ch07 SM Carlon 5e

Solutions Manual
to accompany
Financial
Accounting:
Recording, Analysis
and Decision Making
Fifth Edition
Prepared by
Chrisann Palm
John Wiley & Sons Australia, Ltd 2016

Chapter 7: Reporting and analysing cash and receivables
CHAPTER 7 – REPORTING AND ANALYSING CASH AND RECEIVABLES
ASSIGNMENT CLASSIFICATION TABLE
Brief
Learning Objectives Exercises Exercises Problems
1. Identify the impact of business 1 1 1A, 1B
transactions on cash.
2. Describe electronic banking processes. 2, 9 11
3. Explain the application of internal 3 2, 3 2A, 4A,

control principles for handling cash. 2B, 4B
4. Prepare a bank reconciliation. 4 4 3A, 4A, 5A,

3B, 4B, 5B
5. Discuss the basic principles of cash 6 4, 11

management.
6. Business decision making: assessing 5, 12

the adequacy of cash
7. Identify the different types of 6

receivables.
8. Valuating receivables. 7, 8 7, 10 6A, 7A, 8A,

9A, 6B, 7B,
8B, 9B
9. Describe how receivables are reported 8, 9 8 8A,8B

in financial statements. 9A,9B
10. Analysing and managing receivables. 8 9,13 10A, 10B
11. Explain the operation of a petty cash 5 6

fund.
© John Wiley and Sons Australia Ltd, 2016 7.1

Solutions manual to accompany Financial Accounting: Reporting, Analysis and Decision Making 5e
CHAPTER 7 – REPORTING AND ANALYSING CASH AND RECEIVABLES
ANSWERS TO QUESTIONS
1. Examples of transactions that involve cash at the start-up phase of the business
include: cash injected into the business by Edward; if Edward had borrowed funds
from his parents or banks, the cash injected through these borrowings; cash used to
buy smartphone accessories inventory; cash used to pay for renovating/setting up
the shop on the campus etc.
2. Electronic banking is an electronic payment system that enables customers of a

financial institution to conduct financial transactions on a website operated by the
bank. To access online banking facility, Edward would need to register with his bank
for the service, and set up some password for verification. Once registered, Edward
can transact banking tasks through online banking, including transferring funds
between the customer’s linked accounts and paying third parties, including bill
payments through BPAY.
3. Disagree. Internal control for handling cash is also concerned with the effectiveness
and efficiency of operations, and the safeguarding of cash asset from employee theft,
and unauthorised use.
4. Cash should be reported at $38,850 ($15,000 + $1,850 + $22,000).
5. Cash registers are readily visible to the customer. Thus, they prevent the sales clerk
from ringing up a lower amount and pocketing (stealing) the difference. In addition,
the customer receives an itemised receipt, and the cash register provides a record,
on tape or electronically, for further verification.
6. The basic principles of cash management are:

(1) increase the speed of collection of receivables
(2) keep inventory levels low
(3) don’t make payments earlier than necessary
(4) plan timing of major expenditures
(5) invest idle cash.
7. (a) A dishonoured cheque occurs when the bank on which the cheque is drawn
refuses to pay the cheque, because it has been cancelled or because the
balance of the account on which it is drawn is less than the amount of the
cheque.
(b) It reduced the balance of the bank account reported on the bank statement.
The dishonoured cheque should be recorded in the Cash at Bank account. It
does not appear in the bank reconciliation statement.
(c) A dishonoured cheque should be entered into the cash receipts as a
reduction in cash receipts. The adjusting entry in the company’s ledger
accounts is a debit to Accounts Receivable and a credit to Cash.

8. The activities in a petty cash system and the related principles are:
(a) (1) Establishing the fund.
 Establishment of responsibility for custody of the fund.
(2) Making payment from the fund.
 Documentation procedures, such as the use of a pre-numbered
petty cash receipt and evidence of authorisation of payments.
(3) Replenishing the fund.
 Independent internal verification of schedule of petty cash receipts
because the request for replenishment must be approved before
the cheque is signed.
(b) Journal entries are required for a petty cash fund when it is established and
replenished. Entries are also required when the size of the fund is increased
or decreased.
9. Accounts receivables are amounts owed by customers on account. They result from
the sale of goods and services in the normal course of business operations (i.e. in
trade). Notes receivable represent claims that are evidenced by formal instruments
of credit.
10. Soo Eng should realise that the decrease in the net amount of accounts receivable
occurs when estimated uncollectables are recognised in an adjusting entry. The
write-off of an uncollectable account reduces both accounts receivable and the
allowance for doubtful accounts by the same amount. Thus, the net amount of
accounts receivable does not change.
11. (a) $350,000 of the Trade Debtors should be classified as current receivables;
and $150,000 as non-current receivables.
(b) The 90-day promissory note is a current receivable.
12. A receivable turnover of 8 times means accounts receivable is turned into cash 8
times in a year, or it takes on average 46 days (365/8) to collect the receivable. If the
business has a credit term of 30 days, this suggests that collection policy is not very
effective. The business should promptly follow up overdue accounts.

SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 7.1
(a) Cash flows – monthly loan payment; car loan

payment
(b) Assets – inventory; GST receivable; motor vehicle
(c) Liabilities – bank loan; car loan
BRIEF EXERCISE 7.2
Costs associated with accepting EFTPOS payments include the initial setup costs linking the
cashier and the payment terminal; training costs to staff for using the payment system; and
the on-going merchandise fees charged by the bank etc. The benefits of accepting EFTPOS
payments include the possibility of increased business from customers who don’t carry
enough cash and prefer to pay by their bank cards; reduced staffing costs for handling cash
hence reduced chance for cash misappropriation.
BRIEF EXERCISE 7.3

Franklin Office Supplies Ltd
There was weakness in the internal controls in this situation. Responsibility was not clearly
established and there was no segregation of duties as Aaron could both order and approve
his own purchase, leading to possible exploitation of the system
BRIEF EXERCISE 7.4
Ridley Pty Ltd

Cash balance per bank $8,420
Add: Outstanding deposits 2,700
11,120
Less: Unpresented cheques 862
Balance of Cash at Bank account $10,258
Note: The Bank Service Charge of $20 will have already been included in the cash balance
per bank.
BRIEF EXERCISE 7.5
Gimbal
Mar. 20 Postage Expense 32

Supplies 26
Travel Expense 22
Cash 80

BRIEF EXERCISE 7.6
(a) Other receivables.

(b) Notes receivable.
(c) Accounts receivable.
BRIEF EXERCISE 7.7
Massey Ltd
(a) Bad Debts Expense [($500,000 x 1%) - $3,000] 2,000

Allowance for Doubtful Debts 2,000
(b) Bad Debts Expense [($500,000 x 1%) + $800] 5,800


BRIEF EXERCISE 7.8
Date Account Titles and Explanation Debit Credit

Nov 28 Allowance for doubtful debts 5,000
GST Collected 500
Accounts Receivable (subsidiary ledger 5,500
also credited)
Being the write-off of bad debt of M Waters due
to bankruptcy as per mangers decision)
Brian Bazaar
To: Manager
From: Student
Date: DD/MM/YY
RE: GST and Bad Debts
The issue has arisen where a sale in September on credit was to a debtor who has now
bankrupt and we will not be able to recover the debt from him. Accordingly on your advice
we have written the debt off. I would like to explain the effect on the GST liability for the
write-off.
If the reporting of the GST is on the cash basis, then the liability for the GST collected does
not arise until the cash is collected. Therefore M Waters transaction would not have the GST
liability recorded in our accounting records. As our business records the Sales and GST on
an accruals basis, the GST liability arises in September when the sale was made. In
November when the debt was written off we need to reverse the GST liability and record a
decreasing adjustment against the GST collected account as our business never collected
and never will collect the GST. You will note the full debt is credited against the debtors M
Waters Account in our records.

BRIEF EXERCISE 7.9
Wendy Ltd
(a) Bad Debts Expense 40,000

(b) Current Assets:

Cash $90,000
Accounts receivable $600,000
Less: Allowance for doubtful debts (40,000) 560,000
Inventory 130,000
Prepaid expenses 13,000
Total Current Assets $793,000
(c) $40,000
Credit risk ratio =  6 .7 %
$600,000
$3,000,000
Receivables turnover ratio =  5.7 times
$530,000
365 days
Average collection period =  64 days
5.7
BRIEF EXERCISE 7.9
(a) Cash at Bank ($200 - $8) 192

Credit Card Services Expense ($200 x 4%) 8
Sales 200
(b) Cash at Bank ($50,000 - $2,000) 48,000

Discount on Sale of Receivables ($50,000 x 4%) 2,000
Accounts Receivable 50,000
Note the discount on sale of receivables is an expense.

SOLUTIONS TO EXERCISES
EXERCISE 7.1
(a)
i. Cash inflows – Cash sales; Credit card sales ($18,500+$56,000 = $74,500)
ii. Cash outflows – Loan payment; Operating expenses paid; Payment to

suppliers ($5,800+$24,000+$16,000 = $45,800)
iii. Assets – Inventory; GST receivable; Cash at Bank; Accounts receivable

($28,000+$3,800+8,760+$6,800 = $47,360)
iv. Liabilities – Outstanding bank loan; Rent payable; Accounts payable

($12,000+$2,400+$8,400 = $22,800)
(b) From a cash flow’s perspective, Keitha’s fashion boutique looks like a healthy
business as it has positive cash flows, i.e. cash inflows are much higher than cash
outflows. Further, the value of assets outweighs that of liabilities which is another
good sign as a potential for investment.
EXERCISE 7.2
Gerry’s Pizza
1. Establishment of responsibility. The counter clerk is responsible for handling cash.

Other employees are responsible for making the pizzas.
2. Segregation of duties. Employees who make the pizza do not handle cash.
3. Documentation procedures. The counter clerk uses your order invoice (ticket) in
registering the sale on the cash register. The cash register produces a tape of all
sales.
4. Physical, mechanical and electronic controls. A cash register is used to record the
sale.
5. Independent internal verification. The counter clerk handling the pizza compares the
type of the pizza with the type indicated on the orders.

EXERCISE 7.3
(a) (b)
Procedure Weakness Principle Recommended change
1. Inability to establish Establishment of There should be separate

responsibility for cash. responsibility cash drawers and register
codes for each clerk.
2. Cash is not adequately Physical, mechanical, Cash should be stored in a

protected from theft. and electronic controls. safe until it is deposited in
the bank.
3. Cash is not Independent internal A cashier office supervisor

independently counted. verification. should count cash.
4. The accountant should Segregation of duties. The cashier’s department

not handle cash. should make the deposits.
EXERCISE 7.4
Shoe City Ltd
(a) Balance as per bank statement $4,392.20

Add: Outstanding deposits 708.00
5,100.20
Less: Unpresented cheques (876.00)
Balance as per Cash at Bank account (1) $4,224.20
(1) Cash balance per books $4,770.20

Less: Dishonoured cheque $516.00
Bank charges 30.00 455.00
Adjusted cash balance per books $4,224.20
(b) (In general journal form)
Accounts Receivable 516.00

Cash at Bank 516.00
Bank Charges 30.00

Cash at Bank 30.00

EXERCISE 7.5
Green Dot Furniture
The cash to daily cash expenses ratio is calculated by first calculating average daily
cash expenses.
$92,728
 $254 thousand per day
365
Then cash on hand is divided by average daily cash expenses:
$17,312
 68.2 days
$254
Green Dot’s cash on hand is adequate. It has enough cash on hand to pay for 68 days
of expenses. This, combined with positive cash provided by operations indicates
strong liquidity.
EXERCISE 7.6
Hair Styles Pty Ltd

(In general journal form)

Oct. 1 Petty Cash 130
Cash at Bank 130
31 Office Supplies 36.50

Telecommunications Expense 21.30
Postage Expense 53.70
Freight-out 8.80
Cash Short and Over 1.40
Cash at Bank 121.7
Petty Cash 130

Cash at Bank 130

EXERCISE 7.7
Marc Pty Ltd
(a) Estimated
Accounts Receivable Amount % Uncollectables
Current $65,000 2.0 $1,300

1-30 days past due 12,600 5.0 630
31-90 days past due 8,500 30.0 2,550
Over 90 days 6,400 50.0 3,200
$7,680
(b) Mar. 31 Bad Debts Expense 6,080

($7,680 - $1,600)
(c) The total balance of receivables increased from 2015 to 2016. However, of concern
is the fact that each of the three categories of older accounts increased substantially
during 2016. That is, customers are taking longer to pay and bad debts are likely to
increase. Management needs to investigate the causes of this change.

EXERCISE 7.8

Nov 28 Allowance for doubtful debts 5,000
GST Collected 500
Accounts Receivable (subsidiary ledger 5,500
also credited)
Being the write-off of bad debt of M Waters due
to bankruptcy as per mangers decision)
Brian Bazaar
To: Manager
From: Student
Date: DD/MM/YY
RE: GST and Bad Debts
The issue has arisen where a sale in September on credit was to a debtor who has now
bankrupt and we will not be able to recover the debt from him. Accordingly on your advice
we have written the debt off. I would like to explain the effect on the GST liability for the
write-off.
If the reporting of the GST is on the cash basis, then the liability for the GST collected does
not arise until the cash is collected. Therefore M Waters transaction would not have the GST
liability recorded in our accounting records. As our business records the Sales and GST on
an accruals basis, the GST liability arises in September when the sale was made. In
November when the debt was written off we need to reverse the GST liability and record a
decreasing adjustment against the GST collected account as our business never collected
and never will collect the GST. You will note the full debt is credited against the debtors M
Waters Account in our records.

EXERCISE 7.9
Spring & Co Ltd
Notes to the Financial Statements
as at 30 June 2015
(in millions)
Receivables:
Trade Receivables:
Notes Receivable $95
Accounts Receivable 290
Less: Allowance for Doubtful Debts 11 279
Other Receivables 22
Net Receivables $396
Note: It is assumed that Notes Receivables are part of Trade Receivables.
EXERCISE 7.10
Honey Factory Ltd
(a)
2017 2016
Receivables $1,113.0 $899.3
turnover
ratio =
(($146.6  $6.3)  ($104.3  $5.7)) / 2 (($104.3  $5.7)  ($126  $8.2)) / 2
 9.3 times =8.3 times
Average 365 days 365 days

collection  39.2 days or 39 days  43.9 days or 44 days
9.3 8.3
period =
(b)
2012 2011
Credit risk ratio = $6.3 $5.7
 4.3%  5.5%
$146.6 $104.3
(c) The credit and collection policies in Honey Factory Ltd. seemed to have worked well
in 2017. The company’s receivables turnover has improved from 8.3 times in 2017 to
9.3 times in 2017, with the corresponding average collection period shortened from
44 days to 39 days. The company’s credit risk has also improved from 5.5% to 4.3%
in 2017.

EXERCISE 7.11
Virtual Appliances

Mar. 3 Cash at Bank ($900,000 - $36,000) 864,000
Discount on Sale of Receivables (1) 36,000
(1) Note this is an expense account. The amount is calculated as 4% x $900,000.
EXERCISE 7.12
New Mark Ltd

May 10 Cash at Bank ($2,400 - $36) 2,364
Credit Card Services Expense (1.5% x $2,400) 36
Sales 2,400
EXERCISE 7.13
Burleigh Heaven Miami Paradise
=[ (Cash payment to suppliers & =[ (Cash payment to suppliers &
employees) employees)
(a) +(Cash payment for interest & other +(Cash payment for interest & other
Average daily finance costs) finance costs)
cash expenses +(Cash payment for income tax) ]/365 +(Cash payment for income tax) ]/365
= ($63,905+$6,780+$17,672)/365 =($55,802+$16,383+$12,239)/365
=$88,357/365 =$84,424/365
=$242.07 =$231.30
Cash to daily
cash expenses =Cash/Average daily cash expense =Cash/Average daily cash expense
=$7,110/$242.07 =$4,289/$231.30
=29.3 days =18.5 days
(b) If the adequacy of cash is the only factor for the investment decision, Burleigh Heaven
appears to be the superior candidate it has a higher cash adequacy then Miami Paradise (29
days compared with 19 days).

EXERCISE 7.14
Advanced Lifestyle Ltd

(a) Auckland Queenstown
1.Receivable =$1,498/[($152-$7.2)+($197-$10)/2] = $1,388/[($128-$6.2)+($120-$5.2)/2]
turnover = 9 times = 11.7 times
2. Average
collection = 365/9 = 365/11.7
period = 40.6 days = 31.2 days
3. Credit risk
ratio:
=$10/$197 =$5.2/$120
2016 = 5.08% = 4.33%
=$7.2/$152 =$6.2/$128
2015 = 4.74% = 4.84%
(b) The Queenstown Division has a higher accounts receivable turnover (11.7 vs. 9
times) which means it is collecting accounts receivable 9 days faster than its
Auckland counterpart. In terms of credit risk, Queenstown not only has lower credit
risk ratios in 2016, it is also on an improving trend while Auckland’s credit risk is
deteriorating. In conclusion, Queenstown division seems to have a more effective
credit collection policy and credit risk control.

SOLUTIONS TO PROBLEM
SET A
PROBLEM SET A 7.1
(a)

suppliers ($12,000+$18,000+$21,000 = $51,000)
iii. Assets – Food supplies; Cash at Bank; Accounts receivable; GST receivable
($29,500+$13,200+$7,200+$4,900 = $54,800)

($22,000+$14,800+$12,400 = $49,200)
(b) From a cash flow’s perspective, Toby’s café looks like a healthy business as it has
positive cash flows, i.e. cash inflows are much higher than cash outflows. Further, the
value of assets outweighs that of liabilities which is another good sign as a potential
for investment.
(c) In addition to the above figures and analysis concerning cash flows and assets and
liabilities, James should also look at non-financial information such as location of the
café, clientele, quality of the staff and relationship with food suppliers etc. which are
all important factors in influencing the continuous success of the business.

PROBLEM SET A 7.2
Burlington Theatre
(a)
Principles Application to cash receipts
Establishment of responsibility. Only cashiers are authorised to sell tickets. Only

the manager and cashier can handle cash.
Segregation of duties. The duties of receiving cash and admitting

customers are assigned to the cashier and to the
doorperson. The manager maintains custody of
the cash, and the company accountant records
the cash.
Documentation procedures. Tickets are pre-numbered. Cash count sheets are

prepared. Deposit slips are prepared.
Physical, mechanical, and electronic A safe is used for the storage of cash and a
controls. machine is used to issue tickets.
Independent internal verification. Cash counts are made by the manager at the end
of each cashier’s shift. Daily comparisons are
made by the company treasurer.
(b) Actions by the doorperson and cashier to misappropriate cash include:
(1) Instead of tearing the tickets, the doorperson could return the tickets to the
cashier who could resell them, and the two could divide the cash.
(2) The cashier could issue a lower priced ticket than paid for and the doorperson
would admit the customer. The difference between the ticket issued and the
cash received could be divided between the doorperson and cashier.

PROBLEM SET A 7.3
JONA Ltd
Bank Reconciliation Statement
31 December 2016
Balance as per bank statement 19,580.00

Add: Outstanding deposit 1,190.40
20,770.40
Less: Unpresented cheques

No. Amount
3470 720.10
3474 1,050.00
3478 538.20
3481 807.40
3484 832.00
3486 1,389.50 5,337.20
Balance as per Cash at Bank account 15,433.20
Original balance of Cash at Bank account 13,034.30

Transposition error (deposit 20/12: 2945-2954) - (9.00)
Transposition error (cheque#3485: 540.8-450.8) - (90.00)
Collection of note 3,145.00
NSF cheque (A. Jordan) (647.10)
Adjusted balance of Cash at Bank Account: 15,433.20
(b)
Dec. 31 Cash………………………………………………………………3,145.00
Miscellaneous Expense ........................................................ 15.00
Notes Receivable ................................................... 3,000.00
Interest Revenue .................................................... 160.00
31 Accounts Receivable—A. Jordan.......................................... 647.10

Cash ............................................................. 647.10
31 Accounts Payable ...................................................................... 90.00

Cash ............................................................. 90.00
Dec. 31 Accounts Receivable ................................................................. 9.00

Cash ............................................................. 9.00

PROBLEM SET A 7.4
Delicious Pies Pty Ltd

31 October 2017
(a)
Balance as per bank statement $25,732.00

Add: Undeposited receipts 5,313.71
31,045.71
Less: Unpresented cheques:
No. Amount
62 $177.45
183 210.00
284 354.55
862 266.99
863 317.52
864 231.39 (1,557.90)
(1) Original Balance of Cash at Bank account $30,369.81

Add: Bank credit (collection of note receivable) 280.00
Adjusted balance per books (before theft) 30,649.81
Less: Theft (1,162.00)
Adjusted balance of Cash at Bank account $29,487.81
(b) The cashier attempted to cover the theft of $1,162 by:
1. Not listing as unpresented three cheques totalling $742.00 (No. 62, $177.45;
No. 183, $210.00 and No. 284, $354.55).
2. Understating the unpresented cheques listed by $140. (The correct total of

the 3 cheques listed is $815.90).
3. Did not add $280 credit note to the book balance.
(c) 1. The principle of independent internal verification has been violated because
the cashier prepared the bank reconciliation.
2. The principle of segregation of duties has been violated because the cashier
had access to the accounting records and also prepared the bank
reconciliation.

PROBLEM SET A 7.5
(a)
Computec Ltd
31 May 2015

Add: Outstanding deposits $836.15
Bank error – Teller cheque 600.00 1,436.15
9,220.75
Less: Unpresented cheques (1,276.25)
(1) Original Cash at Bank balance per books $5,681.50

Add: Collection of note receivable 3,060.00
8,741.50
Less: Dishonoured cheque ($700.00)
Error in 12 May receipt (10.00)
Error in recording cheque no. 1181 (27.00)
Bank cheque printing charge (60.00) (797.00)
Adjusted Cash at Bank account balance $7,944.50

May 31 Cash at Bank 3,060
Bank Charges 20
Note Receivable 3,000
Interest Revenue 80
31 Accounts Receivable – W Hoad 700

Cash at Bank 700
31 Sales 10
Cash at Bank 10
31 Accounts Payable – M Helms 27

Cash at Bank 27
31 Bank Charges 60
Cash at Bank 60

PROBLEM SET A 7.6
Chin Ltd
(a) Dec. 31 Bad Debts Expense............................................ 25,450

Allowance for Doubtful Debts ................................. 25,450
($37,450 – $12,000)
(a) & (b)
Bad Debts
Expense Balance
Date Particular Dr Cr Dr Cr
31/12/2016 Allowance for Doubtful Debt $25,450 $25,450
Allowance
for Doubtful
Debt Balance
31/12/2016 Balance $12,000
31/12/2016 Bad Debts Expense $25,450 $37,450
Accounts Receivable
31/3/2017 (Bad Debts Write-off) $500 $36,950
Accounts Receivable
31/5/2017 (Reverse Bad Debts Write-Off) $500 $37,450
2017
(1) Mar. 31 Allowance for Doubtful Debts ........................... 500
Accounts Receivable ................................... 500
(2) May 31 Accounts Receivable........................................ 500

Allowance for Doubtful
Debts................................................... 500
31 Cash .............................................................. 500

Accounts Receivable ................................... 500
(c) 2017
Dec. 31 Bad Debts Expense............................................ 31,100
Allowance for Doubtful Debts ................................. 31,100
($30,300 + $800)

PROBLEM SET A 7.7

Eason Ltd
(a) $2,900.
(b) $700 [($46,000 X 5%) – $1,600].
(c) $3,450 [(46,000 X 5%) + $1,150].
(d) Under the direct write-off method, accounts receivable are overstated because future
estimated write-offs are not anticipated—write-offs are journalised as they occur. In
contrast, under the allowance method, anticipated write-offs are estimated and
reduce the ending accounts receivable balance. The resulting estimated balance of
accounts receivable then represents the best estimate of the cash flows expected to
be derived from the receivable.
PROBLEM SET A 7.8

Lexington Pty Ltd
(a) The allowance method. Since the balance in the allowance for doubtful debts is given,
it must be using this method because the account would not exist if it were using the
direct write-off method.
(b) Dec 31 Bad Debts Expense……………………………………….10,750

($11,750 – $1,000)
Debts................................................... 10,750
(c) Dec. 31 Bad Debts Expense............................................ 12,750

($11,750 + $1,000)
Debts................................................... 12,750
(d) Allowance for Doubtful Debts …………………………………….5,000

Accounts Receivable ............................................................ 5,000
(e) Bad Debts Expense .................................................................. 5,000

Accounts Receivable ................................................................ 5,000
(f) The allowance for doubtful debt is a contra-asset account. It is subtracted from the
gross amount of accounts receivable so that the net accounts receivable is reported
in the statement of financial position.

PROBLEM SET A 7.9
Diego Ltd
Jan. 5 Accounts Receivable—George Company ............................. 16,000

Sales............................................................ 16,000
20 Notes Receivable…………………………………………16,000
Accounts Receivable—George
Company ............................................................... 16,000
Feb. 18 Notes Receivable ................................................. 8,000

Sales ...................................................................... 8,000
Apr. 20 Cash ($16,000 + $360) ............................................... 16,360

Notes Receivable .......................................................... 16,000
Interest Revenue ........................................................... 360
($16,000 X 9% X 3/12)
30 Cash ($15,000 + $600) ............................................... 15,600

($15,000 X 12% X 4/12)
May 25 Notes Receivable 6,000

Accounts Receivable—Avery Inc................................... 6,000
Aug. 18 Cash ($8,000 + $400) ................................................... 8,400

($8,000 X 10% X 6/12)
25 Accounts Receivable—Avery Inc. ................................. 6,120

($6,000 + $120)
Notes Receivable ................................................... 6,000
Interest Revenue .................................................... 120
($6,000 X 8% X 3/12)
Sept. 1 Notes Receivable ................................................. 10,000

Sales ............................................................................. 10,000

PROBLEM SET A 7.10

Qantas and Air New Zealand
(a)
Qantas Air New Zealand
A$ million NZ$ million
Receivables $13,772 $4,046

turnover ratio ($1,054  $27  $1,088  $6)/2 ($274  $2  $322  $3)/2
13.06 times 13.69 times
Average collection 365 365

period  28 days  26.7 days or 27 days
13.06 13.69
Qantas and Air New Zealand appeared to have very similar collection experiences in the
latest financial period, as shown by the receivable turnover ratio of 13.06 times and 13.60
times, and the corresponding collection period of 28 days and 27 days.
(b) Ratio of allowance for doubtful debts to gross accounts receivable (credit risk ratio):
Qantas Air New Zealand
Start $27 ÷ $1,054= 2.56% $2 ÷ $274 = 0.73%

End $6÷ $1,088 = 0.55% $3 ÷ $322 = 0.93%
Qantas appeared to have tightened its credit-granting practices as the allowance for doubtful
debt has decreased substantially and the corresponding credit risk ratio has improved from
the start to the end of the year.
On the other hand, Air New Zealand appeared to have continued with the same credit-
granting practices over the year as both the allowance for doubtful debt and the associated
credit risk ratio are maintained.

SOLUTIONS TO PROBLEM
SET B
PROBLEM SET B 7.1
(a)

suppliers ($4,000+$22,000+$18,000 = $44,000)
iii. Assets – Food supplies; Cash at Bank; Accounts receivable; GST receivable
($18,500+$9,200+$7,200+$2,900 = $37,800)

($15,000+$4,800+$14,400 = $34,200)
(b) From a cash flow’s perspective, Caylie’s bakery looks like a healthy business as it
has positive cash flows, i.e. cash inflows are much higher than cash outflows.
Further, the value of assets is slightly higher than that of liabilities which is another
good sign as a potential for investment.
(c) In addition to the above figures and analysis concerning cash flows and assets and
liabilities, Samantha should also look at non-financial information such as location of
the café, clientele, quality of the staff and relationship with food suppliers etc. which
are all important factors in influencing the continuous success of the business.

PROBLEM SET B 7.2
Rabbit Ears Pet Food Ltd
Principles Application to Cash Disbursements
Establishment of responsibility. Only the accountant and assistant accountant are

authorised to sign cheques.
Segregation of duties. Invoices must be approved by both the purchasing

manager and the receiving department supervisor.
Payment can only be made by the accountant or
assistant accountant, and the cheque signatories
do not record the cash disbursement transactions.
Documentation procedures. Cheques are pre-numbered.
Physical, mechanical, and electronic Blank cheques are kept in a safe in the treasurer’s
controls. office. Only the accountant and assistant
accountant have access to the safe.
Independent internal verification. The cheque signatory compares the check with the
approved invoice prior to issue. Bank and book
balances are reconciled monthly by the assistant
accountant.
Other controls. Following payment, the invoices are stamped PAID.

PROBLEM SET B 7.3
Watson Pty Ltd

30 November 2015
(a)

Add: Outstanding deposits 1,225.00
18,619.60
No. 2451 $1,260.40
No. 2472 426.80
No. 2478 538.20
No. 2482 612.00
No. 2484 829.50
No. 2485 974.80
No. 2487 398.00
No. 2488 800.00
(5,839.70)

Add: Note collected by bank 1,905.00
13,038.90
Less: Cheque printing charge (70.00)
Error in recording cheque no. 2479
($1,750 - $1,570) (180.00)
Error in 20-11 receipt
($2,954 - $2,945) (9.00) (259.00)

Nov. 30 Cash at Bank 1,905
Bank Charges 15
Interest Revenue 120
30 Bank Charges 70
Cash at Bank 70
30 Accounts Payable 180

Cash at Bank 180
30 Accounts Receivable 9
Cash at Bank 9

PROBLEM SET B 7.4

(a)
Wizards and Dragons Pty Ltd
31 October 2016

Add: Undeposited receipts 3,795.51
22,175.51
No. Amount
62 $126.75
183 150.00
284 253.25
862 190.71
863 226.80
864 165.28 (1,112.79)

Add: Bank credit (collec’n of note receivable) 200.00
Adjusted balance per books (before theft) 22,092.72
Less: Theft (1,030.00)
(b) The cashier attempted to cover the theft of $1,030.00 by:
1. Not listing as unpresented three cheques totalling $530.00 (No. 62, $126.75’
No. 183, $150.00 and No. 284, $253.25).
2. Understating the unpresented cheques listed by $100. (The correct total is

$582.79).
3. Subtracting the $200 credit from the bank balance instead of adding it to the
book balance, thereby concealing $400 of the theft.
(c) 1. The principle of independent internal verification has been violated because
the cashier prepared the bank reconciliation.
2. The principle of segregation of duties has been violated because the cashier
had access to the accounting records and also prepared the bank
reconciliation.

PROBLEM SET B 7.5
(a)
Interactive Ltd
31 May 2016

Add: Outstanding deposits $1,672.30
Bank error – Teller cheque 1,200.00 2,872.30
18,441.50
Less: Unpresented cheques (2,552.50)
Adjustment to bank account balance
(1) Original Cash at Bank balance per books $10,949.00

Add: Error in recording cheque no. 360.00
1181
Add: Collection of note receivable 6,120.00
17,429.00
Less: Dishonoured cheque ($1,400.00)
Error in 12 May receipt (20.00)
Bank cheque printing charge (120.00) (1,540.00)

Adjusted Cash at Bank account balance $15,889.00

May 31 Cash at Bank 6,120
Bank Charges 40
Interest Revenue 160
31 Accounts Receivable – W Hoad 1,400

Cash at Bank 1,400
31 Sales 20
Cash at Bank 20
31 Cash at bank 360

Accounts Payable – M Helms 360
31 Bank Charges 120

Cash at Bank 120

PROBLEM SET B 7.6

(a) & (b)
Cain Ltd
(a)
Dec. 31 Bad Debts Expense 24,930
Allowance for Doubtful Debts ($34,930 – 10,000) 24,930
(a) & (b)
Bad Debts
Expense Balance
31/12/2016 Allowance for Doubtful Debt $24,930 $24,930
Allowance
for Doubtful
Debt Balance
31/12/2016 Balance $10,000
31/12/2016 Bad Debts Expense $24,930 $34,930
Accounts Receivable
31/3/2017 (Bad Debts Write-off) $600 $34,330
Accounts Receivable
31/5/2017 (Reverse Bad Debts Write-Off) $600 $34,930
(b)
2017
(1) Mar. 1 Allowance for Doubtful Debts 600
(2) May 1 Accounts Receivable 600

Allowance for Doubtful Debts 600
1 Cash at Bank 600

(c)
Dec. 31 Bad Debts Expense 30,200
Allowance for Doubtful Debts ($29,100 + $1,100) 30,200

PROBLEM SET B 7.7
Benson Ltd
(a) $3,625.
(b) $875 [($57,500 X 5%) – $2,000].
(c) $2,876 [($57,500 X 5%) + $1,438].
(d) Under the direct write-off method, accounts receivable are overstated because future
estimated write-offs are not anticipated—write-offs are journalized as they occur. In
contrast, under the allowance method, anticipated write-offs are estimated and reduce
the ending accounts receivable balance. The resulting estimated balance of accounts
receivable, stated at recoverable amount, then represents the present value of the cash
flows expected to be derived from the receivable.
PROBLEM SET B 7.8
Shine Ltd
(a) The allowance method. Since the balance in the allowance for doubtful debts is given,
it must be using this method because the account would not exist if it were using the
direct write-off method.
(b) Dec. 31 Bad Debts Expense ($16,750 - $1,500) 15,250

(c) Dec. 31 Bad Debts Expense ($16,750 + $1,500) 18,250

(d) Allowance for Doubtful Debts 4,500

(e) Bad Debts Expense 4,500

(f) The allowance for doubtful debt is a contra-asset account. It is subtracted from the
gross amount of accounts receivable so that net accounts receivable is reported in
the statement of financial position.

PROBLEM SET B 7.9

Elam Ltd
General Journal

Jan. 5 Accounts Receivable 6,000
Sales 6,000
Feb. 2 Notes Receivable 6,000

12 Notes Receivable 7,800

Sales 7,800
26 Accounts Receivable 4,000

Sales 4,000
Apr. 12 Cash at Bank 7,800

Notes Receivable 7,800
June 2 Cash at Bank 6,000

July 15 Notes Receivable 3,000

Sales 3,000
Aug. 15 Cash at Bank 2,940

Interest Expense 60

PROBLEM SET B 7.10
CSR and CCA
(a)
CSR CCA
$M $M
Receivables turnover $3,754.9 $4,546.8

ratio ($562.1 $9  $491.9  $7.5) / 2 ($671 $7.8  $777.6  $9) / 2
 7.24 times  6.35 times
Average collection 365 365

period  50.4 days  57.5days
7.24 6.35
CSR’s receivable turnover ratio was slightly higher than CCA’s, which means on
average, CSR was more efficient than CCA in turning receivables into cash in that
year. This may reflect differences in the terms allowed to customers and the types of
customers (retail versus business customers).
(b) Ratio of allowance for doubtful debts to gross accounts receivable (credit risk ratio):
CSR CCA
Start $9 ÷ $562.1 = 1.6% $7.8 ÷ $671 = 1.2%

End $7.5 ÷ $491.9 = 1.5% $9 ÷ $777.6 = 1.2%
Both companies did not appear to have changed their credit-granting practices over
the year as the credit risk ratios are maintained from the start to the end of the year.

BUILDING BUSINESS SKILLS
FINANCIAL REPORTING AND

ANALYSIS
BUILDING BUSINESS SKILLS 7.1 FINANCIAL REPORTING PROBLEM
Domino’s Pizza
(a) The consolidated statement of financial position in 2013 shows cash and cash
equivalents as $18,691 (in thousands) as at 30 June 2013. The cash balance was
$40,340 (in thousands) at the start of the 2012/13 financial year.
(b) Cash is defined as including cash on hand and in banks net of outstanding bank
overdrafts. Cash comprises cash on hand and demand deposits. Cash equivalents
are short-term, highly liquid investments that are readily convertible to known
amounts of cash, which are subject to an insignificant risk of changes in value and
have a maturity of three months or less at the date of acquisition.
(c) The consolidated statement of cash flows indicates net cash provided by operations
was $33,180 (in thousands) during 2012/13.
(d) The ratio of cash to daily cash expenses for 2013 was:
Cash balance reported in the Balance sheet is (in thousands) $18,691
Cash payments for operation (in thousands) $282,864+$405+$11,796 = $295,065
Daily cash expenses (in thousands) $295,065 /365 = $808.40 per day
$18,691/$808.40 = 23.1 days
BUILDING BUSINESS SKILLS 7.2 COMPARATIVE ANALYSIS PROBLEM
Domino’s Pizza
(a) Dollars are in $’000

2013 2012
Cash/cash equivalents balance $18,691 $40,340

Cash expenses $295,065 $259,206
Average daily cash expenses $808.40 $710.15
Ratio of cash to daily cash expenses 23.1 days 56.8 days
(b) 2012 has a stronger cash position as indicated by the ratio of cash to daily cash
expenses.

CRITICAL THINKING
BUILDING BUSINESS SKILLS 7.3 GROUP DECISION CASE
Campus Fashions
(a) 2017 2016 2015
Net credit sales $600,000 $720,000 $480,000
Credit and collection expenses:

Collection agency fees $2,940 $3,000 $1,920
Salary of accounts receivable clerk 4,560 4,560 4,560
Uncollectible accounts 9,600 11,520 7,680
Invoicing and mailing costs 3,000 3,600 2,400
Credit investigation fees 900 1,080 720
Total $21,000 $23,760 $17,280
Total expenses as a percentage of net credit sales 3.5% 3.3% 3.6%
(b) Average accounts receivable (5%) $30,000 $36,000 $24,000
Investment earnings (10%) $3,000 $3,600 $2,400
Total credit and collection expense per above $21,000 $23,760 $17,280
Add: Investment earnings* 3,000 3,600 2,400
Net credit and collection expense $24,000 $27,360 $19,680
Net expense as a percentage of net sales 4.0% 3.8% 4.1%
*The investment earnings on the cash tied up in accounts receivables is an additional

expense of continuing the existing cash policies.
(c) The analysis shows that the credit card fee of 4% of net credit sales will be higher than
the percentage cost of credit and collection expenses in each year before considering
the effect of earnings from other investment opportunities. However, after considering
investment earnings, the credit card fee of 4% will be less than the company’s
percentage cost if annual net credit sales are less than $600,000.
Finally, the decision hinges on:

(1) the accuracy of investment earnings
(2) the expected trend in credit sales
(3) the effect the new policy will have on sales.
Non-financial factors include the effects on customer relationships of the alternative

credit policies and whether the Berkvoms want to continue with the handling of their
own accounts receivable.

BUILDING BUSINESS SKILLS 7.4 ETHICS CASE
Shirts Galore Ltd
(a) The stakeholders in this situation are:

The managing director of Shirts Galore Ltd
The chief accountant of Shirts Galore Ltd
The shareholders of Shirts Galore Ltd
Any other users of the financial statements of Shirts Galore Ltd.
(b) Yes. The chief accountant is posed with an ethical dilemma – should he/she follow
the managing director’s ‘suggestion’ and prepare misleading financial statements
(understated net profit and assets) or should he/she attempt to stand up to and
possibly anger the managing director by preparing true and fair financial statements.
(c) Shirts Galore’s growth rate should be a product of the change in profit resulting from
the application of generally accepted accounting principles in the preparation of
financial statements, not vice versa. That is, one should not prepare financial
statements with the objective of achieving or sustaining a predetermined growth rate.
The growth rate should be a product of management and operating results, not of
creative accounting.

BUILDING BUSINESS SKILLS 7.5 COMMUNICATION ACTIVITY
Ms I Rich
Manager
Aardvark Pty Ltd
Dear Ms Rich
During our audit of your financial statements we reviewed the internal controls over cash
receipts. The weaknesses we discovered and our suggested improvements are listed below.
1. Weaknesses Suggested Improvement

A list of cheques received is This list should be prepared so that it can later be
not prepared by the person compared with the daily cash summary. While this
who opens the mail. procedure does not assure that all cheques will be
listed, it does allow the company to verify that all
cheques on the list were deposited.
2. Mail is opened by only one When this occurs, there is no assurance that all
person. incoming cheques are forwarded to the cashier’s
department.
3. The cashier is allowed to Under this arrangement it is possible for the cashier to
open the mail. open the mail, prepare the cash summary and make
the bank deposit. This involves no segregation of
duties as the cashier controls the cash from the time it
is received until it is deposited in the bank.
4. The accounts receivable Again, there is poor segregation of duties. In this

clerk is allowed to open the case, the clerk could write off a customer’s account as
mail. uncollectible and then misappropriate the collection
when it is received.
5. Mail receipts are deposited This makes the receipts vulnerable to robbery and to
weekly. misappropriation. The receipts should be deposited
intact daily.
We would be pleased to discuss the weaknesses and our recommended improvements with
you at your convenience.
Yours sincerely
Farmers, Chartered Accountants

BUILDING BUSINESS SKILLS 7.6 COMMUNICATION ACTIVITY
“Trail of guilt”
(a) The demand for forensic accountants has been increasing over the past decade
because of the increase of investigation in the number of corporate fraud cases being
committed by unscrupulous staff in the wake of the global financial crisis. Demand is
also driven by the number of corporate collapses being investigated by regulators
and creditors.
(b) Some of the emerging areas of forensic investigation include:
 Consulting-style of work
 Helping companies with their risk-management programs
 Data mining
(c) Some of the forensic accounting work against high-tech corporate crimes include:
 Investigating stealing by setting up “ghost” employees on the payroll;
 Detecting inconsistencies in funds transfers and non-existent tax-file numbers.
 Interrogating very complex and large databases to match bank account details for
payments
(d) Discussion question on whether students will consider taking on forensic accounting
work.

ch07 SM Carlon 5e

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Solutions Manual

John Wiley & Sons Australia, Ltd 2016

CHAPTER 7 – REPORTING AND ANALYSING CASH AND RECEIVABLES

ASSIGNMENT CLASSIFICATION TABLE

2. Describe electronic banking processes. 2, 9 11

3. Explain the application of internal 3 2, 3 2A, 4A,

4. Prepare a bank reconciliation. 4 4 3A, 4A, 5A,

5. Discuss the basic principles of cash 6 4, 11

6. Business decision making: assessing 5, 12

7. Identify the different types of 6

8. Valuating receivables. 7, 8 7, 10 6A, 7A, 8A,

9. Describe how receivables are reported 8, 9 8 8A,8B

10. Analysing and managing receivables. 8 9,13 10A, 10B

11. Explain the operation of a petty cash 5 6

© John Wiley and Sons Australia Ltd, 2016 7.1

CHAPTER 7 – REPORTING AND ANALYSING CASH AND RECEIVABLES

2. Electronic banking is an electronic payment system that enables customers of a

4. Cash should be reported at $38,850 ($15,000 + $1,850 + $22,000).

6. The basic principles of cash management are:

© John Wiley and Sons Australia Ltd, 2016 7.2

© John Wiley and Sons Australia Ltd, 2016 7.3

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 7.1

(a) Cash flows – monthly loan payment; car loan

BRIEF EXERCISE 7.2

BRIEF EXERCISE 7.3

BRIEF EXERCISE 7.4

Ridley Pty Ltd

BRIEF EXERCISE 7.5

Mar. 20 Postage Expense 32

© John Wiley and Sons Australia Ltd, 2016 7.4

BRIEF EXERCISE 7.6

(a) Other receivables.

BRIEF EXERCISE 7.7

(a) Bad Debts Expense [($500,000 x 1%) - $3,000] 2,000

(b) Bad Debts Expense [($500,000 x 1%) + $800] 5,800

© John Wiley and Sons Australia Ltd, 2016 7.5

BRIEF EXERCISE 7.8

Date Account Titles and Explanation Debit Credit

RE: GST and Bad Debts

© John Wiley and Sons Australia Ltd, 2016 7.6

BRIEF EXERCISE 7.9

(a) Bad Debts Expense 40,000

(b) Current Assets:

BRIEF EXERCISE 7.9

(a) Cash at Bank ($200 - $8) 192

(b) Cash at Bank ($50,000 - $2,000) 48,000

Note the discount on sale of receivables is an expense.

© John Wiley and Sons Australia Ltd, 2016 7.7

ii. Cash outflows – Loan payment; Operating expenses paid; Payment to

iii. Assets – Inventory; GST receivable; Cash at Bank; Accounts receivable

iv. Liabilities – Outstanding bank loan; Rent payable; Accounts payable

1. Establishment of responsibility. The counter clerk is responsible for handling cash.

© John Wiley and Sons Australia Ltd, 2016 7.8

Procedure Weakness Principle Recommended change

1. Inability to establish Establishment of There should be separate

2. Cash is not adequately Physical, mechanical, Cash should be stored in a

3. Cash is not Independent internal A cashier office supervisor

4. The accountant should Segregation of duties. The cashier’s department

Shoe City Ltd

(a) Balance as per bank statement $4,392.20

(1) Cash balance per books $4,770.20

(b) (In general journal form)