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344 7 Fraud, Internal Control, and Cash

Fraud triangle The three factors that contribute to Outstanding checks Checks issued and recorded by a
fraudulent activity by employees: opportunity, financial company but not yet paid by the bank. (p. 336).
pressure, and rationalization. (p. 316). Petty cash fund A cash fund used to pay relatively small
Internal auditors Company employees who continu- amounts. (p. 329).
ously evaluate the effectiveness of the company’s inter- Restricted cash Cash that must be used for a special
nal control system. (p. 322). purpose. (p. 341).
Internal control All of the related methods and activities Voucher An authorization form prepared for each pay-
adopted within an organization to safeguard its assets ment in a voucher system. (p. 328).
and enhance the accuracy and reliability of its account- Voucher system A network of approvals by authorized
ing records. (p. 316). individuals acting independently to ensure that all dis-
NSF check A check that is not paid by a bank because bursements by check are proper. (p. 328).
of insufficient funds in a customer’s bank account.
(p. 335).

Self-Test, Brief Exercises, Exercises, Problem Set A, and many more components are available
for practice in WileyPLUS.

SELF-TEST QUESTIONS

Answers are on page 362. (c) Independent internal verification.

(LO 1) 1. Which of the following is not an element of the fraud (d) All of these control activities are relevant to a
triangle? computerized system.
(a) Rationalization. 7. The use of prenumbered checks in disbursing cash is (LO 4)
(b) Financial pressure. an application of the principle of:
(c) Segregation of duties. (a) establishment of responsibility.
(d) Opportunity. (b) segregation of duties.
(LO 1) 2. An organization uses internal control to enhance the (c) physical controls.
accuracy and reliability of its accounting records and to: (d) documentation procedures.
(a) safeguard its assets. 8. A company writes a check to replenish a $100 petty (LO 5)
(b) prevent fraud. cash fund when the fund contains receipts of $94 and
(c) produce correct financial statements. $4 in cash. In recording the check, the company should:
(d) deter employee dishonesty. (a) debit Cash Over and Short for $2.
(LO 2) 3. The principles of internal control do not include: (b) debit Petty Cash for $94.
(a) establishment of responsibility. (c) credit Cash for $94.
(b) documentation procedures. (d) credit Petty Cash for $2.
(c) management responsibility. 9. The control features of a bank account do not include: (LO 6)
(d) independent internal verification. (a) having bank auditors verify the correctness of
(LO 2) 4. Physical controls do not include: the bank balance per books.
(a) safes and vaults to store cash. (b) minimizing the amount of cash that must be kept
(b) independent bank reconciliations. on hand.
(c) locked warehouses for inventories. (c) providing a double record of all bank transactions.
(d) bank safety deposit boxes for important papers. (d) safeguarding cash by using a bank as a depository.
(LO 3) 5. Permitting only designated personnel to handle cash 10. In a bank reconciliation, deposits in transit are: (LO 7)
receipts is an application of the principle of: (a) deducted from the book balance.
(a) segregation of duties. (b) added to the book balance.
(b) establishment of responsibility. (c) added to the bank balance.
(c) independent check. (d) deducted from the bank balance.
(d) human resource controls. 11. The reconciling item in a bank reconciliation that will (LO 7)
(LO 3) 6. Which of the following control activities is not rele- result in an adjusting entry by the depositor is:
vant when a company uses a computerized (rather (a) outstanding checks.
than manual) accounting system? (b) deposit in transit.
(a) Establishment of responsibility. (c) a bank error.
(b) Segregation of duties. (d) bank service charges.
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Questions 345

(LO 8) 12. Which of the following items in a cash drawer at 13. Which of the following statements correctly describes (LO 8)
November 30 is not cash? the reporting of cash?
(a) Money orders. (a) Cash cannot be combined with cash equivalents.
(b) Coins and currency. (b) Restricted cash funds may be combined with cash.
(c) A customer check dated December 1. (c) Cash is listed last in the current assets section.
(d) A customer check dated November 28. (d) Restricted cash funds cannot be reported as a
current asset.

Go to the book’s companion website, www.wiley.com/college/weygandt, for additional Self-Test Questions.

✔ The Navigator

QUESTIONS

1. A local bank reported that it lost $150,000 as the re- 13. What principle(s) of internal control is (are) involved in
sult of an employee fraud. Travis Witt is not clear on making daily cash counts of over-the-counter receipts?
what is meant by an “employee fraud.” Explain the 14. Aurora Department Stores has just installed new elec-
meaning of fraud to Travis and give an example of tronic cash registers in its stores. How do cash regis-
frauds that might occur at a bank. ters improve internal control over cash receipts?
2. Fraud experts often say that there are three primary 15. At Oswego Wholesale Company, two mail clerks open all
factors that contribute to employee fraud. Identify the mail receipts. How does this strengthen internal control?
three factors and explain what is meant by each. 16. “To have maximum effective internal control over
3. Identify and describe the five components of a good cash disbursements, all payments should be made by
internal control system. check.” Is this true? Explain.
4. “Internal control is concerned only with enhancing the 17. Ted Rampolla Company’s internal controls over cash
accuracy of the accounting records.” Do you agree? disbursements provide for the treasurer to sign checks
Explain. imprinted by a check-writing machine in indelible ink
5. What principles of internal control apply to most after comparing the check with the approved invoice.
organizations? Identify the internal control principles that are pres-
6. At the corner grocery store, all sales clerks make ent in these controls.
change out of one cash register drawer. Is this a viola- 18. How do the principles of (a) physical controls and (b)
tion of internal control? Why? documentation controls apply to cash disbursements?
7. Pam Duffy is reviewing the principle of segregation of 19. (a) What is a voucher system? (b) What principles of
duties. What are the two common applications of this internal control apply to a voucher system?
principle? 20. What is the essential feature of an electronic funds
8. How do documentation procedures contribute to transfer (EFT) procedure?
good internal control? 21. (a) Identify the three activities that pertain to a petty
9. What internal control objectives are met by physical cash fund, and indicate an internal control principle
controls? that is applicable to each activity. (b) When are jour-
10. (a) Explain the control principle of independent inter- nal entries required in the operation of a petty cash
nal verification. (b) What practices are important in fund?
applying this principle? 22. “The use of a bank contributes significantly to good in-
11. The management of Yaeger Company asks you, as the ternal control over cash.” Is this true? Why or why not?
company accountant, to explain (a) the concept of 23. Faye Uhlik is confused about the lack of agreement
reasonable assurance in internal control and (b) the between the cash balance per books and the balance
importance of the human factor in internal control. per bank. Explain the causes for the lack of agreement
12. Yorkville Fertilizer Co. owns the following assets at to Faye, and give an example of each cause.
the statement of financial position date. 24. What are the four steps involved in finding differences
between the balance per books and balance per bank?
Cash in bank savings account $ 6,000
25. Pauline Duche asks your help concerning an NSF
Cash on hand 850
check. Explain to Pauline (a) what an NSF check is,
Cash refund due from tax authority 1,000
(b) how it is treated in a bank reconciliation, and
Checking account balance 12,000
(c) whether it will require an adjusting entry.
Postdated checks 500
26. (a) “Cash equivalents are the same as cash.” Do you
What amount should Yorkville report as cash in the agree? Explain. (b) How should restricted cash funds
statement of financial position? be reported on the statement of financial position?
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346 7 Fraud, Internal Control, and Cash

BRIEF EXERCISES

Identify fraud triangle BE7-1 Match each situation with the fraud triangle factor—opportunity, financial pres-
concepts. sure, or rationalization—that best describes it.
(LO 1) 1. An employee’s monthly credit card payments are nearly 75% of his or her monthly earnings.
2. An employee earns minimum wage at a firm that has reported record earnings for each
of the last five years.
3. An employee has an expensive gambling habit.
4. An employee has check-writing and signing responsibilities for a small company, as
well as reconciling the bank account.
Indicate internal control BE7-2 Bridget Harrard has prepared the following statements about internal control.
concepts. 1. One of the objectives of internal control is to safeguard assets from employee theft,
(LO 1) robbery, and unauthorized use.
2. One of the objectives of internal control is to enhance the accuracy and reliability of the
accounting records.
3. The three components of the fraud triangle are opportunity, financial pressure, and fear.
Identify each statement as true or false. If false, indicate how to correct the statement.
Explain the importance of BE7-3 Emily Cooper is the new owner of Preferred Parking. She has heard about internal
internal control. control but is not clear about its importance for her business. Explain to Emily the four
(LO 1) purposes of internal control and give her one application of each purpose for Preferred
Parking.
Identify internal control BE7-4 The internal control procedures in Naperville Company provide that:
principles. 1. Employees who have physical custody of assets do not have access to the accounting
(LO 2) records.
2. Each month, the assets on hand are compared to the accounting records by an internal
auditor.
3. A prenumbered shipping document is prepared for each shipment of goods to customers.
Identify the principles of internal control that are being followed.
Identify the internal control BE7-5 Syracuse Company has the following internal control procedures over cash receipts.
principles applicable to cash Identify the internal control principle that is applicable to each procedure.
receipts. 1. All over-the-counter receipts are entered on cash registers.
(LO 3) 2. All cashiers are bonded.
3. Daily cash counts are made by cashier department supervisors.
4. The duties of receiving cash, recording cash, and custody of cash are assigned to differ-
ent individuals.
5. Only cashiers may operate cash registers.
Make journal entries for cash BE7-6 The cash register tape for Leprechaun Industries reported sales of £6,891.50.
overage and shortfall. Record the journal entry that would be necessary for each of the following situations.
(LO 3) (a) Cash to be accounted for exceeds cash on hand by £46.25. (b) Cash on hand exceeds
cash to be accounted for by £28.32.
Make journal entry using BE7-7 While examining cash receipts information, the accounting department deter-
cash count sheet. mined the following information: opening cash balance $180, cash on hand $1,125.74,
(LO 3) and cash sales per register tape $950.83. Prepare the required journal entry based upon
the cash count sheet.
Identify the internal control BE7-8 Helena Company has the following internal control procedures over cash disburse-
principles applicable to cash ments. Identify the internal control principle that is applicable to each procedure.
disbursements. 1. Company checks are prenumbered.
(LO 4) 2. The bank statement is reconciled monthly by an internal auditor.
3. Blank checks are stored in a safe in the treasurer’s office.
4. Only the treasurer or assistant treasurer may sign checks.
5. Check signers are not allowed to record cash disbursement transactions.
Prepare entry to replenish a BE7-9 On March 20, Yang Company’s petty cash fund of ¥1,000 is replenished when the
petty cash fund. fund contains ¥90 in cash and receipts for postage ¥520, freight-out ¥260, and travel
(LO 5) expense ¥100. Prepare the journal entry to record the replenishment of the petty cash
fund.
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Exercises 347

BE7-10 Louis Whited is uncertain about the control features of a bank account. Explain Identify the control features
the control benefits of (a) a check and (b) a bank statement. of a bank account.

BE7-11 The following reconciling items are applicable to the bank reconciliation for Hinckley (LO 6)
Company: (1) outstanding checks, (2) bank debit memorandum for service charge, (3) bank Indicate location of reconciling
credit memorandum for collecting a note for the depositor, and (4) deposits in transit. Indicate items in a bank reconciliation.
how each item should be shown on a bank reconciliation. (LO 7)
BE7-12 Using the data in BE7-11, indicate (a) the items that will result in an adjustment Identify reconciling items that
to the depositor’s records and (b) why the other items do not require adjustment. require adjusting entries.

BE7-13 At July 31, Shabbona Company has the following bank information: cash balance (LO 7)
per bank $7,420, outstanding checks $762, deposits in transit $1,620, and a bank service Prepare partial bank
charge $20. Determine the adjusted cash balance per bank at July 31. reconciliation.
(LO 7)
BE7-14 At August 31, Felipe Company has a cash balance per books of €8,900 and the
following additional data from the bank statement: charge for printing Felipe Company Prepare partial bank
reconciliation.
checks €35, interest earned on checking account balance €40, and outstanding checks
€800. Determine the adjusted cash balance per books at August 31. (LO 7)
BE7-15 Plano Company has the following cash balances: Cash in Bank $15,742, Payroll Explain the statement
Bank Account $5,000, and Plant Expansion Fund Cash $45,000 (to be used two years from presentation of cash balances.
now). Explain how each balance should be reported on the statement of financial position. (LO 8)

> DO IT! REVIEW

DO IT! 7-1 Identify which control activity is violated in each of the following situations, Identify violations of
and explain how the situation creates an opportunity for fraud or inappropriate account- control activities.
ing practices. (LO 2)
1. Once a month, the sales department sends sales invoices to the accounting depart-
ment to be recorded.
2. Sam Hustad orders merchandise for Green Lake Company; he also receives merchan-
dise and authorizes payment for merchandise.
3. Several clerks at Ralph’s Foods use the same cash register drawer.
DO IT! 7-2 Jerry Holman is concerned with control over mail receipts at Midtown Design system of internal
Sporting Goods. All mail receipts are opened by Don Judd. Don sends the checks to the control over cash receipts.
accounting department, where they are stamped “For Deposit Only.” The accounting (LO 3)
department records and deposits the mail receipts weekly. Jerry asks for your help in
installing a good system of internal control over mail receipts.
DO IT! 7-3 Markee Company established a £100 petty cash fund on August 1. On August Make journal entries for petty
31, the fund had £6 cash remaining and petty cash receipts for postage £31, office sup- cash fund.
plies £42, and miscellaneous expense £16. Prepare journal entries to establish the fund on (LO 5)
August 1 and replenish the fund on August 31.
DO IT! 7-4 Jon Rapp owns Rapp Blankets. Jon asks you to explain how he should treat Explain treatment of items
the following reconciling items when reconciling the company’s bank account. in bank reconciliation.
1. Outstanding checks. (LO 7)
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.

✔ The Navigator

EXERCISES

E7-1 Sue Ernesto is the owner of Ernesto’s Pizza. Ernesto’s is operated strictly on a carryout Identify the principles of
basis. Customers pick up their orders at a counter where a clerk exchanges the pizza for internal control.
cash. While at the counter, the customer can see other employees making the pizzas and (LO 2)
the large ovens in which the pizzas are baked.
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348 7 Fraud, Internal Control, and Cash

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.)

Identify internal control E7-2 The following control procedures are used at Aldean Company for over-the-counter
weaknesses over cash receipts cash receipts.
and suggest improvements.
1. To minimize the risk of robbery, cash in excess of $100 is stored in an unlocked attaché
(LO 2, 3) case in the stockroom until it is deposited in the bank.
2. All over-the-counter receipts are registered by three clerks who use a cash register with
a single cash drawer.
3. The company accountant makes the bank deposit and then records the day’s receipts.
4. At the end of each day, the total receipts are counted by the cashier on duty and recon-
ciled to the cash register total.
5. Cashiers are experienced; they are not bonded.
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 procedure that will result in good internal
control.

Identify internal control E7-3 The following control procedures are used in Morgan’s Boutique Shoppe for cash
weaknesses over cash disbursements.
disbursements and suggest
1. The company accountant prepares the bank reconciliation and reports any discrepancies
improvements.
to the owner.
(LO 2, 4) 2. The store manager personally approves all payments before signing and issuing checks.
3. Each week, 100 company checks are left in an unmarked envelope on a shelf behind the
cash register.
4. After payment, bills are filed in a paid invoice folder.
5. The company checks are unnumbered.
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.

Identify internal control E7-4 At Teresa Company, checks are not prenumbered because both the purchasing agent
weaknesses for cash and the treasurer are authorized to issue checks. Each signer has access to unissued
disbursements and suggest checks kept in an unlocked file cabinet. The purchasing agent pays all bills pertaining
improvements. to goods purchased for resale. Prior to payment, the purchasing agent determines that the
(LO 4) 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. Teresa
Company maintains one checking account that is reconciled by the treasurer.
Instructions
(a) List the weaknesses in internal control over cash disbursements.
(b) Write a memo to the company treasurer indicating your recommendations
for improvement.
Indicate whether procedure is E7-5 Listed below are five procedures followed by Parson Company.
good or weak internal control.
1. Several individuals operate the cash register using the same register drawer.
(LO 2, 3, 4) 2. A monthly bank reconciliation is prepared by someone who has no other cash respon-
sibilities.
3. Fran Vorbeck writes checks and also records cash payment journal entries.
4. One individual orders inventory, while a different individual authorizes payments.
5. Unnumbered sales invoices from credit sales are forwarded to the accounting depart-
ment every four weeks for recording.
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Exercises 349

Instructions
Indicate whether each procedure is an example of good internal control or of weak inter-
nal 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.
Procedure IC Good or Weak? Related Internal Control Principle
1.
2.
3.
4.
5.
E7-6 Listed below are five procedures followed by Bingham Company. Indicate whether procedure is
1. Employees are required to take vacations. good or weak internal control.
2. Any member of the sales department can approve credit sales. (LO 2, 3, 4)
3. Blake Nayak 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 inter-
nal 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.
Procedure IC Good or Weak? Related Internal Control Principle
1.
2.
3.
4.
5.
E7-7 LaSalle Company established a petty cash fund on May 1, cashing a check for $100. Prepare journal entries for a
The company reimbursed the fund on June 1 and July 1 with the following results. petty cash fund.

June 1: Cash in fund $1.75. Receipts: delivery expense $31.25; postage expense $41.00; (LO 5)
and miscellaneous expense $25.00.
July 1: Cash in fund $3.25. Receipts: delivery expense $21.00; entertainment
expense $51.00; and miscellaneous expense $24.75.
On July 10, LaSalle increased the fund from $100 to $150.
Instructions
Prepare journal entries for LaSalle Company for May 1, June 1, July 1, and July 10.
E7-8 Ankara Company uses an imprest petty cash system. The fund was established on Prepare journal entries for a
March 1 with a balance of 100. During March, the following petty cash receipts were petty cash fund.
found in the petty cash box. (LO 5)
Receipt
Date No. For Amount
3/5 1 Stamp Inventory 39
7 2 Freight-Out 17
9 3 Miscellaneous Expense 6
11 4 Travel Expense 24
14 5 Miscellaneous Expense 7
The fund was replenished on March 15 when the fund contained 4 in cash. On March 20,
the amount in the fund was increased to 150.
Instructions
Journalize the entries in March that pertain to the operation of the petty cash fund.
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350 7 Fraud, Internal Control, and Cash

Prepare bank reconciliation E7-9 Basel Company is unable to reconcile the bank balance at January 31. Basel’s recon-
and adjusting entries. ciliation is as follows.
(LO 7)
Cash balance per bank CHF3,660.20
Add: NSF check 590.00
Less: Bank service charge 25.00
Adjusted balance per bank CHF4,225.20

Cash balance per books CHF3,825.20

Less: Deposits in transit 480.00
Add: Outstanding checks 930.00
Adjusted balance per books CHF4,275.20
Instructions
(a) Prepare a correct bank reconciliation.
(b) Journalize the entries required by the reconciliation.
Determine outstanding checks. E7-10 On April 30, the bank reconciliation of Perrin Company shows three outstanding
(LO 7) checks: no. 254, $650; no. 255, $720; and no. 257, $410. The May bank statement and the
May cash payments journal show the following.

Bank Statement Cash Payments Journal

Checks Paid Checks Issued
Date Check No. Amount Date Check No. Amount
5/4 254 650 5/2 258 159
5/2 257 410 5/5 259 275
5/17 258 159 5/10 260 820
5/12 259 275 5/15 261 500
5/20 261 500 5/22 262 750
5/29 263 480 5/24 263 480
5/30 264 560 5/29 264 560

Instructions
Using Step 2 in the reconciliation procedure, list the outstanding checks at May 31.
Prepare bank reconciliation E7-11 The following information pertains to Teresina Video Company.
and adjusting entries.
1. Cash balance per bank, July 31, R$7,293.
(LO 7) 2. July bank service charge not recorded by the depositor R$28.
3. Cash balance per books, July 31, R$7,384.
4. Deposits in transit, July 31, R$1,500.
5. Bank collected R$800 note for Teresina in July, plus interest R$36, less fee R$20. The col-
lection has not been recorded by Teresina, and no interest has been accrued.
6. Outstanding checks, July 31, R$621.
Instructions
(a) Prepare a bank reconciliation at July 31.
(b) Journalize the adjusting entries at July 31 on the books of Teresina Video Company.
Prepare bank reconciliation E7-12 The information below relates to the Cash account in the ledger of Wasson Company.
and adjusting entries.
Balance September 1—$17,150; Cash deposited—$64,000.
(LO 7) Balance September 30—$17,404; Checks written—$63,746.
The September bank statement shows a balance of $16,122 on September 30 and the
following memoranda.
Credit Debit
Collection of $1,500 note plus interest $30 $1,530 NSF check: Violet Jones $725
Interest earned on checking account $45 Safety deposit box rent $65
At September 30, deposits in transit were $4,450, and outstanding checks totaled $2,383.
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Problems: Set A 351

Instructions
(a) Prepare the bank reconciliation at September 30.
(b) Prepare the adjusting entries at September 30, assuming (1) the NSF check was from
a customer on account, and (2) no interest had been accrued on the note.
E7-13 The cash records of Satter Company show the following four situations. Compute deposits in transit
and outstanding checks for
1. The June 30 bank reconciliation indicated that deposits in transit total €920. During
two bank reconciliations.
July, the general ledger account Cash shows deposits of €15,750, but the bank state-
ment indicates that only €15,600 in deposits were received during the month. (LO 7)
2. The June 30 bank reconciliation also reported outstanding checks of €880. During the
month of July, Satter Company’s books show that €17,200 of checks were issued. The
bank statement showed that €16,400 of checks cleared the bank in July.
3. In September, deposits per the bank statement totaled €26,700, deposits per books were
€25,400, and deposits in transit at September 30 were €2,600.
4. In September, cash disbursements per books were €23,700, checks clearing the bank
were €24,000, and outstanding checks at September 30 were €2,100.
There were no bank debit or credit memoranda. No errors were made by either the bank
or Satter 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 Nayak Company has recorded the following items in its financial records. Show presentation of cash
in financial statements.
Cash in bank $ 41,000
Cash in plant expansion fund 100,000 (LO 8)
Cash on hand 8,000
Highly liquid investments 34,000
Petty cash 500
Receivables from customers 89,000
Share investments 61,000
The highly liquid investments had maturities of 3 months or less when they were pur-
chased. The share investments will be sold in the next 6 to 12 months. The plant expansion
project will begin in 3 years.
Instructions
(a) What amount should Nayak report as “Cash and cash equivalents” on its statement of
financial position?
(b) Where should the items not included in part (a) be reported on the statement of finan-
cial position?
(c) What disclosures should Nayak make in its financial statements concerning “cash and
cash equivalents”?

PROBLEMS: SET A

P7-1A Mainland Supply Company recently changed its system of internal control over Identify internal control
cash disbursements. The system includes the following features. principles over cash
Instead of being unnumbered and manually prepared, all checks must now be pre- disbursements.
numbered and written by using the new check-writing machine purchased by the com- (LO 2, 4)
pany. Before a check can be issued, each invoice must have the approval of Erin McGarry,
the purchasing agent, and Barb Speas, the receiving department supervisor. Checks must
be signed by either Amaika Blake, the treasurer, or Ken Yost, the assistant treasurer.
Before signing a check, the signer is expected to compare the amount of the check with
the amount on the invoice.
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352 7 Fraud, Internal Control, and Cash

After signing a check, the signer stamps the invoice PAID and inserts, within the
stamp, the date, check number, and amount of the check. The “paid” invoice is then sent
to the accounting department for recording.
Blank checks are stored in a safe in the treasurer’s office. The combination to the safe
is known only by the treasurer and assistant treasurer. Each month, the bank statement is
reconciled with the bank balance per books by the assistant chief accountant. All employees
who handle or account for cash are bonded.
Instructions
Identify the internal control principles and their application to cash disbursements of
Mainland Supply Company.
Journalize and post petty P7-2A Arial Company maintains a petty cash fund for small expenditures. The following
cash fund transactions. transactions occurred over a 2-month period.
(LO 5) July 1 Established petty cash fund by writing a check on Coulter Bank for $200.
15 Replenished the petty cash fund by writing a check for $198.00. On this date,
the fund consisted of $2.00 in cash and the following petty cash receipts: freight-
out $87.00, postage expense $51.40, entertainment expense $46.60, and miscel-
laneous expense $11.20.
31 Replenished the petty cash fund by writing a check for $192.00. At this date, the
fund consisted of $8.00 in cash and the following petty cash receipts: freight-
out $82.10, charitable contributions expense $45.00, postage expense $25.50, and
miscellaneous expense $39.40.
Aug. 15 Replenished the petty cash fund by writing a check for $187.00. On this date, the
fund consisted of $13.00 in cash and the following petty cash receipts: freight-
out $75.60, entertainment expense $43.00, postage expense $33.00, and miscel-
laneous expense $37.00.
16 Increased the amount of the petty cash fund to $300 by writing a check for $100.
31 Replenished the petty cash fund by writing a check for $277.00. On this date,
the fund consisted of $23 in cash and the following petty cash receipts: postage
expense $133.00, travel expense $95.60, and freight-out $47.10.

Instructions
(a) July 15, Cash short $1.80 (a) Journalize the petty cash transactions.
(b) Aug. 31 balance $300 (b) Post to the Petty Cash account.
(c) What internal control features exist in a petty cash fund?

Prepare a bank reconciliation P7-3A On May 31, 2014, Terrell Company had a cash balance per books of £6,781.50.
and adjusting entries. The bank statement from Home Town Bank on that date showed a balance of £6,804.60.
(LO 7) A comparison of the statement with 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 £836.15 on May 12 were deposited in the bank. The cash receipts journal
entry and the deposit slip were incorrectly made for £886.15. The bank credited Terrell
Company for the correct amount.
3. Outstanding checks at May 31 totaled £276.25. Deposits in transit were £1,916.15.
4. On May 18, the company issued check No. 1181 for £685 to Barry Dietz on account.
The check, which cleared the bank in May, was incorrectly journalized and posted by
Terrell Company for £658.
5. A £3,000 note receivable was collected by the bank for Terrell Company on May 31 plus
£80 interest. The bank charged a collection fee of £20. No interest has been accrued on
the note.
6. Included with the cancelled checks was a check issued by Bridges Company to Jon
Newton for £600 that was incorrectly charged to Terrell Company by the bank.
7. On May 31, the bank statement showed an NSF charge of £680 for a check issued by
Sandy Grifton, a customer, to Terrell Company on account.

Instructions
(a) Adjusted cash balance (a) Prepare the bank reconciliation at May 31, 2014.
per bank £9,044.50 (b) Prepare the necessary adjusting entries for Terrell Company at May 31, 2014.
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Problems: Set A 353

P7-4A The bank portion of the bank reconciliation for Rintala Company at November 30, Prepare a bank reconciliation
2014, was as follows. and adjusting entries from
detailed data.
Rintala Company
Bank Reconciliation (LO 7)
November 30, 2014
Cash balance per bank $14,367.90
Add: Deposits in transit 2,530.20
16,898.10
Less: Outstanding checks
Check Number Check Amount
3451 $2,260.40
3470 720.10
3471 844.50
3472 1,426.80
3474 1,050.00 6,301.80
Adjusted cash balance per bank $10,596.30

The adjusted cash balance per bank agreed with the cash balance per books at November 30.
The December bank statement showed the following checks and deposits.

Bank Statement
Checks Deposits
Date Number Amount Date Amount
12-1 3451 $ 2,260.40 12-1 $ 2,530.20
12-2 3471 844.50 12-4 1,211.60
12-7 3472 1,426.80 12-8 2,365.10
12-4 3475 1,640.70 12-16 2,672.70
12-8 3476 1,300.00 12-21 2,945.00
12-10 3477 2,130.00 12-26 2,567.30
12-15 3479 3,080.00 12-29 2,836.00
12-27 3480 600.00 12-30 1,025.00
12-30 3482 475.50 Total $18,152.90
12-29 3483 1,140.00
12-31 3485 540.80
Total $15,438.70

The cash records per books for December showed the following.

Cash Receipts
Cash Payments Journal Journal
Date Number Amount Date Number Amount Date Amount
12-1 3475 $1,640.70 12-20 3482 $ 475.50 12-3 $ 1,211.60
12-2 3476 1,300.00 12-22 3483 1,140.00 12-7 2,365.10
12-2 3477 2,130.00 12-23 3484 798.00 12-15 2,672.70
12-4 3478 621.30 12-24 3485 450.80 12-20 2,954.00
12-8 3479 3,080.00 12-30 3486 1,889.50 12-25 2,567.30
12-10 3480 600.00 Total $14,933.20 12-28 2,836.00
12-17 3481 807.40 12-30 1,025.00
12-31 1,190.40
Total $16,822.10

The bank statement contained two memoranda:

1. A credit of $3,645 for the collection of a $3,500 note for Rintala Company plus interest
of $160 and less a collection fee of $15. Rintala Company has not accrued any interest
on the note.
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354 7 Fraud, Internal Control, and Cash

2. A debit of $572.80 for an NSF check written by D. Chagnon, a customer. At December 31,
the check had not been redeposited in the bank.
At December 31, the cash balance per books was $12,485.20, and the cash balance per the
bank statement was $20,154.30. The bank did not make any errors, but two errors were
made by Rintala Company.
Instructions
(a) Adjusted balance per (a) Using the four steps in the reconciliation procedure, prepare a bank reconciliation at
books $15,458.40 December 31.
(b) Prepare the adjusting entries based on the reconciliation. (Hint: 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.)
Prepare a bank reconciliation P7-5A Cayemberg Company maintains a checking account at the Commerce Bank. At
and adjusting entries. July 31, selected data from the ledger balance and the bank statement are shown below.
(LO 7) Cash in Bank
Per Books Per Bank
Balance, July 1 €17,600 €16,800
July receipts 81,400
July credits 82,470
July disbursements 77,150
July debits 74,756
Balance, July 31 €21,850 €24,514

Analysis of the bank data reveals that the credits consist of €81,000 of July deposits and a
credit memorandum of €1,470 for the collection of a €1,400 note plus interest revenue of
€70. The July debits per bank consist of checks cleared €74,700 and a debit memorandum
of €56 for printing additional company checks.
You also discover the following errors involving July checks: (1) A check for €230 to a
creditor on account that cleared the bank in July was journalized and posted as €320.
(2) A salary check to an employee for €255 was recorded by the bank for €155.
The June 30 bank reconciliation contained only two reconciling items: deposits in
transit €7,000 and outstanding checks of €6,200.
Instructions
(a) Adjusted balance per books (a) Prepare a bank reconciliation at July 31, 2014.
€23,354 (b) Journalize the adjusting entries to be made by Cayemberg Company. Assume that in-
terest on the note has not been accrued.
Identify internal control P7-6A Nature Hill Middle School wants to raise money for a new sound system for its
weaknesses in cash receipts auditorium. The primary fund-raising event is a dance at which the famous disc jockey
and cash disbursements. Obnoxious Al will play classic and not-so-classic dance tunes. Rob Drexler, the music and
(LO 2, 3, 4) theater instructor, has been given the responsibility for coordinating the fund-raising
efforts. This is Rob’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.
Rob 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 Rob 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.
Rob 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 Rob asked
Erik Radley to count the money, prepare a deposit slip, and deposit the money in a bank
account Rob had opened.
The day of the dance, Rob wrote a check from the account to pay the DJ. Obnoxious Al,
however, said that he accepted only cash and did not give receipts. So Rob took $200 out of
the cash box and gave it to Al. At the dance, Rob had Sobia Hamm working at the entrance
to the gymnasium, collecting tickets from students, and selling tickets to those who had
not prepurchased them. Rob estimated that 400 students attended the dance.
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Problems: Set B 355

The following day, Rob closed out the bank account, which had $250 in it, and gave
that amount plus the $180 in the cash box to Principal Coleman. Principal Coleman
seemed surprised that, after generating roughly $2,000 in sales, the dance netted only $430
in cash. Rob 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.

PROBLEMS: SET B

P7-1B Orpheum Theater is located in the Brooklyn Mall. A cashier’s booth is located near Identify internal control
the entrance to the theater. Three cashiers are employed. One works from 1–5 P.M., another weaknesses over cash
from 5–9 P.M. The shifts are rotated among the three cashiers. The cashiers receive cash receipts.
from customers and operate a machine that ejects serially numbered tickets. The rolls of (LO 2, 3)
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 an usher stationed at the
entrance of the theater lobby some 60 feet from the cashier’s booth. The usher 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 usher.
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. The manager also 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 trans-
actions of the Orpheum Theater.
(b) If the usher and cashier decide to collaborate to misappropriate cash, what actions
might they take?
P7-2B McArtor Company maintains a petty cash fund for small expenditures. The following Journalize and post petty
transactions occurred over a 2-month period. cash fund transactions.
July 1 Established petty cash fund by writing a check on Star Bank for €100. (LO 5)
15 Replenished the petty cash fund by writing a check for €94.90. On this date, the
fund consisted of €5.10 in cash and the following petty cash receipts: freight-out
€51.00, postage expense €20.50, entertainment expense €23.10, and miscella-
neous expense €4.10.
31 Replenished the petty cash fund by writing a check for €92.90. At this date, the
fund consisted of €7.10 in cash and the following petty cash receipts: freight-out
€43.50, charitable contributions expense €20.00, postage expense €20.10, and
miscellaneous expense €9.30.
Aug. 15 Replenished the petty cash fund by writing a check for €98.00. On this date, the
fund consisted of €2.00 in cash and the following petty cash receipts: freight-out
€40.20, entertainment expense €21.00, postage expense €14.00, and miscella-
neous expense €19.80.
16 Increased the amount of the petty cash fund to €150 by writing a check for €50.
31 Replenished the petty cash fund by writing a check for €137.00. On this date, the
fund consisted of €13 in cash and the following petty cash receipts: freight-out
€74.00, entertainment expense €43.20, and postage expense €17.70.
Instructions
(a) Journalize the petty cash transactions. (a) July 15 Cash over €3.80
(b) Post to the Petty Cash account. (b) Aug. 31 balance €150
(c) What internal control features exist in a petty cash fund?
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356 7 Fraud, Internal Control, and Cash

Prepare a bank reconciliation P7-3B Aglife Genetics Company of Lancaster, Wisconsin, spreads herbicides and applies
and adjusting entries. liquid fertilizer for local farmers. On May 31, 2014, the company’s Cash account per its
(LO 7) general ledger showed the following balance.

CASH NO. 101

Date Explanation Ref. Debit Credit Balance
May 31 Balance 13,287

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

Lancaster State Bank

Checks and Debits Deposits and Credits Daily Balance
XXX XXX 5/31 12,732

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 $35 for the printing of additional company
checks.
2. Cash sales of $1,720 on May 12 were deposited in the bank. The cash receipts journal
entry and the deposit slip were incorrectly made for $1,820. The bank credited Aglife
Genetics Company for the correct amount.
3. Outstanding checks at May 31 totaled $1,425, and deposits in transit were $2,100.
4. On May 18, the company issued check no. 1181 for $1,102 to M. Datz on account. The
check, which cleared the bank in May, was incorrectly journalized and posted by Aglife
Genetics Company for $110.
5. A $4,000 note receivable was collected by the bank for Aglife Genetics Company on
May 31 plus $80 interest. The bank charged a collection fee of $25. No interest has
been accrued on the note.
6. Included with the cancelled checks was a check issued by Bohr Company to Carol
Mertz for $900 that was incorrectly charged to Aglife Genetics Company by the bank.
7. On May 31, the bank statement showed an NSF charge of $1,908 for a check issued by
Tyler Gricius, a customer, to Aglife Genetics Company on account.

Instructions
(a) Adj. cash bal. $14,307 (a) Prepare the bank reconciliation at May 31, 2014.
(b) Prepare the necessary adjusting entries for Aglife Genetics Company at May 31, 2014.

Prepare a bank reconciliation P7-4B The bank portion of the bank reconciliation for Brasilia Company at October 31,
and adjusting entries from 2014, was as follows.
detailed data.
(LO 7) Brasilia Company
Bank Reconciliation
October 31, 2014
Cash balance per bank R$6,000
Add: Deposits in transit 842
6,842
Less: Outstanding checks
Check Number Check Amount
2451 R$700
2470 396
2471 464
2472 170
2474 578 2,308
Adjusted cash balance per bank R$4,534

The adjusted cash balance per bank agreed with the cash balance per books at October 31.
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Problems: Set B 357

The November bank statement showed the following checks and deposits:

Bank Statement
Checks Deposits
Date Number Amount Date Amount
11-1 2470 R$ 396 11-1 R$ 842
11-2 2471 464 11-4 666
11-5 2474 578 11-8 545
11-4 2475 903 11-13 1,416
11-8 2476 1,556 11-18 810
11-10 2477 330 11-21 1,624
11-15 2479 980 11-25 1,412
11-18 2480 714 11-28 908
11-27 2481 382 11-30 652
11-30 2483 317 Total R$8,875
11-29 2486 495
Total R$7,115

The cash records per books for November showed the following.

Cash Receipts
Cash Payments Journal Journal
Date Number Amount Date Number Amount Date Amount
11-1 2475 R$ 903 11-20 2483 R$ 317 11-3 R$ 666
11-2 2476 1,556 11-22 2484 460 11-7 545
11-2 2477 330 11-23 2485 525 11-12 1,416
11-4 2478 300 11-24 2486 495 11-17 810
11-8 2479 890 11-29 2487 340 11-20 1,642
11-10 2480 714 11-30 2488 635 11-24 1,412
11-15 2481 382 Total R$8,197 11-27 908
11-18 2482 350 11-29 652
11-30 1,581
Total R$9,632

The bank statement contained two bank memoranda:

1. A credit of R$1,375 for the collection of a R$1,300 note for Brasilia Company plus in-
terest of R$91 and less a collection fee of R$16. Brasilia Company has not accrued any
interest on the note.
2. A debit for the printing of additional company checks R$35.
At November 30, the cash balance per books was R$5,969, and the cash balance per the
bank statement was R$9,100. The bank did not make any errors, but two errors were made
by Brasilia Company.

Instructions
(a) Using the four steps in the reconciliation procedure described on pages 336–337, (a) Adjusted cash balance per
prepare a bank reconciliation at November 30. bank R$7,201
(b) Prepare the adjusting entries based on the reconciliation. (Hint: The correction of any
errors pertaining to recording checks should be made to Accounts Payable. The cor-
rection of any errors relating to recording cash receipts should be made to Accounts
Receivable.)
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358 7 Fraud, Internal Control, and Cash

Prepare a bank reconciliation P7-5B Tizani Company’s bank statement from Eastern National Bank at August 31, 2014,
and adjusting entries. shows the information below.
(LO 7)
Balance, August 1 $11,284 Bank credit memoranda:
August deposits 47,521 Collection of note
Checks cleared in August 46,175 receivable plus $105
Balance, August 31 17,146 interest $4,505
Interest earned 41
Bank debit memorandum:
Safety deposit box rent 30

A summary of the Cash account in the ledger for August shows: balance, August 1, $10,559;
receipts $50,050; disbursements $47,794; and balance, August 31, $12,815. Analysis re-
veals that the only reconciling items on the July 31 bank reconciliation were a deposit in
transit for $2,200 and outstanding checks of $2,925. The deposit in transit was the first
deposit recorded by the bank in August. In addition, you determine that there were two
errors involving company checks drawn in August: (1) A check for $340 to a creditor on
account that cleared the bank in August was journalized and posted for $430. (2) A salary
check to an employee for $275 was recorded by the bank for $277.
Instructions
(a) Adjusted balance per books (a) Prepare a bank reconciliation at August 31.
$17,421 (b) Journalize the adjusting entries to be made by Tizani Company at August 31. Assume
that interest on the note has not been accrued by the company.
Prepare a comprehensive P7-6B Stupendous Company is a very profitable small business. It has not, however, given
bank reconciliation with much consideration to internal control. For example, in an attempt to keep clerical and
theft and internal control office expenses to a minimum, the company has combined the jobs of cashier and book-
deficiencies. keeper. As a result, Jake Burnett handles all cash receipts, keeps the accounting records,
(LO 2, 3, 4, 7) and prepares the monthly bank reconciliations.
The balance per the bank statement on October 31, 2014, was £15,313. Outstand-
ing checks were no. 62 for £107.74, no. 183 for £127.50, no. 284 for £215.26, no. 862 for
£132.10, no. 863 for £192.78, and no. 864 for £140.49. Included with the statement was a
credit memorandum of £460 indicating the collection of a note receivable for Stupendous
Company by the bank on October 25. This memorandum has not been recorded by Stu-
pendous Company.
The company’s ledger showed one cash account with a balance of £18,608.81. The
balance included undeposited cash on hand. Because of the lack of internal controls, Bur-
nett took for personal use all of the undeposited receipts in excess of £3,226.18. He then
prepared the following bank reconciliation in an effort to conceal his theft of cash.

Bank Reconciliation
Cash balance per books, October 31 £18,608.81
Add: Outstanding checks
No. 862 £132.10
No. 863 192.78
No. 864 140.49 390.37
18,999.18
Less: Undeposited receipts 3,226.18
Unadjusted balance per bank, October 31 15,773.00
Less: Bank credit memorandum 460.00
Cash balance per bank statement, October 31 £15,313.00

Instructions
(a) Adjusted balance per books (a) Prepare a correct bank reconciliation. (Hint: Deduct the amount of the theft from the
£17,623.31 adjusted balance per books.)
(b) Indicate the three ways that Burnett attempted to conceal the theft and the pound
amount pertaining to each method.
(c) What principles of internal control were violated in this case?
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Continuing Cookie Chronicle 359

COMPREHENSIVE PROBLEM

CP7 On December 1, 2014, Westmoreland Company had the following account balances.
Debit Credit
Cash $18,200 Accumulated Depreciation—
Notes Receivable 2,000 Equipment $ 3,000
Accounts Receivable 7,500 Accounts Payable 6,100
Inventory 16,000 Share Capital—Ordinary 50,000
Prepaid Insurance 1,600 Retained Earnings 14,200
Equipment 28,000 $73,300
$73,300
During December, the company completed the following transactions.
Dec. 7 Received $3,600 cash from customers in payment of account (no discount allowed).
12 Purchased merchandise on account from Alice Co. $12,000, terms 1/10, n/30.
17 Sold merchandise on account $16,000, terms 2/10, n/30. The cost of the merchan-
dise sold was $10,000.
19 Paid salaries $2,200.
22 Paid Alice Co. in full, less discount.
26 Received collections in full, less discounts, from customers billed on December 17.
31 Received $2,700 cash from customers in payment of account (no discount allowed).
Adjustment data:
1. Depreciation $200 per month.
2. Insurance expired $400.
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 trans-
actions. Use Cost of Goods Sold, Depreciation Expense, Insurance Expense, Salaries
and Wages Expense, Sales Revenue, and Sales Discounts.
(c) The statement from Dodge Bank on December 31 showed a balance of $25,930. A com-
parison of the bank statement with the Cash account revealed the following facts.
1. The bank collected a note receivable of $2,000 for Westmoreland Company on
December 15.
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 an NSF charge of $680 for a check
received by the company from K. Quinn, 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 adjust-
ment 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 statement of financial position
at December 31.

CONTINUING COOKIE CHRONICLE

(Note: This is a continuation of the Cookie Chronicle from Chapters 1–6.)

CCC7 Part 1 Natalie is struggling to keep up with the recording of her accounting trans-
actions. 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.
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360 7 Fraud, Internal Control, and Cash

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 the book’s companion website, www.wiley.com/college/weygandt, to see the completion of

this problem.

Broadening Your PERSPECTIVE

Financial Reporting and Analysis

Financial Reporting Problem: Samsung Electronics Co., Ltd.
BYP7-1 The financial statements of Samsung are presented in Appendix A at the end of this text-
book. The complete annual report, including notes to the consolidated financial statements, is
available in the Investor Relations section of the company’s website, www.samsung.com.

Instructions
(a) What data about cash and cash equivalents are shown in the consolidated statement of financial
position?
(b) In its notes to consolidated financial statements, how does Samsung define cash equivalents?

Comparative Analysis Problem: Nestlé S.A. vs. Zetar plc

BYP7-2 Nestlé’s financial statements are presented in Appendix B. Financial statements of
Zetar are presented in Appendix C.

Instructions
(a) Based on the information contained in these financial statements, determine each of the
following for each company (ignore overdrafts):
(1) Cash and cash equivalents balance at December 31, 2010, for Nestlé and at April 30, 2011,
for Zetar.
(2) Cash provided by operating activities during the most recent fiscal year shown (from the
statement of cash flows).
(b) What conclusions concerning the management of cash can be drawn from these data?

Real-World Focus
BYP7-3 All organizations should have systems of internal control. Universities are no exception.
This site discusses the basics of internal control in a university setting.
Address: www.bc.edu/offices/audit/controls, or go to www.wiley.com/college/weygandt
Steps: Go to the site shown above.

Instructions
The home page of this site provides links to answer the following questions.
(a) In a university setting, who has responsibility for evaluating the adequacy of the system of
internal control?
(b) What do reconciliations ensure in the university setting? Who should review the reconciliation?
(c) What are some examples of physical controls?
(d) What are two ways to accomplish inventory counts?
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Broadening Your Perspective 361

Critical Thinking

Decision-Making Across the Organization

BYP7-4 The board of trustees of a local church is concerned about the internal accounting controls for
the offering collections made at weekly services. The trustees ask you to serve on a three-person audit
team with the internal auditor of a local college and a public accountant who has just joined the church.
At a meeting of the audit team and the board of trustees, you learn the following.
1. The church’s board of trustees has delegated responsibility for the financial management and
audit of the financial records to the finance committee. This group prepares the annual budget
and approves major disbursements. It is not involved in collections or record-keeping. No audit
has been made in recent years because the same trusted employee has kept church records and
served as financial secretary for 15 years. The church does not carry any fidelity insurance.
2. The collection at the weekly service is taken by a team of ushers who volunteer to serve one
month. The ushers take the collection plates to a basement office at the rear of the church. They
hand their plates to the head usher and return to the church service. After all plates have been
turned in, the head usher counts the cash received. The head usher then places the cash in the
church safe along with a notation of the amount counted. The head usher volunteers to serve for
3 months.
3. The next morning, the financial secretary opens the safe and recounts the collection. The secre-
tary withholds $150–$200 in cash, depending on the cash expenditures expected for the week,
and deposits the remainder of the collections in the bank. To facilitate the deposit, church mem-
bers who contribute by check are asked to make their checks payable to “Cash.”
4. Each month, the financial secretary reconciles the bank statement and submits a copy of the
reconciliation to the board of trustees. The reconciliations have rarely contained any bank
errors and have never shown any errors per books.
Instructions
With the class divided into groups, answer the following.
(a) Indicate the weaknesses in internal accounting control over the handling of collections.
(b) List the improvements in internal control procedures that you plan to make at the next meeting
of the audit team for (1) the ushers, (2) the head usher, (3) the financial secretary, and (4) the
finance committee.
(c) What church policies should be changed to improve internal control?

Communication Activity
BYP7-5 As a new auditor for the public accounting firm of Murphy, Mooney, and Feeney, you have
been assigned to review the internal controls over mail cash receipts of Stillwater Company. Your
review reveals the following: Checks are promptly endorsed “For Deposit Only,” but no list of the
checks is prepared by the person opening the mail. The mail is opened either by the cashier or by
the employee who maintains the accounts receivable records. Mail receipts are deposited in the
bank weekly by the cashier.
Instructions
Write a letter to Jack Meyer, owner of Stillwater Company, explaining the weaknesses in internal
control and your recommendations for improving the system.

Ethics Case
BYP7-6 You are the assistant controller in charge of general ledger accounting at Springtime Bot-
tling Company. Your company has a large loan from an insurance company. The loan agreement
requires that the company’s cash account balance be maintained at $200,000 or more, as reported
monthly.
At June 30, the cash balance is $80,000, which you report to Anne Shirley, the financial vice
president. Anne excitedly instructs you to keep the cash receipts book open for one additional day
for purposes of the June 30 report to the insurance company. Anne says, “If we don’t get that cash
balance over $200,000, we’ll default on our loan agreement. They could close us down, put us all
out of our jobs!” Anne continues, “I talked to Oconto Distributors (one of Springtime’s largest
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362 7 Fraud, Internal Control, and Cash

customers) this morning. They said they sent us a check for $150,000 yesterday. We should receive
it tomorrow. If we include just that one check in our cash balance, we’ll be in the clear. It’s in the
mail!”

Instructions
(a) Who will suffer negative effects if you do not comply with Anne Shirley’s instructions? Who will
suffer if you do comply?
(b) What are the ethical considerations in this case?
(c) What alternatives do you have?

Answers to Chapter Questions

Answers to Insight and Accounting Across the Organization Questions
p. 317 And the Controls Are… Q: Why is sustainability information important to investors?
A: Investors, customers, suppliers, and employees want more information about companies’ long-
term impact on society. There is a growing awareness that sustainability issues can affect a com-
pany’s financial performance. Proper reporting on sustainability issues develops a solid reputation
for transparency and provides confidence to shareholders.
p. 324 Internal Control and the Role of Human Resources Q: Why would unsupervised em-
ployees or employees who report to each other represent potential internal control threats? A: An
unsupervised employee may have a fraudulent job (or may even be a fictitious person), e.g., a per-
son drawing a paycheck without working. Or, if two employees supervise each other, there is no
real separation of duties, and they can conspire to defraud the company.
p. 324 Big Theft at Small Companies Q: Why are small companies more susceptible to employee
theft? A: The high degree of trust often found in small companies makes them more vulnerable.
Also, small companies tend to have less sophisticated systems of internal control, and they usually
lack internal auditors. In addition, it is very hard to achieve some internal control features, such as
segregation of duties, when you have very few employees.
p. 332 How Employees Steal Q: How can companies reduce the likelihood of fraudulent dis-
bursements? A: To reduce the occurrence of fraudulent disbursements, a company should follow
the procedures discussed in this chapter. These include having only designated personnel sign
checks; having different personnel approve payments and make payments; ensuring that check
signers do not record disbursements; using prenumbered checks and matching each check to an
approved invoice; storing blank checks securely; reconciling the bank statement; and stamping
invoices PAID.
p. 340 Madoff’s Ponzi Scheme Q: How was Madoff able to conceal such a giant fraud? A: Madoff
fabricated false investment statements that were provided to investors. In addition, his auditor
never verified these investment statements even though the auditor gave him an unqualified opinion
each year.

Answers to Self-Test Questions

1. c 2. a 3. c 4. b 5. b 6. d 7. d 8. a ($100 2 ($94 1 $4)) 9. a 10. c 11. d
12. c 13. c

Another Perspective

Fraud can occur anywhere. And because the three main factors that contribute to fraud are univer-
sal in nature, the principles of internal control activities are used globally by companies. While the
U.S. Sarbanes-Oxley Act (SOX) does not apply to international companies, most large international
companies have internal controls similar to those indicated in the chapter. GAAP and IFRS are also
very similar in accounting for cash. IAS No. 1 (revised), “Presentation of Financial Statements,” is
the only standard that discusses issues specifically related to cash.
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Another Perspective 363

Key Points
• The fraud triangle discussed in this chapter is applicable to all international companies. Some
of the major frauds on a U.S. basis are Enron, WorldCom, and more recently the Bernie Madoff
Ponzi scheme.
• Rising economic crime poses a growing threat to companies, with nearly one-third of all orga-
nizations worldwide being victims of fraud in a recent 12-month period. The survey data shows
that the incidence of economic crime varies by territory; some countries, mainly those in emerg-
ing markets, experienced much higher levels of fraud than the average, as much as 71% in one
country; by industry sector, some (notably insurance, financial services, and communications)
reporting higher levels of fraud than others; and by size and type of organization. But no organi-
zation is immune (PricewaterhouseCoopers’ Global Economic Crime Survey, 2009).
• Economic crime takes on many different forms, some more common than others. The chart
below shows the types of economic crime suffered by those companies who reported experiencing
economic crime in the last 12 months.

Asset misappropriation 67

Accounting fraud 38

Bribery and corruption 27

Intellectual property
15
infringement
Money laundering 12

Tax fraud 5

Illegal insider trading 4

Market fraud involving cartels
3
colluding to fix prices
Espionage 3

Others 5

0 10 20 30 40 50 60 70 80
% reported frauds

% respondents who experienced economic crimes in the last 12 months

This chart shows that the three most common types of economic crimes experienced in the last
12 months were asset misappropriation, accounting fraud, and bribery and corruption (Pricewa-
terhouseCoopers’ Global Economic Crime Survey, 2009).
• Accounting scandals both in the United States and internationally have re-ignited the debate
over the relative merits of GAAP, which takes a “rules-based” approach to accounting, versus
IFRS, which takes a “principles-based” approach. The FASB announced that it intends to intro-
duce more principles-based standards.
• After numerous corporate scandals, the U.S. Congress passed the Sarbanes-Oxley Act (SOX).
Under SOX, all publicly traded U.S. corporations are required to maintain an adequate system
of internal control.
• As a result of SOX, corporate executives and boards of directors must ensure that internal con-
trols are reliable and effective. In addition, independent outside auditors must attest to the ad-
equacy of the internal control system.
• SOX created the Public Company Accounting Oversight Board (PCAOB) to establish auditing
standards and regulate auditor activity.
• On a lighter note, at one time the Ig Nobel Prize in Economics went to the CEOs of those com-
panies involved in the corporate accounting scandals of that year for “adapting the mathematical
concept of imaginary numbers for use in the business world.” A parody of the Nobel Prizes, the
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364 7 Fraud, Internal Control, and Cash

Ig Nobel Prizes (read Ignoble, as not noble) are given each year in early October for 10 achieve-
ments that “first make people laugh, and then make them think.” Organized by the scientific
humor magazine Annals of Improbable Research (AIR), they are presented by a group that in-
cludes genuine Nobel laureates at a ceremony at Harvard University’s Sanders Theater. (See
en.wikipedia.org/wiki/Ig_Nobel_Prize.)
• Internal controls are a system of checks and balances designed to prevent and detect fraud and
errors. While most companies have these systems in place, many have never completely docu-
mented them, nor had an independent auditor attest to their effectiveness. Both of these actions
are required under SOX.
• Companies find that internal control review is a costly process but badly needed. One study esti-
mates the cost of SOX compliance for U.S. companies at over $35 billion, with audit fees doubling
in the first year of compliance. At the same time, examination of internal controls indicates lin-
gering problems in the way companies operate. One study of first compliance with the internal-
control testing provisions documented material weaknesses for about 13% of companies reporting
in a two-year period (PricewaterhouseCoopers’ Global Economic Crime Survey, 2005).
• As indicated earlier, SOX internal control standards apply only to companies listed on U.S.
exchanges. There is continuing debate over whether foreign issuers should have to comply with
this extra layer of regulation.
• The accounting and internal control procedures related to cash are essentially the same under
both GAAP and this textbook. In addition, the definition used for cash equivalents is the same.
• Most companies report cash and cash equivalents together under GAAP, as shown in this text-
book. In addition, GAAP follows the same accounting policies related to the reporting of
restricted cash.
• GAAP and IFRS define cash and cash equivalents similarly as follows.
◆ Cash is comprised of cash on hand and demand deposits.
◆ Cash equivalents are short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.

Looking to the Future

Ethics has become a very important aspect of reporting. Different cultures have different perspec-
tives on bribery and other questionable activities, and consequently penalties for engaging in such
activities vary considerably across countries.
High-quality international accounting requires both high-quality accounting standards and
high-quality auditing. Similar to the convergence of GAAP and IFRS, there is movement to improve
international auditing standards. The International Auditing and Assurance Standards Board
(IAASB) functions as an independent standard-setting body. It works to establish high-quality
auditing and assurance and quality-control standards throughout the world. Whether the IAASB
adopts internal control provisions similar to those in SOX remains to be seen. You can follow
developments in the international audit arena at http://www.ifac.org/iaasb/.
Under proposed new standards for financial statements, companies would not be allowed to
combine cash equivalents with cash.

GAAP Practice
GAAP Self-Test Questions
1. Non-U.S. companies that follow IFRS:
(a) do not normally use the principles of internal control activities described in this textbook.
(b) often offset cash with accounts payable on the statement of financial position.
(c) are not required to follow SOX.
(d) None of the above.
2. Which of the following is the correct accounting under GAAP for cash?
(a) Cash cannot be combined with cash equivalents.
(b) Restricted cash funds may be reported as a current or non-current asset depending on the
circumstances.
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Another Perspective 365

(c) Restricted cash funds cannot be reported as a current asset.

(d) Cash on hand is not reported on the statement of financial position as Cash.
3. The Sarbanes-Oxley Act applies to:
(a) all U.S. companies listed on U.S. exchanges.
(b) all companies that list shares on any securities exchange in any country.
(c) all European companies listed on European exchanges.
(d) Both (a) and (c).
4. High-quality accounting requires both high-quality accounting standards and:
(a) a reconsideration of SOX to make it less onerous.
(b) high-quality auditing standards.
(c) government intervention to ensure that the public interest is protected.
(d) the development of new principles of internal control activities.
5. Cash equivalents under GAAP:
(a) are significantly different than the cash equivalents discussed in the textbook.
(b) are generally disclosed separately from cash.
(c) may be required to be reported separately from cash in the future.
(d) None of the above.

GAAP Exercises
GAAP7-1 Some people argue that the internal control requirements of the Sarbanes-Oxley Act
(SOX) put U.S. companies at a competitive disadvantage to companies outside the United States.
Discuss the competitive implications (both pros and cons) of SOX.
GAAP7-2 State whether each of the following is true or false. For those that are false, explain why.
(a) A proposed new financial accounting standard would not allow cash equivalents to be reported
in combination with cash.
(b) Perspectives on bribery and penalties for engaging in bribery are the same across all countries.
(c) Cash equivalents are comprised of cash on hand and demand deposits.
(d) SOX was created by the International Accounting Standards Board.

GAAP Financial Reporting Problem: Tootsie Roll Industries, Inc.

GAAP7-3 The financial statements of Tootsie Roll are presented in Appendix D. The company’s com-
plete annual report, including the notes to its financial statements, is available at www.tootsie.com.
Instructions
Using the financial statements and notes to the financial statements, answer these questions about
Tootsie Roll’s internal controls and cash.
(a) What comments, if any, are made about cash in the “Report of Independent Registered Public
Accounting Firm”?
(b) What data about cash and cash equivalents are shown in the consolidated balance sheet (state-
ment of financial position)?
(c) What activities are identified in the consolidated statement of cash flows as being respon-
sible for the changes in cash during 2010?
(d) How are cash equivalents defined in the Notes to Consolidated Financial Statements?
(e) Read the section of the report titled “Management’s Report on Internal Control Over Finan-
cial Reporting.” Summarize the statements made in that section of the report.

Answers to GAAP Self-Test Questions

1. c 2. b 3. a 4. b 5. c

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Accounting for
Chapter 8 Receivables
Feature Story
example, BNP Paribas (FRA) recently
Are You Going to
reported a 31% increase in quarterly
Pay Me—or Not? profit. This increase in profitability was
What is the only thing harder than almost entirely due to a decline in the
making a sale? Answer: Collecting the estimated provision for doubtful loans
cash. Just ask a banker, virtually any of more than 50%. The market reacted
banker. Bankers around the world very favorably, with the company’s
have been awash in “doubtful” loans share price rising by 5.3% in one day.
for years. And, it may be many years
On the other hand, when a company
before the mess is finally cleaned up.
announces an unexpected increase in
If your business sells most of its goods its estimated doubtful loans, the
on credit or is in the business of making securities market often reacts severely.
loans, then accurately recording your For example, BBVA (ESP) recently
receivables is one of your most basked in the light of favorable press
important accounting tasks. At the end clippings stating that it was the
of every accounting period, companies healthiest bank in Spain and one of
are required to estimate how many of the strongest in the European Union.
their receivables are “uncollectible.” But, then the bank announced that it
© Piksel/iStockphoto

A significant decline in the amount of was increasing its estimated provision

estimated doubtful loans can send a for doubtful loans by €164 million. Its
company’s share price soaring. For share price fell by 6% in a single day.

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Learning Objectives
Scan Learning Objectives
After studying this chapter, you should be able to:
Read Feature Story
1 Identify the different types of receivables.
Read Preview 2 Explain how companies recognize accounts receivable.
3 Distinguish between the methods and bases companies
Read text and answer DO IT! p. 376
use to value accounts receivable.
p. 379 p. 384 p. 386
4 Describe the entries to record the disposition of accounts
Work Comprehensive DO IT! p. 386 receivable.

Review Summary of Learning Objectives 5 Compute the maturity date of and interest on notes receivable.
6 Explain how companies recognize notes receivable.
Answer Self-Test Questions
7 Describe how companies value notes receivable.
Complete Assignments 8 Describe the entries to record the disposition of notes receivable.
9 Explain the statement presentation and analysis of receivables.
Go to WileyPLUS for practice and tutorials
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Read Another Perspective p. 405

366