Question

The cash account for Brentwood Bike Co. at May 1 indicated a balance of $13,480. During May, the total cash deposited was $67,120 and checks written totaled $62,320. The bank statement indicated a balance of $22,750 on May 31. Comparing the bank statement, the canceled checks, and the accompanying memos with the records revealed the following reconciling items:

1. Checks outstanding totaled $10,140.
2. A deposit of $8,260, representing receipts of May 31, had been made too late to appear on the bank statement.
3. The bank had collected for Brentwood Bike Co. $4,360 on a note left for collection. The face of the note was $4,030.
4. A check for $270 returned with the statement had been incorrectly charged by the bank as $720.
5. A check for $410 returned with the statement had been recorded by Brentwood Bike Co. as $140. The check was for the payment of an obligation to Adkins Co. on account.
6. Bank service charges for May amounted to $40.
7. A check for $1,010 from Jennings Co. was returned by the bank because of insufficient funds.

Instructions:

1. Prepare a bank reconciliation as of May 31.

Brentwood Bike Co.
Bank Reconciliation
May 31
Cash balance according to bank statement		$
	$
		$
Adjusted balance		$
Cash balance according to company's records		$
		$
	$
Adjusted balance		$

2. Journalize the necessary entries (a.) that increase cash and (b.) that decrease cash. The accounts have not been closed. For a compound transaction, if an amount box does not require an entry, leave it blank.

a. May 31
b. May 31

3. If a balance sheet is prepared for Brentwood Bike Co. on May 31, what amount should be reported as cash?
$

Ramona's Clothing is a retail store specializing in women's clothing. The store has established a liberal return policy for the holiday season in order to encourage gift purchases. Any item purchased during November and December may be returned through January 31, with a receipt, for cash or exchange. If the customer does not have a receipt, cash will still be refunded for any item under $75. If the item is more than $75, a check is mailed to the customer.

Whenever an item is returned, a store clerk completes a return slip, which the customer signs. The return slip is placed in a special box. The store manager visits the return counter approximately once every two hours to authorize the return slips. Clerks are instructed to place the returned merchandise on the proper rack on the selling floor as soon as possible.

This year, returns at Ramona's Clothing have reached an all-time high. There are a large number of returns under $75 without receipts.

a. How can sales clerks employed at Ramona's Clothing use the store's return policy to steal money from the cash register?
By writing phony refunds and pocketing the cash.

b. What internal control weaknesses do you see in the return policy that make cash thefts easier?

c. Would issuing a store credit in place of a cash refund for all merchandise returned without a receipt reduce the possibility of theft?

Classify the following as either advantages or disadvantages of issuing a store credit in place of cash.

A clerk could only issue a phony store credit rather than taking money from the cash register.

The store would lose less revenue if customers had to choose other store merchandise instead of getting a cash refund.

Issuing only a store credit for returns without a receipt is a stricter return policy that may affect gift-givers' purchase decisions.

Sales clerks will need to be trained to apply the new policy and write up a store credit. They will also need to be trained to handle the redemption of the store credit on future merchandise purchases.

d. Assume that Ramona's Clothing is committed to the current policy of issuing cash refunds without a receipt. Are there any changes that could be made in the store's procedures regarding customer refunds in order that would improve internal control?

Answer 1

Answer: 1

1.	BRENTWOOD BIKE CO.
	Bank Reconciliation
	May 31,
		Balance per bank statement				$ 22750
		Add:	Deposit of May 31, not recorded by bank		$ 8260
			Bank error in charging check as $720 instead of $270		450		8710
		Subtotal				$ 31460
		Deduct:	Outstanding checks				10140
		Adjusted balance				$ 21320
		Balance per company's records ( balancefigure)				$ 18595
		Add:	Proceeds of note collected by bank, including $330 interest				4360
		Subtotal				$ 22955
		Deduct:	Check returned due to insufficient funds		$ 1,325
			Error in recording check		90
			Bank service charges		30		1635
		Adjusted balance				$ 21320
2.
			Cash		4360
			Notes Receivable				4030
			Interest Revenue				330
			Accounts Receivable - Jennings Co.		1325
			Accounts Payable - Adkins Co.(410-140)		270
			Miscellaneous Expense		40
			Cash				1635
3.
			Amount to be reported as cash on May 31, , balance sheet	$ 21230

Answer: 2

a.         The sales clerks could steal money by writing phony refunds and pocketing the cash supposedly refunded to these fictitious customers.

b.         Ramona's Clothing suffers from inadequate separation of responsibilities for related operations, since the clerks issue refunds and restock all merchandise. In addition, there is a lack of proofs and security measures, since the supervisors authorize returns two hours after they are issued.

c.         A store credit for any merchandise returned without a receipt would reduce the possibility of theft of cash. In this case, a clerk could only issue a phony store credit rather than taking money from the cash register. A store credit is not as tempting as cash. In addition, sales clerks could only use a few store credits to purchase merchandise for themselves without management getting suspicious.

An advantage of issuing a store credit for returns without a receipt is that the possibility of stealing cash is reduced. The store will also lose less revenue if customers must choose other store merchandise instead of getting a cash refund. The overall level of returns/exchanges may be reduced, since customers will not return an acceptable gift simply because they need cash more than the gift. The policy will also reduce the “cash drain” during the weeks immediately following the holidays, allowing Ramona's Clothing to keep more of its money earning interest or use that cash to purchase spring merchandise or pay creditors.

A disadvantage of issuing a store credit for returns without a receipt is that preholiday sales might drop as gift-givers realize that the return policy has tightened. After the holidays, customers wishing to return items for cash refunds may be frustrated when they learn the store policy has changed. The ill will may reduce future sales. It may take longer to explain the new policy and fill out the paperwork for a store credit, lengthening lines at the return counter after the holidays. Sales clerks will need to be trained to apply the new policy and write up a store credit. Sales clerks also will need to be trained to handle the redemption of the store credit on future merchandise purchases.

d.         The potential for abuse in the cash refund system could be eliminated if clerks were required to get a supervisor's authorization for a refund before giving the customer the cash. The supervisor should only authorize the refund after seeing both the customer and the merchandise that is being returned.

An alternative would be to use security measures that would detect a sales clerk attempting to ring up a refund and remove cash when a customer is not present at the sales desk. These security measures could include cameras or additional security personnel discreetly monitoring the sales desk.

Finally, an employee on the following work shift could be assigned the responsibility to restock returned merchandise and reconcile the returns to a refund list for the department.