Chap008 Solution Manual

Chap008 Solution Manual - Chapter 08 Cash and Internal...

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Chapter 08 - Cash and Internal Controls C hapter 8 Cash and Internal Controls QUESTIONS 1. The seven broad principles are: Establish responsibilities; Maintain adequate records; Insure assets and bond key employees; Separate recordkeeping from 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 27, 2010, cash (and equivalents) of $1,470,127 thousand is used by investing activities. Cash (and equivalents) of $843,381 thousand is used by financing activities. 8-1
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Chapter 08 - Cash and Internal Controls 11. Apple’s net income for 2009 was $8,235 million. Further, it reported a net decrease in cash (and equivalents) of $6,612 million. These two figures are different because (1) net income is calculated on the accrual basis, and includes the effects of several noncash transactions and (2) some transactions affect cash but not income. For instance, the purchase of property, plant, and equipment assets reduces cash, but does not affect income, except through annual depreciation over the life of the asset. 12. Nokia’s cash (bank and cash) at December 31, 2009, equals $1,142 (all in EUR millions).
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