Accounting Chapter 6 Internal control procedures become especially

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399

Chapter 6

Cash, Fraud, and Internal Control

QUESTIONS

1. The seven broad principles are: Establish responsibilities; Maintain adequate records;

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

5. If individual departments were permitted to deal directly with suppliers, the amount of

6. The limitations of internal control arise from two sources: the human element (human

error or human fraud) and the cost-benefit principle.

7. Cash is most liquid; and least liquid is a building. The four assets ordered from most to

9. Depositing all receipts on the day of receipt (1) creates an independent record of the

amount of cash received and (2) helps prevent an employee from having personal use of

the money for a period of time before depositing it.

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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

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

13. Samsung’s cash and equivalents decreased by ₩1,566,312 million; specifically, from

₩32,111,442 to ₩30,545,130 (all in KRW millions). Its statement of cash flows identifies

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QUICK STUDIES

Quick Study 6-1 (10 minutes)

1. True Separation of recordkeeping for assets from the custody over assets helps reduce

fraud.

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.

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 6

Quick Study 6-5 (10 minutes)

(a) Cash ………………………………………………………….. 430

Cash Over and Short ……………………………. 10

Quick Study 6-6 (10 minutes)

1. (a) Petty Cash …………………………………………………. 150

Cash ……………………………………………………. 150

2. Answers: a and c. The Petty Cash account is credited when:

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

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 6

403

Quick Study 6-8 (25 minutes)

NOLAN COMPANY

Bank Reconciliation

June 30

Bank statement balance…..

$21,332

Book balance …………………………..

$22,352

Add:

Deduct:

Quick Study 6-9 (20 minutes)

ORGANIC FOOD CO.

Bank Reconciliation

August 31

Bank statement balance ..

$5,160

Book balance …………………………..

$5,500

Add

Deduct

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 6

Quick Study 6-10 (15 minutes)

a. Days’ sales uncollected = x 365

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

Quick Study 6-11A (10 minutes)

Documents prepared as part of a voucher system include: a, c, d.

Accounts receivable

Net sales

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 6

EXERCISES

Exercise 6-1 (10 minutes)

Principle Violated

Exercise 6-2 (15 minutes)

a. Separate recordkeeping from custody of assets

Exercise 6-3 (15 minutes)

Weakness or Strength

Internal Control Principle

1.

Weakness

Divide Responsibility for Related Transactions

3.

Weakness

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 6

Exercise 6-4 (15 minutes)

Good or Bad

Cash Management Strategy

1.

Bad

Delay payment of liabilities

2.

Plan expenditures

3.

Bad

4.

Bad

Encourage collection of receivables

5.

Exercise 6-5 (15 minutes)

Currency and coins …………………………..……………….. $1,000

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

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 6

Exercise 6-8 (20 minutes)

1.

Sept. 9

Petty Cash ………………………………………………………

350

Cash ……………………………………………………….

Establish a $350 petty cash fund.

2.

Sept. 30

Merchandise Inventory* …………………………………..

40

Postage Expenses …………………………………………..

123

Miscellaneous Expenses …………………………..…….

80

Cash Over and Short ……………………………………….

Cash ……………………………………………………….

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 ………………………………………………………

Cash ……………………………………………………….

Establish a $1,050 petty cash fund.

2.

May 30

Merchandise Inventory* …………………………………..

120

Postage Expenses …………………………………………..

369

Miscellaneous Expenses …………………………..…….

240

Cash Over and Short ………………………………….

Cash ……………………………………………………….

Reimburse the petty cash fund.

3.

June 1

Petty Cash ………………………………………………………

150

Cash ……………………………………………………….

Increase the petty cash fund to $1,200.

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 6

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.**

Jan. 8

Petty Cash ………………………………………………………

250

Cash ……………………………………………………….

250

Increase the petty cash fund.**

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Exercise 6-11 (20 minutes)

Bank Balance

Book Balance

Shown or Not

Shown on

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.

but charged against this company’s

5.

Bank service charge.

—

Subtract

Cr.

Shown

6.

Checks outstanding on August 31

that cleared the bank in September.

—

Not Shown

7.

Check written against the company

account and cleared by the bank;

erroneously not recorded by the

company recordkeeper.

—

Subtract

Cr.

Shown

A note receivable is collected by the

bank for the company but not yet

recorded by the company.

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

12.

Bank fees for check printing are not

yet recorded by the company.

—

Cr.

Shown

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 6

Exercise 6-12 (25 minutes)

DEL GATO CLINIC

Bank Reconciliation

June 30

Bank statement balance ..

$10,555

Book balance …………………………..

$11,589

Add

Exercise 6-13 (10 minutes)

June 30

Cash …………………………………………………………..

9

Utilities Expense ……………………………………

9

Cash ……………………………………………………..

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411

Exercise 6-14 (25 minutes)

WRIGHT COMPANY

Bank Reconciliation

May 31

Bank statement balance …

$25,800

Book balance …………………………..

$27,500

Add

Deduct

Exercise 6-15 (15 minutes)

(a) Days’ sales uncollected in Year 1:

x 365 = 32.5 days

$65,000

$730,000

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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.

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413

PROBLEM SET A

Problem 6-1A (20 minutes)

Part 1

a. Separate recordkeeping from custody of assets.

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.

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.

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414

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 ………………………………………………………………

211.80

Reimburse the petty cash fund.

May 31

100.00

Petty Cash ……………………………………………………..

100.00

Decrease the petty cash fund to $400.

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Problem 6-3A (30 minutes)

Part 1

Petty Cash ……………………………………………………….

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 …………………………..

61.95

Merchandise inventory (transportation-in)*

Feb. 9

Feb. 25

45.60

Feb. 20

Purchased office paper ………………………………………..

Part 3

a. Feb. 28

Delivery Expense …………………………………………………

20.00

Mileage Expense ………………………………………………….

68.00

Postage Expense …………………………………………………

61.95

Merchandise Inventory …………………………………………

45.60

81.92

Petty Cash ……………………………………………………….

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Problem 6-4A (30 minutes)

Part 1

BRANCH COMPANY

Bank Reconciliation

July 31

Bank statement balance …..

$27,233

Book balance …………………………..

$27,497

Add

Deduct

Part 2

July 31

Cash ……………………………………………………………………

7,955

Notes Receivable ……………………………………………

7,955

Record note collection.

July 31

Accounts Receivable—E. Shaw …………………………..

Cash ………………………………………………………………

Charge account for NSF check.

July 31

Miscellaneous Expenses ……………………………………..

Cash ………………………………………………………………

Record bank service fee.

Correct an entry error.