Part 1 book “corporate financial accounting” has contents: introduction to accounting and business, analyzing transactions, the adjusting process, completing the accounting cycle, accounting for merchandising businesses, inventories, sarbanes-oxley, internal control, and cash.
This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it WARREN REEVE DUCHAC Corporate Financial Accounting 12e Carl S Warren Professor Emeritus of Accounting University of Georgia, Athens James M Reeve Professor Emeritus of Accounting University of Tennessee, Knoxville Jonathan E Duchac Professor of Accounting Wake Forest University Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Corporate Financial Accounting, 12e Carl S Warren James M Reeve Jonathan E Duchac Senior Vice President, LRS/Acquisitions & Solutions Planning: Jack W Calhoun Editorial Director, Business & Economics: Erin Joyner © 2014, 2012 South-Western, Cengage Learning ALL RIGHTS RESERVED No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means— graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution, information storage and retrieval systems, or in any other manner, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher Editor-in-Chief: Rob Dewey Sr Acquisitions Editor: Matt Filimonov Supervising Developmental Editor: Aaron Arnsparger Sr Developmental Editor: Laura Bofinger Ansara Editorial Assistant: Ann Loch Marketing Manager: Natalie Livingston Sr Marketing Communications Manager: Sarah Greber Sr Content Project Manager: Cliff Kallemeyn For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, 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including Singapore, the United Kingdom, Australia, Mexico, Brazil, and Japan Locate your local office at: www.cengage.com/global Cengage Learning products are represented in Canada by Nelson Education, Ltd For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.cengagebrain.com Printed in USA 17 16 15 14 13 12 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it The Author Team Terry R Spray InHisImage Studios Carl S Warren Dr Carl S Warren is Professor Emeritus of Accounting at the University of Georgia, Athens Dr Warren has taught classes at the University of Georgia, University of Iowa, Michigan State University, and University of Chicago Professor Warren focused his teaching efforts on principles of accounting and auditing He received his Ph.D from Michigan State University and his B.B.A and M.A from the University of Iowa During his career, Dr Warren published numerous articles in professional journals, including The Accounting Review, Journal of Accounting Research, Journal of Accountancy, The CPA Journal, and Auditing: A Journal of Practice & Theory Dr Warren has served on numerous committees of the American Accounting Association, the American Institute of Certified Public Accountants, and the Institute of Internal Auditors He has also consulted with numerous companies and public accounting firms Professor Warren is an avid handball player and has played in the World Handball Championships in Portland, Oregon, and Dublin, Ireland He enjoys backpacking and recently took an eleven-day, ten-night trip in the Thorofare area of Yellowstone National Park He has rafted the Grand Canyon and backpacked rim-to-rim Professor Warren also enjoys fly fishing, skiing, golfing, and motorcycling Charles J Garvey III / Garvey Photography James M Reeve Dr James M Reeve is Professor Emeritus of Accounting and Information Management at the University of Tennessee Professor Reeve taught on the accounting faculty for 25 years, after graduating with his Ph.D from Oklahoma State University His teaching efforts focused on undergraduate accounting principles and graduate education in the Master of Accountancy and Senior Executive MBA programs Beyond this, Professor Reeve is also very active in the Supply Chain Certification program, which is a major executive education and research effort of the College His research interests are varied and include work in managerial accounting, supply chain management, lean manufacturing, and information management He has published over 40 articles in academic and professional journals, including the Journal of Cost Management, Journal of Management Accounting Research, Accounting Review, Management Accounting Quarterly, Supply Chain Management Review, and Accounting Horizons He has consulted or provided training around the world for a wide variety of organizations, including Boeing, Procter & Gamble, Norfolk Southern, Hershey Foods, Coca-Cola, and Sony When not writing books, Professor Reeve plays golf and is involved in faith-based activities Jonathan Duchac © Ken Bennett Dr Jonathan Duchac is the Merrill Lynch and Co Professor of Accounting and Director of International Programs at Wake Forest University He holds a joint appointment at the Vienna University of Business and Economics in Vienna, Austria Dr Duchac currently teaches introductory and advanced courses in financial accounting and has received a number of awards during his career, including the Wake Forest University Outstanding Graduate Professor Award, the T.B Rose Award for Instructional Innovation, and the University of Georgia Outstanding Teaching Assistant Award In addition to his teaching responsibilities, Dr Duchac has served as Accounting Advisor to Merrill Lynch Equity Research, where he worked with research analysts in reviewing and evaluating the financial reporting practices of public companies He has testified before the U.S House of Representatives, the Financial Accounting Standards Board, and the Securities and Exchange Commission and has worked with a number of major public companies on financial reporting and accounting policy issues In addition to his professional interests, Dr Duchac serves on the Board of Directors of The Special Children’s School of Winston-Salem, a private, nonprofit developmental day school serving children with special needs Dr Duchac is an avid long-distance runner, mountain biker, and snow skier His recent events include the Grandfather Mountain Marathon, the Black Mountain Marathon, the Shut-In Ridge Trail run, and NO MAAM (Nocturnal Overnight Mountain Bike Assault on Mount Mitchell) iii Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it A History of Success Leading the Way by Activating Learning Generations of business students have learned accounting from the Warren, Reeve, and Duchac textbook This tradition of success goes back twenty-five editions Corporate Financial Accounting is successful because it continues to innovate and respond to changing student learning styles while introducing students to accounting through a variety of learning models and multimedia This tradition of innovation continues today Countless conversations with accounting instructors and the authors’ own experiences in the classroom have revealed how much the teaching and learning environment has changed Today’s internet generation has grown up on the computer The online and digital universe is both a natural learning environment for students and a learning medium they expect beyond the textbook In response to changes in student learning, the authors have ensured their text is an integrated print/digital learning experience for students In crafting the philosophy for this edition, the authors extended the time-tested integrated learning experience of their text to the technology in interactive ways For this 12th edition, new online Activation Exercises were created by the authors These foundational learning activities are the perfect introduction to the major concepts in each chapter By using the online environment to demonstrate concepts through activities, the authors have gone beyond what is possible in a printed text Students who complete these activities will come to class with a deeper understanding of key terminology, economic events, the accounting system, and the impact on the financial statements With a better foundational knowledge of accounting concepts, class sessions can be utilized to help students delve even further in their understanding These activities are a result of much collaboration with many accounting instructors over the past two years They reflect the suggestions and feedback we receive from instructors and students on an ongoing basis We are very happy with the results and think you will be pleased with the new activities as well The original author of Accounting (the two-semester version of this book), James McKinsey, could not have imagined the success and influence this text has enjoyed over the past 25 editions—or that his original vision would lead the market into the online world through subsequent authors’ expertise As the current authors, we appreciate the responsibility of protecting and enhancing this vision, while continuing to refine it to meet the changing needs of students and instructors Always in touch with a tradition of excellence, but never satisfied with yesterday’s success, this edition enthusiastically embraces a changing environment and continues to proudly lead the way in activating student learning and success We sincerely thank our many colleagues who have helped to make it happen “The teaching of accounting is no longer designed to train professional accountants only With the growing complexity of business and the constantly increasing difficulty of the problems of management, it has become essential that everyone who aspires to a position of responsibility should have a knowledge of the fundamental principles of accounting.” —James O McKinsey, Author, first edition, 1929 iv Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Preface New to the 12th Edition NEW Online Homework Solutions and Student Study Tools Given the prevalence and expansion of student learning through the use of online tools, the Warren, Reeve, and Duchac team has dedicated significant focus to creating new and valuable homework and teaching solutions for the 12th edition Designed to work with the typical instructor’s workflow in mind, the following online homework solutions offer a number of new and innovative choices for both instructors and students using Cengage Learning’s technology platforms: Animated Activities, Activation Exercises, Blueprint Problems, and Blueprint Connections Animated Activities Many instructors struggle to expose students to concepts before class begins Students who come to class more prepared are more likely to succeed, and Animated Activities are the perfect pre-lecture assignment! Animated Activities use illustrations to visually explain and guide students through selected core topics in introductory financial and managerial accounting Each activity uses a realistic company example to illustrate how the concepts relate to the everyday activities of a business These activities offer excellent resources for students prior to coming to lecture and will especially appeal to visual learners Accounting concepts are brought to life through the use of engaging visuals! Topics covered include Introduction to the Financial Statements, Transaction Analysis, Adjusting Entries, Receivables, Bank Reconciliations, Inventory, Depreciation, Bonds, Stockholders’ Equity, Cost of Goods Sold Model, and more Coverage and terminology is consistent with the textbook presentation Animated Activities are in CengageNOW as assignable homework items and as assets that populate the Study Tools/Personalized Study Plan The assignable activities include multiple-choice questions that quiz students on the larger concepts addressed in the animation v Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Preface New to the 12th Edition NEW Activation Exercises For most students, a Principles of Accounting course is their first exposure to both business transactions and the accounting system While these concepts are already difficult to master individually, their combination and interdependency in the introductory accounting course causes students to struggle Students often resort to memorization as a way to pass the course, but such surface learning does little to develop the critical thinking skills and deep understanding that are necessary for success in future business courses To overcome these challenges, the authors created the Activation Exercises to providing a learning system that focuses on developing a better understanding of (1) key terms and definitions, (2) the economics of business transactions, (3) how these transactions are recorded in the accounting system, and where relevant, (4) how these transactions are ultimately reflected in the financial statements The Activation Exercise structure builds the critical thinking skills that are necessary for students to succeed in both introductory accounting and future accounting courses Reviewers have enthusiastically praised the authors’ new online activities and indicated that they would be both ideal pre-class activities and after-class assignments The Activation Exercises are applied to the following financial chapters in this text and available within CengageNOW: Chapters 1–4, 5, 6, and 8–12 Blueprint Problems Blueprint Problems provide an opportunity to teach more than an opportunity to assess the student’s knowledge Blueprint Problems cover the primary learning objectives and help students understand the fundamental accounting concepts and their associated building blocks, and not just memorize the formulas or journal entries vi Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it required for a single concept This means that a Blueprint Problem can include basic concepts from previous chapters, such as account types, the impact on the accounting equation, and other fundamental aspects of the financial statements Where applicable, selected Blueprint Problems include dynamic visual elements that help students with difficult concepts Blueprint Problems cover most major topics and concepts in financial and managerial accounting and include rich feedback to help students when checking their work In addition, these problems provide detailed explanations to reinforce the correct solutions, providing students with an excellent learning resource Coverage and terminology used is consistent with the textbook examples and homework problems Blueprint Problems are available in CengageNOW and Aplia Blueprint Connections Blueprint Connections are shorter extensions of the Blueprint Problems, created based on market demand for briefer but more focused homework assignments that build upon concepts covered and introduced within the Blueprint Problems Blueprint Connections extend beyond the foundations covered in the Blueprint Problems In this example, students are asked to respond to different scenarios related to the disposal of a fixed asset vii Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it New to the 12th Edition NEW Blueprint Connections offer a natural sequence immediately following the completion of a corresponding Blueprint Problem, or completed independently Blueprint Connections share a similar structure and level of feedback and explanation with Blueprint Problems Coverage and terminology used is consistent with the textbook examples and homework problems Blueprint Connections are available in CengageNOW Textbook Changes in the 12th Edition Even with the shift of student learning online, we recognize that textbooks continue to play an invaluable role in the teaching and learning environments Continuing our focus from previous editions, we collaborated with accounting instructors in an effort to improve the textbook presentation and make sure the printed textbook also meets students’ changing needs Our research revealed to us the need to remain current in the areas of emerging topics/trends and to continue to look for ways to make the book more accessible to students The results of this collaboration with hundreds of accounting instructors are reflected in the following significant improvements made to the 12th edition As with every new edition, the authors have ensured that new real-world companies have been added to the content, existing real world data has been updated, and names and values of end-of-chapter material have been changed New highlighted chapter opener companies include Twitter (Chapter 1); Apple (Chapter 2); Google, along with updated bylaws and an activity using Google (Chapter 11); and Dick’s Sporting Goods (Chapter 12) “Accounting for Merchandising Businesses” (Chapter 5) was restructured from the prior edition The discussion of financial statements, including the multiple-step income statement, has been moved to the end of the chapter The chapter now begins with a brief description of the nature of merchandising operations, followed by the accounting for purchase and sales transactions The perpetual inventory system is used throughout the chapter to illustrate merchandise transactions The periodic inventory system is discussed in the end-of-chapter appendix The homework has been designed so that the instructor can assign the perpetual, periodic, or both systems “Inventories” (Chapter 6) has been revised to include coverage of the weighted average inventory cost flow method The weighted average cost method is now described and illustrated for the perpetual and periodic inventory systems In doing so, the chapter illustrations were revised and amounts changed to facilitate comparisons between the perpetual and periodic systems, as well as to avoid rounding issues New homework exercises and problems were added so that instructors can cover the first-in, first-out (FIFO), last-in, first-out (LIFO), and weighted average cost methods using either perpetual or periodic inventory systems The weighted average cost method for the perpetual inventory system was added because of the increased use of accounting software packages that use it with point-of-sale systems In addition, many instructors suggested increasing coverage of the weighted average cost method Working Paper problems (for series A & B) remaining from prior editions in Chapters and have been moved to the product companion site viii Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 346 Chapter Sarbanes-Oxley, Internal Control, and Cash Exercises EX 7-1 Sarbanes-Oxley internal control report OBJ Using Wikipedia (www.wikipedia.com), look up the entry for Sarbanes-Oxley Act Look over the table of contents and find the section that describes Section 404 What does Section 404 require of management’s internal control report? EX 7-2 Internal controls OBJ 2, Madonna Epstein has recently been hired as the manager of Beans Coffee Shop Beans Coffee Shop is a national chain of franchised coffee shops During her first month as store manager, Madonna encountered the following internal control situations: a Beans Coffee Shop has one cash register Prior to Madonna’s joining the coffee shop, each employee working on a shift would take a customer order, accept payment, and then prepare the order Madonna made one employee on each shift responsible for taking orders and accepting the customer’s payment Other employees prepare the orders b Since only one employee uses the cash register, that employee is responsible for counting the cash at the end of the shift and verifying that the cash in the drawer matches the amount of cash sales recorded by the cash register Madonna expects each cashier to balance the drawer to the penny every time—no exceptions c Madonna caught an employee putting a case of 500 single-serving tea bags in her car Not wanting to create a scene, Madonna smiled and said, “I don’t think you’re putting those tea bags on the right shelf Don’t they belong inside the coffee shop?” The employee returned the tea bags to the stockroom State whether you agree or disagree with Madonna’s method of handling each situation and explain your answer EX 7-3 Internal controls OBJ 2, Ramona’s Clothing is a retail store specializing in women’s clothing The store has established a liberal return policy for the holiday season in order to encourage gift purchases Any item purchased during November and December may be returned through January 31, with a receipt, for cash or exchange If the customer does not have a receipt, cash will still be refunded for any item under $75 If the item is more than $75, a check is mailed to the customer Whenever an item is returned, a store clerk completes a return slip, which the customer signs The return slip is placed in a special box The store manager visits the return counter approximately once every two hours to authorize the return slips Clerks are instructed to place the returned merchandise on the proper rack on the selling floor as soon as possible This year, returns at Ramona’s Clothing have reached an all-time high There are a large number of returns under $75 without receipts How can sales clerks employed at Ramona’s Clothing use the store’s return a policy to steal money from the cash register? What internal control weaknesses you see in the return policy that make b cash thefts easier? Would issuing a store credit in place of a cash refund for all merchandise c returned without a receipt reduce the possibility of theft? List some advantages and disadvantages of issuing a store credit in place of a cash refund Assume that Ramona’s Clothing is committed to the current policy of issuing d cash refunds without a receipt What changes could be made in the store’s procedures regarding customer refunds in order to improve internal control? OBJ 2, EX 7-4 Internal controls for bank lending Pacific Bank provides loans to businesses in the community through its Commercial Lending Department Small loans (less than $100,000) may be approved by an individual loan officer, while larger loans (greater than $100,000) must be approved by a board of loan officers Once a loan is approved, the funds are made available to the loan applicant under agreed-upon terms Pacific Bank has instituted a policy whereby its president has the individual authority to approve loans up to $5,000,000 The president believes that Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Chapter Sarbanes-Oxley, Internal Control, and Cash 347 this policy will allow flexibility to approve loans to valued clients much quicker than under the previous policy As an internal auditor of Pacific Bank, how would you respond to this change in policy? EX 7-5 Internal controls OBJ 2, One of the largest losses in history from unauthorized securities trading involved a securities trader for the French bank, Societe Generale The trader was able to circumvent internal controls and create over $7 billion in trading losses in six months The trader apparently escaped detection by using knowledge of the bank’s internal control systems learned from a previous back-office monitoring job Much of this monitoring involved the use of software to monitor trades In addition, traders were usually kept to tight trading limits Apparently, these controls failed in this case What general weaknesses in Societe Generale’s internal controls contributed to the occurrence and size of the losses? EX 7-6 Internal controls OBJ 2, An employee of JHT Holdings, Inc., a trucking company, was responsible for resolving roadway accident claims under $25,000 The employee created fake accident claims and wrote settlement checks of between $5,000 and $25,000 to friends or acquaintances acting as phony “victims.” One friend recruited subordinates at his place of work to cash some of the checks Beyond this, the JHT employee also recruited lawyers, who he paid to represent both the trucking company and the fake victims in the bogus accident settlements When the lawyers cashed the checks, they allegedly split the money with the corrupt JHT employee This fraud went undetected for two years Why would it take so long to discover such a fraud? EX 7-7 Internal controls OBJ 2, All-Around Sound Co discovered a fraud whereby one of its front office administrative employees used company funds to purchase goods, such as computers, digital cameras, and other electronic items for her own use The fraud was discovered when employees noticed an increase in delivery frequency from vendors and the use of unusual vendors After some investigation, it was discovered that the employee would alter the description or change the quantity on an invoice in order to explain the cost on the bill What general internal control weaknesses contributed to this fraud? EX 7-8 Financial statement fraud OBJ 2, A former chairman, CFO, and controller of Donnkenny, Inc., an apparel company that makes sportswear for Pierre Cardin and Victoria Jones, pleaded guilty to financial statement fraud These managers used false journal entries to record fictitious sales, hid inventory in public warehouses so that it could be recorded as “sold,” and required sales orders to be backdated so that the sale could be moved back to an earlier period The combined effect of these actions caused $25 million out of $40 million in quarterly sales to be phony Why might control procedures listed in this chapter be insufficient in stopa ping this type of fraud? How could this type of fraud be stopped? b EX 7-9 Internal control of cash receipts OBJ 2, The procedures used for over-the-counter receipts are as follows At the close of each day’s business, the sales clerks count the cash in their respective cash drawers, after which they determine the amount recorded by the cash register and prepare the memo cash form, noting any discrepancies An employee from the cashier’s office counts the cash, compares the total with the memo, and takes the cash to the cashier’s office Indicate the weak link in internal control a How can the weakness be corrected? b Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 348 Chapter Sarbanes-Oxley, Internal Control, and Cash EX 7-10 Internal control of cash receipts OBJ 2, Sergio Flores works at the drive-through window of Big & Bad Burgers Occasionally, when a drive-through customer orders, Sergio fills the order and pockets the customer’s money He does not ring up the order on the cash register Identify the internal control weaknesses that exist at Big & Bad Burgers, and discuss what can be done to prevent this theft OBJ 2, EX 7-11 Internal control of cash receipts The mailroom employees send all remittances and remittance advices to the cashier The cashier deposits the cash in the bank and forwards the remittance advices and duplicate deposit slips to the Accounting Department Indicate the weak link in internal control in the handling of cash receipts a How can the weakness be corrected? b OBJ 2, EX 7-12 Entry for cash sales; cash short The actual cash received from cash sales was $114,850, and the amount indicated by the cash register total was $114,975 Journalize the entry to record the cash receipts and cash sales OBJ 2, EX 7-13 Entry for cash sales; cash over The actual cash received from cash sales was $32,730, and the amount indicated by the cash register total was $32,690 Journalize the entry to record the cash receipts and cash sales OBJ 2, EX 7-14 Internal control of cash payments Abbe Co is a small merchandising company with a manual accounting system An investigation revealed that in spite of a sufficient bank balance, a significant amount of available cash discounts had been lost because of failure to make timely payments In addition, it was discovered that the invoices for several purchases had been paid twice Outline procedures for the payment of vendors’ invoices, so that the possibilities of losing available cash discounts and of paying an invoice a second time will be minimized OBJ 2, EX 7-15 Internal control of cash payments Paragon Tech Company, a communications equipment manufacturer, recently fell victim to a fraud scheme developed by one of its employees To understand the scheme, it is necessary to review Paragon Tech’s procedures for the purchase of services The purchasing agent is responsible for ordering services (such as repairs to a photocopy machine or office cleaning) after receiving a service requisition from an authorized manager However, since no tangible goods are delivered, a receiving report is not prepared When the Accounting Department receives an invoice billing Paragon Tech for a service call, the accounts payable clerk calls the manager who requested the service in order to verify that it was performed The fraud scheme involves Mae Jansma, the manager of plant and facilities Mae arranged for her uncle’s company, Radiate Systems, to be placed on Paragon Tech’s approved vendor list Mae did not disclose the family relationship On several occasions, Mae would submit a requisition for services to be provided by Radiate Systems However, the service requested was really not needed, and it was never performed Radiate Systems would bill Paragon Tech for the service and then split the cash payment with Mae Explain what changes should be made to Paragon Tech’s procedures for ordering and paying for services in order to prevent such occurrences in the future Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Chapter Sarbanes-Oxley, Internal Control, and Cash 349 EX 7-16 Bank reconciliation OBJ Identify each of the following reconciling items as: (a) an addition to the cash balance according to the bank statement, (b) a deduction from the cash balance according to the bank statement, (c) an addition to the cash balance according to the company’s records, or (d) a deduction from the cash balance according to the company’s records (None of the transactions reported by bank debit and credit memos have been recorded by the company.) Bank service charges, $30 Check of a customer returned by bank to company because of insufficient funds, $1,750 Check for $390 incorrectly recorded by the company as $930 Check for $50 incorrectly charged by bank as $500 Deposit in transit, $9,700 Outstanding checks, $33,110 Note collected by bank, $24,600 OBJ EX 7-17 Entries based on bank reconciliation Which of the reconciling items listed in Exercise 7-16 require an entry in the company’s accounts? Adjusted balance: $31,670 OBJ EX 7-18 Bank reconciliation The following data were accumulated for use in reconciling the bank account of Allenby Co for August: Cash balance according to the company’s records at August 31, $31,080 Cash balance according to the bank statement at August 31, $38,280 Checks outstanding, $12,460 Deposit in transit, not recorded by bank, $5,850 A check for $180 in payment of an account was erroneously recorded in the check register as $810 Bank debit memo for service charges, $40 a. Prepare a bank reconciliation, using the format shown in Exhibit b. If the balance sheet were prepared for Allenby Co on August 31, what amount should be reported for cash? c. Must a bank reconciliation always balance (reconcile)? OBJ EX 7-19 Entries for bank reconciliation Using the data presented in Exercise 7-18, journalize the entry or entries that should be made by the company OBJ EX 7-20 Entries for note collected by bank Accompanying a bank statement for Borsa Company is a credit memo for $18,200, representing the principal ($17,500) and interest ($700) on a note that had been collected by the bank The company had been notified by the bank at the time of the collection, but had made no entries Journalize the entry that should be made by the company to bring the accounting records up to date Adjusted balance: $23,915 OBJ EX 7-21 Bank reconciliation An accounting clerk for Chesner Co prepared the following bank reconciliation: (Continued ) Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 350 Chapter Sarbanes-Oxley, Internal Control, and Cash Chesner Co Bank Reconciliation July 31, 2014 Cash balance according to company’s records Add: Outstanding checks Error by Chesner Co in recording Check No 1056 as $950 instead of $590 Note for $12,000 collected by bank, including interest Deduct: Deposit in transit on July 31 Bank service charges Cash balance according to bank statement $11,100 $ 3,585 360 12,480 $ 7,200 25 16,425 $27,525 7,225 $20,300 a From the data in the above bank reconciliation, prepare a new bank reconciliation for Chesner Co., using the format shown in the illustrative problem b If a balance sheet were prepared for Chesner Co on July 31, 2014, what amount should be reported for cash? Corrected adjusted balance: $19,780 EX 7-22 Bank reconciliation Identify the errors in the following bank reconciliation: OBJ Poway Co Bank Reconciliation For the Month Ended June 30, 2014 Cash balance according to bank statement Add outstanding checks: No 1067 1106 1110 1113 Deduct deposit of June 30, not recorded by bank Adjusted balance Cash balance according to company’s records Add: Proceeds of note collected by bank: Principal Interest Service charges Deduct: Check returned because of insufficient funds Error in recording June 17 deposit of $7,150 as $1,750 Adjusted balance $16,185 $ 575 470 1,050 910 $6,000 300 $6,300 15 $ 890 5,400 3,005 $19,190 6,600 $12,590 $ 8,985 6,315 $15,300 6,290 $ 9,010 EX 7-23 Using bank reconciliation to determine cash receipts stolen OBJ 2, 3, Alaska Impressions Co records all cash receipts on the basis of its cash register tapes Alaska Impressions Co discovered during October 2014 that one of its sales clerks had stolen an undetermined amount of cash receipts by taking the daily deposits to the bank The following data have been gathered for October: Cash in bank according to the general ledger Cash according to the October 31, 2014, bank statement Outstanding checks as of October 31, 2014 Bank service charge for October Note receivable, including interest collected by bank in October $11,680 13,275 3,670 40 2,100 No deposits were in transit on October 31 a Determine the amount of cash receipts stolen by the sales clerk What accounting controls would have prevented or detected this theft? b Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 351 Chapter Sarbanes-Oxley, Internal Control, and Cash EX 7-24 Petty cash fund entries OBJ Journalize the entries to record the following: a Check No 33694 is issued to establish a petty cash fund of $900 b The amount of cash in the petty cash fund is now $70 Check No 33749 is issued to replenish the fund, based on the following summary of petty cash receipts: office supplies, $525; miscellaneous selling expense, $190; miscellaneous administrative expense, $85 (Since the amount of the check to replenish the fund plus the balance in the fund not equal $900, record the discrepancy in the cash short and over account.) OBJ EX 7-25 Variation in cash flows Mattel, Inc., designs, manufactures, and markets toy products worldwide Mattel’s toys include Barbie™ fashion dolls and accessories, Hot Wheels™, and Fisher-Price brands For a recent year, Mattel reported the following net cash flows from operating activities (in thousands): First quarter ending March 31 Second quarter ending June 30 Third quarter ending September 30 Fourth quarter ending December 31 $ (41,844) (184,934) (55,548) 955,600 Explain why Mattel reported negative net cash flows from operating activities during the first three quarters and a large positive cash flow for the fourth quarter, with overall net positive cash flow for the year OBJ EX 7-26 Cash to monthly cash expenses ratio During 2014, El Dorado Inc has monthly cash expenses of $168,500 On December 31, 2014, the cash balance is $1,415,400 a Compute the ratio of cash to monthly cash expenses Based on (a), what are the implications for El Dorado Inc.? b OBJ EX 7-27 Cash to monthly cash expenses ratio Capstone Turbine Corporation produces and sells turbine generators for such applications as charging electric, hybrid vehicles Capstone Turbine reported the following financial data for a recent year (in thousands): Net cash flows from operating activities Cash and cash equivalents $(21,899) 33,456 a Determine the monthly cash expenses Round to one decimal place b Determine the ratio of cash to monthly cash expenses Round to one decimal place Based on your analysis, you believe that Capstone Turbine will remain c in business? EX 7-28 Cash to monthly cash expenses ratio OBJ Allos Therapeutics, Inc., is a biopharmaceutical company that develops drugs for the treat- ment of cancer Allos Therapeutics reported the following financial data (in thousands) for three recent years: For Years Ended December 31 Cash and cash equivalents Net cash flows from operations Year Year Year $ 48,402 (63,656) $141,423 (62,199) $ 30,696 (42,850) (Continued ) Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 352 Chapter Sarbanes-Oxley, Internal Control, and Cash a Determine the monthly cash expenses for Year 3, Year 2, and Year Round to one decimal place b Determine the ratio of cash to monthly cash expenses for Year 3, Year 2, and Year as of December 31 Round to one decimal place Based on (a) and (b), comment on Allos Therapeutics’ ratio of cash to monthly c operating expenses for Year 3, Year 2, and Year Problems Series A PR 7-1A Evaluating internal control of cash OBJ 2, The following procedures were recently installed by Raspberry Creek Company: a After necessary approvals have been obtained for the payment of a voucher, the treasurer signs and mails the check The treasurer then stamps the voucher and supporting documentation as paid and returns the voucher and supporting documentation to the accounts payable clerk for filing b The accounts payable clerk prepares a voucher for each disbursement The voucher along with the supporting documentation is forwarded to the treasurer’s office for approval c Along with petty cash expense receipts for postage, office supplies, etc., several postdated employee checks are in the petty cash fund d At the end of the day, cash register clerks are required to use their own funds to make up any cash shortages in their registers e At the end of each day, all cash receipts are placed in the bank’s night depository f At the end of each day, an accounting clerk compares the duplicate copy of the daily cash deposit slip with the deposit receipt obtained from the bank g All mail is opened by the mail clerk, who forwards all cash remittances to the cashier The cashier prepares a listing of the cash receipts and forwards a copy of the list to the accounts receivable clerk for recording in the accounts h The bank reconciliation is prepared by the cashier, who works under the supervision of the treasurer Instructions Indicate whether each of the procedures of internal control over cash represents (1) a strength or (2) a weakness For each weakness, indicate why it exists OBJ 3, PR 7-2A Transactions for petty cash, cash short and over Picasso Restoration Company completed the following selected transactions during May 2014: May Established a petty cash fund of $800 10 The cash sales for the day, according to the cash register records, totaled $3,345 The actual cash received from cash sales was $3,358 31 Petty cash on hand was $275 Replenished the petty cash fund for the following disbursements, each evidenced by a petty cash receipt: May Store supplies, $290 Express charges on merchandise sold, $70 (Delivery Expense) Office supplies, $12 13 Office supplies, $25 19 Postage stamps, $18 (Office Supplies) 21 Repair to office file cabinet lock, $20 (Miscellaneous Administrative Expense) Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Chapter Sarbanes-Oxley, Internal Control, and Cash 353 May 22 Postage due on special delivery letter, $16 (Miscellaneous Administrative Expense) 24 Express charges on merchandise sold, $40 (Delivery Expense) 30 Office supplies, $10 May 31 The cash sales for the day, according to the cash register records, totaled $6,155 The actual cash received from cash sales was $6,125 31 Decreased the petty cash fund by $50 Instructions Journalize the transactions Adjusted balance: $22,485 PR 7-3A Bank reconciliation and entries OBJ The cash account for Remedy Medical Co at April 30, 2014, indicated a balance of $18,885 The bank statement indicated a balance of $23,775 on April 30, 2014 Comparing the bank statement and the accompanying canceled checks and memos with the records revealed the following reconciling items: a Checks outstanding totaled $7,840 b A deposit of $3,580, representing receipts of April 30, had been made too late to appear on the bank statement c The bank collected $3,780 on a note left for collection The face of note was $3,600 d A check for $770 returned with the statement had been incorrectly recorded by Remedy Medical Co as $700 The check was for the payment of an obligation to Copelin Co for a purchase on account e A check drawn for $330 had been erroneously charged by the bank as $3,300 f Bank service charges for April amounted to $110 Instructions Prepare a bank reconciliation Journalize the necessary entries The accounts have not been closed If a balance sheet were prepared for Remedy Medical Co on April 30, 2014, what amount should be reported as cash? Adjusted balance: $8,260 OBJ PR 7-4A Bank reconciliation and entries The cash account for Fit Bike Co at August 1, 2014, indicated a balance of $12,190 During August, the total cash deposited was $28,100 and checks written totaled $33,010 The bank statement indicated a balance of $12,550 on August 31 Comparing the bank statement, the canceled checks, and the accompanying memos with the records revealed the following reconciling items: a Checks outstanding totaled $7,440 b A deposit of $2,880, representing receipts of August 31, had been made too late to appear on the bank statement c The bank had collected for Fit Bike Co $2,080 on a note left for collection The face of the note was $2,000 d A check for $580 returned with the statement had been incorrectly charged by the bank as $850 e A check for $640 returned with the statement had been recorded by Fit Bike Co as $460 The check was for the payment of an obligation to Brown Co on account f Bank service charges for August amounted to $20 g A check for $900 from Murdock Co was returned by the bank due to insufficient funds Instructions Prepare a bank reconciliation as of August 31 Journalize the necessary entries The accounts have not been closed If a balance sheet were prepared for Fit Bike Co on August 31, 2014, what amount should be reported as cash? Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 354 Chapter Sarbanes-Oxley, Internal Control, and Cash Adjusted balance: $13,216 PR 7-5A Bank reconciliation and entries OBJ Beeler Furniture Company deposits all cash receipts each Wednesday and Friday in a night depository, after banking hours The data required to reconcile the bank statement as of June 30 have been taken from various documents and records and are reproduced as follows The sources of the data are printed in capital letters All checks were written for payments on account CASH ACCOUNT: Balance as of June CASH RECEIPTS FOR MONTH OF JUNE DUPLICATE DEPOSIT TICKETS: Date and amount of each deposit in June: Date June $9,317.40 $9,223.76 Amount Date Amount Date Amount $1,080.50 854.17 840.50 June 10 15 17 $ 996.61 882.95 1,606.74 June 22 24 30 $ 897.34 947.21 1,117.74 CHECKS WRITTEN: Number and amount of each check issued in June: Check No Amount 740 $237.50 741 495.15 742 501.90 743 761.30 744 506.88 745 117.25 746 298.66 Total amount of checks issued in June Check No Amount Check No Amount 747 748 749 750 751 752 753 Void $450.90 640.13 276.77 299.37 537.01 380.95 754 755 756 757 758 759 760 $ 449.75 272.75 113.95 407.95 259.60 901.50 486.39 $8,395.66 BANK RECONCILIATION FOR PRECEDING MONTH: Beeler Furniture Company Bank Reconciliation May 31, 20— Cash balance according to bank statement Add deposit for May 31, not recorded by bank Deduct outstanding checks: No 731 736 738 739 Adjusted balance Cash balance according to company’s records Deduct service charges Adjusted balance $ 9,447.20 690.25 $10,137.45 $162.15 345.95 251.40 60.55 820.05 $ 9,317.40 $ 9,352.50 35.10 $ 9,317.40 Instructions Prepare a bank reconciliation as of June 30 If errors in recording deposits or checks are discovered, assume that the errors were made by the company Assume that all deposits are from cash sales All checks are written to satisfy accounts payable Journalize the necessary entries The accounts have not been closed What is the amount of Cash that should appear on the balance sheet as of June 30? Assume that a canceled check for $390 has been incorrectly recorded by the bank as $930 Briefly explain how the error would be included in a bank reconciliation and how it should be corrected Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 355 Chapter Sarbanes-Oxley, Internal Control, and Cash JUNE BANK STATEMENT: PAGE MEMBER FDIC AMERICAN NATIONAL BANK OF CHICAGO CHICAGO, IL 60603 ACCOUNT NUMBER FROM 6/01/20– (312)441-1239 TO 6/30/20– BALANCE 9,447.20 DEPOSITS 8,691.77 20 WITHDRAWALS BEELER FURNITURE COMPANY OTHER DEBITS AND CREDITS NEW BALANCE 7,599.26 3,085.00CR 13,624.71 © Cengage Learning 2014 * – – – CHECKS AND OTHER DEBITS – – – * – – DEPOSITS – – * – DATE – * – – BALANCE– – * No.731 162.15 No.736 345.95 690.25 6/01 9,629.35 No.739 60.55 No.740 237.50 1,080.50 6/02 10,411.80 10,268.92 No.741 495.15 No.742 501.90 854.17 6/04 No.743 671.30 No.744 506.88 840.50 6/09 9,931.24 No.745 117.25 No.746 298.66 MS 3,500.00 6/09 13,015.33 MS No.748 450.90 No.749 640.13 No.750 276.77 No.751 299.37 210.00 6/09 12,134.30 896.61 6/11 12,454.77 No.752 537.01 No.753 380.95 882.95 6/16 12,419.76 No.754 449.75 No.755 272.75 1,606.74 6/18 13,304.00 No.757 407.95 No.760 486.39 897.34 6/23 13,307.00 942.71 6/25 14,249.71 NSF 550.00 6/28 13,699.71 SC 6/30 13,624.71 75.00 EC –– ERROR CORRECTION OD –– OVERDRAFT MS –– MISCELLANEOUS PS –– PAYMENT STOPPED NSF –– NOT SUFFICIENT FUNDS *** SC –– SERVICE CHARGE *** *** THE RECONCILEMENT OF THIS STATEMENT WITH YOUR RECORDS IS ESSENTIAL ANY ERROR OR EXCEPTION SHOULD BE REPORTED IMMEDIATELY Problems Series B PR 7-1B Evaluating internal control of cash OBJ 2, The following procedures were recently installed by The China Shop: a All sales are rung up on the cash register, and a receipt is given to the customer All sales are recorded on a record locked inside the cash register b Each cashier is assigned a separate cash register drawer to which no other cashier has access c At the end of a shift, each cashier counts the cash in his or her cash register, unlocks the cash register record, and compares the amount of cash with the amount on the record to determine cash shortages and overages d Checks received through the mail are given daily to the accounts receivable clerk for recording collections on account and for depositing in the bank e Vouchers and all supporting documents are perforated with a PAID designation after being paid by the treasurer f Disbursements are made from the petty cash fund only after a petty cash receipt has been completed and signed by the payee g The bank reconciliation is prepared by the cashier Instructions Indicate whether each of the procedures of internal control over cash represents (1) a strength or (2) a weakness For each weakness, indicate why it exists Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 356 Chapter Sarbanes-Oxley, Internal Control, and Cash PR 7-2B Transactions for petty cash, cash short and over OBJ 3, Cedar Springs Company completed the following selected transactions during June 2014: June Established a petty cash fund of $1,000 12 The cash sales for the day, according to the cash register records, totaled $9,440 The actual cash received from cash sales was $9,506 30 Petty cash on hand was $46 Replenished the petty cash fund for the following disbursements, each evidenced by a petty cash receipt: June Store supplies, $375 10 Express charges on merchandise purchased, $105 (Merchandise Inventory) 14 Office supplies, $85 15 Office supplies, $90 18 Postage stamps, $33 (Office Supplies) 20 Repair to fax, $100 (Miscellaneous Administrative Expense) 21 Repair to office door lock, $25 (Miscellaneous Administrative Expense) 22 Postage due on special delivery letter, $9 (Miscellaneous Administrative Expense) 28 Express charges on merchandise purchased, $110 (Merchandise Inventory) 30 The cash sales for the day, according to the cash register records, totaled $13,390 The actual cash received from cash sales was $13,350 30 Increased the petty cash fund by $200 Instructions Journalize the transactions Adjusted balance: $24,305 PR 7-3B Bank reconciliation and entries OBJ The cash account for Stone Systems at July 31, 2014, indicated a balance of $17,750 The bank statement indicated a balance of $33,650 on July 31, 2014 Comparing the bank statement and the accompanying canceled checks and memos with the records reveals the following reconciling items: a Checks outstanding totaled $17,865 b A deposit of $9,150, representing receipts of July 31, had been made too late to appear on the bank statement c The bank had collected $6,095 on a note left for collection The face of the note was $5,750 d A check for $390 returned with the statement had been incorrectly recorded by Stone Systems as $930 The check was for the payment of an obligation to Holland Co for the purchase of office supplies on account e A check drawn for $1,810 had been incorrectly charged by the bank as $1,180 f Bank service charges for July amounted to $80 Instructions Prepare a bank reconciliation Journalize the necessary entries The accounts have not been closed If a balance sheet were prepared for Stone Systems on July 31, 2014, what amount should be reported as cash? Adjusted balance: $78,535 OBJ PR 7-4B Bank reconciliation and entries The cash account for Collegiate Sports Co on November 1, 2014, indicated a balance of $81,145 During November, the total cash deposited was $293,150, and checks written totaled $307,360 The bank statement indicated a balance of $112,675 on November 30, 2014 Comparing the bank statement, the canceled checks, and the accompanying memos with the records revealed the following reconciling items: a Checks outstanding totaled $41,840 b A deposit of $12,200, representing receipts of November 30, had been made too late to appear on the bank statement c A check for $7,250 had been incorrectly charged by the bank as $2,750 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 357 Chapter Sarbanes-Oxley, Internal Control, and Cash d A check for $760 returned with the statement had been recorded by Collegiate Sports Co as $7,600 The check was for the payment of an obligation to Ramirez Co on account e The bank had collected for Collegiate Sports Co $7,385 on a note left for collection The face of the note was $7,000 f Bank service charges for November amounted to $125 g A check for $2,500 from Hallen Academy was returned by the bank because of insufficient funds Instructions Prepare a bank reconciliation as of November 30 Journalize the necessary entries The accounts have not been closed If a balance sheet were prepared for Collegiate Sports Co on November 30, 2014, what amount should be reported as cash? Adjusted balance: $11,494 OBJ PR 7-5B Bank reconciliation and entries Sunshine Interiors deposits all cash receipts each Wednesday and Friday in a night depository, after banking hours The data required to reconcile the bank statement as of July 31 have been taken from various documents and records and are reproduced as follows The sources of the data are printed in capital letters All checks were written for payments on account BANK RECONCILIATION FOR PRECEDING MONTH (DATED JUNE 30): Cash balance according to bank statement Add deposit of June 30, not recorded by bank Deduct outstanding checks: No 580 No 602 No 612 No 613 Adjusted balance $ 9,422.80 780.80 $10,203.60 $310.10 85.50 92.50 137.50 Cash balance according to company’s records Deduct service charges Adjusted balance CASH ACCOUNT: Balance as of July 625.60 $ 9,578.00 $ 9,605.70 27.70 $ 9,578.00 $ 9,578.00 Cash Receipts for Month of July Duplicate Deposit Tickets: Date and amount of each deposit in July: 6,465.42 Date Amount Date Amount Date Amount July $569.50 701.80 819.24 July 12 16 19 $580.70 600.10 701.26 July 23 26 31 $ 713.45 601.50 1,177.87 CHECKS WRITTEN: Number and amount of each check issued in July: Check No Amount 614 $243.50 615 350.10 616 279.90 617 395.50 618 435.40 619 320.10 620 238.87 Total amount of checks issued in July Check No Amount Check No Amount 621 622 623 624 625 626 627 $309.50 Void Void 707.01 158.63 550.03 381.73 628 629 630 631 632 633 634 $ 837.70 329.90 882.80 1,081.56 325.40 310.08 241.71 $8,379.42 (Continued ) Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 358 Chapter Sarbanes-Oxley, Internal Control, and Cash JULY BANK STATEMENT: PAGE MEMBER FDIC AMERICAN NATIONAL BANK OF DETROIT DETROIT, MI 48201-2500 ACCOUNT NUMBER FROM (313)933-8547 7/01/20– TO BALANCE 9,422.80 DEPOSITS 6,086.35 20 WITHDRAWALS SUNSHINE INTERIORS 7/31/20– 7,656.74 OTHER DEBITS AND CREDITS 3,749.00CR NEW BALANCE 11,601.41 * – – – – – CHECKS AND OTHER DEBITS – – – – – * – DEPOSITS – * – DATE – * – BALANCE– * No.580 310.10 No.612 92.50 780.80 07/01 9,801.00 No.602 85.50 No.614 243.50 569.50 07/03 10,041.50 No.615 350.10 No.616 279.90 701.80 07/06 10,113.30 No.617 395.50 No.618 435.40 819.24 07/11 10,101.64 No.619 320.10 No.620 238.87 580.70 07/13 10,123.37 No.621 309.50 No.624 707.01 MS 4,000.00 07/14 13,106.86 No.625 158.63 No.626 550.03 MS 160.00 07/14 12,558.20 No.627 318.73 No.629 329.90 600.10 07/17 12,509.67 No.630 882.80 No.631 07/20 10,170.31 No.632 325.40 No.634 701.26 07/21 10,304.46 731.45 07/24 11,035.91 601.50 07/28 11,637.41 07/31 11,601.41 © Cengage Learning 2014 SC 1,081.56 NSF 375.00 241.71 36.00 EC –– ERROR CORRECTION OD –– OVERDRAFT MS –– MISCELLANEOUS PS –– PAYMENT STOPPED NSF –– NOT SUFFICIENT FUNDS *** SC –– SERVICE CHARGE *** *** THE RECONCILEMENT OF THIS STATEMENT WITH YOUR RECORDS IS ESSENTIAL ANY ERROR OR EXCEPTION SHOULD BE REPORTED IMMEDIATELY Instructions Prepare a bank reconciliation as of July 31 If errors in recording deposits or checks are discovered, assume that the errors were made by the company Assume that all deposits are from cash sales All checks are written to satisfy accounts payable Journalize the necessary entries The accounts have not been closed What is the amount of Cash that should appear on the balance sheet as of July 31? Assume that a canceled check for $180 has been incorrectly recorded by the bank as $1,800 Briefly explain how the error would be included in a bank reconciliation and how it should be corrected Cases & Projects CP 7-1 Ethics and professional conduct in business During the preparation of the bank reconciliation for Building Concepts Co., Joel Kimmel, the assistant controller, discovered that Lone Peak National Bank incorrectly recorded a $3,290 check written by Building Concepts Co as $329 Joel has decided not to notify the bank but wait for the bank to detect the error Joel plans to record the $2,961 error as Other Income if the bank fails to detect the error within the next three months Discuss whether Joel is behaving in a professional manner Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Chapter Sarbanes-Oxley, Internal Control, and Cash 359 CP 7-2 Internal controls The following is an excerpt from a conversation between two sales clerks, Jean Moen and Sara Cheney Jean and Sara are employed by Turpin Meadows Electronics, a locally owned and operated electronics retail store Jean: Did you hear the news? Sara: What news? Jean: Neal and Linda were both arrested this morning Sara: What? Arrested? You’re putting me on! Jean: No, really! The police arrested them first thing this morning Put them in handcuffs, read them their rights— the whole works It was unreal! Sara: What did they do? Jean: Well, apparently they were filling out merchandise refund forms for fictitious customers and then taking the cash Sara: I guess I never thought of that How did they catch them? Jean: The store manager noticed that returns were twice that of last year and seemed to be increasing When he confronted Neal, he became flustered and admitted to taking the cash, apparently over $9,000 in just three months They’re going over the last six months’ transactions to try to determine how much Linda stole She apparently started stealing first Suggest appropriate control procedures that would have prevented or detected the theft of cash CP 7-3 Internal controls The following is an excerpt from a conversation between the store manager of Wholesome Grocery Stores, Kara Dahl, and Lynn Shutes, president of Wholesome Grocery Stores Lynn: Kara, I’m concerned about this new scanning system Kara: What’s the problem? Lynn: Well, how we know the clerks are ringing up all the merchandise? Kara: That’s one of the strong points about the system The scanner automatically rings up each item, based on its bar code We update the prices daily, so we’re sure that the sale is rung up for the right price Lynn: That’s not my concern What keeps a clerk from pretending to scan items and then simply not charging his friends? If his friends were buying 10–15 items, it would be easy for the clerk to pass through several items with his finger over the bar code or just pass the merchandise through the scanner with the wrong side showing It would look normal for anyone observing In the old days, we at least could hear the cash register ringing up each sale Kara: I see your point Suggest ways that Wholesome Grocery Stores could prevent or detect the theft of merchandise as described CP 7-4 Ethics and professional conduct in business Doris Tidwell and Jo Yost are both cash register clerks for Fuller’s Organic Markets Tom Ward is the store manager for Fuller’s Organic Markets The following is an excerpt of a conversation between Doris and Jo: Doris: Jo, how long have you been working for Fuller’s Organic Markets? Jo: Almost five years this April You just started two weeks ago right? Doris: Yes Do you mind if I ask you a question? Jo: No, go ahead Doris: What I want to know is, have they always had this rule that if your cash register is short at the end of the day, you have to make up the shortage out of your own pocket? Jo: Yes, as long as I’ve been working here Doris: Well, it’s the pits Last week I had to pay in almost $40 Jo: It’s not that big a deal I just make sure that I’m not short at the end of the day Doris: How you that? Jo: I just shortchange a few customers early in the day There are a few jerks that deserve it anyway Most of the time, their attention is elsewhere and they don’t think to check their change Doris: What happens if you’re over at the end of the day? Jo: Tom lets me keep it as long as it doesn’t get to be too large I’ve not been short in over a year I usually clear about $20 to $30 extra per day Discuss this case from the viewpoint of proper controls and professional behavior Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 360 Chapter Sarbanes-Oxley, Internal Control, and Cash CP 7-5 Bank reconciliation and internal control The records of Parker Company indicate a July 31 cash balance of $10,400, which includes undeposited receipts for July 30 and 31 The cash balance on the bank statement as of July 31 is $10,575 This balance includes a note of $2,250 plus $150 interest collected by the bank but not recorded in the journal Checks outstanding on July 31 were as follows: No 2670, $1,050; No 3679, $675; No 3690, $1,650; No 5148, $225; No 5149, $750; and No 5151, $800 On July 25, the cashier resigned, effective at the end of the month Before leaving on July 31, the cashier prepared the following bank reconciliation: Cash balance per books, July 31 Add outstanding checks: No 5148 5149 5151 $10,400 $225 750 800 1,675 $12,075 1,500 $10,575 2,400 $ 8,175 Less undeposited receipts Cash balance per bank, July 31 Deduct unrecorded note with interest True cash, July 31 Calculator Tape of Outstanding Checks: 0* 225 750 800 1,675* Subsequently, the owner of Parker Company discovered that the cashier had stolen an unknown amount of undeposited receipts, leaving only $1,500 to be deposited on July 31 The owner, a close family friend, has asked your help in determining the amount that the former cashier has stolen Determine the amount the cashier stole from Parker Company Show your computations in good form How did the cashier attempt to conceal the theft? a. Identify two major weaknesses in internal controls, which allowed the cashier to steal the undeposited cash receipts b. Recommend improvements in internal controls, so that similar types of thefts of undeposited cash receipts can be prevented CP 7-6 Observe internal controls over cash Group Project Select a business in your community and observe its internal controls over cash receipts and cash payments The business could be a bank or a bookstore, restaurant, department store, or other retailer In groups of three or four, identify and discuss the similarities and differences in each business’s cash internal controls CP 7-7 Cash to monthly cash expenses ratio TearLab Corp is a health care company that specializes in developing diagnostic devices for eye disease TearLab reported the following data (in thousands) for three recent years: For Years Ended December 31 Cash and cash equivalents Net cash flows from operations Year Year Year $ 2,726 (4,540) $ 106 (4,098) $ 2,565 (9,435) Determine the monthly cash expenses for Year 3, Year 2, and Year Round to one decimal place Determine the ratio of cash to monthly cash expenses as of December 31, for Year 3, Year 2, and Year Round to one decimal place Based on (1) and (2), comment on TearLab’s ratio of cash to monthly operating expenses for Year 3, Year 2, and Year Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... Coca-Cola Company $72,9 21 = $38,599 = $ 41, 918 + $30,833 + $ 31, 003 $22,004 = $57,8 51 = $6,702 + $11 , 610 + $15 ,302 $ 31, 975 = $86 ,11 3 = $17 ,3 41 + $39,938 + $14 ,634 Dell, Inc eBay, Inc Google McDonald’s... Adjustment 10 5 Adjusting Entries 11 0 Prepaid Expenses 11 0 Integrity, Objectivity, and Ethics in Business: Free Issue 11 2 Unearned Revenues 11 3 Accrued Revenues 11 4 Accrued Expenses 11 5 Business... Ford Motor Company Warranties 11 7 Depreciation Expense 11 7 Summary of Adjustment Process 11 9 Business Connection: Microsoft Corporation 12 1 Adjusted Trial Balance 12 3 Financial Analysis and Interpretation: