financial accounting, 10th edition solutions manual harrison · chapter 4 internal control &...
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Chapter 4 Internal Control & Cash 4-1
Financial Accounting, 10th Edition Solutions Manual Harrison
Completed downloadable package SOLUTIONS MANUAL for Financial
Accounting, 10th Edition by Walter T. Harrison, Charles T. Horngren , C.
William Thomas. Solutions Manual, Answer key, Instructor's Resource Manual
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Chapter 4
Internal Control & Cash
Short Exercises
(5 min.) S 4-1
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
Financial Accounting 10/e Solutions Manual 4-2
believe no one else will ever know or even that everybody else is engaging
in fraudulent behavior
Chapter 4 Internal Control & Cash 4-3
(5 min.) S 4-2 Clyde should report the errors to Lusk because Lusk is Clyde’s
supervisor, and Lusk is responsible for the errors. If Lusk fails to take
action, then Clyde should report the errors to Lusk’s supervisor in the
organization. Clyde should keep going up the chain of command until the
errors are corrected. In any event, outsiders who are relying on Otto
Brothers Limited’s financial statements must be made aware of the need
to correct the reported net income figure.
(10 min.) S4-3 A computer virus enters program code without your consent and
performs destructive action to your computer files or programs.
A Trojan Horse is a malicious computer program that hides inside a
legitimate program and works like a virus to corrupt your computer files
or programs.
A phishing expedition can be a Web site that attracts visitors who may be
tricked into revealing their account numbers, social security numbers,
passwords, or other valuable data. The creator of the Web site then uses
the unsuspecting Web-site visitors’ data to steal from them and for other
illicit purposes.
Financial Accounting 10/e Solutions Manual 4-4
(5-10 min.) S 4-4
COMPONENTS OF INTERNAL CONTROL
1. Control environment — Top managers must set the “tone at the top” to
establish a control environment.
2. Risk assessment — Each company must identify its own risks, based
upon its particular line of business, and establish procedures to minimize
the risks.
3. Control procedures — Specific procedures are needed for a good
system of internal control.
4. Monitoring of controls — Auditors can monitor a company’s actions
and its financial statements. Controls can also be programmed into the
information system.
5. Information system — Accurate information is essential for success in
business. Accounting information enters and exits through the
information system.
Student responses may vary for the descriptions.
(5-10 min.) S 4-5
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 false entry in the accounting records.
Student responses may vary.
Chapter 4 Internal Control & Cash 4-5
(5-10 min.) S 4-6
There are several major internal control procedures as discussed in the
chapter besides separation of duties:
1. Smart hiring practices. The company should be careful to hire both
competent and honest personnel. Smart hiring practices involve
conducting background checks on job applicants, as well as training and
supervision on the job.
2. Comparisons and compliance monitoring. No person or department
should be allowed to completely process a transaction from beginning to
end without being checked by another person or a computer program.
Examples of comparisons and compliance monitoring are the use of
operating and cash budgets. Also, in key functions, one employee (or a
computer program) double checks the work of another for accuracy.
3. Adequate records help to assure that sufficient hard copy documents
or electronic information is kept by the entity to support the validity of
transactions that were processed. Examples include sales invoices,
purchase orders, shipping records, and customer remittance advices.
Among the benefits of adequate records is the ability to provide an audit
trail later for internal or external auditors to follow in auditing the entity’s
financial statements.
4. Limited access goes hand in hand with separation of duties to assure
that only authorized individuals are allowed access to (a) the assets of
Financial Accounting 10/e Solutions Manual 4-6
(continued) S 4-6
the company, such as cash or inventory; and (b) the records. Generally,
only people with custodial responsibilities (such as the cashier or the
warehouse personnel) should be allowed access to assets (such as cash
or inventory). Only people with recordkeeping responsibilities (such as
accountants) should have access to the company’s journals and ledgers.
5. Proper approvals. No transaction should be processed without
management’s general or specific approval. Generally, the larger the
transaction, the higher the organizational level of approval necessary.
Notice that the first letters of these attributes spell the acronym SCALP.
That’s an easy and comprehensive way to remember the control
procedures involved in internal controls.
(20-30 min.) S 4-7
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 its account balance would
suggest.
Student responses may vary.
Chapter 4 Internal Control & Cash 4-7
(20-30 min.) S 4-8
Punching a hole through supporting documents reduces the
opportunity for fraud. Without this control procedure, a dishonest
employee could resubmit documents for payment a second time. The
employee could change the payee’s address and have the check sent
to an address the employee controls. Or the employee could arrange
to have the second payee split the payment with the employee.
Canceling the documents makes it difficult to get approval for a
duplicate payment.
Student responses may vary.
Financial Accounting 10/e Solutions Manual 4-8
(10 min.) S 4-9
Vincente Corp. Bank Reconciliation
August 31, 2014
BANK BOOKS
Balance, August 31 $4,775 Balance, August 31 $3,640
Add: Deposit in transit 300 Add: Bank collection 685
5,075 Interest revenue 20
4,345
Less: Less:
Outstanding checks (800) Service charge (15)
NSF check (55)
Adjusted bank balance $4,275 Adjusted book balance $4,275
Vincente has cash of $4,275.
(5 min.) S 4-10
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Aug. 31 Cash……………………………………….. 685 Accounts Receivable………………... 685 Collection on account. 31 Cash……………………………………….. 20 Interest Revenue……………………... 20 Interest earned on bank balance. 31 Miscellaneous Expense………………... 15 Cash……………………………………. 15 Bank service charge. 31 Accounts Receivable…………………… 55 Cash…………………………………….. 55 NSF check.
Chapter 4 Internal Control & Cash 4-9
(5 min.) S 4-11
It appears that the employee has stolen $710 (adjusted book balance,
$3,300 − adjusted bank balance, $2,590). 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 min.) S 4-12
Sims will notice a gap in the sequence of sales receipts for the receipt that
Young destroyed. This knowledge will lead Sims to investigate what
happened to the missing receipt and what happened to the related cash.
(10 min.) S 4-13
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
Financial Accounting 10/e Solutions Manual 4-10
(5-10 min.) S 4-14
Farm-to-Market (FM)
Cash Budget Year 2015
Millions
Cash balance, beginning $ 7
Estimated cash receipts—total 103
110
Estimated cash payments—total (97)
Cash available (needed) before new financing 13
Budgeted cash balance needed (11)
Cash available for additional investments $ 2
(5 min.) S 4-15
“Cash and cash equivalents” includes liquid assets such as time
deposits, certificates of deposit, and high-grade U.S. or foreign
government securities that are very close to maturity (three months or
less at the time of purchase). Besides cash, all of these listed are
considered to be “cash equivalents”—items quickly and easily converted
to cash.
Chapter 4 Internal Control & Cash 4-11
Exercises
(5-20 min.) E 4-16A
a. Higaredo has access to the cash collected, and he also prepares the
cash report. With access to both items, Higaredo can steal cash and
falsify his cash report to conceal his theft.
b. Valdez 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.
Student responses may vary.
(10 min.) E 4-17A
Cash payments: a. Strong internal control. There is a good separation of duties.
Supervisors request equipment, and the home office purchases the
equipment.
b. Weak internal control. Supervisors request, purchase, and pay for
equipment with little oversight by the home office.
Cash receipts: a. Weak internal control. There is not a good separation of duties. The
accountant both handles cash and accounts for cash.
b. Strong internal control. There is a good separation of duties. Different
people handle cash and account for cash.
Financial Accounting 10/e Solutions Manual 4-12
(10 min.) E 4-18A
To prevent Munson’s embezzlement, Downtown Columbia’s board of
directors could have:
a. Not permitted Munson to write checks for Downtown Columbia.
Instead, appoint a board member to write the checks.
b. Not permitted Munson to receive cash that came to Downtown
Columbia. Have subscriber checks sent to a post office box
belonging to a bank and have the bank collect the checks.
c. Supervised Munson’s work by examining Downtown Columbia’s
documents such as paid checks.
d. Had an audit of Downtown Columbia’s transactions and financial
statements.
Student responses may vary.
Chapter 4 Internal Control & Cash 4-13
(10-20 min.) E 4-19A
F.L. Callan
Bank Reconciliation March 31, 2015
BANK:
Balance, March 31 $ 409
Add: Deposit in transit 1,325
Less: Outstanding checks:
Check No.
626 $ 90
627 270 (360)
Adjusted bank balance $1,374
BOOKS:
Balance, March 31 $1,472
Less:
Correction of book error —
Recorded $81 check as $18 $ 63
NSF check 28
Service charge 7 (98)
Adjusted book balance $1,374
Financial Accounting 10/e Solutions Manual 4-14
(10-20 min.) E 4-20A
Ryan Patrick
Bank Reconciliation
June 30, 2014
BANK:
Balance, June 30 $ 750
Add: Deposit in transit 1,765
2,515
Less: Outstanding checks (610)
Adjusted bank balance $1,905
BOOKS:
Balance, June 30 $1,876
Add: EFT collection — rent 409
2,285
Less:
Service charge $ 7
NSF checks 120
Charge for printed checks 10
Correction of book error —
recorded $270 check as $27 243 (380)
Adjusted book balance $1,905
Patrick’s actual cash balance is $1,905.
Chapter 4 Internal Control & Cash 4-15
(10-15 min.) E 4-21A
Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
June 30 Cash .............................................................. 409 Rent Revenue .......................................... 409 EFT collection of rent. 30 Miscellaneous Expense ($7 + $10) .............. 17 Cash......................................................... 17 Bank service charge and charge for printed checks. 30 Accounts Receivable ................................... 120 Cash......................................................... 120 NSF checks returned by bank. 30 Salary Expense ($270 − $27) ....................... 243 Cash......................................................... 243 Correction of book error.
Financial Accounting 10/e Solutions Manual 4-16
(10-15 min.) E 4-22A
TO: Store Manager
FROM: Student
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, and tabulate total cash sales each day. The manager can
prove the amount of cash in the cash drawer against this recorded
amount.
Chapter 4 Internal Control & Cash 4-17
(10-15 min.) E 4-23A 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, Blue Manufacturing should have someone
other than the payroll department or 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.
Financial Accounting 10/e Solutions Manual 4-18
(20-30 min.) E 4-24A
Dexter Communications, Inc.
Cash Budget
Year Ended December 31, 2015
Millions
Cash balance, December 31, 2014 $ 68
Budgeted cash receipts:
Collections from customers 11,325
Sale of assets 157
11,550
Budgeted cash payments:
Payments for cost of
services and products $6,196
Payments of operating expenses 2,553
Investment in equipment 1,822
Payment of debt 538
Payment of dividends 348 11,457
Cash available (needed) before financing 93
Budgeted cash balance, December 31, 2015 (70)
Cash available for additional investments, or
(New financing needed) $ 23
Dexter Communications expects to have cash available for additional
investments of $23 million during 2015.
Chapter 4 Internal Control & Cash 4-19
(5-20 min.) E 4-25B a. Kennedy has access to the cash collected, and he also prepares the
cash report. With access to both items, Kennedy can steal cash and
falsify his cash report to conceal his theft.
b. Morales 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.
Student responses may vary.
(10 min.) E 4-26B
Cash payments:
a. Strong internal control. There is a good separation of duties.
Supervisors request equipment, and the home office purchases the
equipment.
b. Weak internal control. Supervisors both request, purchase, and pay for
equipment with little oversight by the home office.
Cash receipts:
a. Weak internal control. There is not good separation of duties. The
accountant both handles cash and accounts for cash.
b. Strong internal control. There is a good separation of duties. Different
people handle cash and account for cash.
Financial Accounting 10/e Solutions Manual 4-20
(10 min.) E 4-27B
To prevent Henry’s embezzlement, Downtown Huntsville’s board of
directors could have:
a. Not permitted Henry to write checks for Downtown Huntsville. Instead,
appoint a board member to write the checks.
b. Not permitted Henry to receive cash that came to Downtown Huntsville.
Have customer checks sent to a lock box belonging to the bank and
allow the bank to get the checks from the lock box.
c. Supervised Henry’s work by examining Downtown Huntsville’s
documents such as paid checks.
d. Had an audit of Downtown Huntsville’s transactions and financial
statements.
Student responses may vary.
Chapter 4 Internal Control & Cash 4-21
(10-20 min.) E 4-28B
A.C. Mazanek Bank Reconciliation
May 31, 2014
BANK:
Balance, May 31 $ 405
Add: Deposit in transit 1,320
Less: Outstanding checks:
Check No.
626 $ 75
627 265 (340)
Adjusted bank balance $1,385
BOOKS:
Balance, May 31 $1,452
Less:
Correction of book error —
Recorded $85 check as $58 $ 27
NSF check 37
Service charge 3 (67)
Adjusted book balance $1,385
Financial Accounting 10/e Solutions Manual 4-22
(10-20 min.) E 4-29B
Joe Donney
Bank Reconciliation
August 31, 2014
BANK:
Balance, August 31 $ 638
Add: Deposit in transit 1,695
2,333
Less: Outstanding checks (756)
Adjusted bank balance $1,577
BOOKS:
Balance, August 31 $1,620
Add: EFT collection — rent 375
1,995
Less:
Service charge $ 9
NSF checks 137
Charge for printed checks 20
Correction of book error —
recorded $280 check as $28 252 (418)
Adjusted book balance $1,577
Donney’s actual cash balance is $1,577.
Chapter 4 Internal Control & Cash 4-23
(10-15 min.) E 4-30B
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Aug 31 Cash ......................................................... 375 Rent Revenue ..................................... 375 EFT collection of rent. 31 Miscellaneous Expense ($9 + $20) ......... 29 Cash.................................................... 29 Bank service charge and charge for printed checks. 31 Accounts Receivable .............................. 137 Cash.................................................... 137 NSF checks returned by bank. 31 Salary Expense ($280 − $28) .................. 252 Cash.................................................... 252 Correction of book error.
Financial Accounting 10/e Solutions Manual 4-24
(10-15 min.) E 4-31B TO: Store Manager
FROM: Student
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 and tabulate total cash sales each day. The manager can
prove the amount of cash in the cash drawer against this recorded
amount.
Chapter 4 Internal Control & Cash 4-25
(10-15 min.) E 4-32B
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, Quick Kick should have someone other than
the payroll department or 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.
Financial Accounting 10/e Solutions Manual 4-26
(20-30 min.) E 4-33B
Carron Communications, Inc.
Cash Budget
Year Ended December 31, 2015
Millions
Cash balance, December 31, 2014 $ 72
Budgeted cash receipts:
Collections from customers 11,233
Sale of assets 108
11,413
Budgeted cash payments:
Payments for cost of
services and products $6,129
Payments of operating expenses 2,756
Investment in equipment 1,543
Payment of debt 611
Payment of dividends 316 11,355
Cash available (needed) before financing 58
Budgeted cash balance, December 31, 2015 (65)
Cash available for additional investments, or
(New financing needed) $ (7)
Carron expects to need new financing of $7 million during 2015.
Chapter 4 Internal Control & Cash 4-27
Quiz
Q4-34 c
Q4-35 a
Q4-36 b
Q4-37 d
Q4-38 b
Q4-39 c
Q4-40 c
Q4-41 d
Q4-42 a
Q4-43 d
Q4-44
Q4-45
c [$14,000 + $81,000 − $44,000 − $34,000 − $25,000 −
$13,000 = ($21,000); arrange financing for this
amount.]
e
Financial Accounting 10/e Solutions Manual 4-28
Problems
(15-20 min.) P 4-46A
The internal control weaknesses in English Imports’ system are:
1. O’Hara controls the content of the invoices. With no supervision of her
work, O’Hara could have the suppliers overstate their prices and then
arrange to have them split the excess with her after English Imports
pays the invoices.
2. Luck has both cash handling and accounting duties. With both
responsibilities, Luck could steal incoming cash and cover her theft by
manipulating the accounting records.
As with all small businesses, the key to effective internal control is
more owner involvement. Kregg could:
1. Make the purchase and pay arrangements with the English artisans
who supply English Imports’ products. Let O’Hara keep locating new
products, but don’t let her arrange for the purchases and payment.
2. Kregg could assign either cash handling or accounting duties to Luck
and then hire someone else to do the other (accounting or cash-
handling) duties. Also Kregg needs to perform the bank reconciliation
to keep her eye on cash receipts and cash payments.
Chapter 4 Internal Control & Cash 4-29
(10-20 min.) P 4-47A
Requirement 1 Requirement 2 Requirement 3
Missing Internal Control
Characteristic Possible Problem Solution a. Separation of
duties Theft of diamonds — the purchasing agent could have diamonds sent to a location he controls.
Separate purchasing, approval, and check-signing duties.
b. Assignment of
responsibility Lost revenue, because too many employees are managing the office and neglecting their duties.
Assign a single employee to manage the office when the owner is absent.
c. Separation of
duties Theft of cash. Separate
accounting and cash-handling duties.
Financial Accounting 10/e Solutions Manual 4-30
(20-30 min.) P 4-48A
Req. 1
Richmond Automotive
Bank Reconciliation
June 30, 2014
BANK:
Balance, June 30, 2014 $ 9,142
Add: Deposits in transit ($982 + $2,804) 3,786
12,928
Less: Outstanding checks —
Check No.
3119 $ 542
3120 987
3121 277
3122 2,406 (4,212)
Adjusted bank balance, June 30, 2014 $ 8,716
BOOKS:
Balance, June 30, 2014 $ 7,298
Add: EFT collection of rent $ 525
Bank collection of note receivable 1,375
Book error — $1,380 check
recorded as $1,830 450 2,350
9,648
Less: EFT payment of insurance $ 467
Unauthorized signature check 455
Service charge 10 (932)
Adjusted book balance, June 30, 2014 $ 8,716
Chapter 4 Internal Control & Cash 4-31
(continued) P 4-48A
Req. 2 (entries based on the reconciliation)
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
June 30 Cash .................................................................. 525
Rent Revenue .............................................. 525
EFT deposit for rent revenue earned.
30 Cash .................................................................. 1,375
Note Receivable .......................................... 1,375
Note receivable collected by bank.
30 Cash .................................................................. 450
Accounts Payable ....................................... 450
Correction for check #3115 recorded incorrectly.
30 Insurance Expense ........................................... 467
Cash ............................................................. 467
EFT for payment of insurance.
30 Accounts Receivable ....................................... 455
Cash ............................................................. 455
US customer check returned by bank.
30 Miscellaneous Expense ................................... 10
Cash ............................................................. 10
Bank service charge.
Financial Accounting 10/e Solutions Manual 4-32
(continued) P 4-48A
Req. 3
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 managers can compare to the company’s own cash records and
thereby 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.
Chapter 4 Internal Control & Cash 4-33
(30-45 min.) P 4-49A
Dallas Wireless
Cash Budget
2015
Thousands
Cash balance, beginning $ 1,600
Budgeted cash receipts:
Collections from customers ($61,000 × 1.25) 76,250
Receipt of interest 400
78,250
Budgeted cash payments:
Cash paid for inventory ($46,000 × 1.26) $57,960
Cash paid for operating expenses 13,200
Purchases of equipment 4,500
Purchases of investments 800
Payment of dividends 500
Payment of long-term debt 200 (77,160)
Cash available (needed) before financing 1,090
Budgeted cash balance, ending (4,675)
Cash available for additional investments, or
(New financing needed) $ (3,585)
Financial Accounting 10/e Solutions Manual 4-34
(15-20 min.) P 4-50B
The internal control weaknesses in Finnish Imports’ system are:
1. Martin controls the content of the invoices. With no supervision of her
work, Martin could have the suppliers overstate their prices and then
arrange to have them split the excess with her after Finnish Imports
pays the invoices.
2. Moore has both cash handling and accounting duties. With both
responsibilities, Moore could steal incoming cash and cover her theft
by manipulating the accounting records.
As with all small businesses, the key to effective internal controls is
more owner involvement. Ferguson could:
1. Make the purchase and pay arrangements with the artisans who supply
Finnish Imports’ products. Let Martin keep locating new products, but
don’t let her arrange for the purchases and payment.
2. Ferguson could assign either cash handling or accounting duties to
Moore and then hire someone else to do the other (accounting or cash-
handling) duties. Also Ferguson needs to perform the bank
reconciliation to keep her eye on cash receipts and cash payments.
Chapter 4 Internal Control & Cash 4-35
(10-20 min.) P 4-51B
Requirement 1 Requirement 2 Requirement 3
Missing Internal Control
Characteristic Possible Problem Solution a. Separation of duties Theft of cash or
diamonds by the purchasing agent.
Have a manager, not the purchasing agent, approve invoices for payment and sign the checks.
b. Assignment of
responsibilities Lost revenue due to delay of architectural drawings.
Assign one senior architect to fulfill management duties while Klepper is absent. Other senior architect should focus on producing architectural drawings.
c. Separation of duties Theft of cash. Keep accounting and
cash handling duties separate.
Financial Accounting 10/e Solutions Manual 4-36
(20-30 min.) P 4-52B Req. 1
Big City Automotive
Bank Reconciliation
July 31, 2014
BANK:
Balance, July 31, 2014 $ 9,693
Add: Deposits in transit ($986 + $2,801) 3,787
13,480
Less: Outstanding checks
Check No.
3119 $ 563
3120 972
3121 265
3122 2,831 (4,631)
Adjusted bank balance, July 31, 2014 $ 8,849
BOOKS:
Balance, July 31, 2014 $ 6,958
Add: EFT collection of rent $ 850
Bank collection of note receivable 1,350
Book error — $1,390 check recorded
as $1,930
540 2,740
9,698
Less: Unauthorized signature check $ 417
EFT payment of insurance 407
Service charge 25 (849)
Adjusted book balance, July 31, 2014 $ 8,849
Chapter 4 Internal Control & Cash 4-37
(continued) P 4-52B
Req. 2 (entries based on the reconciliation)
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
July 31 Cash ................................................................... 850
Rent Revenue ............................................... 850
EFT deposit for rent revenue.
31 Cash ................................................................... 1,350
Note Receivable ........................................... 1,350
Note receivable collected by bank.
31 Cash ................................................................... 540
Accounts Payable ........................................ 540
Correction for check #3115 recorded incorrectly.
31 Accounts Receivable ........................................ 417
Cash .............................................................. 417
US customer check returned by bank.
31 Insurance Expense ........................................... 407
Cash .............................................................. 407
EFT for payment of insurance.
31 Miscellaneous Expense .................................... 25
Cash .............................................................. 25
Bank service charge.
Financial Accounting 10/e Solutions Manual 4-38
(continued) P 4-52B
Req. 3
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 Big City 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.
Chapter 4 Internal Control & Cash 4-39
(30-45 min.) P 4-53B
Tampa Wireless
Cash Budget
2015
Cash balance, beginning $ 1,500
Budgeted cash receipts:
Collections from customers ($66,000 × 1.25) 82,500
Receipt of interest 100
84,100
Budgeted cash payments:
Cash paid for inventory ($50,000 × 1.24) $62,000
Cash paid for operating expenses 13,400
Purchase of equipment 4,800
Purchases of investments 400
Payment of dividends 200
Payments of long-term debt 600 (81,400)
Cash available (needed) before financing 2,700
Budgeted cash balance, ending (4,750)
Cash available for additional investments, or
(New financing needed) $ (2,050)
Financial Accounting 10/e Solutions Manual 4-40
Challenge Exercises and Problem
(15-25 min.) E 4-54
Wood could be: Brown could investigate by: 1. Writing business checks to
herself. 1. Performing the bank
reconciliation and examining all checks written by the business.
2. Submitting purchase invoices a
second time for duplicate payment, perhaps altering the mailing address on the duplicate invoice and sending the check to a post office box that Wood controls.
2. Examining purchase invoices for authenticity and comparing invoices to receiving reports to determine that the business received all goods it paid for. Any invoice with a hole indicates it was paid earlier. Calling the suppliers directly to inquire about any questionable invoices.
3. Paying suppliers excess
amounts and arranging for suppliers to kick back part of the excess to Wood.
3. Comparing the business’s ratio of cost of goods sold to retail selling price to the cost-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 to
herself. 4. Examining all cash records and
comparing the records to actual quantities of supplies and other items needed by the business.
Student responses may vary.
Chapter 4 Internal Control & Cash 4-41
(20-30 min.) E 4-55 Req. 1
Gateway Golf, Inc.
Cash Budget
Year Ended December 31, 2015
Thousands
Cash balance, December 31, 2014 $ 145
Budgeted cash receipts:
Collections from customers 20,400
Issuance of stock 632
21,177
Budgeted cash payments:
Purchases of inventory items $14,245
Payment of operating expenses 2,849
Purchase of property and equipment 1,588
Payment of long-term and short-term debt 990
Payment of dividends 307 (19,979)
Cash available (shortage) before financing 1,198
Budgeted cash balance, December 31, 2015 (135)
Cash available for additional investments $ 1,063
Req. 2
Current ratio = Total current assets
= $7,576
= 1.74 Total current liabilities $4,360
Debt ratio = Total liabilities
= $11,588
= 0.51 Total assets $22,677
I would lend $95 thousand to Gateway Golf because the company’s ratio
values are strong. Also, the cash budget indicates strong cash flows
during 2015.
Financial Accounting 10/e Solutions Manual 4-42
P 4-56
The Pembrook Company
Bank Reconciliation
December 31
BANK:
Balance, December 31 (corrected for erroneous
November outstanding checks)
$ 3,668
Add: Deposit in transit
Actual amount of December 30 deposit 650
4,318
Less: Outstanding checks
Check No.
1560 $185
1901 842
1902 168 (1,195)
Adjusted bank balance, December 31 $ 3,123
BOOKS:
Balance, December 31 $ 9,455
Add: Checks #1880, #1882, and #1883 recorded in both November and December
$1,155
EFT receipt from customer 52
Interest revenue 6 1,213
10,668
Less: NSF check $ 135
EFT payment of utility bill 755
Book error (overstatement of Dec. 24 deposit)
3,000
Unexplained difference 3,655 (7,545)
Adjusted book balance, December 31 $ 3,123
Chapter 4 Internal Control & Cash 4-43
(continued) P 4-56
Checks No. 1880, 1882, and 1883 were outstanding in November so should
not also be deducted from Cash in December. The unexplained difference
of $3,655 consists of $1,155 erroneous November outstanding checks and
the $2,500 difference between deposit in transit listed on the original
reconciliation and the amount of the deposit in transit listed on the books.
It is possible that the $3,000 difference between the December 23 deposit
on the books and the December 24 receipt on the bank statement was
intentional and used to cover up the missing cash.
Financial Accounting 10/e Solutions Manual 4-44
Decision Cases
(20-30 min.) Decision Case 1
Environmental Concerns, Inc.
Bank Reconciliation
September 30
BANK:
Balance, September 30 $ 8,224
Add: Deposit of September 30 in transit 3,794
12,018
Less: Outstanding checks ($116 + $150 +
$853 + $990 + $206 + $145) (2,460)
Adjusted bank balance, September 30 $ 9,558
BOOKS:
Balance, September 30 $10,402
Add: Bank collection 200
10,602
Less: Service charge $ 8
NSF check 36 (44)
Adjusted book balance, September 30 $10,558
Based on the above reconciliation, it appears the bookkeeper has stolen
$1,000, the difference between the adjusted bank and book amounts
($9,558 − $10,558). He understated the total of outstanding checks by
$1,000 to cover his theft.
Adjusted
balances
do not
agree.
Chapter 4 Internal Control & Cash 4-45
(continued) Decision Case 1
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.
Financial Accounting 10/e Solutions Manual 4-46
(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 pay check 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.
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 the home
office would at least know that all the workers exist.
2. Have employees sign their own time sheets.
Chapter 4 Internal Control & Cash 4-47
(continued) Decision Case 2
3. Don’t allow Pickins to pass out paychecks. Have employees pick up
paychecks at corporate office or have another corporate employee go
and pass out paychecks. The check distributor should ask for a picture
identification.
4. 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.
5. Occasionally — or always — have a home-office employee go to the
construction site to pass out paychecks.
6. 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.
Financial Accounting 10/e Solutions Manual 4-48
Ethical Issues
Ethical Issue 1
1. Identify the ethical issue. You must decide whether it is ethical for the
auditor not to require the bank to record the loss.
2. What are the alternatives? Require the client to record the loss, or
permit the client not to record the loss.
3. Identify 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.
Assess the possible outcomes. If the auditors require the bank to
record the loss, the auditor will keep his or her reputation intact. But
the auditor will lose the client and also lose the revenue from this large
audit. The accounting firm may then be unable to expand the firm as it
had hoped to do.
If the auditors okay 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 would
be hurt.
(continued) Ethical Issue 1
Chapter 4 Internal Control & Cash 4-49
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 okaying financial statements that include
errors. It’s far better to lose a client than to lose your reputation.
Financial Accounting 10/e Solutions Manual 4-50
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 ($3.6 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 Banks.
Assess the possible consequences. Disclosing Nadar’s weakened
condition to The Salvation Army board may help The Salvation Army
buy the land at a low price, depending on the ethical bearing of
Chapter 4 Internal Control & Cash 4-51
(continued) Ethical Issue 2
fellow board members. This would help The Salvation Army and hurt
Nadar, relative to her ability to sell the land at market value of $3.6
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 $3.6 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
Financial Accounting 10/e Solutions Manual 4-52
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 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. 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 sale to Snicker doesn’t
go through.
Chapter 4 Internal Control & Cash 4-53
Focus on Financials: Amazon.com, Inc.
(20-30 min.)
Req. 1 Cash equivalents include assets that are slightly less liquid than cash, but
similar enough to be reported together. Cash equivalents must be readily
convertible to known amounts of cash and close to maturity (with an
original maturity of three months or less at the time of purchase).
Req. 2 Amazon.com, Inc. includes in its cash equivalents highly liquid
instruments with an original maturity of three months or less at the time
of purchase.
Req. 3 Yes, Note 2- CASH, CASH EQUIVALENTS, AND MARKETABLE
SECURITIES
Cash equivalents and marketable securities include money market funds
and equity securities, foreign government and agency securities, U.S.
government and agency securities, corporate debt securities, asset-
backed securities, and other fixed income securities. Note 2 provides this
list of cash equivalents and marketable securities. The company does not
separately identify the cash equivalents.
Req. 4 Yes, this is cash or cash equivalents required to be restricted as collateral
for debt and other agreements. Stockholders should be aware of what
cash is actually available to the company and which cash is restricted.
Restricted cash is less liquid. From Note 2, restricted cash, cash
equivalents, and marketable securities equal $99 million at December 31,
2012.
Financial Accounting 10/e Solutions Manual 4-54
Focus on Analysis: YUM! Brands, Inc.
(20-30 min.)
Req. 1
1. Net income of $1,608 million, in the operating section.
2. Capital spending, which used $1,099 million, in the investing
section.
3. Repurchase of shares of common stock, which used $965 million,
in the financing section.
4. Depreciation and amortization, which provided $645
million. Actually, these are expenses that do not use cash, so they
are added back to income to arrive at cash provided by operations.
5. Dividends paid on common stock, which used $544 million, in the
financing section.
6. Acquisitions, which used $543 million, in the investing section.
7. Proceeds from refranchising of restaurants, which provided $364
million, in the investing section.
Req. 2
The following items mentioned in Item 9A (following the footnotes), are
also mentioned in the chapter:
“Management is responsible for establishing and maintaining
adequate internal control over financial reporting”. Management
concluded that internal control over financial reporting was
effective as of the end of the year.
An accounting firm evaluated the internal controls and reported on
their effectiveness.
Student responses will vary.
Chapter 4 Internal Control & Cash 4-55
Group Project
Student responses will vary. Reference download links: financial accounting 10th edition solutions financial accounting 10th edition pdf financial accounting 10th edition harrison pdf financial accounting harrison 10th edition financial accounting harrison pdf financial accounting 10th edition solutions manual financial accounting 10th edition harrison horngren and thomas pdf harrison financial accounting 11e