E 7-11

E 7-11

TO: Store Manager

There is a weakness in internal control over cash receipts from customers. The cash registers do not keep an internal record of sales. With no record of sales locked in the cash register, there is no way to determine how much cash should be in the cash drawer. This omission makes it easy for the cashier to steal cash and not get caught. To improve internal control over cash, the company should use cash registers that lock a record of each sale and a record of the total cash receipts for the day into the machine. The manager can prove the amount of cash in the cash drawer against this recorded amount.

(10 min.) E 7-12

Journal
DATE		ACCOUNTS AND EXPLANATIONS	POST. REF.	DEBIT	CREDIT
Apr.	1	Petty Cash		300
		Cash			300

	2	Cash		2,873
		Sales Revenue			2,869
		Cash Short and Over			4

	10	Office Supplies		111
		Delivery Expense		13
		Entertainment Expense		37
		Cash Short and Over		20
		Cash			181

(10-15 min.) E 7-13

Req. 1

Journal
DATE	ACCOUNTS AND EXPLANATIONS	POST. REF.	DEBIT	CREDIT
	Petty Cash		500.00
	Cash in Bank			500.00
	To set up the petty cash fund.

	Delivery Expense		22.19
	Supplies Expense ($34.14 + $85.37)		119.51
	Miscellaneous Expense ($2.85 + $13.78)		16.63
	Postage Expense		52.80
	Cash in Bank			211.13
	To replenish the petty cash fund.

Req. 2

Prior to replenishment:

Currency and coins totaling $288.87

Petty cash tickets totaling 211.13

Imprest total $500.00

Req. 3

After replenishment:

Currency and coins totaling $500.00

(10-15 min.) E 7-14

Sprint Corporation
Cash Budget
Year Ended December 31, 20X4
	Millions
Cash balance, December 31, 20X3		$ 135
Estimated cash receipts:
Collections from customers		11,813
Sale of assets		116
		12,064
Estimated cash payments:
Payments for cost of services and products	$(6,166)
Payments of operating expenses	(2,744)
Investment in equipment	(1,826)
Investment in cellular division	(275)
Payment of debt	(597)
Payments to owners	(338)	(11,946)
Cash available (needed) before financing		118
Budgeted cash balance, December 31, 20X4		(137)
(New financing needed)		$ (19)

Sprint expects to need an additional $19 million to carry out its plans during 20X4.

(15-20 min.) E 7-15

Determine the facts. Given in the text description.

Identify the ethical issues. You must decide whether it is ethical—good or bad, moral or immoral—for a member of the Congress to write these NSF checks on a regular basis.

Specify the alternatives. Deliberately write the NSF checks or not.

Identify the people involved. You, other House members, and the public at large can be affected. The public is affected mostly by the example set by deliberately writing NSF checks. The money used to pay the checks belongs to the other members of the U.S. House of Representatives.

Assess the possible consequences. If you write the NSF checks, you may anger your constituents back home because they may not enjoy this privilege and view the practice as dishonest. They may vote you out of office (this actually occurred). You may also be encouraging the public to be lax in their own thrift and money management. The effect on people’s spending and saving behavior could be negative and widespread. Finally, you would be borrowing from your colleagues with no interest or service charges.

Make the decision. It would be ethical and wise to avoid the practice. The high road is always best. Was it unethical for the legislators to write the NSF checks? Each person must decide for himself or herself. The class discussion should be lively.

It is interesting to contrast the House bank situation with private citizens’ writing NSF checks by prior arrangement with their bank and paying interest and other charges on the borrowed money. Because of the prior arrangement with the bank, this is simply another way to borrow money.

Challenge Exercise

(30-40 min.) E 7-16

Req. 1

Continental Paper Company
Cash Budget
Year Ended December 31, 20X5
	Millions
Cash balance, December 31, 20X4		$ 340
Estimated cash receipts:
Collections from customers	$ 19,467
Investments by owners	516
Other cash receipts	111	20,094
		20,434
Estimated cash payments:
Purchases of inventory	$(14,345)
Payments of operating expenses	(2,349)
Purchase of property and equipment	(1,518)
Acquisition of other companies	(1,168)
Payment of long-term and short-term debt	(950)
Payments to owners	(237)	20,567
Cash available (shortage) before financing		(133)
Budgeted cash balance, December 31, 20X5		(300)
Cash available for additional investments, or
(New financing needed)		$ (433)

(continued) E 7-16

Req. 2

Before Borrowing:

Current ratio	=	Total current assets	=	$5,873	=	1.21
		Total current liabilities		$4,863

Debt ratio	=	Total liabilities	=	$16,180	=	0.67
		Total assets		$23,977

After Borrowing:

Current ratio	=	$5,873 + $433	=	1.30
		$4,863

Debt ratio	=	$16,180 + $433	=	0.68
		$23,977 + $433

I would lend $433 million to Continental Paper because the loan would improve the current ratio and have virtually no effect on the debt ratio.

The budgeted amount of borrowing ($433 million) is low relative to Continental Paper’s current liabilities and total liabilities, so the company should have no trouble paying off the long-term debt.

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