Posted: April 18th, 2016

What suggestions would you make to improve internal control?

1. Accrual Basis Income Statement

HATHAWAY HEALTH CLUB
INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31
Year 1 Year 2 Year 3
Sales C C C
Expenses:
Depreciation C F F
Salaries and wages F F F
Advertising F F F
Rent and utilities F F F
Total expenses
C C C
Net income (loss) C C C

2. Rationale

T
PROBLEM 5-2: CALCULATION OF GROSS PROFIT RATIO FOR WAL-MART AND TARGET

The following information was summarized from the consolidated
statements of income of Wal-Mart Stores, Inc. and Subsidiaries for
the years ended January 31, 2011 and 2010, and the consolidated
statements of operations of Target Corporation for the years ended
January 29, 2011, and January 30, 2010. (For each company, years
FY2010 FY2009
(in Millions) Sales* Cost of Sales Sales* Cost of Sales
Wal-Mart $418,952 $315,287 $405,132 $304,444
65,786 45,725 63,435 44,062
Target
* Described as net sales by Wal-Mart.

Required:
1. Calculate the gross profit ratios for Wal-Mart and Target for 2010 and 2009.
2. Which company appears to be performing better? What factors
might cause the difference in the gross profit ratios of the two
companies? What other information should you consider to
determine how these companies are performing in this regard?

1 Gross profit ratios (dollar amounts in millions):

Step 1:
Gross Profit Formula T
Gross Profit Ratio Formula
T

Step 2:
FY2010 FY2009
WALMART
Sales F F
Cost of Sales F F
Gross Profit C C
Gross Profit Ratio C C

FY2010 FY2009
TARGET
Sales F F
Cost of Sales F F
Gross Profit C C
Gross Profit Ratio C C

2 Rationale:

T
General Instructions
1. The following worksheet may be used to complete the exercise/problem.
You may need to refer to your textbook for additional information.
2. The blue cells are for data entry. Enter text in the T cells, figures in the F cells, calculation in C cells

P5-4A

The following condensed income statements and balance sheets are available for Planter Stores for a two-year period.
(All amounts are stated in thousands of dollars.)

Income Statements FY2012 FY2011
Revenues $ 35,982 $ 26,890
Cost of goods sold 12,594 9,912
Gross profit $ 23,388 $ 16,978
Operating expenses 13,488 10,578
Net income $ 9,900 $ 6,400

Balance Sheets December 31, 2012 December 31, 2011
Cash $ 9,400 $ 4,100
Inventory 4,500 5,400
Other current assets 1,600 1,250
Long-term assets, net 24,500 24,600
Total assets $ 40,000 $ 35,350

Current liabilities 9,380 10,600
Capital stock 18,000 18,000
Retained earnings 12,620 6,750
Total liabilities and stockholders’ equity
$ 40,000 $ 35,350

Before releasing the 2012 annual report, Planter’s controller learns that the inventory of one of the stores
(amounting to $500,000) was counted twice in the December 31, 2011, inventory. The inventory
was correctly counted in the December 31, 2012 inventory.

Required
1. Prepare revised income statements and balance sheets for Planter Stores for each of
the two years. Ignore the effect of income taxes.

(Input all amounts in thousands of dollars.)
Revised income statements:FY2012 FY2011
T F F
T F F
Gross profit C C
T F F
Net income C C
Revised balance sheets:
######## ########
T F F
T F F
T F F

Current
assets C C
T F F
Total assets C C

T F F
T F F
T F F
Total liabilities and stockholders’ equity
C C

2. Compute the current ratio at December 31, 2011, before the statements are revised, and compute the
current ratio at the same date after the statements are revised. If Planter applied for a loan in early 2012
and the lender required a current ratio of at least 1 to 1, would the error have affected the loan?
Explain your answer.

Current
ratio: Formula: T

Before revision: C C
=
F

=
F C
After revision: F

T

3. If Planter did not prepare revised statements before releasing the 2012 annual report, what would be
the amount of overstatement or understatement of net income for the two-year period? What would be
the overstatement or understatement of retained earnings at December 31, 2012, if revised statements
were not prepared?

Net income for two years, before revision: C
Net income for two years, after revision: C
T

Retained earnings at December 31, 2012, before the revision:
F
Retained earnings at December 31, 2012, after F revision:
the

T

4. Given your answers to parts (2) and (3), does it matter if Planter bothers to restate the
financial statements of the two years to correct the error? Explain your answer.

T
nd compute the
an in early 2012
PROBLEM 6-1 Bank Reconciliation

General Instructions
1. The following worksheet may be used to complete the exercise/problem.
You may need to refer to your textbook for additional information.
2. The blue cells are for data entry. Enter text in the T cells, figures in the F cells, calculation in C cells

P6-1

The following information is available to assist you in preparing a bank reconciliation for Calico Corners on May 31, 2

a. The balance on the May 31, 2012, bank statement is $8,432.11.
b. Not included on the bank statement is a $1,250 deposit made by Calico Corners late on May 31.
c. A comparison between the canceled checks returned with the bank statement and the company records indicated
the following checks are outstanding at May 31:

No. 123 $ 23.40
No. 127 145.00
No. 128 210.80
No. 130 67.32

d. The Cash account on the company’s books shows a balance of $9,965.34
e. The bank acts as a collection agency for interest earned on some municipal bonds held by Calico Corners. The M
bank statement indicates interest of $465.00 earned during the month.
f. Interest earned on the checking account and added to Calico Corners’ account during May was $54.60. Miscellane
bank service charges amounted to $50.00.
g. A customer’s NSF check in the amount of $166.00 was returned with the May bank statement.
h. A comparison between the deposits listed on the bank statement and the company’s books revealed that a custom
check in the amount of $123.45 was recorded on the books during May but was never added to the company’s acco
The bank erroneously added the check to the account of Calico Closet, which has an account at the same bank.
i. The comparison of deposits per the bank statement with those per the books revealed that another customer’s che
the amount of $101.10 was correctly added to the company’s account.
In recording the check on the company’s books, however, the accountant erroneously increased the Cash account
by $1011.00

Required

1. Prepare a bank reconciliation in good form.

CALICO CORNERS
BANK RECONCILIATION
May 31, 2012

Balance per bank statement, May 31 F
Add: T F
T F C
Deduct: T
T F
T F
T F
T F C
Adjusted balance, May 31 C

Balance per books, May 31 F
Add: T F
T F C
Deduct T F
T F
T F C
Adjusted balance, May 31 C

2. A friend says to you: “I don’t know why companies bother to prepare bank reconciliations it seems a was
time. Why don’t they just do like I do and adjust the Cash account for any difference between what the bank
shows as a balance and what shows up in the books?” Explain to your friend why a bank reconciliation sho
be prepared as soon as a bank statement is received.

T
alculation in C cells

n for Calico Corners on May 31, 2012:

late on May 31.
nd the company records indicated that

ds held by Calico Corners. The May

uring May was $54.60. Miscellaneous

nk statement.
ny’s books revealed that a customer’s
ver added to the company’s account.
an account at the same bank.
ealed that another customer’s check in

sly increased the Cash account
reconciliations it seems a waste of
ference between what the bank
why a bank reconciliation should
PROBLEM 6-5: INTERNAL CONTROL

At Morris Mart Inc., all sales are on account. Mary Morris-Manning is responsible for
mailing invoices to customers, recording the amount billed, opening mail, and recording the
payment. Mary is very devoted to the family business and never takes off more than one or
two days for a long weekend. The customers know Mary and sometimes send personal
notes with their payments. Another clerk handles all aspects of accounts payable. Mary’s

1. List some problems with the current accounts receivable system.

T

2. What suggestions would you make to improve internal control?

T

3. How would you explain to Mary that she personally is not the problem?

T