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CHAPTER 7
Internal Control and Cash
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
Exercises
A
Problems
B
Problems
1, 2, 3, 4,
5, 6, 7
1, 2
1, 2, 3
8B
8, 9, 10
1A, 3A
1B, 2B, 3B
11, 12,13
5, 6
2A, 3A
2B, 3B
4. Prepare a bank
reconciliation.
5, 6, 7, 8,
9, 10
7, 8,
9, 10, 11
3A, 4A,
5A, 6A,
7A, 8A
3B, 4B,
5B, 6B, 7B
17, 18
11
8A
8B
19, 20
12
12
21
13
13
9A, 10A
9B, 10B
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Description
Difficulty
Level
Time
Allotted (min.)
1A
Simple
20-30
2A
Simple
20-30
3A
Complex
40-50
4A
Moderate
40-50
5A
Moderate
30-40
6A
Moderate
40-50
7A
Moderate
40-50
8A
Moderate
40-50
9A
Simple
20-30
10A
Moderate
30-40
1B
Simple
20-30
2B
Simple
20-30
3B
Complex
40-50
4B
Moderate
40-50
5B
Moderate
30-40
6B
Moderate
40-50
7B
Moderate
40-50
8B
Moderate
20-30
9B
Simple
20-30
10B
Moderate
30-40
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ANSWERS TO QUESTIONS
1.
Disagree. Internal control is also concerned with optimizing the use of resources to reduce
inefficiencies and waste; preventing and detecting errors and irregularities in the accounting
process, and safeguarding assets from employee theft, robbery, and unauthorized use.
2.
This is a violation of the internal control principle of establishing responsibility. In this case,
each sales clerk should have a separate cash register or cash register drawer.
3.
4.
5.
Physical controls include safes, vaults, locked warehouses, and electronic burglary systems
and sensors that help to safeguard assets. Physical controls also include cash registers
and computerized accounting equipment that contribute to the accuracy and reliability of the
accounting records.
6.
(a)
(b)
The concept of reasonable assurance means that the costs of establishing control
procedures should not exceed their expected benefit. Ordinarily, a system of internal
control provides reasonable but not absolute assurance, since absolute assurance
would be too costly.
The human element is an important factor in a system of internal control. A good
system may become ineffective through employee fatigue, carelessness, and
indifference. Moreover, internal control may become ineffective as a result of
collusion.
7.
Cash should be reported at $17,100 ($5,000 + $100 + $12,000). The cash refund and the
post-dated cheques are receivables not cash.
8.
Daily cash counts and deposits of over-the-counter receipts pertain primarily to the
principles of segregation of duties and independent internal verification. Daily cash counts
also involve the establishment of responsibility for performing the counts.
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Questions (Continued)
9.
Cash registers are readily visible to the customer. Thus, they prevent the sales clerk from
ringing up a lower amount and pocketing the difference. In addition, the customer receives
an itemized
receipt, and the cash register tape is locked into the register for further
verification. Having scanners reduces the chance of error in entering the price of an item.
10.
Two mail clerks contribute to a more accurate listing of mail receipts and to the
endorsement of all cheques For Deposit Only. In addition, two clerks reduce the likelihood
of mail receipts being diverted to personal use.
11.
Segregating the duties surrounding the receipt, disbursement and recording of cash
reduces the risk that employees could divert cash for personal use and cover up the theft
by manipulating cash payments or by hiding any discrepancies through creative
bookkeeping.
12.
13.
Principle
Establishment of responsibility
Physical controls
Independent internal verification
14.
A bank contributes significantly to internal control over cash because it: (1) safeguards cash
on deposit, (2) minimizes the amount of cash that must be kept on hand, and (3) provides a
double record of all bank transactions.
15.
The lack of agreement between the cash balances may be due to either:
(1) Time lagsa cheque written in July does not clear the bank until August.
(2) Errorsa cheque for $110 is recorded by the depositor at $101.
16.
(a) An NSF cheque occurs when the cheque writers bank balance is less than the amount
of the cheque.
(b) In a bank reconciliation, a customers NSF cheque is deducted from the balance per
books.
(c) An NSF cheque results in an adjusting entry in the companys books, as a debit to
Accounts Receivable and a credit to Cash.
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Questions (Continued)
17.
Cash equivalents are considered to be near cash. Cash equivalents are highly liquid
investments that may be converted to a specific amount of cash with maturities of three
months or less when purchased. Cash equivalents are often reported with cash in the
current asset section of the balance sheet.
18.
Compensating balances are minimum cash balances which lenders specify that a
borrower must maintain in the borrowers bank account to provide support for a loan. A
compensating balance should be reported as a noncurrent asset and disclosed in the
notes to the financial statements.
19.
The basic principles of cash management are: (1) increase collection of receivables, (2)
keep inventory low, (3) delay payment of liabilities, (4) plan timing of major expenditures,
and (5) invest idle cash.
20.
The company will have to ensure that any excess cash, due to the increase in cash
flows, is properly invested and not sitting idle in a bank account.
21.
(a)
(b)
A cash budget is a tool used to help planning for the companys cash needs. It shows
anticipated cash flows.
A cash budget contributes to effective cash management by enabling a company to
plan ahead to cover possible shortfalls and invest idle funds.
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2.
3.
4.
Optimize the use of resources to reduce inefficiencies and waste. An application for Plenty
Parking is the use of automatic ticket dispensers at the entry gates and time clocks to
determine how long vehicles have been parked.
Prevent and detect errors and irregularities in the accounting process. An application for
Plenty Parking is to segregate responsibilities. For example, a different person (a manager or
Gina as the owner) than the person who collects and deposits the cash should prepare the
bank reconciliation.
Safeguard assets from theft, robbery, and unauthorized use. An application for Plenty
Parking is the use of a cash register to safeguard assets.
Maintain reliable control systems to enhance the accuracy and reliability of its accounting
records. An application for Plenty Parking is the comparison of the daily cash receipts to the
cash register tape.
All four purposes are important to the success of any business endeavour.
Segregation of duties
Independent internal verification
Documentation procedures
Physical controls
Other controls
Independent internal verification
Segregation of duties
Establishment of responsibility
Other controls
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Documentation procedures
Independent internal verification
Physical controls
Establishment of responsibility
Segregation of duties
Establishment of responsibility, segregation of duties and independent internal verification
The reconciling items per the books, items (b) and (c) above, will require adjustment on the
books of the depositor.
The other reconciling items, deposits in transit, outstanding cheques and bank errors do not
require adjustment because they have already been correctly recorded on the depositors
books.
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$7,800
1,700
9,500
760
$8,740
$8,760
20
$8,740
Bank Charges.....................................................................
Cash........................................................................
20
$2,500
(2,300)
$ 200
$2,800
(2,000)
200
$1,000
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20
The Toronto Maple Leafs hockey team are likely to want to focus on how to invest idle
cash. The hockey club likely sells tickets in advance and will want to invest the cash shortterm until such a time as it is needed to pay expenses such as players salaries.
(b)
Imperial Tobacco will likely want to keep inventory levels low to minimize the amount of
cash tied up at any given time.
(c)
Intrawest Corporation has undergone major growth in its resorts over the past several
years. Intrawest will likely want to plan the timing of major expenditures to ensure it has
sufficient resources available to finance the expenditures.
(d)
WestJet Airlines has also undergone significant growth and is likely to need to plan the
timing of major expenditures such as new planes. As well, the company may try to delay
the payment of liabilities to ensure that large bills for items such as jet fuel and catering
are not paid early and that when possible, all discounts are taken.
(e)
The McMaster University Bookstore is likely to manage cash by delaying the payment of
liabilities to publishing companies until the bills are due. As well, the bookstore probably
generates most of its cash at the beginning of the semester and will want to invest any idle
cash.
(f)
Tim Hortons will likely want to keep inventory levels low to minimize the amount of cash
tied up in perishable products.
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$ 2,000
60,000
62,000
65,000
(3,000)
8,000
$ 5,000
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SOLUTIONS TO EXERCISES
EXERCISE 7-1
(a) Cash and Cash Equivalents
1.
2.
3.
5.
6.
(b)
Currency
Guaranteed Investment certificate
April cheques
Royal Bank chequing account
Royal Bank savings account
Total
60
10,000
300
2,500
4,000
$16,860
EXERCISE 7-2
The principles of internal control inherent in the maker-checker procedure are:
1.
2.
Segregation of duties. The employees make the transaction. The supervisors post the
transactions.
Physical controls. Access to the computer system is password protected and task specific.
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EXERCISE 7-3
1.
Establishment of responsibility. The counter clerk is responsible for handling cash. Other
employees are responsible for making the pizzas.
2.
Segregation of duties. Employees who make the pizzas do not handle cash.
3.
Documentation procedures. The counter clerk uses your order invoice (ticket) in registering
the sale on the cash register. The cash register produces a tape of all sales.
4.
5.
Independent internal verification. The counter clerk, in handling the pizza, compares the
size of the pizza with the size indicated on the order.
6.
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EXERCISE 7-4
(a)
Weakness
(b)
Principle
Recommended
Change
1.
Other controls.
2.
Inability to establish
responsibility for cash on a
specific clerk.
Establishment of
responsibility.
3.
Physical controls.
4.
Independent internal
verification.
5.
Segregation of
duties.
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EXERCISE 7-5
(a)
Weakness
(b)
Principle
Recommended
Change
1.
Physical
controls.
2.
Segregation of duties.
3.
Establishment of
responsibility.
4.
Documentation
procedures.
Cheques should be
prenumbered and
subsequently accounted for.
5.
Other controls.
6.
Independent internal
verification.
An independent person
should prepare the bank
reconciliation.
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Re:
EXERCISE 7-6
(a)
Weaknesses
1.
2.
3.
4.
5.
6.
7.
8.
(b)
Memo
Date:
To:
From:
In order to improve control over cheque disbursements, the company should take the
following steps:
1.
2.
3.
4.
5.
6.
7.
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EXERCISE 7-7
(a)
LOKO LTD.
Bank Reconciliation
January 31
$3,660.20
590.00
4,250.20
730.00
$3,520.20
$3,975.20
$430.00
25.00
455.00
$3,520.20
Accounts Receivable...................................................................
Cash....................................................................................
430
25
430
EXERCISE 7-8
The outstanding cheques are as follows:
No.
255
260
264
Amount
$ 800
0925
360
Total $2,085
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25
EXERCISE 7-9
(a)
MOHAMMED LTD.
Bank Reconciliation
July 31
Cash balance per bank statement...................................................................
Add: Deposits in transit..................................................................................
Less: Outstanding cheques............................................................................
Adjusted cash balance per bank.....................................................................
Cash balance per books..................................................................................
Add: Electronic payment on account received by bank................................
Less: Bank service charge.............................................................................
Adjusted cash balance per books....................................................................
(b)
July 31
31
Cash .............................................................................
Accounts Receivable...........................................
1,216
40
$7,238
1,700
8,938
772
$8,166
$6,990
1,216
8,206
40
$8,166
1,216
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40
EXERCISE 7-10
(a)
RESTON LTD.
Bank Reconciliation
September 30
Cash balance per bank statement...........................................
Add: Deposits in transit..........................................................
$16,422
4,996
21,418
2,383
$19,035
NSF cheque................................................................
Safety deposit box rent...............................................
Adjusted cash balance per books............................................
(b)
Sept.
30
30
30
$19,430
45
19,475
$410
30
440
$19,035
Cash ........................................................................
Interest Revenue...............................................
45
30
410
45
30
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410
EXERCISE 7-11
(a)
$16,200
$15,600
(750)
14,850
$ 1,350
$25,900
2,400
28,300
25,400
$ 2,900
$17,200
$16,400
(920)
15,480
$ 1,720
$25,000
2,100
27,100
23,700
$ 3,400
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EXERCISE 7-12
Suggestions to improve cash management practices for Tory, Hachey and Wedunn:
1.
2.
3.
4.
EXERCISE 7-13
HANOVER LIMITED
Cash Budget
Two Months Ending February 28, 2005
January
February
$ 36,000
$ 12,000
70,000
10,000
80,000
116,000
150,000
0
150,000
162,000
40,000
30,000
34,000
104,000
75,000
40,000
49,000
164,000
12,000
(2,000)
0
0
$ 12,000
12,000
0
$ 10,000
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SOLUTIONS TO PROBLEMS
PROBLEM 7-1A
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PROBLEM 7-2A
Principles
Establishment of responsibility
Segregation of duties
Documentation procedures
Physical controls
Other controls
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PROBLEM 7-3A
(a)
GIANT INC.
Bank Reconciliation
November 30, 2004
Balance per bank statement...................................................
$19,460.00
1,210.03
$18,249.97
$19,640.77
750.00
20,390.77
2,140.80
$18,249.97
The principle of independent internal verification has been violated because the
cashier prepared the bank reconciliation. The principle of segregation of duties
has been violated because the cashier had access to the accounting records
and also prepared the bank reconciliation.
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PROBLEM 7-4A
(a)
MALONEY INC.
Bank Reconciliation
May 31, 2004
Cash balance per bank statement.........................
Add: Deposits in transit.......................................
Bank errorBaloney Inc. cheque.................
$6,804.60
$936.15
600.00
(b) May 31
31
31
31
31
1,536.15
8,340.75
276.25
$8,064.50
$8,821.50
20.00
8,841.50
$700.00
10.00
27.00
40.00
777.00
$8,064.50
700
Sales................................................................
Cash.........................................................
10
27
40
Cash.................................................................
Interest Rrevenue.....................................
20
700
10
27
40
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20
PROBLEM 7-5A
(a) General Ledger Cash Balance
April 30...........................................................................
$ 7,964.83
Cash receipts.................................................................
6,915.00
Cash disbursements.......................................................000 (13,423.46)
Unadjusted balance May 31...........................................
$ 1, 456.37
(b)
$4,746.97
1,286.00
6,032.97
$ 89.78
78.82
943.00
890.00
950.00
2,951.60
$3,081.37
$1,456.37
1,650.00
3,106.37
25.00
$3,081.37
25
Cash ................................................................
Accounts Receivable.............................
1,650
25
1,650
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PROBLEM 7-6A
(a)
(b)
RACINE LIMITED
Bank Reconciliation
December 31, 2004
Cash balance per bank statement....................
Add: Deposits in transit...................................
Less: Outstanding cheques
No. 3470..............................................
No. 3474..............................................
No. 3478..............................................
No. 3481..............................................
No. 3484..............................................
No. 3486..............................................
Adjusted cash balance per bank.......................
$19,155.00
1,190.40
20,345.40
$ 1,100.00
1,050.00
538.20
807.40
832.00
1,389.50
5,717.10
$14,628.30
$12,654.40
3,145.00
15,799.40
$1,027.10
45.00
90.00*
9.00 1,171.10
$14,628.30
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31
31
31
31
Cash.......................................................
Accounts Receivable......................
3,145.00
1,027.10
Accounts Payable...................................
Cash...............................................
90.00
Accounts Receivable..............................
Cash...............................................
9.00
45.00
3,145.00
1,027.10
90.00
9.00
45.00
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PROBLEM 7-7A
(a)
PALMEIRO LTD.
Bank Reconciliation
July 31
Cash balance per bank statement.........................
Add: Deposits in transit.......................................
Less: Outstanding cheques..................................
Bank errorSalary cheque..........................
Adjusted cash balance per bank...........................
Cash balance per books........................................
Add: Interest earned...........................................
Error in recording cheque..........................
$24,530
6,9601
31,490
$8,4302
100
8,530
$22,960
$22,700
$ 30
270
300
23,000
40
$22,960
(b) July 31
Cash.................................................................
Bank Charges Expense....................................
Accounts Payable.....................................
Interest Revenue.......................................
260
40
270
30
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PROBLEM 7-8A
(a)
DUBLIN LTD.
Bank Reconciliation
August 31, 2004
Balance per bank statement............................................
Add: Deposit in transit ...................................................
..............................................................................
Bank error ($1,957 - $1,597).................................
Less: Outstanding cheques
No. 628..................................................
No. 635..................................................
No. 636......................................................
No. 637..................................................
Adjusted cash balance per bank.......................
$1,523.47
2,607.61
2,607.61
360.00
4,491.08
$ 781.25
1,333.33
250.00
. 224.53
66.00
150.00
Cash ................................................................
Interest Revenue...................................
5.00
2,589.11
$1,901.97
$2,112.97
5.00
2,117.97
166.00
50.00
$1,901.97
216.00
5.00
(c) Dublin would report $1,902 as Cash in the current assets section of its
balance sheet on August 31.
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PROBLEM 7-9A
(a) Cash collections in April
March.................................
April ...................................
(b) Cash disbursements in April
Purchases March................
Purchases April...................
(c)
$20,000
36,000
$56,000
40% of $50,000
60% of $60,000
$21,750
26,100
$47,850
50% of $43,500
50% of $52,200
$ 8,000
.36,000
.20,000
. 56,000
.64,000
.21,750
.26,100
.13,300
. 2,500
.63,650
00. 350
0.4,650
0
$ 5,000
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PROBLEM 7-10A
(a) (1) Expected Collections from Customers
November ($260,000)..............................
December ($300,000)..............................
January ($350,000)..................................
February ($400,000)................................
Totals.......................................................
(2) Expected Payments for Purchases
December ($100,000)..............................
January ($120,000)..................................
February ($130,000)................................
Totals.......................................................
January
February
$ 26,000
0120,000
0175,000
00000 00
$321,000
$
0
0.30,000
.140,000
. 200,000
$370,000
January
February
$ 50,000
0.60,000
00000 00
$110,000
$
0
0.60,000
0. 65,000
$125,000
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BADGER CORPORATION
Cash Budget
Two Months Ending February 28, 2005
January
Beginning cash balance......................................
Add: Receipts:
Collections from customers [See (a) (1)]
Notes receivable....................................
Total receipts.......................................................
Total available cash.............................................
Less: Disbursements:
Purchases [See (a) (2)]..........................
Operating expenses...............................
Purchase of investment..........................
Purchase of equipment..........................
Dividends...............................................
Total disbursements.............................................
Excess (deficiency) of available cash over
disbursements....................................................
Financing
Borrowings..................................................
Repayments................................................
Ending cash balance............................................
February
$ 55,000
$ 30,000
321,000
15,000
336,000
391,000
370,000
0000000
370,000
400,000
110,000
179,000
125,000
199,000
26,000
0
0 25,000
375,000
0
25,000
050,000
25,000
364,000
27,000
3,000
0
$ 30,000
5,000
0
$ 30,000
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PROBLEM 7-1B
(a)
(b)
Principles
Establishment of responsibility
Segregation of duties
Documentation procedures
Physical controls
Cash counts are made by the manager at the end of each cashiers shift.
Daily comparisons are made by the
company treasurer.
Other controls
Instead of tearing the tickets, the doorperson could return the tickets to the
cashier who could resell them, and the two could divide the cash.
2.
The cashier could issue a lower price ticket than paid for and the
doorperson would admit the customer. The difference between the ticket
issued and the cash received could be divided between the doorperson
and cashier.
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PROBLEM 7-2B
Roger has created a situation that leaves many opportunities for undetected theft.
Here is a list of some of the deficiencies in internal control. You may find others.
1.
Documentation procedures
The tickets were unnumbered. By numbering the tickets, the students
could have been held more accountable for the tickets.
No record was kept of which students took tickets to sell or how many they
took. The student assigned control over the tickets should have kept a
record of which tickets were issued to each student for resale. (Note: This
problem could have been largely avoided if the tickets had been sold at
the door on the day of the dance.)
There was no control over unsold tickets. This deficiency made it possible
for students to sell tickets, keep the cash, and tell Roger that they had
disposed of the unsold tickets. Instead, students should have been
required to return the unsold tickets to the student maintaining control over
tickets, and the cash to Roger. In each case, the students should have
been issued a receipt for the cash they turned in and the tickets they
returned.
Instead of receipts, students simply wrote notes saying how they used the
funds. Instead, it should have been required that they provided a valid
receipt.
Did not receive a receipt from Obnoxious Al. Without a receipt, there is no
way to verify how much Obnoxious Al was actually paid. For example, it is
possible that he was only paid $100 and that Roger took the rest.
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3.
Segregation of duties
Steve Stevens counted the funds, made out the deposit slip, and took the
funds to the bank. This made it possible for Steve Stevens to take some of
the money and deposit the rest since there was no external check on his
work. Roger should have counted the funds, with someone observing him.
Then he could have made out the deposit slip and had Steve Stevens
deposit the funds.
Sara Billings was collecting tickets and receiving cash for additional tickets
sold. Instead, there should have been one person selling tickets at the door
and a second person collecting tickets.
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PROBLEM 7-3B
(a)
(b)
TARIKA LTD.
Bank Reconciliation
October 31, 2004
Balance per bank statement...................................................
$18,480.00
1,112.79
$17,367.21
$18,042.21
45.00
18,087.21
720.00
$17,367.21
2.
3.
Subtracting the $45 credit from the bank balance instead of adding it to
the book balance, thereby concealing $90 of the theft.
(c)
1.
The principle of independent internal verification has been
violated because the cashier prepared the bank reconciliation.
2.
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PROBLEM 7-4B
(a)
DUBEAU LTD.
Bank Reconciliation
July 31, 2004
Cash balance per bank statement.........................
Add: Deposits in transit.......................................
$7,695.80
1,824.30
9,520.10
1,480.10
$8,040.00
(b)
July 31
31
31
31
$7,380.00
1,238.00
8,618.00
$490.00
63.00
25.00
578.00
$8,040.00
Cash.................................................................
Accounts Receivable................................
1,238
490
63
25
1,238
490
63
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25
PROBLEM 7-5B
(a) General Ledger Cash Balance:
YAP LTD.
Bank Reconciliation
March 31, 2004
Balance per bank statement....................................
Add: Deposits in transit..........................................
Less: Outstanding cheques
No. 3470.....................................................
No. 3475.....................................................
Adjusted cash balance per bank..............................
$11,775
1,025
12,800
$720
600
1,320
$11,480
$12,988
$ 49
550
909
1,508
$11,480
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909
49
Accounts Receivable........................................
Cash......................................................
550
909
49
550
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PROBLEM 7-6B
(a) General Ledger Cash Balance:
October 31, 2004 (Adjusted cash balance per bank rec.). .
Cash receipts .................................................................
Cash disbursements..........................................................
Unadjusted balance November 30.....................................
(b)
$ 9,596.30
15,831.70
(14,694.10)
$10,733.90
LONDON INC.
Bank Reconciliation
November 30, 2004
Balance per bank statement.............................
Add: Deposits in transit...................................
Less: Outstanding cheques
No. 2451..............................................
No. 2472..............................................
No. 2478..............................................
No. 2482..............................................
No. 2484..............................................
No. 2485..............................................
No. 2487..............................................
No. 2488..............................................
Adjusted cash balance per bank.......................
$17,554.60
1,225.00
18,779.60
$1,260.40
426.80
538.20
612.00
829.50
974.80
398.00
1,200.00
6,239.70
$12,539.90
$10,733.90
2,105.00
12,838.90
$110.00
180.00
9.00
299.00
$12,539.90
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Cash................................................................ 2,105
Accounts Receivable................................
Bank Charges Expense...................................
Cash.........................................................
110
Accounts Payable.............................................
Cash.........................................................
180
Accounts Receivable........................................
Cash.........................................................
2,105
110
180
9
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PROBLEM 7-7B
(a)
MAYO LTD.
Bank Reconciliation
August 31, 2004
Cash balance per bank statement.........................
Add: Deposits in transit.......................................
Less: Bank errorSalary cheque ($275 - $257)....
Outstanding cheques............................................
Adjusted cash balance per bank...........................
$20,710
9,0001
29,710
$ 18
9,7522
000000
$ 50
360
25
9,770
$19,940
$20,330
45
20,375
435
$19,940
Proof of cash balance per bank statement: $16,400 + $73,000 - $68,660 + $45 $25 - $50 = $20,710
1
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May 31
75
360
390
45
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PROBLEM 7-8B
(a)
Cash balance
Cash on hand............................................................
Commercial bank savings account............................
Commercial bank chequing account..........................
US bank account.......................................................
Special bank accountcustomer cash deposits.........
Total...........................................................................
$ 5,000
100,000
25,000
45,000
7,500
.$182,500
Restricted cash..........................................................
$150,000
(b)
If the company combined its cash and cash equivalents the money market
fund of $32,000 and the Treasury bill fund of $75,000 would also be included.
(c)
4.
An unused line of credit would not be reported on the balance
sheet. It may be disclosed in the notes.
5.
6.
7.
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PROBLEM 7-9B
HANOVER LTD.
Cash Budget
Two Months Ending February 28, 2005
(a)
January
Beginning cash balance....................................
Add: Receipts
Collections from customers................
Sale of short term investments...........
Total receipts.....................................................
Total available cash...........................................
Less: Disbursements
Payments to suppliers.........................
Salaries...............................................
Operating expenses............................
Total disbursements..........................................
Excess (deficiency) of available cash over
disbursements.................................................
Financing
Borrowings................................................
Repayments..............................................
Ending cash balance.........................................
February
$ 36,000
$ 12,000
70,000
10,000
80,000
116,000
150,000
..
0
150,000
162,000
0.40,000
0.30,000
34,000
104,000
.75,000
0 40,000
49,000
164,000
0.12,000
0 (2,000)
00000, 0
0.
0
.$ 12,000
012,000
.
0
$ 10,000
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PROBLEM 7-10B
January
February
$ 40,000
084,000
180,000
00 00000
$304,000
$
0
, 56,000
,108,000
, 200,000
$364,000
January
February
, $54,000
, 40,000
00 0000
$94,000
$
0
060,000
44,000
$104,000
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JOPLIN INC.
Cash Budget
Two Months Ending February 28, 2005
Beginning cash balance..................................
Add: Receipts
Collections from customers [See (a) (1)]
Interest revenue receipts....................
Sale of investments...........................
Total receipts...................................................
Total available cash.........................................
Less: Disbursements
Purchases [See (a) (2)]...........................
Operating expenses................................
Purchase of land.....................................
Total disbursements.............................................
Excess (deficiency) of available cash over
disbursements....................................................
Financing
Borrowings.................................................
Repayments...............................................
Ending cash balance............................................
January
February
$ 20,000
$ 18,000
304,000
03,000
000 ,000
307,000
327,000
364,000
094,000
215,000
_______
309,000
,104,000
255,000
20,000
379,000
18,000
, 8,000
0
,
0
$ 18,000
,2,000
.
0
$ 10,000
5,000
369,000
387,000
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(b)
The management statement explains the role of internal auditors in the internal control
function. The audit report does not refer to the internal auditors.
(c)
Loblaws has made a decision not to net it cash balances with its bank indebtedness. It is
possible that the cash balance represents cash held by the company while bank
indebtedness may be operating lines of credit currently being used. The two represent
different accounts and can therefore be reported separately on the financial statements.
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(In millions)
(a)
(b)
Loblaw
Sobeys
$8231
981
$123.11
348.1
Loblaw defines cash as cash and cash equivalents and short-term investments. Sobeys
defines its cash as cash and cash equivalents.
(c)
(d)
Both companies appear to have strong cash balances and appear to be having no problem
generating cash from operations. The fact that excess cash is invested in short-term and
temporary investments indicates the company is investing idle cash to generate some
returns.
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The tech companies were able to amass so much cash with cost cutting measures and
loyal accounts bringing in cash.
(b)
The market does not reflect the full value of cash holdings in their companys share prices
because there is concern that the companies may not make optimum use of the money.
(c)
(d)
No, traditionally tech companies have reinvested earnings into the business to finance
future growth rather than pay dividends.
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(a)
Cash
equivalents are highly liquid investments. They have maturities of three months or less
when purchased, that can be converted into specific amounts of cash. They include money
market funds, money market savings certificates, bank certificates of deposit, and treasury
bills and notes. Cash equivalents differ from other types of short-term investments in that
they are extremely liquid (that is, easily turned into cash). They also have very low risk of
declining in value while held.
(b)
Working Capital
2002:
$1,127 - $932 =
$195
2001:
$1,290 - $1,186 =
$104
Current Ratio
2002:
$1,127
1.21 : 1
$932
2001:
$1,290
1.09 : 1
$1,186
The companys current ratio increased in 2002 indicating the companys liquidity position
has improved. However, much of the increase in working capital is due to an increase in
trade and other accounts receivable, which may indicate the company is experiencing
collection problems. As well, the increase in Imperials current ratio of 11% was much
lower than the increase in the industry average of 52%.
(c)
Having cash available provides a company with flexibility. However, cash does not earn a
very high return. Therefore if a company holds too much cash it could adversely affect their
share price, as investors may perceive that the company is not generating a sufficient
return on their investment.
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Working Capital
2002:
2001:
Current Ratio
2002:
CHF 35,342
1.05 : 1
CHF 33,737
2001:
CHF 39,045
0.94 : 1
CHF 41,492
The companys liquidity position improved during 2002. Currently, the company has
sufficient current assets to repay their currently maturing liabilities. Even though the
companys cash balances declined in 2002 the company has been better able to generate
cash from operating activities.
(b)
Nestls sales and collections are in a foreign currency. When it converts the foreign
currency to Swiss francs the value amount it receives depends on the exchange rate. When
the currency devalues Nestl receives less of its domestic currency on the conversion.
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The material weaknesses and the related principle(s) of internal control that were violated
are as follows:
Material Weakness
Establishment of responsibility
Disregard of advantages
offered by vendors for prompt payment of
invoices
Establishment of responsibility
Absence of segregation of
duties
Segregation of duties
Documentation procedures
Establishment of responsibility
Establishment of responsibility;
independent internal verification
Documentation procedures
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Memo
To:
From:
Re:
Date:
We have reviewed information from your companys audit and identified that principles of
internal control were violated. Outlined below are the principles that have been violated,
the reason the controls are important and steps that can be taken to improve the
situation.
1.
2.
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Documentation proceduresInadequate
principles, overall poor record-keeping.
procedures
for
applying
accounting
5.
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There should be segregation between the individuals who receive, record and deposit
cash receipts.
Different individuals should approve and make payments and cheque signers should
not record disbursements.
Monthly bank reconciliations should be performed/reviewed by a person independent of
the recording process.
We would be pleased to discuss the weaknesses and our recommended improvements with you,
at your convenience.
Yours sincerely,
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The stakeholders are the customers affected by the policy, the shareholders of the banks
who want to see higher profits and the management of the banks who make the decisions
regarding fees and cheque processing policies.
(b)
Largest to smallest:
Smallest to largest:
In order of cheque number:
(c)
Whether this is ethical is subject to debate. On the one hand, it can be argued that
customers have a responsibility to maintain an adequate balance in their accounts. Some
customers are frequently overdrawn; thus only severe penalties will persuade them to
maintain an adequate balance. However, it could be argued that charging $25 for something
that has a cost to the bank of $1.50 is gougingthat is, taking unfair advantage of the
customer.
(d)
In deciding what approach to take, the bank must consider its relationship with the customer.
Clearly, by adopting a largest to smallest approach, it is going to anger some customers,
who may well decide to leave the bank and go to a more customer-friendly bank. However, it
could be argued that some of the customers the bank may lose are customers that are
frequently overdrawn and therefore costly to the bank. Also, it can be time consuming to
change banks, and most people dont have the spare time to change banks unless they
really need to.
(e)
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Copyright 2004 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.
The data contained in these files are protected by copyright. This manual is furnished under licence and may be
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The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made
available on a network, used to create derivative works, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley &
Sons Canada, Ltd.
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