Fundamentals of financial accounting 5th edition phillips solutions manual download

Fundamentals of Financial Accounting 5th Edition Phillips

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Chapter 5 Fraud, Internal Control, and Cash

ANSWERS TO QUESTIONS

1. The three categories of employee fraud are: corruption, asset misappropriation, and financial statement fraud Asset misappropriation is most common. Financial statement fraud is associated with the largest losses.

2. The three points of the fraud triangle are incentive (which answers the question, “Why would someone commit fraud?”), opportunity (which answers the question “How would someone commit a fraud?”) and rationalization (which answers the question, “How can a person justify fraud?”). Fraud is less likely to occur if one of the elements is missing

3. Managers can be motivated to misreport financial results if they are experiencing financial pressure or aspire to create business opportunities (by satisfying loan covenants, increasing equity financing, and attracting business partners).

4. The Sarbanes-Oxley Act counteracts the incentive to commit fraud by stipulating steeper fines and longer jail terms for those who willfully misrepresent financial data.

5. The Sarbanes-Oxley Act reduces the opportunity to commit fraud by requiring that management monitor their internal controls and submit a report that indicates whether the controls over financial reporting operated effectively. The board of directors must appoint an audit committee to oversee the financial matters of the company. External auditors must test the effectiveness of the company’s internal

Fundamentals of Financial Accounting, 5/e 5-1

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controls and submit a report stating whether they agree with the internal control report issued by management.

6. The Sarbanes-Oxley Act attempts to encourage good employee behavior by mandating the creation of confidential tip lines, whereby employees can report potentially fraudulent conduct. It also offers protection to whistle-blowers.

7. Internal control focuses on objectives relating to operations, reporting, and compliance.

8. The five components of internal control are the control environment, risk assessment, control activities, information and communication, and monitoring activities.

9. Five common internal control principles are:

1) Establish responsibility. This means assigning each task to only one employee.

2) Segregate duties Do not make one employee responsible for all parts of a transaction.

3) Restrict access Do not provide access to assets or information unless it is needed to fulfill assigned responsibilities.

4) Document procedures. Prepare documents to show activities that have occurred.

5) Independently verify. Check others’ work.

10 Assigning each task to only one employee enables a manager to determine who is responsible for any errors or thefts regarding the task.

11. Cash-handling and cash-recording activities should be separated to remove the opportunity for theft of cash and cover-up by altering the records. This separation is accomplished best by assigning the responsibility for cash handling to individuals other than those who have the responsibility for record-keeping. In fact, it usually is desirable that these two functions be performed in different departments of the business. A control commonly called segregation of duties involves assigning responsibilities so that one employee can’t make a mistake or commit a dishonest act without someone else knowing it.

12 Physically locking up valuable assets and electronically securing access to other assets and information are good methods of restricting access.

13 Documentation allows companies to keep track of whether goods have been shipped, customers billed, or cash received. This allows them to determine which transactions have or have not been entered into the accounting system.

14 One way that independent verification can occur is to hire an independent auditor to check the work of employees. Independent verification can also be made part of a person’s job process, such as verifying that the items on a receipt are the items actually received.

15 A mandatory vacation policy, particularly for employees who handle cash, acts as a control because it is very difficult for employees to cover up theft while they are away from the business.

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16. Two limitations of internal control are that (a) controls may not be implemented because their cost exceeds their benefits and (b) controls are susceptible to human error or fraud, including people working together to defeat the control (collusion), and managers disarming control systems (overriding).

17 The primary internal control goal for cash receipts is to ensure that the business receives the appropriate amount of cash and safely deposits it in the bank.

18 The cash register performs three important functions: it restricts access to cash, it documents the amount charged for each item sold, and it summarizes the total cash sales. When cash is received by mail, a mail clerk performs functions similar to the cash register.

19. Cash received in person is independently verified in two ways. First, the amount of cash is counted by a supervisor who verifies the amount reported by the cashier on a cash count sheet. Second, a staff member in the accounting department compares cash register receipts to the cash count sheet (and to the bank deposit slip).

20 The primary internal control goal for cash payments is to ensure that the business pays only for authorized transactions.

21. The purposes of a bank reconciliation are (a) to determine the “true” cash balance and (b) to provide data to adjust the Cash account to that balance. A bank reconciliation involves reconciling the balance in the Cash account at the end of the period with the balance shown on the bank statement (which is not necessarily the “true” cash balance) at the end the period.

22. Cash includes money and any instrument, such as a check, money order, or bank draft, which banks normally will accept for deposit and immediate credit to the depositor’s account. Cash Equivalents include short-term, highly liquid investments purchased within three months of maturity.

23. Restricted cash is cash not available for general use because it has been set aside for legal or contractual reasons. It is reported as a current asset if it is expected to be used up within one year, or as a noncurrent asset if it is expected to be used up in more than one year.

24. By replenishing petty cash funds at the end of each accounting period, a company will record all disbursements made out of petty cash during the period in which they are made. An opposing argument is that this recording of petty cash transactions in the proper period is not necessary because they are immaterial in amount (i.e., will not affect the decisions of financial statement users).

Authors' Recommended Solution Time (Time in minutes)

* Due to the nature of cases, it is very difficult to estimate the amount of time students will need to complete them. As with any open-ended project, it is possible for students to devote a large amount of time to these assignments. While students often benefit from the extra effort, we find that some become frustrated by the perceived difficulty of the task. You can reduce student frustration and anxiety by making your expectations clear, and by offering suggestions (about how to research topics or what companies to select). The skills developed by these cases are indicated below

Fundamentals of Financial Accounting, 5/e 5-5

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ANSWERS TO MINI-EXERCISES

M5–1

1. A

2. B

3. C

4. B

M5–2

1. A

2. B

3. D

4. C

5. E

M5–3

1. Establish responsibility

2. Segregate duties

3. Restrict access

4. Document procedures

5. Document procedures

6. Independently verify

M5–4

1. D – Document procedures

2. E – Independently verify

3. C – Restrict access

4. B – Segregate duties

5. A – Establish responsibility

a) Segregate duties – The cashiers should not have access to the cash and also be solely responsible for reconciling the cash register tape with the cash count summary. This would allow them to take some of the cash and understate the amount received and deposited. Internal control would be improved by limiting the cashiers’ responsibilities to only handling the cash (and preparing a cash count summary that is independently verified).

b) Segregate duties – The accounting department should not have access to and responsibility for recording cash receipts. The receptionist should prepare the cash receipts list before cash receipts are forwarded to accounting. Accounting should compare the cash receipts list to the bank deposit to ensure all cash receipts actually were deposited.

c) Independently verify – The accounting department does not compare cash register totals, cash count sheets, and bank deposit slips to ensure that all cash received is safely deposited in the bank. The accounting department should file each type of documentation by day and, when all have been received for a particular day, compare the amounts to verify that cash receipts have been deposited in the bank.

d) Establish responsibility – If employees exchange jobs during a shift, no one will be able to identify who has committed errors that arise. Where possible, each duty should be assigned to only one employee.

e) Segregate duties – With the responsibility for authorizing price changes, cashiers can reduce the amount charged for a cash sale and take that amount of cash without anyone detecting it. To improve this control, price changes should be authorized by someone other than a cashier.

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M5–

a) Segregate duties – The warehouse manager should not be allowed to place and receive orders because it would allow him to divert goods to a personal location and have the company pay for them. Ordering responsibilities should be assigned to someone who does not receive goods.

b) Independently verify – The owner does not review the documents before signing the check, which would allow the accountant to issue a check for a non-business purpose (or at an erroneous amount) without being detected. The owner should review the documents and ensure they correspond to the check before signing it.

c) Restrict access – Any employee who enters the lunch room could prepare unauthorized checks by accessing the check-signing machine and checks. Access to equipment and supplies for preparing checks should be restricted only to the employee who is responsible for issuing checks.

d) Establish responsibility – By allowing several different employees to approve purchase orders, employees will not be able to identify who has failed to independently verify errors should they arise. Where possible, the responsibility for approving purchase orders should be assigned to only one employee.

Reconciling Item Bank Statement Company’s Books

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M5–10

Outstanding checks to be included in the May 31 bank reconciliation:

M5–11

The May 31 bank reconciliation should include a deposit in transit of $150 made on May 30. M5–12

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M5–14

Yes 1. $10,000 of government Treasury bills purchased 10 days prior to their maturity.

No 2. $50,000 of government Treasury bills purchased to satisfy a legal requirement to set aside funds for a landfill clean-up.

No 3. $10,000 of cash owed by customers on sales made within 20 days of year-end.

Yes 4. $1,000 of cash in the petty cash custodian’s locked cash box

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ANSWERS TO EXERCISES

E5–1

Req. 1

The control principle is segregation of duties and the objective is to prevent or detect unauthorized activities involving the company’s assets.

Req. 2

Having one employee do both jobs would be less expensive, but it also would allow that single employee to easily pocket the cash paid by a moviegoer without getting caught because the employee could let the moviegoer into the movie without issuing a ticket and without recording the sale. This fraud would be classified as asset misappropriation.

E5–2

By failing to issue receipts for all donation transactions, the principle of documenting procedures has been violated in two ways: (a) you didn’t ensure that adequate records (of donations) were maintained, and (b) the failure to issue receipts makes it difficult to know whether you used the company’s (donated) assets in an authorized manner. Donations given without issuing receipts could be pocketed without anyone knowing it. In the future, it would be advisable to require volunteers to issue receipts to all donors and, as a check on this, to require that volunteers work in pairs. Even these principles aren’t foolproof, as two volunteers could agree with each other (“collude”) to take donations without issuing receipts.

E5–3

Req. 1

a. Establish responsibility

b. Document procedures

c. Document procedures

d. Restrict access

e. Segregate duties

f. Document procedures

g. Independently verify

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E5–3 (continued)

Req. 2

Because the supervisor was responsible for handling the cash, preparing the cash count sheet, and depositing cash in the bank, the supervisor was able to steal cash without detection. Accounting could have detected the theft by calculating expected cash receipts from the usage data transmitted by the lockers, but this was not a required part of independently verifying the amount of cash listed by the supervisor on the cash count sheets and daily cash summary.

E5–4

Req. 1

a. Document procedures

b. Segregate duties / Document procedures

c. Establish responsibility

d. Independently verify

e. Document procedures

f. Independently verify

Req. 2

Steps Documentation

1. Request that goods or services be ordered. Purchase requisition Sales manager

Performed By

2. Order goods or services. Purchase order Materials/crew manager

3. Receive goods or services. NONE

4. Obtain bill for goods or services. Supplier invoice Accountant

5. Write check to pay the bill. Company check Accountant

The document excluded in the above scenario is the receiving report. The receiving report would help to document that the goods or services ordered were received by the company.

5-12

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E5–4 (continued)

Req. 3

Because receiving reports were not prepared, there was no way to independently verify that amounts charged by suppliers were for goods that had been delivered to authorized work sites. The materials/crew manager, who initiated the purchase order, could simply instruct suppliers to deliver goods to his home. The accountant could not detect this fraud because no documentation was available to indicate the address to which goods had been delivered. If the company required that receiving reports be prepared by an employee independent of the materials/crew manager, the accountant would have been able to determine that the company was being billed for goods not delivered to a work site.

in millions

Note: Excluded are Unearned Revenue (a liability) and Goodwill (a noncurrent asset).

No journal entries are recorded when amounts are paid out of the petty cash fund. These transactions are recorded only when the fund is replenished.

No journal entries are recorded when amounts are paid out of the petty cash fund. These transactions are recorded only when the fund is replenished.

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ANSWERS TO COACHED PROBLEMS

CP5–1

Req. 1

a. Strength – Use of a cash register restricts access to a valuable asset (cash), and issuance of a receipt helps to document the procedure of collecting cash.

b. Strength – The cash count sheet is a useful means of documenting the procedure performed (cash count).

c. Strength – Independent verification by the manager helps to ensure the accuracy of the cash count records.

d. Weakness – By basing the journal entry on only the cash count sheet, there is no assurance that the cash count sheet equals the total sales (as per the cash register) or that it equals the amount of cash actually deposited in the bank (as per the bank deposit slip). Cash could be taken by a cashier (or the manager) without detection.

e. Weakness – Because the check writer does not inspect goods personally, the possibility exists for the company to issue checks to suppliers for goods that have not been received or for goods that were received in unacceptable condition.

f. Strength – By documenting procedures performed upon receiving goods, the company has a record supporting amounts that will be payable to suppliers.

Req. 2

d. The journal entry should be prepared after ensuring the cash register receipt total equals the total on the cash count sheet and the bank’s stamped deposit slip.

e. Checks should be written to suppliers only after determining that the items on the invoice correspond to goods received by the company in good condition (as indicated on a receiving report).

* Check number 104 was written and recorded in the accounting records for $1,100 but was incorrectly cleared by the bank for $1,000. Therefore the bank did not take out enough funds and a $100 deduction is required on the bank's side of the bank reconciliation to allow for the bank’s error.

CP5–3

Req. 1

Comparison of deposits listed in the Cash account with deposits listed on the bank statement reveals a $5,000 deposit in transit on August 31.

Req. 2

Comparison of the checks cleared on the bank statement with (a) outstanding checks from July, and (b) checks written in August reveals two outstanding checks at the end of August ($290 + $550 = $840).

Req. 3

b. No journal entry. Journal entries are made only when the petty cash fund is established, replenished, increased, or eliminated.

c. No journal entry.

d. No journal entry.

e.

f. No journal entry.

g. No journal entry.

h. No journal entry.

Cash and Cash Equivalents will include the cash in the bank ($1,000), the government T-bills purchased within 90 days of maturity ($500), and the petty cash ($400), for a total of $1,900. The $750 of cash set aside for legal reasons would be excluded from Cash and Cash Equivalents and would instead be reported as Restricted Cash.

ANSWERS TO GROUP A PROBLEMS

PA5–1

Req. 1

a. Weakness – By not issuing a receipt for all cash sales, the company does not adequately document procedures performed. This could allow a cashier to take cash rather than place it in the cash register.

b. Strength – The cash count sheet is a useful means of documenting the procedure performed (cash count) and independent verification by the manager helps to ensure accuracy of the cash count.

c. Strength – By restricting access to excess cash, The Taco Shop reduces the likelihood of it being stolen.

d. Strength – A purchase order form is a useful means of documenting the procedure performed (goods ordered) and independent verification by the manager helps to ensure the purchase is for valid business purposes.

e. Weakness – By not locking the door, access to supplies is not restricted.

Req. 2

a. All sales should be entered into the cash register and receipts should be issued. To encourage this new policy, customers should be advised that they will receive a free meal if they are not given a receipt.

e. Supplies should be safeguarded At a minimum, the rear door should be locked.

charges deducted from bank statement.

These entries are necessary because the bank has appropriately recorded these changes in its accounts, but Martin Company hasn’t yet recorded them in its accounts. The Cash account (and the other accounts in the entries) must be updated before adjusted financial statements can be prepared.

PA5–3

Req. 1

Comparison of deposits listed in the Cash account with deposits listed on the bank statement reveals a $13,000 deposit in transit on December 31.

Req. 2

Comparison of the checks cleared on the bank statement with checks written in December reveals two outstanding checks at the end of December ($4,500 + $150 = $4,650). Req.

STEWART COMPANY

a.

b. No journal entry. Journal entries are made only when the petty cash fund is established, replenished, increased, or eliminated.

c. No journal entry.

d. No journal entry.

e.

f.

g.

h.

Cash and Cash Equivalents will include the cash in the bank ($1,000) and the petty cash ($250), for a total of $1,250. The $500 of government T-bills purchased four months ago were not acquired within 90 days of maturity, so they are not a cash equivalent (instead, they are considered a short-term investment). The $750 of cash set aside for workers’ compensation insurance would be excluded from Cash and Cash Equivalents and would instead be reported as Restricted Cash.

ANSWERS TO GROUP B PROBLEMS

PB5–1 Req 1

a. Strength – By documenting procedures, the company reduces the risk of failing to record (or recording twice) sales transactions.

b. Strength – Segregating the duties of depositing cash from recording cash helps reduce the risk of embezzlement, and it provides an opportunity to ensure that the cash deposited (debit to Cash) equals the credits to customer accounts (credit to Accounts Receivable)

c. Strength – Establishing responsibility for a task enables the company to determine who is responsible for any errors (or overly generous allowances)

d. Weakness – By allowing sales allowances to be entered based on a phone call from the receptionist to the accounting department, the company lacks documentation of the approval for the sales allowance. This would make it difficult to determine whether recorded sales allowances were appropriate. Also, by allowing the receptionist to access customer checks (received in the mail) and to approve credits to customer accounts (for sales allowances), the receptionist could take the checks and request a sales allowance for the customer This type of fraud would be difficult to detect because the customer’s account would be credited for the amount of cash received by the company.

e. Strength – Access to the warehouse is restricted by locks (preventing unauthorized personnel from entering the warehouse) and is monitored by surveillance cameras (facilitating after-the-fact detection of unauthorized entry)

f. Strength – By comparing the supplier’s invoice to the company’s receiving report, the company is requiring independent verification of the purchase before making a payment for it.

Req. 2

d. All sales allowances should be documented in writing. These allowances should either be issued by someone who does not have access to the customer’s payment, or they should be reviewed by a supervisor.

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These entries are necessary because the bank has appropriately recorded these changes in its accounts, but Tony Company hasn’t yet recorded them in its accounts. The Cash account (and the other accounts in the entries) must be updated before adjusted financial statements can be prepared.

PB5–2 (continued)

Req. 3

PB5–3

Req. 1

Comparison of deposits listed in the Cash account with deposits listed on the bank statement reveals a $21,000 deposit in transit on September 30.

Req. 2

Comparison of the checks cleared on the bank statement with checks written in September reveals two outstanding checks at the end of September ($500 + $6,000 = $6,500). Req.

*$6,000

b. No journal entry. Journal entries are made only when the petty cash fund is established, replenished, increased, or eliminated.

c. No journal entry.

d.

g.

Cash and Cash Equivalents will include the cash in the bank ($1,000), the petty cash ($400), and the Treasury bills ($500) that were purchased within 90 days of maturity for a total of $1,900. The $750 of cash set aside for legal reasons would be excluded from Cash and Cash Equivalents and would instead be reported as Restricted Cash.

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ANSWER TO COMPREHENSIVE PROBLEM

C5-1 (continued)

C5-1 (continued)

4 (continued)

C5-1 (continued)

Note: Cash, Accounts Receivable, Interest Revenue, and Office Expense are unchanged from Req. 4, and Cash Equivalents, Equipment, Unearned Revenue, Note Payable, Common Stock, Retained Earnings, and Service Revenue are unchanged from Req. 2.

C5-1 (continued)

Req. 6 (continued)

C5-1 (continued)

7

C5-1 (continued)

Req. 7 (continued)

Pulse Recording Studio

Balance Sheet

At January 31

Note: $8,240 Retained Earnings = $5,300 Beg + $2,940 Net Income - $0 Dividends

8

= 1.94

Yes, Pulse Recording Studios has met its loan covenant since its current ratio is 1.94 which exceeds the required ratio of 1.2.

C5-1 (continued)

Req. 9

Net Profit Margin = Net Income Total Revenue = $2,940 $9,005 = 0.3265 =32.65%

Yes Pulse Recording Studio has achieved its objective by having a net profit margin of 32.65%, which exceeds its goal of 10%.

ANSWERS TO SKILLS DEVELOPMENT CASES

S5–1

1. D

2. A

S5–2

Req. 1

The Home Depot reported $1,929 million of Cash and Cash Equivalents during the year ended February 2, 2014. Lowe’s reported $391 million of Cash and Cash Equivalents at approximately the same date (year ended January 31, 2014). Thus, Lowe’s reported less Cash and Cash Equivalents than The Home Depot.

Req. 2

Internal controls over financial reporting for Lowe’s and most of its subsidiaries were operating effectively at January 31, 2014; the operating effectiveness of internal controls over financial reporting at Orchard Supply Company, a subsidiary acquired by Lowe’s in August 2013, were not assessed.

S5–3

The solutions to this project will depend on the company and/or accounting period selected for analysis.

S5–4

Req. 1

The article refers to asset misappropriation.

Req. 2

Unapproved refunds and voids can be used by dishonest cashiers to eliminate valid sales that have been made and paid for by customers. By eliminating the sales revenue, cashiers can then take the cash given by the customer without anyone knowing it. While the register-monitoring control does not completely prevent this from happening, it does make it possible to detect it on a timely basis. Today, most cash registers require cashiers to enter an employee identification number, so unusual “refund or void” activities can be linked to a particular employee, who can be questioned and/or monitored more closely.

Req. 3

The control that requires two workers to perform related activities is called segregation of duties. It addresses the control objective of preventing or detecting unauthorized activities involving the company’s assets.

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S5–4 (continued)

Req. 4

The parties most directly affected by inventory theft in this case are Famous Footwear’s (1) managers, (2) employees, (3) investors, (4) creditors, and (5) honest customers, who will pay higher prices.

Managers are likely to be paid, in part, based on the financial performance of each store. If inventory is being taken without full payment for the “sale,” the store’s gross profit (and net income) will be lower than it should be. This will adversely affect the managers’ pay.

Obviously, any dishonest employees who are detected will be harmed (fired, sued, jailed) by having committed the theft. Beyond them, though, other store employees will be harmed, particularly if the company’s head office has to close stores whose profits are significantly reduced as a result of inventory theft by dishonest employees.

Because investors ultimately “own” the profits of Famous Footwear, any theft by employees at Famous Footwear will adversely affect investors whose stock will likely fall in value. Similarly, poor financial results could cause the company to violate loan covenants, which could lead to renegotiation of the company’s loans on less favorable terms, causing further reductions in the company’s income and stock price.

Creditors could be adversely affected if financial losses delay the company’s ability to repay its liabilities on a timely basis or, in the extreme case, prevent the company from repaying its liabilities at all.

These possibilities describe only the relatively direct effects of losses caused by inventory theft. Clearly, on an individual by individual basis, the friends and family of each manager, employee, investor, and creditor also could be affected in other personal ways. For example, if managers fail to receive bonuses or employees are laid off when a store is closed, they’ll have less money to pay for their own personal costs of living. It could even be you who loses a job through no fault of your own.

Req. 1

If you go along with your supervisor’s request, no one is likely to suffer in the short-term. You will satisfy your supervisor, which may lead to favorable performance evaluations for you. Your bank will not know about this manipulation, so it is not likely to adversely affect the bank in the short term. However, there may be several adverse long-term consequences of this act, as discussed below.

First, your supervisor may begin to think that you are able and willing to take shortcuts and falsify information to produce pleasing financial results. Many frauds start out by slightly bending the rules, but then escalate to larger and more dishonest acts. You do not want to allow yourself to get caught on this “slippery slope.” Second, your bank may be adversely affected if it turns out that this is the beginning of financial difficulties for your company. Possibly, the delayed payment from your major customer is a sign of financial trouble in the industry or economy, which may lead your company to experience problems collecting from other customers. This could snowball and cause financial hardship for your own company. Should this unravel further, your bank may begin asking questions about why your company had been able to maintain compliance with loan requirements earlier and possibly discover that your dishonest action contributed to a false impression that your company was financially secure. It is possible that this situation could lead you to be identified as the culprit responsible for misstating the financial statements, and conclude with a prison term and fines being levied on you.

If you do not go along with your supervisor’s request, you might suffer in the short term because the supervisor might think you are not a “team player.” In the long run, however, you are unlikely to regret doing the right thing.

Req. 2

As an accounting assistant, your primary responsibility is to provide reliable information on which decisions can be based. Honesty should be more important than loyalty.

Req. 3

One course of action is to go along with the supervisor’s request. For reasons stated in requirements 1 and 2, this is not the “best” alternative. A more appropriate alternative is to account for the checks properly (as a reduction in Cash and Accounts Payable). Should the bank call the company for having violated its minimum cash balance requirement, the situation could be explained to the bank and allow the bank to see that the company’s actions recognize the importance of honest financial reporting. This conversation should include a discussion about the limitations of the bank’s reliance on only one measure of the company’s financial condition (cash) and the need for considering other performance measures (such as the level of accounts payable and current liabilities) in relation to the level of cash and other current assets.

S5–6 Req. 1

(a) $50 x 12 months = $ 600

(b) $12 x (52 weeks x 5 days per week) = 3,120

(c,d) Accounts receivable collections ($300 + $800) = 1,100

Total approximate amount stolen $4,820

Req. 2

Basic recommendations:

(1) Install a tight system of internal control, including the following:

a. Separate cash handling from recordkeeping.

b. Deposit all cash daily.

c. Make all payments by check. Consider a separate cash on hand system for small expense payments.

d. Reconcile the bank statement monthly.

e. Institute a system of spot checks.

f. Establish cash and paperwork flows.

(2) a. Arrange for an annual independent audit on a continuing basis.

b. Carefully plan and assign definite responsibilities for all employees. Focus on attaining internal control. Isolate the once trusted employee from all cash handling and accounting activities.

ANSWERS TO CONTINUING CASES

CC5-1 (continued)

The Treasury Bills are not included in the December 31 Cash and Cash Equivalents balance because they were purchased in August which is not within three months of maturity. The Treasury Bills should be classified as short-term investments.

CC5-2

1. b (Option a relates to opportunity not incentive. Option c is not relevant because Stephen has no opportunity to misstate. Option d relates to incentive not opportunity.)