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Chapter 7: Q711SE (page 414)
Computing the cash ratio Smythe Banners reported the following figures in its financial statements:
Cash $ 26,500 Cash Equivalents 5,000 Total Current Liabilities 30,000 Compute the cash ratio for Smythe Banners.
The current ratio is 1.05:1ss
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Why is it necessary to record journal entries after the bank reconciliation has been prepared? Which side of the bank reconciliation requires journal entries?
Correcting internal control weaknesses
Each of the following situations has an internal control weakness.
a. Jade Applications has decided that one way to cut costs in the upcoming year is to
fire the external auditor. The business believes that the internal auditor should be
able to efficiently monitor the company’s internal controls.
b. In an effort to minimize the amount of paperwork, Ross Homes has decided that it
will not keep copies of customer invoices related to sales revenue. Ross believes that
this effort will minimize the amount of data storage the company will have to pay for.
c. Elle Bee, a trusted employee for many years, has never taken a vacation. The owner
believes that he’s lucky that she is so committed to her job.
d. The Medicine Chest Company keeps a small petty cash fund to handle small cash
transactions. Because no one wants to volunteer to be the custodian, the business
manager has decided that all employees should have access to the petty cash. She
figures that as long as each employee fills out a petty cash ticket, then there are
proper controls in place.
e. Due to the cost of maintaining the security cameras, Wings and More has decided
that it will remove the cameras that monitor the cash register.
f. Bryan Miller, manager of Hardware Emporium, prides himself on hiring
exceptionally skilled employees who need no training to do their jobs.
Requirements
1. Identify the missing internal control characteristics in each situation.
2. Identify the possible problem caused by each control weakness.
3. Propose a solution to each internal control problem.
In 100 words or fewer, explain why there may be a difference between the bank statement ending cash balance and the ending balance in the Cash account. Give at least two examples of adjustments to the bank balance and the book balance.
Evaluating internal control over cash receipts Dogtopia sells pet supplies and food and handles all sales with a cash register. The cash register displays the amount of the sale. It also shows the cash received and any change returned to the customer. The register also produces a customer receipt butkeeps no internal record of the transactions. At the end of the day, the clerk counts the cash in the register and gives it to the cashier for deposit in the company bank account.
Requirements
1. Identify the internal control weakness over cash receipts.
2. What could you do to correct the weakness?
What is separation of duties?
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