Harrison FA IFRS 11e CH05 SM PDF

Chapter 5
Internal Control, Cash, and Receivables
Short Exercises
(5 min.) S 5-1
Fraud is an intentional misrepresentation of facts, made for the

purpose of persuading another party to act in such a way that
causes injury or damage to that party.
The Three Components of the Fraud Triangle
1. Motive - Fraud generally results from either critical need or

greed on the part of the perpetrator. Regardless of
whether the driving force is need or greed most
perpetrators are driven to attempt to acquire something
that belongs to others.
2. Opportunity - The opportunity to commit fraud usually
arises through weak internal controls.
3. Rationalization - The perpetrator(s) is (are) convinced, in
their own minds, that they deserve the object of the
fraudulent behavior. They may believe no one else will
274 Financial Accounting: IFRS 11/e Solutions Manual

ever know or even that everybody else is engaging in
fraudulent behavior.
(5-10 min.) S 5-2

Separation of duties is essential for safeguarding assets. The
person who has custody of an asset should not also account
for the asset. A person who performs both duties can steal the
asset and hide the theft by making a fraudulent entry in the
accounting records.
Student responses may vary.
Chapter 5 Internal Control, Cash, and Receivables 275

(5-10 min.) S 5-3
Cash is important not because of its amount as reported on
the balance sheet, but because of its effect on a business. All
transactions ultimately affect cash. Businesses purchase
assets and must pay cash. They make sales and collect cash.
All expenses ultimately require cash. Also, cash is
susceptible to theft because it is a medium of exchange.
These factors combine to give cash more importance than
the relative size of the account balance to the other non-cash
assets would suggest.
(10 min.) S5-4

Stephanie will notice a gap in the sequence of sales receipts for
the receipt that Cassidy destroyed. This knowledge will lead
Stephanie to investigate what happened to the missing receipt
and what happened to the related cash.

(20-30 min.) S 5-5
1. Paying by check carries three controls over cash:
• The check provides a record of the payment.

• The check must be signed by an authorized official.
• Before signing the check, the official should study the
evidence supporting the payment.
2. A dishonest purchasing agent could:
• Purchase goods and have them delivered to his home or

other location that he controls.
• Approve payment by the company for goods that he spent
too much on, and then split the excess with the supplier.
Companies avoid this internal control weakness by

separating the following duties related to the purchase of,
and payment for, goods:
• purchasing goods
• receiving goods
• approving and paying for goods

(10 min.) S 5-6
Randell Corp.
Bank Reconciliation
October 31, 20X5
BANK BOOKS
Balance, October 31 $3,280 Balance, October 31 $2,500
Add: Add:
Deposit in transit 350 Bank collection 560
3,630 Interest revenue 30
3,090
Less:
Less: Service charge (20)
Outstanding check (600) NSF check (40)
Adjusted bank balance $3,030 Adjusted book balance $3,030
Randell has cash of $3,030.

(5 min.) S 5-7
Oct. 31 Cash……………………………………….. 560
Accounts Receivable………………... 560
Collection on account.
31 Cash……………………………………….. 30
Interest Revenue……………………... 30
Interest earned on bank balance.
31 Miscellaneous Expense………………... 20
Cash……………………………………. 20
Bank service charge.
31 Accounts Receivable…………………… 40
Cash…………………………………….. 40
NSF check.
(5 min.) S 5-8
It appears that the employee has stolen $500 (adjusted book
balance, $5,000 − adjusted bank balance, $4,500). The adjusted
bank balance is the company’s true cash balance, and the
company books show more cash on hand. Therefore, the books
must be incorrect.

(5-10 min.) S 5-9
Crescent Artichoke Growers
Cash Budget
Year 20X6
(in millions)
Cash balance, beginning $ 14
Estimated cash receipts—total 124
138
Estimated cash payments—total (106)
Cash available (needed) before new financing 32
Budgeted cash balance needed (22)
Cash available for additional investments $ 10

(5 min.) S 5-10
1.
Accounts Receivable
Beg. bal. 48,000
Net credit sales 1,200,000 Collections 980,000
Write-offs 18,000
End. bal. 250,000
Amount customers owe the company
2.
Allowance for Uncollectible Accounts
Beg. bal. 10,480
Write-offs 18,000 Allowance for
Uncollectible accounts 40,000
End. bal. 32,480
Amount the
company
expects not
to collect
3.
Net Accounts Receivable = Accounts Receivable –
Allowance for Uncollectible Accounts = $250,000 −
$32,480 = $217,520

(10 min.) S 5-11
(a) Accounts Receivable……………………….. 157,000

Sales Revenue…………………………. 157,000
(b) Cash……………………………………………. 121,000

Accounts Receivable…………………. 121,000
(c) Allowance for Uncollectible Accounts….. 3,200

Accounts Receivable…………………. 3,200
(d) Uncollectible-Account Expense………….. 850

Allowance for Uncollectible
Accounts………………………………. 850

Beg. bal. 4,200
Write-offs 3,200 Uncollectible –
account exp. X = 850
End. bal. 1,850
(5-10 min) S 5-12
Req. 1 and 2
Accounts Receivable
Beg. bal. 89,000
Net credit sales 753,000 Collections 774,000
Write-offs 8,000
End. bal. 60,000
Beg. bal. 6,000
Write-offs 8,000 Uncollectible –
account expense 12,000
End. bal. 10,000
Req. 3
BALANCE SHEET
Accounts receivable……………………… $60,000
Less Allowance for uncollectible accounts (10,000)
Accounts receivable, net………………… $50,000
(10 min.) S 5-13
1. False. The direct write-off method overstates assets because

it fails to take into account the likelihood of uncollectible
receivables until it actually becomes uncollectible.
2. California Bank has interest receivable and interest revenue.

Sacramento Company has interest payable and interest
expense.
Interest for one month ($240,000 × .08 × 1/12)…...$1,600
3. California Bank: Assets = Liabilities + Equity

Accrual of interest 0
4. True.

5. The net amount of receivables — the amount the company
expects to collect — is more interesting because the
company will probably collect this amount in cash.
6. Accounts receivable……………………. $XXX

Less Allowance for uncollectibles…… (X)
Accounts receivable, net………………. $ XX
(10 min.) S 5-14
20X6
a. Aug.31 Note Receivable — N. Thompson…… 2,200
Cash………………………………… 2,200
To loan money.
20X7
b. June30 Interest Receivable
($2,200 × .09 × 10/12)…………………….. 165
Interest Revenue………………….. 165
To accrue interest revenue.
20X7
c. Aug.31 Cash ($2,200 + $198)…………………… 2,398
Interest Receivable………………. 165
Interest Revenue
($2,200 × .09 × 2/12)……………. 33
Note Receivable………………….. 2,200
To collect on note receivable.

(10 min.) S 5-15
Req. 1
20X7
Current Total current assets $300,200

= =
ratio Total current liabilities $103,000
= 2.91
Req. 2
$852,000
One day’s sales = = $2,334.25
365
Average net
Days’ sales in average
accounts receivable ($79,600 + $70,900) / 2
accounts receivable = =
One day’s sales $2,334.25
= 32 days
The company’s days’-sales-in-receivables ratio (32) is good

relative to the 30-day period of the credit terms.

Exercises
Group A
(5-20 min.) E 5-16A
a. Morris has access to the cash collected, and he also
prepares the cash report. With access to both items, Morris
can steal cash and falsify his cash report to conceal his theft.
b. Albom prepares the purchase order and also receives the

goods. She can add some items to the purchase order and
have these extra items shipped to a location she controls.
When the goods come in, she checks the incoming
shipment, so there’s no outside party to learn of her
dishonesty.

(10 min.) E 5-17A
Cash payments:
a. Weak internal control. Supervisors both request purchase

and pay for equipment with little oversight by the home
office.
b. Strong internal control. There is a good separation of duties.
Supervisors request equipment and the home office
purchases the equipment.
Cash receipts:
a. Strong internal control. There is a good separation of duties.

Different people handle cash and account for cash.
b. Weak internal control. The accountant both handles cash and
accounts for cash.

(10 min.) E 5-18A
To prevent Floyd’s embezzlement, Downtown Kalamazoo’s
board of directors could have:
a. Not permitted Floyd to write Downtown Kalamazoo checks

by requiring checks to have two signatories from the
board. Dual signatories meant it is difficult to cash checks
without collusion.
b. Not permitted Floyd to receive cash that came to

Downtown Kalamazoo. Have cash sent to a lock box at the
bank and appoint a board member to get the cash from the
lock box.
c. Supervised Floyd’s work by examining Downtown

Kalamazoo’s documents such as paid checks.
d. Have regular periodic audits of Downtown Kalamazoo’s

transactions and financial statements.

(5-10 min.) E 5-19A
TO: Store Manager
FROM: [Student’s Name]
SUBJECT: Evaluation of internal control and plan for

improvement
There is a weakness in internal control over cash receipts. The

cash registers do not keep a record of sales. With no record,
there is no way to determine how much cash should be in the
cash drawer. This omission makes it easy for the cashier to
steal cash and not get caught.
To improve internal control, the company should use cash

registers that record each sale. The manager can prove the
amount of cash in the cash drawer against this recorded
amount.

(10-20 min.) E 5-20A
The main internal control weakness is that the payroll
department both prepares and distributes the paychecks. With
both duties, a dishonest person in the payroll department can
create a time sheet for a fictitious employee and then keep the
related paycheck after the treasurer returns the signed checks
to the payroll department.
To correct this weakness, New Pastures Golf should have

someone other than the payroll department or have the shop
foreman distribute paychecks to employees. For example, the
human resources department, which has no control over the
time sheets or the paychecks, could distribute paychecks to
the workers.

(10-20 min.) E 5-21A
1. d 5. c
2. a
3. b 6. d
4. b 7. c
(10-15 min.) E 5-22A

D.J. Holt
Bank Reconciliation
August 31, 20XX
BANK:
Balance, August 31 $ 530
Add: Deposit in transit 1,010
Less: Outstanding checks:
Check No.
856 $ 95
857 275 (370)
Adjusted bank balance $1,170
BOOKS:
Balance, August 31 $1,227
Less:
Correction of book error —
Recorded $85 check as $58 $ 27
NSF check 20
Service charge 10 (57)
Adjusted book balance $1,170

(10-15 min.) E 5-23A
Evan Stephens
Bank Reconciliation
April 30, 20X5
BANK:
Balance, April 30 $ 585
2,483
Less: Outstanding checks (622)
BOOKS:
Balance, April 30 $1,936
Add: EFT collection — rent 330
2,266
Less:
Service charge $ 8
NSF checks 135
Charge for printed checks 10
recorded $280 check as $28 252 (405)
Stephens’ actual cash balance is $1,861

(10-15 min.) E 5-24A
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Apr 30 Cash……………………………………. 330

Rent Revenue……………………… 330
EFT collection of rent.
30 Miscellaneous Expense ($8 + $10)... 18

Cash ………………………………. 18
Bank service charge and charge
for printed checks.
30 Accounts Receivable………………... 135

Cash ………………………………. 135
NSF checks returned by bank.
30 Salary Expense ($280 − $28)……….. 252

Cash ………………………………. 252
Correction of book error.

(20-30 min.) E 5-25A
Chad Communications, Inc.
Cash Budget
Year Ended December 31, 20X7
Millions
Cash balance, December 31, 20X6 $ 82
Budgeted cash receipts:

Collections from customers 11,308
Sale of assets 116
11,506
Budgeted cash payments:
Payments for cost of
services and products $6,165
Payments of operating expenses 2,543
Investment in equipment 1,816
Payment of debt 604
Payment of dividends 33 11,161
Cash available (needed) before financing 345
Budgeted cash balance, December 31, 20X7 (86)
Cash available for additional investments, or
(New financing needed) $ 259
Chad Communications has cash available for additional

investmentsof $259 million during 20X7 so there is no need for
additional financing.

(10 min.) E 5-26A
Journal
20X6
Dec. 31
Year-end entry:
Doubtful-Account Expense
($85,000 × .08 - 680)………………… 6,120
Allowance for Doubtful Accounts 6,120
BALANCE SHEET
Current assets:
Accounts receivable, net of allowance
for doubtful accounts of $6,800**…………. $78,2002
_____
2$85,000 − $6,800 = $78,200
**$6,120+ $680 = $6,800

(15 min.) E 5-27A
Req. 1
Journal
Oct. Accounts Receivable……………………... 163,000
Sales Revenue……………………….. 163,000
Oct. Cash…………………………………………. 142,000

Accounts Receivable……………….. 142,000
Oct. Allowance for Uncollectible Accounts… 3,200

Oct. Uncollectible-Account Expense

($4,500 + $3,200 – $2,300)………………... 5,400
Allowance for Uncollectible 5,400
Accounts
Req. 2
Allowance for
Accounts Receivable Uncollectible Accounts
35,000 142,000 2,300
163,000 3,200 3,200 5,400
Bal 52,800 4,500
Net accounts receivable = $48,300 ($52,800 − $4,500)

Hilly Mountain Party Planners expects to collect the net
receivable amount.
Req. 3
BALANCE SHEET
Current assets:
Accounts receivable, net of allowance for
uncollectible accounts of $4,500………… $48,300
(15-30 min.) E 5-28A
Req. 1
The credit balance at December 31 in Allowance for Doubtful

Accounts should be $19,600.
($100,000 × .005) + ($80,000 × .02) + ($50,000 × .05) + ($30,000 ×

.5) = $19,600. The current balance is $12,500. Thus, the balance
of the allowance account is too low.
Req. 2
Journal
Doubtful-Account Expense…………….. 7,100
Allowance for Doubtful Accounts

12,500
7,100
Bal. 19,600
Req. 3
BALANCE SHEET
Current assets:
Cash………………………………………. $ XX
Short-term XX
investments………………..
for doubtful accounts of $19,600……… 240,400*
_____
*Another way to report accounts receivable is

Accounts receivable…………………… $260,000
Less Allowance for doubtful
accounts……………………………….. (19,600) 240,400
(10-15 min.) E 5-29A
Journal
Sept. 1 Note Receivable — Cristy Rocker….. 12,000

Cash………………………………. 12,000
Nov. 6 Note Receivable — Top Masters.……. 10,000

Service Revenue………………… 10,000
16 Note Receivable — Veron, Inc.…… 5,000

Accounts Receivable - Veron Inc. 5,000
30 Interest Receivable…………………….. 299*

Interest Revenue…………………. 299
_____
($12,000 × .08 × 90/365) + ($10,000 × .06 × 24/365) + ($5,000 × .12 × 14/365) = $299
$237** $39** $23**
Aegean Realty earned interest revenue of $299 this year.

** Rounded to nearest dollar.

(10-15 min.) E 5-30A
(a) Current Total current assets

=
ratio Total current liabilities
$3,000 + $20,000 + $58,000 +

= $90,000 + $2,000
$18,000 + $105,000
$173,000
=
$123,000
= 1.4
A current ratio of 1.4 is fairly strong.
(b) One day's Sales revenue $750,000

= = = $2,055
sales 365 365
Days’ sales Average net

in average accounts receivable ($58,000 + $72,000) / 2
= =
receivables One day’s sales $2,055
= 32 days
32 days’ sales in average receivables is good relative to credit

terms of net 30 days.

(10-15 min.) E 5-31A
Req. 1
Average collection period: Millions of dollars
$578,000
One day’s sales =
365
= $1,583.56
Days’ sales in average receivables ($3,750 + $4,920) / 2

= = 3 days
(average collection period) $1,583.56
Req. 2
Modern Limited’s collection period is short as it sells mainly for

cash and on credit cards and bank cards. The company’s
receivables are very low.

Exercises
Group B
(5-20 min.) E 5-32B

a. Michaels has access to the cash collected, and he also
prepares the cash report. With access to both items,
Michaels can steal cash and falsify his cash report to conceal
his theft.
b. Ahern prepares the purchase order and also receives the

goods. She can add some items to the purchase order and
have these extra items shipped to a location she controls.
When the goods come in, she checks the incoming
shipment, so there’s no outside party to learn of her
dishonesty.

(10 min.) E 5-33B
Cash payments:
a. Weak internal control. Supervisors request, purchase, and

pay for equipment with little oversight by the home office.
Supervisors request equipment and the home office
purchases the equipment.
Cash receipts:
a. Weak internal control. The accountant both handles cash and

accounts for cash.

Different people handle cash and account for cash.

(10 min.) E 5-34B
To prevent Stuart’s embezzlement, Downtown Scanlon’s
board of directors could have:
a. Not permitted Stuart to write Downtown Scanlon checks by

requiring checks to have two signatories from the board.
Dual signatories meant it is difficult to cash checks
without collusion.
b. Not permitted Stuart to receive cash that came to

Downtown Scanlon. Have cash sent to a lock box at the
bank and appoint a board member to get the cash from the
lock box.
c. Supervised Stuart’s work by examining Downtown

Scanlon’s documents such as paid checks.
d. Have regular periodic audits of Downtown Scanlon’s

transactions and financial statements.

(5-10 min.) E 5-35B
TO: Store Manager
FROM: [Student Name]
SUBJECT: Evaluation of internal control and plan for

improvement
There is a weakness in internal control over cash receipts. The

cash registers do not keep a record of sales. With no record,
there is no way to determine how much cash should be in the
cash drawer. This omission makes it easy for the cashier to
steal cash and not get caught.
To improve internal control, the company should use cash

registers that record each sale. The manager can prove the
amount of cash in the cash drawer against this recorded
amount.

(10-20 min.) E 5-36B
The main internal control weakness is that the payroll
department both prepares and distributes the paychecks. With
both duties, a dishonest person in the payroll department can
create a time sheet for a fictitious employee and then keep the
related paycheck after the treasurer returns the signed checks
to the payroll department.
To correct this weakness, Long Range Golf should have

someone other than the payroll department or have the shop
foreman distribute paychecks to employees. For example, the
human resources department, which has no control over the
time sheets or the paychecks, could distribute paychecks to
the workers.

(10-20 min.) E 5-37B
1. d 5. b
2. d 6. a
3. b 7. a
4. c
(10-15 min.) E 5-38B
D.J. Hilton
Bank Reconciliation
March 31
BANK:
Balance, March 31 $ 490
Less: Outstanding checks:
Check No.
856 $ 80
857 255 (335)
BOOKS:
Balance, February 28 $1,314
Less:
Recorded €65 check as €56 $ 9
NSF check 20

(10-20 min.) E 5-39B
Harry Sparks
Bank Reconciliation
September 30, 20X5
BANK:
Balance, September 30 € 565
2,535
Less: Outstanding checks (639)
Adjusted bank balance €1,896
BOOKS:
Balance, September 30 €1,995
Add: EFT collection — rent 345
2,340
Less:
Service charge € 9
NSF checks 135
Charge for printed checks 12
recorded €320 check as €32 288 (444)
Adjusted book balance €1,896
Spark’s actual cash balance is €1,896

(10-15 min) E 5-40B
Journal
May 31 Cash……………………………………. 345

Rent Revenue……………………… 345
EFT collection of rent.
31 Miscellaneous Expense (€9 + €12)... 21

Cash ………………………………. 21
Bank service charge and charge
for printed checks.
31 Accounts Receivable………………... 135

Cash ………………………………. 135
NSF checks returned by bank.
31 Salary Expense (€320 − €32)……….. 288

Cash ………………………………. 288
Correction of book error.

(20-30 min.) E 5-41B
Fellow Communications, Inc.
Cash Budget
Millions
Cash balance, December 31, 20X6 € 85

Sale of assets 125
11,527
Payments for cost of
services and products €6,184
Payments of operating expenses 2,546
Investment in equipment 1,841
Payment of debt 602
Cash available (needed) before financing 33
(New financing needed) € (49)
Fellow Communications, Inc., expects to need new financing of

€49 million during 20X7.

(15-20 min.) E 5-42B
Journal
20X5
Dec. 31
Year-end entry:
Doubtful-Account Expense
(€90,000 × .08 - 700)……………… 6,500
Allowance for Doubtful 6,500
Accounts
BALANCE SHEET
Current assets:
for doubtful accounts of €7,200…… €82,8002
_____
2€90,000 − €7,200 = €82,800

(15 min.) E 5-43B
Req. 1
Journal
May Accounts Receivable……………………... 146,000
Sales Revenue……………………….. 146,000
May Cash………………………………………….. 123,000

May Allowance for Uncollectible Accounts… 2,300

May Uncollectible-Account Expense

(€4,000 + €2,300 − €4,500)……………… 1,800
Allowance for Uncollectible 1,800
Accounts
Req. 2
Allowance for
Accounts Receivable Uncollectible Accounts
38,000 123,000 4,500
146,000 2,300 2,300 1,800
Bal. 58,700 4,000
Net accounts receivable = €54,700 (€58,700 − €4,000)

Hilltop Party Planners expects to collect the net receivable
amount.
Req. 3
BALANCE SHEET
Current assets:
Accounts receivable, net of allowance for
uncollectible accounts of €4,000………… €54,700
(15 min.) E 5-44B
Req. 1
The credit balance at December 31 in Allowance for Doubtful

Accounts should be €12,000.
(€80,000 × .005) + (€50,000 × .030) + (€30,000 × .07) + (€20,000 ×

.40) = €12,000. The current balance is €6,500. Thus, the balance
of the allowance account is too low.
Req. 2
Journal
Doubtful-Account Expense…………….. 5,500

6,500
5,500
Bal. 12,000
Req. 3
BALANCE SHEET
Current assets:
Cash……………………………………… € XX
Short-term XX
investments……………….
Accounts receivable, net of

allowance
for doubtful accounts of 168,000*
€12,000………
_____
*Another way to report accounts receivable is
Accounts receivable…………………. €180,000
Less: Allowance for doubtful (12,000) 168,000
accounts

(10-15 min.) E 5-45B
Journal
Apr. 1 Note Receivable — Boyle Denvers… 18,000

Cash………………………………… 18,000
Jun. 6 Note Receivable — Pot Masters.……. 15,000

Service Revenue………………….. 15,000
16 Note Receivable — Veron, Inc.…… 4,000

Accounts Receivable - Veron Inc. 4,000
30 Interest Receivable…………………….. 541*

Interest Revenue…………………. 541
_____
($18,000 × .10 × 90/365) + ($15,000 × .08 × 24/365) + ($4,000 × .12 × 14/365) = $541
$444** $79** $18**
Celtic Realty earned interest revenue of $541 this year.

** Rounded to nearest dollar.

(10-15 min.) E 5-46B
(a) Current Total current assets

=
ratio Total current liabilities
$4,000 + $24,000 + $58,000 +

= $92,000 + $6,000
$17,000 + $106,000
$184,000
=
$123,000
= 1.5
An acid-test ratio of 1.5 is fairly strong.
(b) One day's Sales revenue $730,000

= = = $2,000
sales 365 365
Days’ sales Average net

in average accounts receivable ($58,000 + $75,000) / 2
= =
receivables One day’s sales $2,000
= 33 days
33 days’ sales in average receivables is good relative to credit

terms of net 30 days.

(10-15 min.) E 5-47B
Req. 1
Average collection period: Millions of Euros
€574,000
One day’s sales = = €1,572.60
365
Days’ sales in average receivables (€3,670 + €4,380) / 2

= = 3 days
(average collection period) €1,572.60
Req. 2
Contemporary Co., Inc’s collection period is short because it

sells mainly for cash and on credit cards and bank cards. The
company’s receivables are very low.

Challenge Exercises
(15-25 min.) E 5-48

Temple could be: Hopper could investigate by:
1. Writing business checks to 1. Performing the bank

herself. reconciliation and examining
all checks written by the
business.
2. Submitting purchase invoices 2. Examining purchase invoices

a second time for duplicate for authenticity and comparing
payment, perhaps altering the invoices to receiving reports to
mailing address on the determine that the business
duplicate invoice and sending received all goods it paid for.
the check to a post office box
that Temple controls. Any invoice with a hole
indicates it was paid earlier.
Calling the suppliers directly to

inquire about any questionable
invoices.
3. Paying suppliers excess 3. Comparing the business’s

amounts and arranging for ratio of cost of goods sold to
suppliers to kick back part of retail selling price to the cost-
the excess to Temple. to-retail ratio in the past. A
kickback scheme would show
up in higher cost figures and a
lower profit percentage.
4. Making small cash payments 4. Examining all cash records

to herself. and comparing the records to
actual quantities of supplies
and other items needed by the
business.

(20-30 min.) E 5-49
Req. 1
The Furniture Mart, Inc.

Cash Budget
Thousands
Cash balance, December 31, 20X5 $ 150

Issuance of shares 674
22,924
Purchases of inventory items $14,655
Payment of operating expenses 2,438
Purchase of property and equipment 1,257
Payment of long-term and short-term debt 984
Cash available (shortage) before financing 3,219
Cash available for additional investments $ 3,059

(continued) E 5-49
Req. 2
Total current assets $7,769

Current ratio = = = 1.68
Total current liabilities $4,620
Total liabilities $12,088

Debt ratio = = = 0.50
Total assets $24,377
I would lend $100 thousand to The Furniture Mart because the

company’s ratio values are strong. Also, the cash budget
indicates strong cash flows during 20X6.
(15-20 min.) E 5-50
T-accounts are helpful, as follows (in millions):
Allowances
Beg. bal. 69
(a) Write-offs 13* Expense 18
End. bal. 74
Receivables
Beg. bal. ($2,628 + $69) 2,697
Total revenue 54,333 Write-offs 13
Collections 54,087 (b)
End. bal. ($2,856 + $74) 2,930

Quiz
Q5-51 b
Q5-52 c
Q5-53 c
Q5-54 a
Q5-55 d
Q5-56 d
Q5-57 b
Q5-58 c [($180,000 × .02) + ($50,000 × .08) + ($10,000 ×
.20) − $5,000 = $4,600]
Q5-59 a ($240,000 − $9,600 = $230,400)
Q5-60 a ($5,600 - $2,900 = $2,700)

Problems
Group A
(10-20 min.) P 5-61A
Requirement 1 Requirement 2 Requirement 3
Missing Internal
Control Possible Problem
Characteristic Solution
a. Separation of Theft of diamonds Separate

duties — the purchasing purchasing,
agent could have approval, and
diamonds sent to a check-signing
location he controls. duties.
b. Assignment of Lost revenue Assign a single

responsibility because too many employee to
employees are manage the
managing the office office when the
and neglecting their owner is absent.
duties.
c. Separation of Theft of cash. Separate

duties accounting and
cash-handling
duties.

(20-30 min.) P 5-62A
Req. 1
Dursley Automotive
Bank Reconciliation
July 31, 20X6
BANK:
Balance, July 31, 20X6 $10,487
Add: Deposits in transit ($934 + $2,028) 2,962
13,449
Less: Outstanding checks —
Check No.
3119 $ 450
3120 975
3121 215
3122 2,250 (3,890)
Adjusted bank balance, July 31, 20X6 $ 9,559
BOOKS:
Balance, July 31, 20X6 $ 7,957
Add: EFT collection of rent $ 760
Bank collection of note receivable 1,270
Book error — $1,260 check
recorded as $1,620 360 2,390
10,347
Less: EFT payment of insurance $ 343
Unauthorized signature check 417
Adjusted book balance, July 31, 20X6 $ 9,559

(10-15min) P 5-63A
TO: President, Smooth Skin Care
FROM: Concerned Employee
It is unwise to have the employee who opens the mail also

grant allowances to customers. Suppose a customer pays an
invoice in full. The mailroom employee can steal the customer
check and grant an allowance to cover the theft. To correct this
internal control weakness, deny the mailroom employee access
to all accounting records. Also, appoint a separate employee to
grant allowances to customers.
Notes:
1. Student responses may vary.
2. The mailroom employee obviously has access to the
accounting records—to know that a customer has paid
less than the full amount.
3. It may be necessary to explain to students that the
mailroom employee must forge the company endorsement
on customer checks stolen. This person must also open—
and control—a bank account in the company’s name. This
may be quite easy.

(20-30 min) P 5-64A
Req. 1
Grayson Engineering Associates

Bank Reconciliation
August 31, 20X5
BANK:
Balance, August 31 $8,789.23
Add: Deposit of August 31 in transit 354.38
9,143.61
Less: Outstanding cheques ($401.00 +
$74.82 + $33.25 + $165.55 +
$236.00 + $47.75 + $107.85) $1,066.22
Correction of bank error, which
credited our account for the
deposit of another company 268.40 (1,334.62)
Adjusted bank balance, August 31 $7,808.99
BOOKS:
Balance, August 31 $8,158.71
Add: Interest revenue earned on bank
balance $ 18.58
Bank collection of account receivable 895.15 913.73
9,072.44
Less: EFT (utilities $740, insurance $290) $1,030.00

Service charge 7.50
Returned check due to unauthorized
signature 158.50
NSF check 67.45 (1,263.45)
Adjusted book balance, August 31 $7,808.99

(continued) P 5-64A
Req. 2 (entries based on the reconciliation)
Journal
Aug 31 Cash………………………………………………… 18.58

Interest Revenue………………………………. 18.58
31 Cash………………………………………………… 895.15
Accounts Receivable…………………………. 895.15
Account receivable collected by bank.
31 Utilities Expense………………………………….. 740.00

Cash……………………………………………... 740.00
Monthly utilities.
31 Insurance Expense………………………………. 290.00

Cash……………………………………………... 290.00
Monthly insurance.
31 Miscellaneous Expense…………………………. 7.50

Cash……………………………………………... 7.50
31 Accounts Receivable ($158.50 + $67.45)…… 225.95

Cash……………………………………………... 225.95
NSF customer checks returned by bank.

(30-45 min.) P 5-65A
Req. 1
Scott Wireless
Cash Budget
20X7
(In thousands)
Cash balance, beginning $ 1,500

Collections from customers ($64,000 × 1.12) 71,680
Receipt of interest 300
73,480
Purchases of inventory ($49,000 × 1.25) $61,250
Operating expenses 13,500
Purchases of equipment 4,800
Payment of dividends 300
Purchases of investments 400
Payment of long-term debt 400
(80,650)
Cash available (needed) before financing $ (7,170)
Budgeted cash balance, ending (3,500)
(New financing needed) $ (10,670)

(continued) P 5-65A
Req. 2
Scott Wireless appears to be growing. The company expects a

12% increase in collections from customers and a 25% increase
in the purchases of inventory. It is also continuing to invest in
new equipment, with no sales of long-term assets. Jasper’s
cash budget shows a need for new financing of $10.67 million.
Needing new financing is typical of companies in their growth
stage.

(15-20 min.) P 5-66A
(All amounts in $millions)
Reqs. 1 and 3
Accounts Receivable Allowance for Uncollectibles

3,345 31,779 166
32,491 354 354 327
3,703 139
Req. 2
Journal
a. Accounts Receivable……………… 32,491

Service Revenue…………….. 32,491
b. Cash………………………………….. 31,779
Accounts Receivable……… 31,779
c. Uncollectible-Account Expense… 327

Allowance for Uncollectibles 327
d. Allowance for Uncollectibles…….. 354

Accounts Receivable……… 354
Req. 4
These balances agree with the actual Mail Time amounts.
Req. 5
INCOME STATEMENT
Service revenue…………………. $32,491
Uncollectible-account expense… 327

(25-35 min.) P 5-67A
Req. 1
Journal
Nov. 30 Allowance for Doubtful Accounts……….. 1,600

Accounts Receivable — Black Carpets 1,100
Accounts Receivable — Old Timer…... 500
Dec. 31 Doubtful-Account Expense……………..... 6,900

Allowance for Doubtful Accounts…. 6,900*
_____
*Computation:
Required credit balance in Allowance for Doubtful
Accounts based on aging of Accounts
Receivable ($150,000 × .002) + ($35,000 × .02) +
($20,000 × .08) + ($30,000 × .40)…………………….. $14,600
Credit balance in Allowance for Doubtful Accounts

before the December 31 adjusting entry — (see
the T-account in the answer to Req. 2;
$9,100 − $1,400)………………………………………... 7,700
Credit entry needed to produce the required credit

balance in Allowance for Doubtful Accounts…….. $6,900

(continued) P 5-67A
Req. 2

Nov. 30 Write-offs 1,400 Sept. 30 Balance 9,100
Dec. 31 Adjusting 6,900
Dec. 31 Balance 14,600
Req. 3
Effective Communications
Balance Sheet
December 31, 20X7
20X7
Accounts receivable…………………….... $235,000
Less: Allowance for doubtful accounts. (14,600)
Accounts receivable, net………………… $220,400

(20-30 min.) P 5-68A
Journal
20X6
Oct. 31 Note Receivable — Buy Low Foods…. 36,000
Sales Revenue…………………… 36,000
Dec. 31 Interest Receivable

($36,000 × .0650 × 2/12)………………… 390
Interest Revenue……………… 390
20X7
Jan. 31 Cash………………………………………... 36,585
Note Receivable — Safeway…… 36,000
Interest Receivable……………… 390
Interest Revenue
($36,000 × .0650 × 1/12)… 195
Feb. 18 Note Receivable — Dutton Market …… 7,400

Accounts Receivable —
Dutton Market…………………… 7,400
19 Cash……………………………………. 7,300
Financing Expense……………………… 100
Note Receivable — Dutton Market 7,400

(continued) P 5-68A
Journal
20X7
Nov. 11 Note Receivable — Street Provisions …. 16,400
Cash…………………………………… 16,400
Dec. 31 Interest Receivable………………………... 213

Interest Revenue ($16,400 × .095 × 50/365) 213
Req. 2
December 31,
BALANCE SHEET 20X7 20X6
Current assets:
Note receivable………………… $16,400 $36,000
Interest receivable…………… 213 390

(15-25 min.) P 5-69A
Req. 1
Dollar amounts in millions

20X7 20X6
a. Current Total current assets $930 $875

= = = 1.58 = 1.37
ratio Total current liabilities $590 $640
b. One day’s Net sales $5,900 $5,150

= = = $16.16 = $14.11
sales 365 365 365
Days’ sales Average net receivables ($290+$260)/2 ($260+$250)/2

in average = =
receivables One day’s sales $16.16 $14.11
= 17 days = 18 days
Req. 2
The current ratio improved from 1.37 to 1.58. Days’ sales in

receivables decreased from 18 days to 17 days.
All ratio values improved during 20X7. This demonstrates a
favorable trend because it shows that the company is finding it
easier to pay bills and collect receivables.

Problems
Group B
(10-20 min.) P 5-70B
Requirement 1 Requirement 2 Requirement 3
Missing Internal
Control
Characteristic Possible Problem Solution
a. Separation of Theft of cash by Have a manager, not

duties the purchasing the purchasing
agent. agent approve
invoices for payment
and sign the checks
b. Assignment of Lost revenue due Assign one senior

responsibilities to delay of architect to fulfill
architectural management duties
drawings. while White is
absent. Other senior
architect should
focus on producing
architectural
drawings.
c. Separation of Theft of cash. Keep accounting

duties and cash handling
duties separate.

(20-30 min.) P 5-71B
Req. 1
Dudley Automotive
Bank Reconciliation
January 31, 20X6
BANK:
Balance, January 31, 20X6 $ 8,883
Add: Deposits in transit ($865 + $2,073) 2,938
11,821
Less: Outstanding checks
Check No.
3119 $ 483
3120 995
3121 249
3122 2,332 (4,059)
Adjusted bank balance, January 31, 20X6 $ 7,762
BOOKS:
Balance, January 31, 20X6 $ 6,333
Add: EFT collection of rent $ 680
Bank collection of note receivable 1,340
Book error — $1,350 check recorded 180 2,200
as $1,530 8,533
Less: NSF check $ 436

EFT payment of insurance 313
Adjusted book balance, January 31, 20X6 $ 7,762

(continued) P 5-71B
Req. 2
A bank account helps control cash by providing a place for

safekeeping. The bank also provides a detailed list of the
company’s cash transactions that Dudley Automotive
managers can compare to the company’s own cash records
and thus correct any book errors quickly.
The bank reconciliation helps control cash by ensuring that the

company accounts for its cash transactions correctly and that
the bank and book records of cash are correct. Also, the bank
reconciliation establishes the balance of cash to report on the
balance sheet.

(5-10min) P 5-72B
TO: President, Glowing Skin Care
FROM: Concerned Employee
It is unwise to have the employee who opens the mail also

grant allowances to customers. Suppose a customer pays an
invoice in full. The mailroom employee can steal the customer
check and grant an allowance to cover the theft. To correct this
internal control weakness, deny the mailroom employee access
to all accounting records. Also, appoint a separate employee to
grant allowances to customers.
Notes:
1. Student responses may vary.
2. The mailroom employee obviously has access to the
accounting records — to know that a customer has paid
less than the full amount.
3. It may be necessary to explain to students that the
mailroom employee must forge the company endorsement
on customer checks stolen. This person must also open —
and control — a bank account in the company’s name.
This may be quite easy.

(20-30 min.) P 5-73B
Req. 1
Drake Engineering Associates

Bank Reconciliation
October 31, 2010
BANK:
Balance, October 31 $8,353.87
Add:
Deposit of October 31 in transit $350.80 $350.80
$8,704.67
Less: Outstanding checks ($403.15 +

$78.98 + $36.39 + $155.45 +
$234.00 + $47.50 + $106.79) 1,062.26
Correction of bank error —
credited our account for the
deposit of another company 496.10 (1,558.36)
Adjusted bank balance, October 31 $7,146.31
BOOKS:
Balance, October 31 $7,506.86
Add: Bank collection on account $925.20
Interest revenue on bank balance 15.65 940.85
8,447.71
Less: Service charge $ 8.25
EFT Payment of utility bill 780.00
EFT Payment of insurance bill 260.00
NSF check 67.65
Returned item due to
unauthorized signature 185.50 (1,301.40)
Adjusted book balance, October 31 $7,146.31

(continued) P 5-73B
Req. 2 (entries based on the reconciliation)
Journal
Jan. 31 Cash…………………………………………... 925.20

Accounts Receivable………..………… 925.20
Accounts Receivable collected by bank.
31 Cash…………………………………………... 15.65
Interest Revenue………………………... 15.65
31 Utility Expense …………………………..… 780.00

Prepaid Insurance …………………...…… 260.00
Cash ……………………………………… 1,040.00
EFT payments
31 Miscellaneous Expense…………………… 8.25

Cash……………………………………….. 8.25
31 Accounts Receivable (€67.65 + €185.50).. 253.15

Cash………………………………………… 253.15
NSF customer checks returned by bank.

(30-45 min.) P 5-74B
Req. 1
Carlisle Wireless
Cash Budget
20X7
Cash balance, beginning € 1,900

Collections from customers (€62,000 × 1.15) 71,300
Receipt of interest 700
73,900
Purchases of inventory (€47,000 × 1.22) €57,340
Operating expenses 13,700
Purchase of property and equipment 4,100
Purchases of investments 300
Payment of dividends 400
Payments of long-term debt 500 76,340
Cash available (needed) before financing (2,440)
Budgeted cash balance, ending (3,650)
(New financing needed) € (6,090)

(continued) P 5-74B
Req. 2
Carlisle Wireless appears to be growing. The company expects

a 15% increase in collections from customers and a 22%
increase in purchases of inventory. It is maintaining its
purchases of property and equipment, with no sales of long-
term assets. Carlisle’s cash budget shows a need for new
financing of €6.09m. Needing new financing is typical of
companies in their growth stage.

(15-20 min.) P 5-75B
(All amounts in thousands)
Reqs. 1 and 3
Accounts Receivable Allowance for Uncollectibles

3,435 31,979 156
32,587 350 350 323
3,693 129
Req. 2
Journal
a. Accounts Receivable………………. 32,587

Service Revenue……………… 32,587
b. Cash…………………………………… 31,979
Accounts Receivable……… 31.979
c. Uncollectible-Account Expense…. 323

Allowance for Uncollectibles 323
d. Allowance for Uncollectibles……... 350

Accounts Receivable……… 350
Req. 4
These balances agree with the On-time Delivery amounts.

(continued) P 5-75B
Req. 5
INCOME STATEMENT
Service revenue…………………… €32,587
Uncollectible-account expense… 323

(25-35 min.) P 5-76B
Req. 1
Journal
Dec. 28 Allowance for Doubtful Accounts………….. 2,000

Accounts Receivable — Blue Carpets 1,300
Accounts Receivable — Show-N-Tell 700
Dec. 31 Doubtful-Account Expense………………….. 5,300

Allowance for Doubtful Accounts…… 5,300*
_____
*Computation:
Required credit balance in Allowance for Doubtful
Accounts based on aging of Accounts
Receivable (€160,000 × .005) + (€40,000 × .01) +
(€18,000 × .10) + (€20,000 × .50)………………………… €13,000
Credit balance in Allowance for Doubtful Accounts

before the December 31 entry — (see the
T-account in the answer to Req. 2;
€9,700 − €2,000)…………………………………………… 7,700
Credit entry needed to produce the required credit

balance in Allowance for Doubtful Accounts………... €5,300

(continued) P 5-76B
Req. 2

Dec. 28 Write-offs 2,000 Sept. 30 Balance 9,700
Dec. 31 Adjusting 5,300
Dec. 31 Balance 13,000
Req. 3
Image Communications
Balance Sheet
December 31, 20X7
20X7
Accounts receivable……………………… 238,000
Less: Allowance for doubtful accounts.
(13,000)
Accounts receivable, net………………… €225,000

(20-30 min.) P 5-77B
Req. 1
Journal
20X6
Nov. 30 Note Receivable — Bragg Market………. 30,000
Service Revenue……………………. 30,000
Dec. 31 Interest Receivable (€30,000 × .0425 × 106

1/12).
Interest Revenue……………………… 106
20X7
Feb. 28 Cash…………………………………………… 30,319
Note Receivable — Bragg Market 30,000
Interest Receivable………………… 106
Interest Revenue
(€30,000 × .0425 × 2/12)………………. 213
Mar. 1 Note Receivable — Don’s Market ………... 7,500

Accounts Receivable — Don’s Market 7,500
1 Cash……………………………………………. 7,400
Financing Expense………………………….. 100
Note Receivable — Don’s Market … 7,500

(continued) P 5-77B
Journal
20X7
Dec. 16 Note Receivable — Stratford Provisions 14,400
Cash……………………………………. 14,400
Dec. 31 Interest Receivable………………………. 59

Interest Revenue (€14,400 × .10 × 15/365) 59
Req. 2
December 31
BALANCE SHEET 20X7 20X6
Current assets:
Note receivable………………… €14,400 €30,000
Interest receivable…………… 59 106

(30-40 min.) P 5-78B
Req. 1
Dollar amounts in millions

20X7 20X6
a. Current Total current assets $905 $825

= = = 1.65 = 1.38
ratio Total current liabilities $550 $600
b. One day’s Net sales €5,890 €5,120

= = = €16.14 = €14.03
sales 365 365 365
Days’ sales Average net receivables (€260+€230)/2 (€230+€200)/2

in average = =
receivables One day’s sales €16.14 €14.11
= 15 days = 15 days

(continued) P 5-78B
Req. 2
MEMORANDUM
DATE: _________________
TO: Top management of Gold Pools, Inc.
FROM: [Student Name]
RE: Changes in ratio values from 20X6 to 20X7
The current ratio improved from 1.38 to 1.65. Days’ sales in

receivables were unchanged at 15 days.
Current ratio values improved in 20X7, and the days sales in

receivables held steady. This demonstrates a favorable trend
because it indicates that the company is finding it easier to pay
its bills.

Decision Cases
(20-30 min.) Decision Case 1
Environmental Concerns, Inc.

Bank Reconciliation
September 30
BANK:
Balance, September 30 $ 8,324
Add: Deposit of September 30 in transit 3,994
12,318
Less: Outstanding checks ($116 + $150 +
$853 + $990 + $206 + $145) (2,460)
Adjusted bank balance, September 30 $ 9,858
BOOKS:
Balance, September 30 $10,912 Adjusted
balances
Add: Bank collection 200 do not
11,112 agree.
Less: Service charge $ 13

NSF check 41 (54)
Adjusted book balance, September 30 $11,058
Based on the above reconciliation, it appears the bookkeeper

has stolen $1,200, the difference between the adjusted bank
and book amounts ($9,858 − $11,058). He understated the total
of outstanding checks by $1,200 to cover his theft.
Benz should assign an employee with no cash-handling duties

to prepare the bank reconciliation. The bookkeeper should not
perform this duty, because a person who handles cash and
also prepares the reconciliation can steal cash and manipulate
the reconciliation to cover the theft. Perhaps Benz should
prepare the reconciliation himself.

(15-30 min.) Decision Case 2
The internal control weakness in this case is a lack of

separation of duties. The foreman performs too many duties.
1. The foreman hires the workers.

2. The foreman controls workers’ employment documents.
3. The foreman fills out workers’ time sheets and transmits
all documents to the home office.
4. The foreman passes out paychecks to workers.
5. The workers never go to the home office, so home-office
personnel do not even know whether all workers exist.
The foreman could steal from the company as follows:
1. The foreman could enter a fictitious worker into the payroll

system and fill out bogus time sheets for the fictitious
employee. Then the foreman could pocket the paycheck
written to the employee.
2. The foreman could enter more time than actually worked
by an employee and arrange to split the extra pay received
by the worker.
3. The foreman could pad his own hours to receive pay for
time that he did not work.

(continued) Decision Case 2
The following actions will correct the internal control

weakness:
1. The home office could have the construction workers

come to the office for processing their employee
documents. Then home office would at least know that all
the workers exist.
2. Have employees sign their own time sheets.
3. Have a home-office employee compare signatures on the
workers’ time sheets to their signatures on file and,
occasionally, to their endorsements on the backs of their
paychecks.
4. Occasionally — or always — have a home-office employee
go to the construction site to pass out paychecks.
5. Have a home-office employee go to the construction site
occasionally to “take attendance” of workers on duty that
day. Then match the names of workers on duty to the time
sheets turned in at the end of the week.

(5-10 min) Decision Case 3
Joel’s recommendation seems more appropriate to use in this

situation. Having learned of a possible “loss event” about
Customer C who is very likely to enter into bankruptcy, he
used a combination of aging and specific customer credit
information in determining the required allowance of
uncollectible accounts at year-end. If only the aging
method was used, this possible “loss event” will not be
captured even if there is a high possibility of impairment.

Ethical Issue 1
1. The ethical issue: Smith, Godfroy, and Hannaford must

decide whether it is ethical for them to not require Sunrise
Bank to record the loss in order to keep the bank as a client.
2. The alternatives: Require the client to record the loss, or

permit the client not to record the loss.
3. The stakeholders: The auditor, the bank, and the public at

large can be affected. The auditor’s reputation is on the line.
The bank’s financial statements are in question. The public
can be affected if the bank issues financial statements that
include erroneous amounts since these notes receivables
are relatively large.
Assess the possible outcomes. If the auditors require the

bank to record the loss, the auditor will keep its reputation
intact. But the auditor may lose the client and hence lose the
revenue from this large client. The accounting firm may then
be unable to expand the firm as it had hoped to do.

(continued) Ethical Issues
If the auditors sanction the bank’s financial statements even
after the bank did not record the loss, the auditor would keep
the bank as a client, earn the audit revenue, and be able to
expand the firm as planned. But the bank’s financial
statements would report erroneous amounts for the notes
receivable. People relying on the bank’s financial statements
may suffer losses as a result. The accounting firm’s
reputation may be damaged beyond recovery if the notes
eventually go bad and it was discovered that Smith allowed
the bank not to record the loss.
4. Make the decision. The auditor should require the bank to

record the loss even if that means losing the bank as a client.
By sticking to its belief that the bank should record the loss,
the auditors’ reputation will not be harmed as it would by
sanctioning financial statements that include errors. It’s far
better to lose a client than to lose your reputation.

Ethical Issue 2
1. Identify the ethical issue. Galvin’s ethical issue is whether to
use his knowledge of The Salvation Army’s plans and of
Nadar’s situation to either party’s advantage (or
disadvantage). Should Galvin help The Salvation Army buy
the land at the lowest price? Should he help Nadar sell the
land at the highest price? Galvin’s position presents him with
a conflict of interest.
2. What are the alternatives? There are several:

(a) Let other members of the Salvation Army board of
directors know of Nadar’s situation in order to help The
Salvation Army buy the land at a bargain price.
(b) Disclose Nadar’s situation to fellow board members and
insist that The Salvation Army pay market price ($2.2
million) for the land.
(c) Advise Nadar of The Salvation Army’s plans and
encourage her to hold out for a high price on the sale of
the land.
(d) Reveal nothing to The Salvation Army’s board or to
Nadar and take no part in the negotiation between the
two parties.

(e) Take a temporary leave of absence from The Salvation
Army board for unspecified “personal reasons.”
3. Identify the stakeholders involved. Galvin, The Salvation

Army, Nadar, and Community Bank.
Assess the possible consequences. Disclosing Nadar’s

personal difficulties to The Salvation Army board may help
The Salvation Army buy the land at a low price, depending on
the ethical bearing of fellow board members. This would help
The Salvation Army and hurt Nadar, relative to her ability to
sell the land at market value of $2.2 million. Insisting that The
Salvation Army offer market price for the land would seem
fair to both parties, but that would betray the trust of Nadar.
And it may or may not sway the board to go along with a $2.2
million offer for the land.
Making Nadar aware of The Salvation Army’s plans may help

Nadar get a higher price for the land than she would get
otherwise. This would betray the trust of other members of
The Salvation Army’s board.
Remaining silent would preserve Galvin’s integrity. However,

if either The Salvation Army or Nadar ever learned of Galvin’s

relationship with the other party, they would wonder whether
Galvin used the information against them.
Taking a temporary leave of absence would preserve Galvin’s

integrity and remove him from the conflict of interest. It would
also preserve Galvin’s reputation for fairness and the
reputation of Community Bank for keeping depositor
information confidential.
4. Make the decision. The authors would take the leave of

absence and hope other Salvation Army board members do
not probe Galvin’s “personal reasons.” This way neither The
Salvation Army nor Nadar can accuse Galvin of using inside
information to the advantage of the other party.

Ethical Issue 3
1. Identify the ethical issue. French’s ethical issue is whether to

tell IMS personnel about Snicker Foods’ possible bankruptcy.
2. What are the alternatives?

(a) Keep quiet and let nature take its course, or
(b) Tell IMS’s top managers to warn them of Snicker’s
possible bankruptcy.
3. Identify the stakeholders involved. IMS, Snicker Foods,

Community Bank, and everyone connected to these
organizations — owners, employees, creditors, depositors,
and their communities.
Assess the possible consequences. Telling IMS about

Snicker’s possible bankruptcy may help IMS avoid wasted
effort on Snicker or worse, exposing IMS to Snicker’s
financial difficulties. This may enable IMS to seek more
profitable ventures and aid IMS’s recovery. In turn, this may
help IMS pay its loan to Community Bank.

4. Make the decision. French should not tell IMS of Snicker’s
financial difficulties (after all, Snicker isn’t bankrupt yet).
French should let nature take its course. Then she will protect
the bank’s (and her own) reputation for keeping client
information confidential. In her aiding IMS through the loan-
restructuring process, French may try to help IMS find other
customers that can take up the slack if the contract with
Snicker doesn’t go through.

Focus on Financials: Nestlé
(20-30 min.)
Req. 1
(All answers are in CHF millions)

Bank Books
Balance, Dec. 31, 2016 CHF 8,070 Balance, Dec. 31, 2016 CHF 7,990
+ Deposit in transit CHF 30 + Interest earned CHF 10
− Outstanding checks CHF 80 + Bank collections CHF 20
Adjusted bank balance CHF 8,020 Adjusted book balance CHF 8,020
Req. 2
“Net” means the amount is the difference between accounts

receivable and allowance for doubtful accounts. The
receivables presented on the balance sheet is at its net
realizable value, that is, the amount that is likely to be
collected, rather than how much the company is legally owed.
Nestlé determines its allowance for doubtful debts based on
management’s assessment of credit worthiness of its
customers.
Req. 3
According to the Balance Sheet and footnote 7, the allowance

of doubtful accounts was CHF 351 million in 2016 and CHF 324

million in 2015. The corresponding accounting entries are as
follows.
Allowance of doubtful accounts ……………….. CHF 100 million

Accounts receivable …………………………….. CHF 100 million
Bad debt expense …………………………………. CHF 127 million
Allowance of doubtful accounts …………. CHF 127 million
Group Project
Student responses will vary.

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Chapter 5

Internal Control, Cash, and Receivables

Fraud is an intentional misrepresentation of facts, made for the

The Three Components of the Fraud Triangle

1. Motive - Fraud generally results from either critical need or

274 Financial Accounting: IFRS 11/e Solutions Manual

(5-10 min.) S 5-2

Student responses may vary.

Chapter 5 Internal Control, Cash, and Receivables 275

Student responses may vary.

(10 min.) S5-4

276 Financial Accounting: IFRS 11/e Solutions Manual

• The check provides a record of the payment.

2. A dishonest purchasing agent could:

• Purchase goods and have them delivered to his home or

Companies avoid this internal control weakness by

Chapter 5 Internal Control, Cash, and Receivables 277

Randell has cash of $3,030.

278 Financial Accounting: IFRS 11/e Solutions Manual

Chapter 5 Internal Control, Cash, and Receivables 279

280 Financial Accounting: IFRS 11/e Solutions Manual

Amount customers owe the company

Chapter 5 Internal Control, Cash, and Receivables 281

(a) Accounts Receivable……………………….. 157,000

(b) Cash……………………………………………. 121,000

(c) Allowance for Uncollectible Accounts….. 3,200

(d) Uncollectible-Account Expense………….. 850

Allowance for Uncollectible Accounts

(5-10 min) S 5-12

(10 min.) S 5-13

1. False. The direct write-off method overstates assets because

2. California Bank has interest receivable and interest revenue.

3. California Bank: Assets = Liabilities + Equity

Chapter 5 Internal Control, Cash, and Receivables 283

6. Accounts receivable……………………. $XXX

(10 min.) S 5-14

284 Financial Accounting: IFRS 11/e Solutions Manual

Current Total current assets $300,200

The company’s days’-sales-in-receivables ratio (32) is good

Chapter 5 Internal Control, Cash, and Receivables 285

b. Albom prepares the purchase order and also receives the

Student responses may vary.

286 Financial Accounting: IFRS 11/e Solutions Manual

a. Weak internal control. Supervisors both request purchase

a. Strong internal control. There is a good separation of duties.

Chapter 5 Internal Control, Cash, and Receivables 287

a. Not permitted Floyd to write Downtown Kalamazoo checks

b. Not permitted Floyd to receive cash that came to

c. Supervised Floyd’s work by examining Downtown

d. Have regular periodic audits of Downtown Kalamazoo’s

Student responses may vary.

288 Financial Accounting: IFRS 11/e Solutions Manual

TO: Store Manager

FROM: [Student’s Name]

SUBJECT: Evaluation of internal control and plan for

There is a weakness in internal control over cash receipts. The

To improve internal control, the company should use cash

$237 $39 $23**