Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition CHAPTER Internal Control and Cash ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises A Problems B Problems BPY Describe the primary components of an internal control system 1, 2, 3, 4, 5, 1, 2, 3, 1, 2, 3, 1A, 2A, 3A, 4A 1B, 2B, 3B, 4B 1, 3, 4, Apply key control activities to cash receipts and payments 7, 8, 9, 10, 11, 12, 13 3, 3, 1A, 2A, 3A, 4A 1B, 2B, 3B, 4B 4, Prepare a bank reconciliation 12, 13, 14, 15, 16, 17 5, 6, 7, 8, 9, 10, 11 5, 6, 7, 5A, 6A, 7A 5B, 6B, 7B Explain the reporting and management of cash 18, 19, 20, 21, 22 12, 13 9, 10 8A, 9A, 10A 2, 8B, 9B, 10B Solutions Manual 7-1 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted (min.) 1A Identify control activities over cash receipts Simple 20-30 2A Identify control weaknesses over cash payments Simple 20-30 3A Identify control weaknesses Moderate 30-40 4A Identify control weaknesses over cash receipts and payments Complex 40-50 5A Prepare bank reconciliation and adjusting entries Moderate 30-40 6A Prepare bank reconciliation and adjusting entries Moderate 40-50 7A Prepare bank reconciliation and adjusting entries Moderate 40-50 8A Calculate cash Moderate 15-20 9A Discuss reporting of cash Simple 15-20 10A Recommend cash management improvements Moderate 20-30 1B Identify control activities over cash payments Simple 20-30 2B Identify control weaknesses over cash receipts Simple 20-30 3B Identify control weakness Moderate 30-40 4B Identify control weaknesses over cash receipts and payments Complex 40-50 5B Prepare bank reconciliation and adjusting entries Moderate 30-40 6B Prepare bank reconciliation and adjusting entries Moderate 40-50 7B Prepare bank reconciliation and adjusting entries Moderate 40-50 8B Calculate cash Moderate 15-20 9B Discuss reporting of cash Simple 15-20 11B Recommend cash management improvements Moderate 20-30 Solutions Manual 7-2 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition ANSWERS TO QUESTIONS The five primary components of a good internal control system include the control environment, risk assessment, control activities, information and communication, and monitoring A control environment encourages integrity and a high standard of ethical behaviour Risk assessment involves identification and management of key business risks Control activities are policies and procedures to help mitigate the business risks Information and communication ensures that the internal control system captures and communicates the appropriate information to internal and external users Monitoring the internal control system for its adequacy is a recurring process The six control activities that apply to most companies are authorization of transactions and activities, segregation of duties, documentation, physical controls, independent checks of performance, and human resource controls Documentation procedures contribute to good internal control by providing evidence of the occurrence of transactions and events and, when signatures (or initials) are added, the documents establish responsibility for the transactions The prompt transmittal of documents to the accounting department contributes to recording transactions in the proper period, and the pre-numbering of documents helps to ensure that a transaction is recorded only once Independent review is necessary because employees can forget to, or intentionally fail to follow internal controls, or they might become careless if there is no one to observe and evaluate their performance Segregating the physical custody of assets from accounting record keeping is not enough to ensure that nothing has been stolen A performance review still needs to be done In such a review, the accounting records are compared with existing assets or with external sources of information The review helps ensure accuracy Retail stores that not conduct criminal checks when hiring employees are missing the human resource control activity These stores are accepting increased risk of employee theft and fraud A company’s system of internal control can only give reasonable assurance that assets are properly safeguarded and that accounting records are reliable because the cost of a perfect system outweighs its benefits For example, if a company wanted flawless accounting records, they could double the number of accountants on staff and have the new accountants check all of the work that was done by experienced accountants but the benefit of this is outweighed by the costs Absolute assurance is too costly Furthermore, even if cost was not a factor, human error and collusion cannot be eliminated Solutions Manual 7-3 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) Electronic funds transfers normally result in better internal control since no cash or cheques are handled by employees, thereby limiting the possibility of misappropriation However, controls over EFT payments (and collections) need to be put in place This is a violation of authorization of transactions Each cash register should only be used by one employee and an independent verification of the cash in each register at the end of each shift should be compared to the total of the sales recorded in the cash register plus the float (coins and bills for making change) in the register If a discrepancy arises, the employee responsible for that register can be held responsible Cash registers are visible to the customer Thus, they prevent the sales clerk from ringing up a lower amount and pocketing the difference In addition, the customer receives an itemized receipt, and the cash register tape is locked into the register for further verification Having scanners reduces the chance of error in entering the price of an item 10 This statement is true if the alternative to a cheque payment is one done with cash It is not always practical to make all payments by cheque but payment by cheque contributes to effective internal control over cash disbursements as it provides a record of all payments Also, having only authorized individuals sign the cheques reduces the likelihood of payments being made for unauthorized amounts or to unauthorized vendors 11 The receptionist has an opportunity to commit fraud In the case of an appointment where the customer pays cash, the cash can be pocketed by the receptionist The receptionist can then cancel the appointment, leaving no trace in the accounting records of the revenue generated by the service This is a clear case of lack of segregation of duties 12 An employee who has no other responsibilities that relate to cash should prepare the bank reconciliation If a person had responsibility for handling cash and also prepared the bank reconciliation, they could use the bank reconciliation to hide fraud by falsifying the bank balance or misstating reconciling items 13 A bank contributes significantly to internal control over cash because it: (1) safeguards cash on deposit, (2) minimizes the amount of cash that must be kept on hand, and (3) provides another record of all bank transactions 14 The lack of agreement between the cash balances may be due to either: (1) Time lags—caused by recording a transaction on the company’s books in one month and the bank recording it another month (example – outstanding cheque) or the bank recording a transaction first which the company will record after completing the bank reconciliation (example – a bank service charge, or an NSF cheque) (2) Errors—made by either the company or the bank For example, a cheque for $110 is recorded by the depositor at $101 Solutions Manual 7-4 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) 15 (a) An NSF cheque is a cheque issued by a customer that was recorded by the company when it was received and then deposited in the bank only to discover later that the customer did not have the funds to cover the cheque payment (b) An NSF cheque makes the bank balance lower than the book balance and requires the book balance to be adjusted Consequently, it is deducted from the balance per books (c) An NSF cheque results in an adjusting entry in the company’s books, as a debit to Accounts Receivable and a credit to Cash (assuming the cheque deposited was a collection on account) The debit to Accounts Receivable includes any additional charge that the bank may add for their services with respect to the NSF cheque or the company may add for late payment 16 Since the March cheque has still not cleared the bank at April 30, it must be included in the April 30th bank reconciliation as an outstanding cheque 17 When performing a bank reconciliation, outstanding cheques are subtracted from the bank balance to “move” that balance closer to the one recorded on the company’s books Since the bank balance is lower than the book balance by the amount of this fraud, Sam will understate the amount of outstanding cheques on the reconciliation For example, if there was no fraud, let’s assume that the bank balance would be $5,000 and that the outstanding cheques were $3,000 so the book balance should be $2,000 After the fraud the book balance is still $2,000 but the bank balance is now $3,300 instead of $5,000 When Sam does the reconciliation he has to make sure that the $3,300 will reconcile to $2,000 so he will list the outstanding cheques as only $1,300, thereby understating them by the amount of cash he has stolen The real outstanding cheques of $3,000 less the stolen amount of $1,700, equals $1,300 18 Cash includes cash on hand and cash in bank accounts, including any debit and bank credit card slips Cash equivalents include short-term, highly liquid trading investments less any bank overdrafts Together, these two amounts combine and are reported as cash and cash equivalents in the current assets section of the statement of financial position 19 Restricted cash is not available for general use as it is restricted for a special purpose When the restricted purpose is of a long-term nature, the restricted cash is reported as a non-current asset If it is expected to be used within one year of the statement of financial position date, it would be classified as a current asset and disclosed in the financial statements Compensating balances are minimum cash balances which lenders specify that a borrower must maintain in the borrower’s bank account to provide support for a loan A compensating balance should be reported as a non-current asset and the details of the loan conditions should be disclosed in the notes to the financial statements Solutions Manual 7-5 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) 20 The line of credit facility of $16 million does not represent a liability, until Brandon Corporation borrows (or draws) money under the line of credit In the notes to the financial statement the terms of the line of credit facility and its available limit of $16 million should be reported to demonstrate how the business is well positioned to deal with future cash flow demands or take advantage of investment opportunities 21 The basic principles of cash management are: (1) increase the speed of collection on receivables, (2) keep inventory levels low, (3) delay payment of liabilities, (4) plan the timing of major expenditures, (5) invest idle cash, and (6) prepare a cash budget The first three principles are ways to increase cash on hand The last three principles focus on making sure management understands when cash balances will be high so that investment income can be earned from idle cash and when cash balances will be low so that bank loans or other financing can be obtained 22 Having too much cash on hand may hinder a business’ performance if the cash cannot be used effectively and therefore not give a proper return to the shareholders Effective uses of cash can include upgrading existing property, plant, and equipment, expanding the business, paying down debt, repurchasing shares, or paying dividends Solutions Manual 7-6 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 7-1 Control Activity Example Authorization of transactions and activities One person operates the cash register at the exit of the parking garage Segregation of duties Tickets are provided to those entering the garage by an automated machine This ticket is given to the attendant on exiting the parking garage In this way, the attendant does not authorize the parking and collect the cash Documentation The time on the ticket is entered into a machine to determine the amount owed, which is keyed into the cash register before the gate will open In this way the total time in the parking garage is recorded Physical controls Cash is kept in a cash register Independent checks of performance If a customer is overcharged, they will complain Review to make sure parking gate is not being raised prior to payment being received Human resource controls Employees working the cash register are bonded This allows for insurance to be purchased covering theft or robbery BRIEF EXERCISE 7-2 (a) (b) (c) (d) (e) (f) All transactions should include original, detailed receipts Undeposited cash should be stored in the company safe Employees must take their full vacation allotment each year Surprise cash counts are performed by internal audit Responsibility for related activities should be assigned to specific employees Cheque signers are not allowed to record cash transactions Solutions Manual 7-7 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BRIEF EXERCISE 7-3 Documentation and physical controls Human resource controls Independent checks of performance Segregation of duties Authorization of transactions and activities Physical controls BRIEF EXERCISE 7-4 Documentation Independent checks of performance Physical controls Authorization of transactions and activities Segregation of duties Physical controls BRIEF EXERCISE 7-5 Book – Book + Bank – Bank – NA Bank + 10 11 12 Book + Book – Book – Bank + Book – Bank – BRIEF EXERCISE 7-6 January deposits in transit: Deposits in transit at beginning of month Add: Deposits recorded in company books this month Less: Deposits recorded on this month’s bank statement Deposits in transit at end of month $ 5,000 4,000 $1,000 February deposits in transit: Deposits in transit at beginning of month Add: Deposits recorded in company books this month Less: Deposits recorded on this month’s bank statement Deposits in transit at end of month $1,000 5,600 4,600 $2,000 Solutions Manual 7-8 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BRIEF EXERCISE 7-7 November outstanding cheques: Outstanding cheques at beginning of month Add: Cheques recorded in company books this month Less: Cheques recorded on this month’s bank statement Outstanding cheques at end of month $ 12,600 11,100 $ 1,500 December outstanding deposits: Outstanding cheques at beginning of month Add: Cheques recorded in company books this month Less: Cheques recorded on this month’s bank statement Outstanding cheques at end of month $1,500 9,500 9,900 $1,100 BRIEF EXERCISE 7-8 (a) Kashechewan should correct its books for the error in recording the cheque by reducing cash by $18 ($86 – $68) The cheque mistakenly deducted by the bank should be added back to the bank balance since it is the bank’s error (b) Accounts Payable Cash 18 18 No entry is necessary for the cheque mistakenly deducted by the bank, although the bank should be notified of this error BRIEF EXERCISE 7-9 June 30, adjusted cash balance per bank reconciliation Add: Cash receipts in July Less: Cash disbursements in July July 31, unadjusted cash balance $18,920 21,700 24,300 $16,320 Solutions Manual 7-9 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BRIEF EXERCISE 7-10 Cash balance per bank Add: Deposits in transit $15,840 4,300 20,140 2,300 $17,840 Less: Outstanding cheques Adjusted cash balance per bank Cash balance per books (as per BE7-9) Add: EFT collections on account Less: Bank service charge NSF cheque and fee ($290 + $80) Adjusted cash balance per books $16,320 1,960 18,280 $ 70 370 440 $17,840 BRIEF EXERCISE 7-11 July 31 Cash Accounts Receivable 1,960 Bank Charges Expense Cash 70 Accounts Receivable Cash 370 1,960 70 370 BRIEF EXERCISE 7-12 Ouellette Ltée should report the cash in the bank, the payroll bank account, and the cash register floats as cash The trading investments would be reported as cash equivalents because they mature within 90 days Cash and cash equivalents are recorded as a current asset Assuming the restricted cash is not expected to be used during the next year, the restricted cash for the plant expansion should be reported as a non-current asset The compensating balance should also be reported as a non-current asset and disclosed in the notes BRIEF EXERCISE 7-13 Cash and cash equivalents should be reported at $45,100 ($12,000 + $1,700 + $24,000 + $5,000 + $2,400) Note that all of these items are actually cash The company has no cash equivalents The other items are receivables The income tax refund due from CRA is a receivable until collected Postdated cheques are also receivables until they can be cashed Solutions Manual 7-10 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition PROBLEM 7-8B (a) and (b) (c) Cash: Cash on hand Debit card slips MasterCard credit card slips Bank chequing account US dollar account (Canadian equivalent) Total cash balance $ 1,600 500 975 7,460 2,241 12,776 Cash equivalents: Government of Ontario bond Cash and cash equivalents 5,000 $17,776 The cash due from the customer should be recorded as an account receivable, and reported as a current asset on the statement of financial position The remainder of the entry should update merchandise inventory (current asset), sales (revenue), and cost of goods sold (expense) The deposit with Hydro One should be recorded as an advance or deposit in the current assets section of the statement of financial position as it is very similar to a receivable that the company hopes to collect once the credit history is established Solutions Manual 7-43 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition PROBLEM 7-9B (a) The security deposits were not included in cash and cash equivalents as these amounts cannot be spent freely by the company to pay off current liabilities They are held in trust for the tenants and are therefore a form of restricted cash They are therefore segregated on the statement of financial position (b) Segregated tenant’s security deposits would most likely be classified in the noncurrent assets section of the statement of financial position Depending on the length of the apartment leases to which the security deposits relate and the operating cycle of the business, the timing of when the repayment of these deposits are not likely to be in the current accounting cycle Solutions Manual 7-44 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition PROBLEM 7-10B Accelerating collection of receivables - Currently, no deposit is received from the customers and billing is done at the end of the contract which is four months after the contract started - Jackie should ask customers for a large upfront deposit before the items are purchased on behalf of the customer - Jackie should also consider billing on a monthly basis throughout the contract so that cash is received earlier Delaying payment of liabilities - Jackie is currently paying for items purchased immediately She can apply for credit and pay for the purchases on account, probably 30 days later than she is currently paying Solutions Manual 7-45 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 7-1 FINANCIAL REPORTING (a) The second paragraph of the Management’s Responsibility for Financial Statements clearly states that management is responsible for establishing and maintaining a proper system of internal control This statement is followed by a description of the limitations of internal control, a general description of the purpose of internal control, and mention that the internal auditors of the company perform a review and evaluation of internal controls on management’s behalf In the Independent Auditor’s Report, the auditor considers the internal controls relevant to the company’s preparation and fair presentation of the financial statements Following this study of internal controls, the auditor designs audit procedures that are appropriate under the circumstances in order to express an opinion on the financial statements (b) Management has the primary responsibility for the system of internal control as indicated in the answer to (a) above The auditor points out in the second paragraph of the Independent Auditor’s Report that management is responsible for internal control that will enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error The auditor is not responsible for the design or effectiveness of internal controls and does not express an opinion as to their effectiveness Nonetheless, the auditor does consider the internal controls in the design of their audit, as noted in (a) above (c) Management has the primary responsibility for the preparation and presentation of the financial statements This responsibility is mentioned in both reports The very first sentence of the Management’s Responsibility for Financial Statements states this responsibility and then the auditor repeats the statement in the second paragraph of the auditor’s report Solutions Manual 7-46 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 7-2 COMPARATIVE ANALYSIS (a) Jean Coutu reports a negative balance of cash and cash equivalents of $(1.6) million at March 2, 2013 (b) At March 2, 2013, Jean Coutu reports a temporary investment of $20 million in the current assets section of its statement of financial position and a bank overdraft balance of $21.6 million in the current liabilities section These two amounts net to the $(1.6) million ($20 – $21.6) reported on its statement of cash flows (c) Shoppers Drug Mart reports a positive cash balance of $104,529 thousand, compared to Jean Coutu’s negative cash and cash equivalents balance of $1.6 million Shoppers has the better cash position in the most recent year Solutions Manual 7-47 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 7-3 COMPARING IFRS AND ASPE (a) Generally, which accounting standards a company follows should not have a significant impact on its internal controls However, since IFRS is more principlesbased and relies more upon professional judgment than ASPE, companies need to have controls in place to assess decisions that have been made when making various calculations These types of controls would rely heavily upon review and approval (b) Strong internal controls are essential to proper recording of transactions and the preparation of financial statements to ensure the usefulness of this information for decision-making by external users Publicly traded companies have more external users of their financial statements than private companies By reporting on the effectiveness of their internal controls over financial reporting, public companies provide their stakeholders with important information on the quality of the process used to produce the financial statements Also, because management must prepare a report, it must assess the effectiveness of controls on an ongoing basis Many people argue that this will help identify any weaknesses in the systems, as well as fraud and error, on a timely basis Solutions Manual 7-48 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 7-4 CRITICAL THINKING CASE (a) Vanessa should report several internal control weaknesses for the hotel operations to her father Patrick Chen: For the room rental portion of operations: • The opportunity exists for unrecorded room rental revenues Patrons who pay cash may have access and use of the room but the revenue from the rental remains unreported and the desk clerk pockets the cash collected • Friends can gain access to rooms and related services without any charges and without any revenue to the hotel For bar revenues: • The bartender has the opportunity to bring in inventory purchased personally and resold at the bar, while keeping the cash receipts from sales • Revenue from bar sales may go unrecorded as the bartender is too busy to enter sales in the cash register For parking lot revenues: • The opportunity exists for the attendant to understate the amount of parking revenue collected while pocketing the cash • Friends of the attendant may be allowed parking without having to pay any fees (b) It will not always be possible to establish how much money has been lost or stolen from the hotel While some errors or omissions can be measured, such as room rentals, unrecorded liquor sales will be very difficult to measure since the liquor sold may not have come from inventory purchased (c) A general recommendation concerning hiring family members applies in this case for all of the hotel’s operations Collusion between management and its employees to defraud the hotel is heightened when the employees are members of the general manager’s family In addition, the following steps can be taken to avoid the possibility of fraud in the future: For the room rental portion of operations: • A daily reconciliation should be prepared by someone other than the desk clerk which compares the report for the number rooms cleaned to the number of room rented Solutions Manual 7-49 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 7-4 (Continued) (c) (Continued) For bar revenues: • A division of duty should be established between the person having access to inventory and the person handling cash receipts • Supervision of the handing of the inventory and the handling of the cash should be done whenever possible Any change in the normal procedures, such as was the case in the handling of the tequila should be cause for termination • A daily check for the reasonableness of the amount of revenues reported from bar sales should be made to the inventory consumed For parking lot revenues: • Install the automated payment system which will remove the attendant’s opportunity to understate revenues and pocket cash Solutions Manual 7-50 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 7-5 ETHICS CASE (a) The stakeholders are the customers affected by the policy, the shareholders of the banks who want to see higher profits and the management of the banks who make the decisions regarding fees and cheque processing policies (b) (1) If the bank processes cheque #3158 for $1,510 first it will bounce due to nonsufficient funds as the balance in the account is only $1,500 All of the other cheques to be processed after that will also bounce so consequently all cheques will bounce and the total NSF processing fees charged by the bank will be $225 (5 × $45) (2) If the bank processes the smallest cheques first, all of the cheques will clear processing except for the largest cheque which is cheque #3158 for $1,510 By processing the cheques in this way, only one cheque will bounce and this means that the bank will earn a processing fee of only $45 (c) Whether this is ethical is subject to debate On the one hand, it can be argued that customers have a responsibility to maintain an adequate balance in their accounts Some customers are frequently overdrawn; thus only severe penalties will persuade them to maintain an adequate balance However, it could also be argued that processing cheques from largest to smallest is “gouging” and takes unfair advantage of the customer (d) In deciding what approach to take, the bank must consider its relationship with the customer For customers who not write NSF cheques frequently, it probably does not matter which approach is taken Any customer that is frequently overdrawn may not be the type of customer that the bank is willing to deal with over the long term so it may be beneficial to other account holders to treat those who are always overdrawn as severely as possible If the “largest to smallest” policy is used by all banks, customers won’t gain an advantage by switching accounts to other banks if this policy angers them (e) Answer will vary depending on students’ opinions Solutions Manual 7-51 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 7-6 “ALL ABOUT YOU” ACTIVITY Note to instructors: Answers will vary based on individual student experiences (a) Here is the information that the website will generate assuming a student is attending the University of Calgary and studying business Calculate your school tuition cost Select the province where you will attend school: Alberta Select a school: University of Calgary Select a degree: Business, Mgt and Public Administration Room/rent Business, Mgt a Year ($) Books 48005000 University of Cal Select degree length: Tuition AB Alberta 7697 years Year ($) Year ($) Year ($) 7697 7697 7697 7697 1,500 1,500 1,500 1,500 5,394 5,394 5,394 5,394 3,347 3,347 3,347 3,347 Entertainment 1,600 1,600 1,600 1,600 Transportation 880 880 880 880 0 0 20418 20418 20418 20418 Food Other Total Adapted from Statistics Canada Survey of Tuition and Living Accommodation Costs for Full-time Students at Canadian Degree-granting Institutions (TLAC), 2012 � 2013 Solutions Manual 7-52 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP7-6 (Continued) (b) Here is an example of where the funding for a student’s education may come from using the tool provided How will you pay for school? Enter any additional money that you will use to pay for your education Fields on this tab allow you to enter annual amounts, which are then multiplied by the number of years in your program If you have a one-time funding source (such as a bursary or scholarship), you should divide the total amount of funding by the number of years in your program to avoid overstating your funding For example, if you get a first-year entrance scholarship of $1,000 for your 4-year program, and you not expect to receive the same amount every year, enter $250 for this scholarship ($1,000/4 years) Scholarships & bursaries: $ 5,000 per year Gifts and $ family's contributions: 1,000 per year Earnings from your job (after tax): $ per year Education $ savings plan: 2,500 per year Personal savings: $ 5,000 per year Other: per year $ Total cost of university According to the above current plan, total education costs of $81,672 ($20,418 × years) will be offset by $54,000 ($13,500 × years) in funding Solutions Manual 7-53 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 7-7 SERIAL CASE Note to instructors: All of the material supplementing this group activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook as well as in the Prepare and Present section of WileyPLUS (a) The strengths in Koebel’s system of internal control and related control activity are as follows: Strength Password access to the cash register Cash register calculates the pricing of the goods and prints receipt Control Activity Physical controls Documentation Cash is deposited daily Physical controls Owners are involved in the reconciliation of cash with totals from the cash register Inventory is counted daily Independent checks of performance Independent checks of performance Documentation Invoices are prepared when the shipment of cupcakes is complete The monthly payroll schedule is reconciled to actual salaries paid Janet or Brian authorize the purchase of inventory Independent checks of performance Authorization of transactions Solutions Manual 7-54 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 7-7 (Continued) (b) The weaknesses in Koebel’s system of internal control and the control activities violated are as follows: Weaknesses Employees share one cash register and management currently is unable to affix responsibility for cash to a specific employee Cashier is handling cash and inventory Control Activity Authorization of transactions and activities Segregation of duties Entering transactions can be performed by incorrect cashier, due to no logging off No mention if employees are bonded Physical controls No mention of supervision of employees entering sales and handling inventory No mention of procedures for voided transactions or pricing adjustments on sales Segregation of duties Human resource controls Authorization of transactions and activities Solutions Manual 7-55 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 7-7 (Continued) (b) (Continued) Weaknesses Reconciliation of sales is not done daily and so one cannot establish who has made an error on a sale Inventory is counted daily to determine what product is needed for the next day, but should also be used to determine unrecorded sales Documentation of authorized overtime is not obtained Invoices are not prenumbered Invoices are not issued in duplicate photocopies have to be made and if staff forget to make a photocopy, sales could go unrecorded Invoices are manually prepared, leading to possible pricing or calculation errors No system in place to avoid duplication of purchases Control Activity Independent checks of performance Independent checks of performance Documentation Documentation Documentation Independent checks of performance Independent checks of performance In order to address the weaknesses, improvements that Koebel’s Family Bakery should consider include: Program the cash register such that a new transaction cannot be entered without the operator logging off from the previous transaction Reconcile the sales to the deposit daily and establish the responsibility of errors to the particular employee causing the error Consider bonding the employees handling cash Provide supervision of employees or install cameras to ensure that all sales are recorded Design procedures involving owners for the voiding or altering the pricing for transactions entered Compare and reconcile the reduction of inventory to the sales recorded daily Implement the use of pre-numbered invoices that are printed induplicate carbon copies which cannot be altered Account for the numerical sequence of invoices Consider automating the production of invoices 10 Install a log of purchase orders made to avoid duplication of orders Solutions Manual 7-56 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Legal Notice Copyright Copyright © 2014 by John Wiley & Sons Canada, Ltd or related companies All rights reserved The data contained in these files are protected by copyright This manual is furnished under licence and may be used only in accordance with the terms of such licence The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd (MMXIII xi FI) Solutions Manual 7-57 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited ... 2 476 ($4 ,76 0 – $5,660) Error in Nov 20 deposit ($5,908– $5,890) Adjusted cash balance per books 3,892 $ 17, 742 $14,282 5,008 19,290 $580 50 900 18 1,548 $ 17, 742 Solutions Manual 7- 27. .. and fee ($440 + $40) Adjusted cash balance 1,040 $7, 813 $8,321 650 8, 971 $100 578 480 1,158 $7, 813 Solutions Manual 7- 39 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized... payment Adjusted cash balance 1,205 13,492 $14,541 230 14 ,77 1 $ 114 590 1,062 1 ,76 6 $13,005 Solutions Manual 7- 25 Chapter Copyright © 2014 John Wiley & Sons Canada, Ltd 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