ACCT 210 Homework Chapter 7 Solutions, Fall 2012

© The McGraw-Hill Companies, Inc., 2010 Overview CHAPTER 7 FINANCIAL ASSETS Brief Learning Exercises Topic Objectives Skills B. Ex. 7.1 1, 2 Analysis B. Ex. 7.2 Bank reconciliations 2, 3 Analysis B. Ex. 7.3 1, 4 Analysis, communication B. Ex. 7.4 1, 4 Analysis B. Ex. 7.5 1, 5 Analysis B. Ex. 7.6 1, 5 Analysis B. Ex. 7.7 1, 5, 7 Analysis, judgment, communication B. Ex. 7.8 Notes receivable and interest 6 Analysis B. Ex. 7.9 5, 7 Analysis, judgment, communication B. Ex. 7.10 Analyzing accounts receivable 7 Analysis Learning Exercises Topic Objectives Skills 7.1 You as a student 3 Analysis, communication 7.2 1, 2 Analysis 7.3 2 Analysis, judgment 7.4 Protecting liquid assets 2 Analysis, communication 7.5 Bank reconciliation 3 Analysis 7.6 1, 2 Analysis, communication 7.7 1, 4 Analysis, communication OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING CASES Real World: Singapore Airlines Cash and cash equivalents Real World: Nestlé Mark-to- market adjustments Accounting for investments in securities Uncollectible accounts - balance sheet approach Uncollectible accounts - Income statement approach Real World: Cathay Pacific Airways and Anheuser-Busch Companies Limited Analyzing accounts receivable Real World: Seven and i Holdings Co., Ltd and Nippon Telegraph and Telephone Corporation. Impairment by industry Real World: Foxconn International Reporting financial assets Real World: White Electric Supply Embezzling cash Real World: Asian Bank, Bank of Greater Asia, European Bank, Pacific Asian Bank Evaluating cash equivalents Real World: Assicurazioni Generali S.p.A. Investment in Securities © The McGraw-Hill Companies, Inc., 2010 Overview 7.8 Estimating uncollectible accounts 1, 5 Analysis Real World: Assicurazioni Generali S.p.A. Investment in Securities © The McGraw-Hill Companies, Inc., 2010 Overview (p.2) Learning Exercises Topic Skills 7.9 7 Analysis, communication 7.10 Effects of transactions 1–5 Analysis 7.11 Reporting financial assets 1 Analysis 7.12 Effects of account errors 1, 5, 7 Analysis 7.13 Sale of investments in securities 1, 4 Analysis 7.14 Notes and interest 6 Analysis 7.15 1, 4, 5, 7 Analysis, communication Problems Learning Sets A, B Topic Skills 7.1 A,B Bank reconciliation 1, 3 Analysis, communication 7.2 A,B Protecting cash 2, 3 Analysis, communication 7.3 A,B Aging accounts receivable 1, 5 Analysis, communication 7.4 A,B Uncollectible accounts 1, 5 Analysis, communication 7.5 A,B 1, 4 Analysis, communication 7.6 A,B Notes receivable and interest 6 Analysis, communication 7.7 A,B Short Comprehensive Problem 1, 3–7 Analysis, communication, judgment 7.8 A,B Short Comprehensive Problem 1, 3–7 Analysis, communication, judgment Critical Thinking Cases 7.1 Accounting principles 1, 5, 6 Analysis, communication 7.2 Understanding cash flows 2, 5, 7 Analysis, communication, judgment 7.3 Window dressing 1–5, 7 Analysis, communication, judgment 7.4 1, 2 Objective s Real World: Compagnie Générale des Etablissements Michelin and HK Electric Holdings Limited Collection performance by industry Real World: adidas AG Examining an annual report Objective s Accounting for investments in securities (Ethics, fraud & corporate governance) Real World: Bankrate.com Cash management (Internet) Analysis, communication, technology © The McGraw-Hill Companies, Inc., 2010 Overview Desc. DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES Problems (Sets A and B) 7.1 A,B Banner Limited/Dodge Limited 25 Medium A comprehensive bank reconciliation. 7.2 A,B Osage Farm Supply/Jason Chain Saws Limited 45 Strong 7.3 A,B Super Star/Starlight 15 Medium 7.4 A,B Wilcox Mills/Walc Factory 30 Medium 7.5 A,B Weston Manufacturing Co./Westport Manufacturing Co. 40 Strong 7.6 A,B Eastern Supply/Southern Supply 20 Medium 7.7 A,B Scooter Warehouse/Data Management Limited 20 Medium 7.8 A,B Hendry Corporation/Ciavarella Corporation 40 Strong Below are brief descriptions of each problem and case. These descriptions are accompanied by the estimated time (in minutes) required for completion and by a difficulty rating. The time estimates assume use of the partially filled-in working papers. Students are to analyze a fraudulently prepared bank reconciliation to determine the amount of concealed embezzlement. Also calls for recommendations for improving internal control. A very challenging problem well suited to use as a group assignment. Computation of the amount required in the allowance for doubtful accounts based on an aging schedule of accounts receivable. Also requires journal entries for adjustment of the allowance account and for write-off of a worthless receivable. A problem designed to dispel the misconception that the allowance is equal to annual bad debt expense. Students are to summarize (in general journal entry form) transactions during the year that affect the allowance for doubtful accounts. Then they are to comment on the relative size of the year-end allowance in comparison to write- offs during the subsequent year. * A comprehensive problem on investments in securities. Includes recording gains and losses, the mark-to-market adjustment, and balance sheet presentation. Briefly covers accounting for notes receivable, including accrual of interest, maturity, and default. A short comprehensive problem that integrates the various components of financial assets. Includes a bank reconciliation, cash equivalents, short-term investments, doubtful accounts, notes receivable, and interest revenue. A short comprehensive problem that integrates the various components of financial assets. Includes a bank reconciliation, cash equivalents, short-term investments, doubtful accounts, notes receivable, and interest revenue. © The McGraw-Hill Companies, Inc., 2010 Desc. of Prob & Cases Critical Thinking Cases 7.1 Accounting Principles 20 Medium 7.2 Rock Limited 40 Strong 7.3 "Window Dressing" 40 Strong Ethics, Fraud & Corporate Governance 7.4 Cash Management 10 Easy Business Week 7.5 Bankrate.com No time estimate Internet Estimate, Medium Accounting practices are described in four separate situations. Students are asked to determine whether there has been a violation of generally accepted accounting principles, to identify the principles involved, and to explain the nature of the violations. An unstructured problem involving the effects of a major change in credit policy upon sales, cash receipts, turnover of accounts receivable, and uncollectible accounts. Good problem for classroom discussion. Students are to evaluate several proposals being considered by management for "improving" the year-end balance sheet. One issue is whether the company must comply with GAAP as it is not publicly owned. Involves both ethical and accounting issues. Students are asked to discuss the pros and cons of using cell phones to make credit purchases. An Internet research problem that requires students to compare interest rates of various U.S. Treasury securities, CDs, and money market accounts. © The McGraw-Hill Companies, Inc., 2010 Q1-9 SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1. 2. 3. 4. 5. 6. 7. a. b. c. Prepare an immediate record (or control listing) of all cash receipts. d. Deposit cash receipts in the bank on a daily basis. e. Reconcile bank statements to determine that recorded cash receipts reached the bank. 8. (a) Outstanding checks, and (b) items collected for the depositor by the bank. 9. Receivables are created as a result of sales and are converted into cash as they are collected. Cash receipts that will not be needed in the near term are invested in investment in securities. Then, should cash needs exceed the cash on hand, some of the investment in securities may quickly be converted back into cash. All financial assets appear in the balance sheet at their current value—that is, the amount of cash that the assets represent. For cash, current value is simply the face amount. But for investment in securities, current value means current market value. For receivables, current value means the collectible amount, which is called book value (i.e., the amount of cash to be received). Cash equivalents are very short-term investments that convert quickly into cash. Examples include money market funds, U.S. Treasury bills, certificates of deposit, and high-grade commercial paper. These items are considered so similar to cash that they often are combined with cash in the balance sheet. The first asset in the balance sheet then is called Cash and cash equivalents. Lines of credit are preapproved loans, which the borrower may access simply by writing a check. A line of credit increases solvency, because it gives the holder immediate access to cash. Unused lines of credit generally are disclosed in the notes accompanying financial statements. Yes, efficient management of cash includes more than preventing losses from fraud or theft. Efficient management of cash also includes policies that will (a) provide accurate accounting for all cash receipts, cash payments, and cash balances; (b) maintain a sufficient amount of cash to make all payments promptly as required; and (c) prevent unnecessarily large amounts of cash from being held idle in bank checking accounts that produce little or no revenue. Cash generates little or no revenue. In fact, federal laws prohibit banks from paying interest on corporate checking accounts. Therefore, cash not needed in the near future should be invested to earn some form of revenue. Short-term, liquid investments include cash equivalents and investment in securities. If cash is available on a long-term basis, it usually can be used to finance growth or repay long-term debt. If it cannot be used efficiently in the business, it should be distributed to the company’s owners. Separate the functions of handling cash receipts from maintenance of (or access to) the accounting records. Prepare a cash budget so that departmental cash receipts can be compared with expected amounts. A petty cash fund is a convenient way to pay for small expenditures without having to issue a check. Receipts are kept for all amounts disbursed from the fund. Periodically, the fund is replenished by debiting various expenses (or Miscellaneous Expense) and crediting Cash by the amount of the disbursement receipts on file. © The McGraw-Hill Companies, Inc., 2010 Q10-16 10. 11. 12. 13. 14. 15. 16. Investments in securities are less liquid than cash equivalents, primarily due to management’s intent with regard to converting them to cash. They are usually presented separate from cash and cash equivalents in the balance sheet. For each type of security owned the investment in securities subsidiary ledger shows the total cost, number of units (shares or bonds) owned, and cost per unit. The record assists the investor in keeping track of the securities owned, of interest and dividends received, and in computing the gain or loss resulting from sales of specific securities. Mark-to-market is the process of adjusting the balance sheet valuation of investments in investment in securities to current market value at each balance sheet date. This adjustment affects only the balance sheet. The offsetting entry is to an equity account sometimes entitled Unrealized Holding Gains (or Losses) on Investments. The account Unrealized Holding Gains (or Losses) on Investments represents the difference between the cost of investment in securities owned and their current market value. In essence, this is the amount of gain or loss that would be realized if the securities were sold today. The amount of unrealized gain or loss appears in the equity section of the balance sheet. An unrealized gain increases total equity, and an unrealized loss decreases equity. Uncollectible accounts expense is associated with the revenue resulting from making credit sales to customers who do not pay their bills. The matching principle states that revenue should be offset with all of the expenses incurred in producing that revenue. Therefore, the expense of an uncollectible account should be recognized in the same accounting period as the credit sale. At the time of a credit sale, we do not know that the resulting account receivable will prove to be uncollectible. This determination usually is made only after months of unsuccessful collection effort. Therefore, if the expense of uncollectible accounts is to be recognized in the same period as the related sales revenue, this expense must be estimated. The balance sheet approach to estimating uncollectible accounts means aging the accounts receivable on hand at year-end and estimating the uncollectible portion of these receivables. The Allowance for Impairment is then adjusted by the amount necessary to make it equal to the estimated uncollectible amount contained in the receivables. The income statement approach to estimating uncollectible accounts means determining the average percentage relationship of impairment loss to the year’s sales on credit. Ordinarily, no consideration is given to the existing balance in the allowance account. If the percentage used is valid, the allowance account will be subject to fluctuations in the short run but will neither build up to unreasonable size nor become exhausted. The direct write-off method does not require estimates of impairment loss or use a valuation allowance. When individual accounts receivable are determined to be uncollectible, they are written off by debiting Impairment loss. This method (in contrast to the allowance method) does not attempt to assign the expense from uncollectible accounts to the accounting period in which the uncollectible receivables originated, and therefore does not match related revenue and expenses. © The McGraw-Hill Companies, Inc., 2010 Q10-16 The direct write-off method does not require estimates of impairment loss or use a valuation allowance. When individual accounts receivable are determined to be uncollectible, they are written off by debiting Impairment loss. This method (in contrast to the allowance method) does not attempt to assign the expense from uncollectible accounts to the accounting period in which the uncollectible receivables originated, and therefore does not match related revenue and expenses. © The McGraw-Hill Companies, Inc., 2010 Q17-21 17. 18. 19. 20. 21. No; companies are not required to use the same method of accounting for uncollectible accounts in their financial statements and in their income tax returns. In fact, tax regulations require use of the direct write-off method in income tax returns. In financial statements, however, an allowance method generally is considered preferable and is required for compliance with generally accepted accounting principles. Exceptions may be made due to the concept of materiality. The advantages of making credit sales only to customers who use nationally recognized credit cards are that this policy: (1) eliminates all the work associated with maintaining records of accounts receivable from individual customers, billing customers, and collection procedures; (2) provides cash almost immediately from credit sales; (3) eliminates the risk of uncollectible accounts; (4) eliminates the need to investigate a customer’s credit before making a credit sale; and (5) does not restrict sales by excluding the large number of shoppers who prefer to use these credit cards for purchases. Alta Mine Company apparently has not benefited from the new policy of honoring nationally known credit cards. Since all previous sales were for cash, the restaurant has not had problems with accounts receivable or uncollectible accounts. The only possible benefit for Alta Mine Company from honoring credit cards would be an increase in sales, and this did not occur. Since former cash customers have begun using the credit cards, Alta Mine Company is actually having to wait longer to receive cash from sales and is having to pay a discount to the credit card company. The accounts receivable turnover rate is computed by dividing annual sales by the average amount of accounts receivable throughout the year. This ratio indicates the number of times during the year that the average amount of accounts receivable is collected. Thus, dividing 365 days by the accounts receivable turnover rate indicates the number of days required (on average) for the company to collect its average accounts receivable. These computations are of interest to short-term creditors because they indicate the liquidity of the company’s accounts receivable—that is, how quickly this asset is converted into cash. The annual audit of a company by a CPA firm includes the confirmation of receivables by direct communication with the debtors. The debtors (customers) are asked to respond directly to the CPA firm, confirming the amount and due date of the accounts being confirmed. Thus, documentary evidence is gathered to prove that the customers actually exist and that they agree with the terms stated. The CPA firm will also study the client’s internal controls relating to receivables, evaluate the credit ratings of major debtors, and consider the adequacy of the allowance for doubtful accounts. © The McGraw-Hill Companies, Inc., 2010 Q22-24 22. a. b. c. d. 23. 24. a. Maturity value = $10,900 (interest = $10,000 x .09 x 1 = $900.) Maturity date = July 1, 2010 (365 days later, but the counting starts on July 2). b. Maturity value = $20,400 (interest = $20,000 x .08 x 90/360 = $400.) In a multiple-step income statement, the loss from a sale of investment in securities reduces profit and is classified as a nonoperating item. In a statement of cash flows, the entire proceeds from the sale are shown as a cash receipt from investing activities. The adjusting entry to create or increase the allowance for doubtful accounts involves the recognition of an expense. This expense (impairment loss) appears as a selling expense in a multiple-step income statement. But this adjusting entry, like all adjusting entries, involves no cash receipts or cash payments. Therefore, it has no effect upon cash flows. Writing off an account receivable against the allowance does not affect income or cash flows. The adjusting entry to increase the balance sheet valuation of investment in securities affects only the balance sheet. No cash flows are involved, and the unrealized gain appears in the stockholders’ equity section of the balance sheet, not in the income statement. Changes in the market value of securities owned do not affect the investor's taxable income. For income tax purposes, gains on investments are recognized only when the investments are sold. Maturity date = June 9, (20 days in March, 30 days in April, 31 days in May, leaves 9 days in June). © The McGraw-Hill Companies, Inc., 2010 BE7.1,2 SOLUTIONS TO BRIEF EXERCISES B.Ex.7.1 a. b. B.Ex.7.2 a. Cash balance per general ledger…………………………………. $ 21,749 Less: Bank service charge………………….…………………….. (200) NSF check from Susque Company…………………………. (3,000) Error corrections, office supplies………………………….. (549) Adjusted cash balance, December 31………………………………. $ 18,000 Cash balance per bank statement………………………………… $ 22,000 Add: Deposits in transit……………………………………………. 5,000 Less: Outstanding checks…………………………………………. (9,000) Adjusted cash balance, December 31…………………………….. $ 18,000 b. Adjusted cash balance, December 31 (from part a.)………….. $ 18,000 Cash equivalents: Money market account……………………. 60,000 Cash and cash equivalents, December 31……………………….. $ 78,000 c. Bank Service Charges……………………………… 200 Accounts Receivable……………………………… 3,000 Office Supplies…………………………………… 549 Cash……………...………………………… 3,749 Cash equivalents are usually short-term debt securities (e.g., U.S. Treasury bills, high-grade commercial paper, etc.). This appears to be true for Singapore Airlines, as the footnote specifically mentions that all cash equivalents have a maturity date of three months or less (equity securities have no maturity date). The statement referring to the risk of fluctuation in value of company's assets is low. In short these short term assets will seldom fluctuate in value as a result. Note: Stocks are never considered cash equivalents and commercial paper can be considered cash equivalents only when durations are 90 days or less. To record bank service charges, to reclassify a NSF check as an account receivable, and to correct an error in the recording of office supplies. © The McGraw-Hill Companies, Inc., 2010 BE7.3,4 B.Ex.7.3 a. b. c. d. B. Ex. 7.4 a. Dec. 4 Investments in Securities……………………. 30,000 Cash…………………………………. 30,000 b. Dec. 9 Cash…………………………………………. 10,000 Investments in Securities……………… 7,000 Gain on Sale of Investments……….. 3,000 c. Dec. 18 Cash………………………………………… 5,000 Loss on Sale of Investments……………… 1,000 Investments in Securities……………… 6,000 d. Dec. 31 Investments in Securities……………………. 3,000 Unrealized Holding Gain on Investments ... 3,000 Nestlé's unrealized gain on investments is the difference between the cost of these investments and their current market values. In essence, it is the amount of gain that would be realized if the investments were sold today. But the term "unrealized" indicates that this gain has not been finalized through an actual sale of the investments. Therefore, its amount will change as market values fluctuate. The $358 million unrealized gain increases the asset amount and also appears in an account in Nestlé's shareholders' equity section of its balance sheet. The recognition of this gain does not involve any cash flow. Nestlé's unrealized gain is not included in the computation of taxable income. For income tax purposes, losses and gains on investments are reported in the period in which the investments are sold. Nestlé's short-term creditors are primarily interested in the company's current debt-paying ability. From this perspective, mark-to-market should enhance the usefulness of the balance sheet by showing the amount of liquid resources that would be available if the investment in securities were sold. To record the purchase of investment in securities. To record the sale of investment in securities at a gain. To record the sale of investment in securities at a loss. To adjust the balance sheet valuation of investment in securities from their cost ($30,000 - $7,000 - $6,000 = $17,000) to their current market value of $20,000. © The McGraw-Hill Companies, Inc., 2010 BE7.5,6 B.Ex.7.5 a. Impairment loss…………………. 12,000 Allowance for Impairment .......... 12,000 b. Impairment loss…………………. 15,000 Allowance for Impairment ......... 15,000 Computations: Current $60,000 x 2% = $ 1,200 Past due 1-30 days 40,000 x 4% = 1,600 Past due 31-60 days 25,000 x 16% = 4,000 Past due 61-90 days 12,000 x 40% = 4,800 B.Ex.7.6 Ending book value of accounts receivable……………. $ 6,000,000 Computations: Accounts Receivable (beginning balance)………………………. $ 5,000,000 Add: Credit sales for the period……………………………………. 9,000,000 Less: Accounts receivable written-off…………………………… (100,000) Accounts receivable collected…………………………… (7,835,000) Accounts Receivable (ending balance)………………………….. $ 6,065,000 Allowance for Impairment (beginning balance*)………. $ 75,000 Add: impairment loss of receivable ($9 million x 1%)……… 90,000 Less: Accounts receivable written-off…………………………….. (100,000) Allowance for Impairment (ending balance)……………. $ 65,000 Ending book value ($6,065,000 - $65,000)……………. $ 6,000,000 To record impairment loss of receivable ($13,400 - $1,400 credit balance = $12,000). To record impairment loss ($13,400 + $1,600 debit balance = $15,000). Past due over 90 days 2,000 x 90% = 1,800 Required allowance for impairment balance $13,400 credit * $5,000,000 - $4,925,000 = $75,000 beginning balance in the Allowance for Impairment. © The McGraw-Hill Companies, Inc., 2010 BE7.7,8 B.Ex. 7.7 a. b. c. B.Ex. 7.8 a. Sept. 1 Notes Receivable ………………………… 22,000 Accounts Receivable …………… 22,000 b. Dec. 31 Interest Receivable ……………………… 880 Interest Revenue ………………… 880 To recognize 4 months’ interest on note c. May 31 Cash …………………………………………… 23,980 Notes Receivable ………………… 22,000 Interest Receivable ……………… 880 Interest Revenue ………………… 1,100 Accounts receivable turnover rate (sales/average accounts receivable): Tesco: £54,327/£1,555 = 34.94 times Carrefour: €86,967/€3,172 = 27.42 times Accounts receivable days outstanding (365 days/accounts receivable turnover rate): Tesco: 365 days/34.94 times = 10.45 days Carrefour: 365 days/27.42 times = 13.31 days Both of these companies have very liquid accounts receivable – that is, their receivables convert quickly into cash. However, the accounts receivable of Tesco are even more liquid than those of Carrefour. Tesco, on average, collects on its outstanding accounts 3 days faster than Cathay Pacific (13 days - 10 days). To record receipt of a 9-month, 12% note receivable in settlement of the account receivable of Herbal Innovations. from Herbal Innovations ($22,000 x 12% x 4/12 = $880). To record collection of principal and interest on 12% note from Herbal Innovations. Interest revenue is computed as $22,000 x 12% x 5/12. © The McGraw-Hill Companies, Inc., 2010 BE7.9 B.Ex. 7.9 B.Ex. 7.10 a. b. All sales by long distance carriers, such as Nippon Telegraph and Telephone Corporation, are made on account. In contrast, the majority of sales made by convenience stores, such as Seven and i Holdings Limited, are cash sales. Thus, one would expect accounts receivable, expressed as a percentage of sales, to be larger for Nippon Telegraph and Telephone Corporation than it is for Seven and i Holdings Limited (18.7% versus 2.3%). Sales made on account by convenience store are often to institutional customers (e.g., restaurants, college cafeterias, Boy Scout Camps, etc.). Long distance carriers, on the other hand, generate a large volume of credit sales from individuals. Generally speaking, individuals pose a greater credit risk than institutional customers. Therefore, it is not surprising that the allowance for doubtful accounts, expressed as a percentage of sales, is nearly 5 times greater for Nippon Telegraph and Telephone than it is for Seven and i (0.08% versus 0.4%). $1,500,000 ÷ $125,000 = 12 times 365 days ÷ 12 times turnover rate = 30.4 days © The McGraw-Hill Companies, Inc., 2010 E7.1,2 SOLUTIONS TO EXERCISES Ex. 7.1 a. Balance per bank statement at September 30 ……………………….. $ 3,400 Add: Deposit made by your parents on October 2 ………………….. 2,400 $ 5,800 Deduct outstanding checks: #203 University tuition ……………………………………………….. 1,500 #205 University bookstore …………………………………………… 350 #208 Rocco’s pizza ……………………………………………………. 25 #210 Stereo purchase …………………………………………………. 425 #211 October apartment rent …………………………………………. 500 Adjusted cash balance …………………………………………………. $ 3,000 Balance per your checkbook (including $2,400.00 deposit) $ 3,001 Add: Interest earned in September 4 $ 3,005 Deduct bank’s service charge 5 Adjusted cash balance (as above) $ 3,000 Ex. 7.2 a. b. c. d. e. As shown above, your correct current checkbook balance is $3,000. Prior to adjusting your records, neither your checkbook nor your bank statement report this balance because neither contains complete information about your account activity during the month. Financial assets are cash and other assets that will convert directly into known amounts of cash. Cash and cash equivalents are reported in the balance sheet at face value. Investments in securities are reported at market value, whereas accounts receivable are reported at book value. The common goal is to report these assets at their current value—that is, the amount of cash that each asset represents. Companies hold investment in securities because these assets, unlike corporate checking accounts, have the potential to generate income through interest and capital appreciation. The reason companies hold accounts receivable is different. Most companies must be willing to make sales on account (as opposed to only cash sales) in order to maximize their income potential. Thus, they must be willing to hold some of their resources in the form of accounts receivable. Bank balances and cash comprise cash held by the Group and short term bank deposits with an original maturity of three months or less.. Foxconn’s receivable, in total, amount to $1,439.87 million. Of this amount, however, the company estimates that $1.23 million will not be collected. Thus, the company reports receivables at a book value of $1,438.64 million in its balance sheet ($1,439.87 million - $1.23 million). © The McGraw-Hill Companies, Inc., 2010 E7.3 Ex. 7.3 a. b. There were several controls lacking at White Electric Supply which made it possible for the bookkeeper to embezzle nearly $416,000 in less than five years. First, not only did the bookkeeper prepare the company’s bank reconciliation each month, but she also had complete control over all cash receipts and disbursements. These duties must be segregated for adequate protection against theft. Second, the company had no inventory control system in place. Thus, it went undetected by management when the check register consistently showed inventory purchase amounts in excess of actual inventory received. Finally, because White Electric Supply was not a publicly owned corporation, an independent audit was not required. As a result, management never considered conducting an independent review of the company’s financial records and control systems. Employee theft is never ethical, even if it is committed to pay for medical bills. It is also unethical for employees to “borrow” funds from their employers without formal permission (even if one has the “intent” of eventually paying back the full amount). Note to instructor: The White Electric Supply example is one of several “real world” cases documented in a video entitled, Red Flags: What Every Manager Should Know About Crime. The video is produced by The Institute for Financial Crime Prevention, 716 West Avenue, Austin, TX 78701. © The McGraw-Hill Companies, Inc