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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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Journalizing petty cash
Prepare the journal entries for the following petty cash transactions of Everly Gaming
Supplies:
March 1 Established a petty cash fund with a \(250 balance.
31 The petty cash fund has \)24 in cash and \(235 in petty cash tickets
that were issued to pay for Office Supplies (\)35) and Entertainment
Expense (\(200). Replenished the fund and recorded the expenditures.
April 15 Increased the balance of the petty cash fund to \)300.
What are the five components of internal control? Briefly explain each component.
What are some common controls used with a bank account?
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.
Identifying internal control weakness in cash receipts
Seawind Productions makes all sales on credit. Cash receipts arrive by mail. Justin
Broadway, the mailroom clerk, opens envelopes and separates the checks from
the accompanying remittance advices. Broadway forwards the checks to another
employee, who makes the daily bank deposit but has no access to the accounting
records. Broadway sends the remittance advices, which show cash received, to
the accounting department for entry in the accounts. Broadway’s only other duty
is to grant sales allowances to customers. (A sales allowancedecreases the customer’s
account receivable.) When Broadway receives a customer check for \(600 less a
\)30 allowance, he records the sales allowance and forwards the document to the
accounting department.
Requirements
1. Identify the internal control weakness in this situation.
2. Who should record sales allowances?
3. What is the amount that should be shown in the ledger for cash receipts?
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