Show amounts in
millions and round to the nearest $1 million. (Challenge)
1. Proceeds from a term loan, which provided $250 million, in the financing section.
2. Net income of $208 million, in the operating section.
Refer to Exhibit 4-2 on page 205 that contains the Report of Management on Internal
Control over Financial Reporting. Under Armour, Inc. has a similar report included in its
annual report. Show how this report corresponds to the objectives of internal control
included in this chapter. (Challenge)
The following items mentioned in Item 9A (following the footnotes), are also mentioned
in the chapter:
Chapter 4: Internal Control and Cash Page 58 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Group Project
Requirements
Solution:
Write an internal control manual that will help to safeguard the assets of the business.
The manual should address the following aspects of internal control:
1. Assign responsibilities among the group members.
2. Authorize individuals, including group members and any outsiders that you need to
hire to perform specific jobs.
3. Separate duties among the group and any employees.
4. Describe all documents needed to account for and safeguard the business’s assets.
Student responses will vary.
Chapter 4: Internal Control and Cash Page 59 of 59