FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-1
(5 min.)
Solution:
Define “fraud.” List and briefly discuss the three major components of the “fraud
triangle.”
Fraud is an intentional misrepresentation of facts, made for the purpose of
persuading another party to act in such a way that causes injury or damage to that
Chapter 4: Internal Control and Cash Page 1 of 59
2. Opportunity — The opportunity to commit fraud usually arises through weak
internal controls.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-2
(5 min.)
Solution:
Alston should report the errors to Golden because Golden is Alston’s supervisor,
It is not clear whether the errors were deliberate or accidental. What should Alston
do?
Chapter 4: Internal Control and Cash Page 2 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-3
(10 min.)
Solution:
How do computer viruses, Trojan Horses, and phishing expeditions work? How can
these e-commerce pitfalls hurt you? Be specific.
A computer virus enters program code without your consent and performs
destructive action to your computer files or programs.
Chapter 4: Internal Control and Cash Page 3 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-4
(5-10 min.)
Solution:
COMPONENTS OF INTERNAL CONTROL
1. Control environment — Top managers must set the “tone at the top” to establish
a control environment.
List the components of internal control. Briefly describe each component.
Chapter 4: Internal Control and Cash Page 4 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-5
(5-10 min.)
Solution:
Explain why separation of duties is often described as the cornerstone of internal
control for safeguarding assets. Describe what can happen if the same person has
custody of an asset and also accounts for the asset.
Separation of duties is essential for safeguarding assets. The person who has
Chapter 4: Internal Control and Cash Page 5 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-6
(5-10 min.)
Solution:
Identify the other control procedures usually found in a company’s system of internal
control besides separation of duties, and tell why each is important.
There are several major internal control procedures as discussed in the chapter
besides separation of duties:
1. Smart hiring practices. The company should be careful to hire both competent
and honest personnel. Smart hiring practices involve conducting background
Chapter 4: Internal Control and Cash Page 6 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-7
(20-30 min.)
Solution:
Cash may be a small item on the financial statements. Nevertheless, internal control
over cash is very important. Why is this true?
Cash is important not because of its amount as reported on the balance sheet, but
because of its effect on a business. All transactions ultimately affect cash.
Chapter 4: Internal Control and Cash Page 7 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-8
(20-30 min.)
Solution:
Chapter 4: Internal Control and Cash Page 8 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-9
(10 min.)
Solution:
Balance, August 31 5,483$ Balance, August 31 3,530$
Add: Deposit in transit 400 Add: Bank collection 691
BANK
BOOKS
Prepare a bank reconciliation to determine how much cash Rampart actually has
at August 31.
Rampart Corp.
Bank Reconciliation
August 31, 2016
Chapter 4: Internal Control and Cash Page 9 of 59
Less: Service charge (13)
Adjusted bank balance 4,183$ Adjusted book balance 4,183$
Rampart has cash of $4,183.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-10
(5 min.)
Solution:
DATE DEBIT CREDIT
Aug. 31 Cash……………………………………….. 691
Accounts Receivable…………… 691
Collection on account.
After preparing Rampart Corp.’s bank reconciliation in Short Exercise 4-9, make the
company’s journal entries for transactions that arise from the bank reconciliation.
Date each transaction August 31, 2016, and include an explanation with each entry.
Journal
ACCOUNT TITLES AND EXPLANATION
Chapter 4: Internal Control and Cash Page 10 of 59
Interest Revenue………………… 20
Interest earned on bank balance.
Bank service charge.
NSF check.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-11
(5 min.)
Solution:
Does it appear that the employee has stolen from the company? If so, how much?
Explain your answer. Which side of the bank reconciliation shows the company’s
true cash balance?
It appears that the employee has stolen $765 (adjusted book balance, $4,755 −
Chapter 4: Internal Control and Cash Page 11 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-12
(5 min.)
Solution:
Schwab will notice a gap in the sequence of sales receipts for the receipt that
What will alert manager Jennifer Schwab that something is wrong?
Chapter 4: Internal Control and Cash Page 12 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-13
(10 min.)
Solution:
Answer the following questions about internal control over cash payments:
1. Payment by check carries three controls over cash. What are they?
2. Suppose a purchasing agent receives the goods that he purchases and also
approves payment for the goods. How could a dishonest purchasing agent cheat
the company? How do companies avoid this internal control weakness?
1. Paying by check carries three controls over cash:
• The check provides a record of the payment.
• The check must be signed by an authorized official.
Chapter 4: Internal Control and Cash Page 13 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-14
(5-10 min.)
Solution:
Millions
Cash balance, beginning 5$
Estimated cash receipts—total 103
Kent Market
Cash Budget
Year 2017
Prepare the organization’s cash budget for 2017.
Chapter 4: Internal Control and Cash Page 14 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
S4-15
(5 min.)
Solution:
Describe the types of assets that are typically included under the heading “cash and
cash equivalents” on the balance sheet. What is a “cash equivalent”?
“Cash and cash equivalents” includes liquid assets such as time deposits,
certificates of deposit, and high-grade U.S. or foreign government securities that are
Chapter 4: Internal Control and Cash Page 15 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E4-16A
(10-15 min.)
Solution:
Identify the internal control weakness in the given situations. State how the person
can hurt the company.
a. Sweitzer has access to the cash collected, and she also prepares the cash
report. With access to both items, Sweitzer can steal cash and falsify her cash
report to conceal her theft.
Chapter 4: Internal Control and Cash Page 16 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E4-17A
(10 min.)
Solution:
Evaluate the internal controls in each situation as strong or weak, and give the
reason for your answer.
Cash payments:
a. Strong internal control. There is a good separation of duties. Supervisors
request equipment, and the home office purchases the equipment.
Chapter 4: Internal Control and Cash Page 17 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E4-18A
(10 min.)
Solution:
To prevent Dunbar’s embezzlement, Downtown Forest Lake’s board of directors
could have:
a. Not permitted Dunbar to write checks for Downtown Forest Lake. Instead, appoint
a board member to write the checks.
Give four ways Dunbar’s embezzlement could have been prevented.
Chapter 4: Internal Control and Cash Page 18 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E4-19A
(10-20 min.)
Requirement
Solution:
BANK:
Balance, October 31 279$
Add: Deposit in transit 1,225
Less: Outstanding checks:
Check No.
BOOKS:
Balance, October 31 1,297$
Less:
Recorded $86 check as $68 18$
NSF check 20
F.L. Hardy
Bank Reconciliation
October 31, 2017
1. Prepare Hardy’s bank reconciliation at October 31, 2017.
Chapter 4: Internal Control and Cash Page 19 of 59
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E4-20A
(10-20 min.)
Solution:
BANK:
Balance, March 31 740$
Add: Deposit in transit 1,790
2,530
Rinkland USA
Bank Reconciliation
March 31, 2016
How much cash does White actually have at March 31, 2016?
Chapter 4: Internal Control and Cash Page 20 of 59
BOOKS:
Balance, March 31 1,980$
Less:
Service charge 8$
Charge for printed checks 10