Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 6
Chapter 6
Cash, Fraud, and Internal Control
QUESTIONS
1. The seven broad principles are: Establish responsibilities; Maintain adequate records;
Insure assets and bond key employees; Separate recordkeeping from custody of assets;
Divide responsibilities for related transactions; Apply technology controls; Perform
regular and independent reviews.
2. Internal control procedures become especially critical when the manager of a business
can no longer control the business through personal supervision and direct
participation.
3. Responsibility for related transactions should be divided so that the work of one
department or individual acts as a check on that of another.
4. Separation of custody from recordkeeping of an asset encourages the asset custodian to
avoid misplacing, misappropriating, or wasting the asset. This arrangement makes
collusion necessary if an asset is to be stolen and the theft concealed in the records.
5. If individual departments were permitted to deal directly with suppliers, the amount of
merchandise purchased and the resulting liabilities would not be well controlled. Having
individual departments place orders through a purchasing department helps control the
amounts purchased and the resulting liabilities.
6. The limitations of internal control arise from two sources: the human element (human
error or human fraud) and the cost-benefit principle.
11. Google’s net income was $12,662 million. Further, it reported a net decrease in cash
(and equivalents) of $2,203 million. These two figures are different because (1) net
income is computed on the accrual basis, and includes the effects of several noncash
transactions, and (2) some transactions affect cash but not net income. For instance, the
purchase of property, plant, and equipment as part of assets reduces cash, but does not
affect income, except through annual depreciation over the life of the asset.
12. Samsung’s cash and cash equivalents at December 31, 2017, equals ₩30,545,130 (all in
KRW millions). It is the second largest current asset and makes up about 20.8% of its
current assets.
Its cash and cash equivalents decreased from ₩32,111,442 at December 31, 2016, to
₩30,545,130 at December 31, 2017 (all in KRW millions). As a percent of total current
assets, its cash balance decreased from about 22.7% to about 20.8%.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 6
QUICK STUDIES
Quick Study 6-1 (10 minutes)
1. True Separation of recordkeeping for assets from the custody over assets helps reduce
fraud.
2. False The primary objective of internal control procedures is to safeguard the business
against theft from government agencies.
Quick Study 6-2 (5 minutes)
a. Monitoring
Quick Study 6-3 (10 minutes)
1. a (cash) The ____ category includes currency, coins, and deposits in bank
accounts.
Quick Study 6-4 (10 minutes)
a. False A guideline for safeguarding cash is that all cash receipts be deposited monthly or yearly.
b. False A voucher system of control is a control system exclusively for cash receipts.
Quick Study 6-5 (10 minutes)
(a) Cash ………………………………………………………….. 430
Cash Over and Short ……………………………. 10
Sales …………………………………………………… 420
Record cash sales and a cash overage.
Quick Study 6-6 (10 minutes)
1. (a) Petty Cash …………………………………………………. 150
Cash ……………………………………………………. 150
Establish the petty cash fund.
(b) Entertainment Expense ………………………………. 70
Postage Expense ……………………………………….. 30
Printing Expense………………………………………… 22
Cash ……………………………………………………. 122
Reimburse the petty cash fund.
Quick Study 6-7 (15 minutes)
Bank or Book Side Add or Subtract Adjusting Entry or Not
a. (1) Book (2) Add (3) Adjusting entry required
b. (1) Book (2) Subtract (3) Adjusting entry required
c. (1) Book (2) Subtract (3) Adjusting entry required
d. (1) Bank (2) Subtract (3) No Adjustment required
Quick Study 6-8 (25 minutes)
NOLAN COMPANY
Bank Reconciliation
June 30
Bank statement balance…..
$21,332
Book balance …………………………..
$22,352
Add:
Add:
Deposit of June 30 …………
4,724
Recording error on check …………………………..
9
Interest earned …………………………..
23
Deduct:
Deduct:
Outstanding checks ………
3,713
Bank service charges …………………………..
Quick Study 6-9 (20 minutes)
ORGANIC FOOD CO.
Bank Reconciliation
August 31
Bank statement balance ..
$5,160
Book balance …………………………..
$5,500
Add
Deposit of Aug. 31 ………
1,240
Bank error …………………..
80
Deduct
Deduct
Outstanding checks ……
1,120
Bank service charges …………………………..
NSF check …………………………..
Quick Study 6-10 (15 minutes)
a. Days’ sales uncollected = x 365
Year 2 Year 1
b. Interpretation: The company took 0.9 days less to collect on its
accounts receivable in Year 2 (14.6 days) compared with Year 1 (15.5
days).
The collection of accounts receivable is slightly improving according to
this ratio alone. Management must be careful as it can reduce this ratio
by simply tightening credit policies that decrease accounts receivable;
however, such action might substantially decrease sales, which might
not be in the best interests of the company.
Quick Study 6-11A (10 minutes)
Accounts receivable
Net sales
EXERCISES
Exercise 6-1 (10 minutes)
Exercise 6-2 (15 minutes)
a. Separate recordkeeping from custody of assets
b. Insure assets and bond key employees
Exercise 6-3 (15 minutes)
Weakness or Strength
Internal Control Principle
1.
Weakness
Divide Responsibility for Related Transactions
2.
Weakness
Perform Regular and Independent Reviews
3.
Weakness
Maintain Adequate Records
Exercise 6-4 (15 minutes)
Good or Bad
Cash Management Strategy
1.
Bad
Delay payment of liabilities
2.
Good
Plan expenditures
3.
Bad
4.
Bad
Encourage collection of receivables
5.
Good
Exercise 6-5 (15 minutes)
Currency and coins …………………………..……………….. $1,000
Checking account ……………………………………………… 3,000
U.S. Treasury bill ……………………………………………….. 5,000
Cash and cash equivalents ………………………………… $9,000
Exercise 6-6 (15 minutes)
Strength or Weakness
1.
Weakness
2.
Strength
3.
Strength
4.
Weakness
5.
Weakness
6.
Weakness
Exercise 6-7 (15 minutes)
Strength or Weakness
1.
Strength
2.
Strength
3.
Weakness
4.
Weakness
5.
Strength
6.
Weakness
Exercise 6-8 (20 minutes)
1.
Sept. 9
Petty Cash ………………………………………………………
350
Cash ……………………………………………………….
350
Establish a $350 petty cash fund.
2.
Sept. 30
Merchandise Inventory* …………………………………..
40
Postage Expenses …………………………………………..
123
Miscellaneous Expenses …………………………..…….
80
Cash Over and Short ……………………………………….
Cash ……………………………………………………….
246
Reimburse the petty cash fund.
3.
Oct. 1
Petty Cash ………………………………………………………
50
Cash ……………………………………………………….
50
Increase the petty cash fund to $400.
Exercise 6-9 (20 minutes)
1.
May 2
Petty Cash ………………………………………………………
1,050
Cash ……………………………………………………….
1,050
Establish a $1,050 petty cash fund.
2.
May 30
Merchandise Inventory* …………………………………..
120
Postage Expenses …………………………………………..
369
Miscellaneous Expenses …………………………..…….
240
Cash Over and Short ………………………………….
5
Cash ……………………………………………………….
724
Reimburse the petty cash fund.
* Transportation-in costs are included in Merchandise
Inventory under a perpetual system.
June 1
Petty Cash ………………………………………………………
150
Cash ……………………………………………………….
Increase the petty cash fund to $1,200.
Exercise 6-10 (20 minutes)
1.
Jan. 1
Petty Cash ………………………………………………………
200
Cash ……………………………………………………….
200
Establish a petty cash fund.
2.
Jan. 8
Postage Expense …………………………………………….
74
Merchandise Inventory* …………………………………..
29
Delivery Expense …………………………………………….
16
Miscellaneous Expenses …………………………..…….
43
Cash ……………………………………………………….
162
Reimburse the petty cash fund.
3.
Jan. 8
Postage Expense …………………………………………….
74
Merchandise Inventory ……………………………………
29
Delivery Expense …………………………………………….
16
Miscellaneous Expenses …………………………..…….
43
Cash ……………………………………………………….
162
Reimburse the petty cash fund.**
Cash ……………………………………………………….
250
Increase the petty cash fund.**
Exercise 6-11 (20 minutes)
Bank Balance
Book Balance
Shown or Not
Shown on
Add or Subtract
Add or Subtract
Adjust
Reconciliation
1.
NSF check shown on bank statement
but not yet recorded by company.
—
Subtract
Cr.
Shown
2.
Interest earned on the account.
—
Dr.
Shown
Deposit made on September 5 and
processed by bank on September 6.
4.
Check written by another depositor
but charged against this company’s
account.
Add
—
—
Shown
5.
Bank service charge.
—
Subtract
Cr.
Shown
6.
Checks outstanding on August 31
that cleared the bank in September.
—
—
—
Not Shown
account and cleared by the bank;
erroneously not recorded by the
company recordkeeper.
8.
A note receivable is collected by the
bank for the company but not yet
recorded by the company.
—
Add
Dr.
Shown
9.
Checks written and mailed to payees
on October 2.
—
—
—
Not Shown
10.
Checks written by the company and
mailed to payees on September 30.
Deduct
—
—
Shown
Deposit made on September 30 after
the bank closed.
Add
Shown
12.
Bank fees for check printing are not
yet recorded by the company.
—
Cr.
Shown
Exercise 6-12 (25 minutes)
DEL GATO CLINIC
Bank Reconciliation
June 30
Bank statement balance ..
$10,555
Book balance …………………………..
$11,589
Add
Add
Deposit of June 30 ………
2,856
Error on Ck. No. 919 …………………………..
9
Exercise 6-13 (10 minutes)
June 30
Cash …………………………………………………………..
9
Utilities Expense ……………………………………
9
Correct a journal entry error.
Cash ……………………………………………………..
Record bank service charge.
Exercise 6-14 (25 minutes)
WRIGHT COMPANY
Bank Reconciliation
May 31
Bank statement balance …
$25,800
Book balance …………………………..
$27,500
Add
Deposit of May 31 …………
6,200
Bank error …………………….
400
Deduct
Deduct
Outstanding checks……..
5,600
Bank service charges …………………………..
NSF check …………………………..
Exercise 6-15 (15 minutes)
(a) Days’ sales uncollected in Year 1:
x 365 = 32.5 days
Days’ sales uncollected in Year 2:
$65,000
$730,000
Exercise 6-16A (10 minutes)
1. Purchase requisition E. A document used by department managers to inform the purchasing
department to place an order with a vendor.
2. Purchase order C. A document used to place an order with a vendor that authorizes the
vendor to ship ordered merchandise at the stated price and terms.
3. Invoice A. An itemized statement of goods prepared by the vendor listing the
customer’s name, items sold, sales prices, and terms of sale.
PROBLEM SET A
Problem 6-1A (20 minutes)
Part 1
a. Separate recordkeeping from custody of assets.
b. Establish responsibilities.
Part 2
a. The company should implement a policy whereby the person receiving
incoming cash receipts is not responsible for posting the payments to
the customer accounts.
c. While the daily backup is a very good internal control, the computer
needs to be password locked when Nori is no longer using it. Failing to
lock the computer gives anyone access to the accounting records. The
business should require all employees to password lock computers
after use or automatically lock after a short period of inactivity.
d. Ben Shales needs to implement a way to regularly and independently
review his employees. Hiring of internal auditors or an outside
consultant to objectively review the internal controls and the employees’
work needs to be implemented.
and those in sensitive positions) should be reinstated.
Problem 6-2A (20 minutes)
May 1
Petty Cash ……………………………………………………….
300.00
Cash ………………………………………………………………
300.00
Establish the $300 petty cash fund.
May 15
Janitorial Expenses …………………………..…………………
Miscellaneous Expenses ……………………………………..
Postage Expenses ……………………………………………….
Advertising Expense ……………………………………………
Cash Over and Short ………………………………………
Cash ………………………………………………………………
237.85
Reimburse the petty cash fund.
May 16
Petty Cash ……………………………………………………….
200.00
Cash ………………………………………………………………
200.00
Increase the petty cash fund to $500.
Note: The May 31 entries can be combined into one entry.
May 31
Postage Expenses ……………………………………………….
147.36
Mileage Expense ………………………………………………….
Delivery Expense …………………………..…………………….
Cash Over and Short ……………………………………………
Cash ………………………………………………………………
211.80
Reimburse the petty cash fund.
May 31
Cash ……………………………………………………………………
100.00
Petty Cash ……………………………………………………..
100.00
Decrease the petty cash fund to $400.
Problem 6-3A (30 minutes)
Part 1
Feb. 2
Petty Cash ……………………………………………………….
400
Cash ……………………………………………………….
400
Establish the $400 petty cash fund.
Part 2
Nakashima Gallery
Petty Cash Payments Report (for February)
Delivery expense
Feb. 23
Delivery of customer’s merchandise …………………….
$ 20.00
Mileage expense
Feb. 14
Reimbursement for mileage …………………………..
68.00
Postage expense
Feb. 12
Express delivery of contract …………………………..
Feb. 27
Purchased postage stamps …………………………..
54.00
61.95
Merchandise inventory (transportation-in)*
Feb. 9
32.50
Feb. 25
13.10
45.60
Office supplies expense
Feb. 5
Purchased paper for copier …………………………..
14.15
Feb. 20
Purchased office paper ………………………………………..
67.77
81.92
Total
$277.47
* Transportation-in costs are included in Merchandise Inventory under a perpetual system.
Part 3
a. Feb. 28
Delivery Expense …………………………………………………
20.00
Mileage Expense ………………………………………………….
68.00
Postage Expense …………………………………………………
61.95
Merchandise Inventory …………………………………………
45.60
Office Supplies Expense …………………………..
81.92
Cash Over and Short ……………………………………………
2.11
Cash ……………………………………………………….
279.58
Reimburse the petty cash fund.
Petty Cash ……………………………………………………….
100.00
Cash ……………………………………………………….
100.00
Increase the petty cash fund to $500.
Problem 6-4A (30 minutes)
Part 1
BRANCH COMPANY
Bank Reconciliation
July 31
Bank statement balance …..
$27,233
Book balance …………………………..
$27,497
Add
Add
Deposit of July 31 ………….
11,514
38,747
Proceeds from note …………………………..
7,955
35,452
Deduct
Deduct
Part 2
July 31
Cash ……………………………………………………………………
7,955
Notes Receivable ……………………………………………
7,955
Record note collection.
July 31
Accounts Receivable—E. Shaw …………………………..
805
Cash ………………………………………………………………
805
Charge account for NSF check.
July 31
Miscellaneous Expenses ……………………………………..
25
Cash ………………………………………………………………
25
Record bank service fee.
Correct an entry error.