CH-11 Cash Management and Control – Accounting : Book Guide

Chapter 11: Cash Management and Control Questions and solutions which have a GST version: • Exercise 11.4 • Exercise 11.12 • Problem 11.16 • Problem 11.17 • Problem 11.26 • Problem 11.30 Discussion questions 1. Explain why it is important to manage cash flows. Suggest methods a business can use to manage its cash flows. • It is important to manage cash flows to ensure that the business always has enough cash to pay creditors. • Even when a business is making a profit it may be possible to run short of cash so cash flow needs to be managed separately from measurement of profit. • To manage cash flow a business needs to continually monitor cash inflow and outflow. • A business needs to smooth cash flows so that if they are predicting large cash outflows for a given period then they need to plan to have adequate cash in reserve to meet those needs. • Keeping a detailed record of monitoring of cash flow will make it more straight forward to get extra needed cash from the bank. 2. Many people think of cash as coins and notes. In accounting, cash has a broader meaning. What type of assets are defined as cash in accounting? In accounting the type of assets defined as cash include money, duplicates of credit card and Electronic Funds Transfer at Point of Sale (EFTPOS) sales, and any other negotiable instrument, such as a cheque or postal note, that a bank or financial institution will normally accept as a deposit to an account. 3. Internal control of cash is strengthened by requiring that each day’s receipts are deposited intact and that all payments are made by cheque or electronic transfer. Do you agree? Why or why not? Banking receipts intact is important to discourage ‘hands in the till’ during trading hours, and cash receipts should reflect total sales as recorded by cash registers. All payments should be made by pre-numbered cheque or by some electronic means, e.g. EFTPOS, electronic transfer, as this will provide a record of all cash leaving the entity, and such records can be compared with independent records prepared by the bank as part of the bank reconciliation process. Internal control is only assisted if the cash receipts for the day can be verified. For example, a receipt book of cash register tapes needs to be kept to verify the total receipts for each day. Documentation for payments will also have to be prepared to verify what the payment was for and whether the payment was approved or not. Additional control features would have to be incorporated to improve overall internal control. 4. ‘Although the process of bank reconciliation provides a measure of control over cash in a business entity, bank reconciliation is useless unless it operates within a framework that incorporates essential elements of a good internal control system.’ Discuss this statement. Preparing a bank reconciliation statement does not ensure that all cash receipts in an entity have been banked or that all payments are properly authorised. Only a good internal control system (of which bank reconciliation is only a part) can do that. A good internal control system is needed to ensure that all cash is received and is duly banked intact, and that all payments are authorised by responsible personnel. Nevertheless, a bank reconciliation statement, reconciling cash records of receipts and payments with the bank’s statement of account is useful in maintaining control over banked receipts and payments made by cheques, direct transfer, or by a system of electronic payments. The bank reconciliation statement helps prove the accuracy of both the entity’s and the bank’s records. 5. Mark has done the accounts for his local basketball club for a number of years. You joined the club in the last year and as you have studied some accounting Mark has asked you to help him with the accounts. You note that when doing a bank reconciliation Mark changes the accounts of the basketball club so that they show the same month-end cash balance as the bank statement, even though there are outstanding deposits and cheques. Mark believes this approach is best as the bank must be correct so he needs to agree with its balance. Explain to Mark why the basketball club’s cash balance may be different from the bank statement and yet be the correct balance. The bank can only record transactions that affect the club’s bank account of which it is aware. This means that if the club has received cash but has not yet deposited it the club’s cash position has increased but the bank is not yet aware of this so will not show it on the bank statement. Similarly, if the club has written a cheque and the recipient hasn’t yet banked it then the club’s cash position has reduced but the bank is not yet aware of this and so hasn’t recorded the decrease. As the club’s accounts should reflect the actual cash position, even if the bank is not aware of all transactions, the bank reconciliation should be reconciled to the club’s month end cash balance and not the amount on the bank statement. For this reason Mark should begin with the bank statement balance and then add any outstanding deposits and deduct any unpresented cheques to reconcile with the club’s cash at bank account balance. 6. After reading about the concepts of a good system of internal control over cash covered in this chapter, the owner of a small business was concerned that his internal control was lacking. He counted the daily cash takings and prepared the deposit slip, and banked the takings intact each day. He also approved payments and signed all cheques. To overcome his problem, he decided he would have to hire more staff, so that he would be able to ensure adequate division of responsibility. Would this solve his problem? Explain. The basic purpose of any system of internal control is to safeguard the assets of the business and prevent fraud. In a small business where the management and owner/s are the same, there is virtually no risk of fraud – the owners are unlikely to attempt to defraud themselves. Where owners have to delegate responsibility for control and management of business to employees, the need for a system to prevent or minimise fraud becomes more imperative. Another important aspect to keep in mind is that any system of internal control will involve costs. The more sophisticated the system becomes the more expensive it will be. It is essential to get the appropriate balance between the level of control and the costs to achieve that control. The system being used by the owner in the given circumstances is perfectly acceptable. To suggest the employment of more staff is merely to incur unnecessary costs with no real improvement in internal control. In fact, the employment of extra staff may in effect reduce the level of internal control already being achieved. Any system of internal control should be cost effective and be appropriate to the needs of the particular business. 7. A manager of a small online business believes that because most of the transactions take place using electronic transfer of funds rather than cash or cheques, the business no longer needs to do a bank reconciliation each month. Explain to the manager why a bank reconciliation is still necessary for the business. A bank reconciliation is still necessary for control purposes. There may still be some transactions that occur using cash and cheques and so there may be outstanding deposits and cheques at the end of the period. Even with electronic transfers these are often processed overnight on computer systems and transactions can appear on bank statements a day after they actually occurred. The manager also needs to check that the business’s accounts are correct and have included all of the transactions that have been processed electronically by the bank. Automatic payments, fees and transfers into the account by customers all need to be checked to make sure they have been recorded in the accounting system of the business. It is not uncommon to find errors in items being processed through bank accounts. Interest may be charged when it shouldn’t be or human error may lead to amounts going into the wrong accounts. Sometimes transactions are processed more than once. 8. ‘The principle that receipts should be banked daily and all payments made by cheque or electronic transfer provides a sound basis for internal control over cash. But it breaks down immediately when cash is given to a junior employee to spend through the petty cash fund.’ Discuss this statement. An imprest system of petty cash should be used. Cash should not be available for employees to spend without verification or authentication. A voucher should always be prepared to validate all payments from the petty cash fund and receipts should be provided to the petty cashier to verify the amount spent where possible. Periodic checks should be made to verify that the cash on hand together with the vouchers issued is equal to the imprest amount of the petty cash fund. Adequate petty cash records (e.g. Petty Cash Book) should be monitored. 9. A manager of a small business made the following comment when a friend suggested that his business could benefit if he were to prepare cash budgets: ‘Some people think they are all right but I run only a small business and don’t want to waste my time preparing budgets which, after all, are just best-guessing the future. I am more interested in what actually happens, not what I think might happen.’ Discuss this statement. Discuss in line with section 11.5 ‘Cash budgeting’. 10. A sound cash management system has several advantages. Why is it beneficial to reduce collection time for accounts receivable? Money owed by accounts receivable represents money that cannot be used by the business. The business needs to develop a collections policy to speed up the collection of money owing. However, management must ensure that the policy does not put customers off and lead to the loss of their business. Exercises Exercise 11.1 Cash flow management Benjamin runs a cheese shop at the local shopping centre. Some months Benjamin seems to have more than enough cash to pay his bills when they are due. Other months Benjamin struggles to pay bills on time as he runs short of cash in the business’s bank account and has to use money from his personal account to pay business expenses. Required (a) Advise Benjamin on ways he can overcome his cash flow management issues. (LO2) Benjamin needs to take control of cash flow and reduce the amount of money he needs to keep his business running from day to day and earn a higher return. Benjamin need’s to create a cash flow forecast. The forecast should show exactly how much cash will flow in and out of his business each month. It will help him identify months in which he may be short of money and makes sure his has enough cash on hand. Benjamin needs to track his actual cash flow performance from week to week. It would help to run a single bank account for his business and to use one of the many cash flow tools available for free on most bank web sites. Exercise 11.2 Composition of cash On 30 June, Sophisticated Coffee had the following on its premises: 1. 18 blank cheque forms 2. a cheque for $275 received from a customer on 28 June but dated 1 July 3. cheques dated 28–30 June for the total amount of $2384 received from customers on 30 June. 4. postage stamps to the value of $12.10 5. a $600 IOU from an employee representing a short-term loan 6. currency and coin, $872. Required (a) What total dollar amount should be included in ‘cash’ at 30 June? (b) Explain how any items not included in ‘cash’ should be reported in a balance sheet prepared on 30 June. (LO1) (a) 6. Currency and coin $872 3. Cheques dated 28–30 June 2 384 Total included in cash $3256 (b) 5. The $600 IOU should be reported as a receivable from employees. 2. The $275 postdated cheque should be reported as an account receivable. 1. and 4. would not be reported on a balance sheet. Exercise 11.3 Cash internal control procedures Explain briefly the significance of each of the following in a comprehensive system of control over cash transactions: 1. the segregation of cashier’s duties from other functions 2. the daily banking principle 3. the bank reconciliation statement 4. the imprest system of petty cash 5. cash budgets 6. statements of cash flows. (LO2) 1. With the segregation of cashier’s duties from other functions, the cashier should not have access to the accounting records (other than cash journals). By segregating the duties of the cashier, any fraud will remain undetected only if the cashier colludes with other members of staff. This will reduce the possibility of the cashier misappropriating funds and covering this up by altering the accounting records without being found out. 2. The daily banking principle means that all cash received must be banked daily intact. This will reduce the possibility of cash being misappropriated, as all the cash received is collected and banked in its entirety. Periodic checks are now possible, to ascertain that the cash banked (per bank deposit slip) agrees with the relevant source documents (receipts etc.) and other records. 3. The cash at bank account is balanced at various intervals (usually monthly). To ascertain that this balance actually represents the entity’s cash balance at the bank or the amount owed to the bank, it has to agree with the amount shown on the bank statement at that date. The bank reconciliation links and confirms the cash records with a reliable outside authority – the bank statement. If there are differences in the two records, the bank reconciliation will identify them, and records can be adjusted to take them into account. 4. Under the imprest system of petty cash, management allocates a certain ‘float’ or ‘retainer’ of cash to be used for petty expenses. This ‘float’ must be maintained from period to period until management revises it and allocates an increase in cash funds for petty expenses. The petty cashier uses the funds to meet petty expenses. When the fund is running low, the petty cashier is reimbursed the exact amount that was spent during the period bringing the ‘float’ back to the original amount. This system allows management to control the maximum amount that can be spent on minor expenses. The imprest system of petty cash supplements the control obtained by the general rule of banking all cash received intact and making all payments by cheque. Where it is impractical to write out cheques for payments, the payments should be covered by a petty cash voucher (docket) and the control ensured by the use of a fixed ‘float’. 5. Cash budgets identify future cash inflows and outflows of the entity. By identifying the future expected cash flows management is better able to control and manage the entity’s cash resources; for example, being able to meet ongoing commitments to creditors when they fall due. By identifying large expected cash outlays, management can plan for the payment of such expenditures through increasing cash inflows or by borrowing. Not being able to pay debts as they become due can have dire consequences for an entity — even lead to its demise. 6. A cash flow statement sets out the actual cash inflows and cash outflows of the entity over a period of time. The cash flows are classified in cash flows from operations, cash flows from investing activities, and cash flows related to financing. The statement sets out all the cash activities over the period of the statement, and shows the capacity of the entity to generate cash flows from its operating activities, its sources of long term funds (e.g. long term borrowings, equity raisings), and its long term investments on plant, property and equipment, and other outside investments. This information can lead to conclusions about the entity’s short term liquidity and solvency, and longer term financial stability. Exercise 11.4 Cash short and over Non-GST version Lee runs a fruit stall at the local market and at the end of each day he banks the cash in the cash register. The cash register records each sale and can provide a total for each day but Lee believes that often the staff are too busy and do not always enter the sales in the register but simply put the cash in the till. The total from the cash register is produced each month for the business’s accountant to prepare financial statements. Recently, Lee employed a university student to work on weekends and he is concerned that soon after this the daily amount banked seems to have decreased even though Lee feels that sales have not really changed. The student often talks about how he spends his evenings at the casino in the hope of winning enough to pay for his university studies so that he doesn’t have to work every weekend. Required (a) Explain to Lee what controls he could put in place to minimise the risk of one of his employees stealing cash. (b) After Lee put in place the controls that you suggested, he found that for the first week the cash register showed sales of $7 150 and the amount banked was $6 800. Record the cash short or over. (c) The second week after the new controls were implemented the student resigned and the cash register showed sales of $6 930 and the amount banked was $7 200. Record the cash short or over. (LO2) (a) Lee needs to insist that all sales are rung up on the cash register that is in a position where the customers can see the amount recorded. This is not a perfect check but many customers do watch the amount recorded on a cash register to make sure they are paying the right amount and getting the correct change which also shows on most cash registers. It is also possible for most cash registers to require an employee code for each transaction so that Lee can keep track of sales by staff member in case he has particular concerns about any of his staff. As Lee relies on the total from the cash register to prepare the financial statements he needs to insist all sales go through the cash register. The tape in the register should be locked in and only accessible by Lee or someone he trusts if he is away. Lee should also try to make sure there are at least two people staffing the fruit stall at any time as this will make it harder for a staff member to pocket cash or make sales without using the cash register. (b) Cash at Bank 6 800 Cash Short and Over 350 Sales 7 150 (The week’s cash sales recorded) (c) Cash at Bank 7 200 Cash Short and Over 270 Sales 6 930 (The week’s cash sales recorded) Exercise 11.4 Cash short and over GST version Lee runs a fruit stall at the local market and at the end of each day he banks the cash in the cash register. The cash register records each sale and can provide a total for each day but Lee believes that often the staff are too busy and do not always enter the sales in the register but simply put the cash in the till. The total from the cash register is produced each month for the business’s accountant to prepare financial statements. Recently, Lee employed a university student to work on weekends and he is concerned that soon after this the daily amount banked seems to have decreased even though Lee feels that sales have not really changed. The student often talks about how he spends his evenings at the casino in the hope of winning enough to pay for his university studies so that he doesn’t have to work every weekend. Required (d) Explain to Lee what controls he could put in place to minimise the risk of one of his employees stealing cash. (e) After Lee put in place the controls that you suggested, he found that for the first week the cash register showed sales of $7 150 and the amount banked was $6 800. Record the cash short or over. (f) The second week after the new controls were implemented the student resigned and the cash register showed sales of $6 930 and the amount banked was $7 200. Record the cash short or over. (LO2) (a) Lee needs to insist that all sales are rung up on the cash register that is in a position where the customers can see the amount recorded. This is not a perfect check but many customers do watch the amount recorded on a cash register to make sure they are paying the right amount and getting the correct change which also shows on most cash registers. It is also possible for most cash registers to require an employee code for each transaction so that Lee can keep track of sales by staff member in case he has particular concerns about any of his staff. As Lee relies on the total from the cash register to prepare the financial statements he needs to insist all sales go through the cash register. The tape in the register should be locked in and only accessible by Lee or someone he trusts if he is away. Lee should also try to make sure there are at least two people staffing the fruit stall at any time as this will make it harder for a staff member to pocket cash or make sales without using the cash register. (b) Cash at Bank 6 800 Cash Short and Over 350 Sales 6 500 GST Payable 650 (The week’s cash sales recorded) (c) Cash at Bank 7 200 Cash Short and Over 270 Sales 6 300 GST Payable 630 (The week’s cash sales recorded) Exercise 11.5 Cash internal control procedures Julia Ross Company has the following internal control procedures over cash payments. Identify the internal control principle that is applicable to each procedure. 1. Company cheques are prenumbered. 2. The bank statement is reconciled monthly by an internal auditor. 3. Blank cheques are stored in a safe in the finance manager's office. 4. Only the finance manager or assistant may sign cheques. 5. Cheque signers are not allowed to record cash payment transactions. Required (a) Identify the internal control principle that is applicable to each procedure. (LO2) 1. Documentation procedures 2. Independent internal verification 3. Physical, mechanical and electronic controls 4. Establishment of responsibility 5. Segregation of duties Exercise 11.6 Bank reconciliation Lisa Ceja is unable to reconcile the bank balance at 31 January. Lisa’s reconciliation is as follows. Required Prepare a correct bank reconciliation. Journalise the entries required by the reconciliation. (a) Lisa Ceja Bank Reconciliation Statement as at 31 January Balance as per bank statement $3 660.20 Add: Deposit in transit 530 4 190.20 Less: Outstanding cheques 930 Cash balance per books 3260.20 3875.20 Less: NSF cheque Bank service charge Adjusted cash balance per books 590 25 3 260.20 (b) Accounts receivable Dr 590 Cash Cr 590 Bank Fees expense Dr 25 Cash Cr 25 Exercise 11.7 Bank reconciliation Sandy Poglase, owner of Sandy’s Sandwiches, wants a bank reconciliation statement to be prepared for the month ended 31 March 2019 using the following information: 1. Final balance in the Cash at Bank account in the ledger of Sandy’s Sandwiches (after all entries arising from the bank statement had been entered) was $13 204.26 Dr. 2. Balance shown by the bank statement at 31 March was $13 155.10 Cr. 3. Cheques recorded in the cash payments journal but not presented to the bank for payment were as follows. 4. A deposit of $1270.30 appears as a deposit in the cash receipts journal but had not been recorded by the bank at the date of the statement. Required (a) Prepare the bank reconciliation statement at 31 March, 2019. (LO3) (a) SANDY’S SANDWICHES Bank Reconciliation Statement as at 31 March 2019 Balance as per bank statement Cr $13 155.10 Add: Deposit not credited 1 270.30 14 425.40 Less: Cheques not presented Cheque No. 41 $339.50 Cheque No. 43 262.64 Cheque No. 46 423.90 Cheque No. 51 195.10 1 221.14 Cash at Bank balance Dr $13 204.26 Exercise 11.8 Bank reconciliation The following information relates to the cash position of Cathy Fraser, loan broker. 1. Cash at Bank account balance as at 30 June 2019: $45 451 debit. 2. Bank statement balance as at 30 June 2019: $47 512 credit. 3. 30 June receipts amounting to $1820 have not been deposited. 4. Cheques issued but not presented total $3468. 5. A $312 cheque was returned marked ‘dishonoured’. The cheque had been received from J. Simms, a new customer. 6. A $750 deposit made by L. Richards was incorrectly credited to the bank account of Cathy Fraser. 7. The bank statement shows that the bank has charged the business’s account with fees and charges of $25. 8. Items 4, 5, and 6 have not yet been entered in the cash journals. Required (a) Prepare a bank reconciliation at 30 June 2019, assuming that items 4, 5, and 6 are already recorded in cash journals. (LO3) (a) CATHY FRASER, LOAN BROKER Bank Reconciliation Statement as at 30 June 2019 Balance as per bank statement Cr $47 512 Add: Deposit not credited 1 820 49 332 Less: Cheques not presented 3 468 45 864 Less: Deposit incorrectly credited 750 Balance as per cash at bank account *$45 114 * Workings Cash at bank balance – 30 June 2019 $45 451 Less: Bank fees $25 Cheque not honoured by J. Simms 312 337 Adjusted cash at bank balance – 30 June 2019 $45 114 Exercise 11.9 Bank reconciliation – bank account overdrawn Cathy’s Consulting collected its latest bank statement on 1 July 2019. All entries appearing in the bank statement that had not been entered into the cash journals were entered therein. The cash journals were posted and the resulting balance of the Cash at Bank account in the ledger at 30 June was $30 273 Cr. The balance shown on the bank statement at 30 June was $34 033.24 Dr. The following items recorded in the cash journals did not appear in the bank statement. 1. A deposit made on 30 June of $5254.24. 2. Cheques written during June that had not been presented for payment were: A cheque written for $48 appeared incorrectly in the bank statement as $84. Required (a) Prepare the bank reconciliation statement at 30 June 2019. (LO3) (a) Note: the bank statement balance is Dr. (i.e. in overdraft). CATHY’S CONSULTING Bank Reconciliation Statement as at 30 June 2019 Balance as per bank statement Dr $34 033.24 Add: Cheques not presented Cheque No. 841 $650.6 Cheque No. 845 424.9 Cheque No. 846 454.5 1530 35 563.24 Less: Deposit not credited 5254.24 30 309 Less: Bank error 36.00 Cash at Bank balance Cr – 30 June 2019 $30 273 Exercise 11.10 Petty cash fund transactions During October, Hair Styles Pty Ltd experiences the following transactions in establishing a petty cash fund. Required (a) Journalise the entries in October that pertain to the petty cash fund. (LO4) (a) Oct. 1 Petty cash Dr 130 Cash at bank Cr 130 (To establish the petty cash account) Oct 31 Postage expense Dr 53.70 Office supplies Dr 36.50 Miscellaneous expense Dr 21.30 Freight-out Dr 8.80 Cash over and short Dr 1.40 Cash at bank Cr 121.70 (To reimburse the petty cash fund) Oct 31 Petty cash Dr 130 Cash at bank Cr 130 (To increase the petty cash fund) Exercise 11.11 Budgeted cash receipts from sales Hannah’s Handbags Pty Ltd is preparing a budget for the quarter ended 30 June 2019. Hannah estimates that approximately 70% of the handbag sales will be for cash and the rest will be on credit. Of the credit sales, 20% of the money will be received in the month of sale, 40% will be received the following month and 38% will be received 2 months after sale. Approximately 2% of credit sales are never collected and are written off. The actual sales for the previous quarter ended 31 March 2019 were as follows. The budgeted sales for the June quarter are as follows:. Required (a) Calculate budgeted cash receipts for the quarter ended 30 June 2019. (LO5) (a) HANNAH’S HANDBAGS PTY LTD Budgeted Cash Receipts from Sales April May June From cash sales in same month [1] $29 848.00 $30 765.00 $32 144.00 [70%  current month] From credit sales same month [2] 2 558 40 2 637.00 2 755.20 [30%  current month  20%) From preceding month’s sales [3] 4 821.60 5 116.80 5 274.00 [30%  40%  preceding month] From second preceding month [4] 3 963.78 4 580.52 4 860.96 [30%  38%  second preceding month] $41 191.78 $43 099.32 $45 034.14 [1] 70% of monthly sales are for cash. [2] 30% of monthly sales are for credit. 20% of monthly credit sales are collected in month of sale. [3] 40% of monthly credit sales are collected in the next month. [4] 38% of monthly credit sales are collected two months later. Exercise 11.12 Budgeted cash receipts from sales Non-GST version Kay’s Hardware Ltd’s budgeted monthly sales for January to June 2019 are given below. About 70% of the monthly sales are expected to be on credit. Approximately 60% of the credit sales are collected in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale; 5% are never collected and are written off. The budgeted gross sales by month are as follows. Required (a) Prepare a schedule of expected cash receipts from sales for April, May and June 2019. (LO5) (a) KAY’S HARDWARE LTD Budgeted Cash Receipts from Sales April May June From cash sales in same month [1] $37 500 $45 000 $39 000 [30%  current month] From credit sales same month [2] 52 500 63 000 54 600 [70%  current month  60%) From preceding month’s sales [3] 29 190 26 250 31 500 [70%  30%  preceding month] From second preceding month [4] 5 670 4 865 4 375 [70%  5%  second preceding month] $124 860 $139 115 $129 475 [1] 30% of monthly sales are for cash. [2] 70% of monthly sales are for credit. 60% of monthly credit sales are collected in month of sale. [3] 30% of monthly credit sales are collected in the next month. [4] 5% of monthly credit sales are collected two months later. Exercise 11.12 Budgeted cash receipts from sales GST version Kay’s Hardware Ltd’s budgeted monthly sales for January to June 2016 are given below. About 70% of the monthly sales are expected to be on credit. Approximately 60% of the credit sales are collected in the month of sale, 30% in the month following the sale, and 5% in the second month following the sale; 5% are never collected and are written off. The budgeted gross sales including GST of 10% by month are as follows. Required (a) Prepare a schedule of expected cash receipts from sales for April, May and June 2016 (LO5) (a) KAY’S HARDWARE LTD Budgeted Cash Receipts from Sales April May June From cash sales in same month [1] $37 500 $45 000 $39 000 [30%  current month] From credit sales same month [2] 52 500 63 000 54 600 [70%  current month  60%) From preceding month’s sales [3] 29 190 26 250 31 500 [70%  30%  preceding month] From second preceding month [4] 5 670 4 865 4 375 [70%  5%  second preceding month] $124 860 $139 115 $129 475 [1] 30% of monthly sales are for cash. [2] 70% of monthly sales are for credit. 60% of monthly credit sales are collected in month of sale. [3] 30% of monthly credit sales are collected in the next month. [4] 5% of monthly credit sales are collected two months later. Exercise 11.13 Budgeted cash payments for purchases The accountant for Schulz Ltd compiled the following figures in order to estimate budgeted cash payments for March and April 2019. Schulz Ltd uses the following assumptions when preparing budgets. The cost of sales is 60% of sales. The company pays for 60% of its purchases in the month after purchase, 30% in the second month, following the purchase and 10% in the third month following the purchase. No discounts are received. It is business policy to maintain a month-end inventory balance sufficient to meet the projected sales requirement for the following month. Required (a) Calculate the budgeted purchases for March and April 2019. Ignore GST. (b) Prepare a schedule of expected cash payments for purchases for March and April 2019. (LO5) (a) SCHULZ LTD Budgeted Purchases — March–April 2019 March April Required ending inventory $133 800 [1] $159 000 [3] Cost of sales 149 040 [2] 133 800 [4] Less beginning inventory (131 400) (133 800) [5] Required purchases $151 440 $159 000 (b) SCHULZ LTD Expected Cash Payments for Purchases — March–April 2019 March April 60% – previous month 95 220 [8] 90 864 [11] 30% – second preceding month 44 700 [7] 47 610 [10] 10% – third preceding month $15 600 [6] $14 900 [9] Cash payments $155 520 $153 374 [1] 223 000 (0.60) [2] 248 400 (0.60) [3] 265 000 (0.60) [4] 223 000 (0.60) [5] Ending inventory – March [6] 156 000  0.10 [7] 149 000  0.30 [8] 158 700  0.60 [9] 149 000  0.10 [10] 158 700  0.30 [11] 151 440  0.60 Exercise 11.14 Principles of cash management Bill has been running his local homewares store for 4 decades and has built up a large following of loyal customers. Bill believes that the key to developing a loyal customer base is to be generous in giving credit, to let customers pay when they have the money, and have plenty of stock so that customers don’t have to wait for him to order in what they want. Bill also prides himself in minimising his debts by paying his accounts as soon as he receives them — to do this he likes to keep at least $30 000 in his store’s cheque account. While you are studying at university, you work part-time for Bill and are aware of his approach to customers and bill paying. Bill has expressed his concern that he does not think he will have enough saved for when he retires in a few years. Required (a) Explain to Bill how the principles of cash management could help him to increase his savings so that he has more funds set aside for his retirement. (LO7) (a) Reduce collection time for accounts receivable: Although customers may appreciate Bill’s generous credit terms money owed by accounts receivable represents money that cannot be used by the business. The business needs to develop a collections policy to speed up the collection of money owing; that is, reduce the average collection time for receivables. However, management must ensure that the policy does not put customers off and lead to the loss of their custom. Postpone payments to accounts payable: Although Bill likes to minimise debt this will actually incur a cost to his business. There are due dates for all payables and payment should be delayed until those due dates. This allows the business to have use of funds which would otherwise be unavailable. This policy should take advantage of any discounts on offer, and ensure that the business’s credit rating is not threatened by late payment. Keep inventory levels to a minimum: Although there is a need for Bill to keep adequate levels of inventory to meet the demands of customers, inventories tie up cash and incur costs of storage and insurance. It is therefore sound cash management policy to keep inventory levels to a minimum. Invest surplus cash: Cash is intrinsically a non–productive asset. Good cash management will ensure that any cash surplus to immediate requirements is invested in appropriate ways to produce a return in the form of additional cash, or savings in cash outlays. With good cash budgeting Bill can reduce the amount of cash in his cheque account and still make all payments on time. Exercise 11.15 Analysing adequacy of cash flows Overton Pty Ltd is a private company that runs a coffee shop. Its owner, Carl, is concerned that the cash flows for the past year have deteriorated and has provided the following abridged versions of Overton Pty Ltd’s balance sheet and statement of cash flows. Required (a) Calculate the short-term cash flow adequacy ratio and the cash flow adequacy ratio for 2019 and 2020 and comment on Overton Pty Ltd’s ability to meet its current and overall obligations to creditors. (a) Short-term cash flow adequacy ratio: 2019 360 000 = 1.125 2020 220 000 = 0.58 320 000 380 000 Cash flow adequacy ratio 2019 360 000 = 0.10 2020 220 000 = 0.06 3 480 000 3 500 000 Overton Pty Ltd’s ability to meet its current and overall obligations to creditors has declined significantly in the last year. Problems Problem 11.16 Cash receipts Non-GST version During the week ended 12 September 2019 the daily sales for Calum’s Chocolaterie were as follows. Required (a) Record the transactions for the week ended 12 September in the cash receipt journal of Calum’s Chocolaterie, set out as below, and prepare a general journal entry for cash short and over if necessary. (LO2) (a) CALUM’S CHOCOLATERIE Cash Receipts Journal Date Account Debits Credits Cash at Bank Discount Allowed Sales Accounts Receivable Sep 8 Sales 2 948 2 948 9 Sales 2 886 2 886 10 Sales 3 266 3 266 11 Sales 3 630 3 630 12 Sales 3 526 3 526 Sep. 8 Cash Short and Over $572 Sales $572 (Cash shortage on cash sales) Sep. 9 Cash Short and Over 40 Sales 40 (Cash shortage on cash sales) Sep. 10 Sales 10 Cash Short and Over 10 (Cash over on cash sales) Sep. 12 Cash Short and Over 60 Sales 60 (Cash shortage on cash sales) [Sep 8] $3 696 – 176 = $3 520 cash sales – $2 948 banked = $572 cash shortage. [Sep 9] $3 036 – 110 = $2 926 cash sales – $2 886 banked = $40 cash shortage. [Sep 10] $3 388 – 132 = $3 256 cash sales – $3 266 banked = $10 cash over. [Sep 11] $3 784 – 154 = $3 630 cash sales – $3630 banked = $0 under or over. [Sep 12] $3 696 – 110 = $3 586 cash sales – $3 526 banked = $60 cash shortage. Problem 11.16 Cash receipts GST version During the week ended 12 September 2016 the daily sales for Calum’s Chocolaterie were as follows. Total sales (including GST) Sales on account Banked September 2016 Monday 8 Tuesday 9 Wednesday 10 Thursday 11 Friday 12 $ 3 696 3 036 3 388 3 784 3 696 $ 176 110 132 154 110 $ 2 948 2 886 3 266 3 630 3 526 Required (a) Record the transactions for the week ended 12 September in the Cash Receipt Journal of Calum’s Chocolaterie, set out as below, and prepare a general journal entry for cash short and over if necessary. (LO2) (a) CALUM’S CHOCOLATERIE Cash Receipts Journal Date Account Debits Credits Cash at Bank Discount Allowed Sales Accounts Receivable GST Payable Sep 8 Sales 2 948 2 680 [1] 268 9 Sales 2 886 2 624 [2] 262 10 Sales 3 266 2 969 [3] 297 11 Sales 3 630 3 300 [4] 330 12 Sales 3 526 3 205 [5] 321 Sep. 8 Cash Short and Over $572 Sales $520 GST Payable 52 (Cash shortage on cash sales) Sep. 9 Cash Short and Over 40 Sales 36 GST Payable 4 (Cash shortage on cash sales) Sep. 10 Sales 9 GST Payable 1 Cash Short and Over 10 (Cash over on cash sales) Sep. 12 Cash Short and Over 60 Sales 55 GST Payable 5 (Cash shortage on cash sales) [1] $3 696 – 176 = $3 520 cash sales – $2 948 banked = $572 cash shortage. $2 948 banked  10/11 = $2 680 cash sales ex GST [2] $3 036 – 110 = $2 926 cash sales – $2 886 banked = $40 cash shortage. $2 886 banked  10/11 = $2 624 cash sales ex GST [3] $3 388 – 132 = $3 256 cash sales – $3 266 banked = $10 cash over. $3 266 banked  10/11 = $2 969 cash sales ex GST [4] $3 784 – 154 = $3 630 cash sales – $3630 banked = $0 under or over. $3 630 banked  10/11 = $3 300 cash sales ex GST [5] $3 696 – 110 = $3 586 cash sales – $3 526 banked = $60 cash shortage. $3 526  10/11 = $3 205 cash sales ex GST Problem 11.17 Cash receipts Non-GST version The daily sales for Sunny Fruit & Vegetable Shop during the week ended 5 April 2019 were as follows. Required (a) Record the transactions for the week ended 5 April 2019 in the cash receipts journal of Sunny Fruit & Vegetables Shop, set out as below, and prepare a general journal entry for cash short and over if necessary. (LO2) (a) SUNNY FRUIT & VEGETABLES SHOP Cash Receipts Journal Date Account Debits Credits Cash at Bank Discount Allowed Sales Accounts Receivable Apr 1 Sales 4 104 4 104 2 Sales 4 156 4 156 3 Sales 4 356 4 356 4 Sales 4 350 4 350 5 Sales 5 084 5 084 Apr 1 Sales 34 Cash Short and Over 34 (Cash over on cash sales) Apr 2 Cash Short and Over 2 Sales 2 (Cash shortage on cash sales) Apr 4 Cash Short and Over 226 Sales 226 (Cash shortage on cash sales) Apr 5 Sales 68 Cash Short and Over 68 (Cash over on cash sales) [Apr 1] $4 912 – 842 = $4 070 cash sales - $4 104 banked = $34 cash over [Apr 2] $5 044 – 886 = $4 158 cash sales - $4 156 banked = $2 cash short [Apr 4] $5 286 – 930 = $4 356 cash sales - $4 356 banked = $0 [Apr 4] $5 568 – 992 = $4 576 cash sales - $4 350 = $226 cash short [Apr 5] $6 070 – 1 054 = $5 016 cash sales - $5 084 = $68 cash over Problem 11.17 Cash receipts GST version The daily sales for Sunny Fruit & Vegetable Shop during the week ended 5 April 2016 were as follows. Total sales (including GST) Sales on account Banked April 2016 Monday 1 Tuesday 2 Wednesday 3 Thursday 4 Friday 5 $ 4 912 5 044 5 286 5 568 6 070 $ 842 886 930 992 1 054 $ 4 104 4 156 4 356 4 350 5 084 Required (a) Record the transactions for the week ended 5 April 2016 in the cash receipts journal of Sunny Fruit & Vegetables Shop, set out as below, and prepare a general journal entry for cash short and over if necessary. (LO2) (a) SUNNY FRUIT & VEGETABLES SHOP Cash Receipts Journal Date Account Debits Credits Cash at Bank Discount Allowed Sales Accounts Receivable GST Payable Apr 1 Sales 4 104 3 734 [1] 370 2 Sales 4 156 3 778 [2] 378 3 Sales 4 356 3 960 [3] 396 4 Sales 4 350 3 934 [4] 416 5 Sales 5 084 4 628 [5] 456 Apr 1 Sales 34 Cash Short and Over 34 (Cash over on cash sales) Apr 2 Cash Short and Over 2 Sales 2 (Cash shortage on cash sales) Apr 4 Cash Short and Over 226 Sales 226 (Cash shortage on cash sales) Apr 5 Sales 68 Cash Short and Over 68 (Cash over on cash sales) [1] $4 912 – 842 = $4 070 cash sales, $4 070  10/11 = $3 700 cash sales ex GST [2] $5 044 – 886 = $4 158 cash sales, $4 158  10/11 = $3 780 cash sales ex GST [3] $5 286 – 930 = $4 356 cash sales, $4 356  10/11 = $3 960 cash sales ex GST [4] $5 568 – 992 = $4 576 cash sales, $4 576  10/11 = $4 160 cash sales ex GST [5] $6 070 – 1 054 = $5 010 cash sales, $5 010  10/11 = $4 560 cash sales ex GST Problem 11.18 Outstanding deposits and unpresented cheques The following information has been extracted from the cash records of Wheeler Ltd and shows four independent situations. Assume there were no direct bank debits or credits on the bank statement and that all outstanding deposits and unpresented cheques in one month appeared on the bank statement in the following month. 1. The total of outstanding deposits on the 30 April bank reconciliation statement was $1875. During May, the company made deposits of $40 200 to its bank account but the bank statement showed that only $39 840 was deposited during the month. 2. The total of unpresented cheques on the 30 April bank reconciliation statement was $1440. During May, the total of cheques issued was $29 175 but the bank statement showed that only $27 720 in cheques were presented during the month. 3. During July, deposits recorded on the bank statement totalled $46 200, but deposits according to the company’s records were $43 950 and outstanding deposits at 31 July were $4125. 4. In July, cash payments according to Wheeler Ltd’s records were $40 800, cheques presented and shown on the bank statement were $43 000 and unpresented cheques at 31 July were $3960. Required (a) In situation 1, what were the outstanding deposits at 31 May? (b) In situation 2, what were the unpresented cheques at 31 May? (c) In situation 3, what were the outstanding deposits at 30 June? (d) In situation 4, what were the unpresented cheques at 30 June? (LO3) (a) Outstanding deposits at 31 May is $2235. [$40 200 (cash deposits for May) – [$39 840 (deposits received by bank in May) – $1875 (from previous bank rec.)] (b) Unpresented cheques at 31 May is $2895. [$1440 unpresented from 30 April + $29 175 cheques issued in May – $27 720 presented in May]. (c) Outstanding deposits at 30 June is $6375. [$46 200 (total cash deposits received by bank in July) – $43 950 (cash deposits for July) + $4125 (cash deposits for July made but not recorded by the bank)]. (d) Unpresented cheques at 30 June is $6160. [$3960 unpresented at 31 July + $43 000 cheques presented in July – $40 800 cheques written in July]. Problem 11.19 Bank reconciliation Information about the cash position for Cavanagh’s Charter Tours Pty Ltd for the month of June is presented below. 1. The general ledger Cash at Bank account had a balance of $12 600 on 31 May. 2. The cash receipts journal showed total cash receipts of $45 796 for June. 3. The cash payments journal showed total cash payments of $49 152 for June. 4. The June bank statement reported a bank balance of $8066 on 30 June. 5. Outstanding cheques at the end of June were: no. 864, $120; no. 866, $146; and no. 870, $224. 6. Cash receipts of $2400 for 30 June were placed in the bank’s night safe on 30 June and were not included in the June bank statement. 7. Comparison of the presented cheques with the entries in the cash payments journal disclosed that cheque no. 842 for $708, for rent expense, had been wrongly recorded as $690. 8. Included on the bank statement were: • a total credit for $1468, indicating an electronic transfer of $1360 plus interest earned, which the bank had credited to the account • a dishonoured cheque written by Vinko Ltd, a client, for $654 • account and transaction fees, $64. Required (a) Set up cash receipts and cash payments journals with totals shown, enter the necessary adjustments, and complete the journals for June. (b) Post the journals in requirement A to the Cash at Bank account and balance the account. (c) Prepare a bank reconciliation statement as at 30 June. (d) What is the amount of cash that should be reported on the 30 June balance sheet? (LO3) (a) Cash Receipts Journal Cash Payments Journal Date Particulars Cash at Bank Date Particulars Cash at Bank Jun 30 Progress, total $45 796 Jun 30 Progress, total $49 152 Vinko Ltd Bank fees 64 (dishon. cheque) (654) Adj. to Chq. 842 Error 18 Electronic transfer 1 360 Interest revenue 108 $46 610 $49 234 (b) Cash at Bank 1/6 Balance b./d $12 600 30/6 CPJ $49 234 30/6 CRJ 46 610 Balance c/d 9 976 $59 210 $59 210 30/6 Balance b/d $9 976 (c) CAVANAGH’S CHARTER TOURS Bank Reconciliation Statement as at 30 June Balance as per bank statement Cr $8 066 Add: Outstanding deposit 2 400 $10 466 Less: Unpresented cheques: no. 864 $120 no. 866 146 no. 870 224 490 Balance as per Cash at Bank account Dr $9 976 (d) Cash at bank $9 976. Problem 11.20 Bank reconciliation Information about Bond Ltd’s cash position for the month of December is presented below. 1. The general ledger Cash at Bank account had a balance of $21 200 on 30 November. 2. The cash receipts journal showed total cash receipts of $292 704 for December. 3. The cash payments journal showed total cash payments of $265 092 for December. 4. The December bank statement reported a bank balance of $41 184 on 31 December. 5. Outstanding cheques at the end of December were: no. 3456, $1448; no. 3457, $84; no. 3460, $70 and no. 3462, $410. 6. Cash receipts of $10 090 for 31 December were placed in the bank’s night safe on 31 December and were not included in the December bank statement. 7. Comparison of the presented cheques with the entries in the cash payments journal disclosed that cheque no. 3442 for $846, for purchases expense, had been wrongly recorded as $864. 8. Included on the bank statement were: • a dishonoured cheque written by James Ltd, a client, for $136 • a credit for an electronic transfer from a customer of $644 and a credit for interest earned of $44 • account and transaction fees, $120. Required (a) Set up cash receipts and cash payments journals with totals shown above, enter the necessary adjustments, and complete the journals for December. (b) Post the journals in requirement A to the Cash at Bank account and balance the account. (c) Prepare a bank reconciliation statement at 31 December. (d) What is the amount of cash that should be reported on the 31 December balance sheet? (LO3) (a) Cash Receipts Journal Cash Payments Journal Date Particulars Cash at Bank Date Particulars Cash at Bank Dec 31 Progress, total $292 704 Dec 31 Progress, total $265 092 James Ltd Bank fees 120 (dishon. cheque) (136) Adj. to Chq. 3442 Error (18) Electronic transfer 644 Interest revenue 44 $293 256 $265 194 (b) Cash at Bank 1/12 Balance b./d $21 200 31/12 CPJ $265 194 31/12 CRJ 293 256 31/12 Balance c/d 49 262 $314 456 $314 456 31/12 Balance b/d $49 262 (c) BOND LTD Bank Reconciliation Statement as at 31 December Balance as per bank statement Cr $41 184 Add: Outstanding deposit 10 090 $51 274 Less: Unpresented cheques: no. 3456 $1 448 no. 3457 84 no. 3460 70 no. 3462 410 2 012 Balance as per Cash at Bank account Dr $49 262 (d) Cash at bank $49 262. Problem 11.21 Bank reconciliation The following information was available from records and the bank statement of Baldacchino Services Ltd, on 31 May. The date and the amount of each deposit as recorded during May were as follows. The number and amount of each cheque written during the month were recorded in the cash payments journal as follows. The bank statement obtained on 31 May is as shown below. On 31 May, the bank debited the account for $268.00 for a customer cheque (deposited in April) returned because of insufficient funds, and for $32.00 for account fees. On 31 May, the bank also credited the account for $1250.00 for the proceeds of a non-interest-bearing note receivable that it had collected on behalf of the company. Outstanding cheques at the last statement date, 30 April, were: no. 320 for $938.16, no. 328 for $242.00, and no. 326 for $813.00; outstanding deposits were $1437.60. The accountant discovered that cheque no. 336 (in payment for the purchase of office equipment) was correctly issued for $810.30 but incorrectly recorded in the cash payments journal as $801.30. The balance in the Cash at Bank account in the company’s records on 1 May was $16 998.54. Required (a) Complete the cash journals and post the totals to the Cash at Bank account. Show the Cash at Bank account (T-account form) after it had been balanced on 31 May. (b) Prepare a bank reconciliation statement as at 31 May. (LO3) (a) Cash journals: Before adjustments Adjustments Final Totals Receipts: $14 538.18 + 1 250 Note credited – $268 ret. $15 520.18 Payments: $14 800.62 + $9 Error adj. + $32.00 fees $14 841.62 Cash at Bank 1/5 Balance b./d $16 998.54 31/5 CPJ $14 841.62 31/5 CRJ 15 520.18 Balance c/d 17 677.10 $32 518.72 $32 518.72 1/6 Balance b/d $17 677.10 (b) BALDACCHINO SERVICES LTD Bank Reconciliation Statement as at 31 May Balance as per bank statement Cr $17 955.10 Add: Outstanding deposit 1 285.80 $19 240.90 Less: Unpresented cheques: no. 326 $813 no. 342 402.80 no. 345 348.00 1 563.80 Balance as per Cash at Bank account Dr $17 677.10 Problem 11.22 Bank reconciliation The bank reconciliation statement of Feng Zhen Liu on 21 June 2019 was as shown below. The cash receipts and cash payments journals for the week ending 28 June were as follows. Feng Zhen Liu’s bank statement at 28 June is shown below. Required (a) Complete, where necessary, the cash journals starting with the totals shown. (b) Open a Cash at Bank account with the correct balance on 21 June 2019 and post the totals of the cash journals. Balance the account at 28 June 2019. (c) Prepare a statement reconciling the Cash at Bank balance with the balance as shown by the bank statement as at 28 June 2019. (LO3) (a) Cash Receipts Journal Date Particulars Cash at Bank 2019 28/6 Progress, total $18 350 H Tsui (dishon. chq) (860) Interest revenue – bonds 840 $18 330 Cash Payments Journal Date Particulars Cash at Bank 2019 28/6 Progress, total $12 612 Bank payment to B Chang 1896 Bank fees 120 Bank fees 24 Bank fees 120 Interest on overdraft 844 $15 616 (b) Cash at Bank 2019 2019 21/6 Balance b/d $5 224 28/6 CRJ 18 330 28/6 CPJ $15 616 Balance c/d 2 510 $20 840 $20840 28/6 Balance b/d $ 2 510 (c) FENG ZHEN LIU Bank Reconciliation Statement as at 28 June 2019 Balance as per bank statement $654 Add: Outstanding deposit 4 350 $5 004 Less: Unpresented cheques: no. 178 $ 54 no. 183 864 no. 185 1 650 no. 186 914 no. 188 4 032 7 514 Balance as per Cash at Bank account Cr (OD) $2 510 Problem 11.23 Bank reconciliation The March 2019 bank statement of Tong’s Toyworld has just been received from its bankers. The following information is available. 1. The March bank column totals of the cash receipts and cash payments journals are, respectively, $21 546 and $24 108 before taking into account any of the items appearing on the bank statement. 2. The following items appear on the March bank statement but not in the cash journals for the same month. •A deposit on 1 March 2019 of $2100. •Cheque no. 253 for $248.20 and no. 257 for $417.40. •A debit of $300 to correct an error. •A dishonoured cheque (received from K. Matthews) for $294. •A deposit of $400 by owner Penelope Tong to her personal bank account held at the same bank. •Rent of $420 from a tenant who sublets space was deposited directly. •A standing transfer order of $350 for insurance premiums. •Interest on overdraft $48, account fees $30. 3. The following items appear in the cash journals but not on the bank statement: •Cheque no. 284 was stopped for payment because the amount written on the cheque was wrong. The cheque was given to NW Minerals Ltd for goods, $1500. •Cheque no. 288 for $632 and no. 293 for $342. •A deposit on 31 March for $1720. •A post-dated cheque no. 289 for $1000 given to Simpson Pty Ltd. 4. Additional information: •On 31 March 2019 the bank statement showed a debit balance of $2342.80. •Cheque no. 193 for $60 was drawn on 17 December 2017 as a donation to the Scouts Association (cheque is now a stale cheque). •Cheque no. 285 for $228 appears twice on the bank statement. •Cheque no. 296 was entered correctly as $360 in the cash journal but appeared in the bank statement as $560. 5. Bank reconciliation statement on 28 February 2019 is below. Required (a) Prepare and balance the Cash at Bank account in the general ledger for March 2019. (b) Prepare the bank reconciliation statement at 31 March 2019. (c) What conclusions can be drawn regarding control over cash payments after preparation of the reconciliation statement? (LO3) (a) Cash at Bank 2019 2019 Mar 31 Cash receipts $21 546 Feb 28 Balance $484 Rent revenue 420 Mar 31 Cash payments 24 108 Stale cheque 60 Dishon. cheque 294 Balance c/d 3 288 Insurance expense 350 Bank fees 30 Interest expense 48 $25 314 $25 314 Apr 1 Balance b/d $3 288 (b) TONG’S TOYWORLD Bank Reconciliation Statement as at 31 March 2019 Balance as per bank statement Dr $2 342.80 Add: Unpresented cheques no. 261 719.20 no. 288 632.00 no. 289 1 000.00 no. 293 342.00 Error deposit 400.00 3 093.20 5 436.00 Less: Outstanding deposit 1 720.00 Bank error – cheque 285 shown twice 228.00 Bank error – cheque 296 200.00 2 148.00 Balance as per cash at bank Cr $3 288.00 (c) The preparation of the bank reconciliation statement has: 1. Verified the accuracy of both the cash at bank account balance with the balance of the bank statement by reconciling the two independent records. 2. Identified errors in the business’s as well as the bank’s records. •The reconciliation process has confirmed that control of cash is adequate. Problem 11.24 Bank reconciliation As accountant for J. Stojanovic & Son, you are required to perform a bank reconciliation at the end of June 2019. The bank reconciliation statement for the previous month is set out below. Abridged cash receipts and cash payments journals before finalisation and posting are as follows. The following is a copy of the bank statement for the month of June 2019. Required (a) Complete the cash journals, amending or adding to them as necessary, and post the cash at bank totals to the Cash at Bank account. (b) Prepare the Cash at Bank account showing the final balance at 30 June 2019. (c) Prepare the bank reconciliation statement as at 30 June 2019. (LO3) (a) Date Account Cash at Bank 2019 Jun 2 R Wike 121.66 5 Sales 270.36 Langer Ltd 66.00 9 C Nunn 341.55 12 Sales 149.82 J Byron 93.55 S Banks 187.78 16 Sales 122.26 22 R Ricketts 27.50 Cowra Cannery Ltd 308.00 27 Sales 84.89 R Wike 154.00 Langer Ltd 53.40 28 R Ricketts – dishon cheque (27.50) 29 Sales 224.83 30 Sales 241.34 $2 419.44 Cash Payments Journal Date Account Chq no. Credits Cash at Bank 2019 Jun 2 Stationery 1010 35.75 3 Royal Ltd 1011 328.13 5 Advertising 1012 28.05 6 J Brown Ltd 1013 54.10 Wages and Salaries 1014 302.50 Petty Cash 1015 27.50 9 Riley and Sons 1016 123.36 11 Vehicle expenses 1017 36.08 Wages and salaries 1018 302.50 13 Travel – sales staff 1019 16.50 16 Sales commission 1020 33.82 17 Royal Ltd 1021 105.51 18 Wages and Salaries 1022 302.50 20 Electricity expense 1023 118.59 25 Wages and salaries 1024 297.00 26 R Banco 1025 42.15 Austral Motors 1026 46.86 Donation – Red Cross 1027 11.00 28 Riley and Sons 1028 85.14 30 Freight inwards 1029 24.25 P Minecello 1030 90.82 2412.11 30 Error in cheque 1024 5.50 A/c and Transaction Fees 22.50 $2 440.11 (b) Cash at Bank 2019 2019 June 1 Balance 413.49 June 30 CPJ 2 440.11 June 30 CRJ 2 419.44 June 30 Balance c/d 392.82 2 832.93 2 832.93 July 1 Balance b/d 392.82 (c) J. STOJANOVIC & SON Bank Reconciliation Statement as at 30 June 2019 Balance as per bank statement Cr $362.69 Add: Outstanding deposits 241.34 604.03 Less: Unpresented cheques 1027 $11.00 1028 85.14 1029 24.25 1030 90.82 211.21 Balance as per cash at bank Dr $392.82 Problem 11.25 Bank reconciliation As the accountant for Sam & Ben’s Ice Cream you are required to perform a bank reconciliation at the end of June 2019. The bank reconciliation statement for the previous month is set out below. Abridged cash receipts and cash payments journals before finalisation and posting are as follows. The following is a copy of the bank statement for the month of June 2019. Required (a) Complete the cash journals, amending or adding to them as necessary, and post the cash at bank totals to the Cash at Bank account. (b) Prepare the Cash at Bank account showing the final balance at 30 June 2019. (c) Prepare the bank reconciliation statement as at 30 June 2019. (LO3) (a) Cash Receipts Journal Date Account Cash at Bank 2019 June 1 Sales 599.54 2 M. Fraser 56.98 Sales 515.90 4 P. Bartel 64.00 Sales 602.78 5 Sales 548.70 8 C. Mason 98.00 I. Ellis 45.68 Sales 555.60 9 Sales 525.00 12 J. Rasheed 34.65 Sales 502.40 15 Sales 519.56 17 J. Botten 35.40 J. Greenhalgh 22.20 Sales 440.86 19 J. Rasheed – dishonoured cheque (34.65) Sales 498.90 22 Sales 548.65 26 M Fraser 34.50 Sales 536.00 29 Sales 506.80 30 Sales 480.65 7 738.10 Error Sales June 9 (5.00) $7 733.10 Cash Payments Journal Date Account Cheque no. Cash at Bank 2019 June 1 Love Ltd 4582 345.67 2 Bishop Ltd 4583 189.60 4 Wages and salaries 4584 880.00 5 Petty cash 4585 54.65 D. Elliot 4586 125.60 8 Taylor & Sons 4587 54.90 9 PB Petrol Bowsers 4588 95.00 Accommodation 4589 235.40 11 G. Warner & Partner 4590 584.30 12 Electricity Ltd 4591 720.89 15 Big Gas Corporation 4592 220.54 Telephone Company 4593 325.90 17 Advertising 4594 220.00 18 Wages and salaries 4595 880.00 19 Donation – Sallies Army 4596 50.00 22 Freight 4597 80.00 24 Purchases 4598 2 080.90 25 PB Petrol Bowsers 4599 56.80 26 S Bartel 4600 125.00 29 Petty Cash 4601 42.05 30 K. Turner 4602 38.70 7 405.90 Error cheque 4594 10.00 Account Fees 60.00 $7 475.90 (b) Cash at Bank 2019 2019 June 1 Balance 5 577.67 June 30 CPJ 7 475.90 June 30 CRJ 7 733.10 June 30 Balance c/d 5 834.87 13 310.77 13 310.77 July 1 Balance b/d 5 834.87 (c) SAM & BEN’S ICE CREAM Bank Reconciliation Statement as at 30 June 2019 Balance as per bank statement Cr $5 585.27 Add: Outstanding deposits 480.65 6 065.92 Less: Unpresented cheques 4578 $67.35 4600 125.00 4602 38.70 231.05 Balance as per cash at bank Dr $5 834.87 Problem 11.26 Petty cash transactions Non-GST version The following transactions and events relate to the petty cash fund (imprest amount $200) of Honshu Ltd. 1. Paid $27.50 delivery charges on inventory purchased. 2. Paid $44 (part payment) for the repair of computer scanner. 3. Purchased office supplies, $31.90. 4. Paid $20 for postage. 5. Paid $16.50 for newspapers. 6. The petty cashier exchanged the vouchers in the petty cash box for a cheque to reimburse the fund and to increase the size of the fund from $200 to $250. 7. Paid Post Express $44 for delivery of urgently needed supplies. 8. Paid $33 for office window cleaning. 9. Reimbursed an employee $17.60 for taxi fares for business-related trip. 10. Paid $12.75 for coffee and supplies for the staffroom. 11. Refunded $29.70 for petrol purchased by driver for business delivery vehicle. 12. Paid $33 for dry-cleaning an office curtain. Required (a) Show the entries in the cash payments journal to: i. establish the petty cash fund for the amount of $200 (cheque no. 0137) ii. reimburse the fund after transaction (5) and increase its size to $250 with cheque no. 0146 (delivery charges and express delivery payments are to be debited to Freight Inwards; expenses unrelated to motor vehicles, office supplies and postage should be debited to Sundry Expenses). iii. reimburse the fund after transaction (12) (cheque no. 0155). (LO4) (a) Cash Payments Journal Account Cheque No. Post Ref. Accounts Payable GST Receivable Other Discount Received Cash at Bank i. Petty Cash 0137 200.00 200.00 ii. Freight In 2.50 25.00 Office Supplies Exp. 2.90 29.00 Postage Expense 20.00 Sundry Expenses 5.50 55.00 Petty Cash 0146 10.90 129.00 50.00 189.90 iii. Freight In 4.00 40.00 Motor Vehicle Exp. 2.70 27.00 Sundry Expenses 8.76 87.60 Petty Cash 0155 15.46 154.60 170.06 Problem 11.26 Petty cash transactions GST version The following transactions and events relate to the petty cash fund (imprest amount $200) of Honshu Ltd (all amounts include GST). 1. Paid $27.50 delivery charges on inventory purchased. 2. Paid $44 (part payment) for the repair of computer scanner. 3. Purchased office supplies, $31.90. 4. Paid $20 for postage (GST-free). 5. Paid $16.50 for newspapers. 6. The petty cashier exchanged the vouchers in the petty cash box for a cheque to reimburse the fund and to increase the size of the fund from $200 to $250. 7. Paid Post Express $44 for delivery of urgently needed supplies. 8. Paid $33 for office window cleaning. 9. Reimbursed an employee $17.60 for taxi fares for business-related trip. 10. Paid $12.75 for coffee and supplies for the staffroom. 11. Refunded $29.70 for petrol purchased by driver for business delivery vehicle. 12. Paid $33 for dry-cleaning an office curtain. Required Note: GST can be ignored in this question by treating all amounts as including GST. (a) Show the entries in the cash payments journal to: i. establish the petty cash fund for the amount of $200 (cheque no. 0137) ii. reimburse the fund after transaction (5) and increase its size to $250 with cheque no. 0146 (delivery charges and express delivery payments are to be debited to Freight Inwards; expenses unrelated to motor vehicles, office supplies and postage should be debited to Sundry Expenses.) iii. reimburse the fund after transaction (12) (cheque no. 0155). (LO4) (a) Cash Payments Journal Account Cheque No. Post Ref. Accounts Payable GST Receivable Other Discount Received Cash at Bank i. Petty Cash 0137 200.00 200.00 ii. Freight In 2.50 25.00 Office Supplies Exp. 2.90 29.00 Postage Expense 20.00 Sundry Expenses 5.50 55.00 Petty Cash 0146 10.90 129.00 50.00 189.90 iii. Freight In 4.00 40.00 Motor Vehicle Exp. 2.70 27.00 Sundry Expenses 8.76 87.60 Petty Cash 0155 15.46 154.60 170.06 Problem 11.27 Cash budget Brockbank Builders Ltd is preparing a cash budget for May and June of 2019. Past records reveal that 20% of all credit sales are collected during the month of sale, 60% in the month following the sale, 10% in the second month following the sale and 10% in the third month following the sale. The company pays for 75% of purchases in the month after purchase, and the balance is paid in the month following that. Selling expenses amount to $6600 per month plus 15% of monthly sales. Administrative expenses are estimated to be $13 200 per month, which includes $4800 of depreciation expense. Finance expenses are $1200 per month. All selling and distribution, administrative, and finance and other expenses (except depreciation) are paid for when incurred. It is planned to purchase equipment during May 2019 at a cost of $6600. A $9000 loan payable will be repaid during June 2019. The interest due at maturity will be $1650. The company’s expected Cash at Bank balance at 1 May 2019 is $13 500. Estimated sales and purchases data are as follows. Required (a) Ignoring GST, prepare a cash budget for May and June 2019, by month and in total. (LO5) (a) Cash Budget for May and June 2019 May June Total Beginning cash at bank balance $13 500 $11 125 $13 500 Expected cash collections: 3rd preceding month (10%) 7 500 6 600 14 100 2nd preceding month (10%) 6 600 8 800 15 400 1st preceding month (60%) 52 800 36 300 89 100 current month (20%) 12 100 14 300 26 400 Total expected cash flows 79 000 66 000 145 000 Total cash available 92 500 77 175 158 500 Expected cash payments: Purchases: 1st preceding month (75%) 41 250 20 625 61 875 2nd preceding month (25%) 8 250 13 750 22 000 Selling expenses 15 675 [1] 17 325 [3] 32 950 Administrative expenses 8 400 [2] 8 400 [2] 16 800 Financial expenses 1 200 1 200 2 400 Equipment purchase 6 600 — 6 600 Loan payable and interest — 10 650 10 650 Total cash payments 81 375 71 950 153 275 Ending cash at bank balance 11 125 5 175 $5 175 [1] $6600 + 0.15 ($60 500) = $6600 + $9025 = $15 625 [2] $13 200 – $4800 = $8400 [3] $6600 + 0.15 ($71 500) = $6600 + $10 725 = $17 325 Problem 11.28 Bank reconciliation and internal control The owner of Smith Hardware has completed a bank reconciliation and cannot get the bank’s records to agree with the cash records of his business. He concludes that internal control has somehow failed and cash is being misappropriated. He asks you to check the records and confirm or otherwise his suspicions. He supplies the reconciliation statement at the end of last month, his cash records, and the most recent bank statement. Last month’s reconciliation statement is presented below. The total of the cash receipts journal for June is $64 776.30 and the total of the cash payments journal is $63 265.60. The current bank statement shows that cheques presented and paid amount to $59 725.10, and total deposits amount to $64 780.60. There are also additional debits on the statement for a dishonoured cheque for $210, and account fees for $20. An examination of the records reveals that all reconciling items at 31 May 2019 appear in the bank statement for June, unpresented cheques at 30 June total $7154.40, and the 30 June deposit of $1950.40 has not been credited by the bank. Your check of the cash journals reveals that addition errors have been made by the clerks responsible. Receipts should total $65 766.30 and payments should total $63 185.60. Required (a) Recalculate and present the general ledger Cash at Bank account balance as it should be at 30 June 2019. (b) Prepare the bank reconciliation statement at 30 June 2019. (c) Advise the owner of Smith Hardware whether cash is being misappropriated, assuming that the records maintained by the bank are accurate. (LO3) (a) Cash at Bank 2019 2019 May 31 Balance $5 329.70 June 30 CPJ $63 205.60 June 30 CRJ [$64 776.30 – $210 ret. chq. + $990 add. error] 65 556.30 [$63 265.60 + $20 account fee – $80 add. error] June 30 Balance c/d 7 680.40 $70 886.00 $70 886.00 June 30 Balance b/d $7 680.40 (b) SMITH HARDWARE Bank Reconciliation Statement as at 30 June 2019 Balance as per previous bank statement (31 May) $4 328.90 Add: Deposits to bank in June 64 780.60 69 109.50 Less: Total cheques presented and paid $59 725.10 Dishonoured cheque 210.00 Bank fees 20.00 59 955.10 Balance as per Bank Statement 9 154.40 Add: Outstanding deposit 1 950.40 11 104.80 Less: Unpresented cheques 7 154.40 Balance as per Cash at Bank account $3 950.40 (c) The Cash at Bank balance as at 30 June 2019 should be $7680.40 The Cash at Bank balance as per the Bank Reconciliation is $3950.40 There is a discrepancy of $3730. It appears that all the cash receipts reported in the cash receipts journal had not been deposited in the bank. This would suggest some breakdown in the internal control procedures over cash; that is, a deposit has not been banked or lost through theft. Assuming the bank records are accurate, the owner must investigate the shortfall and take action to establish better control over the asset cash. Problem 11.29 Cash budget Prickly Pear Ltd wishes to prepare a cash budget for the first quarter of 2019. In response to your request for past and projected financial data, you receive the following: Of sales, 70% of sales are on credit, with 65% collected during the month of sale, 30% collected during the month following the sale, and 5% during the second month after the sale; 30% of the projected sales are for cash. Ignore GST. Since all suppliers require substantial lead time, purchases of inventory are made 2 months in advance of sale and are paid for 1 month in advance of sale. The cost of sales is 50% of the selling price. Other regular monthly cash payments (ignoring GST) are as follows. A special advertising campaign is planned that will require a cash payment of $16 650 on 1 March. An interim dividend of $13 500 is planned for payment on 16 February. On 1 January 2019, there was an outstanding bank debt of $90 000 that must be paid off in 5 months by making principal repayments of $18 000 at the end of each month. Interest is payable at the end of each month at 1% per month on the balance outstanding at the beginning of the month. The cash balance on 1 January is estimated to be $112 500. Required (a) Prepare the cash budget of Prickly Pear Ltd covering January, February and March 2019. (LO5) (a) Cash Budget For three months ending 31 March 2019 Jan. Feb. Mar. Cash at bank – beginning $112 500 $126 250 ($83 255) Estimated collections: Cash sales [1] 59 400 57 000 86 400 Credit sales [6] 126 000 133 175 177 870 Total for month $185 400 $190 175 $264 270 Total cash available $297 900 $316 425 $347 525 Expected cash payments: Purchases [5] 95 000 144 000 108 000 Sales commissions on credit sales 13 860 13 300 20 160 Salaries 6 600 6 600 6 600 Administrative expenses 14 850 14 850 14 850 Insurance 16 500 16 500 16 500 Delivery expenses (3% total sales) 5 940 5 700 8 640 Advertising — — 16 650 Interim dividend — 13 500 — Loan repayments 18 000 18 000 18 000 Interest payments 900 720 540 Total expected payments $171 650 $233 170 $209 940 Cash balance – end $126 250 $83 255 $137 585 PRICKLY PEAR LTD Workings Sales (ex GST) Nov. Dec. Jan. Feb. Mar. Apr. [1] Cash sales 30% $43 200 $44 100 $59 400 $57 000 $86 400 $64 800 [2] Credit sales 70% 100 800 102 900 138 600 133 000 201 600 151 200 [3] TOTAL $144 000 $147 000 $198 000 $190 000 $288 000 $216 000 Cost of sales (50% of total sales) [3] [4] $72 000 $73 500 $99 000 $95 000 $144 000 $108 000 Estimated payments for purchases (excluding GST) [5] Next month’s purchases $95 000 $144 000 $108 000 Estimated collections from credit sales (includes GST) Current month’s sales 65% $90 090 $86 450 $131 040 Previous month’s sales 30% 30 870 41 580 39 900 2nd previous months sales 5% 5 040 5 145 6 930 [6] TOTAL $126 000 $133 175 $177 870 Problem 11.30 Cash budget Non-GST version Ken Dunlop of Dunlop’s Dishes wishes to prepare a cash budget for the 6 months ending 30 June 2020 so he can arrange for overdraft drawings facilities, if required. The following information is available. 1. The business has consistently marked up its goods so as to realise a gross margin of 40% on sales. Policy is to have sufficient inventory on hand at the end of each month to cover the next 2 months sales. This was the situation at 31 December 2019, when the inventory was $160 500 (cost). 2. All sales are on credit. Debtors pay their accounts 50% in the month of sale and 50% in the following month. 3. All creditors are paid in the month following purchase. 4. The bank overdraft on 31 December 2019 was $10 800. Purchases in December of goods for resale amounted to $86 400. 5. Estimated quarterly payments to the ATO are to be made in January for $14 000 and in April for $6900. 6. Sales in November and December 2019 were $72 000 and $86 000 respectively. A growth of $14 000 per month is expected over the next 6 months. (GST has yet to be added to these amounts.) 7. The estimated payments for expenses are: •Salaries $10 800 per month •Administration $3300 per month •Rent $19 800 for the year to 31 December 2019; this is to be paid as a lump sum in January 2020 8. On 1 January 2020, a new machine costing $90 000 is to be purchased and paid for. It is expected that this machine will last 10 years and have no resale value. All existing plant was scrapped during December 2019. Required (a) Prepare a separate cash budget for each of the 6 months, January to June 2020. (b) Prepare the projected income statement for the 6 months ending 30 June 2020. (c) Explain the reasons for the difference between the projected profitability and the projected liquidity for the period. (LO5) (a) DUNLOP’S DISHES CASH BUDGET For six months ending 30 June 2020 Jan Feb Mar Apr May June Total Cash at bank – beginning –$10 800 –$141 800 –$87 370 –$62 090 –$37 550 $50 –$10 800 Estimated collections Sales 102 300 117 700 133 100 148 500 163 900 179 300 844 800 Total for month $102 300 $117 700 $133 100 $148 500 $163 900 $179 300 $844 800 Total cash available $91 500 –$24 100 $45 730 $86 410 $126 350 $179 350 $834 000 Expected cash payments Purchases $86 400 $49 170 $93 720 $102 960 $112 200 $121 440 $565 890 ATO for GST payable 14 000 6 900 20 900 Salaries 10 800 10 800 10 800 10 800 10 800 10 800 64 800 Admin. expenses 3 300 3 300 3 300 3 300 3 300 3 300 19 800 Rent 19 800 19 800 Equipment purchase 99 000 99 000 Total expected payments $233 300 $63 270 $107 820 $123 960 $126 300 $135 540 $790 190 Cash balance – end –$141 800 –$87 370 –$62 090 $37 550 $50 $43 810 $43 810 (b) DUNLOP’S DISHES Projected Income Statement for the six months ended 30 June 2020 SALES $810 000 Less: Cost of sales Inventory, 1 January 2020 $160 500 Purchases 554 700 Goods available for sale 715 200 Less Inventory 30 June 2020 229 200 486 000 GROSS PROFIT (40% of $810 000) $324 000 Less Expenses Salaries 64 800 Administration 18 000 Rent (1/2  $18 000) 9 000 Depreciation (1/2  $90 000/10) 4 500 96 300 PROFIT $227 700 (c) Projected profit is determined using accrual accounting. Cash flow involves a comparison of all cash inflows and outflows occurring in the period. Cash outflows will include revenue expenditure and capital expenditure but only the relevant revenue expenditure items and a depreciation charge relevant to the capital expenditure will be included as expenses when determining the profit. Sales/purchases/cost of sales: Sales, purchases and changes in inventory levels (all ex. GST), are included in the calculation of expected profit. The cash flow statement reflects all cash inflows from debtors and all cash outflows to creditors irrespective of the month in which the sales or purchases took place and include GST. Rent: The full amount plus GST is included as an outflow of cash. Only half the amount of rent paid excluding the GST component is applicable as an expense. Capital expenditure: Plant represents a cash outflow cost plus GST, but affects profit only to the extent of a relevant depreciation charge which excludes GST. Cash problems have been caused by purchasing equipment, low profit margins, differences in credit terms between debtors and creditors and volumes of inventory held, and lack of cash sales. Jan Feb Mar Apr May June July Aug Total Jan–June Sales (ex GST) [1] 100 000 114 000 128 000 142 000 156 000 170 000 184 000 198 000 810 000 Sales (plus GST) [2] 110 000 125 400 140 800 156 200 171 600 187 000 202 400 217 800 891 000 Cost of Sales 60% of Sales [1] [3] 60 000 68 400 76 800 85 200 93 600 102 000 110 400 118 800 486 000 Required Ending Inventory (Next two months; Sales ex GST at Cost) [4] 145 200 162 000 178 800 195 600 212 400 229 200 Required Goods Available for Sale [3] + [4] [5] 205 200 230 400 255 600 280 800 306 000 331 200 Opening Inventory [6] 160 500* 145 200 162 000 178 800 195 600 212 400 Required Purchases (ex GST) [5] – [6] [7] 44 700 85 200 93 600 102 000 110 400 118 800 554 700 Purchases (plus GST) [8] 49 170 93 720 102 960 112 200 121 440 130 680 645 480 Estimated Receipts from Customers [9] Current month sales 50% 55 000 62 700 70 400 78 100 85 800 93 500 Previous month sales 50% 47 300 55 000 62 700 70 400 78 100 85 800 TOTAL 102 300 117 700 133 100 148 500 163 900 179 300 844 800 Estimated Payments to Suppliers [10] Previous Month 86 400** 49 170 93 720 102 960 112 200 121 440 565 890 * Represents the actual opening inventory carried over from 31 December 2019. ** Actual purchases for month of December. Problem 11.30 Cash budget GST version Ken Dunlop of Dunlop’s Dishes wishes to prepare a cash budget for the 6 months ending 30 June 2017 so he can arrange for overdraft drawings facilities, if required. The following information is available. 1. The business has consistently marked up its goods so as to realise a gross margin of 40% on sales (excluding GST). Policy is to have sufficient inventory on hand at the end of each month to cover the next 2 months sales. This was the situation at 31 December 2016, when the inventory was $160 500 (cost). 2. All sales are on credit and are subject to GST. Debtors pay their accounts 50% in the month of sale and 50% in the following month. 3. All creditors are paid in the month following purchase. 4. The bank overdraft on 31 December 2016 was $10 800. Purchases in December of goods for resale amounted to $86 400. 5. Estimated quarterly payments of GST to the ATO are to be made in January for $14 000 and in April for $6900. 6. Sales in November and December 2016 were $72 000 and $86 000 respectively. A growth of $14 000 per month (before GST) is expected over the next 6 months. (GST has yet to be added to these amounts.) 7. The estimated payments for expenses are: •Salaries $10 800 per month (GST-free) •Administration $3300 per month (includes GST) •Rent $19 800 (including GST) for the year to 31 December 2016; this is to be paid as a lump sum in January 2017. 8. On 1 January 2017, a new machine costing $90 000 plus GST is to be purchased and paid for. It is expected that this machine will last 10 years and have no resale value. All existing plant was scrapped during December 2016. Required (a) Prepare a separate cash budget for each of the 6 months, January to June 2017. (b) Prepare the projected income statement for the 6 months ending 30 June 2017. (c) Explain the reasons for the difference between the projected profitability and the projected liquidity for the period. (LO5) (a) DUNLOP’S DISHES CASH BUDGET For six months ending 30 June 2017 Jan Feb Mar Apr May June Total Cash at bank – beginning –$10 800 –$141 800 –$87 370 –$62 090 –$37 550 $50 –$10 800 Estimated collections Sales 102 300 117 700 133 100 148 500 163 900 179 300 844 800 Total for month $102 300 $117 700 $133 100 $148 500 $163 900 $179 300 $844 800 Total cash available $91 500 –$24 100 $45 730 $86 410 $126 350 $179 350 $834 000 Expected cash payments Purchases $86 400 $49 170 $93 720 $102 960 $112 200 $121 440 $565 890 ATO for GST payable 14 000 6 900 20 900 Salaries 10 800 10 800 10 800 10 800 10 800 10 800 64 800 Admin. expenses 3 300 3 300 3 300 3 300 3 300 3 300 19 800 Rent 19 800 19 800 Equipment purchase 99 000 99 000 Total expected payments $233 300 $63 270 $107 820 $123 960 $126 300 $135 540 $790 190 Cash balance – end –$141 800 –$87 370 –$62 090 $37 550 $50 $43 810 $43 810 (b) DUNLOP’S DISHES Projected Income Statement for the six months ended 30 June 2017 SALES $810 000 Less: Cost of sales Inventory, 1 January 2017 $160 500 Purchases 554 700 Goods available for sale 715 200 Less Inventory 30 June 2017 229 200 486 000 GROSS PROFIT (40% of $810 000) $324 000 Less Expenses Salaries 64 800 Administration 18 000 Rent (1/2  $18 000) 9 000 Depreciation (1/2  $90 000/10) 4 500 96 300 PROFIT $227 700 (c) Projected profit is determined using accrual accounting. Cash flow involves a comparison of all cash inflows and outflows occurring in the period. Cash outflows will include revenue expenditure and capital expenditure but only the relevant revenue expenditure items and a depreciation charge relevant to the capital expenditure will be included as expenses when determining the profit. Sales/purchases/cost of sales: Sales, purchases and changes in inventory levels (all ex. GST), are included in the calculation of expected profit. The cash flow statement reflects all cash inflows from debtors and all cash outflows to creditors irrespective of the month in which the sales or purchases took place and include GST. Rent: The full amount plus GST is included as an outflow of cash. Only half the amount of rent paid excluding the GST component is applicable as an expense. Capital expenditure: Plant represents a cash outflow cost plus GST, but affects profit only to the extent of a relevant depreciation charge which excludes GST. Cash problems have been caused by purchasing equipment, low profit margins, differences in credit terms between debtors and creditors and volumes of inventory held, and lack of cash sales. Jan Feb Mar Apr May June July Aug Total Jan–June Sales (ex GST) [1] 100 000 114 000 128 000 142 000 156 000 170 000 184 000 198 000 810 000 Sales (plus GST) [2] 110 000 125 400 140 800 156 200 171 600 187 000 202 400 217 800 891 000 Cost of Sales 60% of Sales [1] [3] 60 000 68 400 76 800 85 200 93 600 102 000 110 400 118 800 486 000 Required Ending Inventory (Next two months; Sales ex GST at Cost) [4] 145 200 162 000 178 800 195 600 212 400 229 200 Required Goods Available for Sale [3] + [4] [5] 205 200 230 400 255 600 280 800 306 000 331 200 Opening Inventory [6] 160 500* 145 200 162 000 178 800 195 600 212 400 Required Purchases (ex GST) [5] – [6] [7] 44 700 85 200 93 600 102 000 110 400 118 800 554 700 Purchases (plus GST) [8] 49 170 93 720 102 960 112 200 121 440 130 680 645 480 Estimated Receipts from Customers [9] Current month sales 50% 55 000 62 700 70 400 78 100 85 800 93 500 Previous month sales 50% 47 300 55 000 62 700 70 400 78 100 85 800 TOTAL 102 300 117 700 133 100 148 500 163 900 179 300 844 800 Estimated Payments to Suppliers [10] Previous Month 86 400** 49 170 93 720 102 960 112 200 121 440 565 890 * Represents the actual opening inventory carried over from 31 December 2016. ** Actual purchases for month of December. Case studies Decision analysis Improving cash flows for Exquisite Hotels Pty Ltd Your friend Ninette Nobis was a tourism management student when you were at university together and is now a manager of an upmarket hotel in the Exquisite Hotels chain. Because of the impact of an economic downturn on her customers, Ninette is concerned about the cash flow of the hotel she manages. Ninette needs advice on how to improve the business’s cash flow. Required (a) How would you help Ninette decide on ways to improve the cash flow of the hotel? Ideas that may help Ninette improve the cash flow of Exquisite Hotels Pty Ltd include: • good cash flow management to reduce the gap between payment to suppliers and receipt of cash from customers • prepare cash flow projections by month, quarter and year • predict what cash will be received from whom and when, these may not be accurate as they are predictions but at least they give Ninette a base to work from • work out when payments such as rent, salaries, equipment and advertising will be made • offer discounts to customers who pay cash or who pay quickly • issue invoices or accounts promptly • follow up late payments as soon as possible, even within a few days, this will require clear records of when each customer is due to pay • ask new customers for a deposit when booking • avoid slow paying customers • take full advantage of payment terms by using electronic banking to pay on the last day the account is due • try to reduce costs • organise a line of credit with the bank to avoid running out of cash • talk to suppliers to see if they will extend terms of payment. Critical thinking Internal controls over cash receipts The Leaning Tower of Metropolis is a tall structure attached to the top of the highest building in the city with a lift in the centre to take paying customers to a viewing platform at the top of the tower. On payment of the appropriate fee for an adult, concession or child customer, the cashier in the ticket booth enters the details into the computer system, which then prints out a cardboard ticket. The ticket includes the price paid and whether the customer is an adult, concession or child. The customer then takes the ticket to the attendant who stands ouside the lift. The attendant collects the tickets and is supposed to tear them in half and put them in a bin. At the end of the day, the manager counts the money in the ticket booth and compares this with what has been entered into the computer to produce the tickets. At the end of each month the accountant compares the deposits per the bank statement with the daily takings compiled by the computer system. Required (a) What are the most important internal control principles and procedures being used by the Leaning Tower of Metropolis to ensure control over cash receipts? Does the Tower have an adequate system of internal control? (b) Is it possible for the ticket seller and the lift attendant to misappropriate cash through collusion? If so, how could the system be improved to overcome this possibility? (a) The following internal control principles and procedures over cash receipts evident in the case of the Leaning Tower of Metropolis are detailed in terms of the general internal control concepts set out in the text. Clearly established lines of authority: Ticket sellers are responsible for issuing tickets and receiving cash. The manager should be the only other person to handle cash before it is banked. The accountant is responsible for verification of documentation for ticket sales and cash against the independent bank records, and necessary records. Separation of record-keeping and custodianship: Custodianship of cash resides with the ticket sellers and the manager until banked. Reconciliation and banking documentation is performed by the manager not the person handling cash, and accounting records made only by the business accountant. Division of responsibility: Same as set out above with the addition that an attendant is responsible for ensuring that all persons admitted have an appropriate ticket, which is torn into two and one stub placed in the bin. It is assumed that a number of attendants are used as is the case with ticket sellers. Mechanical and electronic devices: In use is a mechanical ticket dispensing machine, with rolls of tickets for the various classes of patrons. It is installed and reconciled by the manager. System of internal audit: Insufficient detail given. Physical controls: A secured ticket seller area is presumably used. No details are given of physical controls. Other controls: Included are rotation of ticket sellers and attendants (not specified but assumed) and supervision by manager on an ad hoc basis. The system of internal control over cash can be improved with prenumbered tickets being used. The manager can lock the tickets into a dispensing machine at the start of each day. At the end of the day the manager can then check the number of tickets issued from the dispensing machine with the number registered on the computer and can compare this with the cash. The attendant can be required to give half the ticket back to the customer and put the other half (with the prenumbering on it) into a locked box that only the manager or accountant can access. (b) Without supervision, the ticket seller can issue concessional tickets for normal fare patrons. Patrons could be told that correct tickets are not available, and the cash fare difference retained and shared with the attendant. The co-operation of the attendant is required to ensure that the attendant would accept the lesser value ticket for admission purposes. The attendant can also retain the whole ticket (not returning half to the patron), return the ticket to the ticket seller who can then resell the ticket and share the cash with the attendant. The scope for misappropriation of large sums of money is limited, although the introduction of some of the controls suggested at the end of A may be cost effective. Ethics and governance Maintaining a cash balance You are the assistant accountant at Krispies Co. Ltd, a distributor of snack foods. Krispies has a large loan from a bank, and part of the loan agreement stipulates that the company must maintain a Cash at Bank account balance of at least $75 000, reviewed monthly by the bank manager. At 31 March you report to the accountant, Naomi Kidman, that the cash balance is only $50 000. Naomi is concerned and instructs you to keep the cash receipts records open for one more day. She explains that if Krispies reports this cash balance to the bank, the company will default on the loan agreement and the bank may foreclose on the loan. The company could be forced into liquidation and all employees will lose their jobs. Naomi’s friend Brian Sheen is the accountant at Freers Foods, one of Krispies’ largest customers. She says she will ring Brian and get him to send through a cheque for $35 000 (in part payment of Freers Foods’ account) dated 30 March, which you will receive tomorrow, 1 April. Naomi instructs you to include this cheque in the cash balance that will place Krispies in the clear with the bank. Required (a) Who are the stakeholders in this situation? (b) What do you think are the ethical issues involved here? (c) List the courses of action you might take and the consequences of each. (a) The stakeholders in this situation (apart from yourself) are: •Naomi •Krispies Co Ltd’ Bank •Brian Sheen of Freers Foods •Krispies Co Ltd, its employees, and shareholders. (b) The major ethical issues involved here is that Naomi is conspiring with the cooperation of Brian Sheen to manipulate the cash balance in order to meet the loan agreement condition of the bank. The transaction being manipulated is not in accord with the normal course of business events and is only being done to deceive the bank. Naomi is breaching the trust of her employer and the company’s bank. (c) It is suggested that you should approach Naomi and remind her of your concerns that she is manipulating the situation to deceive the Bank. It could be pointed out that if the manipulation is subsequently discovered it would be considered a breach of trust by the bank, and this could have serious consequences for the current loan situation and for bank funding the future. This, on the information available, could have serious consequences for the continuing operations of Krispies Co Ltd. The threat of retaliation by Naomi could be negated to some extent by suggesting that she have management approach the bank, explain the position, and point out that the cash shortfall is very temporary, with the promise that the cash position will conform to the loan agreement conditions almost immediately. In the unlikely event that Naomi threatens adverse consequences to force you to remain silent, you should point out to her that you will consider approaching senior management with your concerns. Financial analysis Refer to the latest financial report of JB Hi-Fi Limited on its website, www.jbhifi.com.au, and answer the following questions. 1. How is ‘cash’ defined in the financial statements? 2. Did the total of cash held by JB Hi-Fi Limited increase or decrease over the period? By how much? 3. Is the balance of cash as shown in the balance sheet at the end of the year different from the figure for cash at end of period as shown in the statement of cash flows? If so, how and why? (Hint: Refer to the notes to the statement of cash flows for the explanation.) 4. Is there any reference in the report to aspects of internal control used by JB Hi-Fi Limited? 5. Does JB Hi-Fi Limited have an internal audit department? If it has, what are the major functions of such a department? Please note: all answers are based on the 2013 annual report. 1. Cash and cash equivalents are defined in Note 1(g) of the Annual Report as: including “cash on hand, deposits held at call with financial institutions, other short term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet.” 2. The cash held by JB Hi-Fi Limited increased over the year ended 30 June 2013 from $39 710 000 to a cash at bank position of $67 368 000, and increase of $27 658 000. 3. The balance of cash as shown in the Balance sheet at the end of the year is the same as the balance at the end of the Cash Flow Statement. 4. In the Governance, Environmental and Social Statements under the Audit Risk Management Committee heading it states: •‘The Board has established an Audit and Risk Management Committee. The Audit and Risk Management Committee is charged primarily with assisting the Board in its: (c) review of the Company’s policies on risk oversight and management, and in discharging its responsibilities to satisfy itself that a sound system of risk management and internal control has been implemented to manage the material risks affecting the Company’s business, including compliance with all applicable laws.’ In outlining the Directors’ Responsibilities in the audit report the external auditors point out that: •‘The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal controls relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error.’ The audit report also states: •‘The auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances. 5. JB Hi-Fi Limited has an Audit Risk and Management Committee. Solution Manual for Accounting John Hoggett, John Medlin, Claire Beattie, Keryn Chalmers, Andreas Hellmann, Jodie Maxfield 9780730344568