Homework Chapter 7 Accounting 121

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. Indicate whether the procedures listed below for the payment of vendors' invoices would reduce the possibility of losing available cash discounts and of paying an invoice a second time. 1. Each voucher should be approved for payment by a designated official before verifying price, quantities, and terms. 2. Each voucher should be filed by the last day of the discount period or the due date if the invoice is not subject to a cash discount. 3. Each day, the vouchers should be removed from the appropriate section of the file and checks issued by the disbursing official. 4. At the time of payment, all vouchers and supporting documents should be stamped or perforated "Paid".

1.False 2.True 3.True 4.True

Entries for Bank Reconciliation The following data were accumulated for use in reconciling the bank account of Creative Design Co. for August 20Y6: Cash balance according to the company's records at August 31, $17,020. Cash balance according to the bank statement at August 31, $18,220. Checks outstanding, $3,460. Deposit in transit not recorded by bank, $2,770. A check for $170 in payment of an account was erroneously recorded in the check register as $710. Bank debit memo for service charges, $30. Journalize the entries that should be made by the company that (a) increase cash and (b) decrease cash.

A. Debit Cash 540 Credit Accounts Payable 540 B. Debit Miscellaneous Expense 30 Credit 30

Petty Cash Fund Entries Journalize the entries to record the following: Check No. 12-375 is issued to establish a petty cash fund of $900. The amount of cash in the petty cash fund is now $306. Check No. 12-476 is issued to replenish the fund, based on the following summary of petty cash receipts: office supplies, $345; miscellaneous selling expense, $143; miscellaneous administrative expense, $89. (Because the amount of the check to replenish the fund plus the balance in the fund do not equal $500, record the discrepancy in the cash short and over account.) a. Journalize the entry to establish the petty cash fund. If an amount box does not require an entry, leterm-11ave it blank. b. Journalize the entry to replenish the petty cash fund. For a compound transaction, if an amount box does not require an entry, leave it blank.

A. Debit Petty Cash 900 Credit Cash 900 B. Debit Office Supplies 345 Debit Miscellaneous Selling Expense 143 Debit Miscellaneous Administrative Expense 89 Debit Cash Short and Over 17 Credit Cash 594

Internal Controls 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 have reached an all-time high. There are a large number of returns under $75 without receipts. a. How can sales clerks employed at Ramona's Clothing use the store's return policy to steal money from the cash register? b. What internal control weaknesses do you see in the return policy that make cash thefts easier? c. Would issuing a store credit in place of a cash refund for all merchandise returned without a receipt reduce the possibility of theft? Classify the following as either advantages or disadvantages of issuing a store credit in place of cash. 1. A clerk could only issue a phony store credit rather than taking money from the cash register. 2. The store would lose less revenue if customers had to choose other store merchandise instead of getting a cash refund. 3. Issuing only a store credit for returns without a receipt is a stricter return policy that may affect gift-givers' purchase decisions. 4. Sales clerks will need to be trained to apply the new policy and write up a store credit. They will also need to be trained to handle the redemption of the store credit on future merchandise purchases. d. Assume that Ramona's Clothing is committed to the current policy of issuing cash refunds without a receipt. Are there any changes that could be made in the store's procedures regarding customer refunds in order that would improve internal control?

A.By writing phony refunds and pocketing the cash. b.Both inadequate separation of responsibilities, and proofs and security measures. c.Yes 1.Advantage 2.Advantage 3.Disadvantage 4.Disadvantage d.Yes. These could involve management intervention and electronic monitoring

Entry for Cash Sales; Cash Short The actual cash received from cash sales was $43,240, and the amount indicated by the cash register total was $43,259. Journalize the entry to record the cash receipts and cash sales. If an amount box does not require an entry, leave it blank.

Debit Cash 43,240; Debit Cahs Short and Over 19; Credit sales 43,259

Entry for Cash Sales; Cash Over The actual cash received from cash sales was $12,169 and the amount indicated by the cash register total was $12,135. Journalize the entry to record the cash receipts and cash sales. If an amount box does not require an entry, leave it blank.

Debit cash 12,169 Credit Sales 12,135 Credit Cash Short and Over 34

Faith Cassen has recently been hired as the manager of Gibraltar Coffee Shop. Gibraltar Coffee Shop is a national chain of franchised coffee shops. During her first month as store manager, Faith encountered the following internal control situations: I ________ with Faith's method of handling this situation because she has __________ the internal control principle of safeguarding of assets.

Disagree; not followed

Financial Statement Fraud 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. a. Why might control procedures listed in this chapter be insufficient in stopping this type of fraud? b. Would an audit committee made up of representatives from senior management be effective in stopping this type of fraud?

a. It involved senior managers of the company. B. No

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. a. Identify the weak link in internal control. b. Who should remove the cash register tapes from the register?

a.The sales clerks should not have access to the cash register tapes. b.An employee from the cashier's office

Gibraltar Coffee Shop has one cash register. Prior to Faith's joining the coffee shop, each employee working on a shift would take a customer order, accept payment, and then prepare the order. Faith made one employee on each shift responsible for taking orders and accepting the customer's payment. Other employees prepare the orders: I _______ with Faith's method of handling this situation because Faith has _______ the internal control principle of assignment of responsibility and _______ the internal control principle of segregation of duties.

agree, followed, followed

Because 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. Faith expects each cashier to balance the drawer to the penny every time—no exceptions: I _______ with Faith's method of handling this situation because Faith has _________ the internal control principle of segregation of duties.

disagree; not followed