To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Reporting and Analyzing Cash and Internal Controls QUESTIONS The seven broad principles are: Establish responsibilities; Maintain adequate records; Insure assets and bond employees; Separate recordkeeping and custody of assets; Divide responsibilities for related transactions; Apply technology controls; Perform regular and independent reviews Internal control procedures become especially critical when the manager of a business can no longer control the business through personal supervision and direct participation Responsibility for related transactions should be divided so that the work of one department or individual acts as a check on that of another Separation of custody from recordkeeping of an asset encourages the asset custodian to avoid misplacing, misappropriating, or wasting the asset This arrangement makes collusion necessary if an asset is to be stolen and the theft concealed in the records If individual departments were permitted to deal directly with suppliers, the amount of merchandise purchased and the resulting liabilities would not be well controlled Having individual departments place orders through a purchasing department helps control the amounts purchased and the resulting liabilities The limitations of internal control arise from two sources: the human element (human error or human fraud) and the cost-benefit principle Cash is most liquid; and least liquid is a building The four assets ordered from most to least liquid are: cash, accounts receivable, inventory, and building A petty cash receipt is a document stating that a payment has been made from petty cash The one who received payment and the one who approved payment both sign the receipt Depositing all receipts on the day of receipt (1) creates an independent record of the amount of cash received and (2) helps prevent an employee from having personal use of the money for a period of time before depositing it 10 During the year ended February 26, 2005, cash (and equivalents) of $1,166,000,000 is used by investing activities Cash (and equivalents) of $459,000,000 is used by financing activities ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 349 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 11 Circuit City‘s cash at February 28, 2005, equals $879,660,000 It is the second largest current asset, after Merchandise inventory Cash comprises about 33% current assets Its Cash increased from $783,471,000 at February 29, 2004, to $879,660,000 at February 28, 2005 As a percent of total current assets, its Cash balance increased from about 27% to about 33% 12 Apple‘s cash and equivalents decreased by $427,000,000 during the fiscal year ended September 25, 2004; from $3,396,000,000 to $2,969,000,000 Its statement of cash flows identifies several causes for this change Three major sources and uses are: (1) $934,000,000 from operating activities; (2) $(1,488,000,000) used by investing activities; and (3) $127,000,000 provided by financing activities The largest outflow is the purchase of short-term investments in the amount of $3,270,000,000 QUICK STUDIES Quick Study 6-1 (10 minutes) The main objective of internal control procedures is to safeguard the assets of the business This objective is best accomplished by designing an operational system with managerial policies that protect the assets from waste, fraud and theft The system should be designed in compliance with the seven broad principles of internal control that are described in the chapter Separation of recordkeeping for assets from the custody over assets is intended to reduce theft and fraud If this fundamental principle is followed, there has to be collusion between two or more employees for assets to be stolen and the theft to be concealed in the records The responsibility for a transaction should be divided between two or more individuals or departments to ensure that the work of one acts as a check on the other Absent this, someone could create fictitious invoices and pay the money to herself or himself Quick Study 6-2 (10 minutes) A liquid asset refers to an asset that can be readily converted into another type of asset or be used to satisfy an obligation A cash equivalent is a highly liquid short-term investment that can be readily converted to a known amount of cash and is sufficiently close to its maturity date so that its market value is relatively insensitive to interest rate changes Companies usually invest idle cash in cash equivalents to make a higher return on these assets ©McGraw-Hill Companies, 2008 350 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 6-3 (10 minutes) The cash category includes currency and coins along with the amounts on deposit in bank accounts, checking accounts, and savings accounts Cash also includes items that are acceptable for deposit in these accounts including customer checks, cashier checks, certified checks, and money orders The cash equivalents category includes short-term, highly liquid investment assets meeting two criteria: (1) readily convertible to a known cash amount and (2) sufficiently close to their due dates so that their market value is not sensitive to interest rate changes Usually only investments purchased within months of their due date satisfy these criteria Examples of cash equivalents include U.S Treasury bills and money market funds Liquidity refers to a company‘s ability to pay for its near-term obligations Quick Study 6-4 (10 minutes) The three basic guidelines for safeguarding cash are: (a) Separate the duties of those who handle (have custody of) cash from those that keep cash records (b) Require that all cash receipts be deposited daily (c) Require that all cash disbursements be made by check (a) Voucher system of control, and (b) Petty cash system of control Quick Study 6-5 (10 minutes) (a) Petty Cash 85.00 Cash 85.00 To establish the petty cash fund (b) Entertainment Expense 52.15 Postage Expense 8.95 Printing Expense 9.10 Cash 70.20 To reimburse the petty cash fund The Petty Cash account is credited when either (1) the dollar amount of the fund is being reduced, or (2) the fund is being eliminated ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 351 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 6-6 (15 minutes) a b c d e f g (i) Book (i) Book (i) Book (i) Bank (i) Book (i) Book (i) Bank (1) (ii) Addition (ii) Subtraction (ii) Subtraction (ii) Subtraction (ii) Addition (ii) Subtraction (ii) Addition (2) Adjusting entry required Adjusting entry required Adjusting entry required No adjustment required Adjusting entry required Adjusting entry required No adjustment required Quick Study 6-7 (15 minutes) Days' sales uncollected = 2008 $85,692 $2,691,855 x 365 11.6 days Accounts receivable x 365 Net sales 2007 $80,485 $2,396,858 x 365 12.3 days Interpretation: The collection of accounts receivable seems to be slightly improving It took the company slightly over one-half day less to collect on its accounts receivable in 2008 than in 2007 Quick Study 6-8A (10 minutes) The documents in a voucher system are: Purchase requisition, Purchase order, Invoice, Receiving report, Invoice approval, and Voucher Quick Study 6-9B (15 minutes) (a) A Discounts Lost account is employed with the Net Method of recording purchases of inventory (b) The advantage of this method is that the Discounts Lost account highlights for management (on the income statement) the costs incurred by the business that have resulted from the failure to take cash discounts Management can then determine the reason and possibly correct the handling of future cash payments to ensure that all favorable purchase discounts are taken ©McGraw-Hill Companies, 2008 352 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXERCISES Exercise 6-1 (10 minutes) Evaluation The company‘s internal control system failed to require separation of asset custody from asset recordkeeping Principles Ignored (1) The recordkeeper should not have been allowed to sign the company‘s checks (2) Since a loss was incurred, the company apparently had not bonded its employee If it had, the bonding company would have insured the loss If regular, independent reviews of the accounting records had been done, the payments of salary checks to a nonemployee may have been discovered earlier Exercise 6-2 (15 minutes) (a) Internal Control Problems (1) A major internal control problem is that the recordkeeper (who has control over the accounting records) has physical control over the cash receipts Nothing in the system prevents the recordkeeper from taking cash from the mail and using it personally (2) The recordkeeper might also delay recording a cash receipt from a customer until more cash comes in at a later date from a second customer Then, the new cash receipt would be deposited and recorded as a payment made by the first customer No entry would be made in the second customer‘s account until cash was received from a third customer, and so on (This type of fraud is called "lapping.") (3) The recordkeeper also could pocket cash and claim that a payment was never received and apparently lost in the mail (b) Internal Control Recommendations (1) If only one person is present when the mail is opened, that person may steal cash and claim it was never received If possible, two people should be present Otherwise, the honesty and integrity of the person chosen to open the mail is critical One might also consider the use of a P.O Box for cash receipts by mail as another control procedure (2) It is important the recordkeeper not have physical control over cash ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 353 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 6-3 (15 minutes) A cash register (with a locked record) should be used at the sales stand— it should also be anchored to the stand If a cash register cannot be used, the total sales value of the sunscreen, shirts, and sunglasses given to the employee each day should be calculated The employee should sign a receipt for the merchandise and the amount of cash that he or she has been given At the end of each day, the employee should be required to return cash plus remaining sunscreen, shirts, and sunglasses equal to the amount taken to the stand—possibly consider one or two return trips if the amounts are large The employee should sign a receipt for the total amount of cash he or she is given each weekend Each time the employee makes a purchase, he or she should obtain a signed sales receipt for the payment The sales receipt should list the items purchased and the prices paid When the employee returns to the store, the total value of the signed sales receipts plus any remaining cash should equal the amount of cash originally given to the employee Also, the merchandise brought back by the employee should be the same as the items listed on the signed sales receipts ©McGraw-Hill Companies, 2008 354 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 6-4 (20 minutes) Jan Petty Cash Cash 200 200 To establish a petty cash fund Jan Postage Expense Merchandise Inventory* Delivery Expense Miscellaneous Expenses Cash 74 29 16 43 162 To reimburse the petty cash fund * Transportation-in costs are included in Merchandise Inventory under a perpetual system Jan Postage Expense Merchandise Inventory Delivery Expense Miscellaneous Expenses Cash 74 29 16 43 162 To reimburse the petty cash fund.* Jan Petty Cash Cash 250 250 To increase the petty cash fund.* * The two January entries can be combined into one entry ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 355 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 6-5 (20 minutes) Sept Petty Cash Cash 350 350 To establish a $350 petty cash fund Sept 30 Merchandise Inventory* Postage Expenses Miscellaneous Expenses Cash Short and Over Cash 40 123 80 246 To reimburse the petty cash fund * Transportation-in costs are included in Merchandise Inventory under a perpetual system Oct Petty Cash Cash 50 50 To increase the petty cash fund to $400 ©McGraw-Hill Companies, 2008 356 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 6-6 (20 minutes) Bank Balance Add Deduct Add NSF check from customer returned on Sept 25 but not recorded by this company Book Balance Not Shown on Deduct Adjust Reconciliation x Interest earned on the account x Cr Dr Deposit made on September and processed by bank on September Check written by another depositor but charged against this company's account x x Bank service charge x Cr Checks outstanding on August 31 that cleared the bank in September x Check written against the company account and cleared by the bank; erroneously not recorded by the company recordkeeper x Principal and interest on a note receivable to this company is collected by the bank but not yet recorded by the company Checks written and mailed to payees on October 10 Checks written by the company and mailed to payees on September 30 11 Deposit made on September 30 after the bank closed 12 Special bank charge for collection of note in No on company's behalf Cr x Dr x Dr x x x Cr Exercise 6-7 (10 minutes) The voucher system of control establishes procedures for: (a) Verifying, approving, and recording obligations for eventual cash disbursements, and (b) Issuing checks for payment of verified, approved, and recorded obligations All expenditures should be overseen by a voucher system of control (not only the purchase of merchandise) The voucher is initially prepared by the accounting department when it receives the purchase requisition from the department making the request or when it receives reliable evidence that an obligation has been incurred ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 357 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 6-8 (25 minutes) DEL GATO CLINIC Bank Reconciliation June 30, 2008 Bank statement balance Add Deposit of June 30 Deduct Outstanding checks Adjusted bank balance $10,555 2,856 13,411 1,829 $11,582 Book balance $11,589 Add Error on Ck No 919 11,598 Deduct Bank service charge 16 Adjusted book balance $11,582 Exercise 6-9 (10 minutes) June 30 Cash Utilities Expense 9 To correct a journal entry error 30 Miscellaneous Expenses Cash 16 16 To record bank service charge Exercise 6-10 (15 minutes) (a) Days' sales uncollected on December 31, 2007: $61,000 $665,000 x 365 = 33.5 days Days' sales uncollected on December 31, 2008: $93,000 $747,000 x 365 = 45.4 days (b) Evaluation: The change from 33.5 to 45.4 days' sales uncollected indicates that the receivables have become less liquid While the accounts receivable were, on average, collected in about one month at the end of 2007, this has increased by about 12 days in Year 2008 The company needs to follow up to identify the reasons for this change ©McGraw-Hill Companies, 2008 358 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 6-4B (30 minutes) Part SEVERINO CO Bank Reconciliation December 31, 2008 Bank statement balance Add Deposit of Dec 31 Deduct Checks No 1242 $ 410.40 1273 4,589.30 1282 400.00 Adjusted bank balance $46,822.40 Book balance $32,878.30 Add 9,583.10 Error (Ck 1267) $ 9.00 56,405.50 Proceeds of note less $20 fee 18,980.00 18,989.00 51,867.30 Deduct NSF check $ 762.50 Printing fee 99.00 5,399.70 861.50 $51,005.80 Adjusted book balance $51,005.80 Part Dec 31 Cash Office Supplies To correct an entry error 31 Cash 18,980 Collection Expense 20 Notes Receivable 19,000 To record note collection less fees 31 Accounts Receivable—Titus Industries 762.50 Cash 762.50 To charge account for NSF check plus fees 31 Miscellaneous Expenses 99 Cash 99 To record check printing charge Part In a banking context, a debit memo is notification from the bank that it has debited the depositor's account Since the depositor's account is a liability of the bank (a credit balance account), the debit notification means the bank has reduced the depositor's account balance Conversely, a credit memo is a notification that the depositor's account has been credited, which means the bank has increased the depositor‘s cash balance ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 371 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 6-5B (50 minutes) Part SHAMARA SYSTEMS Bank Reconciliation May 31, 2008 Bank statement balance Add Deposit of May 31 $21,762.70 Book balance $15,177.30 Add 2,727.30 Proceeds of note less 24,490.00 $50 fee 7,350.00 22,527.30 Deduct Deduct Checks No 1780 $1,425.90 1786 353.10 1789 639.50 Adjusted bank balance NSF check $431.80 Service charge 14.00 2,418.50 Error (Ck 1788) 10.00 455.80 $22,071.50 Adjusted book balance $22,071.50 Part May 31 Cash 7,350 Collection Expense 50 Notes Receivable 7,400 To record note collection less fee 31 Accounts Receivable—W Sox 431.80 Cash 431.80 To charge account for NSF check plus fee 31 Miscellaneous Expenses 14 Cash 14 To record bank service fee 31 Utilities Expense 10 Cash 10 To correct an entry error ©McGraw-Hill Companies, 2008 372 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 6-5B (Concluded) Part There are several possible reasons why some prenumbered checks are missing from the sequence of canceled checks returned with a bank statement Reasons include: (1) Some of the checks in the numbered sequence may have cleared the bank in a previous period and were returned with the bank statement in that previous period (2) Some of the checks in the numbered sequence may remain outstanding If so, they will be returned with the bank statement in a later period when they clear the bank (3) The issuer of the checks may have voided one or more of the checks in the numbered sequence, perhaps because of making an error in writing the checks (4) Occasionally, a check will reach the bank but the bank will incorrectly charge the check to the wrong account When the bank detects the error, it will return the check separately with a note of explanation to the depositor ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 373 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SERIAL PROBLEM — SP Serial Problem — SP 6, Success Systems (50 minutes) Part SUCCESS SYSTEMS Bank Reconciliation March 31, 2008 Bank statement balance Add $86,896 Book balance $87,266 Add Bank error Deposits in Transit 470 87,366 Bank interest 33 87,299 Deduct Safety deposit rental …$ 50 Deduct Outstanding Check 192 Adjusted bank balance $87,174 Charge for checks 75 125 Adjusted book balance $87,174 Part Mar 25 Miscellaneous Expenses 677 Cash 101 50 50 To record safety deposit box rental 26 Miscellaneous Expenses 677 Cash 101 75 75 To record charge for printing checks 31 Cash 101 Interest Revenue 404 33 33 To record interest earned ©McGraw-Hill Companies, 2008 374 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Reporting in Action — BTN 6-1 ($ in millions) Balance Feb 26, 2005 Cash and equivalents as % of: Balance Feb 28, 2004 Cash and equivalents as % of: Cash and cash equivalents $ 470 — $ 245 — Current assets 6,903 6.8% 5,724 4.3% Current liabilities 4,959 9.5 4,501 5.4 Stockholders‘ equity 4,449 10.6 3,422 7.2 Total assets 10,294 4.6 8,652 2.8 Analysis comment: Cash and cash equivalents have increased as a percent of the various bases over this two-year period It is safe to say that Best Buy‘s liquidity position has at least slightly improved Per the statement of cash flows for year ended February 26, 2005 ($ millions): Cash and equivalents, beginning-year $245 Cash and equivalents, year-end $470 Percent change* 91.8% increase *[($470 - 245) / $245] Per the statement of cash flows for year ended February 28, 2004 ($ millions): Cash and equivalents, beginning-year $373 Cash and equivalents, year-end $245 Percent change* 34.3% decrease *[($245 – $373) / $373] ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 375 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Reporting in Action (Concluded) Days' Sales Uncollected ($ millions) Days‘ sales uncollected = Accounts receivable Net sales x 365 Feb 26, 2005: $375 $27,433 x 365 = 4.99 days Feb 28, 2004: $343 $24,548 x 365 = 5.10 days The number of days of uncollected sales in accounts receivable has decreased slightly from 5.10 days to 4.99 days This decrease of 0.11 days indicates that the company‘s assets are tied up in receivables for a shorter period of time; but this difference is probably immaterial Best Buy‘s accounts receivable are not a significant asset They represent only 5.4% ($375/$6,903) of total current assets and 3.6% ($375/$10,304) of total assets Best Buy‘s receivables are so low because few, if any, sales are made on account receivable Most customers buy from Best Buy using cash, checks, or credit cards Solution depends on the annual report information obtained ©McGraw-Hill Companies, 2008 376 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comparative Analysis Days‘ sales uncollected = — BTN 6-2 Accounts receivable x 365 Net sales Best Buy ($ millions) Current Year: $375 $27,433 x 365 = 4.99 days Prior Year: $343 $24,548 x 365 = 5.10 days Best Buy‘s days‘ sales uncollected has decreased by 0.11 days The percent decrease: (4.99 - 5.10) / 5.10 = (2.2)% Circuit City ($ millions) Current Year: Prior Year: $173 $10,472 x 365 = 6.03 days $171 $9,857 x 365 = 6.33 days Circuit City‘s days‘ sales uncollected has decreased by 0.30 days The percent decrease: (6.03 - 6.33) / 6.33 = (4.7)% Comparative Analysis: Circuit City‘s decline is 4.7%, and this is a marked improvement compared with Best Buy‘s decrease of 2.2% That is, Circuit City has successfully managed the number of days‘ sales that are uncollected relative to the prior year However, it is important to remember that neither company‘s accounts receivable are a significant current asset ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 377 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethics Challenge — BTN 6-3 In a small business office it is very important that the owner of the business become involved with control and oversight In this medical office it would greatly enhance the internal control environment if Dr Conrad reconciles the bank statements Unfortunately, due to collusion of the employees, the bank reconciliation will not detect this fraud The cash deposits per the books will reconcile to the cash deposits per the bank Despite the collusion, the scheme is not foolproof For example, some procedures in which the scheme might be uncovered or prevented include the following: A bank employee could become suspicious and call Dr Conrad and ask if she is aware that occasionally her employee cashes a patient‘s check for cash An astute patient might notice that his/her statement contains a miscellaneous credit rather than a cash payment notation If the patient is aware of accounting practices, then the patient might inform Dr Conrad Dr Conrad might be able to detect the fraud herself if she reviews the daily posting log generated by most computers and then reviews and notices in the batch totals that miscellaneous credits are posted at times different from all cash payment credits Dr Conrad could require approval for each miscellaneous credit As a control, Dr Conrad could require all checks be stamped ‗For Deposit Only‘ when they are received Dr Conrad should review her salary schedules for employees to make sure that she is at least offering market pay She may want to consider bonding her employees to insure herself against material losses Dr Conrad should probably reconcile the bank statement herself as well as make it a practice to review the daily posting log for miscellaneous credits Also, she should implement a policy whereby she is the only one to authorize any miscellaneous credits to patient accounts ©McGraw-Hill Companies, 2008 378 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Communicating in Practice — BTN 6-4B Memorandum To: From: Date: Subject: ―Owner‖ ―Consultant‖ Advice on monitoring purchase discounts [Instructor‘s Note: The response should acknowledge the owner‘s concern and recommend the net method of recording purchases It should explain how this method results in the recording of ―Discounts Lost,‖ which will flow through to the income statement, thus providing the information desired The memo might look something like the following.] The net method gives management an advantage in controlling and monitoring purchase discounts When invoices are recorded at gross amounts, the amount of discounts taken is deducted from the balance of the Merchandise Inventory account This means that the amount of any discounts lost is not reported in any account or on the income statement Consequently, discounts lost are unlikely to come to the attention of management However, when purchases are recorded at net amounts, a discounts lost expense is brought to management‘s attention as an operating expense on the income statement Management can then seek to identify the reason for discounts lost, such as oversight, carelessness, or unfavorable terms This practice gives management better control over persons responsible for paying bills on time to take advantage of favorable discounts This also means it‘s less likely that favorable discounts are lost ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 379 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Taking It to the Net — BTN 6-5 [Instructor Note: These answers were taken from the 2004 Report to the Nation— subsequent updates may alter these answers.] It is estimated that 6% of 2003 revenues were lost as a result of occupational fraud and abuse Applied to the U.S Gross Domestic Product, this translates to losses of approximately $660 billion Small businesses are the most vulnerable to occupational fraud and abuse The average scheme in a small business causes $98,000 in losses The average scheme in the largest companies costs $105,500 The most common method for detecting occupational fraud is through tips from employees, customers, vendors and anonymous sources The second most common method of discovery is compliance The typical occupational fraud perpetrator is a first-time offender Only 12% of occupational fraudsters in this study were known to have prior convictions for fraud-related offenses All occupational frauds fall into one of three categories: asset misappropriations, corruption, or fraudulent statements Over 90% of occupational frauds involve asset misappropriations Cash is the targeted asset 93% of the time Corruption schemes account for 30% of all occupational frauds and they cause over $250,000 in losses, on average Fraudulent statements are the most costly form of occupational fraud with median losses of $1 million per scheme Frauds committed by employees cause median losses of $62,000, while frauds committed by owners cause median losses of $900,000 10 Losses caused by perpetrators older than 60 are 29 times higher than losses caused by employees 25 and younger ©McGraw-Hill Companies, 2008 380 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action — BTN 6-6 Common internal controls visible in a typical retail store include: Door locks and roll down screens for after-hours lock-up Electronic detection devices stationed at entrances or anti-theft devices on merchandise that must be removed by cashier with special equipment Security cameras Security guards Cash registers Separate cash drawers or transaction codes to identify clerks at registers Bar coding on merchandise Limited number of apparel items allowed in a dressing room Dressing room attendants 10 A security safe on the premises 11 Timeclocks ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 381 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Business Week Activity — BTN 6-7 The reasons stated by Cohen are: The business owner is better able to deal with professionals like auditors or tax professionals and will save time and money The business owner will be more in control of the business and can spot problems early The owner can prevent or stop fraud Cohen suggests that the owner should retain an accounting professional who has proficiency with bookkeeping and specific software the company uses; have appropriate accounting software; and have a professional check over the business owner‘s work The business owner should invest in training and support to understand the accounting system used The business owner should not give the software‘s administrative password to any employee The business owner should keep the accounting software‘s audit trail feature turned on that allows tracking of deletions and changes to transactions The business owner should back up accounting data and keep the backups offsite Cohen also suggests that business owners become familiar with the accounting reports, such as the balance sheet and income statement, so that they can judge the financial health of their business He recommends that all incoming checks be copied and have two different people write checks and make deposits He also says that some companies require two signatures on large checks ©McGraw-Hill Companies, 2008 382 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Entrepreneurial Decision — BTN 6-8 Seven principles of internal control along with examples are: a Establish responsibilities The clerks at the counter should be responsible for handling cash The other employees should be responsible for preparing the orders and helping customers There also should be employees assigned responsibilities such as maintaining inventories, cleaning premises, clerical duties, locking doors, etc b Maintain adequate records The clerks at the counter should enter all sales on the cash registers The cash registers should include a locked record of all sales rung up for subsequent verification procedures Other records should include those for inventories, supplies, payroll time records, and so on c Insure assets and bond key employees The owner should acquire insurance for the employees and the physical facilities Insurance should also be acquired for potential casualties such as a customer slipping on the floor d Separate recordkeeping from custody of assets The employee who is responsible for food preparation and inventory should not be in control of the recordkeeping for the inventory Similar separation should exist for all important assets e Divide responsibility for related transactions The employee responsible for ordering inventory should be separate from the employee controlling inventory who should also be separate from the employee who pays for inventory f Apply technological controls The owner should invest in technological controls such as cash registers, time clocks, security cameras, and other devices to reduce the risk of fraud or theft g Perform regular and independent reviews The owner should implement regular reviews of all operating and control procedures As Graves‘ business grows, controls will become more important He will have more employees and will have to delegate more responsibilities Strong controls will be important to make sure that his business is not a victim of fraud or employee errors ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 383 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Hitting the Road — BTN 6-9 No formal solution exists for this activity It is usually interesting for the class to exchange their discoveries via class discussion This is particularly the case with respect to popular college service/product centers Common controls found in college units include: Door locks and roll down screens for after-hours lock-up Electronic detection devices stationed at entrances or anti-theft devices on merchandise that must be removed by a cashier Security cameras Security guards Cash registers Bar coding on products and assets A security safe on the premises Global Decision — BTN 6-10 (₤ millions) Current year balance Cash as % of: Prior year Cash as % balance of: Cash ₤ 293.3 — ₤ 152.0 — Current assets 2,303.9 12.7% 1,090.2 13.9% Current liabilities 1,565.8 18.7 1,679.0 9.1 Stockholders‘ equity 1,467.7 20.0 1,376.5 11.0 Total assets 3,873.8 7.6 4,158.0 3.7 Analysis comment: Cash has increased as a percent of the various bases over this two-year period, except for cash as a percent of current assets Dixons‘ liquidity position has improved ©McGraw-Hill Companies, 2008 384 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Global Decision (Concluded) Cash, beginning-year (₤ millions) ₤ 152.0 Cash, year-end (₤ millions) ₤ 293.3 Percent change* 93% increase *[(₤293.3 – 152.0) / ₤152.0] Days' Sales Uncollected Formula (₤ millions) Days‘ sales uncollected = Accounts receivable Net sales x 365 Current Year: ₤427.2 ₤6,458.0 x 365 = 24.1 days Prior year: ₤1,018.8 ₤5,719.8 x 365 = 65.0 days The number of days of uncollected sales in accounts receivable has significantly decreased from the prior year to the current year Dixons is collecting its receivables much more efficiently this year than last year ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 385 ... back by the employee should be the same as the items listed on the signed sales receipts ©McGraw-Hill Companies, 2008 354 Financial Accounting, 4th Edition To download more slides, ebook, solutions... cleared by the bank; erroneously not recorded by the company recordkeeper x Principal and interest on a note receivable to this company is collected by the bank but not yet recorded by the company... would be overstated by $211.80 ($147.36 + $23.50 + $34.75 + $6.19) Also, the petty cash asset and total assets would be overstated by $211.80 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter