Questions

Note: All asterisked Questions, Exercises, and Problems relate to material in the appendix to the chapter.

1. A local bank reported that it lost $150,000 as the result of employee fraud. Ray Fairburn is not clear on what is meant by “employee fraud.” Explain the meaning of fraud to Ray and give an example of fraud that might occur at a bank.

2. Fraud experts often say that there are three primary factors that contribute to employee fraud. Identify the three factors and explain what is meant by each.

3. Identify the five components of a good internal control system.

4. “Internal control is concerned only with enhancing the accuracy of the accounting records.” Do you agree? Explain.

5. Discuss how the Sarbanes-Oxley Act has increased the importance of internal control to top managers of a company.

6. What principles of internal control apply to most businesses?

7. In the corner grocery store, all sales clerks make change out of one cash register drawer. Is this a violation of internal control? Why?

8. Branden Doyle is reviewing the principle of segregation of duties. What are the two common applications of this principle?

9. How do documentation procedures contribute to good internal control?

10. What internal control objectives are met by physical controls?

11. a. Explain the control principle of independent internal verification.

 b. What practices are important in applying this principle?

12. As the company accountant, explain the following ideas to the management of Ortiz Company.

a. The concept of reasonable assurance in internal control.

b. The importance of the human factor in internal control.

13. Discuss the human resources department’s involvement in internal controls.

14. Robbins Inc. owns the following assets at the balance sheet date.

What amount should be reported as Cash in the balance sheet?

15. What principle(s) of internal control is (are) involved in making daily cash counts of over-the-counter receipts?

16. Assume that Kohl’s Department Stores installed new cash registers in its stores. How do cash registers improve internal control over cash receipts?

17. At Lazlo Wholesale Company, two mail clerks open all mail receipts. How does this strengthen internal control?

18. “To have maximum effective internal control over cash disbursements, all payments should be made by check or electronic funds transfer.” Is this true? Explain.

19. Pauli Company’s internal controls over cash disbursements provide for the treasurer to sign checks imprinted by a checkwriter after comparing the check with the approved invoice. Identify the internal control principles that are present in these controls.

20. How do these principles apply to cash disbursements?

a. Physical controls.

b. Human resource controls.

21. What is the essential feature of an electronic funds transfer (EFT) procedure?

22. “The use of a bank contributes significantly to good internal control over cash.” Is this true? Why?

23. Hank Cook is confused about the lack of agreement between the cash balance per books and the balance per bank. Explain the causes for the lack of agreement to Hank and give an example of each cause.

24. Identify the basic principles of cash management.

25. Trisha Massey asks for your help concerning an NSF check. Explain to Trisha (a) what an NSF check is, (b) how it is treated in a bank reconciliation, and (c) whether it will require an adjusting entry on the company’s books.

26. a. Describe cash equivalents and explain how they are reported.

 b. How should restricted cash funds be reported on the balance sheet?

27. What was Apple’s balance in cash and cash equivalents at September 30, 2017? Did it report any restricted cash? How did Apple define cash equivalents?

*28. a. Identify the three activities that pertain to a petty cash fund, and indicate an internal control principle that is applicable to each activity.

  b. When are journal entries required in the operation of a petty cash fund?

Brief Exercises

BE7.1 (LO 1), K Match each situation with the fraud triangle factor (opportunity, financial pressure, or rationalization) that best describes it.

a. An employee’s monthly credit card payments are nearly 75% of their monthly earnings.

b. An employee earns minimum wage at a firm that has reported record earnings for each of the last five years.

c. An employee has an expensive gambling habit.

d. An employee has check-writing and -signing responsibilities for a small company, and is also responsible for reconciling the bank account.

BE7.2 (LO 1), C Shelly Eckert has prepared the following list of statements about internal control.

• a. One of the objectives of internal control is to safeguard assets from employee theft, robbery, and unauthorized use.
• b. One of the objectives of internal control is to enhance the accuracy and reliability of the accounting records.
• c. No laws require U.S. corporations to maintain an adequate system of internal control.

Identify each statement as true or false. If false, indicate how to correct the statement.

BE7.3 (LO 1), C Pat Buhn is the new owner of Young Co. She has heard about internal control but is not clear about its importance for her business. Explain to Pat the four purposes of internal control, and give her one application of each purpose for Young Co.

BE7.4 (LO 1), C The internal control procedures in Dayton Company result in the following provisions. Identify the principles of internal control that are being followed in each case.

a. Employees who have physical custody of assets do not have access to the accounting records.

b. Each month, the assets on hand are compared to the accounting records by an internal auditor.

c. A prenumbered shipping document is prepared for each shipment of goods to customers.

BE7.5 (LO 2), C Jolson Company has the following internal control procedures over cash receipts. Identify the internal control principle that is applicable to each procedure.

a. All over-the-counter receipts are entered in cash registers.

b. All cashiers are bonded.

c. Daily cash counts are made by cashier department supervisors.

d. The duties of receiving cash, recording cash, and having custody of cash are assigned to different individuals.

e. Only cashiers may operate cash registers.

BE7.6 (LO 2), AP The cash register tape for Bluestem Industries reported sales of $6,871.50. Record the journal entry that would be necessary for each of the following situations. (a) Sales per cash register tape exceeds cash on hand by $50.75. (b) Cash on hand exceeds cash reported by cash register tape by $28.32.

BE7.7 (LO 2), AP While examining cash receipts information, the accounting department determined the following information: opening cash balance $150, cash on hand $1,125.74, and cash sales per register tape $988.62. Prepare the required journal entry based upon the cash count sheet.

BE7.8 (LO 2), C Tott Company has the following internal control procedures over cash disbursements. Identify the internal control principle that is applicable to each procedure.

a. Company checks are prenumbered.

b. The bank statement is reconciled monthly by an internal auditor.

c. Blank checks are stored in a safe in the treasurer’s office.

d. Only the treasurer or assistant treasurer may sign checks.

e. Check-signers are not allowed to record cash disbursement transactions.

BE7.9 (LO 3), C Luke Roye is uncertain about the control features of a bank account. Explain the control benefits of (a) a checking account and (b) a bank statement.

BE7.10 (LO 3), C The following reconciling items are applicable to the bank reconciliation for Forde Co. Indicate how each item should be shown on a bank reconciliation.

a. Outstanding checks.

b. Bank debit memorandum for service charge.

c. Bank credit memorandum for collecting from customer an electronic funds transfer.

d. Deposit in transit.

BE7.11 (LO 3), C Using the data in BE7.10, indicate (a) the items that will result in an adjustment to the depositor’s records and (b) why the other items do not require adjustment.

BE7.12 (LO 3), AP At July 31, Planter Company has this bank information: cash balance per bank $7,291, outstanding checks $762, deposits in transit $1,350, and a bank service charge $40. Determine the adjusted cash balance per bank at July 31.

BE7.13 (LO 3), AP In the month of November, Fiesta Company Inc. wrote checks in the amount of $9,750. In December, checks in the amount of $11,762 were written. In November, $8,800 of these checks were presented to the bank for payment, and $10,889 in December. There were no outstanding checks at the beginning of November. What is the amount of outstanding checks at the end of November? At the end of December?

BE7.14 (LO 3), AP At August 31, Pratt Company has a cash balance per books of $9,500 and the following additional data from the bank statement: charge for printing Pratt Company checks $35 and interest earned on checking account balance $40. In addition, Pratt Company has outstanding checks of $800. Determine the adjusted cash balance per books at August 31.

BE7.15 (LO 4), C Spahn Company has these cash balances: cash in bank $12,742, payroll bank account $6,000, and plant expansion fund cash $25,000. Explain how each balance should be reported on the balance sheet.

BE7.16 (LO 4), AP The following information is available for Bonkers Company for the month of January: expected cash receipts $59,000, expected cash disbursements $67,000, and cash balance on January 1, $12,000. Management wishes to maintain a minimum cash balance of $9,000. Prepare a basic cash budget for the month of January.

*BE7.17 (LO 5), AP On March 20, Harbor’s petty cash fund of $100 is replenished when the fund contains $19 in cash and receipts for postage $40, supplies $26, and travel expense $15. Prepare the journal entry to record the replenishment of the petty cash fund.

DO IT! Exercises

DO IT! 7.1 (LO 1), C Identify which control activity is violated in each of the following situations, and explain how the situation creates an opportunity for fraud or inappropriate accounting practices.

• 1. Once a month, the sales department sends sales invoices to the accounting department to be recorded.
• 2. Steve Nicoles orders merchandise for Binn Company; he also receives merchandise and authorizes payment for merchandise.
• 3. Several clerks at Draper’s Groceries use the same cash register drawer.

DO IT! 7.2 (LO 2), C Wes Unsel is concerned with control over mail receipts at Wooden Sporting Goods. All mail receipts are opened by Mel Blount. Mel sends the checks to the accounting department, where they are stamped “For Deposit Only.” The accounting department records and deposits the mail receipts weekly. Wes asks your help in installing a good system of internal control over mail receipts.

DO IT! 7.3 (LO 3), C Ned Douglas owns Ned’s Blankets. Ned asks you to explain how he should treat the following reconciling items when reconciling the company’s bank account.

• 1. Outstanding checks.
• 2. A deposit in transit.
• 3. The bank charged to our account a check written by another company.
• 4. A debit memorandum for a bank service charge.

DO IT! 7.4a (LO 4), AP Indicate whether each of the following statements is true or false. If false, indicate how to correct the statement.

• 1. A company has the following assets at the end of the year: cash on hand $40,000, cash refund due from customer $30,000, and checking account balance $22,000. Cash and cash equivalents is therefore $62,000.
• 2. A company that has received NSF checks should report these checks as a current liability on the balance sheet.
• 3. Restricted cash that is a current asset is reported as part of cash and cash equivalents.
• 4. A company has cash in the bank of $50,000, petty cash of $400, and stock investments of $100,000. Total cash and cash equivalents is therefore $50,400.

DO IT! 7.4b (LO 4), AP Stern Corporation’s management wants to maintain a minimum monthly cash balance of $8,000. At the beginning of September, the cash balance is $12,270, expected cash receipts for September are $97,200, and cash disbursements are expected to be $115,000. How much cash, if any, must Stern borrow to maintain the desired minimum monthly balance? Determine your answer by using the basic form of the cash budget.

Exercises

E7.1 (LO 1), C Bank employees use a system known as the “maker-checker” system. An employee will record an entry in the appropriate journal, and then a supervisor will verify and approve the entry. These days, as all of a bank’s accounts are computerized, the employee first enters a batch of entries into the computer, and then the entries are posted automatically to the general ledger account after the supervisor approves them on the system.

Access to the computer system is password-protected and task-specific, which means that the computer system will not allow the employee to approve a transaction or the supervisor to record a transaction.

Instructions

Identify the principles of internal control inherent in the “maker-checker” procedure used by banks.

E7.2 (LO 1), C Ricci’s Pizza operates strictly on a carryout basis. Customers pick up their orders at a counter where a clerk exchanges the pizza for cash. While at the counter, the customer can see other employees making the pizzas and the large ovens in which the pizzas are baked.

Instructions

Identify the six principles of internal control and give an example of each principle that you might observe when picking up your pizza. (Note: It may not be possible to observe all the principles.)

E7.3 (LO 1, 2), C Listed below are five procedures followed by Eikenberry Company.

• 1. Several individuals operate the cash register using the same register drawer.
• 2. A monthly bank reconciliation is prepared by someone who has no other cash responsibilities.
• 3. Joe Cockrell writes checks and also records cash payment entries.
• 4. One individual orders inventory, while a different individual authorizes payments.
• 5. Unnumbered sales invoices from credit sales are forwarded to the accounting department every four weeks for recording.

Instructions

Indicate whether each procedure is an example of good internal control or of weak internal control. If it is an example of good internal control, indicate which internal control principle is being followed. If it is an example of weak internal control, indicate which internal control principle is violated. Use the table below.

E7.4 (LO 1, 2), C Listed below are five procedures followed by Gilmore Company.

• 1. Employees are required to take vacations.
• 2. Any member of the sales department can approve credit sales.
• 3. Paul Jaggard ships goods to customers, bills customers, and receives payment from customers.
• 4. Total cash receipts are compared to bank deposits daily by someone who has no other cash responsibilities.
• 5. Time clocks are used for recording time worked by employees.

Instructions

Indicate whether each procedure is an example of good internal control or of weak internal control. If it is an example of good internal control, indicate which internal control principle is being followed. If it is an example of weak internal control, indicate which internal control principle is violated. Use the table below.

E7.5 (LO 2), E The following control procedures are used in Keaton Company for over-the-counter cash receipts.

• 1. Each store manager is responsible for interviewing applicants for cashier jobs. They are hired if they seem honest and trustworthy.
• 2. All over-the-counter receipts are registered by three clerks who share a cash register with a single cash drawer.
• 3. To minimize the risk of robbery, cash in excess of $100 is stored in an unlocked briefcase in the stock room until it is deposited in the bank.
• 4. At the end of each day, the total receipts are counted by the cashier on duty and reconciled to the cash register total.
• 5. The company accountant makes the bank deposit and then records the day’s receipts.

Instructions

a. For each procedure, explain the weakness in internal control and identify the control principle that is violated.

b. For each weakness, suggest a change in the procedure that will result in good internal control.

E7.6 (LO 2), E The following control procedures are used in Bunny’s Boutique Shoppe for cash disbursements.

• 1. Each week, 100 company checks are left in an unmarked envelope on a shelf behind the cash register.
• 2. The store manager personally approves all payments before she signs and issues checks.
• 3. The store purchases used goods for resale from people that bring items to the store. Since that can occur anytime that the store is open, all employees are authorized to purchase goods for resale by disbursing cash from the register. The purchase is documented by having the store employee write on a piece of paper a description of the item that was purchased and the amount that was paid. The employee then signs the paper and puts it in the register.
• 4. After payment, bills are “filed” in a paid invoice folder.
• 5. The company accountant prepares the bank reconciliation and reports any discrepancies to the owner.

Instructions

a. For each procedure, explain the weakness in internal control and identify the internal control principle that is violated.

b. For each weakness, suggest a change in the procedure that will result in good internal control.

E7.7 (LO 2), E At Martinez Company, checks are not prenumbered because both the purchasing agent and the treasurer are authorized to issue checks. Each signer has access to unissued checks kept in an unlocked file cabinet. The purchasing agent pays all bills pertaining to goods purchased for resale. Prior to payment, the purchasing agent determines that the goods have been received and verifies the mathematical accuracy of the vendor’s invoice. After payment, the invoice is filed by vendor name and the purchasing agent records the payment in the cash disbursements journal. The treasurer pays all other bills following approval by authorized employees. After payment, the treasurer stamps all bills “paid,” files them by payment date, and records the checks in the cash disbursements journal. Martinez Company maintains one checking account that is reconciled by the treasurer.

Instructions

a. List the weaknesses in internal control over cash disbursements.

b. Identify improvements for correcting these weaknesses.

E7.8 (LO 3), AP The following information pertains to Ranchero Company.

• 1. Cash balance per books, August 31, $7,364.
• 2. Cash balance per bank, August 31, $7,328.
• 3. Outstanding checks, August 31, $686.
• 4. August bank service charge not recorded by the depositor $38.
• 5. Deposits in transit, August 31, $2,700.

In addition, $2,016 was collected for Ranchero Company in August by the bank through electronic funds transfer. The collection has not been recorded by Ranchero Company.

Instructions

a. Prepare a bank reconciliation at August 31, 2022.

b. Journalize the adjusting entries at August 31 on the books of Ranchero Company.

E7.9 (LO 3), AP Rachel Sells is unable to reconcile the bank balance at January 31. Rachel’s reconciliation is shown here.

Instructions

a. What is the proper adjusted cash balance per bank?

b. What is the proper adjusted cash balance per books?

c. Prepare the adjusting journal entries necessary to determine the adjusted cash balance per books.

E7.10 (LO 3), AP At April 30, the bank reconciliation of Back 40 Company shows three outstanding checks: No. 254 $650, No. 255 $700, and No. 257 $410. The May bank statement and the May cash payments journal are given here.

Instructions

Using step 2 in the reconciliation procedure, list the outstanding checks at May 31.

E7.11 (LO 3), AP The following information pertains to Lance Company.

• 1. Cash balance per bank, July 31, $8,732.
• 2. July bank service charge not recorded by the depositor $45.
• 3. Cash balance per books, July 31, $8,768.
• 4. Deposits in transit, July 31, $3,500.
• 5. $2,023 collected from a customer for Lance Company in July by the bank through electronic funds transfer. The collection has not been recorded by Lance Company.
• 6. Outstanding checks, July 31, $1,486.

Instructions

a. Prepare a bank reconciliation at July 31, 2022.

b. Journalize the adjusting entries at July 31 on the books of Lance Company.

E7.12 (LO 3), AP This information relates to the Cash account in the ledger of Howard Company.

• Balance September 1—$16,400; Cash deposited—$64,000
• Balance September 30—$17,600; Checks written—$62,800

The September bank statement shows a balance of $16,500 at September 30 and the following memoranda.

At September 30, deposits in transit were $4,738 and outstanding checks totaled $2,383.

Instructions

a. Prepare the bank reconciliation at September 30, 2022.

b. Prepare the adjusting entries at September 30, assuming the NSF check was from a customer on account.

E7.13 (LO 3), AP The cash records of Upton Company show the following.

For July:

• 1. The June 30 bank reconciliation indicated that deposits in transit total $580. During July, the general ledger account Cash shows deposits of $16,900, but the bank statement indicates that only $15,600 in deposits were received during the month.
• 2. The June 30 bank reconciliation also reported outstanding checks of $940. During the month of July, Upton Company books show that $17,500 of checks were issued, yet the bank statement showed that $16,400 of checks cleared the bank in July.

For September:

• 3. In September, deposits per bank statement totaled $25,900, deposits per books were $26,400, and deposits in transit at September 30 were $2,200.
• 4. In September, cash disbursements per books were $23,500, checks clearing the bank were $24,000, and outstanding checks at September 30 were $2,100.

There were no bank debit or credit memoranda, and no errors were made by either the bank or Upton Company.

Instructions

Answer the following questions.

a. In situation 1, what were the deposits in transit at July 31?

b. In situation 2, what were the outstanding checks at July 31?

c. In situation 3, what were the deposits in transit at August 31?

d. In situation 4, what were the outstanding checks at August 31?

E7.14 (LO 3), AP Perth Inc.’s bank statement from Main Street Bank at August 31, 2022, gives the following information.

A summary of the Cash account in the ledger for August shows the following: balance, August 1, $18,700; receipts $74,000; disbursements $73,570; and balance, August 31, $19,130. Analysis reveals that the only reconciling items on the July 31 bank reconciliation were a deposit in transit for $4,800 and outstanding checks of $4,500. In addition, you determine that there was an error involving a company check drawn in August: A check for $400 to a creditor on account that cleared the bank in August was journalized and posted for $40.

Instructions

a. Determine deposits in transit.

b. Determine outstanding checks. (Hint: You need to correct disbursements for the check error.)

c. Prepare a bank reconciliation at August 31.

d. Journalize the adjusting entry(ies) to be made by Perth Inc. at August 31.

E7.15 (LO 4), AP A new accountant at Wyne Inc. is trying to identify which of the amounts shown below should be reported as the current asset “Cash and cash equivalents” in the year-end balance sheet, as of April 30, 2022.

• 1. $60 of currency and coin in a locked box used for incidental cash transactions.
• 2. A $10,000 U.S. Treasury bill, due May 31, 2022.
• 3. $260 of April-dated checks that Wyne has received from customers but not yet deposited.
• 4. An $85 check received from a customer in payment of its April account, but postdated to May 1.
• 5. $2,500 in the company’s checking account.
• 6. $4,800 in its savings account.
• 7. $75 of prepaid postage in its postage meter.
• 8. A $25 IOU from the company receptionist.

Instructions

a. What balance should Wyne report as its “Cash and cash equivalents” balance at April 30, 2022?

b. In what account(s) and in what financial statement(s) should the items not included in “Cash and cash equivalents” be reported?

E7.16 (LO 4), C Lance, Art, and Wayne have joined together to open a law practice but are struggling to manage their cash flow. They haven’t yet built up sufficient clientele and revenues to support their legal practice’s ongoing costs. Initial costs, such as advertising, renovations to their premises, and the like, all result in outgoing cash flow at a time when little is coming in. Lance, Art, and Wayne haven’t had time to establish a billing system since most of their clients’ cases haven’t yet reached the courts, and the lawyers didn’t think it would be right to bill them until “results were achieved.”

Unfortunately, Lance, Art, and Wayne’s suppliers don’t feel the same way. Their suppliers expect them to pay their accounts payable within a few days of receiving their bills. So far, there hasn’t even been enough money to pay the three lawyers, and they are not sure how long they can keep practicing law without getting some money into their pockets.

Instructions

Can you provide any suggestions for Lance, Art, and Wayne to improve their cash management practices?

E7.17 (LO 4), AP Rigley Company expects to have a cash balance of $46,000 on January 1, 2022. These are the relevant monthly budget data for the first two months of 2022.

• 1. Collections from customers: January $71,000 and February $146,000.
• 2. Payments to suppliers: January $40,000 and February $75,000.
• 3. Wages: January $30,000 and February $40,000. Wages are paid in the month they are incurred.
• 4. Administrative expenses: January $21,000 and February $24,000. These costs include depreciation of $1,000 per month. All other costs are paid as incurred.
• 5. Selling expenses: January $15,000 and February $20,000. These costs are exclusive of depreciation. They are paid as incurred.
• 6. Sales of short-term investments in January are expected to realize $12,000 in cash. Rigley has a line of credit at a local bank that enables it to borrow up to $25,000. The company wants to maintain a minimum monthly cash balance of $20,000.

Instructions

Prepare a cash budget for January and February.

*E7.18 (LO 5), AP During October, Bismark Light Company experiences the following transactions in establishing a petty cash fund.

Instructions

Journalize the entries in October that pertain to the petty cash fund.

*E7.19 (LO 5), AP Kael Company maintains a petty cash fund for small expenditures. These transactions occurred during the month of August.

Instructions

a. Journalize the petty cash transactions.

b. Post to the Petty Cash account.

c. What internal control features exist in a petty cash fund?

Problems: Set A

P7.1A (LO 2), C Gary Theater is in the Hoosier Mall. A cashier’s booth is located near the entrance to the theater. Two cashiers are employed. One works from 1:00 to 5:00 P.M., the other from 5:00 to 9:00 P.M. Each cashier is bonded. The cashiers receive cash from customers and operate a machine that ejects serially numbered tickets. The rolls of tickets are inserted and locked into the machine by the theater manager at the beginning of each cashier’s shift.

After purchasing a ticket, the customer takes the ticket to a doorperson stationed at the entrance of the theater lobby some 60 feet from the cashier’s booth. The doorperson tears the ticket in half, admits the customer, and returns the ticket stub to the customer. The other half of the ticket is dropped into a locked box by the doorperson.

At the end of each cashier’s shift, the theater manager removes the ticket rolls from the machine and makes a cash count. The cash count sheet is initialed by the cashier. At the end of the day, the manager deposits the receipts in total in a bank night deposit vault located in the mall. In addition, the manager sends copies of the deposit slip and the initialed cash count sheets to the theater company treasurer for verification and to the company’s accounting department. Receipts from the first shift are stored in a safe located in the manager’s office.

Instructions

a. Identify the internal control principles and their application to the cash receipts transactions of Gary Theater.

b. If the doorperson and cashier decided to collaborate to misappropriate cash, what actions might they take?

P7.2A (LO 2), C Blue Bayou Middle School wants to raise money for a new sound system for its auditorium. The primary fund-raising event is a dance at which the famous disc jockey Kray Zee will play classic and not-so-classic dance tunes. Grant Hill, the music and theater instructor, has been given the responsibility for coordinating the fund-raising efforts. This is Grant’s first experience with fund-raising. He decides to put the eighth-grade choir in charge of the event; he will be a relatively passive observer.

Grant had 500 unnumbered tickets printed for the dance. He left the tickets in a box on his desk and told the choir students to take as many tickets as they thought they could sell for $5 each. In order to ensure that no extra tickets would be floating around, he told them to dispose of any unsold tickets. When the students received payment for the tickets, they were to bring the cash back to Grant, and he would put it in a locked box in his desk drawer.

Some of the students were responsible for decorating the gymnasium for the dance. Grant gave each of them a key to the money box and told them that if they took money out to purchase materials, they should put a note in the box saying how much they took and what it was used for. After 2 weeks, the money box appeared to be getting full, so Grant asked Lynn Dandi to count the money, prepare a deposit slip, and deposit the money in a bank account that Grant had opened.

The day of the dance, Grant wrote a check from the account to pay Kray Zee. The DJ said, however, that he accepted only cash and did not give receipts. So Grant took $200 out of the cash box and gave it to Kray. At the dance, Grant had Dana Uhler working at the entrance to the gymnasium, collecting tickets from students and selling tickets to those who had not pre-purchased them. Grant estimated that 400 students attended the dance.

The following day, Grant closed out the bank account, which had $250 in it, and gave that amount plus the $180 in the cash box to Principal Sanchez. Principal Sanchez seemed surprised that, after generating roughly $2,000 in sales, the dance netted only $430 in cash. Grant did not know how to respond.

Instructions

Identify as many internal control weaknesses as you can in this scenario, and suggest how each could be addressed.

P7.3A (LO 3), AP On July 31, 2022, Keeds Company had a cash balance per books of $6,140. The statement from Dakota State Bank on that date showed a balance of $7,690.80. A comparison of the bank statement with the Cash account revealed the following facts.

• 1. The bank service charge for July was $25.
• 2. The bank collected $1,520 from a customer for Keeds Company through electronic funds transfer.
• 3. The July 31 receipts of $1,193.30 were not included in the bank deposits for July. These receipts were deposited by the company in a night deposit vault on July 31.
• 4. Company check No. 2480 issued to L. Taylor, a creditor, for $384 that cleared the bank in July was incorrectly entered in the cash payments journal on July 10 for $348.
• 5. Checks outstanding on July 31 totaled $1,860.10.
• 6. On July 31, the bank statement showed an NSF charge of $575 for a check received by the company from W. Krueger, a customer, on account.

Instructions

a. Prepare the bank reconciliation as of July 31.

b. Prepare the necessary adjusting entries at July 31.

P7.4A (LO 3), AP The bank portion of the bank reconciliation for Bogalusa Company at October 31, 2022, is shown below.

The adjusted cash balance per bank agreed with the cash balance per books at October 31. The November bank statement showed the following checks and deposits.

The cash records per books for November showed the following.

The bank statement contained two bank memoranda:

• 1. A credit of $2,242 for the collection from a customer for Bogalusa Company of an electronic funds transfer.
• 2. A debit for the printing of additional company checks $85.

At November 30, the cash balance per books was $11,073.80 and the cash balance per bank statement was $17,712.50. The bank did not make any errors, but Bogalusa Company made two errors.

Instructions

a. Using the steps in the reconciliation procedure described in the chapter, prepare a bank reconciliation at November 30, 2022.

b. Prepare the adjusting entries based on the reconciliation. (Note: The correction of any errors pertaining to recording checks should be made to Accounts Payable. The correction of any errors relating to recording cash receipts should be made to Accounts Receivable.)

P7.5A (LO 3), AP Timmins Company of Emporia, Kansas, spreads herbicides and applies liquid fertilizer for local farmers. On May 31, 2022, the company’s Cash account per its general ledger showed a balance of $6,738.90.

The bank statement from Emporia State Bank on that date showed the following balance.

A comparison of the details on the bank statement with the details in the Cash account revealed the following facts.

• 1. The statement included a debit memo of $40 for the printing of additional company checks.
• 2. Cash sales of $883.15 on May 12 were deposited in the bank. The cash receipts journal entry and the deposit slip were incorrectly made for $933.15. The bank credited Timmins Company for the correct amount.
• 3. Outstanding checks at May 31 totaled $276.25, and deposits in transit were $1,880.15.
• 4. On May 18, the company issued check No. 1181 for $685 to H. Moses, on account. The check, which cleared the bank in May, was incorrectly journalized and posted by Timmins Company for $658.
• 5. $2,690 was collected from a customer’s note receivable by the bank for Timmins Company on May 31 through electronic funds transfer.
• 6. Included with the canceled checks was a check issued by Tomins Company to C. Pernod for $360 that was incorrectly charged to Timmins Company by the bank.
• 7. On May 31, the bank statement showed an NSF charge of $380 for a check issued by Sara Ballard, a customer, to Timmins Company on account.

Instructions

a. Prepare the bank reconciliation at May 31, 2022.

b. Prepare the necessary adjusting entries for Timmins Company at May 31, 2022.

P7.6A (LO 1, 2, 3), E Daisey Company is a very profitable small business. It has not, however, given much consideration to internal control. For example, in an attempt to keep clerical and office expenses to a minimum, the company has combined the jobs of cashier and bookkeeper. As a result, Bret Turrin handles all cash receipts, keeps the accounting records, and prepares the monthly bank reconciliations.

The balance per the bank statement on October 31, 2022, was $18,380. Outstanding checks were No. 62 for $140.75, No. 183 for $180, No. 284 for $253.25, No. 862 for $190.71, No. 863 for $226.80, and No. 864 for $165.28. Included with the statement was a credit memorandum of $185 indicating the collection of a note receivable for Daisey Company by the bank on October 25. This memorandum has not been recorded by Daisey.

The company’s ledger showed one Cash account with a balance of $21,877.72. The balance included undeposited cash on hand. Because of the lack of internal controls, Bret took for personal use all of the undeposited receipts in excess of $3,795.51. He then prepared the following bank reconciliation in an effort to conceal his theft of cash.

Instructions

a. Prepare a correct bank reconciliation. (Hint: Deduct the amount of the theft from the adjusted balance per books.)

b. Indicate the three ways that Bret attempted to conceal the theft and the dollar amount involved in each method.

c. What principles of internal control were violated in this case?

P7.7A (LO 4), AP You are provided with the following information taken from Moynahan Inc.’s March 31, 2022, balance sheet.

Additional information concerning Moynahan Inc. is as follows.

• 1. Gross profit is 25% of sales.
• 2. Actual and budgeted sales data:
  

  March (actual)	$46,000
  April (budgeted)	70,000

• 3. Sales are both cash and credit. Cash collections expected in April are:
  

  March	$18,400	(40% of $46,000)
  April	42,000	(60% of $70,000)
  	$60,400

• 4. Half of a month’s purchases are paid for in the month of purchase and half in the following month. Cash disbursements expected in April are:
  

  Purchases March	$22,400
  Purchases April	28,100
  	$50,500

• 5. Cash operating costs are anticipated to be $11,200 for the month of April.
• 6. Equipment costing $2,500 will be purchased for cash in April.
• 7. The company wishes to maintain a minimum cash balance of $9,000. An open line of credit is available at the bank. All borrowing is done at the beginning of the month, and all repayments are made at the end of the month. The interest rate is 12% per year, and interest expense is accrued at the end of the month and paid in the following month.

Instructions

Prepare a cash budget for the month of April. Determine how much cash Moynahan Inc. must borrow, or can repay, in April.

P7.8A (LO 4), AP Bastille Corporation prepares monthly cash budgets. Here are relevant data from operating budgets for 2022.

All sales and purchases are on account. Budgeted collections and disbursement data are given below. All other expenses are paid in the month incurred. Administrative expenses include $1,000 of depreciation per month.

Other data.

• 1. Collections from customers: January $326,000; February $378,000.
• 2. Payments for purchases: January $110,000; February $135,000.
• 3. Other receipts: January: collection of December 31, 2021, notes receivable $15,000; February: proceeds from sale of securities $4,000.
• 4. Other disbursements: February $10,000 cash dividend.

The company’s cash balance on January 1, 2022, is expected to be $46,000. The company wants to maintain a minimum cash balance of $40,000.

Instructions

Prepare a cash budget for January and February.

Continuing Case

Cookie Creations

(Note: This is a continuation of the Cookie Creations case from Chapters 1 through 6.)

CC7 Part 1 Natalie is struggling to keep up with the recording of her accounting transactions. She is spending a lot of time marketing and selling mixers and giving her cookie classes. Her friend John is an accounting student who runs his own accounting service. He has asked Natalie if she would like to have him do her accounting. John and Natalie meet and discuss her business.

Part 2 Natalie decides that she cannot afford to hire John to do her accounting. One way that she can ensure that her Cash account does not have any errors and is accurate and up-to-date is to prepare a bank reconciliation at the end of each month. Natalie would like you to help her.

Go to WileyPLUS for complete case details and instructions.

Comprehensive Accounting Cycle Review

ACR7 On December 1, 2022, Ravenwood Company had the following account balances.

During December, the company completed the following transactions.

Adjustment data:

• 1. Depreciation $200 per month.
• 2. Insurance expired $400.
• 3. Income tax expense was $425. It was unpaid at December 31.

Instructions

a. Journalize the December transactions. (Assume a perpetual inventory system.)

b. Enter the December 1 balances in the ledger T-accounts and post the December transactions. Use Cost of Goods Sold, Depreciation Expense, Insurance Expense, Salaries and Wages Expense, Sales Revenue, Sales Discounts, Income Taxes Payable, and Income Tax Expense.

c. The statement from Lyon County Bank on December 31 showed a balance of $25,930. A comparison of the bank statement with the Cash account revealed the following facts.

• 1. The bank collected the $2,000 note receivable for Ravenwood Company on December 15 through electronic funds transfer.
• 2. The December 31 receipts were deposited in a night deposit vault on December 31. These deposits were recorded by the bank in January.
• 3. Checks outstanding on December 31 totaled $1,210.
• 4. On December 31, the bank statement showed a NSF charge of $680 for a check received by the company from M. Lawrence, a customer, on account.

Prepare a bank reconciliation as of December 31 based on the available information. (Hint: The cash balance per books is $26,100. This can be proven by finding the balance in the Cash account from parts (a) and (b).)

d. Journalize the adjusting entries resulting from the bank reconciliation and adjustment data.

e. Post the adjusting entries to the ledger T-accounts.

f. Prepare an adjusted trial balance.

g. Prepare an income statement for December and a classified balance sheet at December 31.

Expand Your Critical Thinking

A Look at IFRS