155
PROBLEMS
P5–1
Strengths: a, d, e, g
Weaknesses:
b. An independent person (for example, a supervisor) should count the cash in
each cashier’s cash register, unlock the record, and compare the amount of
cash with the amount on the record to determine cash shortages or overages.
156
P5–2
1. RECREATIONAL SYSTEMS
Bank Reconciliation
March 31, 20Y6
Cash balance according to bank statement …………….. $27,150
Add deposit of March 31, not recorded by bank ………. 4,175
$31,325
Deduct: Outstanding checks…………………………………. $9,675
Bank error in charging check as $570
instead of $750 …………………………………… 180 9,855
2.
Balance Sheet
Statement of
Assets
=
+
Stockholders’ Equity
Income
Cash Flows
Notes
Retained
Statement
Cash
+
Receivable
=
+
Earnings
Mar. 31.
9,110
–8,000
480
Mar. 31.
Statement of Cash Flows
Income Statement
Mar. 31.
Operating
9,110
Mar. 31.
Interest
revenue
480
Balance Sheet
Statement of
=
+
Stockholders’ Equity
Income
Cash Flows
Retained
Statement
=
Earnings
Mar. 31.
Mar. 31.
Statement of Cash Flows
Income Statement
157
P5–3
1. ALL AMERICAN SPORTS CO.
Bank Reconciliation
April 30, 20Y5
Cash balance per bank statement …………………………. $40,360
Add deposit of April 30, not recorded by bank ………. 9,275
$49,635
Deduct: Outstanding checks……………………………….. $ 14,300
Bank error in charging check as $270
instead of $720 …………………………………. 450 14,750
Adjusted balance …………………………………………………. $34,885
158
P5–3, Concluded
2.
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Notes
Accounts
Retained
Statement
Cash
+
=
Payable
+
Earnings
Apr. 30
Apr. 30
revenue
320
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Accounts
Accounts
Retained
Statement
Cash
+
Receivable
=
Payable
Earnings
Apr. 30
–1,375
1,300
–75
Apr. 30
159
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:
Cash balance according to Rancho Foods …………………. $ 6,491.88*
Add: Proceeds of note collected by bank:
Principal ……………………………………………………. $ 4,000.00
Interest ……………………………………………………… 160.00
Error in recording May 9 deposit as $189.24
by the company instead of $819.24.
($819.24 – $189.24 = $630.00) …………………….. 630.00
Error in recording Check No. 625 as $185.63
P5–4, Concluded
2.
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Notes
Accounts
Retained
Statement
Cash
+
Receivable
=
Payable
+
Earnings
May 31
4,817
–4,000
27
790
May 31
Statement of Cash Flows
Income Statement
May 31
Operating
4,817
May 31
Sales
630
May 31
Interest
revenue
160
Balance Sheet
Statement of
Assets
=
Liabilities
+
Stockholders’ Equity
Income
Cash Flows
Retained
Statement
Cash
+
Receivable
=
Earnings
May 31
May 31
Statement of Cash Flows
Income Statement
expense
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-
161
FINANCIAL ANALYSIS
FA5–1
1. Year 2 Year 1
2. Ratio of cash to monthly cash expenses:
$7,794 ÷ $(1,274) …………………. 6.1 months
$3,055 ÷ $(1,019) …………………. 3.0 months
3. Ratio of cash to monthly cash expenses:
4. At the end of Year 1, AceIRx could continue operating only 3–4 months before
running out of cash. During Year 2, AceIRx’s monthly cash expenses rose
5. During Year 2, AceIRx must have issued more stock or borrowed funds. Note
to Instructors: The financial statements for Year 2 indicate that AceIRx issued
stock for $34,939 and borrowed $19,762 in long-term debt.
162
FA5–2
1. Year 2 Year 1
2. Ratio of cash to monthly cash expenses:
$47,467 ÷ $(2,583) ……………….. 18.4 months
$27,447 ÷ $(2,073) ……………….. 13.2 months
3. Ratio of cash to monthly cash expenses:
4. At the end of Year 1, Pacira could continue operating for 13.2 months before
running out of cash. During Year 2, Pacira’s monthly cash expenses rose
5. During Year 2, Pacira must have issued more stock or borrowed funds. Note
to Instructors: The financial statements for Year 2 indicate that Pacira issued
stock for $87,158.
163
FA5–3
1. Year 2 Year 1
2. Ratio of cash to monthly cash expenses:
$6,211 ÷ $(675) ……………………. 9.2 months
$3,548 ÷ $(365) …………………… 9.7 months
3. Ratio of cash to monthly cash expenses:
4. At the end of Year 1, Kips Bay Medical could continue operating for only 9.7
months before running out of cash. During Year 2, Kips Bay Medical’s month-
ly cash expenses increased almost 85% [($675 – $365) ÷ $365] from $365 to
$675. However, its cash and cash equivalents rose from $3,548 to $6,211. As a
result, at the end of Year 2, Kips Bay Medical had 9.2 months of cash remain-
5. During Year 2, Kips Bay Medical must have issued more stock or borrowed
FA5–4
1. Boston Scientific generates positive cash flows from its operations of $1,008
in Year 2 and $325 in Year 1. Boston Scientific has been in operation since
1979 and has proven that it can be profitable and generate positive cash flows
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.
CASES
Case 5–1
Acceptable business and professional conduct requires Sarah Ferrari to notify
Case 5–2
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, re-
165
Case 5–3
Several possible procedures for preventing or detecting the theft of grocery items
by failing to scan their prices include the following:
a. Most scanning systems are designed so that an audible beep is heard each
time an item is rung up on the cash register. This is intended to alert the
cashier that the item has been properly rung up. Thus, observing whether a
cashier is ringing up all merchandise can be accomplished by standing near
the cash register and listening for the beeps. Such observations might be
done on a periodic, surprise basis by supervisors.
166
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
167
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
undeposited receipts, the bank reconciliation adjusted balances will not
agree. The difference between the adjusted balances is the estimate of the
amount stolen by the cashier.
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
Cash balance according to Clairemont Company ………. $6,675
Add note collected by bank, with interest of $210 ………. 3,210
Adjusted balance………………………………………………………. $9,885
Adjusted balance according to company’s records ……. $9,885
Adjusted balance according to bank statement ………….. 4,480
Amount stolen by cashier …………………………………………. $5,405
168
Case 5–5, Concluded
2. The cashier attempted to conceal the theft by preparing an incorrect bank
(3) incorrectly handled the treatment of the note and interest collected by
the bank.
3. a. Two major weaknesses in internal controls, which allowed the cashier to
steal the undeposited cash receipts, are as follows:
• Undeposited cash receipts were kept on hand for a two-day period,
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:
• 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.
Note to Instructors: In addition to the above recommendations, Clairemont Com-
pany should be counseled that it is standard practice for any disgruntled employ–
ees, fired employees, or employees who have announced quitting dates to be
removed from sensitive positions (such as the cashier position) so that company
assets or records will not be jeopardized. Finally, checks which have been out-
standing for long periods of time (such as Nos. 370, 379, and 390) should be
voided (with stop payment instructions given to the bank) and reentered in the
cash records. This establishes control over these items and prevents their mis-
use.
169
Case 5–6
Note to Instructors: The purpose of this activity is to familiarize students with the
internal controls used by specific businesses within your community. For exam-
ple, 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