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Accounts Receivable Internal Controls and Effect of an Error

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8. An employee of Wu Company collects $100 from a customer for payment of a balance due account. The employee keeps the money for personal use, debits sales returns and allowances, and credits accounts receivable in the general journal. Which internal control procedure would have discouraged this embezzlement?
a. Comparing the accounts receivable subsidiary ledger with accounts receivable in the general ledger

b. providing the separation of duties of employees
c. obtaining fidelity bond insurance for employees handling cash
d. using prenumbered sales invoices and records

9. Two years ago a company's sales revenue was overstated by $15000. The error is discovered this year. The company's tax rate is 40%. How should this error be disclosed on the current financial statements?
a. decrease current net income by $9,000
b. decrease current net income by $15000
c. decrease beginning retained earnings by 9,000
d. decrease ending retained earnings by 9,000

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8. The internal control weakness described here is that the same employee who collects the cash can manipulate the accounting records. Had the employee not been able to do both, either the employee would have stolen the funds, leading the customer to complain, or he employee would have submitted the collection record to the person responsible for recording accounts receivable actions and the ...

Solution Summary

8. An employee of Wu Company collects $100 from a customer for payment of a balance due account. The employee keeps the money for personal use, debits sales returns and allowances, and credits accounts receivable in the general journal. Which internal control procedure would have discouraged this embezzlement?

a. Comparing the accounts receivable subsidiary ledger with accounts receivable in the general ledger
b. providing the separation of duties of employees
c. obtaining fidelity bond insurance for employees handling cash
d. using prenumbered sales invoices and records

9. Two years ago a company's sales revenue was overstated by $15000. The error is discovered this year. The company's tax rate is 40%. How should this error be disclosed on the current financial statements?
a. decrease current net income by $9,000
b. decrease current net income by $15000
c. decrease beginning retained earnings by 9,000
d. decrease ending retained earnings by 9,000

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Practice Problems

Problem 6 - 5A Internal Control
Abbott Inc. is expanding and needs to hire more personnel in the accounting office. Barbara Barker, the chief accounting clerk, knew that her cousin Cheryl was looking for a job. Barbara and Cheryl are also roommates. Barbara offered Cheryl a job as her assistant. Barbara will be responsible for Cheryl's performance reviews and training.
Required:
1. List some problems with the proposed personnel situations in the accounting department.
2. Explain why accountants are concerned with the hiring of personnel. What suggestions would you make to improve internal control at Abbott?
3. How would you explain to Barbara and Cheryl that they personally are not the problem?

Problem 7 -3 Accounts Receivables Turnover for Coca Cola and PepsiCo
The following information was summarized from the 2006 annual report of the Coca-Cola Company:

(in millions)
____________________________________________________________________________
Trade accounts receivable, less allowances of $63 and $72, respectively
December 31, 2006 $2,587
December 31, 2005 2,281
Net operating revenues for the year ended December 31:
2006 24,088
2005 23,104

The following information was summarized from the fiscal year 2006 annual report of PepsiCo:
(in millions)
____________________________________________________________________________
Accounts and notes, receivable, net
December 30, 2006 $3,725
December 31, 2005 3,261
Net revenue for the year ended:
December 30, 2006 35,137
December 31, 2005 32,562

Required:
1. Calculate the accounts receivable turnover ratios for Coca-Cola and PepsiCo for 2008.
2. Calculate the average collective period, in days, for both companies for 2006. Comment on the reasonableness of the collection periods for these companies considering the nature of their business.
3. Which company appears to be performing better? What other information should you consider in determining how these companies are performing?

Problem 7-7 Effects of Changes in Receivable Balances on Statement of Cash Flows
Stegner Inc. reported net income of $130,000 for the year ended December 31, 2008. The following items were included on Stegner's balance sheets at December 31, 2008 and 2007:
12/31/08 12/31/07
Cash $105,000 $110,000
Accounts receivables 223,000 83,000
Notes receivables 99,000 100,00
Stegner uses the indirect method to prepare its statement of cash flows. Stegner does not have any other current assets or current liabilities and did not enter into any investing or financing activities during 2008.
Required:
1. Prepare Stegner's 2008 statement of cash flows.
2. Explain why cash decreased during a profitable year.

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