Continuing Cookie Chronicle

(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 6.)
CCC7 Part 1 Natalie is struggling to keep up with the recording of her accounting
transactions. She is spending a lot of time marketing and selling mixers and giving her
cookie classes. Her friend John is an accounting student who runs his own accounting
service. He has asked Natalie if she would like to have him do her accounting.
John and Natalie meet and discuss her business. John suggests that he do the following
for Natalie.
1. Hold onto cash until there is enough to be deposited. (He would keep the cash locked
up in his vehicle). He would also take all of the deposits to the bank at least twice a
month.
2. Write and sign all of the checks.
3. Record all of the deposits in the accounting records.
4. Record all of the checks in the accounting records.
5. Prepare the monthly bank reconciliation.
6. Transfer all of Natalie’s manual accounting records to his computer accounting program.
John maintains all of the accounting information that he keeps for his clients
on his laptop computer.
7. Prepare monthly financial statements for Natalie to review.
8. Write himself a check every month for the work he has done for Natalie.
Instructions
Identify the weaknesses in internal control that you see in the system that John is recommending.
(Consider the principles of internal control identified in the chapter.) Can
you suggest any improvements if John is hired to do Natalie’s accounting?
Part 2 Natalie decides that she cannot afford to hire John to do her accounting. One
way that she can ensure that her cash account does not have any errors and is accurate
and up-to-date is to prepare a bank reconciliation at the end of each month.
Natalie would like you to help her. She asks you to prepare a bank reconciliation for
June 2012 using the following information.
GENERAL LEDGER—COOKIE CREATIONS INC.
Cash
Date Explanation Ref. Debit Credit Balance
2012
June 1 Balance 2,657
1 750 3,407
3 Check #600 625 2,782
3 Check #601 95 2,687
8 Check #602 56 2,631
9 1,050 3,681
13 Check #603 425 3,256
20 155 3,411
28 Check #604 297 3,114
28 110 3,224
2 chapter 7 Fraud, Internal Control, and Cash
Additional information:
1. On May 31, there were two outstanding checks: #595 for $238 and #599 for $361.
2. Premier Bank made a posting error to the bank statement: check #603 was issued for
$425, not $452.
3. The deposit made on June 20 was for $125 that Natalie received for teaching a class.
Natalie made an error in recording this transaction.
4. The electronic funds transfer (EFT) was for Natalie’s cell phone use. Remember that
she uses this phone only for business.
5. The NSF check was from Ron Black. Natalie received this check for teaching a class
to Ron’s children. Natalie contacted Ron and he assured her that she will receive a
check in the mail for the outstanding amount of the invoice and the NSF bank charge.
Instructions
(a) Prepare Cookie Creations’ bank reconciliation for June 2012.
(b) Prepare any necessary general journal entries.
(c) If a balance sheet is prepared for Cookie Creations Inc. at June 30, 2012, what balance
will be reported as cash in the current assets section

1. On May 31, there were two outstanding checks: #595 for $238 and #599 for $361.

2. Premier Bank made a posting error to the bank statement: check #603 was issued for
$425, not $452.
3. The deposit made on June 20 was for $125 that Natalie received for teaching a class.
Natalie made an error in recording this transaction.
4. The electronic funds transfer (EFT) was for Natalie’s cell phone use. Remember that
she uses this phone only for business.
5. The NSF check was from Ron Black. Natalie received this check for teaching a class
to Ron’s children. Natalie contacted Ron and he assured her that she will receive a
check in the mail for the outstanding amount of the invoice and the NSF bank charge.
Instructions
(a) Prepare Cookie Creations’ bank reconciliation for June 2012.
(b) Prepare any necessary general journal entries.
(c) If a balance sheet is prepared for Cookie Creations Inc. at June 30, 2012, what balance

Part 1: Weaknesses in Internal Control and Improvements

1. Holding onto cash until there is enough to be deposited: While this may save time, it increases the risk of theft or loss if John's vehicle is not secure. Natalie should consider depositing the cash as soon as possible or using a secure cash drop-off location.

2. John writing and signing all checks: This gives John complete control over the company's expenses, which could lead to potential fraud or unauthorized transactions. Natalie should be involved in the approval process for payments and consider implementing a dual control system where another person reviews and approves checks.

3. Recording all deposits in the accounting records: This is a good practice, but Natalie should still have access to the records to ensure accuracy and transparency. It is important for Natalie to review and reconcile the bank deposits regularly.

4. Recording all checks in the accounting records: Similar to deposits, Natalie should have access to check records to review and verify the accuracy of expenses recorded. She should periodically review and reconcile the recorded checks with bank statements.

5. Preparing the monthly bank reconciliation: John preparing the reconciliation is helpful, but Natalie should also review it to ensure accuracy and identify any discrepancies. It is important for Natalie to understand and reconcile the bank statement with the company's records.

6. Transferring accounting records to John's computer accounting program: While this can streamline the process, Natalie should still retain copies of the original records for her own reference and verification. In case of any issues or discrepancies, she should have access to the complete set of records.

7. Monthly financial statements prepared by John: Natalie should review and analyze the financial statements herself to understand the company's financial position and make informed decisions. Simply relying on John's statements may result in a lack of understanding or awareness of the company's financial health.

8. Writing himself a check for monthly work: This can create a conflict of interest and an opportunity for overbilling. Instead, Natalie could agree on a fixed fee for John's services and pay him through a regular invoice or direct bank transfer.

Part 2: Bank Reconciliation for June 2012

(a) Bank Reconciliation for Cookie Creations Inc. for June 2012:

Balance per bank statement (June 30) $3,114
Add: Outstanding checks:
#595 $238
#599 $361
Adjusted balance per bank $3,713

Balance per general ledger (June 30) $3,224
Add: Deposit error on June 20 $125
Less: NSF check $150 (check amount + bank charge)
Adjusted balance per general ledger $3,199

(b) General Journal Entries:

1. To adjust the deposit on June 20:

Date: June 20
Account Debit Credit
Cash $30 (Error: Adjusting Entry)
Teaching Revenue $95 (Amount Received)
Accounts Receivable $125 (Correct Amount Received)

2. To record the NSF check and expected payment:

Date: June 30
Account Debit Credit
Accounts Receivable $150 (NSF Check + Bank Charge)
Cash $150 (Expected Payment from Ron Black)

(c) If a balance sheet is prepared for Cookie Creations Inc. at June 30, 2012, the reported balance as cash in the current assets section would be $3,199. This is the adjusted balance per the general ledger.

Part 1: Weaknesses in Internal Control and Suggestions for Improvement

1. Holding onto cash: This is a weakness in internal control because cash should be deposited into the bank regularly to reduce the risk of loss or theft. The cash should not be kept locked up in John's vehicle. A suggestion for improvement would be for Natalie to make regular deposits herself or hire someone specifically for this task.

2. Writing and signing all checks: This is a potential weakness as it gives John complete control over the cash disbursements. A better practice would be for Natalie to have the authority to sign checks and maintain oversight of the business's expenses.

3. Recording deposits: It is good that John suggests recording deposits in the accounting records. However, it would be even better if Natalie had access to these records and could verify that they are accurately recorded.

4. Recording checks: Similarly, recording checks in the accounting records is important, but Natalie should also have access to these records to ensure accuracy and prevent unauthorized transactions.

5. Monthly bank reconciliation: The suggestion to prepare a monthly bank reconciliation is a good control measure. However, Natalie should be involved in reviewing and reconciling the bank statements herself to ensure accuracy.

6. Transferring accounting records to John's computer: This may create a security risk as Natalie's sensitive financial information is transferred to John's laptop. A better solution would be for John to maintain the records on Natalie's computer under her control.

7. Monthly financial statements: The suggestion to prepare monthly financial statements for Natalie to review is a good control measure. However, it would be better if Natalie had access to the accounting software and could generate these statements herself.

8. Writing himself a check: This could be considered a conflict of interest and a potential fraud risk. It would be better if John billed Natalie for his services and Natalie paid him separately.

Part 2: Bank Reconciliation for June 2012
(a) Bank Reconciliation for Cookie Creations Inc. for June 2012:

Ending Bank Statement Balance $2,987
Add: Deposit in transit $125
Less: Outstanding check #595 $238
Less: Outstanding check #599 $361
Less: Bank error for check #603 $27 [$452 - $425]
Adjusted Bank Statement Balance $2,546

Ending General Ledger Balance $3,224
Less: NSF check $50
Less: Error in recording deposit on June 20 $125
Adjusted General Ledger Balance $3,049

Discrepancy between Adjusted Bank Statement Balance and Adjusted General Ledger Balance ($503)

(b) General Journal Entries:

1. To record the outstanding check #595:
Date: June 30
Account Title: Cash
Debit: $238
Account Title: Accounts Payable
Credit: $238

2. To record the outstanding check #599:
Date: June 30
Account Title: Cash
Debit: $361
Account Title: Accounts Payable
Credit: $361

3. To correct the bank error for check #603:
Date: June 30
Account Title: Cash
Debit: $27
Account Title: Accounts Payable
Credit: $27

4. To correct the error in recording the deposit on June 20:
Date: June 30
Account Title: Cash
Debit: $125
Account Title: Teaching Income
Credit: $125

(c) The balance reported as cash in the current assets section of the balance sheet at June 30, 2012, will be the adjusted general ledger balance of $3,049.