Accounting Chapter 5 Homework Cash receipts should not be handled by the accounts receivable clerk. This violates the segregation of duties between the handling of cash

161

PROBLEMS

P5–1

Strengths: a, b, e, f

Weaknesses:

c. An independent person (for example, a supervisor) should count the cash in

each cashier’s cash register, unlock the cash register record, and compare

the amount of cash with the amount on the record to determine cash shortag-

es or overages.

162

P5–2

1. DEAVER CONSULTING

Bank Reconciliation

October 31, 20Y6

Cash balance according to bank statement …………….. $31,095

Add deposit of October 31, not recorded by bank ……. 4,120

$35,215

Deduct: Outstanding checks …………………………………. $10,125

Bank error in charging check as $230

instead of $320 ……………………………………. 90 (10,215)

Adjusted balance……………………………………………………. $25,000

2.

Increases to Cash

Oct. 31. 10,400 (10,000) 400

Statement of Cash Flows Income Statement

Oct. 31. Operating 10,400 Oct. 31. Interest

r

evenue

400

Decreases to Cash

Balance Sheet

Assets = Liabilities + Stockholders’ Equit

y

Accounts Retained

(

163

P5–3

1. HIGHLANDER DIAMOND CO.

Bank Reconciliation

April 30, 20Y5

Cash balance per bank statement …………………………. $ 60,927

Add deposit of April 30, not recorded by bank ………. 13,913

$ 74,840

Deduct: Outstanding checks ………………………………. $ 21,450

Bank error in charging check as $170

instead of $710 …………………………………. 540 (21,990)

Adjusted balance …………………………………………………. $ 52,850

Cash balance per Highlander Diamond Co. ………….. $ 46,455*

Add: Proceeds of note collected by bank,

including $480 interest …………………………… $ 6,480

Error in recording check as $2,200 by company

instead of $220 ($2,200 – $220 = $1,980) ….. 1,980 8,460

$ 54,915

164

P5–3, Concluded

2.

Increases to Cash

Balance Sheet

Assets = Liabilities + Stockholders’ Equit

y

Notes Accounts Retained

Cash + Receivable = Pa

y

able + Earnin

g

s

Apr. 30. 8,460

(

6,000

)

1,980 480

Statement of Cash Flows Income Statement

Apr. 30. Operating 8,460 Apr. 30. Interest

revenue

480

Decreases to Cash

Balance Sheet

Assets = Liabilities + Stockholders’ Equity

Accounts Accounts Retained

(

)

165

P5–4

1. RANCHO FOODS

Bank Reconciliation

May 31, 20Y8

Cash balance according to bank statement ……………… $11,697.04

Add deposit of May 31, not recorded by bank ………….. 580.34

$12,277.38

Deduct outstanding checks:

No. 613 …………………………………………………………….. $ 137.50

628 …………………………………………………………….. 837.70

634 …………………………………………………………….. 503.30 (1,478.50)

Adjusted balance ……………………………………………………. $10,798.88

Cash balance according to Rancho Foods ………………….. $ 6, 491 .88 *

Add: Proceeds of note collected by bank:

Principal …………………………………………………….. $ 4,000.00

Interest ………………………………………………………. 160.00

Deduct: Check returned because of insufficient funds $ 450.00

Service charges ………………………………………… 60.00 (510.00)

Adjusted balance ……………………………………………………. $10,798.88

*Balance per cash in bank account, May 1 …………… $ 9,578.00

166

P5–4, Concluded

2.

Increases to Cash

Balance Sheet

Assets = Liabilities + Stockholders’ Equit

y

Notes Accounts Retained

Cash + Receivable = Pa

y

able + Earnin

g

s

Ma

y

31. 4,817

(

4,000

)

27 790

Statement of Cash Flows Income Statement

Operatin

g

4,817 Sales 630

Interest

revenue

160

Decreases to Cash

Balance Sheet

Assets = Liabilities + Stockholders’ Equit

y

Accounts Retained

g

y

(

)

(

)

3. $10,798.88

4. The error of $450 ($500 – $50) in the canceled check should be added to the

“balance according to bank statement” on the bank reconciliation. The can-

167

METRIC-BASED ANALYSIS

MBA 5–1

1. $2,480 [$29,765 ÷ 12]

3. 24.4 months [($52,902 + $7,567) ÷ $2,480]

4. For the recent year, AceIRx has negative monthly cash expenses (cash burn) of

$2,480 per month. If this cash burn continues, AceIRx can continue operating

5. Although AceIRx has experienced negative cash flows from operations for

168

MBA 5–2

Data shown in thousands

1. Year 2 Year 1

Monthly cash expenses:

$55,989 ÷ 12 ………………………….. $4,666

$60,662 ÷ 12 ………………………….. $5,055

4. At the end of Year 1, with negative monthly cash expenses of $5,055 per

month, Insys could continue to operate for 6.3 months using its cash and

cash equivalents of $31,999. By including short-term investments of $85,189,

Insys could continue operations for an additional 16.9 months for a total of

23.2 months.

169

MBA 5–3

1. Year 3 Year 2 Year 1

Monthly cash expenses:

$212,889 (in thousands) ÷ 12 ……. $17,741

$129,753 (in thousands) ÷ 12 ……. $10,813

$100,989 (in thousands) ÷ 12 ……. $8,416

2. Ratio of cash to monthly

cash expenses:

3. Ratio of cash to monthly

cash expenses:

($136,986 + $0) ÷ $17,741 ………….. 7.7 months

($82,387 + $0) ÷ $10,813 ……………. 7.6 months

($61,653 + $50,097) ÷ $8,416 ……… 13.3 months

4. Synergy Pharmaceuticals has reported losses and negative cash flows from

operations in each of the three years analyzed. Synergy Pharmaceuticals was

able to raise funds by issuing stock in all three years and issuing long-term

debt in Year 3. At the end of Year 1, with negative monthly cash flows of

5. Based upon the preceding results in (2) and (3), loaning money to Synergy

Pharmaceuticals would be extremely risky. Unless management of Synergy

could convince you that a turnaround was likely and that Synergy would gen-

170

MBA 5–4

1. Boston Scientific generates positive cash flows from its operations (in mil-

lions) of $1,426 in Year 2 and $1,182 in Year 1. Boston Scientific has been in

2. The computation of the ratio of cash to monthly cash expenses would not be

meaningful for Boston Scientific since it is profitable and is currently generat-

ing positive cash flows from operations.

171

CASES

Case 5–1

Acceptable business and professional conduct requires Sarah Ferrari to notify

the bank of the error. Note to Instructors: Individuals may be criminally prosecut-

ed for knowingly using funds that are erroneously credited to their bank

accounts.

Case 5–2

Several control procedures could be implemented to prevent or detect the theft of

cash from fictitious returns.

172

Case 5–3

Several possible procedures for preventing or detecting the theft of grocery items

by failing to scan their prices include the following:

b. Some grocery stores have their cash registers networked so an employee in a

centralized office, usually high above the floor, can monitor any cash register’s

activity. In this way, a supervisor could monitor cash register activity on a

periodic basis.

Case 5–4

Sue is clearly behaving in an unprofessional manner in intentionally shortchang-

ing her customers.

At this point, Javier is in a difficult position. He is apparently adhering to Healthy

Markets’ policy of making up shortages out of his own pocket, but he is obviously

upset about it. If Javier accepts Sue’s advice, he will be engaging in unprofes-

sional behavior. Javier is also faced with the dilemma of whether he should report

Sue’s behavior. If Javier continues to work for Healthy Markets, his best course of

action is simply to try to do the best job possible in not making errors in ringing

up sales and providing customers change.

173

Case 5–5

1. There are several methods that could be used to determine how much the

cashier has stolen. The method described below is based on preparing a

bank reconciliation as illustrated in this chapter. Because of the theft of the

CLAIREMONT COMPANY

Bank Reconciliation

August 31, 20Y1

Cash balance according to bank statement ……………….. $5,350

Add undeposited cash receipts on hand ……………………. 2,500

$7,850

Deduct outstanding checks:

No. 370 …………………………………………………………….. $ 580

379 …………………………………………………………….. 615

390 …………………………………………………………….. 900

1148 …………………………………………………………… 225

1149 …………………………………………………………… 300

1151 …………………………………………………………… 750 (3,370)

Adjusted balance ……………………………………………………… $4,480

Outstanding checks omitted from the bank

reconciliation prepared by the cashier:

No. 370 …………………………………………………………….. $ 580

379 ……………………………………………………………. 615

390 ……………………………………………………………. 900 $2,095

174

Case 5–5, Concluded

2. The cashier attempted to conceal the theft by preparing an incorrect bank

3. a. Two major weaknesses in internal controls, which allowed the cashier to

steal the undeposited cash receipts, are as follows:

1. Undeposited cash receipts were kept on hand for a two-day period:

August 30 and 31. This large amount of undeposited cash receipts

b. Two recommendations that would improve internal controls so that simi-

lar types of thefts of undeposited cash receipts could be prevented are as

follows:

1. All cash receipts should be deposited daily. This would reduce the

risk of significant cash losses. In addition, any missing cash would

be more easily detected.

2. The bank reconciliation should be prepared by an independent indi-

vidual who does not handle cash or the accounting records. One

possibility would be for the owner of Clairemont Company to prepare

the reconciliation.

175

Case 5–6

Note to Instructors: Answers will vary. The purpose of this activity is to familiarize

students with the internal controls used by specific businesses within your

community. For example, when ordering food at a McDonald’s drive-through

window, your order is processed as follows:

1. The order is taken at a remote location by speaking with the cashier who

rings up the order and indicates the amount you owe.

2. The order is simultaneously shown on a computer screen in the food