BU8101 Sem3_Group 11.pptx

7/27/2019 BU8101 Sem3_Group 11.pptx

1/63

SEMINAR 3FINANCIAL STATEMENTS:

ACCOUNTING AND PRESENTATION

OF CURRENT ASSETS

Wu SicongYao Xibing

Di boyu

Si Zengyu

Ma Linlu


2/63

Bank Reconciliation

QUESTION 1


3/63

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


4/63

On 3 June, the cashier

resigned effective at the

end of the month. Before

leaving on 30 June, the

cashier prepared thefollowing bank

reconciliation:

Q1


5/63

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) Prepare the proper bank reconciliation and determine the amount the

cashier has stolen from Daily Company.

(b) How did the cashier attempt to conceal the theft?

(c)

I. Identify two major weaknesses in internal controls, which allowed thecashier to steal the undeposited cash receipts.

II. Recommend improvements in internal controls, so that similar types of

thefts of undeposited cash receipts can be prevented.

Q1


6/63

Company Bank Reconciliation as of June 30:

Q1Cash Balance per bank statement, 30 June $ 6,575

Add: Undeposited Receipt 4,000

Less: outstanding cheques:

No. 370

No. 379

No. 390

No. 1148

No. 1149

No. 1151

$ 580

615

900

225

300

750 3,370

Adjusted cash balance $ 7,205

Balance per Companys records, 30 June $ 9,400

Add: Note receivable $ 4,000

Interest earned 160 4,160

Adjusted cash balance $ 13,560


7/63

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


8/63

(a) Prepare the proper bank reconciliation and determine the

amount the cashier has stolen from Daily Company.

Amount Stolen

= adjusted balance perCompanys recordsadjusted balance per

bank statement

= $13,560 $7,205= $6,355

Q1


9/63

(b) How did the cashier attempt to conceal the theft?

Q1

Omitted Outstanding

Checks:

No. 370 --- $580

No. 379 --- $615No. 390 --- $900

Addition of

unrecorded note

with interest

Miscalculation:

1,275


10/63

(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


11/63

(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, thusreducing the chances of cash losses

Q1


12/63

Accounting Receivable

QUESTION 2


13/63

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 theyear, 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


14/63

An aging analysis showed the following for accounts receivable at

30 September 2012:

Q2


15/63

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 Receivableaccount 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 estimatedimpairment of accounts receivable adjustment for the year

(round the amount to the nearest whole number)

Q2


16/63

(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).

Q2

Sales on Account 468,800

Collections (450,730)

NSF 183

Contribution to AR 18,253

Accounts Title Debit Credit

Account Receivable 18,253

Revenue 18,253


17/63

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).

Q2

Accounts Title Debit Credit

Allowance for Doubtful Account 7,900

Account Receivable 7,900


18/63

At 1 October 2011, the balance of the Accounts Receivable account was a debitof $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)

Original Account Receivable 88,430

Adjustment 18,253

Written Off (7,900)

Total Account Receivable $98,783

Q2


19/63

(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


20/63

Time Amount

PercentageConsidered

impaired

Estimatedimpairment

Not yet due $ 58,030 * 2% = $ 1,161

1- 30 days past due 24,253 * 5 = $ 1,213

31- 60 days past due 9,210 * 15 = $ 1,382

61- 90days past due 3,990 * 25 = $ 998

Over 90 days past due 3,300 * 50 = $ 1,650

Total 98,783 6,402

Q2


21/63

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

Q2


22/63

Problem 7.5B Accounting for marketable securities

QUESTION 3


23/63

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):

Cost

CurrentMarket

Value

Lamb Computer, Inc. (1,000 shares: cost, $30 per share;

market value, $50) $30,000 $50,000

Dry Foods (5,000 shares: cost, $9 per share;market value, $8) 45,000 40,000

Totals $75,000 $90,000

Q3


24/63

In 2011, Westport engaged in the following two transactions:

At December 31, 2011, the market values of these stocks were: Lamb

Computer, $40 per share; Dry Foods, $7

Q3

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.


25/63

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


26/63

b. Prepare journal entries to record the transactions on April 6 and April

20.

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

Q3

Debit($) Credit($)

April 6 Cash 5480

Marketable Securities 3000

Gain on sale of investments 2480


27/63

b. Prepare journal entries to record the transactions on April 6 and April

20.

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

Q3

Debit($) Credit($)

April 20 Cash 17,480

Loss on sale of investments 5020

Marketable Securities 22500


28/63

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.)

Q3

Market Securities As at 1 Jan. 2011 sell As at 31 Dec. 2011

Lamb computer 50,000 (5,000) 45,000

Dry Foods 40,000 (20,000) 20,000

90,000 (25,000) 65,000

Marketable Securities Account

Balance as at 1 Jan. 2011 90,000

Less Sale of securities on Apr. 6 3000)

Sale of securities on Apr. 20 (22500)

(25500)

Balance as at 31 Dec. 2011 64500


29/63

Refer to question given that

assume no unrealized gains or losses have been recognized since last year.

Q3

Market Securities As at 1 Jan. 2011 No Change As at 31 Dec. 2011

Lamb computer 20,000 20,000

Dry Foods (5,000) (5,000)

15,000 15,000

Unrealized Holding gain on Investments 15,000


30/63

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 Current MarketValue

Lamb Computer, Inc. (900 shares; cost $30 per

share; market value, $40) $ 27,000 $ 36,000

Dry Foods (2,500 shares; cost, $9 per share;

marketmarket value, $7). 22,500 17,500

Totals $ 49,500 $ 53,500

Q3


31/63

e. Prepare the fair value adjusting entry required at December 31, 2011.

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

Unrealized Holding Gain on Investments 11,000

Marketable Securities 11,000

Q3


32/63

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.)

Q3

Cost Market Value Unrealizedgains/losses

Lamb Computer 27,000 36,000 9,000

Dry Foods 22,500 17,500 (5,000)

49,500 53,500 4,000


33/63

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.)

Q3

Current assets:

Marketable securities (cost, $49500) 53,500

Stockholders' equity:

Unrealized holding gain on investments 4,000


34/63

g. Illustrate the presentation of the net realizedgains(or losses) in the 2011income statement. Assume a multiple-step income statement and show the

caption identifying the section in which this amount would appear.

Q3

Companys Name

Income Statement

for the year end 31 Dec. 2011

Nonoperating items;

Loss on sale of investments 2540

Working:

Realized Gains $2840

Less Realized Losses 5020

Net realized losses (2,540)


35/63


36/63

Exercise 7.3 Grandmothers secret

QUESTION 4


37/63

The former bookkeeper of White Electric Supply is serving time in prisonfor 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 registeran 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


38/63

a. What controls must have been lacking at white electric supply to

enable the bookkeeper to steal nearly $416,000 before being caught?

Q4


39/63

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, notonly 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


40/63

Second, the company should promptly reconcile bank statements with theaccounting 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 ofsupervision.

Q4


41/63

Fourth, the company had no inventory control system in place. Thus, itwent 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


42/63

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

If this had been the case, would it have been ethical for her to takecompany funds to pay for the operation if she intended to pay the

company back in full? Defend your answer.

Q4


43/63

Employee theft is never ethical, even if it is committed to pay for medicalbills.

It is also unethical for employees to borrow funds from their employerswithout formal permission(even if one has the intent of eventually

paying back the full amount).

Q4


44/63

REVIEW OF LECTURE


45/63

ASSETS

Assets

Current Assets

Non-current Assets (To be discussed)

Cash and cash equivalents

Marketable securities

(Short-term investments)

Receivables (Account Receivable)

Inventories (To be discussed)

Financial Assets

Recovered more than 1 year


46/63

Accounts

receivable

Marketable

securities

Cash and cash

equivalents

Collections from

customers Payments

Converted backInvested

FINANCIAL ASSETS


47/63

Valuation:

Net realizable valueValuation:

Face amount

Valuation:

Current market value

FINANCIAL ASSETS

Accounts

receivable

Marketable

securities

Cash and cash

equivalents

In balance sheet:


48/63

Cash

Cash equivalents

Currency

Coins

Deposit in bank

Customer checks

Bank drafts

Money orders

Treasury bills

Preferred stock

CASH & CASH EQUIVALENTS

Short-term investments

Stable market value

Maturity date of less

than three months


49/63

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.


50/63

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


51/63

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


52/63

MARKETABLE SECURITIES

MarketableSecurities

Purchase of investments

Recognition of Investment

Sale of investments

End-of period adjustments

Readily marketable

Liquidity next to cash


53/63


Purchase of investmentsGeneral Journal

Date Account Titles and Explanation Debit Credit

Marketable Securities X

Cash X

Recognition of Investment

General Journal


Cash X

Dividend Revenue X


54/63


Sale of investmentsGeneral Journal


Cash X

Marketable Securities XGain on Sale X

End-of period adjustments

General Journal


Unrealized Holding Loss/Gain X

Marketable Securities X


55/63

ACCOUNTS RECEIVABLE

AccountReceivable

Measuring and reporting receivables

Writing off an uncollectible account

Recovering a written off account receivable

Comprises the largest financial

asset

Liquidity is next only to cash

and marketable securities


56/63

ACCOUNTS RECEIVABLE

Measuring and reporting receivablesGeneral Journal


Accounts Receivable X

Sales Revenue XTo recognize credit sales

Writing off an uncollectible account

General Journal


Allowance for Impairment of AR X


Uncollectible accounts written off


57/63

ACCOUNTS RECEIVABLE

Recovering a written off account receivableGeneral Journal



Allowance for Impairment of AR XReversal of accounts receivable previously written off

Cash X


Recovery of amount due from previously written off


58/63

REVIEW QUESTION


59/63

REVIEW QUESTION

1 Which of the following would be considered a major stepin achieving internal controlover cash transactions?

A Separate the function of handling cash from themaintenance 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


60/63

REVIEW QUESTION

2 In the balance sheet,financial assets are shown atwhich value?

A Current valueB Cash equivalent

C Historical cost

D None of the above


61/63

REVIEW QUESTION

3 The proper treatment of outstanding checks is to reportthem in the bank reconciliation as which of the following?

A An addition to the balance per bank statementB 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


62/63

REVIEW QUESTION

4 When a firm writes off a bad debt under the allowance method ofaccounting 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


63/63

THANK YOU !

Date post:	02-Apr-2018
Category:	Documents
Upload:	shweta-sridhar
View:	225 times
Download:	0 times

BU8101 Sem3_Group 11.pptx

Documents