SEMINAR 3

FINANCIAL STATEMENTS: ACCOUNTING AND PRESENTATION OF CURRENT ASSETS

Wu Sicong Yao Xibing Di boyu Si Zengyu Ma Linlu

Bank Reconciliation

QUESTION 1

Q1
The records of Daily Company indicate a 30 June cash balance of $9,400,

which includes undeposited receipts of $4,000 for 29 June and 30 June.

The cash balance on the bank statement as of 30 June is $6,575. This balance includes a note of $4,000 plus $160 interest collected by the

bank but not recorded in the journal. Cheques outstanding on 30 June

were as follows: No. 370, $580; No. 379, $615; No. 390, $900; No. 1148, $225; No. 1149, $300; and No. 1151, $750.

Q1
On 3 June, the cashier resigned effective at the end of the month. Before leaving on 30 June, the cashier prepared the following bank reconciliation:

Q1
Subsequently, the owner of Daily Company discovered that the cashier had stolen an unknown amount of undeposited receipts, leaving only $1,000 to be deposited on 30 June. The owner, a close family friend, has asked for your help in determining the amount that the former cashier has stolen.
(a)

(b) (c)

Prepare the proper bank reconciliation and determine the amount the cashier has stolen from Daily Company. How did the cashier attempt to conceal the theft?
I.

II.

Identify two major weaknesses in internal controls, which allowed the cashier to steal the undeposited cash receipts. Recommend improvements in internal controls, so that similar types of thefts of undeposited cash receipts can be prevented.

Q1
Company Bank Reconciliation as of June 30:
Cash Balance per bank statement, 30 June Add: Undeposited Receipt Less: outstanding cheques: No. 370 No. 379 No. 390 No. 1148 No. 1149 No. 1151 $ 6,575 4,000

580 615 900 225 300 750

3,370

Adjusted cash balance

Balance per Companys records, 30 June Add: Note receivable Interest earned Adjusted cash balance $ 4,000 160

$
$

7,205
9,400

4,160 $ 13,560

Q1
The records of Daily Company indicate a 30 June cash balance of $9,400,

which includes undeposited receipts of $4,000 for 29 June and 30 June.

The cash balance on the bank statement as of 30 June is $6,575. This balance includes a note of $4,000 plus $160 interest collected by the

bank but not recorded in the journal. Cheques outstanding on 30 June

were as follows: No. 370, $580; No. 379, $615; No. 390, $900; No. 1148, $225; No. 1149, $300; and No. 1151, $750.

Q1
(a) Prepare the proper bank reconciliation and determine the amount the cashier has stolen from Daily Company.

Amount Stolen = adjusted balance per Companys records adjusted balance per bank statement = $13,560 $7,205 = $6,355

Q1
(b) How did the cashier attempt to conceal the theft?
Omitted Outstanding Checks: No. 370 --- $580 No. 379 --- $615 No. 390 --- $900

Addition of unrecorded note with interest

Miscalculation: 1,275

Q1
(c) (i) Identify two major weaknesses in internal controls, which allowed the cashier to steal the undeposited cash receipts.

On one hand, the cashier who is responsible for handling cash receipts is also responsible for maintaining accounts receivable records. On the other hand, cash receipts were not banked intact on a daily basis.

Q1
(c) (ii) Recommend improvements in internal controls, so that similar types of thefts of undeposited cash receipts can be prevented. Bank reconciliation should be prepared by an independent individual who does not handle cash or the accounting records, e.g. owner of the business

Cash receipts should be banked intact on a daily basis, thus reducing the chances of cash losses

Accounting Receivable

QUESTION 2

Q2
The company uses the accounts receivable aging method to estimate impairment of Accounts Receivable account. At 1 October 2011, the balance of the Accounts Receivable account was a debit of $88,430, and the balance in the Allowance for Impairment of Accounts Receivable account was a credit of $7,200. During the year, the company had sales on account of $468,800, accounts receivable written off of $7,900, and collections from customers of $450,730 (this amount includes the $183 NSF cheque received from Ann Kelly).

Q2
An aging analysis showed the following for accounts receivable at 30 September 2012:

Q2
Required: Based on the information gathered by you, Mary requested you to: (d) Determine the net realizable value of accounts receivable at 30 September 2012 by: (i) Computing the year-end balances of Accounts Receivable account and the Allowance for Impairment of Accounts Receivable account (before yearend adjustments for impairment of accounts receivable). (ii) Completing the aging analysis and calculating the estimated impairment of accounts receivable adjustment for the year (round the amount to the nearest whole number)

Q2
(i) Compute the year-end balances of Accounts Receivable account and the Allowance for Impairment of Accounts Receivable account (before yearend adjustments for impairment of accounts receivable).
Sales on Account Collections
NSF Contribution to AR

468,800 (450,730)
183 18,253

Accounts Title Account Receivable Revenue

Debit 18,253

Credit 18,253

Q2
Written off
During the year, the company had sales on account of $468,800, accounts receivable written off of $7,900, and collections from customers of $450,730 (this amount includes the $183 NSF cheque received from Ann Kelly).

Accounts Title Allowance for Doubtful Account Account Receivable

Debit 7,900

Credit

7,900

Q2
Original Account Receivable Adjustment Written Off Total Account Receivable 88,430 18,253 (7,900) $98,783

At 1 October 2011, the balance of the Accounts Receivable account was a debit of $88,430, and the balance in the Allowance for Impairment of Accounts Receivable account was a credit of $7,200. Allowance for Impairment of AR = Balance - Written Off Amount = 7,200 - 7,900 = $700 (Debit) Answer : Year-end Balances of Accounts Receivable : $98,783

Allowances for Impairment of Accounts Receivable : $700 (Debit)

Q2

(ii) Completing the aging analysis and calculating the estimated impairment of accounts receivable adjustment for the year (round the amount to the nearest whole number)

Q2
Time Not yet due Amount $ 58,030 Percentage Considered impaired * 2% Estimated impairment = $ 1,161

1- 30 days past due

31- 60 days past due 61- 90days past due Over 90 days past due Total

24,253
9,210 3,990 3,300 98,783

*
* * *

5
15 25 50

=
= = =

$ 1,213
$ 1,382 $ 998

$ 1,650 6,402

Q2
Based on the information gathered by you, Mary requested you to: Determine the net realizable value of accounts receivable at 30 September 2012.

NAR

= Year - end Balances of Accounts Receivable - Estimated impairment of AR = 98,783 - 6,402 = 92,381

Problem 7.5B Accounting for marketable securities

QUESTION 3

Q3
At December 31, 2010, Westport Manufacturing Co. owned the following investments in the capital stock of publicly owned companies(all classified as available-for-sale securities):
Current Market Value

Cost Lamb Computer, Inc. (1,000 shares: cost, $30 per share; market value, $50) Dry Foods (5,000 shares: cost, $9 per share; market value, $8) Totals

$30,000 $50,000 45,000 40,000

$75,000 $90,000

Q3
In 2011, Westport engaged in the following two transactions:
Apr. 6 Sold 100 shares of its investment in Lamb Computer at a price of $55 per share, less a brokerage commission of $20.

Apr. 20

Sold 2,500 shares of its Dry Foods stock at a price of $7 per share, less a brokerage commission of $20.

At December 31, 2011, the market values of these stocks were: Lamb Computer, $40 per share; Dry Foods, $7

Q3
a. Illustrate the presentation of marketable securities and the unrealized holding gain or loss in Westports balance sheet at December 31, 2010. Include a caption indicating the section if the balance sheet in which each of these accounts appears. According to these statistics and the equation: Assets = Liabilities + Owners Equity
Current assets: Marketable securities (cost, $75,000) $ 90,000

Stockholders' equity: Unrealized holding gain on investments $ 15,000

Q3
b. Prepare journal entries to record the transactions on April 6 and April 20.
Debit($) April 6 Cash Marketable Securities Gain on sale of investments 5480 3000 2480 Credit($)

Sold 100 shares of Lamb Computer at a price above cost.

Q3
b. Prepare journal entries to record the transactions on April 6 and April 20.
Debit($) Credit($)

April 20 Cash
Loss on sale of investments

17,480 5020

Marketable Securities

22500

Sold 2,500 shares of Dry Foods at a price below cost.

Q3
c. Prior to making a fair value adjustment at the end of 2011, determine the unadjusted balance in the Marketable Securities controlling account and the Unrealized Holding Gain (or Loss) on Investments account. (Assume that no unrealized gains or losses have been recognized since last year.)
Market Securities Lamb computer Dry Foods As at 1 Jan. 2011 50,000 40,000 90,000 Marketable Securities Account Balance as at 1 Jan. 2011 Less Sale of securities on Apr. 6 Sale of securities on Apr. 20 3000) (22500) (25500) 90,000 sell (5,000) (20,000) (25,000) As at 31 Dec. 2011 45,000 20,000 65,000

Balance as at 31 Dec. 2011

64500

Q3
Refer to question given that assume no unrealized gains or losses have been recognized since last year.
Market Securities Lamb computer Dry Foods As at 1 Jan. 2011 20,000 (5,000) 15,000 No Change As at 31 Dec. 2011 20,000 (5,000) 15,000

Unrealized Holding gain on Investments

15,000

Q3
d. Prepare a schedule showing the cost and market values of securities owned at the end of 2011.(Use the same format as the schedule illustrated above.)
Cost
Lamb Computer, Inc. (900 shares; cost $30 per share; market value, $40) $ 27,000 $ 36,000

Current Market Value

Dry Foods (2,500 shares; cost, $9 per share; market market value, $7).
Totals $

22,500 49,500 $

17,500 53,500

Q3
e. Prepare the fair value adjusting entry required at December 31, 2011.
Unrealized Holding Gain on Investments Marketable Securities 11,000 11,000

In order to achieve a credit balance in unrealized holding gain of $4,000( (1000-100) * (40-30) + (5000-2500) * (7-9)), we have to debit $11,000, i.e. reducing the unrealized holding gain from $15,000 to $11,000

Q3
f. Illustrate the presentation of the marketable securities and unrealized holding gain(or loss) in the balace sheet at December 31, 2011.(Follow the same format as in part a.)
Cost
Lamb Computer Dry Foods 27,000 22,500

Market Value
36,000 17,500

Unrealized gains/losses
9,000 (5,000)

49,500

53,500

4,000

Q3
f. Illustrate the presentation of the marketable securities and unrealized holding gain(or loss) in the balace sheet at December 31, 2011.(Follow the same format as in part a.)

Current assets: Marketable securities (cost, $49500) 53,500

Stockholders' equity: Unrealized holding gain on investments 4,000

Q3
g. Illustrate the presentation of the net realized gains(or losses) in the 2011 income statement. Assume a multiple-step income statement and show the caption identifying the section in which this amount would appear.
Companys Name Income Statement for the year end 31 Dec. 2011

Nonoperating items;
Loss on sale of investments Working: Realized Gains Less Realized Losses Net realized losses $2840 5020 (2,540) 2540

Q3
h. Explain how both the realized and the unrealized gains and losses will affect the companys 2011 income tax return.

Unrealized gains and losses are not recognized by tax authorizes, so no tax purposes. Realized gains is taxable and will increase the tax liabilities Realized losses is tax deductible and will decrease the tax liabilities

Exercise 7.3 Grandmothers secret

QUESTION 4

Q4
The former bookkeeper of White Electric Supply is serving time in prison for embezzling nearly $416,000 in less than five years. She would write a check for the correct amount payable to a supplier for,say$15,000. However, she would record in the company's check register an amount significantly greater, say $20,000. She would then write a check payable to herself for the 5,000 difference. In the check register, next to the number of each check she had deposited in her personal bank account, she would write the word "void", making it appear as though the check had been destroyed. This process went undetected for nearly five years.

Q4

a. What controls must have been lacking at white electric supply to enable the bookkeeper to steal nearly $416,000 before being caught?

Q4
There were several internal controls lacking at White Electric Supply.

First, the company needs to separate the function of handing cash from the maintenance of accounting records. The bookkeeper in this case, not only had complete control over all cash receipts and disbursements ,but also was the person prepare the companys book. These duties must be segregated for adequate protection against theft.

Q4
Second, the company should promptly reconcile bank statements with the accounting records . the person who reconciles the bank statements should not have any opportunities to physically handle cash.

Third, independent verification is missing in this case. One individual or department is supposed to act as a check on the work of another. However, the bookkeepers work is lack of supervision.

Q4
Fourth, the company had no inventory control system in place. Thus, it went undetected by management when the check register consistently showed inventory purchase amounts in excess of actual inventory received.

Finally, because White Electric Supply was not a publicly owned corporation, an independent audit was not required. As a result, management never considered conducting an independent review of the companys financial records and control systems.

Q4
b. What the bookkeeper did was definitely unethical. But what if one of her grandchildren had been ill and needed an expensive operation?

If this had been the case, would it have been ethical for her to take company funds to pay for the operation if she intended to pay the company back in full? Defend your answer.

Q4
Employee theft is never ethical, even if it is committed to pay for medical bills.

It is also unethical for employees to borrow funds from their employers without formal permission (even if one has the intent of eventually paying back the full amount).

REVIEW OF LECTURE

ASSETS
Assets Non-current Assets (To be discussed)
Recovered more than 1 year

Current Assets

Cash and cash equivalents

Marketable securities (Short-term investments) Financial Assets

Receivables (Account Receivable)

Inventories (To be discussed)

FINANCIAL ASSETS

Accounts receivable

Collections from customers

Cash and cash equivalents

Payments

Invested

Converted back

Marketable securities

FINANCIAL ASSETS
In balance sheet:
Accounts receivable Valuation: Net realizable value Cash and cash equivalents Valuation: Face amount

Marketable securities Valuation: Current market value

CASH & CASH EQUIVALENTS

Short-term investments Stable market value Maturity date of less than three months

Cash

Currency Coins Deposit in bank Customer checks

Bank drafts Money orders Cash equivalents

Treasury bills Preferred stock

CASH MANAGEMENT
Objectives:

Provide accurately account for cash transactions.

Prevent theft and fraud.

Assure the availability of adequate amounts of cash. Prevent unnecessarily large amounts of idle cash.

INTERNAL CONTROL OVER CASH

Separate the function of cash handling and accounting records Prepare cash budget for planning future cash All cash receipts be deposited daily in the bank Make most payments by check, and small payments from petty cash fund Approving expenditures for check payment, separate from check signing Independent reviews for accounting system Bank Reconciliation with the accounting records

BANK RECONCILIATION

Transactions not recorded by the bank: Outstanding checks Deposits in transit Transactions not recorded by the depositor: Deposits by Bank Service charges Charges for depositing Not Sufficient Funds(NSF) checks Interest revenue/expenses Giro payments

MARKETABLE SECURITIES
Readily marketable Liquidity next to cash

Marketable Securities

Purchase of investments Recognition of Investment Sale of investments

End-of period adjustments

MARKETABLE SECURITIES
Purchase of investments
General Journal Date Account Titles and Explanation Marketable Securities Cash Debit X X Credit

Recognition of Investment
General Journal Date Account Titles and Explanation Cash Dividend Revenue Debit X X Credit

MARKETABLE SECURITIES
Sale of investments
General Journal Date Account Titles and Explanation Cash Marketable Securities Gain on Sale Debit X X X Credit

End-of period adjustments

General Journal Date Account Titles and Explanation Unrealized Holding Loss/Gain Marketable Securities Debit X X Credit

ACCOUNTS RECEIVABLE
Comprises the largest financial asset Liquidity is next only to cash and marketable securities Account Receivable

Measuring and reporting receivables Writing off an uncollectible account Recovering a written off account receivable

ACCOUNTS RECEIVABLE
Measuring and reporting receivables
General Journal Date Account Titles and Explanation Accounts Receivable Sales Revenue To recognize credit sales Debit X X Credit

Writing off an uncollectible account

General Journal Date Account Titles and Explanation Allowance for Impairment of AR Accounts Receivable Uncollectible accounts written off Debit X X Credit

ACCOUNTS RECEIVABLE
Recovering a written off account receivable
General Journal Date Account Titles and Explanation Accounts Receivable Allowance for Impairment of AR Reversal of accounts receivable previously written off Cash Accounts Receivable Recovery of amount due from previously written off X X Debit X X Credit

REVIEW QUESTION

REVIEW QUESTION
1 Which of the following would be considered a major step in achieving internal control over cash transactions? A Separate the function of handling cash from the maintenance of accounting records. B Make all payments by check (with the exception of the Petty Cash fund). C Require that all cash receipts be deposited daily. D All of above

REVIEW QUESTION
2 In the balance sheet, financial assets are shown at which value? A Current value B Cash equivalent C Historical cost D None of the above

REVIEW QUESTION
3 The proper treatment of outstanding checks is to report them in the bank reconciliation as which of the following? A An addition to the balance per bank statement B A deduction from the balance per bank statement C An addition to the balance per depositor's records D A deduction from the balance per depositor's records

REVIEW QUESTION
4 When a firm writes off a bad debt under the allowance method of accounting for bad debts, which of the following will occur?

A The cash account will decrease B The net realizable value of accounts receivable decreases C The net realizable value of accounts receivable will not change

THANK YOU !