Chapter 6 Solutions to Exercises and Problems

Chapter 6 Solutions to Exercises and Problems - Chapter 6...

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C hapter 6 Reporting and Analyzing Cash and Internal Controls QUESTIONS 1. The seven broad principles are: Establish responsibilities; Maintain adequate records; Insure assets and bond employees; Separate recordkeeping and custody of assets; Divide responsibilities for related transactions; Apply technology controls; Perform regular and independent reviews. 2. Internal control procedures become especially critical when the manager of a business can no longer control the business through personal supervision and direct participation. 3. Responsibility for related transactions should be divided so that the work of one department or individual acts as a check on that of another. 4. Separation of custody from recordkeeping of an asset encourages the asset custodian to avoid misplacing, misappropriating, or wasting the asset. This arrangement makes collusion necessary if an asset is to be stolen and the theft concealed in the records. 5. If individual departments were permitted to deal directly with suppliers, the amount of merchandise purchased and the resulting liabilities would not be well controlled. Having individual departments place orders through a purchasing department helps control the amounts purchased and the resulting liabilities. 6. The limitations of internal control arise from two sources: the human element (human error or human fraud) and the cost-benefit principle. 7. Cash is most liquid; and least liquid is a building. The four assets ordered from most to least liquid are: cash, accounts receivable, inventory, and building. 8. A petty cash receipt is a document stating that a payment has been made from petty cash. The one who received payment and the one who approved payment both sign the receipt. 9. Depositing all receipts on the day of receipt (1) creates an independent record of the amount of cash received and (2) helps prevent an employee from having personal use of the money for a period of time before depositing it. 10. During the year ended February 26, 2005, cash (and equivalents) of $1,166,000,000 is used by investing activities. Cash (and equivalents) of $459,000,000 is used by financing activities.
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11. Circuit City’s cash at February 28, 2005, equals $879,660,000. It is the second largest current asset, after Merchandise inventory. Cash comprises about 33% current assets. Its Cash increased from $783,471,000 at February 29, 2004, to $879,660,000 at February 28, 2005. As a percent of total current assets, its Cash balance increased from about 27% to about 33% 12. Apple’s cash and equivalents decreased by $427,000,000 during the fiscal year ended September 25, 2004; from $3,396,000,000 to $2,969,000,000. Its statement of cash flows identifies several causes for this change. Three major sources and uses are: (1) $934,000,000 from operating activities; (2) $(1,488,000,000) used by investing activities; and (3) $127,000,000 provided by financing activities. The largest outflow is the purchase of short-term investments in the amount of
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Chapter 6 Solutions to Exercises and Problems - Chapter 6...

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