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Internal Control and Accounting for Cash
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After reconciling its bank account, Addy Equipment Company made the following adjusting entries:
| Entry No. | Account Titles | Debit | Credit |
|---|---|---|---|
| 1 | Accounts Receivable | 250 | |
| Cash | 250 | ||
| To record NSF check from Wilson | |||
| 2 | Rent Expense | 35 | |
| Cash | 35 | ||
| To correct understatement of expense | |||
| 3 | Service Charge Expense | 15 | |
| Cash | 15 | ||
| To record bank service charge | |||
| 4 | Cash | 175 | |
| Accounts Receivable | 175 | ||
| To record bank collection | |||
| 5 | Cash | 40 | |
| Interest Revenue | 40 | ||
| To record interest revenue |
Required:
Identify the event depicted in each journal entry as an asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE). Also, explain how each entry affects the accounting equation by placing a + for increase, − for decrease, or NA for not affected under the following components of the accounting equation.
The following is a bank reconciliation for BBQ Express for May 31, Year 1:
| Item | Cash Account | Bank Account |
|---|---|---|
| Balance as of 5/31/Year 1 | $25,000 | $22,000 |
| Deposit in transit | $4,250 | |
| Outstanding checks | ($465) | |
| Note collected by bank | $1,815 | |
| Bank service charge | ($30) | |
| Automatic payment on loan | ($1,000) | |
| Adjusted cash balance as of 5/31/Year 1 | $25,785 | $25,785 |
Because of limited funds, BBQ Express employed only one accountant who was responsible for receiving cash, recording receipts and disbursements, preparing deposits, and preparing the bank reconciliation. The accountant left the company on June 8, Year 1, after preparing the May 31 bank reconciliation. His replacement compared the checks returned with the bank statement to the cash disbursements journal and found the total of the outstanding checks to be $4,600.
Required:
a. Prepare a corrected bank reconciliation.
b. What is the total amount of cash missing, and how was the difference between the “true cash” per the bank and the “true cash” per the books hidden on the reconciliation prepared by the former employee?
c. What could BBQ Express do to avoid cash theft in the future?
The following data pertain to the petty cash fund of Marsh Company:
Required:
a. Prepare all general journal entries necessary to (1) establish the fund, (2) reimburse employees, and (3) recognize the expenses and replenish the fund as of March 31. (Hint: Journal entries may not be required for all three events.)
b. Explain how the Cash Short and Over account required in this case affects the income statement.
c. Identify the event depicted in each journal entry recorded in Requirement a as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE).
d. Show the effects on the financial statements of the events in Requirement a using a horizontal statements model like the following one. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Use NA to indicate that an account was not affected by the event.
Connie Stevens is a partner in a regional accounting firm. Stevens was hired by a client to audit the company’s books. After extensive work, Stevens determined that she was unable to perform the appropriate audit procedures.
Required
a. Name the type of audit report that Stevens should issue with respect to the work that she did accomplish.
b. If Stevens had been able to perform the necessary audit procedures, there are three types of audit reports she could have issued depending on the outcome of the audit. Name and describe these three types of audit reports.
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