Chapter 7: Q7RQ (page 411)
What are some limitations of internal controls?
There are four limitations of the internal controls.
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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?
Correcting internal control weaknesses
Each of the following situations has an internal control weakness.
a. Upside-Down Applications develops custom programs to customers’ specifications.
Recently, development of a new program stopped while the programmers
redesigned Upside-Down’s accounting system. Upside-Down’s accountants could
have performed this task.
b. Norma Rottler has been your trusted employee for 24 years. She performs all cashhandling
and accounting duties. Norma just purchased a new luxury car and a new
home in an expensive suburb. As owner of the company, you wonder how she
can afford these luxuries because you pay her only $30,000 a year and she has no
source of outside income.
c. Izzie Hardwoods, a private company, falsified sales and inventory figures in order
to get an important loan. The loan went through, but Izzie later went bankrupt and
could not repay the bank.
d. The office supply company where Pet Grooming Goods purchases sales receipts
recently notified Pet Grooming Goods that its documents were not prenumbered.
Howard Mustro, the owner, replied that he never uses receipt numbers.
e. Discount stores such as Cusco make most of their sales in cash, with the remainder
in credit card sales. To reduce expenses, one store manager ceases purchasing
fidelity bonds on the cashiers.
f. Cornelius’s Corndogs keeps all cash receipts in an empty box for a week because
the owner likes to go to the bank on Tuesdays when Joann is working.
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.
Preparing a bank reconciliation
The Cash account of Guard Dog Security Systems reported a balance of \(2,540 at December 31, 2018. There were outstanding checks totaling \)400 and a December 31 deposit in transit of \(100. The bank statement, which came from Park Cities Bank, listed the December 31 balance of \)3,340. Included in the bank balance was a collection of \(510 on account from Brendan Ballou, a Guard Dog customer who pays the bank directly. The bank statement also shows a \)30 service charge and $20 of interest revenue that Guard Dog earned on its bank balance. Prepare Guard Dog’s bank reconciliation for December 31.
The Scott Sun & Shade Company had the following financial data at December 31, 2018:
Cash and cash equivalents $ 60,000
Total current liabilities 75,000
What is the cash ratio as of December 31, 2018, for Scott Sun & Shade?
Phoenix Restaurants accepts credit and debit cards as forms of payment. Assume Phoenix had $12,000 of credit and debit card
sales on June 30, 2017.
9. Suppose Phoenix’s processor charges a 2% fee and deposits sales net of the fee. Journalize the sale transaction for the
restaurant.
10. Suppose Phoenix’s processor charges a 2% fee and deposits sales using the gross method. Journalize the sale transaction for
the restaurant.
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