Solution manual accounting 21e by warreni ch 07

The Cash balance and the bank statement balance are likely to differ because of 1 a delay by bank or depositor in recording transactions such as checks or deposits or 2 errors by bank or

CHAPTER 7 CASH

CLASS DISCUSSION QUESTIONS

1 Many transactions affect cash, and it is the

asset most susceptible to improper

diversion and use because of its high value

in relation to its mass and its ease of

transfer among parties For these reasons,

the control of cash often warrants special

attention.

2 a Cash Short and Over

b Cash shortages are debited to this

account.

3 Other income section

4 The three documents supporting the

liability are vendor’s invoice, purchase

order, and receiving report The invoice

should be compared with the receiving

report to determine that the items billed

have been received and with the purchase

order to verify quantities, prices, and terms.

5 A voucher is recorded after it has been

approved for payment.

6 The prenumbering of checks and the

paying of all obligations by check are

desirable elements of internal control The

fundamental weakness in internal control is

the failure to separate the responsibility for

the maintenance of the accounting records

(bookkeeping) from the responsibility for

operations (payment of obligations).

7 a In the unpaid voucher file, the vouchers

should be filed by the due dates so that

each voucher can be paid when due.

b In the paid voucher file, the vouchers

should be filed in numerical order so

that they can be easily located when

needed.

8 The Cash balance and the bank statement

balance are likely to differ because of (1) a

delay by bank or depositor in recording

transactions (such as checks or deposits) or (2) errors by bank or depositor in recording transactions.

9 The purpose of a bank reconciliation is to

determine the reasons for the difference between the balance according to the depositor’s records and the balance according to the bank statement, and to correct those items representing errors in recording that may have been made by the bank or by the depositor.

10 Additions made by the bank to the

depositor’s balance

11 Accounts Receivable should be debited

and Cash should be credited.

12 Payments of small amounts by check often

result in delay, annoyance, and excessive expense of maintaining records and processing the payments For these reasons, small cash payments are made from a petty cash fund.

13 a Petty Cash

b Various expense and asset accounts as

indicated by a summary of expenditures

14 The fund should be replenished as of the

last day of the period It is the simplest means of recording the $690 of expenditures in the appropriate accounts and restoring the amount of the petty cash

to the amount shown in the ledger account.

15 Cash and cash equivalents are usually

reported as one amount in the Current Assets section of the balance sheet.

16 The details of a compensating balance are

reported in notes to the financial statements.

117

Ex 7–1

a The sales clerks should not have access to the cash register tapes.

b The cash register tapes should be locked in the cash register and the key retained by the cashier An employee of the cashier’s office should remove the cash register tape, record the total on the memorandum form, and note discrepancies.

on the cash register This will produce a printed receipt or an entry on a computer screen at the food bin area, specifying the items that must be assembled to fill each order Once the drive-through clerk has entered the sale on the cash register, the clerk cannot steal the customer’s payment because the clerk’s cash drawer will not balance at the end of the shift This change also makes the drive- through more efficient and could reduce the time it takes to service a drive- through customer.

If another employee cannot be added, the weakness in internal control could be improved with more thorough supervision The restaurant manager should be directed to keep a watchful eye on the drive-through area in order to detect when

a clerk takes an order without ringing up the sale.

Ex 7–3

a The remittance advices should not be sent to the cashier.

b The remittance advices should be sent directly to the Accounting Department

by the mailroom.

Ex 7–6

The use of the voucher system is appropriate, the essentials of which are outlined below (Although invoices could be used instead of vouchers, the latter more satisfactorily provide for account distribution, signatures, and other significant data.)

1 Each voucher should be approved for payment by a designated official only after completion of the following verifications: (a) that prices, quantities, terms, etc., on the invoice are in accordance with the provisions of the purchase order, (b) that all quantities billed have been received in good condition, as indicated on a receiving report, and (c) that all arithmetic details are correct.

2 The file for unpaid vouchers should be composed of 31 compartments, one for each day of the month Each voucher should be filed in the compartment representing the last day of the discount period or the due date if the invoice

is not subject to a cash discount.

3 Each day, the vouchers should be removed from the appropriate section of the file and checks issued by the disbursing official If the bank balance is insufficient to pay all of the vouchers, those that remain unpaid should be refiled according to the date when payment should next be considered.

4 At the time of payment, all vouchers and supporting documents should be stamped or perforated “Paid” to prevent their resubmission for payment They should then be filed in numerical sequence for future reference.

Ex 7–7

To prevent the embezzlement scheme described, Satchell must separate responsibilities for related operations As in the past, all service requisitions should be submitted to the Purchasing Department After receiving the service request, Purchasing should complete a Service Verification form, stating what service has been ordered and the name of the company that will provide the service This form should be delivered via intercompany mail to the person responsible for verifying that the service was performed This person should be someone who has firsthand knowledge of whether the service has been performed This person, who must be someone other than the manager requesting the service, should fill in the date and time the service was received and sign the form In addition, the vendor providing the service should sign the form before leaving the premises When completed, the Service Verification form should be forwarded to the Accounting Department Accounting will authorize payment of the vendor’s invoice after the Service Verification form has been compared with the invoice.

Ex 7–8

a Addition to the balance per bank: (4), (6)

b Deduction from the balance per bank: (5)

c Addition to the balance per depositor’s records: (1), (7)

d Deduction from the balance per depositor’s records: (2), (3)

Ex 7–9

(1), (2), (3), (7)

Ex 7–10

KIDSTOCK CO.

Bank Reconciliation March 31, 20—

Cash balance according to

bank statement $ 4,457.25

Add deposit in transit, not

recorded by bank 5,780.40

$10,237.65 Deduct outstanding checks 2,276.20

Adjusted balance $ 7,961.45

Cash balance according to depositor’s records $7,671.45 Add error in recording

check 306.00

$7,977.45 Deduct bank service charge 16.00 Adjusted balance $7,961.45

Ex 7–11

Cash 306.00

Accounts Payable 306.00 Miscellaneous Administrative Expense 16.00

Cash 16.00

Ex 7–12

Cash 15,300.00

Notes Receivable 15,000.00 Interest Revenue 300.00

Ex 7–13

a.

DUBITZKY CO.

Bank Reconciliation July 31, 2006 Cash balance according to bank statement $ 13,859.87 Add: Deposit in transit on July 31 7,150 00

$ 21,009.87 Deduct: Outstanding checks 6,557 12 Adjusted balance $ 14,452 75 Cash balance according to depositor’s records $ 8,100.75 Add: Error in recording Check No 4217 as $6,315

instead of $3,615 $2,700.00

Note for $3,600 collected by bank, including

interest 3,672 00 6,372 00

$ 14,472.75 Deduct: Bank service charges 20 .00 Adjusted balance $14,452 75

b $14,452.75

Ex 7–14

1 The heading should be for April 30, 2006, and not For the Month Ended April

30, 2006.

2 The outstanding checks should be deducted from the balance per bank.

3 The deposit of April 30, not recorded by the bank, should be added to the balance per bank.

4 In deducting the deposit of April 30, not recorded by the bank, the adjusted balance of $9,637.50 is mathematically incorrect It should be $10,637.50.

5 Service charges should be deducted from the balance per depositor’s records.

6 The error in recording the April 10 deposit of $4,850 as $4,580 should be added to the balance per depositor’s records.

A correct bank reconciliation would be as follows:

IMAGING SERVICES CO.

Bank Reconciliation April 30, 2006

Add deposit of April 30, not recorded by bank 1,010 06

$ 10,777.82 Deduct outstanding checks:

No 821 $ 345.95

839 272.75

843 759.60

844 501 .50 1,879 80 Adjusted balance $ 8,898 02 Cash balance according to depositor’s

records $ 1,118.32 Add: Proceeds of note collected by bank:

of insufficient funds $ 752.30 Service charges 18 .00 770 .30 Adjusted balance $ 8,898 02

Ex 7–15

a The amount of cash receipts stolen by the sales clerk can be determined by attempting to reconcile the bank account The bank reconciliation will not reconcile by the amount of cash receipts stolen The amount stolen by the sales clerk is $6,207.18, determined as shown below.

PROMETHEUS CO.

Bank Reconciliation April 30, 2006 Cash balance according to bank statement $ 13,271.14 Deduct: Outstanding checks 1,750 20 Adjusted balance $ 11,520 94 Cash balance according to depositor’s records $ 12,573.22 Add: Note collected by bank, including interest 5,200 00

$ 17,773.22 Deduct: Bank service charges 45 .10 Adjusted balance $ 17,728 12 Amount stolen: $6,207.18 ($17,728.12 – $11,520.94)

b The theft of the cash receipts might have been prevented by having more than one person make the daily deposit Collusion between two individuals would then have been necessary to steal cash receipts In addition, two employees making the daily cash deposits would tend to discourage theft of the cash receipts from the employees on the way to the bank.

Daily reconciliation of the amount of cash receipts, comparing the cash register tapes to a receipt from the bank as to the amount deposited (a duplicate deposit ticket), would also discourage theft of the cash receipts In this latter case, if the reconciliation were prepared by an employee independent of the cash function, any theft of cash receipts from the daily deposit would be discovered immediately That is, the daily deposit would not reconcile against the daily cash receipts.

Ex 7–16

a Petty Cash 750.00

Cash 750.00

b Office Supplies 415.83

Miscellaneous Selling Expense 107.90

Miscellaneous Administrative Expense 88.10

Cash Short and Over 18.60

Cash 630.43

Ex 7–17

Retailers experience a seasonal trend in cash and cash equivalents Circuit City’s lowest level of cash flows is in the fall, when merchandise that has been ordered for the holiday season must be paid for During the remainder of the year, Circuit City has higher levels of cash and cash equivalents Its cash and cash equivalents peak in May, just prior to the fall buying season.

PROBLEMS Prob 7–1A

Strengths: a, b, e, and g

Weaknesses:

c Cash receipts should not be handled by the accounts receivable clerk This violates the segregation of duties between the handling of cash receipts and the recording of cash receipts.

d An independent person (for example, a supervisor) should count the cash in each cashier’s cash register, unlock the record, and compare the amount of cash with the amount on the record to determine cash shortages or overages.

f The bank reconciliation should be prepared by someone not involved with the handling or recording of cash.

Miscellaneous Administrative Expense 179.50

Cash Short and Over 11.25

Prob 7–3A

1.

SHOWTIME SYSTEMS Bank Reconciliation February 28, 2006 Cash balance according to bank statement $ 31,391.40 Add deposit of February 28, not recorded by bank 6,215 50

$ 37,606.90 Deduct: Outstanding checks $ 11,021.50

Bank error in charging check as $585 instead

of $855 270 .00 11,291 50 Adjusted balance $ 26,315 40 Cash balance according to depositor’s records $ 19,144.15 Add: Proceeds of note collected by bank, including

$300 interest $ 6,300.00

Error in recording check 900 .00 7,200 00

$26,344.15 Deduct bank service charges 28 .75 Adjusted balance $ 26,315 40

2 Cash 7,200.00

Notes Receivable 6,000.00 Interest Revenue 300.00 Accounts Payable—Wilson Co 900.00 Miscellaneous Administrative Expense 28.75

Cash 28.75

Prob 7–4A

1.

ALPINE SPORTS CO.

Bank Reconciliation April 30, 2006 Balance per bank statement $18,880.45 Add deposit of April 30, not recorded by bank 3,481 70

$ 22,362.15 Deduct: Outstanding checks $ 5,180.27

Bank error in charging check as $260

instead of $620 360 .00 5,540 27 Adjusted balance $ 16,821 88 Balance per depositor’s records $14,284.88* Add: Proceeds of note collected by bank,

including $224 interest $ 3,424.00

Error in recording check 18 .00 3,442 00

$ 17,726.88 Deduct: Check returned because of insufficient funds $ 880.00

Bank service charges 25 .00 905 .00 Adjusted balance $ 16,821 88

*Cash balance, April 1 $ 16,911.95

Plus cash deposited in April 65,500.40

Less checks written in April (68,127 47)

Balance per depositor’s records, April 30 $ 14,284 88

2 Cash 3,442.00

Notes Receivable 3,200.00 Interest Revenue 224.00 Accounts Payable—Bray & Son 18.00 Accounts Receivable—Shuler Co 880.00

Miscellaneous Administrative Expense 25.00

Cash 905.00

Prob 7–5A

1.

ROCKY MOUNTAIN INTERIORS Bank Reconciliation May 31, 20—

Cash balance according to bank statement $ 14,145.54 Add deposit of May 31, not recorded by bank 1,325 05

$ 15,470.59 Deduct outstanding checks:

No 602 $ 85.50

628 837.70

634 303 .30 1,226 50 Adjusted balance $ 14,244 09

Cash balance according to depositor’s records $ 8,531.99* Add proceeds of note collected by bank:

Principal $ 5,000.00

Interest 400.00

Add error in recording Check No 632 561 .60 5,961 60

$ 14,493.59 Deduct: Check returned because of insufficient funds $ 225.40

Service charges 24 .10 249 50 Adjusted balance $ 14,244 09

*Balance per cash in bank account, May 1 $ 10,578.00

Add May receipts 6,630.60

Deduct May disbursements (8,676 61)

Balance per cash in bank account, May 31 $ 8,531 99

2 Cash 5,961.60

Notes Receivable 5,000.00 Interest Revenue 400.00 Accounts Payable 561.60 Accounts Receivable 225.40

Miscellaneous Administrative Expense 24.10

Cash 249.50

3 $14,244.09

4 The error of $360 in the canceled check should be added to the “balance according to bank statement” on the bank reconciliation The canceled check should be presented to the bank, with a request that the bank balance be corrected.