Chapter 4

Internal Control and Cash

Exercises
(10-20 min.)

E 4-19

LeAnn Bryant
Bank Reconciliation
November 30, 2011
BANK:
Balance, November 30

$ 604

Add: Deposit in transit

846

Less: Outstanding cheques:

Cheque No.
626

$ 25

627

275

Adjusted bank balance

(300)
$1,150

BOOKS:
Balance, November 30

$1,197

Less:
Correction of book error
Recorded $85 cheque as $58
NSF cheque
Service charge
Adjusted book balance

$ 27
8
12

(47)
$1,150

Chapter 4 Internal Control and Cash

Copyright 2012 Pearson Canada Inc.

25

(10-20 min.)
Tim Wong
Bank Reconciliation
May 31, 2011
BANK:
Balance, May 31

$ 595

Add: Deposit in transit

1,788
2,383

Less: Outstanding cheques

(603)

Adjusted bank balance

$1,780

BOOKS:
Balance, May 31

$1,882

Add: EFT collection

customer account

300
2,182

Less:
Service charge
NSF cheques
Charge for printed cheques

$ 12
120
9

Correction of book error

recorded $290 cheque
as $29

261

Adjusted book balance

Wongs actual cash balance is $1,780.

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(402)
$1,780

E 4-20

(10-15 min.)

E 4-21

Journal
DATE

May

ACCOUNT TITLES AND EXPLANATION

DEBIT

31

Cash.
Service Revenue
EFT collection of customer account.

31

Miscellaneous Expense ($12 + $9)...

Cash
.
Bank service charge and charge
for printed cheques.

21

31

Accounts Receivable...
Cash
.
NSF cheques returned by bank.

120

Salary Expense ($290 $29)..

Cash
.
Correction of book error.

261

31

CREDIT

300

Store Manager

FROM:

Student

21

120

261

(10-15 min.)
TO:

300

E 4-22

SUBJECT: Evaluation of internal control and plan for

improvement
There is a weakness in internal control over cash receipts. The cash registers do not keep a record of sales.
With no record, there is no way to determine how much cash should be in the cash drawer. This omission
makes it easy for the cashier to steal cash and not get caught.

To improve internal control, the company should use cash registers that record each sale. The manager can
prove the amount of cash in the cash drawer against this recorded amount.

Chapter 4 Internal Control and Cash

Copyright 2012 Pearson Canada Inc.

27

(20-30 min.)

E 4-24

Wireless Communications Inc.

Cash Budget
Year Ended December 31, 2012
(Millions)
Cash balance, December 31, 2011

81

Budgeted cash receipts:

Collections from customers

11,284

Sale of assets

115
11,480

Budgeted cash payments:

Payments for cost of
services and products

$6,166

Payments of operating expenses

2,543

Investment in equipment

1,825

Payment of debt

597

Payment of dividends

338

11,469

Cash available (needed) before financing

11

Budgeted cash balance, December 31, 2010

(75)

Cash available for additional investments, or

(New financing needed)

Wireless should expect to need new financing of $64 million during 2012.

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Problems
Group A
(20-30 min.)

P 4-43A

Req. 1
Alta Vista Toyota
Bank Reconciliation
June 30, 2011
BANK:
Balance, June 30, 2011

$ 9,513

Add: Deposits in transit ($1,060 + $337)

1,397
10,910

Less: Outstanding cheques

Cheque No.
3119

$ 632

3120

1,675

3121

100

3122

2,413

(4,820)

Adjusted bank balance, June 30, 2011

$ 6,090

BOOKS:
Balance, June 30, 2011
Add: EFT collection of monthly car lease
Bank collection of note receivable

$ 4,665
$ 326
1,701

Book error $1,390 cheque

recorded as $1,930

540

2,567
7,232

Less: EFT payment of insurance

Unauthorized signature cheque
Service charge

$ 219
903
20

Adjusted book balance, June 30, 2011

(1,142)
$ 6,090

Chapter 4 Internal Control and Cash

Copyright 2012 Pearson Canada Inc.

29

(continued)

P 4-43A

Req. 2
A bank account helps control cash by providing a place for safekeeping. The bank also provides a detailed list
of the companys cash transactions that managers can compare to the companys own cash records and
thereby correct any book errors quickly.

The bank reconciliation helps control cash by ensuring that the company accounts for its cash transactions
correctly and that the bank and book records of cash are correct. Also, the bank reconciliation establishes the
balance of cash to report on the balance sheet. The bank reconciliation is a critical tool in the detection of
fraud related to cash.

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Financial Accounting Fourth Canadian Edition Instructors Solutions Manual

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(20-30 min.)

P 4-44A

Req. 1
Family Services Association
Bank Reconciliation
May 31
BANK:
Balance, May 31

$4,023.05

Add: Deposit of May 31 in transit

16.15
4,039.20

Less: Outstanding cheques ($46.10 +

$141.00 + $578.05 + $11.87 +
$609.51 + $8.88 + $101.63)

$1,497.04

Correction of bank error, which

credited our account for the
deposit of another company

300.00

(1,797.04)

Adjusted bank balance, May 31

$2,242.16

BOOKS:
Balance, May 31

$2,256.14

Add: Interest revenue earned on bank

balance
Bank collection of donation

38.19
850.00

888.19
3,144.33

Less: EFT (utilities $250, insurance $100)

Service charge

$ 350.00
10.50

Returned cheque due to unauthorized

signature

395.00

NSF cheque

146.67

Adjusted book balance, May 31

(902.17)
$2,242.16

Chapter 4 Internal Control and Cash

Copyright 2012 Pearson Canada Inc.

31

(continued)

P 4-44A

DEBIT

CREDIT

Req. 2 (entries based on the reconciliation)

Journal
DATE

May

ACCOUNT TITLES AND EXPLANATION

31

Cash

38.19

Interest Revenue.

38.19

Interest earned on bank balance.

31

Cash

850.00

Donation Revenue.

850.00

Electronic receipt by bank.

31

Utilities Expense..

250.00

Cash...

250.00

Monthly rent.

31

Insurance Expense.

100.00

Cash...

100.00

Monthly insurance.

31

Miscellaneous Expense.

10.50

Cash...

10.50

Bank service charge.

31

Donations Revenue

395.00

Accounts Receivable..

146.67

Cash...
NSF client cheque and donor cheque returned by bank.

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541.67

(10-15 min.)
TO:

President, Sun Skin Care

FROM:

Concerned Employee

P 4-45A

It is unwise to have the employee who opens the mail also grant allowances to customers. Suppose a
customer pays an invoice in full. The mailroom employee can steal the customer cheque and grant an
allowance to cover the theft. To correct this internal control weakness, deny the mailroom employee access to
all accounting records. Also, appoint a separate employee to grant allowances to customers.

Notes:
1.

Student responses may vary.

2.

The mailroom employee obviously has access to the accounting recordsto know that a customer
has paid less than the full amount.

3.

It may be necessary to explain to students that the mailroom employee must forge the company
endorsement on customer cheques stolen. This person must also openand controla bank
account in the companys name. This may be quite easy.

Chapter 4 Internal Control and Cash

Copyright 2012 Pearson Canada Inc.

33

Problems
Group B
(20-30 min.)

P 4-50B

Req. 1
Cree Products
Bank Reconciliation
September 30, 2011
BANK:
Balance, September 30, 2011

$ 7,359

Add: Deposit of September 30 in transit

2,038
9,397

Less: Outstanding cheques

Cheque No.
1420

$ 970

1421

200

1422

2,267

Adjusted bank balance, September 30, 2011

(3,437)
$ 5,960

BOOKS:
Balance, September 30, 2011
Add: EFT collection of rent
Bank collection of note receivable

$ 4,831
$ 625
1,400

2,025
6,856

Less: NSF cheque

EFT payment of insurance
Service charge

$ 441
340
25

Book error $4,216 cheque

recorded as $4,126

90

Adjusted book balance, September 30, 2011

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(896)
$ 5,960

(continued)

P 4-50B

Req. 2
A bank account helps control cash by providing a place for safekeeping. The bank also provides a detailed list
of the companys cash transactions that Cree Products managers can compare to the companys own cash
records and thus correct any book errors quickly.

The bank reconciliation helps control cash by ensuring that the company accounts for its cash transactions
correctly and that the bank and book records of cash are correct. Also, the bank reconciliation establishes the
balance of cash to report on the balance sheet. The bank reconciliation is a critical tool in the detection of
fraud related to cash.

(10-15 min.)
TO:

President, Nordhaus Energy Co.

FROM:

Concerned Employee

P 4-52B

It is unwise to have the employee who opens the mail also grant allowances to customers. Suppose a
customer pays an invoice in full. The mailroom employee can steal the customer cheque and grant an
allowance to cover the theft. To correct this internal control weakness, deny the mailroom employee access to
all accounting records. Also, appoint a separate employee to grant allowances to customers.

Notes:
1.

Student responses may vary.

2.

The mailroom employee obviously has access to the accounting records to know that a customer
has paid less than the full amount.

3.

It may be necessary to explain to students that the mailroom employee must forge the company
endorsement on customer cheques stolen. This person must also open and control a bank
account in the companys name. This may be quite easy.
Chapter 4 Internal Control and Cash
Copyright 2012 Pearson Canada Inc.

35

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Financial Accounting Fourth Canadian Edition Instructors Solutions Manual

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