Financial Accounting: An Integrated Statements Approach, 2nd Edition

Satchell Company, a communications equipment manufacturer, recently fell victim to an em-

bezzlement scheme masterminded by one of its employees. To understand the scheme, it is nec-

essary to review Satchell’s procedures for the purchase of services.

The purchasing agent is responsible for ordering services (such as repairs to a photocopy

machine or office cleaning) after receiving a service requisition from an authorized manager.

However, since no tangible goods are delivered, a receiving report is not prepared. When the

Accounting Department receives an invoice billing Satchell for a service call, the accounts

payable clerk calls the manager who requested the service in order to verify that it was

performed.

The embezzlement scheme involves Drew Brogan, the manager of plant and facilities. Drew

arranged for his uncle’s company, Brogan Industrial Supply and Service, to be placed on

Satchell’s approved vendor list. Drew did not disclose the family relationship.

On several occasions, Drew would submit a requisition for services to be provided by

Brogan Industrial Supply and Service. However, the service requested was really not needed,

and it was never performed. Brogan would bill Satchell for the service and then split the cash

payment with Drew.

Explain what changes should be made to Satchell’s procedures for ordering and paying for

services in order to prevent such occurrences in the future.

Identify each of the following reconciling items as: (a) an addition to the cash balance according

to the bank statement, (b) a deduction from the cash balance according to the bank statement,

(c) an addition to the cash balance according to the company’s records, or (d) a deduction from

the cash balance according to the company’s records. (None of the transactions reported by bank

debit and credit memorandums have been recorded by the company.)

1. Check drawn by company for $300 but incorrectly recorded as $3,000.


2. Check of a customer returned by bank to company because of insufficient funds, $775.


3. Bank service charges, $35.


4. Check for $129 incorrectly charged by bank as $219.


5. Outstanding checks, $6,137.68.


6. Deposit in transit, $7,500.


7. Note collected by bank, $12,000.

Which of the reconciling items listed in Exercise 7-16 require an entry in the company’s

accounts?

The following data were accumulated for use in reconciling the bank account of Kidstock Co.

for March:

a. Cash balance according to the company’s records at March 31, $7,671.45.

b. Cash balance according to the bank statement at March 31, $4,457.25.

c. Checks outstanding, $2,276.20.

d. Deposit in transit, not recorded by bank, $5,780.40.

e. A check for $145 in payment of an account was erroneously recorded in the check register

at $451.

f. Bank debit memorandum for service charges, $16.00.

Prepare a bank reconciliation, using the format shown in Exhibit 7.

336 Chapter 7 Sarbanes-Oxley, Internal Control, and Cash

Exercise 7-15

Internal control of cash

payments

Goals2, 3

Exercise 7-16

Bank reconciliation

Goals4, 5

Exercise 7-17

Entries based on bank

reconciliation

Goals4, 5

Exercise 7-18

Bank reconciliation

Goals4, 5

Adjusted balance: $7,961.45