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1. Internal controls.
6-1
7. When employees are not required to take extended periods
of leave or vacation, the employee may be able to cover up
illegal or unscrupulous activities while being present in the
work environment. If jobs are rotated or someone else does
the job while the employee is absent, improprieties may be
discovered.
6-2
12. Independent verification of performance provides an
objective evaluation. It also requires the employee to be
accountable under predetermined standards.
Independent verification of the internal control systems
assures that the system is functioning properly.
6-3
• Timely reconciliation of actual cash to records of cash
receipts.
21. The bank's balance will be larger than the book balance if
there are outstanding checks that exceed outstanding
deposits. The bank's balance will be smaller if the
outstanding deposits exceed the outstanding checks.
Errors also will cause differences.
6-4
23. An outstanding check is a cash disbursement that has
been recorded on the payer’s books but has not been
deducted from the payer’s bank account by the bank (i.e.,
has not “cleared” the bank).
28. The petty cash fund is a small cash fund that is kept on
the premises that is used to pay small disbursements
where it is not practical to write a check. For example, a
payment of $1.24 for postage might be paid out of petty
cash.
6-5
• Cash.
• Marketable Securities.
• Accounts Receivable.
• Short-Term Notes Receivable.
• Inventory.
• Interest Receivable.
• Supplies.
• Prepaids.
• Currently maturing portion of Long-Term Notes
Receivable.
6-6
However, if the current ratio is too high, the company may
have excess current assets which may be invested to yield a
higher return for owners.
6-7
SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 6
EXERCISE 6-1A
6-8
9. Performance Evaluations: A periodic and independent
evaluation of employees' performance alerts management
to inefficiencies of employees.
6-9
EXERCISE 6-2A
6-10
EXERCISE 6-3A
6-11
EXERCISE 6-4A
EXERCISE 6-5A
6-12
Also, the owner should have insisted that the employee
take regular vacations.
6-13
EXERCISE 6-6A
a. & c.
Best Supplies
Statements Model
b. Asset exchange.
6-14
EXERCISE 6-7A
Book Added or
Reconciling Items: Balance Subtracte
Adjusted? d?
Charge for Checks Yes −
NSF Check from Customer Yes −
ATM Fee Yes −
Outstanding Checks No NA
Interest Revenue Earned on the Yes +
Account
Deposits in Transit No NA
Service Charge Yes −
Automatic Debit for Utility Bill Yes −
6-15
EXERCISE 6-8A
Bank Added or
Reconciling Items: Balance Subtracted?
Adjusted?
NSF Check from No NA
Customer
Interest Revenue No NA
Bank Service Charge No NA
Outstanding Checks Yes −
Deposits in Transit Yes +
Debit Memo No NA
Credit Memo No NA
ATM Fee No NA
Petty Cash Voucher No NA
6-16
EXERCISE 6-9A
a.
Bank Reconciliation
Unadjusted Bank Balance 5/31/2004 $14,625
Add: Deposit in Transit 1,590
Less: Outstanding Check (1,873)
True Cash Balance 5/31/2004 $14,342
Unadjusted Book Balance 5/31/2004 $14,330
Add: Credit Memo for Interest Earned 20
Less: Debit Memo for Service Charge (8)
True Cash Balance 5/31/2004 $14,342
b.
Date Account Titles Debit Credit
Adj Cash 20
1
Interest Earned 20
Adj Bank Service Charge Expense 8
2
Cash 8
6-17
EXERCISE 6-10A
EXERCISE 6-11A
6-18
EXERCISE 6-12A
a. Asset exchange.
b.
Belcher Transfer Company
Statements Model
c.
Belcher Transfer Company
General Journal
6-19
EXERCISE 6-13A
a.
Xterra, Inc.
Statements Model
Assets = S. Rev. − Exp. = Net Statement
Equity Inc.
Petty Ret. of
No Cash + Cash = Earn. Cash
. Flows
1. (300.0 + 300.00 = NA NA − NA = NA NA
0)
2. NA + NA = NA NA − NA = NA NA
3. NA + (247.5 = (247.5 NA − 247.50 = (247.5 (247.50)
0) 0) 0) OA
4. (247.5 + 247.50 = NA NA − NA = NA NA
0)
b.
Xterra, Inc.
General Journal Entries
Event Account Titles Debit Credit
No.
1. Petty Cash 300.00
Cash 300.00
2. No Entries
3. Postage Expense 65.00
Office Supplies Expense 80.75
Printing Expense 10.50
Entertainment Expense 88.25
Cash Short and Over 3.00
Petty Cash 247.50
4. Petty Cash 247.50
Cash 247.50
6-20
6-21
EXERCISE 6-14A
c. Replenishment.
6-22
EXERCISE 6-15A
Borg Co.
Classified Balance Sheet
As of December 31, 2003
Assets
Current Assets
Cash $15,260
Accounts Receivable 42,500
Merchandise Inventory 32,000
Prepaid Insurance 3,200
Total Current Assets $ 92,960
Property, Plant and Equipment
Office Equipment 26,500
Total Property, Plant and 26,500
Equipment
Total Assets $
119,460
6-23
EXERCISE 6-16A
Operating Cycle:
a.
Cash Inventory Accounts Receivable Cash
6-24
SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 6
PROBLEM 6-17A
6-25
PROBLEM 6-18A
a.
Long Builders, Inc.
Bank Reconciliation
October 31, 2001
Unadjusted Bank Balance, October 31, $8,000
2001
Add: Deposit in Transit 2,000
Less: Outstanding Checks (1,200)
True Cash Balance, October 31, 2001 $8,800
b.
General Journal
Ref. Account Title Debit Credit
1. Cash 270
Equipment 270
2. Office Supplies Expense 50
Cash 50
6-26
PROBLEM 6-19A
6-27
PROBLEM 6-20A
General Journal
Event Account Titles Debit Credit
No.
a. No Entry
b. Cash 8,000
Accounts Receivable 8,000
c. No Entry
d. No Entry
e. Accounts Receivable 375
Cash 375
f. Cash 75
Interest Revenue 75
g. Cash 495
Supplies 495
h. Bank Service Charge Expense 40
Cash 40
i. Theft Loss 1,000
Cash 1,000
j. No Entry
6-28
PROBLEM 6-21A
a.
Oceanside Hotel
Bank Reconciliation
October 31, 2005
Unadjusted Bank Balance, October 31, $14,000
2005
Add: Deposit in Transit 3,550
Less: Outstanding Checks #2353 $1,500
2356 745 (2,245)
True Cash Balance, October 31, 2005 $15,305
Unadjusted Book Balance, October 31, $13,000
2005
Add: Credit Memo for Collection of
Notes 2,325
Receivable
Less: Debit Memo for Printed Checks (20)
True Cash Balance, October 31, 2005 $15,305
b.
Account Title Debit Credit
Cash 2,325
Notes Receivable 2,325
6-29
PROBLEM 6-22A
Asset = Liabiliti + Stockholders’
s es Equity
Event Type Commo + Retaine
Number of n Stock d
Event Earning
s
1. AU − = NA + NA + −
2. AU − = NA + NA + −
3. AE +− = NA + NA + NA
4. AS + = NA + NA + +
5. AE +− = NA + NA + NA
6-30
PROBLEM 6-23A
a.
Pete’s Sandwich Shop
Bank Reconciliation
May 31, 2006
Unadjusted Bank Balance, May 31, $22,000
2006
Add: Deposit in Transit 4,250
Less: Outstanding Checks (5,000)
True Cash Balance, May 31, 2006 $21,250
6-31
PROBLEM 6-24A
a.
General Journal
Event Account Titles Debit Credit
1. Petty Cash 100
Cash 100
2. No Entry
3a. Postage Expense 32
Delivery Expense 20
Meals Expense 42
Cash Short and Over 2
Petty Cash 92
3b. Petty Cash 92
Cash 92
c.
Event Type of Event
Number
1. AE
2. No Effect
3. AU
AE
6-32
PROBLEM 6-24A (cont.)
d.
Effect of Transactions on Financial Statements
Assets = Liab + S. Rev. − Exp. = Net Cash Flow
. Equity Inc.
No. Cash + Petty =
Cash
1. (100) + 100 = NA + NA NA − NA = NA NA
2. NA + NA = NA + NA NA − NA = NA NA
3a. NA + (92) = NA + (92) 2 − 94 = (92) (92) OA
3b. (92) + 92 = NA + NA NA − NA = NA NA
PROBLEM 6-25A
Nixon Enterprises
Classified Balance Sheet
December 31, 2005
Assets
Current Assets
Cash $ 3,600
Accounts Receivable 4,000
Interest Receivable 240
Supplies 500
Inventory 9,000
Prepaid Rent 9,600
Total Current Assets $ 26,940
Long-Term Assets
Notes Receivable 6,000
6-33
Office Equipment $58,000
Less: Accumulated (4,800) 53,200
Depreciation
Land 50,000
Total Long-Term Assets 109,200
Total Assets $136,140
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable $ 1,000
Interest Payable 740
Salaries Payable 1,800
Unearned Revenue 9,600
Total Current Liabilities $ 13,140
Long-Term Liabilities
Notes Payable 40,000
Total Liabilities 53,140
Stockholders’ Equity
Common Stock 41,000
Retained Earnings 42,000
Total Stockholders’ Equity 83,000
Total Liab. & Stockholders’ $136,140
Equity
6-34
PROBLEM 6-25A (cont.)
Nixon Enterprises
Income Statement
For the Year Ended December 31, 2005
Sales Revenue $340,000
Cost of Goods Sold (174,000)
Gross Margin 166,000
Operating Expenses
Operating Expenses $ 19,000
Salaries Expense 118,000
Total Operating (137,000)
Expenses
Operating Income 29,000
Non-Operating Items:
Interest Revenue 420
Gain on Sale of 6,400
Equipment
Interest Expense (12,200) (5,380)
Net Income $ 23,620
6-35
SOLUTIONS TO EXERCISES - SERIES B - CHAPTER 6
EXERCISE 6-1B
6-36
EXERCISE 6-2B
a. The use of computers does not reduce the need for internal
controls; it increases the controls that are needed.
Computers do not think independently so there must be
tests for reasonableness. Since significant technical
expertise is required to design and run computer programs,
competent computer programmers are necessary. Controls
must be in place to assure the competence of these
computer programmers and operators. Computers also
present different security issues. Procedures must be in
place to safeguard computers and computer information.
Also, since computer data can be easily lost or damaged,
controls must be in place to assure backup data is kept
secure.
6-37
EXERCISE 6-3B
6-38
EXERCISE 6-4B
EXERCISE 6-5B
6-39
EXERCISE 6-6B
a. & c.
Clark Stationery
Statements Model
b. Asset exchange.
6-40
EXERCISE 6-7B
Book Added or
Reconciling Items: Balance Subtracte
Adjusted? d?
Interest Revenue Yes +
Deposits in Transit No NA
Debit Memo Yes −
Service Charge Yes −
Charge for Checks Yes −
NSF Check from Customer Yes −
Note Receivable Collected by Yes +
Bank
Outstanding Checks No NA
Credit Memo Yes +
6-41
EXERCISE 6-8B
Bank Added or
Reconciling Items: Balance Subtracted?
Adjusted?
Deposits in Transit Yes +
Debit Memo No NA
Credit Memo No NA
Certified Checks No NA
Petty Cash Voucher No NA
NSF Check from No NA
Customer
Interest Revenue No NA
Bank Service Charge No NA
Outstanding Checks Yes −
6-42
EXERCISE 6-9B
a.
Bank Reconciliation
Unadjusted Bank Balance 6/30/2006 $13,879.8
5
Add: Deposits in Transit 1,476.30
Less: Outstanding Check (1,843.74)
True Cash Balance 6/30/2006 $13,512.4
1
Unadjusted Book Balance 6/30/2006 $13,483.7
5
Add: Credit Memo for Interest Earned 35.00
Less: Debit Memo for Service Charge (6.34)
True Cash Balance 6/30/2006 $13,512.4
1
b.
Date Account Titles Debit Credit
Adj Cash 35.0
1 0
Interest Revenue 35.00
Adj Bank Service Charge Expense 6.34
2
Cash 6.34
6-43
EXERCISE 6-10B
EXERCISE 6-11B
6-44
EXERCISE 6-12B
a. Asset exchange.
b.
Cole Company
Statements Model
c.
Cole Company
General Journal
6-45
EXERCISE 6-13B
a.
Family Vision Center
Statements Model
Assets =
S. Rev. − Exp. = Net Statement
Equity Inc.
Petty Ret. Of
No Cash + Cash = Earn. Cash
. Flows
1. (100.0 + 100.00 = NA NA − NA = NA NA
0)
2. NA + NA = NA NA − NA = NA NA
3. NA + (83.25 = (83.25 1.18 − 84.4 = (83.25 (83.25)OA
) ) 3 )
4. (83.25) + 83.25 = NA NA − NA = NA NA
b.
Family Vision Center
General Journal Entries
Event Account Titles Debit Credit
No.
1. Petty Cash 100.00
Cash 100.00
2. No Entries
3. Postage Expense 34.68
Office Supplies Expense 18.43
Printing Expense 7.40
Transportation Expense 23.92
Cash Short and Over 1.18
Petty Cash 83.25
4. Petty Cash 83.25
Cash 83.25
6-46
6-47
EXERCISE 6-14B
c. Replenishment.
6-48
EXERCISE 6-15B
Coleman Co.
Classified Balance Sheet
As of December 31, 2003
Assets
Current Assets
Cash $10,992
Accounts Receivable 12,150
Merchandise Inventory 16,000
Total Current Assets $39,142
Property, Plant and Equipment
Land 12,500
Total Property, Plant and 12,500
Equipment
Total Assets $51,642
6-49
EXERCISE 6-16B
Operating Cycle:
a.
Cash Inventory Accounts Receivable Cash
6-50
SOLUTIONS TO PROBLEMS - SERIES B - CHAPTER 6
PROBLEM 6-17B
6-51
PROBLEM 6-18B
a.
We Trade
Bank Reconciliation
August 31, 2006
Unadjusted Bank Balance, August 31, 2006 $17,000
Add: Deposit in Transit 2,260
Less: Outstanding Checks ( 3,000)
True Cash Balance, August 31, 2006 $16,260
b.
General Journal
Ref. Account Title Debit Credit
1. Cash 360
Inventory 360
2. Office Supplies Expense 100
Cash 100
6-52
PROBLEM 6-19B
6-53
PROBLEM 6-20B
General Journal
Event Account Titles Debit Credit
No.
a. No Entry
b. No Entry
c. Office Supplies 9
Cash 9
d. Cash 330
Notes Receivable 330
e. No Entry
f. Bank Service Charge Expense 22
Cash 22
g. No Entry
h. Accounts Receivable 31
Cash 31
6-54
PROBLEM 6-21B
a.
Cooters Garage
Bank Reconciliation
March 31, 2002
Unadjusted Bank Balance, March 31, $16,000.00
2002
Add: Deposit in Transit 2,000.00
Less: Outstanding Checks #1469 $1,500.00
1470 102.00 (1,602.00)
True Cash Balance, March 31, 2002 $16,398.00
b.
Account Titles Debit Credit
Cash 175.00
Accounts Receivable 175.00
Equipment 630.00
Cash 630.00
Bank Service Charge Expense 15.00
Cash 15.00
6-55
PROBLEM 6-22B
2. AS + = NA + NA + +
3. AU − = NA + NA + −
4. AE +− = NA + NA + NA
5. AS + = NA + NA + +
6-56
PROBLEM 6-23B
a.
Account Title Debit Credit
Accounts Receivable 1,500
Cash 1,500
6-57
PROBLEM 6-24B
a.
General Journal
Event Account Titles Debit Credit
1. Petty Cash 250
Cash 250
2. No Entry
3. Office Supplies Expense 14
Miscellaneous Expense 25
Meals Expense 75
Transportation Expense 80
Maintenance Expense 22
Cash Short and Over 2
Petty Cash 218
4. Petty Cash 218
Cash 218
c.
Event Type of Event
Number
1. AE
2. No Effect
3. AU
4. AE
6-58
PROBLEM 6-24B (cont.)
d.
Effect of Events on the Financial Statements
No. Assets = Liab + Stk. Rev. − Exp. = Net Cash
. Equity Inc. Flows
Cash + Petty = + Ret. Ear.
Cash
1. (250) + 250 = NA + NA NA − NA = NA NA
2. NA + NA = NA + NA NA − NA = NA NA
3. NA + (218) = NA + (218) NA − 218 = (218) (218) ÒA
4. (218) + 218 = NA + NA NA − NA = NA NA
6-59
PROBLEM 6-25B
6-60
Total Liab. & Stockholders’
Equity
$193,30
0
6-61
PROBLEM 6-25B (cont.)
Income Statement
6-62
ATC 6-1
Financial Statement Analysis
a. The current ratio can be computed from information provided on the balance sheet:
$9,491÷$6,543=1.45 to 1.00
c. $9,491÷$13,435=71%
d. According to the footnote on “Long-term Debt and Interest Rate Risk Management,”
there were no significant restrictions.
6-63
ATC 6-2
a.1.
The information is analyzed as follows:
Company 1
Significant amount of accounts receivable
Very significant amount of property, plant and equipment
No inventory
Company 2
Small amount of accounts receivable
Small amount of property, plant and equipment (as compared with the other companies)
Large amount of inventory
Company 3
Significant amount of accounts receivable
Significant amount of property, plant and equipment
Small amount of inventory
6-64
ATC 6-2 (cont.)
a.2.
Classified Balance Sheets
Assets
Current Assets
Cash $ 623,343 $ 32,280 $ 234,262
Accounts Receivable 76,530 4,128 66,755
Inventories -0- 220,013 35,633
Other Current Assets 108,543 29,057 44,904
Total Current Assets 808,416 285,478 381,554
Stockholders’ Equity
Common Stock 376,903 204,327 345,019
Retained Earnings 1,632,115 118,721 839,215
Total Stockholders’ Equity 2,009,018 323,048 1,184,234
Total Liab. and Stkholders’ Equity $4,248,160 $570,268 $1,941,680
6-65
ATC 6-2 (cont.)
b.
Some identifying characteristics include the following:
Southwest Airlines:
large amount of property, plant and equipment
no inventories
Pier I Imports
large amount of inventory
small amount of property, plant and equipment
Wendy’s
large amount of property, plant and equipment
small amount of inventory
6-66
ATC 6-3
1. “The Company is responsible for the information presented in this Annual Report...”
This is the management’s acknowledgment that the financial reports and the
accounting practices on which these reports are based, are primarily its responsibility.
Persons not knowledgeable about the role of the independent auditor sometimes
believe the auditor has the primary responsibility for a company’s financial reporting
practices. Although the independent auditor is responsible for conducting a proper
audit and identifying situations when a company’s reporting is not in compliance with
GAAP, the company’s management has the primary responsibility for the reports.
This is an acknowledgment that no internal control system is foolproof, and that to try
to design such a system would cost more than its value. It does not make sense to
spend $1,000 to prevent a $5 theft. Nevertheless, the management at J. C. Penney
believes its system provides reasonable assurance at a reasonable cost.
3 & 4. “Emphasis is placed on the careful selection, training, and development of professional
managers...”
This acknowledges that a good system of internal controls requires more than
“checking up” on employees. Employees, including management, are less likely to
make mistakes if they have the appropriate ethics and skill when hired, and if they are
properly trained to do the job they are expected to perform. For example, if employees
are formally told what types of activities involving suppliers the company considers to
be unethical, employees are less likely to get themselves and J. C. Penney into trouble
by engaging in unacceptable activities.
6-67
ATC 6-3 (cont.)
5. “...delegation of authority...”
This is an acknowledgment that the top levels of management cannot make all
decisions. A large organization requires that upper management delegate some
decision-making authority to subordinates who have been properly selected and
trained, and these employees must be trusted to do what is in the best interest of the
company.
6. “...division of responsibility...”
This relates to proper separation of duties. The company tries not to place an
employee in a position where he or she can commit a fraud and then conceal that act.
For example, the person with authority to write checks should not be the person
responsible for reconciling the bank statements.
Management has the right and responsibility for establishing the business policies that
will be used at a company. However, if the employees are not properly informed of
these policies, they cannot be expected to follow them. An example of how policies
are communicated throughout an organization would be the use of “procedures
manuals.”
6-68
ATC 6-4
b. Other things being equal, Code-Breakers would be able to pay its bills, in the short-
run, easier than Cipher-Tec because it has more current assets in relation to current
liabilities.
c. Because Code-Breakers has less of its total assets invested in current assets
($40,000 versus $70,000) it has more assets invested in long-term operational assets.
Thus, one might expect Code-Breakers to have a higher return-on-assets ratio than
Cipher-Tec.
6-69
ATC 6-5
Current ratios:
Stillman $ 80,000 ÷ $60,000 = 1.33 to 1.00
Tsay $110,000 ÷ $70,000 = 1.57 to 1.00
b.
Stillman Tsay
Current Assets (see above) $ 80,000 $110,000
Building 80,000 80,000
Land 45,000 50,000
Total Assets $205,000 $240,000
Tsay appears to have the higher long-term financial risk because its debt to assets ratio is
higher than Stillman’s.
6-70
ATC 6-6
6-71
ATC 6-7
a. Because the credit was made directly to retained earnings and not recorded as
revenue, the amount would not have appeared on the company’s income statement.
c. In asking Putman to be dishonest by originally subtracting the error from the bank’s
unadjusted trial balance, and later by asking Putman to make a dishonest entry to
adjust the cash account to coincide with the bank’s balance, Mr. Wheeler has proven
himself a person of shady character. Mr. Wheeler is obviously only concerned about
his own self interest. He is not the kind of person one would expect to be loyal.
Unethical behavior is not usually applied on a selective basis. If a person is unethical
in one arena, he can be expected to act the same way in other circumstances.
d. It is not only unethical but also illegal to take the $18,000. The failure to report a
known error to the bank would be considered to be a criminal act of embezzlement.
6-72
ATC 6-8
Using the EDGAR Database
NOTE: This solution was accurate as of December 15, 2001. However, the EDGAR
database is subject to update at any time, so this solution will likely be “dated”
at the time you assign this case to your students.
These data are from the February 3, 2001 financial statements and dollar amounts are in
thousands.
a. Pep Boys current assets were $699,666 and its current liabilities were $590,459.
Thus, its current ratio was 1.19 to 1.00.
b. Merchandise inventory was the current asset with the largest balance. At $547,735 it
comprised 78% of the current assets.
c. Total assets were $1,906,204, so current assets were 37% of total assets.
d. On its balance sheet Pep Boys shows currently maturing long-term debt of $197 ($197
thousand).
e. If Pep Boys were a manufacturer of auto parts, its current assets would probably
represent a smaller percentage of its total assets. This would be the result of it needing
more equipment.
6-73