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Using Financial Accounting Information The Alternative To Debits and Credits 10th Edition Porter Solutions Manual Download
Using Financial Accounting Information The Alternative To Debits and Credits 10th Edition Porter Solutions Manual Download
CHAPTER 6
Cash and Internal Control
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Objectives Exercises Minutes Level
Module 1
6-1
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6-2 USING FINANCIAL ACCOUNTING INFORMATION SOLUTIONS MANUAL
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CHAPTER 6 • CASH AND INTERNAL CONTROL 6-3
Problems Estimated
and Time in
Learning Objectives Alternates Minutes Level
Module 1
Module 2
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6-4 USING FINANCIAL ACCOUNTING INFORMATION SOLUTIONS MANUAL
Estimated
Time in
Learning Objectives Cases Minutes Level
Module 1
Module 2
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CHAPTER 6 • CASH AND INTERNAL CONTROL 6-5
EXERCISES
LO 1 EXERCISE 6-2 CASH AND CASH EQUIVALENTS AND THE STATEMENT OF CASH
FLOWS
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6-6 USING FINANCIAL ACCOUNTING INFORMATION SOLUTIONS MANUAL
The amounts on the bank statement and on the books prior to adjustment can be deter-
mined by working backwards:
DEXTER COMPANY
BANK RECONCILIATION
1. Students’ answers to this question will vary. Among the possible guidelines the club
should follow are:
a. Prenumbered tickets
b. Segregation of duties for collecting cash, counting and recording cash, and depos-
iting cash in a bank account
c. Payment by check of any expenses associated with the raffle
2. The president would like verification that all money is collected and recorded. It would
be difficult, if not impossible, to be completely sure that this happens. For example,
human errors in counting and handling the cash may result in not all of the cash being
collected (such as errors in making change). Also, it is impossible to prevent collusion
from occurring if two or more individuals work together to misdirect any of the cash.
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CHAPTER 6 • CASH AND INTERNAL CONTROL 6-7
Many possible combinations are possible. One appropriate way to segregate the duties
would be as follows:
Employee
Task Mary Sue John
Prepare invoices X
Mail invoices X
Pick up mail from post office X
Open mail, separate checks X* X*
List checks on deposit slip in triplicate X
Post payment to customer’s account X
Deposit checks X
Prepare monthly schedule of
accounts receivable X
Reconcile bank statements X
Key concepts are as follows:
*Two employees should be present to open mail and separate checks.
Person who reconciles the bank statements should not be the same as the person who
makes the deposits or posts to customer’s account.
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6-8 USING FINANCIAL ACCOUNTING INFORMATION SOLUTIONS MANUAL
MULTI-CONCEPT EXERCISE
PROBLEMS
1. CALICO CORNERS
BANK RECONCILIATION
MAY 31
Balance per bank statement, May 31 $ 8,432.11
Add: Deposit in transit $1,250.00
Bank error: Deposit added to wrong account 123.45 1,373.45
Deduct: Outstanding checks:
No. 123 $ 23.40
No. 127 145.00
No. 128 210.80
No. 130 67.32 (446.52)
Adjusted balance, May 31 $ 9,359.04
Balance per books, May 31 $ 9,965.34
Add: Interest earned on bonds $ 465.00
Interest earned on account 54.60 519.60
Deduct: Bank service charges $ 50.00
NSF check 166.00
Book error: Deposit of $101.10
recorded as $1,011.00 909.90 (1,125.90)
Adjusted balance, May 31 $ 9,359.04
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CHAPTER 6 • CASH AND INTERNAL CONTROL 6-9
2. The fallacy in the friend’s reasoning is that only the company, not the bank, can make
errors. A bank reconciliation is needed to detect errors and omissions in both the
books and the bank’s records.
3. The primary concern in this operation is control over cash, because all sales are cash.
This concern was addressed by using a cash register, having the lead person check
the cash, and depositing it intact daily.
1. The old system of allowing each motel to buy supplies from local distributors offered
very little internal control. For example, the corporate office had no control over the
amount paid by each individual operation for its supplies. The new system will allow
the company to buy in larger quantities, hopefully at better prices. Also, with the old
system, there was no physical control over the supplies. Dishonest employees at a
particular motel could steal supplies much easier than under the new system.
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6-10 USING FINANCIAL ACCOUNTING INFORMATION SOLUTIONS MANUAL
2. The purchase requisition form should be in triplicate, with the original filled out by the
requesting department and copies to the purchasing and accounting departments.
The form should show the following:
a. requesting department
b. date requested
c. preferred vendor
d. date needed
e. complete description of items requested
f. quantity of each item requested
g. blank for signature of person requesting
h. blank for signature of supervisor for approval
i. sequential numbering of the forms
The receiving report should be in duplicate, with the original filled out by the receiving
department with a copy to the accounting department. It should show the following:
a. purchase order number
b. vendor
c. carrier/shipper
d. credit terms
e. dates requested, ordered, and received
f. shipping instructions
g. items ordered and quantity of each ordered
h. quantities received of each item
i. blank for signature of person receiving
j. blank for approvals
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CHAPTER 6 • CASH AND INTERNAL CONTROL 6-11
MULTI-CONCEPT PROBLEMS
LO 1,2 PROBLEM 6-4 CASH AND LIQUID ASSETS ON THE BALANCE SHEET
1. Morris Mart suffers from a lack of segregation of duties. Mary handles all tasks asso-
ciated with collection of customer accounts.
2. Mary should not handle all aspects of accounts receivable, billing, and collection. Two
different employees should mail invoices and record the amounts billed. Two employ-
ees should be present when the mail is opened. Another employee should be respon-
sible for recording collections from customers. Finally, all employees should be re-
quired to take vacations, and there should be rotation of job duties among employees.
3. Someone should explain to Mary that she personally is not the problem but that a
good system of internal control requires certain changes to be made. This could be
explained to her not in the context of fraud but rather in the context of the necessity to
verify and check the work performed by all employees.
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6-12 USING FINANCIAL ACCOUNTING INFORMATION SOLUTIONS MANUAL
ALTERNATE PROBLEMS
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CHAPTER 6 • CASH AND INTERNAL CONTROL 6-13
1. The bank and regulatory agency are concerned with these documents because with-
out proper documentation the legal agreement could be invalid. For example, without
a valid title, the bank has no recourse if the customer defaults on the loan. A valid
insurance policy is necessary in case the motorist should have an accident. The reg-
ulatory agency is empowered by the government to protect the interests of the public.
2. Internal control procedures to ensure that the documents are obtained and safe-
guarded are as follows:
a. The accuracy and completeness of all information on the note, insurance policy,
and title should be verified and reviewed.
b. The note and insurance policy should be reviewed periodically for expiration dates.
c. Each of the documents should be kept in locked compartments with limited
access.
1. Procedures to ensure that all royalties are paid to the actors are as follows:
a. All payments must be made by check.
b. All payments are subject to approval by a supervisor.
c. All payments should be cross-referenced to the actual sales of movies.
2. The shipping form should be in duplicate, with the original filled out by the shipping
department and a copy to the accounting department. It should include the following:
a. authorizations
b. dates ordered and shipped, and expected delivery date
c. customer name, address
d. customer contact person
e. description of titles to be shipped
f. quantity of each title to be shipped
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6-14 USING FINANCIAL ACCOUNTING INFORMATION SOLUTIONS MANUAL
LO 1,2 PROBLEM 6-4A CASH AND LIQUID ASSETS ON THE BALANCE SHEET
1. Cash in the checking account and the petty cash fund are cash. The three-month
certificates of deposit and the money market fund are both cash equivalents.
2. Accounts receivable and marketable securities should be classified on the balance
sheet as current assets and listed in the order of their liquidity (marketable securities
are more liquid than accounts receivable).
3. Increase
Cash and Cash Equivalents 12/31/17 12/31/16 (Decrease)
Certificates of Deposit $10,000 $10,000 $ 0
Petty Cash Fund 1,200 1,500 (300)
Money Market Fund 25,800 28,000 (2,200)
Cash in Checking Account 6,000 6,000 0
Totals $43,000 $45,500 $ (2,500)
The company is not as liquid at the end of 2017 as it was at the end of 2016. Although
the decrease in liquidity is not large, it is due to the decreases in the balances in the
petty cash fund and the money market fund.
1. There are two major problems with the proposed personnel arrangements. First, re-
gardless of how ethical and honest the two individuals might be, from the viewpoint of
appearances alone, it is not healthy to have two relatives working this closely together
in a business. The potential for collusion is very high in this situation. Also, it is not fair
to either party for Barbara to do a performance review for her cousin as her objectivity
may be compromised.
2. Regardless of how effective a system of internal control, it can be easily circumvented
by collusion, that is, two or more employees working together to perpetrate a fraud.
The potential for this to develop can be lessened by not having one relative reporting
to another. Also, Barbara should not do the performance evaluation for Cheryl.
3. The above should be explained to the two individuals. They personally are not the
problem. Any two or more persons in this situation would face a conflict and weaken
the company’s system of internal control.
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CHAPTER 6 • CASH AND INTERNAL CONTROL 6-15
DECISION CASES
1. The balance in Cash and cash equivalents on Chipotle’s balance sheet at the end of
the year was $248,005,000, a decrease of $171,460,000 from the $419,465,000 bal-
ance at the end of the prior year. The balance in Cash and cash equivalents on Panera
Bread’s balance sheet at the end of the year was $241,886,000, an increase of
$45,393,000 from the $196,493,000 balance at the end of the prior year.
2. The increase or decrease in Cash and cash equivalents for each company appears
on the statement of cash flows. The statement of cash flows summarizes a company’s
operating, investing, and financing activities for the year, and the net increase or de-
crease in these activities appears towards the bottom of the statement.
3. The companies define Cash and cash equivalents very similarly. In Note 2 to the state-
ments, Panera Bread states that “The Company considers all highly liquid investments
with an original maturity at the time of purchase of three months or less to be cash
equivalents.” Similarly, in its Note 1, Chipotle indicates that “The Company considers
all highly liquid investment instruments purchased with an initial maturity of three
months or less to be cash equivalents.”
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6-16 USING FINANCIAL ACCOUNTING INFORMATION SOLUTIONS MANUAL
I have reviewed the loan proposals recently submitted by R Montague and J Capulet and
have summarized my findings. Because of limited resources available for short-term
loans, my recommendation is that we make a six-month $10 million loan to
J Capulet only.
The total current asset positions of the two companies are identical. Each has $33
million in current assets. However, the composition of the current assets differs consider-
ably between the two companies. On the surface, R Montague may appear to be stronger
because it has twice the amount of cash on hand that J Capulet does. How-ever, cash is
essentially a nonearning asset, and I am skeptical as to why R Montague believes it nec-
essary to maintain such a large sum of cash on hand, and consequently, why it believes
it needs to borrow an additional $10 million.
The accounts receivable for J Capulet is significantly larger than that for R Montague.
Assuming that the estimates of bad debts are reasonably reliable, R Montague has a bigger
problem with uncollectibles than does J Capulet. R Montague has an allowance that is 1/15,
or 6.67% of accounts receivable, while J Capulet’s percentage is only 1/23, or 4.35%.
In summary, J Capulet is a better candidate at the present time for a loan. I recom-
mend that we make a six-month $10 million loan to J Capulet at the current market rate
of interest. Please call if you need any further details in connection with these two loan
requests.
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CHAPTER 6 • CASH AND INTERNAL CONTROL 6-17
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6-18 USING FINANCIAL ACCOUNTING INFORMATION SOLUTIONS MANUAL
Thank you for the opportunity to spend a week at one of our stores and learn more about
the bookstore business. During my training, I received valuable experience that will ben-
efit me as I begin working for the company. I am concerned, however, about one proce-
dure related to the receipt of cash. The current system for handling cash short-ages and
overages is not effective from an internal control viewpoint.
A fundamental principle of internal control over cash is that all cash receipts should
be deposited intact. I know that you can appreciate that the current system does not
allow us to keep an accurate record of all receipts. For this reason, I recommend that we
keep a daily record of all cash shortages and overages. If these amounts are material,
they should be investigated immediately. Under no circumstances should we keep a sep-
arate cash fund to make up the differences. Aside from the obvious concerns over phys-
ical custody of the cash, the present system of simply keeping a cash-over-and-short
envelope results in a lack of important information to us.
I am sure you share my concerns over this critical part of our business. Please call me
if I can provide any further information to you.
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