Chapter 6

Cash and Internal Controls

QUESTIONS

1. The seven broad principles are: Establish responsibilities; Maintain adequate records;
Insure assets and bond key employees; Separate recordkeeping from custody of assets;
Divide responsibilities for related transactions; Apply technology controls; Perform
regular and independent reviews.
2. Internal control procedures become especially critical when the manager of a business
can no longer control the business through personal supervision and direct
participation.
3. Responsibility for related transactions should be divided so that the work of one
department or individual acts as a check on that of another.
4. Separation of custody from recordkeeping of an asset encourages the asset custodian to
avoid misplacing, misappropriating, or wasting the asset. This arrangement makes
collusion necessary if an asset is to be stolen and the theft concealed in the records.
5. If individual departments were permitted to deal directly with suppliers, the amount of
merchandise purchased and the resulting liabilities would not be well controlled. Having
individual departments place orders through a purchasing department helps control the
amounts purchased and the resulting liabilities.
6. The limitations of internal control arise from two sources: the human element (human
error or human fraud) and the cost-benefit principle.
7. Cash is most liquid; and least liquid is a building. The four assets ordered from most to
least liquid are: cash, accounts receivable, inventory, and building.
8. A petty cash receipt is a document stating that a payment has been made from petty
cash. The one who received payment and the one who approved payment both sign the
receipt.
9. Depositing all receipts on the day of receipt (1) creates an independent record of the
amount of cash received and (2) helps prevent an employee from having personal use of
the money for a period of time before depositing it.
10. During the year ended December 31, 2011, cash (and equivalents) of $141,145 thousand
is used by investing activities. Cash (and equivalents) of $227,516 thousand is used by
financing activities.

11. Arctic Cats net income for 2011 was $13,007 thousand. Further, it reported a net
decrease in cash (and equivalents) of $17,111 thousand. These two figures are different
because (1) net income is calculated on the accrual basis, and includes the effects of
several noncash transactions and (2) some transactions affect cash but not income. For
instance, the purchase of property, plant, and equipment assets reduces cash, but does
not affect income, except through annual depreciation over the life of the asset.
12. KTMs cash (liquid assets) at December 31, 2011, equals 14,962 (all in EUR thousands).
It is the third largest current asset and makes up about 7.7% of its current assets.
Its Cash (liquid assets) increased from 8,946 at December 31, 2010, to 14,962 at
December 31, 2011 (all in EUR thousands). As a percent of total current assets, its Cash
balance increased from about 4.9% to about 7.7%

13. Piaggios cash and equivalents decreased by 2,956 thousand during 2011; specifically,
from 154,758 thousand to 151,802 thousand (Instructor note: these cash numbers are
somewhat different than what is reported on its balance sheet, which might confuse
some students). Its statement of cash flows identifies the three major sources and uses
of its cash flows: (1) 155,624 thousand from operating activities; (2) 84,709 thousand
used in investing (investment) activities; and (3) 73,871 thousand used by financing
(funding) activities.