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Chapter 8: Q1SE (page 466)

Ensuring internal control over the collection of receivables Consider internal control over receivables collections. What job must be withheld from a company’s credit department in order to safeguard its cash? If the credit department does perform this job, what can a credit department employee do to hurt the company?

Short Answer

Expert verified

Internal controls are the systems used by an organization to manage risk and diminish the occurrence of fraud.

Step by step solution

01

Step 1: Segregation of Duties- Job must be withheld from a company’s credit department

The company should proper segregate the duties to credit appraisal department and treasury department.

The credit department should not have access to cash collection in order to safeguard the cash.

02

Consequence on the company is credit department perform cash collection

  1. Since the credit department has access to cash and can authorize written-off, this may have a chance that credit department employees, could pocket money received from a customer.
  2. The employee could then label the customer’s account as uncollectible, and the company would stop billing that customer.
  3. In this scenario, the employee may have covered his or her theft.

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Most popular questions from this chapter

What is the expense account associated with the cost of uncollectible receivables called?

In accounting for bad debts, how do the income statement approach and the balance sheet approach differ?

At January 1, 2018, Hilltop Flagpoles had Accounts Receivable of \(28,000, and Allowance for Bad Debts had a credit balance of \)3,000. During the year, Hilltop Flagpoles recorded the following:

a. Sales of \(185,000 (\)164,000 on account; \(21,000 for cash). Ignore Cost of Goods Sold.

b. Collections on account, \)135,000.

c. Write-offs of uncollectible receivables, $2,300.

Requirements

1. Journalize Hilltop’s transactions that occurred during 2018. The company uses the allowance method.

2. Post Hilltop’s transactions to the Accounts Receivable and Allowance for Bad Debts T-accounts.

3. Journalize Hilltop’s adjustment to record bad debts expense assuming Hilltop estimates bad debts as 10% of accounts receivable. Post the adjustment to the appropriate T-accounts.

4. Show how Hilltop Flagpoles will report net accounts receivable on its December 31, 2018, balance sheet

When a receivable is written off under the allowance method, how does it affect the net realizable value shown on the balance sheet?

How is the acid-test ratio calculated, and what does it signify?

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