27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Bank reconciliation and internal control

The records of Parker Company indicate a July 31 cash balance of $10,400, which includes undeposited receipts for July 30 and 31. The cash balance on the bank statement as of July 31 is $10,575. This balance includes a note of $2,250 plus $150 interest collected by the bank but not recorded in the journal. Checks outstanding on July 31 were as follows: No. 2670, $1,050; No. 3679, $675; No. 3690, $1,650; No. 5148, $225; No. 5149, $750; and No. 5151, $800.

On July 25, the cashier resigned, effective at the end of the month. Before leaving on July 31, the cashier prepared the following bank reconciliation:

Cash balance per books, July 31 Add outstanding checks: $10,400
No. 5148 $225
5149 750
5151 800 1,675
Less undeposited receipts 1,500
Cash balance per bank, July 31 $10,575
Deduct unrecorded note with interest 2,400
True cash, July 31 $ 8,175


Subsequently, the owner of Parker Company discovered that the cashier had stolen an unknown amount of undeposited receipts, leaving only $1,500 to be deposited on July 31. The owner, a dose family friend, has asked for your help in determining the amount that the former cashier stole.

  1. 1. Determine the amount the cashier stole from Parker Company. Show your computations in good form.
  2. 2. How did the cashier attempt to conceal the theft?
  3. 3. a.    Identify two major weaknesses in internal controls that allowed the cashier to steal the undeposited cash receipts.

  b.    Recommend improvements in internal controls so that similar types of thefts of undeposited cash receipts can be prevented.


To determine

Bank reconciliation: Bank statement is prepared by bank. The company maintains its own records from its perspective. This is why the cash balance per bank and cash balance per books seldom agree. Bank reconciliation is the statement prepared by company to remove the differences and disagreement between cash balance per bank and cash balance per books.

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

To determine: The amount cashier stole from P Company.


  • The deposits which are not recorded by the bank are referred to as deposits in transit. Since the deposits in transit are not reflected on the bank statement, the company should add deposits in transit to cash balance per bank, while preparation of bank reconciliation statement.
  • Outstanding checks are the checks that are issued by the company, but not yet paid by the bank. When the check is issued for payment, the company deducts the cash balance immediately. But the bank deducts only when the cash is paid for the issued check...


To determine

To find: ways how cashier has attempted to conceal the theft.


To determine

To indentify: Two major weakness in the internal controls and two recommendations to improve the internal controls.

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