ACO 201 Problems Chapter 7 Solutions, Spring 2013

Brief Learning Exercises Objectives B. Ex. 7.1 B. Ex. 7.2 Bank reconciliations B. Ex. 7.3 B. Ex. 7.4 B. Ex. 7.5 Analysis B. Ex. 7.6 B. Ex. 7.7 B. Ex. 7.8 Notes receivable and interest B. Ex. 7.9 B. Ex. 7.10 Learning Objectives 7.1 3 7.2 1, 2 7.3 2 7.4 2 7.5 3 7.6 1, 2 7.7 1, 4 7.8 1, 5 Analysis Analysis, communication Analysis Analysis, judgment Analysis, communication Analysis, communication Analysis CHAPTER 7 FINANCIAL ASSETS OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING CASES Topic Skills 1, 4 1, 5 1, 2 Analysis Bank reconciliation Exercises Topic Accounting for marketable securities 1, 5 Real World: White Electric Supply Embezzling cash Real World: Nexity Bank, Bank of America, Discover Bank, Commerce Bank Evaluating cash equivalents Real World: Weis Markets and Sprint Nextel Co. Doubtful accounts by industry Real World: Molson Coors Brewing Co. and Anheuser- Busch Companies, Inc. Analyzing accounts receivable Uncollectible accounts - Income statement approach Analysis 1, 5, 7 Analysis, judgment, communication Real World: Westinghouse Electric Cash and cash equivalents Real World: Weis Markets Mark-to-market adjustments Analysis 2, 3 Analysis Analysis, communication 1, 4 6 Analysis 5, 7 Analysis, judgment, communication Analysis, communication 7 Analysis Skills Uncollectible accounts - balance sheet approach Protecting liquid assets Analyzing accounts receivable Real World: Apple Computer Reporting financial assets Real World: Microsoft Corporation Marketable securities Estimating uncollectible accounts You as a student © The McGraw-Hill Companies, Inc., 2010 Overview Learning Objective 7.9 7 7.10 Effects of transactions 1–5 7.11 Reporting financial assets 1 Analysis 7.12 Effects of account errors 1, 5, 7 7.13 Sale of marketable securities 1, 4 7.14 Notes and interest 6 7.15 1, 4, 5, 7 Learning Topic Objective 7.1 A,B 1, 3 7.2 A,B 2, 3 7.3 A,B 1, 5 7.4 A,B 1, 5 7.5 A,B 1, 4 7.6 A,B Notes receivable and interest 6 7.7 A,B Short Comprehensive Problem 1, 3–7 7.8 A,B Short Comprehensive Problem 1, 3–7 7.1 1, 5, 6 7.2 2, 5, 7 7.3 1–5, 7 7.4 2 7.5 1, 2 Analysis Analysis Analysis, communication Real World: Goodyear Tire & Rubber and PPL Energy Co. Collection performance by industry (Ethics, fraud & corporate governance) Accounting for marketable securities Bank reconciliation Protecting cash Aging accounts receivable Real World: The Home Depot, Inc. Examining an annual report Window dressing Exercises Topic Skills Analysis, communication Analysis Analysis Problems Critical Thinking Cases Cash management Analysis, communication Analysis, communication, judgment (Business Week) Real World: Bankrate.com Cash management (Internet) Analysis, communication, technology Analysis, communication, judgment Analysis, communication Analysis, communication, judgment Analysis, communication Analysis, communication, judgment Analysis, communication Analysis, communication Analysis, communication Analysis, communication Sets A, B Skills Analysis, communication Accounting principles Uncollectible accounts Understanding cash flows © The McGraw-Hill Companies, Inc., 2010 Overview (p.2) DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES Problems (Sets A and B) 7.1 A,B 25 Medium 7.2 A,B 45 Strong 7.3 A,B 15 Medium 7.4 A,B 30 Medium 7.5 A,B 40 Strong 7.6 A,B 20 Medium 7.7 A,B 20 Medium 7.8 A,B 40 Strong 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. Wilcox Mills/Walc Factory 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. Briefly covers accounting for notes receivable, including accrual of interest, maturity, and default. Scooter Warehouse/Data Management, Inc. 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. Weston Manufacturing Co./Westport Manufacturing Co. A comprehensive problem on marketable securities. Includes recording gains and losses, the mark-to-market adjustment, and balance sheet presentation. Eastern Supply/Southern Supply Hendry Corporation/Ciavarella Corporation 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. Super Star/Starlight 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. Banner, Inc./Dodge, Inc. A comprehensive bank reconciliation. Osage Farm Supply/Jason Chain Saws, Inc. 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. © The McGraw-Hill Companies, Inc., 2010 Overview Desc. Critical Thinking Cases Accounting Principles Rock, Inc. "Window Dressing" Ethics, Fraud & Corporate Governance Cash Management Business Week Bankrate.com No time estimate Internet 7.2 7.1 An Internet research problem that requires students to compare interest rates of various U.S. Treasury securities, CDs, and money market accounts. 10 Easy 20 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. 40 Strong 40 Strong Estimate, Medium 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. 7.3 7.4 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. 7.5 Students are asked to discuss the pros and cons of using cell phones to make credit purchases. © The McGraw-Hill Companies, Inc., 2010 Desc. of Prob & Cases SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1. 2. 3. 4. 5. 6. 7. a. b. c. d. e. 8. 9. Deposit cash receipts in the bank on a daily basis. 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 marketable securities. Then, should cash needs exceed the cash on hand, some of the marketable securities may quickly be converted back into cash. 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. 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 marketable securities, current value means current market value. For receivables, current value means the collectible amount, which is called net realizable value (i.e., the amount of cash to be received). Reconcile bank statements to determine that recorded cash receipts reached the bank. 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 marketable 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. (a) Outstanding checks, and (b) items collected for the depositor by the bank. 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. 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. Prepare an immediate record (or control listing) of all cash receipts. © The McGraw-Hill Companies, Inc., 2010 Q1-9 10. 11. 12. 13. 14. 15. 16. Mark-to-market is the process of adjusting the balance sheet valuation of investments in marketable securities to current market value at each balance sheet date. This adjustment affects only the balance sheet. The offsetting entry is to an owners’ 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 marketable 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 owners’ equity section of the balance sheet. An unrealized gain increases total owners’ equity, and an unrealized loss decreases owners’ 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. Marketable 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 marketable 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. The direct write-off method does not require estimates of uncollectible accounts expense or use a valuation allowance. When individual accounts receivable are determined to be uncollectible, they are written off by debiting Uncollectible Accounts Expense. 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. 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 Doubtful Accounts 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 uncollectible accounts expense to the year’s net 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 McGraw-Hill Companies, Inc., 2010 Q10-16 17. 18. 19. 20. 21. 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. 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. 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. 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 net 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. © The McGraw-Hill Companies, Inc., 2010 Q17-21 22. a. b. c. d. 23. 24. a. b. 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 marketable 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. In a multiple-step income statement, the loss from a sale of marketable securities reduces net income 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 (uncollectible accounts expense) 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. 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 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). Maturity value = $20,400 (interest = $20,000 x .08 x 90/360 = $400.) 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 Q22-24 B.Ex.7.1 a. b. c. B.Ex.7.2 a. $ 21,749 (200) (3,000) (549) $ 18,000 $ 22,000 5,000 (9,000) $ 18,000 b. $ 18,000 60,000 $ 78,000 c. Bank Service Charges………………………………… 200 Accounts Receivable…………………………………… 3,000 Office Supplies………………………………………… 549 Cash……………...………………………… 3,749 NSF check from Susque Company…………………………. Adjusted cash balance, December 31 (from part a.)………….. Cash equivalents: Money market account……………………. Cash and cash equivalents, December 31……………………….. Cash balance per bank statement………………………………… Add: Deposits in transit……………………………………………. Less: Outstanding checks…………………………………………. Adjusted cash balance, December 31…………………………….. SOLUTIONS TO BRIEF EXERCISES 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 Westinghouse Electric, 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 company's limited credit exposure to any one financial institution means simply that Westinghouse has not put "all of its eggs in any one basket." In short, it has spread any risk associated with cash equivalents across numerous financial institutions that issue these short-term securities. 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. Error corrections, office supplies………………………….. Adjusted cash balance, December 31………………………………. Note: Stocks are never considered cash equivalents and commercial paper can be considered cash equivalents only when durations are 90 days or less. The $42 million designated as restricted cash and cash equivalents is not available to meet the normal operating needs of the company. The amount may be reserved for a specific purpose or may represent a compensating balance as a condition of a bank loan or some other credit agreement. Cash balance per general ledger…………………………………. Less: Bank service charge………………….…………………….. © The McGraw-Hill Companies, Inc., 2010 BE7.1,2 B.Ex.7.3 a. b. B. Ex. 7.4 a. Dec. 4 Marketable Securities……………………. 30,000 Cash…………………………………. 30,000 b. Dec. 9 Cash…………………………………………. 10,000 Marketable Securities……………… 7,000 Gain on Sale of Investments……….. 3,000 c. Dec. 18 Cash………………………………………… 5,000 Loss on Sale of Investments……………… 1,000 Marketable Securities……………… 6,000 d. Dec. 31 Marketable Securities……………………. 3,000 Unrealized Holding Gain on Investments ... 3,000 To adjust the balance sheet valuation of marketable securities from their cost ($30,000 - $7,000 - $6,000 = $17,000) to their current market value of $20,000. Weis'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. The $14 million unrealized gain increases the asset amount and also appears in an account in Weis's stockholders' equity section of its balance sheet. The recognition of this gain does not involve any cash flow. Weis'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. To record the sale of marketable securities at a loss. c. d. Weis'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 marketable securities were sold. To record the sale of marketable securities at a gain. To record the purchase of marketable securities. © The McGraw-Hill Companies, Inc., 2010 BE7.3,4 B.Ex.7.5 a. Uncollectible Accounts Expense…………………. 12,000 Allowance for Doubtful Accounts .......... 12,000 b. Uncollectible Accounts Expense…………………. 15,000 Allowance for Doubtful Accounts ......... 15,000 B.Ex.7.6 $ 6,000,000 $ 5,000,000 9,000,000 (100,000) (7,835,000) $ 6,065,000 $ 75,000 90,000 (100,000) $ 65,000 Ending net realizable value ($6,065,000 - $65,000)……………. 6,000,000 $ Allowance for Doubtful Accounts (ending balance)……………. Accounts Receivable (beginning balance)………………………. Add: Credit sales for the period……………………………………. Less: Accounts receivable written-off…………………………….. Accounts receivable collected…………………………… Accounts Receivable (ending balance)………………………….. Less: Accounts receivable written-off…………………………… Past due 61-90 days 12,000 x 40% = 4,800 Required allowance for doubtful accounts balance $13,400 credit Past due over 90 days 2,000 x 90% = 1,800 * $5,000,000 - $4,925,000 = $75,000 beginning balance in the Allowance for Doubtful Accounts. Past due 1-30 days 40,000 x 4% = 1,600 Allowance for Doubtful Accounts (beginning balance*)………. Add: Uncollectible accounts expense ($9 million x 1%)……… To record uncollectible accounts expense ($13,400 - $1,400 credit balance = $12,000). Ending net realizable value of accounts receivable……………. Computations: To record uncollectible accounts expense ($13,400 + $1,600 debit balance = $15,000). Computations: Current $60,000 x 2% = $ 1,200 Past due 31-60 days 25,000 x 16% = 4,000 © The McGraw-Hill Companies, Inc., 2010 BE7.5,6 B.Ex. 7.7 a. b. c. B.Ex. 7.8 a. Sept. 1 22,000 Accounts Receivable ………………… 22,000 b. Dec. 31 Interest Receivable ……………………………… 880 Interest Revenue ……………………… 880 c. May 31 23,980 Notes Receivable ……………………… 22,000 Interest Receivable …………………… 880 Interest Revenue ……………………… 1,100 Accounts receivable turnover rate (net sales/average accounts receivable): To record receipt of a 9-month, 12% note receivable in settlement of the account receivable of Herbal Innovations. Both of these companies have very liquid accounts receivable – that is, their receivables convert quickly into cash. However, the accounts receivable of Anheuser-Busch are even more liquid than those of Molson Coors. Anheuser- Busch, on average, collects on its outstanding accounts 12 days faster than Anheuser-Busch (31 days - 19 days). Notes Receivable ………………………………… Cash ……………………………………………… Molson Coors : $8,320/$720 = 11.6 times Anheuser-Busch : $17,400/$900 = 19.3 times Accounts receivable days outstanding (365 days/accounts receivable turnover rate): To recognize 4 months’ interest on note Molson Coors : 365 days/11.6 times = 31 days Anheuser-Busch : 365 days/19.3 times = 19 days 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 BE7.7,8 B.Ex. 7.9 B.Ex. 7.10 a. b. $1,500,000 ÷ $125,000 = 12 times 365 days ÷ 12 times turnover rate = 30.4 days All sales by long distance carriers, such as Sprint Nextel Corporation, are made on account. In contrast, the majority of sales made by grocery chains, such as Weis Markets, are cash sales . Thus, one would expect accounts receivable, expressed as a percentage of net sales, to be larger for Sprint Nextel than it is for Weis (10.5% versus 2.1%). Sales made on account by grocery chains 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 net sales, is nearly 28 times greater for Sprint Nextel than it is for Weis (1.1% versus 0.04%). © The McGraw-Hill Companies, Inc., 2010 BE7.9 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. Cash equivalents are safe and highly liquid investments that convert to cash within 90 days of acquisition. These investments often include certificates of deposits (CDs), U.S. Treasury bills, and money market accounts. Apple Computer’s accounts receivable, in total, amount to $1.637 billion. Of this amount, however, the company estimates that $44 million will not be collected. Thus, the company reports receivables at a net realizable value of $1.593 billion in its balance sheet ($1.637 billion - $44 million). 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. Marketable securities are reported at market value, whereas accounts receivable are reported at net realizable 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 marketable 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. SOLUTIONS TO EXERCISES 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. Ex. 7.1 © The McGraw-Hill Companies, Inc., 2010 E7.1,2 Ex. 7.3 a. b. 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. 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. © The McGraw-Hill Companies, Inc., 2010 E7.3 Ex. 7.4 a. b. c. (1) (2) (3) (