Chapter Review
8-9iCases & Projects
Ethics in Action
Tehra Dactyl is an accountant for Skeds, Inc., a footwear and apparel company. The company’s revenue and net income have increased by more than 100% over the past three years. During the same period, Tehra and her colleagues in the Accounting Department have not received a raise or salary increase. Frustrated by not receiving a raise while the company has thrived, Tehra has begun submitting expense reimbursements for personal purchases. Tehra has a good relationship with her supervisor, and he simply “signs off” on Tehra’s expense reimbursements. Tehra suspects that he knows she is submitting personal expenses for reimbursement and is “looking the other way” because Tehra has not received a raise in the past three years.
Are Tehra and her supervisor acting in an ethical manner? Why or why not?
Ethics in Action
During the preparation of the bank reconciliation for Building Concepts Co., Joel Knolls, the assistant controller, discovered that Lone Peak National Bank incorrectly recorded a $3,290 check written by Building Concepts Co. as $329. Joel has decided not to notify the bank but wait for the bank to detect the error. Joel plans to record the $2,961 error as Other Income if the bank fails to detect the error within the next three months.
Discuss whether Joel is behaving in a professional manner.
Team Activity
In teams, select a public company that interests you and is a business that requires inventory. Obtain the company’s most recent annual report on Form 10-K. The Form 10-K is a company’s annually required filing with the Securities and Exchange Commission (SEC). It includes the company’s financial statements and accompanying notes. The Form 10-K can be obtained either (a) by referring to the investor relations section of the company’s website or (b) by using the company search feature of the SEC’s EDGAR database service found at www.sec.gov/edgar/searchedgar/companysearch.html.
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Based on the information in the company’s most recent annual report, answer the following questions:
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How much cash does the company have at the end of the most recent year?
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What percentage of total current assets is cash during the most recent two years presented? Has this percentage increased, decreased, or remained the same during this period?
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Review Management’s Annual Report on Internal Control Over Financial Reporting. Based on this information, answer the following questions:
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Who has responsibility for establishing and maintaining adequate internal controls over a company’s financial reporting?
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How is “internal control over financial reporting” defined in this report?
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What level of assurance is provided that fraud will be detected?
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Team Activity
Select a business in your community and observe its internal controls over cash receipts and cash payments. The business could be a bank or a bookstore, a restaurant, a department store, or another retailer. In groups of three or four, identify and discuss the similarities and differences in each business’s cash internal controls.
Communication
Wholesome and Happy Foods is a farm-to-family grocery store located in the Pacific Northwest. The company recently installed four self-checkout lanes that allow customers to scan their own groceries and pay for their purchases using an automated checkout kiosk. The kiosks are monitored by a single attendant. In recent weeks, management has become concerned that some customers are not scanning all of the items when using the self-checkout lanes.
Write a brief memo to your instructor suggesting features and capabilities for the kiosks that would serve as control procedures, ensuring that all items brought through the self-checkout lanes are properly scanned and purchased.
Internal Controls
The following is an excerpt from a conversation between two salesclerks, Jean Moen and Sara Cheney. Jean and Sara are employed by Turpin Meadows Electronics, a locally owned and operated electronics retail store.
Did you hear the news?
What news?
Neal and Linda were both arrested this morning.
What? Arrested? You’re putting me on!
No, really! The police arrested them first thing this morning. Put them in handcuffs, read them their rights—the whole works. It was unreal!
What did they do?
Well, apparently they were filling out merchandise refund forms for fictitious customers and then taking the cash.
I guess I never thought of that. How did they catch them?
The store manager noticed that returns were twice that of last year and seemed to be increasing. When he confronted Neal, he became flustered and admitted to taking the cash, apparently more than $9,000 in just three months. They’re going over the transactions of the last six months to try to determine how much Linda stole. She apparently started stealing first.
Suggest appropriate control procedures that would have prevented or detected the theft of cash.
Internal Controls
The following is an excerpt from a conversation between the store manager of Wholesome Grocery Stores, Kara Dahl, and Lynn Shutes, president of Wholesome Grocery Stores:
Kara, I’m concerned about this new scanning system.
What’s the problem?
Well, how do we know the clerks are ringing up all the merchandise?
That’s one of the strong points about the system. The scanner automatically rings up each item based on its bar code. We update the prices daily, so we’re sure the sale is rung up for the right price.
That’s not my concern. What keeps a clerk from pretending to scan items and then simply not charging his friends? If his friends were buying 10–15 items, it would be easy for the clerk to pass several items through putting his finger over the bar code or just pass the merchandise through the scanner with the wrong side showing. It would look normal for anyone observing. In the old days, we at least could hear the cash register ringing up each sale.
I see your point.
Suggest ways that Wholesome Grocery Stores could prevent or detect the theft of merchandise as described.
Bank Reconciliation and Internal Control
The records of Parker Company indicate a July 31 cash balance of $10,400, which includes undeposited receipts for July 30 and 31. The cash balance on the bank statement as of July 31 is $10,575. This balance includes a note of $2,250 plus $150 interest collected by the bank but not recorded in the journal. Checks outstanding on July 31 were as follows: No. 2670, $1,050; No. 3679, $675; No. 3690, $1,650; No. 5148, $225; No. 5149, $750; and No. 5151, $800.
On July 25, the cashier resigned, effective at the end of the month. Before leaving on July 31, the cashier prepared the following bank reconciliation:
Subsequently, the owner of Parker Company discovered that the cashier had stolen an unknown amount of undeposited receipts, leaving only $1,500 to be deposited on July 31. The owner, a close family friend, has asked for your help in determining the amount that the former cashier stole.
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Determine the amount the cashier stole from Parker Company. Show your computations in good form.
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How did the cashier attempt to conceal the theft?
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Identify two major weaknesses in internal controls that allowed the cashier to steal the undeposited cash receipts.
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Recommend improvements in internal controls so that similar types of thefts of undeposited cash receipts can be prevented.
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Cash to Monthly Cash Expenses Ratio
TearLab Corp. is a health care company that specializes in developing diagnostic devices for eye disease. TearLab reported the following data (in thousands) for three recent years:
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Determine the monthly cash expenses for Year 3, Year 2, and Year 1. Round to one decimal place.
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Determine the ratio of cash to monthly cash expenses as of December 31 for Year 3, Year 2, and Year 1. Round to one decimal place.
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Based on (1) and (2), comment on TearLab’s ratio of cash to monthly operating expenses for Years 1, 2, and 3.
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