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Chapter 8 - accounting Volume 1 Horngren Solutions

accounting Volume 1 Horngren Solutions

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Principles of Accounting I (ACCT 1110)

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looking for Horngren's Accounting Volume 1 11th Edition, P3-7B solutions

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Accounting Fundamental Accounting

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Chapter 8 Internal Control and Cash

Questions

1. Safeguarding assets and records is the most fundamental of internal control

features because the entity must safeguard its assets and records if it is to

survive. Providing accurate, reliable information, optimizing the use of

resources, and preventing and detecting error and fraud are important, but

they are not as critical as safeguarding assets.

2. Management (owners and managers) of a company bears primary

responsibility for the company’s financial statements as disclosed in the

annual report and for maintaining its system of internal control. Managers

review the internal control system for effectiveness, policies and guidelines,

and select and train qualified personnel. Internal control is a management

priority. The owners of the company set the goals. Management is

responsible for developing, implementing and ensuring compliance with the

internal control. Integral to the success of internal control systems is the

selection and training of qualified personnel.

3. Seven features of an effective system of internal control are (1) competent,

reliable and ethical personnel, (2) assigned responsibilities, (3) proper

authorization, (4) separation of duties, (5) internal and external audits,

(6) documents and records, and (7) electronic and computer controls, and

other controls.

4. Three key elements of separation of duties are (1) separation of operations

from accounting, (2) separation of the custody of assets from accounting, and

(3) separation of the authorization of transactions from the custody of related

assets.

5. An audit is an examination of an organization’s financial statements and the

accounting systems, controls, and records that produced them. Internal audits

are performed by employees to ensure controls are being followed. External

audits are performed by independent auditors hired by the organization to

determine if the financial statements are prepared in accordance with GAAP.

6. Business documents and records provide the details of business transactions.

Documents such as sales invoices, purchase orders and cheques should be

prenumbered. A gap in a numbered sequence draws attention to a possible

error or omission.

Evaluated receipts settlement (ERS) is a streamlined payment procedure that compresses the approval process into a single step: comparing the receiving report with the purchase order. This procedure saves the accounting department time as routine purchases can be processed electronically allowing time for more complex tasks.

8. The same employees should not write the computer programs for cash

payments, sign cheques, and mail the cheques to payees because they could

program the computer to write cheques to themselves. They could then sign

the cheques and mail them. Concentrating all these duties with one employee

makes it easy for that person to steal cash.

9. The bank account acts as a control device because banks have established

practices for safeguarding cash. Also, banks provide depositors with detailed

records of cash transactions. Banks use the signature card to verify

signatures on documents and thus protect the bank and the depositor against

forgery. The deposit slip serves as a proof of receipt for a deposit made in a

bank account. This document describes the details of the deposit. The bank

statement provides a record of each transaction that affected the account

during the period.

10. Internal control systems are not usually designed to be foolproof and perfect

because of cost constraints. Internal controls are designed to be effective and

consistent, not to guarantee foolproof, perfect performance. Two

fundamental constraints are red tape, which may strangle business

operations, and the cost of the system. The benefits of the system should

exceed its costs.

11. Internal controls can be circumvented by collusion between two or more

individuals intent on beating internal controls and defrauding the system.

12. b Outstanding cheque a Deposit in transit

d NSF cheque c Bank collection

d Bank service charge d EFT payment

d Cost of printed cheques d Customer’s cheque returned

c EFT receipt because of unauthorized

signature

a Bank error that decreased d Book error that increased

bank balance balance of Cash account

13. A bank reconciliation explains the reason for differences between the book

and bank balances of the depositor’s cash in the bank account at a certain

date. It ensures that all cash transactions have been accounted for and that the

bank and book records of cash are correct.

14. A cash register controls cash receipts. It is a security device because a tape is

locked inside or a link to a central computer records the amount of each

transaction entered through the machine. By making periodic comparisons of

cash on hand against the tape inside the machine or the data in the central

computer, management discourages theft.

Starters

(5 min.) S 8-

Safeguarding assets is most important because all organizations need assets to survive.

(5 min.) S 8-

The Sarbanes-Oxley Act of 2002 requires public companies in the U., major suppliers of U.

companies, Canadian subsidiaries of U. companies, and Canadian companies listed on

American stock exchanges to issue an internal control report, and the outside auditor must

evaluate the client’s internal controls.

(5-10 min.) S 8-

Separation of duties is essential for safeguarding assets. The person who has custody of an asset

should not also account for the asset. With both duties, the person can steal the asset and hide the

theft by making a false entry in the accounting records.

(5 min.) S 8-

Differences:

1. External auditors are entirely independent of the business. Internal auditors are employees of

the business.

2. External audits are designed to determine whether the company’s financial statements are

prepared in accordance with ASPE or IFRS.

Internal audits are designed to ensure that employees follow company policies and that

operations run efficiently.

Similarities:

1. Both types of auditors suggest improvements that help the business run more efficiently.

2. Both types of auditors determine whether the company is following legal requirements.

(5 min.) S 8-

1. A bank reconciliation is neither a journal, a ledger, an account, nor a financial statement.

Instead, it is an accountant’s tool, separate from the company’s books, that explains all

differences between the firm’s cash records and the bank statement figures.

2. A bank statement is the document the bank uses to report what it did with the depositor’s

cash. The statement shows the bank account’s beginning and ending cash balances, receipts

(deposits and other receipts) and payments (cheques etc. and other payments).

A bank reconciliation is a document prepared by the company (not by the bank) to explain

all differences between the company’s cash records and the bank statement figures. The bank

reconciliation ensures that all cash transactions have been accounted for, and that the bank

and book records of cash are correct.

(5 min.) S 8-

Outstanding cheques at the end of July: $4,520 – $3,760 = $

Outstanding cheques at the end of August: ($6,340 + $760) – $2,580 = $4,

(10 min.) S 8-

Ranger Security Systems Bank Reconciliation May 31, 2014

BANK BOOKS Balance, May 31 $3,800 Balance, May 31 $2, Add: Add: Deposit in transit 200 Bank collection 630 4,000 Interest revenue 10 3, Less: Less: Outstanding cheques (900) Service charge (20) Adjusted bank balance $3,100 Adjusted book balance $3,

Amounts agree

Formatted: Font color: Auto

(10 min.) S 8-

Journal

DATE ACCOUNT TITLES AND EXPLANATIONS

POST.

REF. DEBIT CREDIT

April 1 Petty Cash 200 Cash 200

30 Office Supplies 117 Entertainment Expense 70 Cash 181 Cash Short and Over 6

(5 min.) S 8-

Brennan should report the errors to Stone, because Stone is her supervisor, and Stone is

responsible for the errors. If Stone fails to take action, then Brennan should report the errors to

Stone’s superior or the owner of the business. In any event, outsiders who are relying on Ireland

Limited’s financial statements must be made aware of the need to correct the reported net income

figure, although it is not Brennan’s responsibility to notify outsiders.

Exercises

(10 min.) E 8-

1. The store clerk can issue a fictitious return slip and pay himself/herself the

money.

Having store clerks place returned goods back on the shelf provides no way to

link the returned merchandise to cash refunds paid to customers.

2. Yorkshire should have the store clerk keep all returned merchandise for review

by a manager. The manager can match the returned goods to the return slips

issued by the clerk and agree the value of returns to cash out from the cash

register. The clerk should also take the customer’s name and phone number,

and have the customer sign the return slip to help ensure the customer was

legitimate. The policy should also require that the customer hands in the

original bill of sale, a copy of which should be attached to the return slip.

(10 min.) E 8-

Barings’ internal control weakness was a lack of separation of duties. The details

of the BSS situation outline how Leeson had control and authority over all BSS

assets. As a result he was able to take unauthorized speculative positions and hide

the trading in an unused error account on the BSS Balance Sheet.

Barings could have avoided the loss by separating the responsibilities of general

manager and head trader. If Barings had not ignored their internal auditors and

reviewed the error account, the losses would have been identified before growing

so large, enough to bankrupt the parent company. Barings could have also had its

external auditors review the bank’s safeguards and internal controls.

(10-15 min.) E 8-

a. Weakness. The control environment will not be as effective as it would be if

top management led in establishing internal controls.

b. Weakness. The accounting department should not be allowed to order

merchandise. An accountant could have goods sent to his or her home or

other location, then approve payment for the goods.

c. Weakness. The sales clerk should not have access to the total recorded by the

machine. The clerk could steal cash and delete a cash receipt from the

machine record.

d. Weakness. The vice-president should examine the payment packet to ensure

that the payment is valid and for the correct amount. Note: He or she may

have to do this on a sample basis if there is a large number of cheques to

sign.

(5 min.) E 8-

Cash balance = $3,250 + $3,000 + $5,000 + $250 + $500 = $12,

(5 min.) E 8-

1. a. 4

b. 3

c. 2

d. 1

e. 1

f. 2

g. 2

h. 3

i. 4

j. 1

k. 4

2. (a) Items c, d, e, f, g and j will require adjusting journal entries to the companies records.

(b) Since the other items are corrections to the bank balance, it is assumed that the

corrections to the bank will occur as these missed items are processed in the normal

course of business and the errors will be corrected by the bank.

Formatted: Font: (Default) Times New Roman, 12 pt, Not I talic, Complex Script Font: Times New Roman, 12 pt Formatted: Font: (Default) Times New Roman, 12 pt, Not I talic, Complex Script Font: Times New Roman, 12 pt Formatted: Font: (Default) Times New Roman, 12 pt, Not I talic, Complex Script Font: Times New Roman, 12 pt Formatted: Font: (Default) Times New Roman, 12 pt, Not I talic, Complex Script Font: Times New Roman, 12 pt Formatted: Font: (Default) Times New Roman, 12 pt, Not I talic, Complex Script Font: Times New Roman, 12 pt Formatted: Font: 10 pt, I talic, Complex Script Font: 10 pt Formatted: Font: I talic

(10–20 min.) E 8-

Adams Enterprises

General ledger:

Balance, January 1, 2014 $ 0

Add: deposits in January 193,

193,

Deduct: Cash payments 129,

Balance, January 31, 2014 $64,

Adams Enterprises Bank Reconciliation January 31, 2014 BANK: Bank Balance, January 31, 2014 $67, Add: Deposit in transit 25, Less: Outstanding cheques: Cheque 003 $10, Cheque 005 17,000 (27,000) Less: Bank error correction (2,000) Adjusted bank balance, January 31, 2014 $64,

BOOKS: Book Balance, January 31, 2014 $64, Add: Interest 8 Less: Service charge (48) (40) Adjusted book balance, January 31, 2014 $64,

(10-20 min.) E 8-

Bobbie Daechsel Bobbie Daechsel Bank Reconciliation July 31, 2014 BANK: Bank Balance, July 31, 2014 $ 3, Add: Deposit in transit 17, Less: Outstanding cheques: Cheque No. 626 $ 132 627 2,932 (3,064) Adjusted bank balance $17,

BOOKS: Book Balance, July 31 $17, Less: Correction of book error––Recorded $316 cheque as $276 $ 40 Cost of cheques 52 Service charge 32 (124) Adjusted book balance $17,

Bobbie Daechsel has cash of $17,356 on July 31, 2014. Formatted: Font: Times New Roman, 12 pt,

Complex Script Font: 12 pt

(10-20 min.) E 8-

Corey Sneids Corey Snieds Bank Reconciliation May 31, 2014 BANK: Bank Balance, May 31, 2014 $23, Add: Deposit in transit 8, 31, Less: Outstanding cheques (716) Adjusted bank balance $30,

BOOKS: Book Balance, May 31, 2014 $31, Add: EFT collection––rent 1, $32, Less: Service charge $ 60 NSF cheques 1, Charge for printed cheques 100 Correction of book error––recorded $440 cheque as $144 296 (1,836) Adjusted book balance $30,

Formatted: Font: 10 pt, Not Bold, Complex Script Font: 10 pt

(5-15 min.) E 8-

Outstanding cheques at the end of April: $6,532 – $5,220 = $1,

Outstanding cheques at the end of May: $1,312 + 9,764 – 8,223 = $ 2,

(5-15 min.) E 8-

1. The way to approach this question is to piece together what the book balance

should be using the data provided;

Book? Bank Balance $18,

Note collected 1,250 No o/s deposits -

Interest earned 250

Service charges 40 Deduct o/s cheques 3,

Reconciled Balance *$15,244 $15,

*assumed that this amount is the same as bank side.

To solve book beginning balance: $15,244 + $40 – $250 – $1,250 = $13,

We should have according to our calculations $13,784 showing in our cash

general ledger account however we actually have $15,500 which means that the

clerk has stolen $1,716.

2. The most important control that would prevent this theft is the duties of cash

handling and cash record keeping should be kept separate. Other controls

such as hiring competent ethical personnel, bonding cashiers, and electronic

devices and computer controls such as matching deposits with cash register

records and using electronic cash registers to process sales could have all

prevented or detected this theft. Internal and external audits would eventually

detect the theft but it may not be as timely as the daily procedures mentioned.

Formatted: Font: 12 pt, Complex Script Font: 12 pt Formatted: Font: 12 pt, Complex Script Font: 12 pt Formatted: Font: 12 pt, Complex Script Font: 12 pt

(5-15 min.) E 8-

The most likely way a person would manipulate a bank reconciliation to cover a

theft is by understating the dollar amount of the outstanding cheques. These are

the most numerous items on the bank reconciliation and thus the place where a

manipulation would be hardest to detect.

Example:

Reconciliation Actual Manipulated Bal. per bank $800 $ Less: Outstanding cheques (400) (300) Adjusted bal. per bank $400 $ Adjusted bal. per books $500 $

This theft could have been avoided by having someone besides the treasurer

perform the bank reconciliation. Treasurers manage cash and should therefore

have no accounting duties, such as the preparation of the reconciliation.

Instructional Note: Student responses probably will not include this numerical

example.

(10-15 min.) E 8-

TO: Leroy Simon

There is a weakness in internal control over cash receipts from customers. The

cash registers do not keep a record of sales. With no record of sales locked in the

cash register, there is no way to determine how much cash should be in the cash

drawer. This omission makes it easy for the cashier to steal cash and not get

caught. To improve the internal control over cash, the company should use cash

registers that lock a record of each sale and a record of the total cash receipts for

the day into the machine. The manager can prove the amount of cash in the cash

drawer against this recorded amount.

Formatted: Font: 10 pt, I talic, Complex Script Font: 10 pt Formatted: Font: I talic

(10 min.) E 8-

1. An imprest petty cash system maintains the Petty Cash account at the

prescribed balance at all times. The account balance equals the sum of (a)

cash still in the fund plus (b) petty cash tickets for payments that have been

made from the fund.

2.

Journal

DATE ACCOUNT TITLES AND EXPLANATIONS

POST.

REF. DEBIT CREDIT

Nov. 1 Petty Cash 400 Cash 400 To open the petty cash fund.

30 Office Supplies 240 Delivery Expense 100 Cash 320 Cash Short and Over 20 To replenish the petty cash fund.

3.

Petty Cash Nov. 1 400

Petty Cash balance at all times ............................................................. $

Formatted: I ndent: Before: 1", Hanging: 0"

(10-15 min.) E 8-

General Journal

DATE ACCOUNT TITLES AND EXPLANATIONS

POST.

REF. DEBIT CREDIT

(a) Petty Cash 500. Cash in Bank 500. To set up the petty cash fund.

(b) Delivery Expense 128. Supplies Expense ($60 + 14) 75. Miscellaneous Expense 9. Postage Expense 85. Cash Short and Over 3. Cash 302. To replenish the petty cash fund.

(5 min.) E 8-

General Journal

DATE ACCOUNT TITLES AND EXPLANATIONS

POST.

REF. DEBIT CREDIT

Petty Cash 100. Cash 100. To increase the amount of the petty cash fund.

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