E 8-1
MEMORANDUM
DATE: __________
TO: Karla Bates
FROM: Student Name
RE: Essential element of internal control over customer collections
Separation of duties is the essential element in a system to ensure that cash received by mail from customers is properly handled and accounted for. It is very important to separate cash-handling duties from accounting duties. Otherwise, an employee can steal a cash receipt from a customer and cover the theft by writing off the customer account as uncollectible.
Note: Student responses may vary.
(10 min.)
E 8-2The internal control weakness is that the credit department receives incoming cash receipts from customers. With access to cash, a credit department employee can pocket cash received from a customer and destroy the related remittance slip. The credit department can then write off the customer’s account as uncollectible, and the company will stop pursuing collection from the customer.
To strengthen the controls, the company can have cash go to a lock box at the bank or to the company mail room, not to the credit department.
Note: Student responses may vary.
E 8-13
|
Actual without Bankcards |
Expected with Bankcards |
|
|
Sales revenue......................................... |
$350,000 |
$392,000* |
|
Cost of goods sold.................................. |
$210,000 |
$235,200** |
|
Uncollectible-account expense.............. |
4,000 |
— |
|
Bankcard discount expense.................. |
3,840*** |
|
|
Other expenses....................................... |
61,000 |
59,000**** |
|
Total expenses........................................ |
275,000 |
298,040 |
|
Net income............................................. |
$ 75,000 |
$ 93,960 |
Decision: Accept bankcards because of the expected increase in net income.
__________
* $350,000 ´ 1.12 = $392,000
** $210,000 ´ 1.12 = $235,200
*** $392,000 ! $200,000 = $192,000 ´ .02 = $3,840
Note: The switch to bankcards should produce bankcard discount expense
only on the portion of sales made on bankcards.
**** $ 61,000 ! $2,000 = $59,000