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    Horizontal Analysis: Internal Controls

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    Financial information for Blevins Inc. is presented below:

    December 31, 2009 December 31, 2008

    Current assets $125,000 $100,000
    Plant assets (net) 396,000 330,000
    Current liabilities 91,000 70,000
    Long-term liabilities 133,000 95,000
    Common stock, $1 par 161,000 115,000
    Retained earnings 136,000 150,000


    Prepare a schedule showing a horizontal analysis for 2009 using 2008 as the base year. Listed below are five procedures followed by The Beat Company.
    1. Several individuals operate the cash register using the same register drawer.
    2. A monthly bank reconciliation is prepared by someone who has no other cash responsibilities.
    3. Ellen May writes checks and also records cash payment journal entries.
    4. One individual orders inventory, while a different individual authorizes payments.
    5. Unnumbered sales invoices from credit sales are forwarded to the accounting department every four weeks for recording.

    Indicate whether each procedure is an example of a good internal control or of a weak internal control (IC). If it is an example of a good internal control, indicate which internal control principle is being followed. If it is an example of a weak internal control, indicate which internal control principle is violated. Use the table below.

    Procedure IC Good or Weak? Related Internal Control Principle

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    Solution Preview

    December 31, 2009 December 31, 2008 $ Increase/ % Increase/
    (Decrease) (Decrease)

    Current assets $125,000 $100,000 $ 25,000 25%
    Plant assets (net) 396,000 330,000 66,000 ...

    Solution Summary

    The first part of this solution illustrates how to perform a horizontal analysis. In the second part, certain procedures are classified as weak or strong and their related internal control principle is described.