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Chapter 8Internal Control and CashStudy Guide SolutionsFill-in-the-Blank Equations1. Liability2. Increase; debit3. Monthly cash expenses4. Cash as of year-endExercises1. In Poletti Co.’s financial statements, the management makes an assessment of thecompany’s internal controls. The company produces the assessment every year in itsannual financial statements. Who else must make a report on the effectiveness ofinternal controls?Independent auditor2. The passing of Sarbanes-Oxley caused companies to strengthen their internal controls.Which of the following relate to internal controls?a. Yesb. Yesc. No3. Sarbanes-Oxley attempts to do which of the following?a. Yesb. Noc. YesStrategy: The Sarbanes-Oxley Act was passed as a result of fraud and weak internalcontrols as a way to restore investor confidence. The act attempts to strengthen internalcontrols and reporting to do so.4. To which of the five elements of internal controls does each of the following relate?a. Monitoringb. Control proceduresc. Control environment1 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2Chapter 85. To which of the five elements of internal controls does each of the followingdescriptions relate?a. Risk assessmentb. Control proceduresc. Information and communication6. Which of the following relate to the control procedures a business should possess?a. Yesb. Yesc. YesStrategy: The control environment is the attitude about the company’s internal controls,which is outlined by policies and the operating style. The risk assessment works todevelop the internal controls by deciding which risks the company is threatened by.Control procedures are the actual processes the company should use in order to decreasethe possibility of theft and fraud. A company monitors its people and accounting systemfor red flags that could be a sign of theft and fraud. Information and communicationshould be used to ensure the company is using all available information from reliableresources.7. Stop-a-Second’s cash receipt processing has adequate separation of duties amongemployees. However, the employee who collects the cash, the employee who recordsthe cash receipts, and the employee preparing the deposit ticket for the day may worktogether to steal cash from the company. Of which limitation of internal control is thisan example?The human element of controls, collusion among employees8. The purchasing director of a manufacturer works to find materials at the best prices.Although the director’s responsibilities are adequately separated to avoid theft andfraud, he mistakenly writes down the wrong discount taken by a supplier. To whichlimitation of internal controls does this relate?The human element of controls, human error 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Internal Control and Cash39. Stop-a-Second is preparing its assessment of internal controls for the annual financialstatements. The managers verify the employees have sufficient segregation of dutiesand supervision. However, because the company is quite large, all lower-levelemployees cannot be supervised at all times to ensure that theft and fraud does notoccur. To which limitation of internal controls does this relate?Cost-benefit considerations; the cost to supervise all lower-level employees at all timeswould exceed the benefit.Strategy: The two limitations of internal controls include the human element of controlsand the cost-benefit considerations. Human element includes any weaknesses caused bythe employees administering the control procedure. The cost-benefit considerationshould be used to create effective internal controls without causing more harm thanbenefit for the business.10. ASC requires that all cashiers receive a cash drawer with exactly 40 before each shift.During each sale, the cashier is prompted to input the type and amount of eachpayment. The cash register’s screen is usually visible to customers, but the cashier onshift likes to face it toward him due to his bad eyesight. He also has a bad memory,which causes him to forget to give customers their receipts at times. ASC is a small storewith many regular customers, so they all trust the cashier is giving them the correctchange. Identify any problems in the cash receipts controls that ASC may have.The customers are unable to verify the sales amount is correct without seeing thescreen or receiving a receipt. This could allow the employee to falsely charge customersfor sales and take the payment.11. After opening the mail and stamping checks “For Deposit Only,” an employee deliversthe cash and money orders to the Cashier’s Department, where he prepares a bankdeposit ticket. After preparing and delivering the bank deposit ticket, the employee alsorecords the cash receipts and posts amounts to the customer accounts. Does theprocess to record the cash receipts received in the mail have any weaknesses?The duties to record the receipt of cash and handle the cash should be separated.Otherwise, an employee could conceal theft of the cash. 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4Chapter 812. Since ASC is a small retail business, the supervisor on duty usually collects the cash fromthe registers and deposits the cash sales on his way home. The next day, he brings thedeposit slips to the Accounting Department so the cash sales for the previous day can berecorded. How could ASC strengthen its cash receipts controls?ASC should separate the duty of collecting cash and preparing a deposit ticket, especiallysince the deposit ticket is the only source to record cash sales. The AccountingDepartment should receive the cash register receipts to check amounts to the depositticket.Strategy: To reduce the possibility of theft and fraud, internal controls should separatethe duties to have possession of the cash and record the cash receipt in the accountingsystem. By separating these responsibilities, the company creates more difficulty toemployees trying to steal the cash.13. On October 8, 20Y5, a company’s cash receipts from sales totaled 62,392, while thecash register total for cash sales equaled 62,379. Calculate the shortage or overage andprepare the journal entry to record the cash receipts, sales, and overage or shortage.Cash overage of 13Oct. 8 Cash62,392Cash Short and Over13Sales62,37914. Williams Supply Co.’s cash receipts from sales totaled 54,470 on August 12, 20Y5. Thecash register total for cash sales for the day was 54,493. How much under or over arethe company’s cash receipts for the day? Prepare the journal entry to record the cashreceipts, sales, and overage or shortage.Cash shortage of 23Aug. 12 Cash54,470Cash Short and Over23Sales54,493 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Internal Control and Cash515. On January 23, 20Y5, a company received 32,629 for the day’s cash sales. Thecompany’s register showed total sales of 45,000, of which 73% were paid for usingcash. Calculate the cash shortage or overage. Prepare the journal entry to record thecash receipts, cash sales, and overage or shortage.Cash shortage of 221Jan. 23 Cash32,629Cash Short and Over221Sales32,850Strategy: The cash register total gives the amount of cash sales for the day, while thecash receipts are the cash received by the company for the day. The difference isrecorded in the cash short and over account. If the sales are greater than the cashreceived, there is a cash shortage (debit), while a cash overage is when the cash receiptsare greater than the cash sales (credit).16. Titan Coolers creates documents that must be submitted for approval before beingrecorded in the accounts payable. When approving the document, the employee checksthe amounts to the supplier’s invoice, purchase order, and receiving report. Which typeof cash payment system does Titan Coolers use?Voucher system; the document being approved is a voucher.17. Titan Coolers makes monthly payments for its utilities. To decrease errors, Titan Coolersauthorizes an electronic transfer from its bank account to the utility company’s bankaccount. Which type of cash payment system is the company using?Electronic funds transfer (EFT) system, since the transfer is made between bankaccounts electronically 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6Chapter 818. A recent flood has caused Titan Coolers to lose much of its inventory and paperwork. Inan attempt to resume business quickly, the company has placed many large orders withmultiple suppliers. The Accounting Department has received the following vouchers andsupporting documents for approval:o Voucher for Invoice No. 201, Ice Maniao Supplier Invoice No. 375, RediCoolers Inc.o Receiving Report for Invoice No. 201, Ice Maniao Voucher for Invoice No. 202, Big & Coolo Purchase Order for RediCoolers Inc. (Invoice No. 203)o Voucher for Invoice No. 375, RediCoolers Inc.Which documents are missing to approve the vouchers and record the accounts payableledgers?Voucher for Invoice No. 201, Ice Mania, also requires a purchase order and supplier’sinvoice.Voucher for Invoice No. 202, Big & Cool, also requires a supplier’s invoice and receivingreport.Voucher for Invoice No. 375, RediCoolers Inc. also requires a purchase order andreceiving report.Strategy: Since the voucher system must go through various processes, such as ordering(use a purchase order), billing (supplier’s invoice), and delivery (receiving report), thevoucher must be supported and verified in every step. The EFT is much simpler becausethe transfer is made from one bank account to another bank account.19. Determine if each item will appear on the bank statement as a debit or credit memo.Also indicate if the item will increase or decrease the balance of the company’s bankaccount.a. Credit memo, increases the bank accountb. Debit memo, decreases the bank accountc. Credit memo, increases the bank account 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Internal Control and Cash720. RPL Co.’s accountant is preparing the bank reconciliation for the month. The followingare shown on the document. Will each be shown as a debit or credit memo to theaccount? By how much will each item cause the balance of RPL Co.’s bank account toincrease or decrease?a. Debit memo, decrease the bank account for 550b. Debit memo, decrease the bank account for 642c. Debit memo, decrease the bank account for 36021. Moe’s Mowers received its bank statement for the month of July. The bank statementincluded the items below. Determine if each item will be a credit or debit memo and ifeach causes the bank account balance to increase or decrease.a. Credit memo, increase the bank accountb. Credit memo, increase the bank accountc. Debit memo, decrease the bank accountStrategy: When determining if an item will increase or decrease the bank account, firstdecide if the item will give the company more money (increase the account) or cost thecompany money (decrease the account). If the transaction gives the company moremoney, it will be shown as a credit memo in the bank statement, since a credit increasesa liability and the bank statement is from the bank’s point of view. If the transactiondecreases the company’s account, it will be shown as a debit memo in the bankstatement, as a debit decreases a liability. 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
8Chapter 822. Moe’s Mowers’ cash ledger shows a balance of 41,200. The company currently has 9,338of deposits in transit and 12,000 of checks outstanding. Using the bank statement below,prepare the bank statement for the month and the journal entries to update the company’sledgers. Assume all electronic transfers received were to be applied to accounts receivableand had not yet been recorded by Moe’s. The electronic transfer sent for 1,828.80 was topay the company’s utility bills to Bright Energy, which had been recorded as an accountpayable but the cash payment had not yet been recorded.Charles K. Bank of the CarolinasPage 1Account number 2237854From 8/31/20Y5 to 9/30/20Y5Balance 8/31 ACHWithdrawalCheck No. 232DepositService ChargeNSF-Joe 8042,818.00Balance 9/30 42,818.00Cash balance according to bankAdd: Deposits in transitDeduct: Outstanding checksAdjusted balanceCash balance according to companyAdd: EFT depositsDeduct: EFT payments (1,828.80)Service charge(55.00)NSF checks(1,750.19)Adjusted balance 42,818.00 9,338.00(12,000.00)(2,662.00) 40,156.00 41,200.00 2,589.99(3,633.99)(1,044.00) 40,156.00Sept. 30 Cash2,589.99Accounts Receivable2,589.9930 Accounts Payable—Bright Energy 1,828.80Miscellaneous Expense55.00Accounts Receivable—Joe Kyuk1,750.19Cash3,633.99 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Internal Control and Cash923. Kelby Kibble’s cash ledger shows a balance of 2,570.20. On October 31, 20Y5, thecompany made a deposit of 1,320.40 and wrote a check to suppliers for 892.50. Withthe bank statement shown below, prepare a bank reconciliation for the month ofOctober and the journal entries to adjust Kelby Kibble’s cash ledger. All electronictransfers received should be applied to accounts receivable. The electronic transferssent should be applied to the company’s outstanding balance with Bright Energy, whichhad been recorded as an account payable.Charles K. Bank of the CarolinasPage 1Account number 2236862From 9/30/20Y5 to 10/31/20Y5Balance 9/30 10/31Loan ProceedsService ChargeDepositCheck No. 652DepositACHNSF—Jim TortiACHNSF—Dan .553,275.25Balance 10/31 3,275.25Cash balance according to bankAdd: Deposits in transitDeduct: Outstanding checksAdjusted balanceCash balance according to companyAdd: EFT depositsProceeds from loanDeduct: EFT paymentsService chargeNSF checksAdjusted balance 3,275.25 1,320.40(892.50)427.90 3,703.15 2,570.20 435.201,860.35 2,295.55 (800.60)(115.00)(247.00) (1,162.60)1,132.95 3,703.15 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
10Chapter 8Oct. 31 Cash2,295.55Accounts Receivable435.20Notes Payable1,860.3531 Accounts Payable—Bright Energy800.60Miscellaneous Expense115.00Accounts Receivable—Jim Torti199.70Accounts Receivable—Dan Snead47.30Cash1,162.6024. Tiger Honey’s cash ledger shows a balance of 2,870.20, which includes a deposit intransit of 890.60 and outstanding checks totaling 500.75. Prepare a bankreconciliation for the company with the given bank statement for the month of August.Record the journal entries to update the company’s cash ledger to the adjusted balance.All electronic transfers received should be applied to accounts receivable, whileelectronic transfers sent should be applied to the company’s outstanding accountspayable balance with Busy Bees.Charles K. Bank of the CarolinasPage 1Account number 215350From 7/31/20Y5 to 8/31/20Y5Balance 7/31 epositNSF—Dan SneadACHCheck No. 545Notes ReceivableACHCheck No. 546NSF—Jill JacksonService 97.012,582.012,932.01Balance 8/31 2,932.01 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Internal Control and CashCash balance according to bankAdd: Deposits in transitDeduct: Outstanding checksAdjusted balanceCash balance according to companyAdd: EFT depositsCollection of notes receivableDeduct: EFT paymentsService chargeNSF checksAdjusted balance11 2,932.01 890.60(500.75)389.85 3,321.86 2,870.20 650.15300.00 (312.50)(15.00)(170.99) 950.15(498.49)451.66 3,321.86Aug. 31 Cash950.15Accounts Receivable650.15Notes Receivable300.0031 Accounts Payable—Busy Bees312.50Miscellaneous Expense15.00Accounts Receivable—Dan Snead 46.49Accounts Receivable—Jill Jackson 124.50Cash498.49Strategy: Using the steps shown in the chapter, begin with the bank section. Since mostof the adjustments will be made to the company’s balance, the bank’s adjusted balancewill give a check figure for the company’s adjusted balance. The journal entry to recordan increase in cash should debit Cash and credit the corresponding accounts. The journalentry to record a decrease in cash should credit Cash and debit the correspondingaccounts. 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
12Chapter 825. On March 1, 20Y5, Tiger’s Honey creates a 750 petty cash fund to pay for smallexpenses. At the end of the month, the petty cash receipts included payments for: officesupplies, 225; plumbing repair (record as a maintenance expense), 190; and shippingexpenses, 60. The petty cash fund had 265 on hand at the end of the month. Preparethe journal entries to establish the fund and replenish the fund at the end of the month,recording any shortage or overage in the account.Mar. 1 Petty Cash 750Cash750Mar. 31 Office SuppliesMaintenance ExpenseShipping ExpenseCash Short and OverCash225190601048526. Lily’s Doodles creates a petty cash fund of 300 at the beginning of April. During themonth, the company used the petty cash fund to pay for the following: office supplies, 80; miscellaneous administrative expenses, 55; and delivery fees, 24. The companyhad 146 of petty cash on hand at the end of the month. Prepare the journal entries toestablish the fund and replenish the fund at the end of the month, recording any cashshort or over.Apr. 1 Petty Cash 300Cash300Apr. 30 Office SuppliesMisc. Administrative ExpenseDelivery ExpenseCash Short and OverCash8055245154 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Internal Control and Cash1327. At the beginning of June, Lily’s Doodles creates a petty cash fund of 400. On June 30,20Y5, the remaining amount of cash in the petty cash fund is 95. The companyreplenished the fund based on the following receipts from the petty cash fund: officesupplies, 175; store supplies, 65; and delivery fees, 55. Record the journal entry toestablish the fund and replenish the fund at the end of the month. Any missing fundsshould be recorded in the cash short and over account.June 1 Petty Cash 400Cash400June 30 Office SuppliesStore SuppliesDelivery ExpenseCash Short and OverCash175655510305Strategy: The petty cash fund is established once and replenished afterwards for theamounts used. Since it is a way for a business to easily pay for small expenses, thecompany replenishes the fund at the end of the period, using the expenditure receiptspaid for the petty cash fund. The company records these expenditures in a journal entry,which is the total amount of petty cash used for the period and also the amount thebusiness must put back into the fund to restore it to its normal balance.28. Tiny Treats has a cash balance of 3,700 at the beginning of August 20Y5. To earninterest on excess cash, the company invests 400 in U.S. Treasury bills and 900 incommercial paper. How much excess cash is invested in cash equivalents? Prepare theportion of the balance sheet that shows how these will be reported. 1,300 in cash equivalents ( 400 900)Tiny TreatsBalance SheetAugust 1, 20Y5AssetsCurrent assets:Cash and cash equivalents 3,700 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
14Chapter 829. On December 31, 20Y5, Tiny Treats has a balance of 890 in its bank account. Thecompany also has 500 invested in U.S. Treasury bills and long-term investmentstotaling 1,560. How much in cash and cash equivalents will the company’s balancesheet present? 1,390; ( 890 500)Long-term investments are not considered a cash equivalent.30. Tiny Treats’ bank statement on September 30, 20Y5, has a balance of 1,475. The onlydiscrepancy between the bank statement and cash ledger is an outstanding check for 90. The company also has the following investments: U.S. Treasury bills, 590;commercial paper, 320; and long-term notes receivable, 1,300. Prepare the portion ofthe company’s quarterly balance sheet that presents the cash and cash equivalents.Tiny TreatsBalance SheetSeptember 30, 20Y5AssetsCurrent assets:Cash and cash equivalents 2,295Cash and cash equivalents: ( 1,475 – 90) 590 320Strategy: Cash equivalents are highly liquid investments, meaning that the company canreturn the investment to cash easily if needed. Cash equivalents do not include long-terminvestments since these are much harder to restore to cash. Since the cash equivalentsare easily converted back to cash, they are shown on the same line as cash.31. Using the following information, calculate MAF Co.’s ratio of cash to monthly cashexpenses and interpret the results of the ratio. Round answers to two decimal places.For the Year Ended December 31, 20Y5Cash and cash equivalents at year-end 14,750Cash flow from operations(49,500)Monthly cash expenses4,125Ratio of cash to monthly cash expenses3.58 monthsMAF Co. has 3.58 months of cash remaining to sustain operations. If the companywishes to continue operations longer, it will need to generate positive cash flows fromoperations or raise additional financing. 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Internal Control and Cash1532. Using the following information, calculate MAF Co.’s ratio of cash to monthly cashexpenses for 20Y5 and 20Y6. Interpret the results of the ratio. Round answers to twodecimal places.For the Years EndedDecember 31, 20Y6 December 31, 20Y5Cash and cash equivalents at year-end 4,250 9,260Cash flow from operations(15,355)(18,750)Monthly cash expenses1,279.581,562.50Ratio of cash to monthly cash expenses3.32 months5.93 monthsAs of the end of 20Y5, MAF Co. has enough cash to continue operations for 5.93months. However, the company was able to raise additional financing to continuethrough the remainder of 20Y6. At the end of 20Y6, the company has enough cash tofinance operations for 3.32 months.33. Using the following information, calculate MAF Co.’s ratio of cash to monthly cashexpenses for 20Y5 and 20Y6. Interpret the results of the ratio. Round answers to twodecimal places.For the Years EndedDecember 31, 20Y6 December 31, 20Y5Cash and cash equivalents at year-end 20,470 15,380Cash flow from operations(26,300)(25,200)Monthly cash expenses2,191.672,100Ratio of cash to monthly cash expenses9.34 months7.32 monthsAt the end of 20Y5, MAF Co. has 7.32 months of cash remaining. The company was ableto obtain additional financing to continue through the remainder of the year. As of the20Y6 year-end, MAF Co. has sufficient cash on hand to continue operations for another9.34 months.Strategy: To calculate the ratio of cash to monthly cash expenses, first calculate themonthly cash expenses, which are the average amount of cash the company spends in amonth to stay in business. Next, divide the cash and cash equivalents at year-end by themonthly cash expenses to determine the ratio of cash to monthly cash expenses. Theratio gives an estimate of the number of months a company can remain in business withthe cash on hand, unless the company obtains additional financing or improves itsoperations. 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The passing of Sarbanes-Oxley caused companies to strengthen their internal controls. Which of the following relate to internal controls? a. Yes. b. Yes. c. No . 3. Sarbanes-Oxley attempts to do which of the following? a. Yes. b. No. c. Yes. Strategy: The Sarbanes-Oxley Act was passed as a result of fraud and weak internal
