ACC225 Week 8 Assignment

Problem 8-1A

Analyzing internal control

C1

For each of these five separate cases, identify the principle of internal control that is violated.

Recommend what the business should do to ensure adherence to principles of internal control.

1. Heather Flatt records all incoming customer cash receipts for her employer and posts the customer payments to their respective accounts. – The internal control that was overlooked or violated is “divide responsibility for related transactions”.  There should be two individuals doing these two related tasks.  This would serve as a check each for the other to prevent errors or intentional mistakes.  The company should designate another employee to do either the incoming cash receipts or posting to customer accounts. 

2. At Netco Company, Jeff and Jose alternate lunch hours. Jeff is the petty cash custodian, but if someone needs petty cash when he is at lunch, Jose fills in as custodian. – The petty cash custodian should never alter between two individuals.  There is no internal control of separation of duties.  In case of theft or error, neither employee can ethically be held responsible for the petty cash since there would be no way to tell which was in charge during the error.  This company should pick between Jeff and Jose to be custodian alone.

3. Nadine Cox posts all patient charges and payments at the P-Town Medical Clinic. Each night

Nadine backs up the computerized accounting system to a tape and stores the tape in a locked file at her desk. – This example violates the internal control that asks for separation of duties.  Nadine has no secondary person to ensure that her input was correct before she backs up the computer and files the tapes.  This company should have a separate person in control of the locked drawers and/or backing up the computer.  Putting another person in either position would help keep internal control, two people would be ideal, one to back up and one to keep the locked cabinet. 

4. Barto Sayles prides himself on hiring quality workers who require little supervision. As office manager, Barto gives his employees full discretion over their tasks and for years has seen no reason to perform independent reviews of their work. – This violates the internal control of performing regular and independent reviews of employee work.  The fact that there has been no visible reason to perform independent reviews is not adequate evidence that it is not needed.  This could simply be a case of no one has been caught yet instead of no one is misbehaving, but without the reviews the manager may never know. This manager should instate independent and regular reviews.

5. Desi West’s manager has told her to reduce costs. Desi decides to raise the deductible on the plant’s property insurance from $5,000 to $10,000. This cuts the property insurance premium in half. In a related move, she decides that bonding the plant’s employees is a waste of money since the company has not experienced any losses due to employee theft. Desi saves the entire amount of the bonding insurance premium by dropping the bonding insurance. – This violates the internal control of keeping all employees bonded.  This internal control protects the company against employee theft.  Just because there have been no issues, does not mean there will not be and Desi should not ever drop bonding insurance. 

Problem 8-3A

Establish, reimburse, and increase

petty cash

P2

Inoke Gallery had the following petty cash transactions in February of the current year:

Feb. 2 Wrote a $300 check, cashed it, and gave the proceeds and the petty cashbox to Bo Brown, the petty cashier.

5 Purchased bond paper for the copier for $10.13 that is immediately used.

9 Paid $22.50 COD shipping charges on merchandise purchased for resale, terms FOB shipping point. Metro uses the perpetual system to account for merchandise inventory.

12 Paid $9.95 postage to express mail a contract to a client.

14 Reimbursed Alli Buck, the manager, $58 for business mileage on her car.

20 Purchased stationery for $77.76 that is immediately used.

23 Paid a courier $18 to deliver merchandise sold to a customer, terms FOB destination.

25 Paid $15.10 COD shipping charges on merchandise purchased for resale, terms FOB shipping point.

27 Paid $64 for postage expenses.

28 The fund had $21.23 remaining in the petty cash box. Sorted the petty cash receipts by accounts affected and exchanged them for a check to reimburse the fund for expenditures.

The fund amount is also increased to $400.

Required

1. Prepare the journal entry to establish the petty cash fund.

2. Prepare a petty cash payments report for February with these categories: delivery expense, mileage expense, postage expense, merchandise inventory (for transportation-in), and office supplies expense. Sort the payments into the appropriate categories and total the expenditures in each category

3. Prepare the journal entries for part 2 to both (a) reimburse and (b) increase the fund amount.

Date	Accounts		Debit	Credit
Feb 2	Petty Cash		300
		Cash		300
Feb 28	Delivery expense		82
	Mileage expense		58
	Postage expense		9.95
	Merchandise inventory (for transportation-in)		37.60
	Office supplies expense		87.89
	Cash over or short		3.33
	Petty Cash		100
		Cash		378.77

ACC225 Week 8 Checkpoint

QS 8-6

Bank reconciliation

P3

1.      For each of the following items, indicate whether its amount (i) affects the bank or book side of a bank reconciliation and (ii) represents an addition or a subtraction in a bank reconciliation:

a.       Outstanding checks          Bank                Subtraction in Bank reconciliation

b.      Debit memos                     Book               Subtraction in Bank reconciliation

c.       NSF checks                       Book               Subtraction in Bank reconciliation

d.      Unrecorded deposits         Bank                Addition in Bank reconciliation

e.       Interest on cash balance    Book               Addition in Bank reconciliation

f.       Credit memos                    Book               Addition in Bank reconciliation

g.      Bank service charges         Book               Subtraction in Bank reconciliation

2.      Which of the items in part 1 require an adjusting journal entry?  Only those items that adjust the book balance require an adjusted journal entry.  In this case those would be debit memos, nsf checks, interest on cash balance, credit memos and bank service charges. 

Exercise 8-3

Analyzing internal control

C1

Bemis Company is a rapidly growing start-up business. Its recordkeeper, who was hired one year ago, left town after the company’s manager discovered that a large sum of money had disappeared over the past six months. An audit disclosed that the recordkeeper had written and signed several checks made payable to her fiancé and then recorded the checks as salaries expense. The fiancé, who cashed the checks but never worked for the company, left town with the recordkeeper. As a result, the company incurred an uninsured loss of $84,000. Evaluate Bemis’s internal control system and indicate which principles of internal control appear to have been ignored.

Several internal controls appear to either have been circumvented or were not put in place.  First of all there is no separation of duties (#4).  The same person who approves the spending of the funds is the same person as the one who cuts the checks.  There is also the question of if this is the same person who signs the checks or is this simply a case of the signer did not look at the checks and verify before signing.  Also, obviously there was a breakdown of adequate and correct records, as she would have altered books to appear legitimate (#2).   I am assuming there were no adequate technological controls to protect against this kind of theft, since she was capable of getting around them (#6).  The story did indicate the recordkeeper was not insured which is a breakdown of the internal control indicating employees should be bonded and assets insured (#3).  There was also no back up to check the records of this employee so the internal control that talks about division of responsibility for related transactions was ignored as well (#5).  Finally, I would say that six months is too long for a brand new company to go without an internal audit, especially since their recordkeeper was apparently responsible for many individual tasks and this would indicate that the last internal control was also ignored that indicates that regular and independent reviews take place (#7).

Exercise 8-4

Petty cash fund with a shortage

P2

Gannon Company establishes a $400 petty cash fund on September 9. On September 30, the fund shows $166 in cash along with receipts for the following expenditures: transportation-in, $32; postage expenses, $113; and miscellaneous expenses, $87. The petty cashier could not account for a $2 shortage in the fund. Gannon uses the perpetual system in accounting for merchandise inventory. Prepare (1) the September 9 entry to establish the fund and (2) the September 30 entry to both reimburse the fund and reduce it to $300.

Date	Account	Debit	Credit
Sept 9	Petty Cash	400
	Cash		400
Sep 30	Transportation-in	32
	Postage expenses	113
	Misc expenses	87
	Cash over or short	2
	Cash		234
	Cash	100
	Petty Cash		100

                                    

Accounting Information Systems and Special Journals

1.     CheckPoint: Accounting Information Systems and Special Journals

·         Resource: Fundamental Accounting Principles, pp. 289, 290, & 291

·         Complete Quick Study questions 7-1 & 7-3 on p. 289 and Exercises 7-1, 7-4, 7-7, & 7-10 on pp. 290–291.

·         Post your answers as an attachment.

QUICK STUDY

QS 7-1

Accounting information

system principles

Place the letter of each system principle in the blank next to its best description.

A. Control principle      D. Flexibility principle

B. Relevance principle E. Cost-benefit principle

C. Compatibility principle

1. __D__The principle prescribes the accounting information system to change in response to technological advances and competitive pressures.

2. __A__The principle prescribes the accounting information system to help monitor activities.

3. __B__The principle prescribes the accounting information system to provide timely information for effective decision making.

4. __C__The principle prescribes the accounting information system to adapt to the unique characteristics of the company.

5. _E__The principle that affects all other accounting information system principles.

QS 7-3

Accounting information

system components

Identify the most likely role in an accounting system played by each of the numbered items 1 through

12 by assigning a letter from the list A through E on the left:

A. Source documents B. Input devices C. Information processors D. Information storage E. Output devices

__C__1. Bar code reader __D__2. Filing cabinet __A__3. Bank statement __B__4. Computer scanner __B__5. Computer keyboard __D__6. Zip drive __E__7. Computer monitor __A__8. Invoice from a supplier __C__9. Computer software __E__10. Computer printer __B__11. Digital camera __D__12. MP3 player

Exercise 7-1

Sales journal—perpetual

P1

Hutton Company uses a sales journal, a purchases journal, a cash receipts journal, a cash disbursement journal, and a general journal. The following transactions occur in the month of March:

Mar.     2 Sold merchandise costing $300 to B. Fager for $450 cash, invoice no. 5703.

            5 Purchased $2,300 of merchandise on credit from Marsh Corp.

            7 Sold merchandise costing $800 to J. Dryer for $1,150, terms 2_10, n_30, invoice no.            5704.

            8 Borrowed $8,000 cash by signing a note payable to the bank.

            12 Sold merchandise costing $200 to R. Land for $320, terms n_30, invoice no. 5705.

            16 Received $1,127 cash from J. Dryer to pay for the purchase of March 7.

            19 Sold used store equipment for $900 cash to Malone, Inc.

            25 Sold merchandise costing $350 to T. Burton for $550, terms n_30, invoice no. 5706.

Prepare headings for a sales journal like the one in Exhibit 7.5. Journalize the March transactions that should be recorded in this sales journal.

Date	Account Dr	Invoice Number	PR	Accounts Receivable Dr Sales Cr	Terms	Cost of Goods Sold Dr Inventory Cr
Mar 2	B Fager	5703	✓	450		300
Mar 7	J Dryer	5704	✓	1150	2/10,n/30	800
Mar 12	R Land	5705	✓	320	n/30	200
Mar 25	T Burton	5706	✓	550	n/30	350

Exercise 7-4

Cash receipts journal—perpetual

P1

Moeder Co. uses a sales journal, a purchases journal, a cash receipts journal, a cash disbursements journal, and a general journal. The following transactions occur in the month of November.

Nov.    3 Purchased $3,100 of merchandise on credit from Hargrave Co., terms n_20.

            7 Sold merchandise costing $840 on credit to J. York for $900, subject to a $18 sales discount if paid by the end of the month.

            9 Borrowed $2,750 cash by signing a note payable to the bank.

            13 J. Emling, the owner, contributed $4,000 cash to the company.

            18 Sold merchandise costing $130 to B. Box for $230 cash.

            22 Paid Hargrave Co. $3,100 cash for the merchandise purchased on November 3.

            27 Received $882 cash from J. York in payment of the November 7 purchase.

            30 Paid salaries of $1,600 in cash.

Prepare headings for a cash receipts journal like the one in Exhibit 7.7. Journalize the November

transactions that should be recorded in the cash receipts journal.

Date	Account Credited	Explanation	PR	Cash Dr	Sales Discount Dr	Account Receivable Cr	Sales Cr	Other Accounts Cr	Cost of goods sold Dr Inventory Cr
Nov 9	Note payable	Borrowed cash	✓	2750				2750
Nov 13	Capital	Owner investment	✓	4000				4000
Nov 18	B Box	Sales	x	230			230		130
Nov 22	Hargrave Co	Buy merchandise	✓	3100				3100
Nov 27	J York	Invoice 11/7	✓	882		882
Nov 30	Salaries Payable	Paid Salaries	✓	1600				1600

Exercise 7-7

Purchases journal—perpetual

P1

Redmon Company uses a sales journal, a purchases journal, a cash receipts journal, a cash disbursements journal, and a general journal. The following transactions occur in the month of June.

June     1 Purchased $8,100 of merchandise on credit from Vick, Inc., terms n_30.

            8 Sold merchandise costing $900 on credit to R. Panke for $1,500 subject to a $30 sales                      discount if paid by the end of the month.

            14 Purchased $240 of store supplies from Poe Company on credit, terms n_30.

            17 Purchased $260 of office supplies on credit from Rehmer Company, terms n_30.

            24 Sold merchandise costing $400 to L. Barnett for $630 cash.

            28 Purchased store supplies from Piburn’s for $90 cash.

            29 Paid Vick, Inc., $8,100 cash for the merchandise purchased on June 1.

Prepare headings for a purchases journal like the one in Exhibit 7.9. Journalize the June transactions that should be recorded in the purchases journal.

Date	Account	Date of Invoice	Terms	PR	Accounts Payable Cr	Inventory Dr	Office supplies Dr	Other Accounts Dr
Jun 1	Vick Inc	Jun 1	n/30	✓	8100			8100
Jun 14	Poe Co	Jun 14	n/30	✓	240	240
Jun 17	Rehmer Co	Jun 17	n/30	✓	260		260

Exercise 7-10

Cash disbursements journal—perpetual

P1

Politte Supply uses a sales journal, a purchases journal, a cash receipts journal, a cash disbursements journal, and a general journal. The following transactions occur in the month of April.

Apr.     3 Purchased merchandise for $2,750 on credit from Scott, Inc., terms 2_10, n_30.

            9 Issued check no. 210 to Kidman Corp. to buy store supplies for $450.

            12 Sold merchandise costing $400 on credit to C. Myers for $670, terms n_30.

            17 Issued check no. 211 for $1,500 to pay off a note payable to City Bank.

            20 Purchased merchandise for $3,500 on credit from LeBron, terms 2_10, n_30.

            29 Issued check no. 212 to LeBron to pay the amount due for the purchase of April 20,            less the discount.

            30 Paid salary of $1,700 to B. Decker by issuing check no. 213.

            31 Issued check no. 214 to Scott, Inc., to pay the amount due for the purchase of April 3.

Prepare headings for a cash disbursements journal like the one in Exhibit 7.11. Journalize the April transactions that should be recorded in the cash disbursements journal.

Date	Ck No	Payee	Account Debited	PR	Cash Cr	Inventory Cr	Other Accounts Dr	Accounts Payable Dr
Apr 9	210	Kidman, Corp	Inventory	✓	450	450
Apr 17	211	City Bank	Note Payable	✓	1500		1500
Apr 29	212	Lebron	Inventory	✓	2800	2800	700
Apr 30	213	B Decker	Salaries Payable	✓	1700		1700
Apr 31	214	Scott	Inventory	✓	2750	2750