Financial Accounting Tools For Business Decision Making 6th Canadian Edition by Paul D. Kimmel – Test Bank A+

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Financial Accounting Tools For Business Decision Making 6th Canadian Edition by Paul D. Kimmel – Test Bank A+

Name: Financial Accounting Tools For Business Decision Making 6th Canadian Edition by Paul D. Kimmel – Test Bank A+
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$35.00

SKU: Financial Accounting Tools For Business Decision Making 6th Canadian Edition by Paul D. Kimmel – Test Bank A+

Description

Item	SO	LOD	Item	SO	LOD	Item	SO	LOD	Item	SO	LOD	Item	SO	LOD
True-False Statements
1.	1	E	9.	2	M	17.	2	E	25.	4	M	33.	5	E
2.	1	E	10.	2	E	18.	2	E	26.	4	E	34.	5	E
3.	1	M	11.	2	M	19.	2	M	27.	4	E	35.	5	M
4.	1	M	12.	2	E	20.	3	E	28.	5	E	*36.	6	M
5.	1	E	13.	2	E	21.	3	M	29.	5	E	*37.	6	E
6.	1	E	14.	2	E	22.	3	E	30.	5	E	*38.	6	E
7.	1	M	15.	2	E	23.	3	M	31.	5	M
8.	2	E	16.	2	M	24.	4	M	32.	5	M
Multiple Choice Questions
39.	1	M	53.	2	M	67.	3	E	81.	3	E	95.	5	M
40.	1	M	54.	2	E	68.	3	E	82.	3	E	96.	5	H
41.	1	M	55.	2	M	69.	3	E	83.	3	M	97.	5	E
42.	1	E	56.	2	H	70.	3	M	84.	3	E	98.	5	E
43.	1	H	57.	2	M	71.	3	E	85.	3	E	99.	5	E
44.	1	H	58.	2	M	72.	3	E	86.	3	E	100.	5	E
45.	1	E	59.	2	M	73.	3	E	87.	3	M	101.	5	E
46.	2	E	60.	2	M	74.	3	E	88.	4	M	102.	5	M
47.	2	E	61.	2	H	75.	3	E	89.	4	M	103.	5	H
48.	2	M	62.	2	M	76.	3	M	90.	4	E	*104.	6	E
49.	2	M	63.	2	E	77.	3	M	91.	4	E	*105.	6	M
50.	2	M	64.	2	E	78.	3	E	92.	5	E	*106.	6	E
51.	2	H	65.	2	E	79.	3	E	93.	5	E	*107.	6	E
52.	2	M	66.	3	M	80.	3	M	94.	5	M	*108.	6	M
Exercises
109.	1	H	113.	2	H	117.	4	H	121.	5	M	*125.	6	M
110.	1,4	H	114.	2	H	118.	4	M	122.	5	E	*126.	6	M
111.	2	H	115.	2,3	E	119.	4	M	123.	5	M	*127.	6	M
112.	2	M	116.	3	M	120.	5	E	*124.	6	E
Matching
128.	1,2,5	E,M
Short-Answer Essay
129.	1	M	131.	2,3	H	133.	4	M
130.	1,5	E	132.	2,3	M	134.	5	E

Note: E = Easy M = Medium H = Hard

*This topic is dealt with in an Appendix to the chapter.

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type
Study Objective 1
1.	TF	4.	TF	7.	TF	41.	MC	44.	MC	110.	Ex	130.	SAE
2.	TF	5.	TF	39.	MC	42.	MC	45.	MC	128.	Ma
3.	TF	6.	TF	40.	MC	43.	MC	109.	Ex	129.	SAE
Study Objective 2
8.	TF	14.	TF	46.	MC	52.	MC	58.	MC	64.	MC	115.	Ex
9.	TF	15.	TF	47.	MC	53.	MC	59.	MC	65.	MC	128.	Ma
10.	TF	16.	TF	48.	MC	54.	MC	60.	MC	111.	Ex	131.	SAE
11.	TF	17.	TF	49.	MC	55.	MC	61.	MC	112.	Ex	132.	SAE
12.	TF	18.	TF	50.	MC	56.	MC	62.	MC	113.	Ex
13.	TF	19.	TF	51.	MC	57.	MC	63.	MC	114.	Ex
Study Objective 3
20.	TF	67.	MC	72.	MC	77.	MC	82.	MC	87.	MC
21.	TF	68.	MC	73.	MC	78.	MC	83.	MC	115.	Ex
22.	TF	69.	MC	74.	MC	79.	MC	84.	MC	116.	Ex
23.	TF	70.	MC	75.	MC	80.	MC	85.	MC	131.	SAE
66.	MC	71.	MC	76.	MC	81.	MC	86.	MC	132.	SAE
Study Objective 4
24.	TF	26.	TF	88.	MC	90.	MC	110.	Ex	118.	Ex	133.	SAE
25.	TF	27.	TF	89.	MC	91.	MC	117.	Ex	119.	Ex
Study Objective 5
28.	TF	32.	TF	92.	MC	96.	MC	100.	MC	120.	Ex	128.	Ma
29.	TF	33.	TF	93.	MC	97.	MC	101.	MC	121.	Ex	130.	SAE
30.	TF	34.	TF	94.	MC	98.	MC	102.	MC	122.	Ex	134.	SAE
31.	TF	35.	TF	95.	MC	99.	MC	103.	MC	123.	Ex
*Study Objective 6
*36.	TF	*38.	TF	*105.	MC	*107.	MC	*124.	Ex	*126.	Ex
*37.	TF	*104.	MC	*106.	MC	*108.	MC	*125.	Ex	*127.	Ex

Note: TF = True-False Ma = Matching

MC = Multiple Choice Ex = Exercise SAE = Short-Answer Essay

*This topic is dealt with in an Appendix to the chapter.

CHAPTER STUDY OBJECTIVES

Describe the steps in determining inventory quantities. The steps are (1) taking a physical inventory of goods on hand and (2) determining the ownership of goods in transit, on consignment, and in similar situations.

Apply the methods of cost determination using specific identification, FIFO, and average cost under a perpetual inventory system. Costs are allocated to the cost of goods sold account each time that a sale occurs in a perpetual inventory system. The cost is determined by specific identification, or by using the first-in, first-out (FIFO) and average cost methods.

Specific identification is used for goods that are not ordinarily interchangeable. This method tracks the actual physical flow of goods, allocating the exact cost of each merchandise item to cost of goods sold and ending inventory.

The FIFO cost formula assumes a first-in, first-out cost flow for sales. Cost of goods sold consists of the cost of the earliest goods purchased. Ending inventory consists of the cost of the most recent goods purchased.

The average cost method is used for goods that are homogenous or non-distinguishable. Under this method, a new weighted (moving) average unit cost is calculated after each purchase or purchase return and applied to the number of units sold (and as a result, to the number of units remaining in ending inventory).

Explain the effects on the financial statements of choosing each of the inventory cost determination methods. Specific identification results in an exact match of costs and revenues on the income statement. When prices are rising, the average cost formula results in a higher cost of goods sold and lower profit than FIFO. The average cost method therefore results in a better allocation on the income statement of more current (recent) costs with current revenues than does FIFO. In the statement of financial position, FIFO is considered to be better because it results in an ending inventory that is closest to current (replacement) value. All three methods result in the same cash flow before income tax.

Identify the effects of inventory errors on the financial statements. Ignoring the effects of income tax, an error made in determining the quantities and/or cost of inventory at the end of the year will also affect cost of goods sold. If ending inventory is overstated, cost of goods sold will be understated and this in turn will cause profit to be overstated. Therefore, an error that overstates inventory will also overstate profit and after recording closing entries, the overstatement in profit will be reflected as an overstatement in retained earnings. In following period, the overstatement in inventory will flow into cost of goods sold and overstate cost of goods sold and understate profit, thereby reversing the effect of the prior period error. As long as the cost of inventory at the end of this subsequent period is determined properly, the reversal of the error will mean that both inventory and retained earnings are not misstated at that time.

If an error is made by recording an inventory purchase in a period preceding the actual purchase, both inventory and accounts payable will be overstated; if the purchase has actually occurred but is not recorded or counted, then both inventory and accounts payable will be understated.

Demonstrate the presentation and analysis of inventory. Inventory is valued at the lower of its cost and net realizable value, which results in the recording of an increase in cost of goods sold and a reduction in inventory when the net realizable value is less than cost.

Ending inventory is reported as a current asset on the statement of financial position at the lower of cost and net realizable value. Cost of goods sold is reported as an expense on the income statement.

The inventory turnover ratio is a measure of liquidity. It is calculated by dividing the cost of goods sold by average inventory. It can be converted to days in inventory by dividing 365 days by the inventory turnover ratio. In general, a higher inventory turnover and lower days in inventory ratio is desired.

*6. Apply the FIFO and average cost inventory cost determination methods under a periodic inventory system (Appendix 6A). Under the FIFO cost formula, the cost of the most recent goods purchased is allocated to ending inventory. Cost of goods sold is calculated by deducting ending inventory from the cost of goods available for sale (or proven by applying the cost of the earliest goods on hand to determine the cost of goods sold).

Under the average cost method, the total cost of goods available for sale during the period is divided by the units available for sale during the same period to calculate a weighted average cost per unit. This unit cost is then applied to the number of units remaining in inventory to calculate the ending inventory. Cost of goods sold is calculated by deducting ending inventory from the cost of goods available for sale (or proven by applying the unit cost to the units sold to determine the cost of goods sold).

Each of these cost methods is applied in the same cost flow order as in a perpetual inventory system. The main difference is that in a perpetual inventory system, the cost is determined at the date of each sale, while in a periodic inventory system, the cost is determined only at the end of the period.

TRUE-FALSE STATEMENTS

A system of internal control is not needed when a company regularly takes a physical inventory.

An inventory count should be done by the employees who keep track of the stock.

Goods in transit shipped FOB shipping point should be included in the buyer’s ending inventory.

Goods that have been purchased FOB destination, but are in transit, should be excluded from the buyer’s ending inventory.

Consigned goods are held for sale by one party although ownership of the goods is retained by another party.

Once goods leave the premises of the seller, they should never be added to the seller’s physical inventory count.

In order to remove the cost of items sold from inventory, a unit cost must be determined.

When using the perpetual system, the average cost method relies on a simple average calculation.

If prices never changed, there would be no need for alternative inventory cost methods.

Inventory cost methods such as FIFO and average deal more with the flow of costs than with the flow of goods.

The first-in, first-out (FIFO) inventory cost method results in an ending inventory valued at the most recent cost.

The physical inventory count determines the number of units on hand.

The specific identification method is desirable when a company sells a large number of low-unit-cost items.

If a company has no beginning inventory and the unit cost of inventory items does not change during the year, the unit cost assigned to the cost of goods sold will be the same under FIFO and average cost formulas.

A company may use more than one inventory cost determination method if it has different types of inventory.

The cost formula a company chooses should correspond as closely as possible to the actual physical flow of goods.

The FIFO inventory cost formula agrees closely to the actual physical movement of goods in most businesses.

In periods of falling prices, FIFO will result in a higher ending inventory valuation than the average cost formula.

The method of inventory cost determination that best matches cost and revenues is FIFO.

In periods of falling prices, FIFO will result in a higher cost of goods sold than the average cost formula.

A change in the method of cost determination for inventory must be disclosed in the financial statements.

Approximating the physical flow of inventory is not important when selecting an inventory cost formula.

All three methods of inventory cost determination will produce the same cumulative cost of goods sold over the life cycle of the business.

An error in the ending inventory of the current period will have a similar but inverse effect on profit of the next accounting period.

An error that overstates the ending inventory will cause profit for the period to be understated.

An error that understates the ending inventory will cause assets to be understated.

An error that understates the ending inventory will cause the cost of goods sold for the period to be understated.

When the value of inventory is lower than its cost, the inventory is written down to its net realizable value.

If net realizable value of the inventory is lower than its cost, the total assets on the statement of financial position and profit on the income statement will be reduced.

Inventory that originally cost $100 had been written down to its net realizable value (NRV) of $75. Subsequently, the NRV of the inventory recovered to equal its cost of $100. In this situation, the amount of the $25 ($100 – $75) prior write-down in value should be reversed.

An inventory write down from cost to net realizable value should not be made in the period in which the price decline occurs.

The lower of cost and net realizable value should be applied to the total inventory, rather than to individual inventory items.

A low inventory turnover ratio could mean a company is at risk of experiencing inventory shortages.

A high inventory turnover ratio indicates that minimal funds are tied up in inventory.

In the average cost method used in a periodic inventory system, the same weighted average cost per unit is used to calculate all of the goods sold during the period.

*36. When the average cost method is applied in a periodic inventory system, the sale of goods during the year will change the unit cost used for calculating ending inventory.

*37. When the average cost method is applied in a periodic inventory system, a moving average cost per unit is calculated after each purchase.

*38. The results under FIFO in a perpetual inventory system are the same as in a periodic inventory system.

Answers to True-False Statements

Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.
1.	F	8.	F	15.	F	22.	T	29.	F	*36.	T
2.	F	9.	T	16.	T	23.	F	30.	T	*37.	T
3.	T	10.	F	17.	T	24.	F	31.	T	*38.	F
4.	T	11.	T	18.	F	25.	T	32.	T
5.	T	12.	T	19.	T	26.	T	33.	F
6.	F	13.	T	20.	T	27.	F	34.	F
7.	F	14.	T	21.	F	28.	T	35.	F

MULTIPLE CHOICE QUESTIONS

The factor which determines whether or not goods should be included in a physical count of inventory is

(a) physical possession.

(b) ownership.

(d) whether or not the purchase price has been paid.

If goods in transit are shipped FOB destination,

(a) the seller has legal title to the goods until they are delivered.

(b) the buyer has legal title to the goods during transit.

(d) no one has legal title to the goods until they are delivered.

To ensure the accuracy of the inventory during a physical inventory count,

(a) the employee is required to count all items twice for the sake of verification.

(b) the items counted are compared to the inventory account balance.

(d) pre-numbered inventory tags need not be used.

To accurately determine inventory quantities, a company must

(a) use the perpetual inventory system.

(b) employ an independent company to conduct inventory counts.

(d) take a physical inventory.

Which of the following should not be included in an inventory count?

(a) goods taken home by a customer on approval

(b) purchased goods shipped FOB shipping point still in transit from a supplier

(d) consigned goods and goods taken home by a customer on approval

Westcom Corporation’s goods in transit at December 31 include (1) sales made FOB destination, (2) sales made FOB shipping point, (3) purchases made FOB destination, and (4) purchases made FOB shipping point. Which items should be included in Westcom’s inventory at December 31?

(a) (2) and (3)

(b) (1) and (4)

(d) (2) and (4)

Goods held on consignment are

(a) never owned by the consignee.

(b) included in the consignee’s ending inventory.

(d) not included in anyone’s ending inventory.

A company just starting in business purchased three merchandise inventory items at the following prices. March 2, $75; March 7, $80; and March 15, $90. If the company sold two units for $125 each on March 10 and March 20, and used the FIFO cost formula in a perpetual inventory system, the gross profit for March would be

(a) $100.

(b) $95.

(d) $75.

Inventory cost methods make assumptions about the flow of

(a) costs.

(b) goods.

(d) fair values.

A company just starting a business purchased three inventory items at the following prices: March 2, $75; March 7, $80; and March 15, $90. If the company sold one unit for $115 on March 10 and one unit for $125 on March 20 and uses the average cost method in a perpetual inventory system, what is the cost of ending inventory?

(a) $81.67

(b) $83.75

(d) $125.00

Use the following information for questions 49–52.

A company just starting business made the following four inventory purchases in June:

Date Number of Units Total Cost

June 1 150 $480

June 10 200 660

June 15 200 680

June 28 150 525

On June 25, the company made its first sale when a local customer purchased 500 units for $3,500. The company uses a perpetual inventory system.

Using the FIFO cost method, the cost of the ending inventory on June 30 is

(a) $645.

(b) $695.

(d) $1,700.

Using the FIFO cost method, the amount of the cost of goods sold for June is

(a) $645.

(b) $695.

(d) $1,700.

Using the average cost method, the cost of the ending inventory on June 30 is

(a) $670.00.

(b) $690.45.

(d) $1,675.00.

The inventory cost formula that results in the highest gross profit for June is

(a) FIFO.

(b) average.

(d) not determinable.

Average Corp. purchased inventory as follows:

March 3 300 units at $9

March 4 200 units at $10

March 7 100 units at $11

On March 5, Average sold 400 units for $17 each. The average unit cost to be used for the cost of goods sold on March 5, in a perpetual inventory system, is

(a) $9.40.

(b) $9.50.

(d) $17.00.

Use the following information for the month of July for questions 54–58.

ABC Inc. uses the FIFO cost method in a perpetual inventory system.

Jul 1 Beginning inventory 20 units @ $19 per unit

Jul 7 Purchases 70 units @ $20 per unit

Jul 8 Sales 50 units

Jul 9 Sales 25 units

Jul 10 Purchases 50 units @ $22 per unit

Jul 22 Sales 40 units

The cost of goods sold for the July 8 sale was

(a) $950.

(b) $980.

(d) $1,000.

The cost of goods sold for the July 9 sale was

(a) $475.

(b) $480.

(d) $500.

Total cost of goods sold for the month of July is

(a) $2,330.

(b) $2,530.

(d) $2,880.

Ending inventory at July 31 is

(a) $2,330.

(b) $720.

(d) $550.

If ABC Inc. used the average cost method instead of FIFO, gross profit from the July 8 sale would be

(a) higher.

(b) lower.

(d) cannot be determined.

Use the following information for the month of June for questions 59–62.

XYZ Inc. uses the average cost formula in a perpetual inventory system.

(Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)

Jun 1 Beginning inventory 20 units @ $19.00 per unit

Jun 5 Purchase 100 units @ $22.00 per unit

Jun 8 Sale 70 units

Jun 9 Purchase 80 units @ 22.31 per unit

Jun 10 Sale 25 units

Jun 22 Sale 40 units

The cost of goods sold for the June 8 sale is

(a) $1,480.00.

(b) $1,505.00.

(d) $1,540.00.

The cost of goods sold for the June 10 sale is

(a) $545.60.

(b) $549.96.

(d) $557.75.

Total cost of goods sold for the month of June is

(a) $2,914.65.

(b) $2,934.90.

(d) $2,994.80.

XYZ Inc. has an ending inventory on June 30 of

(a) $1,370.00

(b) $1,418.56.

(d) $1,450.15.

Gene’s Used Cars uses the specific identification method of costing inventory. During March, Gene purchased three cars for $5,000, $6,500, and $8,000, respectively. During March, two cars are sold for $7,500 each. Gene determines that at March 31, the $8,000 car is still on hand. What is Gene’s cost of goods sold for March?

(a) $8,000

(b) $11,500

(d) $15,000

Which of the following statements regarding inventories is correct?

(a) FIFO assumes that the costs of the earliest goods acquired are the last to be sold.

(b) It is generally good business management to sell the most recently acquired goods first.

(d) FIFO seldom coincides with the actual physical flow of inventory.

Management may be able to manipulate profit using

(a) the FIFO cost formula.

(b) specific identification.

(d) need more information to answer.

XYZ Inc. uses the average cost formula in a perpetual inventory system.

(Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)

Jun 1 Beginning inventory 20 units @ $19.00 per unit

Jun 5 Purchase 100 units @ $22.00 per unit

Jun 8 Sale 70 units

Jun 9 Purchase 80 units @ 22.31 per unit

Jun 10 Sale 25 units

Jun 22 Sale 40 units

If XYZ Inc. was using the FIFO cost formula instead of average, gross profit from the June 8 sale would be

(a) higher.

(b) lower.

(d) cannot be determined.

Of the following businesses, which one would not be likely to use the specific identification method for inventory costing?

(a) piano store

(b) car dealership

(d) grocery store

A problem with the specific identification method is that

(a) inventories can be reported at actual costs.

(b) management can manipulate profit.

(d) lower of cost and net realizable value cannot be applied.

The selection of an appropriate inventory cost formula for a company is made by:

(a) external auditors.

(b) Canada Revenue Agency (CRA).

(d) management.

Which of the following should a business consider when choosing between the FIFO and average cost formulas?

(a) whether the method closely follows the physical flow of goods

(b) whether the method reports an inventory cost that approximates recent cost

(d) all of the above.

Which of the following statements regarding inventory cost determination methods is correct?

(a) A company may use more than one inventory cost determination method.

(b) A company should use the method that is easiest.

(d) A company may never change its inventory cost method once it has chosen it.

The specific identification method of inventory cost determination must be used

(a) for goods that are produced and segregated for specific projects.

(b) when goods are not ordinarily interchangeable.

(d) for goods that are produced and segregated for specific projects, and/or when goods are not ordinarily interchangeable.

The inventory cost determination method that results in the inventory value on the statement of financial position that is closest to its actual cost is

(a) FIFO.

(b) specific identification.

(d) either FIFO or average cost.

In a period of declining prices, which of the following inventory cost formulas generally results in the lowest inventory figure on the statement of financial position?

(a) average cost

(b) FIFO

(d) Need more information to answer.

In a period of rising prices, which of the following inventory cost methods generally results in the lowest profit figure?

(a) average cost

(b) FIFO

(d) Need more information to answer.

Two companies report the same cost of goods available for sale but each employs a different inventory cost formula. If the price of goods has increased during the period, then the company using

(a) FIFO will report lower ending inventory.

(b) Average cost will report lower ending inventory.

(d) Average cost will report lower cost of goods sold.

In a period of inflation (prices are rising), which inventory cost formula will result in higher profit?

(a) FIFO

(b) average cost

(d) There would be no effect on profit.

The specific identification method of costing inventories is used when the

(a) physical flow of units cannot be determined.

(b) company sells large quantities of relatively homogeneous items.

(d) company sells a small number of expensive, easily distinguishable items.

The specific identification method of inventory costing

(a) always maximizes a company’s profit.

(b) always minimizes a company’s profit.

(d) may enable management to manipulate profit.

The managers of Winning Ways Ltd. receive performance bonuses based on the company’s profit. Which inventory cost formula are they likely to favour in periods of declining prices?

(a) FIFO

(b) average cost

(d) Need more information to answer.

Which cost determination method smoothes the effects of price changes?

(a) specific identification

(b) FIFO

(d) lower of cost and net realizable value

Selection of an inventory cost method by management should be influenced most by the

(a) fiscal year end.

(b) physical flow of goods.

(d) Income tax effects.

Which cost method provides the better (1) income statement and (2) statement of financial position valuations, respectively?

(a) (1) average and (2) FIFO

(b) (1) FIFO and (2) average

(d) (1) average and (2) average

During a period of inflation, using ___ will approximate a company’s current cost of ending inventory.

(a) the average cost method

(b) FIFO

(d) both FIFO and the average cost method

The consistent application of an inventory cost method is essential for

(a) neutrality.

(b) accuracy.

(d) relevance.

Cost of goods available for sale consists of the

(a) cost of beginning inventory plus the cost of ending inventory.

(b) cost of ending inventory plus the cost of goods purchased during the year.

(d) difference between the cost of goods purchased and the cost of goods sold during the year.

The cost of goods available for sale is allocated between

(a) beginning inventory and ending inventory.

(b) beginning inventory and cost of goods on hand.

(d) ending inventory and cost of goods sold.

An error in the physical count of goods on hand at the end of a period resulted in a $10,000 overstatement of the ending inventory. The effect of this error in the current period is

Cost of Goods Sold Profit .

(a) Understated Understated

(b) Overstated Overstated

(d) Overstated Understated

If beginning inventory is understated by $10,000, the effect of this error in the current period is

Cost of Goods Sold Profit .

(a) Understated Understated

(b) Overstated Overstated

(d) Overstated Understated

An overstatement of the beginning inventory results in

(a) an overstatement of profit.

(b) an understatement of profit.

(d) a need to adjust purchases.

An overstatement of ending inventory in one period results in

(a) no effect on profit of the next period.

(b) an overstatement of profit of the next period.

(d) an overstatement of the ending inventory of the next period.

The lower of cost and net realizable value basis of valuing inventories ensures that inventories are

(a) valued at their current cost.

(b) valued at their selling price.

(d) not over-valued.

Under the lower of cost and net realizable value basis, the adjusting entry to record a decline in net realizable value below cost includes a

(a) debit to the Inventory account.

(b) debit to the Cost of Goods Sold account.

(d) credit to the Sales account.

XYZ Inc. is a wholesaler of electronics. It purchased 1,000 units of Product X for $500 each during 2015. The selling price during the year was $750 per unit. At year end, it had 100 units on hand and due of changes in technology, the selling price will have to be reduced by 40% in order to sell them. The value of each unit of Product X for the year-end inventory presentation should be

(a) $600.

(b) $500.

(d) $450.

Inventory that originally cost $10,000 was written down to its net realizable value of $8,500 at the end of 2014. At the end of 2015, the net realizable value is determined to be $10,500. At what amount should the inventory be reported on the December 31, 2015 statement of financial position?

(a) $10,500

(b) $10,000

(d) $8,500

For 2015, Nervous Energy Inc. reported $24,000 beginning inventory and $26,000 ending inventory. Net sales were $160,000 and gross profit was $55,000 for the same period. Based on these figures, inventory turnover for 2015 was

(a) 3.4 times.

(b) 4.2 times.

(d) 9.2 times.

An aircraft manufacturer would most likely have a

(a) high inventory turnover.

(b) low profit margin.

(d) low inventory turnover.

The inventory turnover ratio is calculated by dividing cost of goods sold by

(a) beginning inventory.

(b) ending inventory.

(d) 365 days.

Days in inventory is calculated by dividing 365 days by

(a) average inventory.

(b) beginning inventory.

(d) the inventory turnover ratio.

Use the following information for questions 100–101.

The following information was available for Riley Limited at December 31, 2015:

Beginning inventory…………………………… $ 120,000

Ending inventory……………………………….. 150,000

Cost of goods sold…………………………….. 810,000

Net sales………………………………………….. 1,400,000

Riley’s inventory turnover was

(a) 5.0 times.

(b) 6.0 times.

(d) 9.0 times.

Riley’s days in inventory was

(a) 40.6 days.

(b) 48.7 days.

(d) 73.0 days.

An increase in inventory turnover means days in inventory

(a) increases.

(b) decreases.

(d) cannot be determined.

NHL Canada Ltd. has a days in inventory ratio of 40 and average inventory of $254,000. What is its cost of goods sold?

(a) Cannot be determined.

(b) $12,700,000

(d) $1,854,200

*104. In a periodic inventory system, the cost of goods sold is determined

(a) at the beginning of the accounting period.

(b) after each sale.

(d) at the end of the accounting period.

*105. In order to determine cost of goods sold in a periodic inventory system we

(a) add purchases to beginning inventory.

(b) subtract ending inventory from beginning inventory.

(d) subtract purchases from ending inventory.

Use the following information to answer questions *106–*108.

Abalone Corp. uses a periodic inventory system.

Jul 1 Beginning inventory 20 units @ $19 $ 380

7 Purchases 70 units @ $20 1,400

22 Purchases 10 units @ $22 220

$2,000

A physical count of merchandise inventory on July 31 shows that 25 units are on hand.

*106. Under the FIFO cost method, ending inventory at July 31 was

(a) $1,500.

(b) $1,480.

(d) $500.

*107. Under the average cost method, cost of goods sold for July was

(a) $1,600.

(b) $1,500.

(d) $500.

*108. Which cost method will provide the highest profit?

(a) average cost

(b) FIFO

(d) Cannot be determined.

Answers to Multiple Choice Questions

Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.
39.	b	49.	b	59.	b	69.	d	79.	d	89.	c	99.	d
40.	a	50.	c	60.	b	70.	d	80.	b	90.	b	100.	b
41.	c	51.	b	61.	b	71.	a	81.	c	91.	c	101.	c
42.	d	52.	a	62.	c	72.	d	82.	b	92.	d	102.	b
43.	c	53.	a	63.	b	73.	b	83.	a	93.	b	103.	c
44.	b	54.	b	64.	c	74.	b	84.	b	94.	d	*104.	d
45.	a	55.	d	65.	b	75.	a	85.	c	95.	b	*105.	c
46.	b	56.	a	66.	a	76.	b	86.	c	96.	b	*106.	c
47.	a	57.	d	67.	d	77.	a	87.	d	97.	d	*107.	b
48.	b	58.	b	68.	b	78.	d	88.	c	98.	c	*108.	b

EXERCISES

Ex. 109

Bunkers Corporation has just completed a physical inventory count at year end, December 31, 2015. Only the items on the shelves, in storage, and in the receiving area were counted. The inventory amounted to $77,000. Bunkers uses a perpetual inventory system. During the year-end audit, the independent C.A. discovered the following additional information:

There were goods in transit on December 31, 2015, from a supplier with terms FOB destination, costing $8,500. Because the goods had not arrived, they were excluded from the physical inventory count.
On December 27, 2015, a regular customer purchased goods for cash amounting to $1,000 and left them for pickup on January 4, 2016. Bunkers had paid $1,200 for the goods and, because they were on hand, included them in the physical inventory count.
Bunkers Corporation, on the date of the inventory count, received notice from a supplier that goods ordered earlier, at a cost of $10,000, had been delivered to the transportation company on December 28, 2015; the terms were FOB shipping point. Because the shipment had not arrived on December 31, 2015, it was excluded from the physical inventory.
On December 31, 2015, there were goods in transit to customers, with terms FOB shipping point, amounting to $800 (expected delivery on January 8, 2016). Because the goods had been shipped, they were excluded from the physical inventory count.
On December 31, 2015, Bunkers shipped $2,500 worth of goods to a customer, FOB destination. This shipment arrived on January 5, 2016. Because the goods were not on hand, they were not included in the physical inventory count.
Bunkers Corporation, as the consignee, had goods on consignment that cost $5,000. Because these goods were on hand at December 31, 2015, they were included in the physical inventory count.

Instructions

Analyze the above information and calculate a corrected amount for the ending inventory. Explain the rationale for your treatment of each item.

Solution 109 (20 min.)

Start with $77,000

Item 1. — (Because the goods were shipped FOB destination, the title will pass to Bunkers upon arrival. Correctly excluded.)

Item 2. – 1,200 (Goods should be excluded. The customer owns them.)

Item 3. + 10,000 (Goods belong to Bunkers. Title passed when supplier delivered the goods to the transportation company.)

Item 4. — (Because the goods were shipped FOB shipping point, Bunkers no longer has title to these goods. Correctly excluded.)

Item 5. + 2,500 (Goods were shipped FOB destination. Bunkers retains title until the customer receives them.)

Item 6. – 5,000 (These goods are owned by the consignor, not the consignee, and should not be included in Bunkers’ inventory.)

Corrected inventory $83,300

Ex. 110

Haddock Sales Inc. has a December 31 year end. Complete the table below to show the error (understated (U) or overstated (O)), if any, including the dollar amount. If there is no impact, state no effect (NE).

	Assets December 31, 2015	Profit December 31, 2015	Retained Earnings December 31, 2015
1. Inventory of $75,000 held on consignment is included in inventory at December 31, 2015.
2. $25,000 of inventory purchased was included in the inventory on December 31, 2015. It was shipped FOB shipping point on December 28, 2015, but did not arrive until January 4, 2016.
3. Merchandise costing $3,000 was returned by a customer on January 2, 2016. The merchandise was in good condition and the customer was given full credit of $5,000. $3,000 was deducted from inventory on December 31, 2015.
4. Merchandise was returned to a supplier for credit on December 28, 2015. Credit of $7,000 was received on January 2, 2016. No adjustment was made until the credit was received.
5. Merchandise shipped FOB destination was received by Haddock on December 30, 2015. It was recorded in inventory at $980—the invoice cost of $1,000 less the 2% early payment discount. The company has a policy of always taking cash discounts.

Solution 110 (20–25 min.)

	Assets December 31, 2015	Profit December 31, 2015	Retained Earnings December 31, 2015
1. Inventory of $75,000 held on consignment is included in inventory at December 31, 2015.	Overstated $75,000	Overstated $75,000	Overstated $75,000
2. $25,000 of inventory purchased was included in the inventory on December 31, 2015. It was shipped FOB shipping point on December 28, 2015, but did not arrive until January 4, 2016.	NE	NE	NE
3. Goods on approval costing $3,000 were returned by a customer on January 2, 2016. The merchandise was in good condition and the customer was given full credit of $5,000. $3,000 was deducted from inventory on December 31, 2015.	Understated $3,000	Understated $3,000	Understated $3,000
4. Merchandise was returned to a supplier for credit on December 28, 2015. Credit of $7,000 was received on January 2, 2016. No adjustment was made until the credit was received.	Overstated $7,000	Overstated $7,000	Overstated $7,000
5. Merchandise shipped FOB destination was received by Haddock on December 30, 2015. It was recorded in inventory at $980—the invoice cost of $1,000 less the 2% early payment discount. The company has a policy of always taking cash discounts.	NE	NE	NE

Ex. 111

Hansen Corporation uses the perpetual inventory system and had the following information available:

Units Unit Cost Total Cost

Jan 1 Beginning inventory 15 $4.00 $ 60

20 Purchase 60 4.40 264

21 Sale 65 – –

Jul 25 Purchase 30 4.20 126

Oct 20 Purchase 45 4.80 216

Nov 15 Sale 75 – –

Instructions

Answer the following independent questions and show calculations supporting your answers:

(a) Assume that the company uses the FIFO cost method. The cost of goods sold for the Jan 21 sale was $__________.

(b) Assume that the company uses the average cost method. The cost of goods sold for the Jan 21 sale was $__________. (Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)

(c) Assume that the company uses the average cost method. The value of the inventory after the Nov 15 sale was $__________. (Use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.)

(d) Assume that the company uses the FIFO cost method. The value of the inventory after the Oct 20 purchase is $__________.

Solution 111 (20 min.)

(a) Cost of Goods Sold (FIFO): (15 units @ $4) + (50 units @ $4.40) = $280

(b) Cost of Goods Sold (average): ($60 + $264) = $324 ÷ 75 = $4.32 per unit

Sold 65 units @ $4.32 = $280.80

$385.20 ÷ (15 + 60 – 65 + 30 + 45) = $4.53 (rounded) per unit

10 units on hand (85 – 75) @ $4.53 (rounded) = $45.32 (using unrounded numbers in calculation)

(d) Inventory (FIFO): $386.00

After the Jan 21 sale 10 units x $4.40 = $ 44.00

Jul 25 purchase 30 units x $4.20 = 126.00

Oct 20 purchase 45 units x $4.80 = 216.00

Value of inventory = $386.00

Ex. 112

Owl Ltd. sells many products. Hoot is one of its popular items. Below is an analysis of the inventory purchases and sales of Hoot for the month of March. Owl uses the perpetual inventory system.

Purchases Sales

Units Unit Cost Units Selling Price/Unit

Mar 1 Beginning inventory 600 $40

3 Purchase 100 60

4 Sales 190 $80

10 Purchase 100 66

16 Sales 275 120

19 Sales 220 120

25 Sales 75 120

30 Purchase 460 75

Instructions

(a) Using the FIFO cost method, calculate the cost of goods sold for March. Show calculations.

(b) Using the average cost method, calculate the ending inventory at March 31. Show calculations and use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.

Solution 112 (20 min.)

(a) FIFO

Date	Description	Purchases			COGS			Ending Inventory
Mar 1	Beginning							600	$40	$24,000
3	Purchase	100	$60	$ 6,000				600 100	40 60	30,000
4	Sale				190	$40	$ 7,600	410 100	40 60	22,400
10	Purchase	100	66	6,600				410 100100	40 60 66	29,000
16	Sale				275	40	11,000	135 100100	40 60 66	18,000
19	Sale				135 85	40 60	10,500	15 100	60 66	7,500
25	Sale				15 60	60 66	4,860	40	66	2,640
30	Purchase	460	75	34,500				40 460	66 75	37,140
30	Ending				760		$33,960	220	,	$37,140

(b) Average

Date	Description	Purchases			COGS			Ending Inventory
Mar 1	Beginning							600	$42.86	$24,000
3	Purchase	100	$60	$ 6,000				700	42.86	30,000
4	Sale				190	$42.86	$ 8,143	510	42.86	21,859
10	Purchase	100	66	6,600				610	46.65	28,459
16	Sale				275	46.65	12,829	335	46.65	15,628
19	Sale				220	46.65	10,263	115	46.65	5,365
25	Sale				75	46.65	3,499	40	46.65	1,866
30	Purchase	460	75	34,500				500	72.73	36,366
30	Ending				760		$34,734	500	,	$36,366

Please note that discrepancies may result in the above schedule due to rounding.

Ex. 113

Nector Ltd., which uses a perpetual inventory system, recorded the following inventory transactions for this year:

Purchases Sales

Units Unit Cost Units Selling Price/Unit

Apr 1 Beginning inventory 45 $ 8

25 Purchase 150 9

May 4 Purchase 65 10

16 Sale 120 $16

Jun 4 Purchase 50 12

Instructions

(a) Using the FIFO cost method, calculate the cost of goods sold for the quarter ended June 30. Show calculations.

(b) Using the average cost method, calculate the ending inventory at June 30. Show calculations and use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.

Solution 113 (30 min.)

(a) Purchases Cost of Balance

Goods Sold

Apr 1 (45 @ $8) = $360

Apr 25 (150 @ $9) = $1,350 (45 @ $8) = $360

(150 @ $9) = 1,350

$1,710

May 4 (65 @ $10) = $650 (45 @ $8) = $360

(150 @ $9) = 1,350

(65 @ $10) = $650

$2,360

May 16 (45 @ $8) = $360 (75 @ $9) = $675

(75 @ $9) = $675 (65 @ $10) = $650

$1,035 $1,325

Jun 4 (50 @ $12) = $600 (75 @ $9) = $675

(65 @ $10) = $650

(50 @ $12) = $600

$1,925

(b) Purchases Cost of Balance

Goods Sold

Apr 1 (45 @ $8) = $360.00

Apr 25 (150 @ $9) = $1,350.00 (195 @ $8.77) = $1,710.00

May 4 (65 @ $10) = $650.00 (260 @ $9.08) = $2,360.00

May 16 (120 @ $9.08) = $1,089.23) (140 @ $9.08) = $1,270.77

Jun 4 (50 @ $12) = $600.00 (190 @ $9.85) = $1,870.77

Please note that discrepancies may result in the above schedule due to rounding.

Ex. 114

Churchill Corporation, which uses a perpetual inventory system, recorded the following inventory transactions during the last two months of 2015:

Purchases Sales

Units Unit Cost Units Selling Price/Unit

Nov 1 Beginning inventory 105 $60

13 Purchase 70 58

29 Sale 96 $87

Dec 3 Purchase 50 56

16 Sale 52 84

Instructions

(a) Using the FIFO cost method, calculate the cost of goods sold for the two months of November and December. Show calculations.

(b) Using the average cost method, calculate the ending inventory at December 31. Show calculations and use unrounded numbers in your calculations but round to the nearest cent for presentation purposes in your answer.

Solution 114 (30 min.)

(a) Purchases Cost of Balance

Goods Sold

Nov 1 (105 @ $60) = $6,300

Nov 13 (70 @ $58) = $4,060 (105 @ $60) = $6,300

(70 @ $58) = $4,060

$10,360

Nov 29 (96 @ $60) = $5,760

(9 @ $60) = $540

(70@$58)=$4,060

$4,600

Dec 3 (50 @ $56) = $2,800 (9 @ $60) = $540

(70 @ $58) = $4,060

(50 @ $56) = $2,800 $7,400

Dec 16 (9 @ $60) = $540 (27 @ $58) = $1,566

(43 @ $58)= $2494 (50 @ $56) = $2,800

$3,034 $4,366

(b) Purchases Cost of Balance

Goods Sold

Nov 1 (105 @ $60) = $6,300.00

Nov 13 (70 @ $58) $4,060.00 (175 @ $59.20) = $10,360.00

Nov 29 (96 @ $59.20) = $5,683.20 (79 @ $59.20) = $4,676.80

Dec 3 (50 @ $56) $2,800.00 (129 @ $57.96) = $7,476.80

Dec 16 (52 @ $57.96) = $3,013.92 (77 @ $57.96) = $4,462.88

Please note that discrepancies may result in the above schedule due to rounding.

Ex. 115

Glamorous Gold Inc. opened for business on April 1, 2015 selling unique jewellery, which it purchases from local artisans. During April, the company made the following purchases:

Date Inventory Tag Number Cost

April 1 001 $2,750

April 3 002 600

April 5 003 1,150

004 2,300

April 10 005 700

April 13 006 1,200

007 3,900

April 26 008 600

009 1,700

April 31 010 2,400

On April 31, only inventory items 006, 008, and 010 remained in inventory.

Instructions

(a) Calculate the cost of goods sold for April using the specific identification cost determination method.

(b) Discuss whether or not specific identification is an appropriate cost determination method for this company.

Solution 115 (20 min.)

(a) Inventory sold:

Inventory Tag Number Cost

001 $ 2,750

002 600

003 1,150

004 2,300

005 700

007 3,900

009 1,700

Cost of goods sold: $13,100

(b) Specific identification would be the preferred inventory method for this company because it provides the most accurate cost of goods sold and ending inventory values. It is appropriate because of the uniqueness of the company’s inventory items. The comparatively small volume of inventory items purchased and sold makes this method practical for either a computerized or manual inventory system.

Ex. 116

Houle Limited reported the following summarized annual data at the end of 2015:

Sales revenue……………………………………………………… $3,500,000

Cost of goods sold*………………………………………………. 1,700,000

Gross profit………………………………………………………….. 1,800,000

Operating expenses……………………………………………… 1,200,000

Profit before income tax……………………………………….. $ 600,000

*Based on an ending inventory of $420,000, using FIFO.

The controller of the company is considering a switch from FIFO to average cost. He has determined that on an average cost basis, the ending inventory would have been $320,000.

Instructions

(a) Restate the summary information on an average cost basis.

(b) If you were the management of this business, what would your reaction be to this proposed change?

Solution 116 (25 min.)

(a) Restate to average cost:

…… Sales revenue……………………………………………………… $3,500,000

…… Cost of goods sold*………………………………………………. 1,800,000

…… Gross profit………………………………………………………….. 1,700,000

…… Operating expenses……………………………………………… 1,200,000

…… Profit before income tax……………………………………….. $ 500,000

*Ending inventory would be $100,000 less ($420,000 – $320,000 = $100,000) under average cost, thereby increasing cost of goods by $100,000.

(b) The company’s management would not likely see this change as desirable, since it results in an increase in cost of goods sold, and thus a decrease in profit before income tax. In addition, the inventory cost determination method chosen should be the one that closely corresponds with the physical flow of goods and the inventory’s recent cost reported on the statement of financial position. It should be used consistently, so unless the type of inventory or its nature and usage has changed, management should not be changing its inventory cost method.

Ex. 117

For each of the independent events listed below, analyze the impact on the indicated items at the end of the current year by placing the appropriate code letter in the box under each item.

Code: O = item is overstated

U = item is understated

NA = item is not affected

Items _

Assets Shareholders’ Cost of Profit

Equity Goods Sold

The ending inventory in the previous period was overstated.

—————————————————————————————————————————–

A physical count of goods on hand at the end of the current year resulted in some goods being counted twice.

—————————————————————————————————————————–

Goods purchased on account in December of the current year and shipped FOB shipping point were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

—————————————————————————————————————————–

Goods purchased on account in December of the current year and shipped FOB destination were recorded as purchases, but were not included in the count of goods on hand on December 31 because they had not arrived by December 31.

—————————————————————————————————————————–

The internal auditors discovered that the ending inventory in the previous period was understated $15,000 and that the ending inventory in the current period was overstated $25,000.

Solution 117 (20 min.)

Items

Shareholders’ Cost of

Events Assets Equity Goods Sold Profit

NA NA O U

O O U O

U U O U

NA U O U

O O U O

Ex. 118

Condensed income statements for Collingwood Limited are shown below for two years:

2015 2016

…… Sales………………………………………………………………. ….. $92,000 $106,000

…… Cost of goods sold……………………………………………. ….. 54,000 65,000

…… Gross profit……………………………………………………… ……. 38,000 41,000

…… Operating expenses…………………………………………. ….. 15,000 15,000

…… Profit before income tax……………………………………. ….. $23,000 $ 26,000

Instructions

(a) Calculate the corrected profit before income tax for 2015 and 2016, assuming that the inventory as of the end of 2015 was mistakenly understated by $7,000.

2015 $____________ 2016 $____________

(b) Calculate the ending retained earnings at the end of 2016, assuming retained earnings at the end of 2015 was $195,000 and at the end of 2016, $205,000.

Solution 118 (5 min.)

(a) 2015 = $30,000 ($23,000 + $7,000)

2016 = $19,000 ($26,000 – $7,000)

(b) Retained earnings at the end of 2016 would be unchanged at $205,000 because the profit corrects itself over the two year period.

Ex. 119

Miller’s Grocery reported the following selected information:

2015 2016

Cost of goods sold……………………………………………. … $837,000 $900,000

Ending inventory………………………………………………. ……. 64,000 55,000

Miller made two errors:

2015 ending inventory was overstated by $5,000.
2016 ending inventory was understated by $9,000.

Instructions

Assuming the errors have not been corrected, indicate the dollar effect that the errors had on the items listed below. Also indicate if the amounts are overstated (O) or understated (U).

2015 2016

Overstated/ Overstated/

Amount Understated Amount Understated

Total assets $_________ _______ $_________ _______

Shareholders’ equity $_________ _______ $_________ _______

Cost of goods sold $_________ _______ $_________ _______

Profit before income tax $_________ _______ $_________ _______

Solution 119 (20 min.)

2015 2016

Overstated/ Overstated/

Amount Understated Amount Understated

Total assets $5,000 O $9,000 U

Shareholders’ equity $5,000 O $9,000 U

Cost of goods sold $5,000 U $14,000 O

Profit before income tax $5,000 O $14,000 U

Ex. 120

Copper Mining Inc. has been stock-piling copper inventory in anticipation of better prices. Unfortunately, the market has not improved and at year end, December 31, 2014, inventory with a cost of $4.5 million would only be worth $3.5 million if it could be sold.

During the next year, the prices start to recover, but the company still has not sold the inventory. At December 31, 2015, the market value of the same copper inventory has increased and would be worth $4.6 million.

Instructions

(a) Prepare the adjusting entry required at December 31, 2014 to record the decline in the value of the inventory, assuming Copper Mining uses a perpetual inventory system.

(b) Prepare the adjusting entry required at December 31, 2015, if any.

Solution 120 (10 min.)

(a) Dec 31, 2014 Cost of Goods Sold………………………………………… 1,000,000

Merchandise Inventory…………………………….. 1,000,000

($4,500,000 – $3,500,000 = $1,000,000)

(b) Dec 31, 2015 Merchandise Inventory…………………………………… 1,000,000

Cost of Goods Sold………………………………….. 1,000,000

Note that inventory cannot be written up above cost.

Ex. 121

The following information is available from recent financial statements of Competitor A and Competitor B:

(Amounts in millions)

Competitor A Competitor B

Ending inventory………………………………………….. ….. $ 7,500 $ 5,210

Beginning inventory……………………………………… ……… 8,100 6,059

Cost of goods sold……………………………………….. ……. 23,760 33,616

Sales………………………………………………………….. ……. 30,251 39,950

Instructions

(a) Calculate the inventory turnover and days in inventory for both companies.

(b) What conclusions concerning the management of inventory can be drawn from these data?

Solution 121 (20 min.)

(a) Competitor A Competitor B

$23,760 $33,616

Inventory turnover —————————— ——————————

($7,500 + $8,100) ÷ 2 ($5,210 + $6,059) ÷ 2

$23,760 $33,616

———— = 3.0 times ———––– = 6.0 times

$7800 $5,634.50

Days in inventory 365 ÷ 3.0 = 122 days 365 ÷ 6.0 = 61 days

(b) Competitor B’s inventory turnover is approximately 100% [(6.0 – 3.0) ÷ 3.0)] higher than Competitor A’s. In addition, Competitor B’s days in inventory is 50% [(122– 61) ÷ 122] lower than Competitor A’s. Generally, a company prefers to maintain as high an inventory turnover as possible. We can conclude that Competitor B manages inventory more effectively than Competitor A.

Ex. 122

The following information is available for Omari Corporation for 2015:

Beginning inventory………………………………………………. $ 700,000

Ending inventory………………………………………………….. 800,000

Cost of goods sold………………………………………………… 6,000,000

Sales…………………………………………………………………… 8,000,000

Instructions

Calculate the inventory turnover and days in inventory for Omari Corporation.

Solution 122 (5 min.)

Inventory turnover = $6,000,000 ÷ [($700,000 + $800,000) ÷ 2]

= $6,000,000 ÷ $750,000 = 8 times

Days in inventory = 365 days ÷ 8 = 46 days

Ex. 123

Solve for the missing amounts:

A B C

Sales……………………………………………. $100,000 $239,000 $438,000

Cost of goods sold…………………………. (a) 122,000 345,000

Inventory, beginning of year…………… 23,000 45,000 (h)

Inventory, end of year……………………. 17,000 39,000 105,000

Average inventory…………………………. (b) (e) 101,500

Gross profit…………………………………… 46% (f) (i)

Inventory turnover…………………………. (c) (g) (j)

Days in inventory………………………….. (d) 126 (k)

Solution 123 (20 min.)

A B C

Sales……………………………………………. $100,000 $239,000 $438,000

Cost of goods sold…………………………. 54,000 122,000 345,000

Inventory, beginning of year…………… 23,000 45,000 98,000

Inventory, end of year……………………. 17,000 39,000 105,000

Average inventory…………………………. 20,000 42,000 101,500

Gross profit ………………………………….. 46% 49% 21%

Inventory turnover…………………………. 2.7 2.9 3.4

Days in inventory………………………….. 135 126 107

*Ex. 124

Quinoa Corp. uses the periodic inventory system, and has the following information about purchases and sales during the year:

January 1 Beginning inventory 150 items @ $3 = $ 450

May 1 Purchases 450 items @ $5 = 2,250

Total 600 items $2,700

Total sales 300 items

December 31 Ending inventory 300

Instructions

Calculate the cost to be assigned to ending inventory for each of the cost methods below:

(a) Average $____________

(b) FIFO $____________

*Solution 124 (10 min.)

(a) $1,350 ($2,700 ¸ 600 = $4.50 ´ 300)

(b) $1,500 (300 ´ $5)

*Ex. 125

Coucous Corp. uses the periodic inventory system. Information related to Coucous’ inventory for September is given below:

Sep 1 Beginning inventory 200 units @ $10.00 = $ 2,000

8 Purchase 600 units @ $10.40 = 6,240

16 Purchase 400 units @ $10.80 = 4,320

24 Purchase 100 units @ $11.60 = 1,160

1,300 units $13,720

Instructions

(a) Calculate the ending inventory using FIFO assuming 400 units remain on hand at September 31 (show calculations).

(b) Calculate the ending inventory using average cost assuming 400 units remain on hand at September 31 (show calculations).

*Solution 125 (20 min.)

(a) 400 units in ending inventory

Under FIFO, the units remaining in inventory are the ones purchased most recently.

Sep 24 100 units @ $11.60 = $1,160

16 300 units @ 10.80 = 3,240

400 units $4,400

(b) 400 units in ending inventory

Under the average cost method, the weighted-average cost per unit must be calculated:

$13,720 ¸ 1,300 units = $10.55

400 units ´ $10.55 = $4,220

*Ex. 126

Garmin Ltd. uses the periodic inventory system and had the following inventory information available:

Units Unit Cost Total Cost

Jan 1 Beginning inventory 100 $4 $ 400

20 Purchase 500 $5 2,500

Jul 25 Purchase 100 $6 600

Nov 20 Purchase 300 $7 2,100

1,000 $5,600

A physical count of inventory on December 31 showed that there were 350 units on hand.

Instructions

Answer the following independent questions and show calculations supporting your answers.

(a) Assume that the company uses FIFO. The value of the ending inventory at December 31 is $__________.

(b) Assume that the company uses average cost. The value of the ending inventory on December 31 is $__________.

(c) Determine the difference in the amount of profit that the company would have reported if it had used FIFO instead of average cost. Would profit have been greater or less?

*Solution 126 (20 min.)

(a) FIFO: Ending inventory $2,400

300 units @ $7 = $2,100

50 units @ $6 = 300

350 units $2,400

(b) Average Cost: Ending inventory $1,960

$5,600 ¸ 1,000 = $5.60 per unit ´ 350 units = $1,960

Cost of goods available – Ending Inventory = Cost of goods sold

$5,600 – $2,400 = $3,200

Proof: 100 units @ $4 = $ 400

500 units @ $5 = 2,500

50 units @ $6 = 300

650 units $3,200

Average: Cost of goods sold $3,640

Proof: Cost of goods available – Ending Inventory = Cost of goods sold

$5,600 – $1,960 = $3,640

Profit would have been $440 ($3,640 vs. $3,200) greater if the company used FIFO instead of average.

*Ex. 127

Harmony Corporation uses the periodic inventory system and had the following inventory information available:

Units Unit Cost Total Cost

Jan 1 Beginning inventory 15 $4.00 $ 60

20 Purchase 60 4.40 264

Jul 25 Purchase 30 4.20 126

Oct 20 Purchase 45 4.80 216

150 $666

A physical inventory count on December 31 showed that there were 50 units on hand.

Instructions

Answer the following independent questions and show calculations supporting your answers:

(a) Assume that the company uses FIFO. The value of the ending inventory at December 31 is $__________.

(b) Assume that the company uses average cost. The value of the ending inventory on December 31 is $__________.

(c) Assume that the company uses average cost. The value of cost of goods sold for the year ended December 31 is $__________.

(d) Assume that the company uses FIFO. The value of the cost of goods sold for the year ended December 31 is $__________.

*Solution 127 (20 min.)

(a) FIFO: Ending inventory $237

45 units @ $4.80 = $216

5 units @ $4.20 = 21

50 units $237

(b) Average Cost: Ending inventory $222

$666 ¸ 150 = $4.44 per unit ´ 50 units = $222

Cost of goods available – Ending Inventory = Cost of goods sold

$666 – $222 = $444

(d) FIFO: Cost of goods sold $429

Cost of goods available – Ending Inventory = Cost of goods sold

$666 – $237 = $429

Proof: 15 units @ $4.00 = $ 60

60 units @ $4.40 = 264

25 units @ $4.20 = 105

100 units $429

MATCHING

Match the items below by entering the appropriate code letter in the space provided.

Merchandise inventory F. First-in, first-out (FIFO)
Cost G. Periodic
FOB shipping point H. Average cost
FOB destination I. Perpetual
Specific identification method J. Inventory turnover

Cost of goods sold is determined at the time of each sale in a ___ inventory system.

___ consists of goods ready for sale to customers by retailers and wholesalers.

If goods are sold ___ and are in transit at the end of the period, they should be included in the buyer’s inventory.

If goods are sold ___ and are in transit at the end of the period, they should be included in the seller’s inventory.

Each of the inventory cost methods used in a perpetual inventory system may be used in a(n) ___ inventory system.

The ___ method tracks the actual physical flow for each inventory item available for sale.

Ending inventory consists of the most recent inventory purchases in the ___ cost method.

The same unit cost is used to determine the cost of inventory and cost of goods sold in the ___ cost method.

Inventory is valued on the statement of financial position at the lower of ___ and net realizable value.

The ___ measures the number of times the inventory sold during the period.

Answers to Matching

SHORT-ANSWER ESSAY QUESTIONS

S-A E 129

Lucia Kraus and Tren Lee are department managers in the housewares and shoe departments, respectively, for Beatons, a large department store. Tren has observed Lucia taking inventory from her own department home, apparently without paying for it. He hesitates confronting Lucia because he is due to be promoted, and needs Lucia’s recommendation. He also does not want to notify the company management directly, because he doesn’t want an ethics investigation on his record, believing that it will give him a “goody-goody” image. This week, Lucia tried on several pairs of expensive running shoes in her department before finding a pair that suited her. She did not, however, buy them. That very pair was missing this morning.

Beatons recently replaced its old periodic inventory system with a perpetual inventory system using scanners and bar codes. In addition, the annual physical inventory count is to be replaced by a monthly inventory conducted by an independent firm. On hearing the news of the changes, Tren relaxes. “The system will catch Lucia now,” he says to himself.

Instructions

(a) Who are the stakeholders in this situation?

(b) Is Tren’s attitude justified? Why or why not?

Solution 129

(a) The stakeholders in this situation include

Lucia Kraus

Tren Lee

Company management

Bankers and other parties who might rely on the financial statements

(b) Tren’s attitude is not justified. The system will only be able to detect that merchandise is missing, but will not be able to determine who took it.

(c) Tren should notify his superiors at once. He has knowledge of what may be criminal acts, and by concealing them, he is very close to becoming a party to the acts. Tren’s apparent fear of not being promoted because of a “goody-goody” image seems unjustified. It would seem more likely that Tren’s refusal to accept unethical (and illegal) acts by others would make him a more valuable manager. He may even be jeopardizing his career with Beatons if someone else reports Lucia’s actions. The resulting investigation may implicate Tren because of his failure to notify the proper authorities in a timely manner.

S-A E 130

Why do you think a business will take goods on consignment, rather than purchasing them outright?

Solution 130

Two common reasons for taking goods on consignment are to keep inventory costs down and to avoid buying inventory that the business may not be able to sell. Consignments will also keep the inventory turnover ratio higher. Consignments are commonly entered into by used clothing and sporting goods stores, art galleries, and antique dealers.

S-A E 131

FIFO and average cost are the two most commonly used cost methods in Canada. The amounts assigned to the same inventory items on hand may be different under each cost method. Assuming a perpetual inventory system, explain the difference in the cost of the ending inventory under FIFO and average cost when prices of inventory items purchased during the period have (1) been increasing, (2) been decreasing, and (3) remained constant.

Solution 131

The FIFO cost formula method determines cost of goods sold using the earliest purchase cost. The amount left in inventory represents the cost of the most recent purchase(s). The average cost method determines the cost of goods sold using an average cost calculated at the date of each purchase. The amount left in inventory represents the same (moving) average cost.

If the FIFO cost method is used and prices during the period are increasing, the ending inventory value under FIFO will be greater than under average cost. Likewise, if the FIFO cost method is used and prices during the period are decreasing, the ending inventory under FIFO will be less than under average. If prices remain constant, then there will be no difference in the ending inventory values.

S-A E 132

The general manager of Winnipeg Manufacturing Corp. wants to use the specific identification method for the machinery the company manufactures (all of which have a unique serial number), and average cost for the parts inventory. The controller, on the other hand, insists that Winnipeg must use the same cost determination method for all the company’s inventory, “otherwise, we won’t be following the principle of consistency.” Who do you think is right here? Give your rationale.

Solution 132

They are both right. It is acceptable to use two different inventory cost determination methods for different types of inventory, as long as the company is consistent. Specific identification is normally used for items that are not interchangeable and can be easily tracked (such as the machinery which can be identified by serial number). Since parts can be interchanged easily and it would be prohibitively expensive to track each one separately, average cost would be an acceptable method to use.

S-A E 133

Vu Mobutu, a new employee of Crafter’s Paradise, recorded $3,000 in consigned goods received as part of the company’s January 2015 inventory. The goods were received one day after the end of the month, but Vu reasoned that the goods should be included in inventory sooner because Crafter’s paid the freight. The mistake was brought to his attention by the purchasing department who said the goods should not have been recorded as Crafter’s inventory at all. Vu told Sun Ying, the purchasing supervisor, that nobody needed to worry, because the mistake would cancel itself out the following month. In Vu’s opinion, there was no reason to get everyone excited over nothing, especially since it was monthly, and not annual, financial statements that were affected. Sun Ying has reported the problem to the accounting department.

Instructions

You are Vu’s supervisor. Write a memo to Vu explaining why the error should have been corrected.

Solution 133

M E M O

TO: Vu Mobutu, Accounting Department

FROM: Supervisor

DATE: March 12, 2015

It has come to my attention that $3,000 in consigned goods were included in the inventory reported in our January financial statements. You were informed that this amount should be removed from inventory, which you did not do, apparently believing that February’s entries would correct the error.

The error would have been corrected in February if it were only a matter of your recording inventory in the wrong month. January’s inventory and expenses would have been overstated, and February’s understated, but the net effect would have been zero. Since the $3,000 is a fairly large amount, however, that still would not have been appropriate.

The error you made, however, was to enter into inventory goods that the company did not own, and will not own. Consigned goods are owned by the consignors until purchased by customers. We only provide our shops for the consignors to sell their goods, and we collect a fee for doing so.

Please correct the error at once. We may need to notify some of the other departments of the error as well. Please arrange to meet with me in my office as soon as possible to discuss the matter.

(signature)

S-A E 134

Winter Wonderland Ltd. is a private company that sells winter sports equipment. Its year end is June 30, which is the off-season for its products. Matilda Eisenberg, the company’s new controller, has decided to mark all inventory down by 20% for the current year end. Her theory is that sales are slow at this time of year and, therefore, inventory should be less. There is no indication based on prior years that inventory will be sold at less than cost. Matilda says the write-down is necessary and justifies it based on the rule of reporting inventory at lower of cost and net realizable value. She also points out that it will produce the added benefit of paying less income tax.

Instructions

Is the controller’s treatment appropriate? Why or why not?

Solution 134

The controller’s treatment is not appropriate. Sales are slow because it is the off-season. It doesn’t mean there is a decline in the net realizable value or that net realizable value will fall below cost. It is appropriate to use the lower of cost and net realizable value rule only when there is evidence that the net realizable value has declined below cost. The facts in this case, including information from previous years, do not support a write-down. The fact that Winter Wonderland is a private company or that the write-down will reduce income tax is not relevant.

In any case, even if the inventory were written down and the value recovered the following year (assuming the inventory was still on hand), the write-down would have to be reversed.

LEGAL NOTICE

The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence.

The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.

CHAPTER 7

INTERNAL CONTROL AND CASH

Summary of Question TYPEs by STUDY Objective and Level of difficulty

Item	SO	LOD	Item	SO	LOD	Item	SO	LOD	Item	SO	LOD	Item	SO	LOD
True-False Statements
1.	1	E	11.	1	M	21.	1	M	31.	3	M	41.	4	E
2.	1	E	12.	1	M	22.	1	E	32.	3	M	42.	4	E
3.	1	E	13.	1	E	23.	2	E	33.	3	E	43.	4	M
4.	1	E	14.	1	M	24.	2	E	34.	3	M	44.	4	M
5.	1	E	15.	1	M	25.	2	E	35.	3	E	45.	4	E
6.	1	M	16.	1	M	26.	2	M	36.	3	M	46.	4	E
7.	1	M	17.	1	E	27.	2	E	37.	4	E
8.	1	E	18.	1	E	28.	2	E	38.	4	M
9.	1	M	19.	1	M	29.	3	E	39.	4	M
10.	1	M	20.	1	M	30.	3	E	40.	4	E
Multiple Choice Questions
47.	1	H	61.	1	M	75.	2	E	89.	3	M	103.	3	E
48.	1	E	62.	1	E	76.	2	M	90.	3	E	104.	3	H
49.	1	E	63.	1	E	77.	2	E	91.	3	E	105.	3	M
50.	1	M	64.	1	M	78.	2	E	92.	3	E	106.	3	M
51.	1	M	65.	1	M	79.	2	M	93.	3	M	107.	3	H
52.	1	E	66.	1	H	80.	2	M	94.	3	E	108.	3	M
53.	1	M	67.	1	M	81.	2	E	95.	3	E	109.	4	E
54.	1	M	68.	1	M	82.	2	E	96.	3	E	110.	4	M
55.	1	M	69.	1	H	83.	3	M	97.	3	M	111.	4	M
56.	1	M	70.	1	M	84.	3	M	98.	3	M	112.	4	E
57.	1	M	71.	1	E	85.	3	E	99.	3	M	113.	4	E
58.	1	E	72.	2	E	86.	3	M	100.	3	M
59.	1	M	73.	2	E	87.	3	M	101.	3	M
60.	1	E	74.	2	M	88.	3	M	102.	3	E
Exercises
114.	1	E	118.	1,2	M	122.	3	M	126.	3	H	130.	3	E
115.	1	E	119.	3	E	123.	3	M	127.	3	M	131.	3	H
116.	1	M	120.	3	E	124.	3	M	128.	3	E	132.	4	H
117.	1,2	M	121.	3	E	125.	3	M	129.	3	M
Matching
133.	1–4	E,M
Short-Answer Essay
134.	1	E	136.	1	M	138.	3	M	140.	4	E
135.	1	M	137.	2	M	139.	3	M	141.	4	M

Note: E = Easy M = Medium H = Hard

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE

Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type
Study Objective 1
1.	TF	9.	TF	17.	TF	49.	MC	57.	MC	65.	MC	115.	Ex
2.	TF	10.	TF	18.	TF	50.	MC	58.	MC	66.	MC	116.	Ex
3.	TF	11.	TF	19.	TF	51.	MC	59.	MC	67.	MC	117.	Ex
4.	TF	12.	TF	20.	TF	52.	MC	60.	MC	68.	MC	118.	Ex
5.	TF	13.	TF	21.	TF	53.	MC	61.	MC	69.	MC	133.	Ma
6.	TF	14.	TF	22.	TF	54.	MC	62.	MC	70.	MC	134.	SAE
7.	TF	15.	TF	47.	MC	55.	MC	63.	MC	71.	MC	135.	SAE
8.	TF	16.	TF	48.	MC	56.	MC	64.	MC	114.	Ex	136.	SAE
Study Objective 2
23.	TF	26.	TF	72.	MC	75.	MC	78.	MC	81.	MC	118.	Ex
24.	TF	27.	TF	73.	MC	76.	MC	79.	MC	82.	MC	133.	Ma
25.	TF	28.	TF	74.	MC	77.	MC	80.	MC	117.	Ex	137.	SAE
Study Objective 3
29.	TF	83.	MC	91.	MC	99.	MC	107.	MC	125.	Ex	138.	SAE
30.	TF	84.	MC	92.	MC	100.	MC	108.	MC	126.	Ex	139.	SAE
31.	TF	85.	MC	93.	MC	101.	MC	119.	Ex	127.	Ex
32.	TF	86.	MC	94.	MC	102.	MC	120.	Ex	128.	Ex
33.	TF	87.	MC	95.	MC	103.	MC	121.	Ex	129.	Ex
34.	TF	88.	MC	96.	MC	104.	MC	122.	Ex	130.	Ex
35.	TF	89.	MC	97.	MC	105.	MC	123.	Ex	131.	Ex
36.	TF	90.	MC	98.	MC	106.	MC	124.	Ex	133.	Ma
Study Objective 4
37.	TF	40.	TF	43.	TF	46.	TF	111.	MC	132.	Ex	141.	SAE
38.	TF	41.	TF	44.	TF	109.	MC	112.	MC	133.	Ma
39.	TF	42.	TF	45.	TF	110.	MC	113.	MC	140.	SAE

Note: TF = True-False Ma = Matching

MC = Multiple Choice Ex = Exercise SAE = Short-Answer Essay

CHAPTER STUDY OBJECTIVES

1. Describe the primary components of an internal control system. Internal control systems have the following components: the control environment, risk assessment, control activities, information and communication and monitoring. Control activities include the authorization of transactions and activities, segregation of duties, documentation, physical controls, independent performance checks, and human resource controls.

Apply the key control activities to cash receipts and payments. Control activities over cash receipts include (a) designating only personnel such as cashiers to handle cash; (b) assigning the duties of receiving cash, recording cash, and having custody of cash to different individuals; (c) obtaining remittance advices for mail receipts, cash register tapes for over-the-counter receipts, and deposit slips or confirmations for bank deposits; (d) using company safes and bank vaults to store cash, with access limited to authorized personnel, and using cash registers in executing over-the-counter receipts; (e) depositing all cash intact daily in the bank account or using EFT; (f) making independent daily counts of register receipts and daily comparisons of total receipts with total deposits; and (g) conducting background checks, bonding personnel who handle cash, and requiring employees to take vacations.

Control activities over cash payments include (a) making all payments by cheque or by EFT; (b) having only specified individuals authorized to sign cheques; (c) assigning to different individuals the duties of approving items for payment, paying the items, and recording the payments; (d) using prenumbered cheques and accounting for all cheques; (e) storing each cheque in a safe or vault with access restricted to authorized personnel, and using electronic methods to print amounts on cheques; (f) comparing each cheque or EFT with the approved invoice before initiating payment, and making monthly reconciliations of bank and book balances; and (g) conducting background checks, bonding personnel who handle cash, and requiring employees to take vacations.

Prepare a bank reconciliation. In reconciling the bank account, it is customary to reconcile the balance per books and the balance per bank to their adjusted balances. Reconciling items for the bank include deposits in transit, outstanding cheques, and any errors made by the bank. Reconciling items for the books include unrecorded amounts added to or deducted from the bank account and any errors made by the company. Adjusting entries must be made for all items required to reconcile the balance per books to the adjusted cash balance.

Explain the reporting and management of cash. Cash is usually listed first in the current assets section of the statement of financial position. Cash restricted for a special purpose is reported separately as a current asset or as a non-current asset, depending on when the cash is expected to be used. Compensating balances are a form of restriction on the use of cash and are reported as a current or non-current asset depending on the term of the restriction.

The six principles of cash management are to (a) accelerate the collection of receivables, (b) keep inventory levels low, (c) delay the payment of liabilities, (d) plan the timing of major expenditures, (e) invest idle cash, and (f) prepare a cash budget.

TRUE-FALSE STATEMENTS

Fraud is an unintentional act to misappropriate (steal) assets or misstate financial statements.

A good system of internal control does not require monitoring.

Errors give rise to unintentional misstatements in the financial statements.

Risk assessment is one component of a good system of internal control.

When one individual is responsible for all related activities, the potential for errors and irregularities is decreased.

Control activities are most effective when several people are responsible for a given task.

The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

Requiring employees to take vacations is a weakness in a control activity because it does not promote operational efficiency.

The person responsible for making credit sales should be the vice-president of finance.

External auditors report on whether or not the company’s financial statements fairly present its financial position and results of operations.

External auditors are usually employees of the company.

Bonding means insuring a company against misappropriation of assets by employees.

It is unlikely that a company would want to bond its employees who handle cash or inventory.

An effective control activity results when at least two individuals are assigned to one cash drawer so that each can serve as check on the other.

A good internal control system will help a company achieve reliable financial reporting, effective and efficient operations, and compliance with laws and regulations.

An internal control system cannot be considered effective until the possibility of human error has been completely eliminated.

Only large companies need to be concerned with a system of internal control.

The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.

Background checks of prospective employees are not necessary when a company has an effective system of internal control.

The extent of internal control activities adopted by a company must be evaluated in terms of cost-benefit.

Segregation of duties among employees eliminates the possibility of collusion.

All documents should be prenumbered.

Debit card and bank credit card transactions are considered cash.

The use of a bank account makes internal control over cash more difficult.

The use of electronic funds transfers normally results in better control over cash.

Control over cash disbursements is improved if all expenditures are paid by cheque or through use of electronic funds transfers.

An example of segregation of duties is having a cheque signer record cash disbursements.

An authorized signing officer should sign a cheque only after reviewing the appropriate supporting documentation.

To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by the person authorized to sign cheques.

Electronic funds transfers never have to be recorded.

All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the Cash account.

NSF cheques received from customers are debited by the bank to the depositor’s account.

A bank reconciliation is generally prepared by the bank and sent to the depositor along with cancelled cheques.

An NSF cheque that was received is recorded as an account receivable.

NSF cheques received are accounted for by adding them to the cash balance per books.

Deposits in transit require an adjustment to the cash balance per books.

Management only needs to know how much cash is available at the end of the month (when the bank reconciliation is prepared).

Debt investments due within three months are normally classified as cash equivalents.

A compensating balance is always reported as a non-current asset.

Cash restricted in use should be reported separately on the statement of financial position.

When the cash account has a credit balance in the general ledger, it is reported as a non-current liability.

A basic principle of cash management is to increase the speed of paying liabilities.

A company should plan the timing of major expenditures in light of its operating cycle.

A cash budget will help determine if additional financing will be necessary.

Idle cash should be reported as restricted cash.

A key principle of cash management is to increase the speed of collection on receivables.

ANSWERS TO TRUE-FALSE STATEMENTS

Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.
1.	F	9.	F	17.	F	25.	T	33.	F	41.	F
2.	F	10.	T	18.	T	26.	T	34.	T	42.	F
3.	T	11.	F	19.	F	27.	F	35.	F	43.	T
4.	T	12.	T	20.	T	28.	T	36.	F	44.	T
5.	F	13.	F	21.	F	29.	F	37.	F	45.	F
6.	F	14.	F	22.	T	30.	F	38.	T	46.	T
7.	T	15.	T	23.	T	31,	T	39.	F
8.	F	16.	F	24.	F	32.	T	40.	T

MULTIPLE CHOICE QUESTIONS

Internal controls may be limited by each of the following except

(a) the size of the business.

(b) the human element.

(d) collusion.

Which one of the following is not a primary component of an internal control system?

(a) control activities

(b) delay payment of liabilities

(d) control environment

Independent internal reviews should be done

(a) at the end of each accounting period.

(b) at the end of each month.

(d) by the external auditor.

All of the following are examples of a control activity except

(a) using prenumbered documents.

(b) reconciling the bank statement.

(d) insistence that employees take vacations.

All of the following are examples of a control activity except

(a) an extensive marketing plan.

(b) bonding of employees.

(d) recording of all transactions.

All of the following are examples of a control activity except

(a) limit access to assets.

(b) independent internal reviews.

(d) increasing the speed of collection on receivables.

Which of the following is not a limitation of internal control?

(a) cost of establishing control procedures

(b) the human element

(d) the size of the company

Internal controls are concerned with all of the following except

(a) computerized systems of accounting.

(b) effective and efficient operations.

(d) compliance with relevant laws and regulations.

An employee who makes a sale, ships the goods, and bills the customer violates which control activity?

(a) authorization of transactions and activities

(b) documentation

(d) human resource controls

Physical controls are not designed to safeguard assets from

(a) natural disasters.

(b) employee theft.

(d) unauthorized use.

Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them

(a) increases the potential for errors and fraud.

(b) decreases the potential for errors and fraud.

(d) reduces cost and maximizes benefit.

The custodian of a company asset should

(a) not be bonded.

(b) be someone outside the company.

(d) be an accountant.

Internal auditors

(a) are hired by independent accounting firms to audit companies.

(b) are employees of the government who evaluate the internal controls of companies filing tax returns.

(d) cannot evaluate the system of internal controls of the companies that employ them because they are not independent.

When two or more people get together for the purpose of circumventing prescribed controls, it is called

(a) fraud prevention.

(b) collusion.

(d) bonding of employees.

From an internal control standpoint, what type of controls are thorough background checks and bonding of employees?

(a) physical controls

(b) human resource controls

(d) documentation

The control activity related to not having the same person authorize and pay for goods is known as

(a) authorization of transactions and activities.

(b) independent checks of performance.

(d) human resource controls.

Joe is warehouse custodian and also maintains the accounting records of the inventory held at the warehouse. Which control activity is violated?

(a) documentation

(b) independent checks of performance

(d) authorization of transactions and activities

Physical controls to safeguard assets do not include

(a) cashier department supervisors.

(b) vaults.

(d) locked warehouses.

In large companies, independent checks of performance are often assigned to

(a) shift supervisors.

(b) management.

(d) external auditors.

Maximum benefit from independent checks of performance is obtained when

(a) it is made on a pre-announced basis.

(b) it is done by the employee possessing custody of the asset.

(d) it is done at the time of the external audit.

If employees are bonded, it means that

(a) they are not allowed to handle cash.

(b) they have worked for the company for at least 10 years.

(d) they are not allowed to take vacations.

Ms. Greene has worked for Ambleside Inc. for 20 years without taking a vacation. An internal control activity that would address this situation would be

(a) human resource controls.

(b) authorization of transactions and activities.

(d) documentation.

A system of internal control can only provide reasonable assurance, which is based on the belief that

(a) the system is infallible.

(b) the system can always detect errors and irregularities.

(d) the human element is not important.

Two employees at a retail store work the same cash register. You evaluate this situation as

(a) a violation of authorization of transactions and activities.

(b) a violation of segregation of duties.

(d) supporting independent checks of performance.

An accounts payable clerk also has cheque signing authority. Which control procedure is violated?

(a) authorization of transactions and activities

(b) independent checks of performance

(d) segregation of duties

The use of electronic funds transfers

(a) normally results in better internal controls.

(b) does not require segregation of duties.

(d) does not require proper authorization.

Which one of the following items would not be considered cash?

(a) debit cards

(b) money orders

(d) post-dated cheques

Which of the following is(are) considered cash?

(a) debit cards only

(b) debit cards and bank credit cards

(d) debit cards and all types of credit cards

Which of the following is not a good control activity over cash?

(a) Payments to creditors should be made in cash.

(b) There should be limited access to cash.

(d) Cash should be deposited daily.

Control over cash disbursements is generally more effective when

(a) all bills are paid in cash.

(b) disbursements are made by the accounts payable subsidiary clerk.

(d) all purchases are made on credit.

Which of the following is not a suggested procedure to establish a good control activity over cash disbursements?

(a) pre-signed blank cheques

(b) Different individuals approve and make payments.

(d) The bank statement is reconciled monthly.

Which of the following is not a control activity over cash?

(a) Only designated personnel are authorized to handle cash.

(b) The same individual receives the cash and pays the bills.

(d) Access to cash is limited.

The use of prenumbered cheques is an example of

(a) documentation.

(b) independent checks of performance.

(d) segregation of duties.

Allowing only the treasurer to sign cheques is an example of which control activity?

(a) documentation

(b) segregation of duties

(d) authorization of transactions and activities

Blank cheques

(a) should be safeguarded.

(b) should be pre-signed.

(d) should not be prenumbered.

An employee authorized to sign cheques should not record

(a) shipping documents.

(b) mail receipts.

(d) sales transactions.

A bank statement

(a) lets a depositor know the financial position of the bank as of a certain date.

(b) is a credit reference letter written by the depositor’s bank.

(d) shows the activity that increased or decreased the depositor’s account balance.

Which one of the following would not cause a bank to debit a depositor’s account?

(a) bank service charge

(b) collection of a note receivable

(d) cheques marked NSF

A company maintains the asset account, Cash in Bank, on its books, while the bank maintains a reciprocal account that is recorded, on the bank’s books, as

(a) a contra-asset account.

(b) a liability account.

(d) a shareholders’ equity account.

On the April 30 bank reconciliation, a deposit made by a company to its bank account on April 18 will likely appear as a(n)

(a) addition to the balance per books.

(b) deduction from the balance per books.

(d) This will not affect the current period’s bank reconciliation.

An NSF cheque received from a customer should appear in which section of the bank reconciliation?

(a) addition to the balance per books

(b) deduction from the balance per books

(d) deduction from the balance per bank

On a bank reconciliation, which of the following would be deducted from the balance per books?

(a) outstanding cheques

(b) deposits in transit

(d) bank service charges

On a bank reconciliation, which of the following would be added to the balance per books?

(a) outstanding cheques

(b) deposits in transit

(d) bank service charges

On a bank reconciliation, which of the following would be deducted from the balance per bank?

(a) outstanding cheques

(b) deposits in transit

(d) bank service charges

On a bank reconciliation, which of the following would be added to the balance per bank?

(a) outstanding cheques

(b) deposits in transit

(d) bank service charges

A cheque returned by the bank marked “NSF” means

(a) no service fee.

(b) no signature found.

(d) not sufficient funds.

Outstanding cheques from the prior period which clear the bank in the current period

(a) should be added to the balance per books.

(b) should be deducted from the balance per books.

(d) do not affect the current period’s bank reconciliation.

A bank reconciliation should be prepared

(a) whenever the bank refuses to lend the depositor money.

(b) when an employee is suspected of fraud.

(d) by the person who is authorized to sign cheques.

Deposits in transit

(a) have been recorded on the depositor’s books but not yet by the bank.

(b) have been recorded by the bank but not yet by the depositor.

(d) are customers’ cheques that are in the mail but have not yet been received by the depositor.

In preparing a bank reconciliation, outstanding cheques are

(a) added to the balance per bank.

(b) deducted from the balance per books.

(d) deducted from the balance per bank.

If a cheque correctly written and paid by the bank for $521 is incorrectly recorded on the company’s books for $251, the appropriate treatment on the bank reconciliation would be to

(a) add $270 to the balance per bank.

(b) add $270 to the balance per books.

(d) deduct $270 from the balance per bank.

A cheque written by the company for $157 is incorrectly recorded as $175. On the bank reconciliation, the $18 error should be

(a) added to the balance per books.

(b) deducted from the balance per books.

(d) deducted from the balance per bank.

For which of the following errors should the appropriate amount be added to the balance per bank on a bank reconciliation?

(a) cheque for $43 recorded as $34 by the depositor

(b) deposit of $500 recorded by the bank as $50

(d) cheque for $35 recorded as $53 by the depositor

Which of the following bank reconciliation items would not require an adjusting entry on the depositor’s books?

(a) bank service charge

(b) outstanding cheques

(d) electronic payment on account

Which of the following bank reconciliation items would require an adjusting entry on the depositor’s books?

(a) error by the bank

(b) outstanding cheques

(d) deposit in transit

All of the following bank reconciliation items would require an adjusting entry on the depositor’s books except

(a) interest earned.

(b) deposits in transit.

(d) a customer’s NSF cheque.

Notification by the bank that a customer’s deposited cheque was returned NSF requires that the depositor make the following adjusting entry:

(a) Accounts Receivable

Cash

(b) Cash

Accounts Receivable

(d) No adjusting entry is necessary.

On Druskus Corp.’s April bank reconciliation, cheques outstanding totalled $7,200. In May, the corporation issued cheques totalling $43,300. The May bank statement shows that $32,900 in cheques cleared the bank in May. A cheque from one of Druskus Corp.’s customers in the amount of $290 was also returned marked “NSF.” The amount of outstanding cheques on Druskus’ May bank reconciliation should be

(a) $10,400.

(b) $17,310.

(d) $17,600.

Great Scott Corporation gathered the following reconciling information in preparing its August bank reconciliation:

Cash balance per books, August 31……………………….. $3,500

Deposits in transit…………………………………………………. 150

Electronic collection of account receivable……………… 850

Bank charge for cheque printing…………………………….. 20

Outstanding cheques……………………………………………. 2,000

NSF cheque………………………………………………………… 170

The adjusted cash balance per books at August 31 is

(a) $4,160.

(b) $4,010.

(d) $2,310.

Driftech Limited gathered the following reconciling information in preparing its October bank reconciliation:

Cash balance per books, October 31……………………… $15,500

Electronic collection of account……………………………… 4,000

Outstanding cheques……………………………………………. 11,000

Deposits in transit…………………………………………………. 13,200

Bank service charge…………………………………………….. 1,010

NSF cheque………………………………………………………… 1,200

The adjusted cash balance per books at October 31 is

(a) $14,380.

(b) $19,500.

(d) $17,290.

Island Corporation gathered the following reconciling information in preparing its September bank reconciliation:

Cash balance per bank, September 30…………………… $11,000

Note receivable collected by bank………………………….. 6,000

Outstanding cheques……………………………………………. 9,000

Deposit in transit…………………………………………………… 4,500

Bank service charge…………………………………………….. 75

NSF cheque………………………………………………………… 1,200

The adjusted cash balance per bank at September 30 is

(a) $ 1,775.

(b) $ 6,500.

(d) $15,725.

Bank errors

(a) occur because of time lags.

(b) must be corrected by debits.

(d) are corrected by making an adjusting entry on the depositor’s books.

Cash equivalents are

(a) often combined with cash and reported as a current asset.

(b) usually reported as a non-current asset.

(d) included as a compensating balance.

Which of the following is not true with respect to the reporting of cash?

(a) Cash equivalents are normally combined with cash and reported as a current asset.

(b) Compensating balances are minimum cash balances required by the bank.

(d) Cash overdrafts are reported as contra-assets.

Cash equivalents

(a) include all investments in shares.

(b) include short-term, highly liquid trading investments plus accounts receivable less any bank overdrafts.

(d) are reported as non-current assets.

Which of the following is not a basic principle of cash management?

(a) Increase collection of receivables.

(b) Keep inventory levels high.

(d) Invest idle cash.

It is a good idea to invest idle cash because

(a) it will increase the speed of collection on receivables.

(b) it will keep inventory levels low.

(d) it will delay the payment of liabilities.

ANSWERS TO MULTIPLE CHOICE QUESTIONS

Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.
47.	c	59.	c	71.	d	83.	d	95.	a	107.	b
48.	b	60.	b	72.	a	84.	b	96.	d	108.	c
49.	c	61.	b	73.	d	85.	b	97.	c	109.	a
50.	c	62.	c	74.	b	86.	d	98.	a	110.	d
51.	a	63.	c	75.	a	87.	b	99.	b	111.	c
52.	d	64.	a	76.	c	88.	d	100.	b	112.	b
53.	c	65.	c	77.	a	89.	c	101.	c	113.	c
54.	a	66.	c	78.	b	90.	a	102.	b
55.	c	67.	c	79.	a	91.	b	103.	a
56.	a	68.	a	80.	d	92.	d	104.	d
57.	a	69.	c	81.	a	93.	d	105.	a
58.	c	70.	a	82.	c	94.	c	106.	d

EXERCISES

Ex. 114

Below are descriptions of internal control problems. In the space to the left of each item, enter the code letter of the one best control activity that is related to the problem described.

Control Activity

Authorization of transactions and activities
Segregation of duties
Physical controls
Documentation
Independent internal reviews
Independent external reviews
Human resource controls

_____ 1. The same person opens incoming mail and posts the accounts receivable subsidiary ledger.

_____ 2. Three people handle cash sales from the same cash register drawer.

_____ 3. A clothing store is experiencing a high level of inventory shortages because people try on clothing and walk out of the store without paying for the merchandise.

_____ 4. The person who is authorized to sign cheques approves purchase orders for payment.

_____ 5. Some cash payments are not recorded because cheques are not prenumbered.

_____ 6. Cash shortages are not discovered because there are no daily cash counts by supervisors.

_____ 7. The treasurer of the company has not taken a vacation for over 5 years.

_____ 8. The external audit firm reports on the financial statements each year.

Solution 114 (5 min.)

Ex. 115

Indicate whether each of the business practices listed below strengthens (S) or weakens (W) a company’s system of control activities.

_____ (a) Cashiers are not bonded.

_____ (b) All payments are made with cheques instead of cash.

_____ (c) Employees are encouraged to take paid vacations.

_____ (d) Two people handle cash sales from the same cash register drawer.

_____ (e) The company uses prenumbered sales invoices.

_____ (f) Audited financial statements are provided to the creditors each fiscal year.

Solution 115 (5 min.)

(a) W

(b) S

(d) W

(e) S

(f) S

Ex. 116

Craig Thompson has worked for Dr. Hung Pow, a dentist, for several years. Craig demonstrates a loyalty that is rare among employees. He hasn’t taken a vacation in the last three years. One of Craig’s primary duties is to open the mail and list the cheques received. He also takes cash from patients as they leave. At times it is so hectic that Craig doesn’t bother with giving patients a receipt for the cash paid on their accounts. He assures them he will see to it that they receive the proper credit and a receipt later. When it is slow in the office, Craig offers to help Julia post payments to the patients’ accounts receivable. She is always happy to receive his help, because Craig is such a conscientious worker.

Instructions

Identify any internal control activities that may be violated in this situation.

Solution 116 (10 min.)

Violations:

It is Julia’s responsibility to post payments to patient accounts. In allowing Craig to assist her, the control activity of authorization of transactions and activities is violated.

Although it appears to be a small office, it is not appropriate that Craig both opens the mail and receives and records cash receipts from patients. He also appears to have custody of cash. This situation violates the segregation of duties control activity. By posting to patients’ accounts, it would be possible to post credits to patient accounts and pocket the cash.

The documentation control is violated when patients are not given cash receipts. Although many professional offices do not have cash registers, computerized or manual receipts are customary and necessary.

Independent internal review (independent checks of performance) is also being violated. There is no independent counting of the cash and comparison to total receipts.

Human resource controls are being violated. Is Craig bonded? As well, he should be required to take regular vacations.

Ex. 117

Sally Small is the sole shareholder of a corner store, The Small Store Inc. She hasn’t taken a vacation in two years and is planning to take one next month. She would like to know things are being properly handled in the store before she leaves. She has asked you to observe her operations for a day and tell her if there are any problems you see or improvements you can suggest to the way the company operates with respect to internal controls. She would also like to know if there are things she is doing correctly so that she can continue to do them.

You note the following activities during the day. Sally opens the store at 9 a.m. She balances the cash from the previous day before opening. Sarah, a long time employee, starts work at 10 a.m. and works until 5 p.m. Peter, another part time employee, works from 4 p.m. until 11 p.m. and closes the store. He locks the cash register when he leaves. Sally, Sarah and Peter all serve customers during the day. There is only one cash register. Sally leaves the store for lunch and finishes for the day around 6 p.m. She tells you she sometimes drops back in at night to see how things are going.

Bread and milk are delivered to the store during the day and whoever is at the cash register at the time takes money from the register to pay for the products.

There is a camera that records customers at the cash register and a mirror so the person serving at the cash register can see most of the store.

Instructions

a) Prepare a list of control activity weaknesses over cash, explaining why each is a weakness and a suggestion as to how to improve. Use point form.
b) Prepare a list of items that are being done correctly and why they provide good control. Use point form.

Solution 117 (10 min.)

a) Weaknesses

The cash is left in the store in the cash register overnight. This increases the risk of it being stolen. It should be locked in the safe or taken to the night deposit.
There is only one cash register but three people work the cash. This means it is not possible to establish who is responsible for any shortages. Each person should have his or her own cash drawer and user numbers for the cash register.
Cash is not deposited intact—payments are made in cash for purchases. This may result in inadequate documentation and will make errors harder to find. Purchases should be paid for with a cheque.
The fact that Sally has not taken a vacation in two years is not a concern, as she is the owner. But normally, employees not taking a vacation may indicate they are concerned with covering something up. Everyone should be encouraged/required to take vacation on a regular basis.

b) Strengths

The camera is a good control because it records events.
Sally dropping in unexpectedly at night is a good control as she can do spot checks.

Ex. 118

Listed below are seven errors or problems that might occur in the processing of cash transactions. Also shown is a list of control activities. Evaluate each possible error and cite a control activity given that would reduce the probability of the error occurring. If none of the control activities given will correct the problem, write “None.” If you think more than one control is appropriate, list all that apply.

Possible Errors or Problems

____ 1. An employee steals the cash collected from a customer for an account receivable and conceals this theft by issuing a credit memorandum indicating that the customer returned the merchandise.

____ 2. A small fire destroys 3 days of cash receipts.

____ 3. The official designated to sign cheques is able to steal blank cheques and issue them to herself without fear of detection.

____ 4. A salesclerk in serving customers often rings up a sale for less than the actual amount and then keeps the additional cash collected from the customer.

____ 5. Three cashiers use one cash register drawer and the cash in the drawer is often short.

____ 6. Each cashier counts his/her own register drawer each day and verbally reports the results to the supervisor.

____ 7. Cashiers with over 5 years’ experience are not bonded.

Internal Control Activities

(a) Authorization of transactions and activities

(b) Segregation of duties

(d) Documentation

(e) Independent checks of performance

(f) Human resource controls

Solution 118 (10 min.)

5. (a) and (e)

(d) and (e)

Ex. 119

Using the following information, prepare a bank reconciliation for Gloss Corporation at July 31, 2015:

The unadjusted bank statement balance is $6,612.
The unadjusted cash account balance in the general ledger is $9,869.
Outstanding cheques totalled $1,170.
Deposits in transit are $4,350.
The bank service charge is $50.
A cheque for $196 for supplies was posted as $169 in the company’s general ledger.

Solution 119 (10 min.)

GLOSS CORPORATION

Bank Reconciliation

July 31, 2015

–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––

Cash balance per bank………………………………………………………………… $6,612

Add: (d) Deposit in transit…………………………………………………………. 4,350

10,962

Less: (c) Outstanding cheques………………………………………………….. 1,170

Adjusted cash balance per books………………………………………………….. $9,792

Cash balance per books………………………………………………………………. $9,869

Less: (f) Cheque amount error ($196 – $169)…………………………….. $ 27

(e) Bank service charge…………………………………………………… 50 77

Adjusted cash balance per books………………………………………………….. $9,792

Ex. 120

Using the following information, prepare a bank reconciliation for Biling Inc. at May 31, 2015:

The unadjusted bank statement balance is $7,200.
The unadjusted cash account balance is $6,024.
Outstanding cheques totalled $1,600.
Deposits in transit are $800.
The bank service charge is $24.
Electronic collections on account totalled $400.

Solution 120 (10 min.)

BILING INC.

Bank Reconciliation

May 31, 2015

Cash balance per bank………………………………………………………………… $7,200

Add: (d) Deposit in transit…………………………………………………………. 800

8,000

Less: (c) Outstanding cheques………………………………………………….. 1,600

Adjusted cash balance…………………………………………………………………. $6,400

Cash balance per books………………………………………………………………. $6,024

Add: (f) Electronic collections………………………………………………….. 400

6,424

Less (e) Bank service charge…………………………………………………… 24

Adjusted cash balance…………………………………………………………………. $6,400

Ex. 121

Given the following information, determine the adjusted cash balance per books.

Unadjusted balance per books at March 31, $9,700.
Outstanding cheques, $1,600.
NSF cheque returned with bank statement, $190.
Deposit placed in night deposit the evening of March 31 (not on bank statement), $750.
Cheque printing charges $45.
Interest earned on chequing account, $100.

Solution 121 (5 min.)

$9,565 ($9,700 – $190 – $45+ $100)

Ex. 122

Seattle Coffee Limited’s bank statement for the month of November 2015 showed a balance per bank of $7,000. The company’s general ledger Cash account showed a balance of $5,659 at November 30. Other information is as follows:

Cash receipts for November 30 recorded on the company’s books were $5,200, but this amount does not appear on the bank statement.
The bank statement shows a debit memorandum for $40 for cheque printing charges.
Cheque #119 payable in the amount of $248 to Holt Corporation was recorded in the general journal and cleared the bank for $248. A review of the accounts payable records shows a $36 credit balance in Holt’s account and that the total payment should have been for $284.
The total amount of cheques outstanding at November 30 was $5,800.
Cheque #138 was correctly written and paid by the bank for $409. The cash payment journal reflects an entry for Cheque #138 as a debit to Accounts Payable and a credit to Cash for $490.
The bank returned an NSF cheque from a customer for $560.
The bank statement included a deposit for $1,260, which represents the electronic collection of customer accounts which have not yet been recorded on the company’s books.

Instructions

(a) Prepare a bank reconciliation for Seattle Coffee Limited at November 30, 2015.

(b) Prepare any adjusting entries necessary as a result of the bank reconciliation.

Solution 122 (25 min.)

(a)

SEATTLE COFFEE LIMITED

Bank Reconciliation

November 30, 2015

Cash balance per bank………………………………………………………………… $ 7,000

Add: (1) Deposit in transit…………………………………………………………… 5,200

12,200

Less: (4) Outstanding cheques……………………………………………………. 5,800

Adjusted cash balance per bank……………………………………………………. $ 6,400

Cash balance per books………………………………………………………………. $ 5,659

Add: (5) Accounts payable error ($490 – $409)……………………………. $ 81

(7) Electronic collections……………………………………………………. 1,260 1,341

7,000

Less: (2) Cheque printing……………………………………………………………. $ 40

(6) NSF cheque………………………………………………………………… 560 600

Adjusted cash balance per books………………………………………………….. $ 6,400

Note: Item (3) is not relevant.

(b)

Nov 30 Cash…………………………………………………………………………. 81

Accounts Payable ……………………………………………………… 81

(To correct error in recording Cheque #138)

30 Cash…………………………………………………………………………. 1,260

Accounts Receivable……………………………………………. 1,260

(To record collection of accounts receivable)

30 Bank Charges Expense………………………………………………. 40

Cash…………………………………………………………………… 40

(To record cheque printing charges)

30 Accounts Receivable………………………………………………….. 560

Cash…………………………………………………………………… 560

(To record NSF cheque)

Ex. 123

The bank statement for Indiana Inc. shows an unadjusted balance of $2,330 at June 30, 2015, while the unadjusted cash balance per books was $599. The following information pertains to the bank transactions for the company.

Deposits of $160, representing cash receipts of June 30, did not appear on the bank statement.
Outstanding cheques totalled $240.
Bank service charges for June were $9.
Electronic collections on account totalled $1,740, and have not yet been recorded by the company.
An NSF cheque for $80 from a customer was returned with the statement.

Instructions

(a) Prepare a bank reconciliation at June 30.

(b) Prepare any adjusting entries necessary as a result of the bank reconciliation.

Solution 123 (25 min.)

(a)

INDIANA INC.

Bank Reconciliation

June 30, 2015

Cash balance per bank………………………………………………………………… $2,330

Add: (1) Deposit in transit…………………………………………………………… 160

2,490

Less: (2) Outstanding cheques……………………………………………………. 240

Adjusted cash balance per bank……………………………………………………. $2,250

Cash balance per books………………………………………………………………. $ 599

Add: (4) Electronic collections on account…………………………………… 1,740

2,339

Less: (3) Bank service charge…………………………………………………….. $ 9

(5) NSF cheque………………………………………………………………… 80 89

Adjusted cash balance per books………………………………………………….. $2,250

(b)

Jun 30 Cash…………………………………………………………………………. 1,740

Accounts Receivable……………………………………………. 1,740

(To record collection of accounts receivable)

30 Accounts Receivable………………………………………………….. 80

Cash…………………………………………………………………… 80

(To record NSF cheque)

30 Bank Charges Expense………………………………………………. 9

Cash…………………………………………………………………… 9

(To record bank service charges)

Ex. 124

Smith’s Cafe Ltd. had the following information regarding its bank transactions for the month of April 2016:

…… Unadjusted balance per books April 30……………………………………. $ 2,805

…… Unadjusted balance per bank statement April 30………………………. 11,400

1…. Cheques written in April but still outstanding, $6,000.

2…. Cheques written in March but still outstanding, $2,800.

3…. Deposits of April 30 not yet recorded by bank, $6,100.

4…. A customer’s cheque for $700 was returned by the bank as NSF.

5…. Cheque #210 for $594 was correctly issued and paid by bank but incorrectly entered in the general journal as a payment on account for $549.

6…. Bank service charge for April was $50.

7…. A payment on account (Cheque #318) was incorrectly entered in the general journal and posted to the general ledger as $824. However it had been correctly prepared for $284. The cheque cleared the bank in April.

8…. Electronic collections on account totalled $6,150, and have not yet been recorded by the company.

Instructions

Prepare a bank reconciliation for Smith’s Cafe Ltd. at April 30.

Solution 124 (20 min.)

SMITH’S CAFE LTD.

Bank Reconciliation

April 30, 2016

Cash balance per bank………………………………………………………………… $11,400

Add: (3) Deposit in transit………………………………………………………….. 6,100

17,500

Less: (1) April outstanding cheques……………………………………………. $6,000

(2) March outstanding cheques…………………………………………. 2,800 8,800

Adjusted cash balance per bank……………………………………………………. $ 8,700

Cash balance per books………………………………………………………………. $2,805

Add: (7) Error on Cheque #318 (824 – 284)……………………………….. $ 540

(8) Electronic collections on account…………………………………. 6,150 6,690

9,495

Less: (4) NSF Cheque……………………………………………………………… $700

(5) Error on Cheque #210 (594 – 549)……………………………….. 45

(6) Bank service charge…………………………………………………… 50 795

Adjusted cash balance per books………………………………………………….. $ 8,700

Ex. 125

Using the code letters below, indicate how each of the items listed would be handled in preparing a bank reconciliation. Enter the appropriate code letter in the space to the left of each item.

Code

A Add to cash balance per books

B Deduct from cash balance per books

C Add to cash balance per bank

D Deduct from cash balance per bank

E Does not affect the bank reconciliation

Items

_____ 1. Outstanding cheques

_____ 2. Bank service charge

_____ 3. Cheque for $320 correctly written and paid by the bank but incorrectly entered in the general journal for $230.

_____ 4. Deposit in transit

_____ 5. Bank returned a customer’s deposited cheque marked NSF.

_____ 6. Interest earned on bank account

_____ 7. Bank debit memorandum for cheque printing fees

_____ 8. Bank charged a cheque against the company, which should have been charged to another company.

_____ 9. A cheque for $236 was correctly paid by the bank but was incorrectly entered in the general journal for $263.

Solution 125 (10 min.)

Ex. 126

The adjusted cash balance per books and per bank for Murdoch Ltd. at November 30, 2015 is $10,740.93. The following cheques and receipts were recorded for the month of December, 2015:

Cheques Receipts

No. Amount No. Amount Amount Date

17 $372.96 22 $ 578.84 $ 843.86 Dec 5

18 780.62 23 1,687.50 941.54 21

19 157.00 24 921.30 808.58 27

20 587.50 25 246.03 1,067.00 31

21 234.15

In addition, the bank statement for the month of December is presented below:

Balance Amounts Deducted (Debits) Amounts Added (Credits) Balance

Last Statement No. Total Amount No. Total Amount This Statement

$5,404.84 10 $3,632.19 5 $9,278.36 $11,051.01

———————————————————————————————————————

Cheques and other debits Deposits Date Balance

———————————————————————

No. Amount No. Amount No. Amount

————————————————————————————————————————

14 148.29 17 372.96 22 578.84 5,484.38 Dec 1 $9,789.13

18 708.62 24 921.30 843.86 8 $9,003.07

19 157.00 25 246.03 941.54 23 $9,541.58

21 234.15 15.00 SC 808.58 29 $10,101.01

250.00 NSF 1,200.00 EFT 31 $11,051.01

————————————————————————————————————————

Symbols: NSF (Not sufficient funds) SC (Service charge) EFT (Electronic funds transfer)

————————————————————————————————————————

Cheque #18 was correctly written for $708.62 for a payment on account. The NSF cheque was from Mr. S. Horn, a customer, in settlement of an account receivable. An entry had not been made for this. The EFT is for an electronic collection of accounts receivable in the amount of $1,200, which has not yet been recorded by the company. The bank service charge is $15.

Instructions

(a) Calculate the unadjusted cash balance at December 31, 2015.

(b) Prepare a bank reconciliation at December 31, 2015.

Solution 126 (30–35 min.)

(a) Nov. 30 adjusted balance per books + receipts – cheques written = Dec. 31 unadjusted

balance per books

$10,740.93 + $3,660.98 – $5,565.90 = $8,836.01

(b)

MURDOCH LTD.

Bank Reconciliation

December 31, 2015

Cash balance per bank statement…………………………………………….. $11,051.01

Add: Deposits in transit………………………………………………………….. 1,067.00

12,118.01

Less: Outstanding cheques

#20……………………………………………………………………………… $ 587.50

#23……………………………………………………………………………… 1,687.50 2,275.00

Adjusted cash balance per bank……………………………………………….. $ 9,843.01

Cash balance per books…………………………………………………………… $ 8,836.01

Add: Error in recording cheque #18 (780.62 – 708.62)……………… $ 72.00

Electronic collection of accounts…………………………………….. 1,200.00 1,272.00

10,108.01

Less: Bank service charge……………………………………………………… $ 15.00

NSF cheque…………………………………………………………………. 250.00 265.00

Adjusted cash balance per books……………………………………………… $ 9,843.01

(c)

Dec 31 Cash…………………………………………………………………………. 72

Accounts Payable………………………………………………… 72

(To correct recording error on cheque #18)

31 Cash…………………………………………………………………………. 1,200

Accounts Receivable……………………………………………. 1,200

(To record collection of accounts receivable)

31 Bank Charges Expense………………………………………………. 15

Cash…………………………………………………………………… 15

(To record bank service charge)

31 Accounts Receivable………………………………………………….. 250

Cash…………………………………………………………………… 250

(To record NSF cheque from S. Horn)

Ex. 127

Yamamoto Corporation’s bank statement included two types of electronic funds transfers (EFT). One type of EFT totalled $10,000 and was from customers paying their accounts online. Another type of EFT totalled $16,500 and was from Yamamoto paying its accounts payable online.

Instructions

(a) How will each of these items affect Yamamoto’s bank reconciliation, assuming the company does not record these until it receives the bank statement?

(b) Prepare the required journal entries, if any, that Yamamoto will make to record the above information on its books.

Solution 127 (10 min.)

(a) Yamamoto Corporation must add the electronic collections from customers in payment of their accounts receivable to its cash balance per books on the bank reconciliation. It must deduct the electronic payments it made in payment of its accounts payable from its cash balance per books on the bank reconciliation.

(b) Cash……………………………………………………………………………………. 10,000

Accounts Receivable ……………………………………………………… 10,000

Accounts Payable…………………………………………………………………. 16,500

Cash……………………………………………………………………………… 16,500

Ex. 128

The cash records of Emmett Corp. show the following:

The January 31 bank reconciliation indicated that deposits in transit totalled $950. During February, the general ledger account, Cash, shows deposits of $14,500, but the bank statement indicates that only $12,000 in deposits were received during the month.
The January 31 bank reconciliation also reported outstanding cheques of $2,200. During February, Emmett Corp.’s books show that $13,900 of cheques were issued, yet the bank statement showed that $13,300 of cheques cleared the bank in February.

No errors were made by either the bank or Emmett Corp.

Instructions

(a) Calculate the amount of the deposits in transit at February 29.

(b) Calculate the amount of the outstanding cheques at February 29.

Solution 128 (10 min.)

(a) Deposits in transit:

Deposits per books in February………………………………………………. $14,500

Deposits per the bank in February…………………………………………… $12,000

Less: January 31 deposits in transit…………………………………………. 950

February receipts deposited in February………………………………….. 11,050

Deposits in transit, February 29………………………………………………. $ 3,450

(b) Outstanding cheques:

Cheques per books in February………………………………………………. $13,900

Cheques clearing the bank in February……………………………………. $13,300

Less: Outstanding cheques, January 31…………………………………… 2,200

February cheques clearing in February……………………………………. 11,100

Outstanding cheques, February 29………………………………………….. $ 2,800

Ex. 129

The records of Western Cattle Co. Ltd. show the following:

In February, deposits per the bank statement totalled $18,850; deposits per books $19,500; and deposits in transit at February 28 were $1,400.
In February, cheques issued per books were $17,750; cheques clearing the bank were $18,400; and outstanding cheques at February 28 were $1,250.

No errors were made by either the bank or Western Cattle Co. Ltd.

Instructions

(a) Calculate the amount of the deposits in transit at January 31.

(b) Calculate the amount of the outstanding cheques at January 31.

Solution 129 (10 min.)

(a) Deposits in transit:

Deposits per bank statement in February…………………………………. $18,850

Add: Deposits in transit, February 28……………………………………….. 1,400

Total deposits to be accounted for…………………………………………… 20,250

Less: Deposits per books……………………………………………………….. 19,500

Deposits in transit, January 31………………………………………………… $ 750

(b) Outstanding cheques:

Cheques clearing the bank in February……………………………………. $18,400

Add: Outstanding cheques, February 28………………………………….. 1,250

Total cheques to be accounted for………………………………………….. 19,650

Less: Cheques issued per books…………………………………………….. 17,750

Outstanding cheques, January 31…………………………………………… $ 1,900

Ex. 130

Listed below are items that may be useful in preparing the March 2015 bank reconciliation for Moose Jaw Machine Works.

Using the code letters below, insert in the space before each item the letter where the amount would be located or otherwise treated in the bank reconciliation process.

Code Located or Treated

A Add to the cash balance per books

B Deduct from the cash balance per books

C Add to the cash balance per bank

D Deduct from the cash balance per bank

E Does not affect the bank reconciliation

_____ 1. Included with the bank statement materials was a cheque from Joe Terrell for $40 stamped “account closed.”

_____ 2. The bank statement included a bank service charge of $35 in payment of the annual safety deposit box fee.

_____ 3. The bank statement included a bank service charge of $22 for four books of blank cheques for Moose Jaw Machine Works.

_____ 4. The bank statement contains a credit of $42.75 for interest earned on the chequing account balance during the month.

_____ 5. The deposits of March 30 and March 31, for $3,362 and $3,125 respectively, were not included on the bank statement.

_____ 6. Two cheques totalling $316.86, which were outstanding at the end of February, cleared in March and were returned with the March statement.

_____ 7. The bank statement included a credit of $62 for the monthly interest on a certificate of deposit that the company owns.

_____ 8. Four cheques, #8712, #8716, #8718, #8719, totalling $5,369.65, did not clear the bank during March.

_____ 9. On March 24, 2015, $3,400 was credited by the bank to Moose Jaw Machine Works’ bank account as an electronic funds transfer from a customer in payment of its account. This was not recorded in advance by the company.

_____ 10. On March 31, 2015, Moose Jaw Machine Works paid its $700 utility bill using the bank online payment system. As Moose Jaw Machine Works initiated this payment, it recorded it in advance of receiving the bank statement.

Solution 130 (10 min.)

Ex. 131

You have recently started a part time job in the accounting department of Home Energy Limited. The accountant, Joe Kool, had prepared the company’s bank reconciliation for June 2015. After completing the reconciliation he made the following journal entry:

Jun 30 Cash……………………………………………………………………………… 2,390

Bank Charges Expense…………………………………………………… 124

Accounts Receivable ($3,000 collection less $500 NSF) 2,500

Interest Earned………………………………………………………. 14

Joe was reviewing the bank reconciliation with you when unfortunately you spilled your coffee on it. He asks you to rewrite the reconciliation, in good form. He remembers that the only outstanding deposit was the last deposit for the month. You check the general ledger and the bank balance at June 30 was $24,527 (credit). You also check the bank statement and the balance was $22,314 (debit on the bank statement, that is, overdrawn). You look up the last deposit for the month—it was for $21,789.

Instructions

Using the above information prepare, in good form, the bank reconciliation for Home Energy Limited for June.

Solution 131 (25–30 min.)

HOME ENERGY LIMITED

Bank Reconciliation

June 30, 2015

Cash balance per bank………………………………………………………………… $(22,314)

Add: Deposit in transit……………………………………………………………….. 21,789

(525)

Less: Outstanding cheques (see note below)………………………………… 21,612

Adjusted cash per bank………………………………………………………………… $(22,137)

Cash balance per books………………………………………………………………. $(24,527)

Add: Electronic collection of account………………………………………….. $3,000

Interest earned………………………………………………………………….. 14 3,014

(21,513)

Less: Bank service charge…………………………………………………………. $124

NSF cheque…………………………………………………………………….. 500 624

Adjusted cash balance per books………………………………………………….. $(22,137)

Note: To solve, you complete the bank reconciliation with the information you know—the outstanding cheques and the adjusted cash per bank will be unknown. After you arrive at the adjusted balance per books, you enter this as the adjusted cash per bank and solve for the outstanding cheques.

Ex. 132

About eight months ago, your friend Sydney Carton started her own bookkeeping business. She caters to small businesses, and has now developed a fairly large clientele. Yesterday, she called you and asked you to come over and give her some advice. It appears that although she has lots of business, she is having serious cash flow problems. “I can’t pay my bills!” she exclaims, “and I want to get a bank loan to get more up-to-date office equipment, but the bank won’t lend the business any money. Please come over and help me!”

So today you went to Sydney’s office, and asked to see her general ledger and her latest financial statements. Although the records are up to date, including the receivables and payables, Sydney admits she hasn’t had time to prepare any financial statements yet. You ask her about the receivables, and she agrees they are rather high but all of her revenue is on account. She also adds that “The economy still isn’t very good, and most of my clients are self-employed tradesmen, and I hate to ask them for money when they’re having a tough time.”

You create a trial balance, based on the general ledger, which follows

SYDNEY CARTON ENTERPRISES

Trial Balance

(date)

Dr Cr

Cash………………………………………………………………………………….. $ 2,700

Accounts receivable……………………………………………………………. 45,000

Prepaid insurance……………………………………………………………….. 1,800

Supplies…………………………………………………………………………….. 2,800

Equipment………………………………………………………………………….. 9,000

Vehicle………………………………………………………………………………. 25,000

Accounts payable……………………………………………………………….. $ 14,100

GST payable………………………………………………………………………. 8,100

Dividends…………………………………………………………………………… 18,000

Common shares…………………………………………………………………. 15,000

Bookkeeping revenue………………………………………………………….. 110,000

Rent expense……………………………………………………………………… 32,000

Telephone expense…………………………………………………………….. 4,000

Utilities expense………………………………………………………………….. 3,000

General expenses……………………………………………………………….. 3,900 _______

Totals………………………………………………………………………………… $147,200 $147,200

Notes:

The “official” credit terms for receivables and payables are n/30.

Instructions

Suggest ways that Sydney can improve her cash flows. Do not list generalities, but address her specific situation.

Solution 132 (20 min.)

(The following are some suggestions. Students may come up with others.)

First of all, you must address your receivables to get more cash in. You have recorded $110,000 in revenue, and at this point, approximately 40% of it is still uncollected. I would suggest that you prepare an aged schedule of the receivables to find out which are the oldest, and you must pressure them to pay. You could suggest that you will not do any more work for them until they pay up.

Consider offering a cash discount for early payment and shorten your credit terms, for example, 2/10, n/20. Although you will incur a cost, this will encourage more clients to pay sooner.

For any new clients, you should require a deposit up front especially if this is standard industry practice. If they are not willing to do this, you probably don’t want them as a client anyway.

Your rent seems very high in comparison to your revenue (approximately 30%). Can you negotiate a lower rent with the landlord? Failing this, perhaps you should consider looking for cheaper premises.

As far as your “regular” payables are concerned, can you negotiate longer terms with any of them (to delay payment as long as possible). It’s worth a try.

I would suggest that you prepare a cash budget. This will show you when you will be short of cash and when you will have excess cash available. This won’t happen for a while, but if you follow my suggestions, it will.

If all else fails, you may have to approach the bank and offer personal assets as security to secure a loan.

MATCHING

Match the items below by entering the appropriate code letter in the space provided.

Prenumbered documents
Custody of an asset should be kept separate from the record-keeping for that asset
Television monitors, garment sensors and burglar alarms are examples
Bonding employees
Collusion
Electronic funds transfer
Invest idle cash
Cancelled cheques
NSF cheques
Outstanding cheques

____ 1. Segregation of duties

____ 2. Two or more employees circumventing prescribed procedures.

____ 3. Prevent a transaction from being recorded more than once.

____ 4. Physical controls

____ 5. Insurance protection against misappropriation of assets

____ 6. Transferring money electronically from one bank account to another without any paper money changing hands.

____ 7. Cheques that have been returned by the issuer’s bank for lack of funds.

____ 8. Cheques that have been paid by the depositor’s bank.

____ 9. Issued cheques that have not been paid by the bank.

____ 10. A basic principle of cash management

ANSWERS TO MATCHING

SHORT-ANSWER ESSAY QUESTIONS

S-A E 134

Important objectives of a system of internal controls are to achieve reliable financial reporting, effective and efficient operations, and compliance with relevant laws and regulations. Briefly discuss how (1) cost-benefit considerations, (2) the human element, and (3) the size of the business affect the implementation of a system of internal controls.

Solution 134

The implementation of an internal control system is affected by cost-benefit considerations, the human element, and the size of the business. A company’s internal control system can provide reasonable assurance, but not absolute assurance, that assets are properly safeguarded and that the accounting records are reliable. The concept of reasonable assurance rests on the premise that the costs of establishing control activities should not exceed their expected benefit. A very costly set of safeguards may produce something approaching absolute assurance, but the value of the benefits received would not come close to outweighing the costs.

The human element can cause a good internal control system to become ineffective due to employee fatigue, carelessness, or indifference. Additionally, collusion between two or more employees to circumvent prescribed controls may significantly impair the effectiveness of the system.

The size of the business impacts internal controls because a smaller business may not have the necessary resources available to effect the implementation of desirable controls.

S-A E 135

Clinix is a medical office management franchise. There are currently twenty-five medical offices managed by a Clinix franchisee. One of the services provided to franchisees is assistance in training various staff members.

Clinix is preparing a manual for the front office staff to use as a reference guide. It will be used in training new employees as well. One of the reasons the manual is being prepared is to stress the importance of strong internal controls.

Instructions

Prepare a short paragraph, to be included in the training materials, describing the benefits of sound internal control activities, from the viewpoint of the employee.

Solution 135

All the controls discussed in this manual may seem unnecessary to you. It may also seem that management trusts no one. However, these practices and procedures actually benefit you, the employee. First, control activities clearly outline who is to be responsible for various activities, such as making the daily deposit of cash in the bank. If a problem arises regarding a deposit, it is very clear to whom the company should turn to resolve the problem. If correct procedures were not followed, blame is not placed on all employees. Only those who did not follow correct procedures are held accountable for their actions. Also, strong control activities will discourage dishonest employees looking for opportunities to steal from the company. They will find such opportunities extremely limited. Finally, all these systems, practices, and procedures result in a well-managed company that is less likely to suffer unnecessary losses, and a much better place for you to work and build a career.

S-A E 136

Taylor Instruments Inc. is a rapidly growing manufacturer of engineering equipment. As a result of its growth, the company’s management recently modified several of its procedures and practices to improve internal control. Some employees are upset with the changes. They have complained that all these changes just show that the company no longer trusts them.

Instructions

“Internal controls exist because most people can’t be trusted.” Is this true? Explain.

Solution 136

Internal controls exist, not because most people can’t be trusted, but to protect the company’s assets from those few who cannot be trusted. If it was a perfect world, and everyone could be trusted, internal controls would not be needed. However, it does not follow that internal controls indicate the opposite.

Rather than feel threatened by internal control measures, honest employees should feel grateful. When responsibility for all activities is clearly defined and when access to company assets is carefully controlled, the honest employees can demonstrate their honesty. When all employees are considered to be honest, on the other hand, and no controls exist, all employees are unfairly tainted when one among them proves to be dishonest.

S-A E 137

In business, electronic funds transfers (EFT) are very popular, with some companies, such as Sears, paying all their bills by EFT. Most companies now also pay their employees by EFT, with the net pay being deposited directly to the employee’s bank account. Individuals also are using EFT to pay their bills through on-line banking.

Instructions

Explain the implications of EFT payments from an internal control standpoint. Does EFT guarantee that fraud will be eliminated?

Solution 137

EFT is a way of transferring money electronically from one bank account to another. Using EFT eliminates the need for cheques. This generally results in better internal control, since no cash or cheques are handled by company employees, thereby minimizing the possibility of having cheques stolen. However, they still have to be properly recorded, and this should be done by an employee who has no access to the EFT records (for example, the bank account numbers of the payees). Without proper authorization and segregation of duties, it is possible an employee could redirect electronic transfers to his/her personal bank account. So, no, the use of EFT does not guarantee that fraud will be eliminated. However, fraud is far less likely to occur than when cheques and cash are used to make payments.

S-A E 138

The preparation of a bank reconciliation is an important cash control procedure. If a company deposits cash receipts daily and makes all cash disbursements by cheque, explain why the cash balance per books might not agree with the cash balance shown on the bank statement. Identify specific examples that may cause differences between the cash balance per books and the cash balance per bank.

Solution 138

The cash balance per books may not agree with the cash balance shown on the bank statement due to time lags and errors by either party. A time lag could mean the bank records a transaction in a period later than the company records it (outstanding cheques, deposits in transit) or the company records a transaction in a period later than the bank records it (interest earned, NSF cheque, electronic funds transfers, and the like).

S-A E 139

You are busily working away at your new job in the accounting department of Humongous Enterprises Ltd. Your friend from the marketing department stops by to pick you up for lunch and asks what you are doing. You tell her you are preparing the bank reconciliation. She says she remembers doing that in an accounting course she took once but didn’t think it would be necessary any more—given that most things were done by computers now and the banks and a big company like ours are both required to have internal control systems in place to prevent errors. Surely there can’t be any reconciling things left. You sigh and start to explain it to her on your way to lunch.

Instructions

Prepare, in point form, the explanation you would give your friend.

Solution 139

The reconciliation is part of the company’s control system.
It will identify any errors made by the bank or the company.
Most of the processing is done by computers but mistakes can still be made.
There will always be reconciling items because of the time lags.
Some items are recorded earlier in the books and take time to clear the bank (for example, cheques, deposits).
Some items are received first by the bank and are recorded in the books from the bank reconciliation – for example, NSF cheques, and bank service charges.

S-AE 140

You and your friend Pete are reviewing the latest financial reports from a large Canadian corporation. Although you are studying accounting at school, he is not. On the statement of financial position, Pete notices a line item called “Cash and Cash Equivalents.” “That doesn’t make sense!” he exclaims. “How can you have an equivalent to cash? Cash is cash! There is no equivalent!”

Instructions

Explain to Pete what “cash equivalents” are and why they are included with cash on the statement of financial position.

Solution 140

In accounting, cash equivalents are short-term, trading investments subject to insignificant risk of changes in value, and that are highly liquid less any bank overdrafts. Short-term, highly liquid trading investments mean they can be converted to cash very quickly. There are limited items that fit this requirement; they are usually short-term investments in debt instruments (for example, guaranteed investment certificates). I know they are not “cash” in the traditional sense of coins and bills in your wallet, Pete, but for accounting purposes, these “cash equivalents” are considered cash for financial statement presentation, so that’s why they show on the same line as cash.

S-A E 141

Managing cash is one of the most important things a company has to do.

Instructions

Identify some reasons why a company can have difficulty in managing its cash.
What can be done by management to manage its cash?

Solution 141

Reasons why a company can have difficulty in managing its cash:
Too many receivables that are slow in collection
Too much inventory that is not selling fast enough
Significant capital expenditures required
Too many expenses, or lack of profitability
Insufficient access to debt or equity financing

Cash management techniques:
Establish credit and collection policies
Reduce inventory
Defer capital expenditures or time them to match cash flow
Review gross margins and profit margins
Prepare and review budgets
Obtain additional debt or equity financing

LEGAL NOTICE

The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence.

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