Financial and Managerial Accounting

Business

Quiz 7 :

Financial Assets

Quiz 7 :

Financial Assets

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Osage Farm Supply had poor internal control over its cash transactions. Facts about the company's cash position at November 30 are described below. The accounting records showed a cash balance of $35,400, which included a deposit in transit of $1,245. The balance indicated in the bank statement was $20,600. Included in the bank state­ment were the following debit and credit memoranda: img Outstanding checks were as follows: img Bev Escola, the company's cashier, has been taking portions of the company's cash receipts for several months. Each month. Escola prepares the company 's bank reconciliation in a manner that conceals her thefts. Her bank reconciliation for November was as follows: img Instructions a. Determine the amount of the cash shortage that has been concealed by Escola in her bank rec­onciliation. (As a format, we suggest that you prepare the hank reconciliation correctly. The amount of the shortage then will be the difference between the adjusted balances per the bank statement and per the accounting records. You can then list this unrecorded cash shortage as the final adjustment necessary to complete your reconciliation.) b. Carefully review Eseola's bank reconciliation and explain in detail how she concealed the amount of the shortage. Include a listing of the dollar amounts that were concealed in various ways. This listing should total the amount of the shortage determined in part a. c. Suggest some specific internal control measures that appear to be necessary for Osage Farm Supply.
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Bank reconciliation statement is prepared to explain or reconcile the difference between cash balance on a company's balance sheet and the cash balance on the bank statement. It is prepared to know the actual cash balance of a company. It helps in detecting fraud or any cash manipulation done in the company.
1.
Calculate the adjusted cash balance as per bank statement as follows:
img Therefore, the adjusted cash balance as per bank statement is $9,653.
Calculate the adjusted cash balance as per accounting records as follows:
img Therefore, the adjusted cash balance as per accounting records is $46,365.
Calculate shortage as follows:
img Therefore, cash shortage is $36,730.
Pass the adjusting entry if cash short cannot be recovered from cashier as follows:
img The bank account will decrease by $36,750 and cash theft will be treated as loss to the company.
Pass the adjusting entry if cash short is recovered from cashier as follows:
img The bank account will decrease by $36,750 and cash theft will be deducted from E's salary.
b.
Calculate the amount concealed in shortage and prepare the list as follows:
img Therefore, the amount concealed in excess of shortage is $2,780.
c.
The specific internal control measures that appear to be necessary for O F supply are as follows:
1.
There should be job rotation in the cashier job as this practice will ensure no fraudulent activities are performed by cashier.
2.
The bank reconciliation statement should be checked by either internal auditor or superior in order to ensure that
• There are no arithmetical errors.
• There is appropriate classification of adjustments in bank reconciliation statement.
• To cross check that all outstanding checks are considered in both ways.
• To cross check deposit later after its is deposited later in bank statement.

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Aging Accounts Receivable; Write-offs Putnam Putnam, a legal firm, uses the balance sheet approach to estimate uncollectible accounts expense. At year-end, an aging of the accounts receivable produced the following five groupings: img On the basis of past experience, the company estimated the percentages probably uncollectible for the above five age groups to be as follows: Group a, 1 percent; Group b, 3 percent; Group c, 10 percent; Group d, 20 percent; and Group e, 50 percent. The Allowance for Doubtful Accounts before adjustment at December 31 showed a credit balance of $5,900. Instructions a. Compute the estimated amount of uncollectible accounts based on the above classification by age groups. b. Prepare the adjusting entry needed to bring the Allowance for Doubtful Accounts to the proper amount. c. Assume that on January 10 of the following year, Putnam Putnam learned that an account receivable that had originated on September 1 in the amount of $4,300 was worthless because of the bankruptcy of the client, Safeland Co. Prepare the journal entry required on January 10 to write off this account. d. The firm is considering the adoption of a policy whereby clients whose outstanding accounts become more than 60 days past due will be required to sign an interest-bearing note for the full amount of their outstanding balance. What advantages would such a policy offer?
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Allowance for Doubtful Accounts
Allowance for doubtful accounts reduces accounts receivables (as well as net income) for an estimate of uncollectible account. The allowance for doubtful accounts increases when estimates are charged to bad debt expenses. The allowance for doubtful accounts decreases when accounts are written off.
a.
Compute the estimated amount of uncollectible accounts based on the classification by age groups as follows:
img b.
Prepare the adjusting entry needed to bring the allowance for doubtful accounts to the proper amount as follows:
img Explanation
The debit of bad debt expense charges the uncollectible amount directly to the current period's bad debts expense account.
Working notes (W.N.)
Calculate the amount of bad debt expense as follows:
img Hence, the amount of Bad debt expense is $12,750.
c.
Prepare the journal entries on January 10 to write off the account as follows:
img Explanation
The debit of bad debt expense charges the uncollectible amount directly to the current period's bad debts expense account.
img Explanation
The debit of Allowance for doubtful accounts charges the uncollectible amount directly to the current period's Bad Debts Expense account. The credit removes its balance from the Accounts Receivable account in the general ledger.
d.
The policy would offer monetary advantage. An interest bearing note represents funds loaned by a lender to a borrower, on which interest is accrued as per the terms of the agreement. An account receivable converted into a note, works as a loan amount, under which a customer pays interest on what had formerly been considered an account receivable. In this way, company will earn some money in the form of interest.

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Different categories of financial assets are valued differently in the balance sheet. These different valuation methods have one common goal. Explain.
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The different valuation methods for cash all have one common goal, which is to measure the current value of financial assets. The purpose of these methods is to determine the value of cash, accounts receivable, and marketable securities. For cash, this means the face amount; for marketable securities, current market value; and for receivables, net realizable value.

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The Cash account in the general ledger of Lyco Corporation showed a balance of $21,749 at December 31 (but prior to performing a bank reconciliation). The company's bank statement showed a balance of $22,000 at the same date. The only reconciling items consisted of: (1) a $5,000 deposit in transit. (2) a bank service charge of $200, (3) outstanding checks totaling $9,000, (4) a $3,000 check marked "NSF" from Susque Company, one of Lyco's customers, and (5) a check written for office supplies in the amount of $1,832, recorded by the company's bookkeeper as a debit to Office Supplies of $1,283. and a credit to Cash of $1,283. In addition to the above information, Lyco owned the following financial assets at December 31: (1) a money market account of $60,000, (2) $3,000 of high-grade, 120-day commercial paper, and (3) $5,000 of highly liquid stock investments. a. Prepare the company's December 31 bank reconciliation. b. Determine the amount at which cash and cash equivalents will be reported in the company's balance sheet dated December 31. c. Prepare the necessary journal entry to update the accounting records.
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Prudent cash management is an important function in any business. Large amounts of cash sitting idle in non-interest-bearing checking accounts can.cost a company thousands?even millions?of dollars annually in foregone revenue. Thus, many businesses invest large amounts of idle cash in Treasury bills, certificates of deposit (CDs), and money market accounts. Visit the Bankrate.com home page at the following address: Search the site for information on CDs. money market accounts, and other interest-bearing prod­ucts. Look for links under the "Compare Rates" menu. Instructions a. Prepare a table showing the current interest rates on Treasury bills, various CDs. and money market accounts. b. If you were in charge of investing $1 million among the cash equivalents identified in part a. how would you make your allocation? Defend your answer. Internet sites are time and date sensitive. It is the purpose of these exercises to have you explore the Internet. You may need to use the Yahoo! search engine http://www.yahoo.com (or another favorite search engine) to find a company's current Web address.
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Fair Value Adjustment Apple Inc. accumulates large amounts of excess cash throughout the year. It typically invests these funds in marketable securities until they are needed. The company's most recent financial statements revealed a nearly $160 million unrealized gain on short-term investments. Footnotes to the financial statements disclosed that Apple Inc. reports its short-term investments at fair value. a. Explain the meaning of the company's unrealized gain on short-term investments. b. How does the unrealized gain impact the company's financial statements? c. Is the unrealized gain included in the computation of the company's taxable income? Explain. d. Evaluate fair value accounting from the perspective of the company's creditors.
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Rock, Inc., sells stereo equipment. Traditionally, the company's sales have been in the following categories: cash sales, 25 percent; customers using national credit cards, 35 percent; sales on ac­count (due in 30 days). 40 percent. With these policies, the company earned a modest profit, and monthly cash receipts exceeded monthly cash payments by a comfortable margin. Uncollectible accounts expense was approximately 1 percent of net sales. (The company uses the direct write-off method in accounting for uncollectible accounts receivable.) Two months ago, the company initiated a new credit policy, which it calls "Double Zero." Cus­tomers may purchase merchandise on account, with no down payment and no interest charges. The accounts are collected in 12 monthly installments of equal amounts. The plan has proven quite popular with customers, and monthly sales have increased dramatically. Despite the increase in sales, however, Rock is experiencing cash flow problems- it hasn't been generating enough cash to pay its suppliers, most of which require payment within 30 days. The company's bookkeeper has prepared the following analysis of monthly operating results: img The bookkeeper offered the following assessment: "Double Zero is killing us. Since we started that plan, our accounts receivable have increased nearly sevenfold, and they're still growing. We can't afford to carry such a large nonproductive asset on our books. Our cash receipts are down to nearly half of what they used to be. If we don't go back to more cash sales and receivables that can be collected more quickly, we'll become insolvent." In reply Maxwell "Rock" Swartz. founder and chief executive officer, shouted out: "Why do you say that our accounts receivable are nonproductive? They're the most productive asset we have! Since we started Double Zero, our sales have nearly doubled, our profits have more than doubled, and our bad debt expense has dropped to nothing!" Instructions a. Is it logical that the Double Zero plan is causing sales and profits to increase while also causing a decline in cash receipts? Explain. b. Why has the uncollectible accounts expense dropped to zero? What would you expect to hap­pen to the company's uncollectible accounts expense in the future-say, next year? Why? c. Do you think that the reduction in monthly cash receipts is permanent or temporary? Explain. d. In what sense are the company's accounts receivable a "nonproductive" asset? e. Suggest several ways that Rock may be able to generate the cash it needs to pay its bills with­out terminating the Double Zero plan. f. Would you recommend that the company continue offering Double Zero financing, or should it return to the use of 30-day accounts? Explain the reasons for your answer, and identify any unresolved factors that might cause you to change this opinion in the future.
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In each of the situations described below, indicate the accounting principles or concepts, if any. that have been violated and explain briefly the nature of the violation. If you believe the practice is in accord with generally accepted accounting principles, state this as your position and defend it. a. A small business in which credit sales fluctuate greatly from year to year uses the direct write­ off method both for income tax purposes and in its financial statements. b. A manufacturing company charges all of its petty cash expenditures to Miscellaneous Ex­pense, rather than to the various expense accounts that reflect the nature of each expenditure. c. Computer Systems often sells merchandise, in exchange for interest-bearing notes receivable, maturing in 6. 12. or 24 months. The company records these sales transactions by debiting Notes Receivable for the maturity value of the notes, crediting Sales for the sales price of the merchandise, and crediting Interest Revenue for the balance of the maturity value of the note. The cost of goods sold also is recorded. d. A company has $400,000 in unrestricted cash. $1 million in a bank account specifically earmarked for the construction of a new factory, and $2 million in cash equivalents. In the balance sheet, these amounts are combined and shown as "Cash and cash equivalents... $3.4 million."
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Cash and Cash Equivalents The following footnote appeared in a recent financial statement of Oakwood Corporation : The Corporation considers all investment securities with a maturity of three months or less when acquired to be cash equivalents. All cash and temporary investments are placed with high-credit-quality financial institutions, and the amount of credit exposure to any one financial institution is limited. At December 31, cash and cash equivalents include restricted funds of $36 million. a. Are the company's cash equivalents debt or equity securities? How do you know? b. Explain what is meant by the statement that "the credit exposure to any one financial institution is limited." c. Explain what is meant by the term restricted funds used in the footnote.
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Affections manufactures candy and sells only to retailers. It is not a publicly owned company and its financial statements are not audited. But the company frequently must borrow money. Its credi­tors insist that the company provide them with unaudited financial statements at the end of each quarter. In October, management met to discuss the fiscal year ending next December 31. Due to a sluggish economy, Affections was having difficulty collecting its accounts receivable, and its cash position was unusually low. Management knew that if the December 31 balance sheet did not look good, the company would have difficulty borrowing the money it would need to boost production for Valentine's Day. Thus the purpose of the meeting was to explore ways in which Affections might improve its December 31 balance sheet. Some of the ideas discussed are as follows: 1. Offer customers purchasing Christmas candy a 10 percent discount if they make payment within 30 days. 2. Allow a 30-day grace period on all accounts receivable overdue at the end of the year. As these accounts will no longer be overdue, the company will not need an allowance for overdue accounts. 3. For purposes of balance sheet presentation, combine all forms of cash, including cash equiva­lents. compensating balances, and unused lines of credit. 4. Require officers who have borrowed money from the company to repay the amounts owed at December 31. This would convert into cash the "notes receivable from officers." which now appear in the balance sheet as noncurrent assets. The loans could be renewed immediately after year-end. 5. Present investments in marketable securities at their market value, rather than at cost. 6. Treat inventory as a financial asset and show it at current sales value. 7. On December 31, draw a large check against one of the company 's bank accounts and deposit it in another of the company's accounts in a different bank. The check won't clear the first bank until after year-end. This will substantially increase the amount of cash in bank accounts at year-end. Instructions a. Separately evaluate each of these proposals. Consider ethical issues as well as accounting issues b. Do you consider it ethical for management to hold this meeting in the first place? That is. should management plan in advance how to improve financial statements that will be distributed to creditors and investors?
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Starlight, a Broadway media firm, uses the balance sheet approach to estimate uncollectible accounts expense. At year-end an aging of the accounts receivable produced the following five groupings: img On the basis of past experience, the company estimated the percentages probably uncollectible for the above five age groups to be as follows: Group a, 1 percent; Group b. 3 percent: Group c, 10 percent; Group d, 20 percent: and Group e, 50 percent. The Allowance for Doubtful Accounts before adjustments at December 31 showed a credit balance of $4,700. Instructions a. Compute the estimated amount of uncollectible accounts based on the above classification by age groups. b. Prepare the adjusting entry needed to bring the Allowance for Doubtful Accounts to the proper amount. c. Assume that on January 18 of the following year. Starlight learned that an account receivable that had originated on August 1 in the amount of $1,600 was worthless because of the bank­ruptcy of the client. May Flowers. Prepare the journal entry required on January 18 to write off this account. d. The firm is considering the adoption of a policy whereby clients whose outstanding accounts become more than 60 days past due will be required to sign an interest-bearing note for the full amount of their outstanding balance. What advantages would such a policy offer?
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Assume that the following information relates to your most recent bank statement dated September 30: img Checks written that had not cleared the bank as of September 30: img Interest amounting to $4 was credited to your account by the bank in September. The bank's ser­vice charge for the month was $5. In addition to your bank statement, you received a letter from your parents informing you that they had made a $2,400 electronic funds transfer directly into your account on October 2. After reading your parents' letter, you looked in your checkbook and discov­ered its balance was $601. Adding your parents' deposit brought that total to $3,001. Prepare a bank reconciliation to determine your correct checking account balance. Explain why neither your bank statement nor your checkbook shows this amount.
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Mumford Corporation invested $30,000 in marketable securities on December 4. On December 9. it sold some of these Investments for $10,000. and on December 18, it sold more of these invest­ments for $5,000. The securities sold on December 9 had cost the company $7,000, whereas the ; securities sold on December 18 had cost the company $6,000. a. Record the purchase of marketable securities on December 4. b. Record the sale of marketable securities on December 9. c. Record the sale of marketable securities on December 18. d. Record the necessary mark-to-market adjustment on December 31, assuming that the market value of the company's remaining unsold securities was $20,000.
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Briefly describe the flow of cash among receivables, cash, and marketable securities.
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The cash transactions and cash balances of Dodge, Inc., for November were as follows: 1. The ledger account for Cash showed a balance at November 30 of $6,750. 2. The November bank statement showed a closing balance of $4,710. 3. The cash received on November 30 amounted to $3,850. It was left at the bank in the night depository chute after banking hours on November 30 and therefore was not recorded by the bank on the November statement. 4. Also included with the November bank statement was a debit memorandum from the bank for $15 representing service charges for November. 5. A credit memorandum enclosed with the November bank statement indicated that a non- interest-bearing note receivable for $4,000 from Wright Sisters, left with the bank for collection, had been collected and the proceeds credited to the account of Dodge, Inc. 6. Comparison of the paid checks returned by the bank with the entries in the accounting records revealed that check no. 810 for $430. issued November 15 in payment for computer equip­ment. had been erroneously entered in Dodge's records as $340. 7. Examination of the paid checks also revealed that three checks, all issued in November, had not yet been paid by the bank: no. 814 for $115: no. 816 for $170: no. 830 for $530. 8. Included with the November bank statement was a $2,900 check drawn by Steve Dial, a cus­tomer of Dodge. Inc. This check was marked "NSF," It had been included in the deposit of November 27 but had been charged back against the company's account on November 30. Instructions a. Prepare a bank reconciliation for Dodge. Inc.. at November 30. b. Prepare journal entries (in general journal form) to adjust the accounts at November 30. Assume that the accounts have not been closed. c. State the amount of cash that should be included in the balance sheet at November 30.
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Financial Assets The following financial assets appeared in a recent balance sheet of Apple, Inc. (dollar amounts are stated in millions): img a. Define financial assets. b. A different approach is used in determining the balance sheet value for each category of Apple Inc. 's financial assets, although each approach serves a common goal. Explain. c. Why do companies like Apple Inc. hold so much of their financial assets in the form of marketable securities and receivables? d. What types of investments might Apple Inc. own that are considered cash equivalents? e. Explain what is meant by the balance sheet presentation of Apple Inc. 's Accounts Receivable as shown in the table.
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Jason Chain Saws. Inc.. had poor internal control over its cash transactions. Facts about the com­pany's cash position at April 30 are. described below. The accounting records showed a cash balance of $20,325. which included a deposit in transit of $5,000. The balance indicated in the bank statement was $14,300. Included in the bank state­ment were the following debit and credit memoranda: img Outstanding checks as of April 30 were as follows: img Tom Crook, the company's cashier, has been taking portions of the company's cash receipts for several months. Each month, Crook prepares the company's bank reconciliation in a manner that conceals his thefts. His bank reconciliation for April is illustrated as follows: img Instructions a. Determine the amount of cash shortage that has been concealed by Crook in his bank rec­onciliation. (As a format, we suggest that you prepare the bank reconciliation correctly. The amount of the shortage then will be the difference between the adjusted balances per the bank statement and per the accounting records. You can then list this unrecorded cash shortage as the final adjustment necessary to complete your reconciliation.) b. Carefully review Crook's bank reconciliation and explain in detail how he concealed the amount of the shortage. Include a listing of the dollar amounts that were concealed in various ways. This listing should total the amount of shortage determined in part a. c. Suggest some specific internal control measures that appear to be necessary for Jason Chain Saws, Inc.
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The former bookkeeper of White Electric Supply is serving time in prison for embezzling nearly $416,000 in less than five years. She describes herself as "an ordinary mother of three kids and a proud grandmother of four." Like so many other "ordinary" employees, she started out by taking only small amounts. By the time she was caught, she was stealing lump sums of $5,000 and $10.000.' ?Her method was crude and simple. 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. a. What controls must have been lacking at White Electric Supply to enable the bookkeeper to steal nearly $416,000 before being caught? b. What the bookkeeper did was definitely unethical. But what if one of her grandchildren had been ill and needed an expensive operation? If [his 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 1 back in full? Defend your answer.
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The cash transactions and cash balances of Banner. Inc.. for July were as follows: 1. The ledger account for Cash showed a balance at July 31 of $125,568. 2. The July bank statement showed a closing balance of $114,828. 3. The cash received on July 31 amounted to $16,000. It was left at the bank in the night depository chute after banking hours on July 31 and therefore was not recorded by the bank on the July statement. 4. Also included with the July bank statement was a debit memorandum from the bank for $50 representing service charges for July. 5. A credit memorandum enclosed with the July bank statement indicated that a non-interest- bearing note receivable for $4,000 from Rene Manes, left with the bank for collection, had been collected and the proceeds credited to the account of Banner. Inc. 6. Comparison of the paid checks returned by the bank with the entries in the accounting records revealed that check no. 821 for $519, issued July 15 in payment for office equipment, had been erroneously entered in Banner's records as $915. 7. Examination of the paid checks also revealed that three checks, all issued in July, had not yet been paid by the bank: no. 811 for $314: no. 814 for $625: no. 823 for $175. 8. Included with the July bank statement was a $200 check drawn by Howard Williams, a cus­tomer of Banner. Inc. This check was marked "NSE" It had been included in the deposit of July 27 but had been charged back against the company's account on July 31. Instructions a. Prepare a bank reconciliation for Banner, Inc., at July 31. b. Prepare journal entries (in general journal form ) to adjust the accounts at July 31. Assume that the accounts have not been closed. c. State the amount of cash that should be included in the balance sheet at July 31. d. Explain why the balance per the company's bank statement is often larger than the balance shown in its accounting records.
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What are cash equivalents ? Provide two examples. Why are these items often combined with cash for the purpose of balance sheet presentation?
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