Continuing Cookie Chronicle 1
Continuing Cookie Chronicle
(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 6.)
CCC7 Part 1 Natalie is struggling to keep up with the recording of her accounting
transactions. She is spending a lot of time marketing and selling mixers and
giving her cookie classes. Her friend John is an accounting student who runs his
own accounting service. He has asked Natalie if she would like to have him do
her accounting.
John and Natalie meet and discuss her business. John suggests that he do
the following for Natalie.
1. Hold onto cash until there is enough to be deposited. (He would keep the
cash locked up in his vehicle). He would also take all of the deposits to the
bank at least twice a month.
2. Write and sign all of the checks.
3. Record all of the deposits in the accounting records.
4. Record all of the checks in the accounting records.
5. Prepare the monthly bank reconciliation.
6. Transfer all of Natalie’s manual accounting records to his computer
accounting program. John maintains all of the accounting information that
he keeps for his clients on his laptop computer.
7. Prepare monthly financial statements for Natalie to review.
8. Write himself a check every month for the work he has done for Natalie.
Instructions
Identify the weaknesses in internal control that you see in the system that John is
recommending. (Consider the principles of internal control identified in the
chapter.) Can you suggest any improvements if John is hired to do Natalie’s
accounting?
Part 2 Natalie decides that she cannot afford to hire John to do her accounting.
One way that she can ensure that her cash account does not have any errors
and is accurate and up–to-date is to prepare a bank reconciliation at the end of
each month.
GENERAL LEDGER—COOKIE CREATIONS INC.
Cash
Date
2015
Explanation
Ref
Debit
Credit
Balance
June 1
Balance
2,657
1
750
3,407
3
625
2,782
3
2,687
8
2,631
9
1,050
3,681
425
3,256
155
3,411
297
3,114
110
3,224
PREMIER BANK
Statement of Account—Cookie Creations Inc.
June 30, 2015
Date
Explanation
Deposits
Balance
May 31
Balance
3,256
June 1
Deposit
750
4,006
3,381
95
3,286
56
3,230
Deposit
4,280
10
4,180
10
35
4,145
14
3,693
20
Deposit
125
3,818
23
EFT–Telus
3,733
28
Check #599
3,372
30
Bank charges
3,359
Additional information:
1. On May 31, there were two outstanding checks: #595 for $238 and #599
for $361.
2. Premier Bank made a posting error to the bank statement: check #603 was
issued for $425, not $452.
Instructions
(a) Prepare Cookie Creations’ bank reconciliation for June 2015.
(b) Prepare any necessary general journal entries.
(c) If a balance sheet is prepared for Cookie Creations Inc. at June 30, 2015,
what balance will be reported as cash in the current assets section?
Part 1
The weaknesses in internal accounting controls in the system recommended by
John are:
(1) The cash could be stolen from John’s car before it is deposited in the
bank.
Improvements should include the following:
(1) Cash should be deposited in the bank daily. At a minimum cash
should be locked in a safe until it can be deposited.
(2) John should be responsible for the accounting function only. Natalie
(or some other independent person) should sign all checks and
make all deposits. Checks should only be signed when there is
documentation present to support the payment. All invoices should
be stamped “PAID” to avoid duplicate payment.
(5) John should submit a monthly invoice for the work he has done to
Natalie for her approval. Natalie should then write and sign the check.
Part 2
(a) COOKIE CREATIONS INC.
Bank Reconciliation
June 30, 2015
Cash balance per bank statement ……………………………..
$3,359
Add: Deposit in transit …………………………………………….
$110
Bank error Check No. 603 ($452 – $425) …………
Less: Outstanding checks ($238 + $297) ……………………
Cash balance per books ……………………………………………
NSF check ($100 + $35 service charge)…………..
(b)
June 30
Miscellaneous Expense ………………………….
13
Cash …………………………………………….
13
Service Revenue …………………………………….
30
30
85
85
Accounts Receivable—Ron Black …………..