Last revised: September 2021
SOLUTIONS MANUAL
to accompany
Fundamental Accounting Principles
17th Canadian Edition
by Larson/Dieckmann/Harris
Revised for the 17th Edition by:
John Harris, Seneca College
Technical checks by: Rhonda Heninger, SAIT
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 7-1
,Last revised: September 2021
Chapter 7 Internal Control and Cash
Chapter Opening Critical Thinking Challenge Questions*
If a customer uses a debit card, the payment for the purchase is electronically transferred from
the customer’s bank account to the vendor’s bank account immediately at the point of sale.
Although there is a fee for this service, there is a benefit for retailers who accept payment by
debit card because it means they are exposed to fewer of the risks associated with accepting
cash such as counterfeit and theft.
From the buyer’s perspective, the journal entry would not change. Assuming a $10 item were
purchased, the buyer would make the following journal entry whether the payment is made
using cash or a debit card:
Expense 10.00
Cash 10.00
To record purchase of services.
If cash were used to pay for the services, the seller would make the following journal entry:
Cash 10.00
Service revenue 10.00
To record a cash sale.
However, if a debit card were used to pay for the services, the seller’s journal entry would
change to reflect the bank fees associated with the debit card transaction. Assuming the bank
charges $0.40 per debit card transaction, the seller would make the following journal entry:
Cash 9.60
Debit card expense .40
Service revenue 10.00
To record a sale using a debit card.
*The Chapter 7 Critical Thinking Challenge questions are asked at the beginning of this chapter.
Students are reminded at the conclusion of the chapter to refer to the Critical Thinking
Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking
Challenge questions are available here in the Solutions Manual and accessible to students in
the print and ebooks.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 7-2
,Last revised: September 2021
Knowledge Check-Up Questions
1. b) 2. d) 3. c) 4. a) 5. b)
6. c) 7. d) 8. a) 9. c) 10. a)
Concept Review Questions
1. Cash, accounts receivable, merchandise inventory and building.
2. Internal controls are important to a business to protect assets, ensure reliable accounting,
promote efficient operations and encourage adherence to company policies. The
fundamental principles of internal control are (1) ensure transactions and activities are
authorized, (2) maintain records, (3) insure assets and bond key employees, (4) separate
recordkeeping and custody of assets, (5) establish separation of duties, (6) apply
technological controls, and (7) perform internal and external audits.
3. While Eddie may be trying to be helpful, his proposed plan increases the risk of theft due to
the lack of separation of duties. It is possible for Eddie to pocket some of the cash that he
is counting and update the accounting records to cover up the theft. This situation
illustrates why it is important to separate the person who has custody of assets with the
person who is recordkeeping.
4. Internal control procedures become critical when the manager of a business can no longer
control the business through personal supervision and direct participation in its affairs.
5. Weakness #1 Lack of separation of duties: There is a lack of separation of duties as the
bartender has custody of the inventory and performs recordkeeping.
Implication: There is risk that the bartender could steal alcohol and update the accounting
records to cover up this theft.
Recommendation: The responsibility of counting alcohol and recordkeeping should be
performed by separate people.
Weakness #2 Lack of review: There is a lack of review over the bartender’s inventory count
and no investigation of the differences between the inventory records and the inventory
count.
Implication: There could be errors either in the inventory records or the inventory count,
leading to errors in the financial statements.
Recommendation: A manager should review the bartender’s inventory count and
investigate the reason for differences between the inventory records and the physical
inventory count. Any changes to the recordkeeping should be performed by an authorized
individual.
6. The three components of the fraud triangle are motivation, opportunity and rationale. A
student may be motivated to cheat on an exam in order to pass an exam or a course. If the
student is at high risk of not passing, they may be more motivated to cheat. The student
may have an opportunity to copy off a neighbor or to use notes when the professor is not
watching. For rationalization, the student may justify that they have put a lot of effort into
the course and deserve to pass. The student may also rationalize that they have no choice
as they had a bad professor, textbook or blame some other external factor.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 7-3
, Last revised: September 2021
7. If department managers were permitted to deal directly with the suppliers, the amount of
merchandise purchased and the resulting liabilities would not be well controlled. Having
department managers place orders through a purchasing department helps control the
amounts purchased and the resulting liabilities.
8. A petty cash receipt is a document stating that a payment has been made from petty cash.
The person who receives payment signs the receipt.
9. $320,600,000 for 2020 and $115,300,000 for 2019.
10. ( $40,539,000 $2,109,071,000) × 100 = 1.92%.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 7-4
SOLUTIONS MANUAL
to accompany
Fundamental Accounting Principles
17th Canadian Edition
by Larson/Dieckmann/Harris
Revised for the 17th Edition by:
John Harris, Seneca College
Technical checks by: Rhonda Heninger, SAIT
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 7-1
,Last revised: September 2021
Chapter 7 Internal Control and Cash
Chapter Opening Critical Thinking Challenge Questions*
If a customer uses a debit card, the payment for the purchase is electronically transferred from
the customer’s bank account to the vendor’s bank account immediately at the point of sale.
Although there is a fee for this service, there is a benefit for retailers who accept payment by
debit card because it means they are exposed to fewer of the risks associated with accepting
cash such as counterfeit and theft.
From the buyer’s perspective, the journal entry would not change. Assuming a $10 item were
purchased, the buyer would make the following journal entry whether the payment is made
using cash or a debit card:
Expense 10.00
Cash 10.00
To record purchase of services.
If cash were used to pay for the services, the seller would make the following journal entry:
Cash 10.00
Service revenue 10.00
To record a cash sale.
However, if a debit card were used to pay for the services, the seller’s journal entry would
change to reflect the bank fees associated with the debit card transaction. Assuming the bank
charges $0.40 per debit card transaction, the seller would make the following journal entry:
Cash 9.60
Debit card expense .40
Service revenue 10.00
To record a sale using a debit card.
*The Chapter 7 Critical Thinking Challenge questions are asked at the beginning of this chapter.
Students are reminded at the conclusion of the chapter to refer to the Critical Thinking
Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking
Challenge questions are available here in the Solutions Manual and accessible to students in
the print and ebooks.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 7-2
,Last revised: September 2021
Knowledge Check-Up Questions
1. b) 2. d) 3. c) 4. a) 5. b)
6. c) 7. d) 8. a) 9. c) 10. a)
Concept Review Questions
1. Cash, accounts receivable, merchandise inventory and building.
2. Internal controls are important to a business to protect assets, ensure reliable accounting,
promote efficient operations and encourage adherence to company policies. The
fundamental principles of internal control are (1) ensure transactions and activities are
authorized, (2) maintain records, (3) insure assets and bond key employees, (4) separate
recordkeeping and custody of assets, (5) establish separation of duties, (6) apply
technological controls, and (7) perform internal and external audits.
3. While Eddie may be trying to be helpful, his proposed plan increases the risk of theft due to
the lack of separation of duties. It is possible for Eddie to pocket some of the cash that he
is counting and update the accounting records to cover up the theft. This situation
illustrates why it is important to separate the person who has custody of assets with the
person who is recordkeeping.
4. Internal control procedures become critical when the manager of a business can no longer
control the business through personal supervision and direct participation in its affairs.
5. Weakness #1 Lack of separation of duties: There is a lack of separation of duties as the
bartender has custody of the inventory and performs recordkeeping.
Implication: There is risk that the bartender could steal alcohol and update the accounting
records to cover up this theft.
Recommendation: The responsibility of counting alcohol and recordkeeping should be
performed by separate people.
Weakness #2 Lack of review: There is a lack of review over the bartender’s inventory count
and no investigation of the differences between the inventory records and the inventory
count.
Implication: There could be errors either in the inventory records or the inventory count,
leading to errors in the financial statements.
Recommendation: A manager should review the bartender’s inventory count and
investigate the reason for differences between the inventory records and the physical
inventory count. Any changes to the recordkeeping should be performed by an authorized
individual.
6. The three components of the fraud triangle are motivation, opportunity and rationale. A
student may be motivated to cheat on an exam in order to pass an exam or a course. If the
student is at high risk of not passing, they may be more motivated to cheat. The student
may have an opportunity to copy off a neighbor or to use notes when the professor is not
watching. For rationalization, the student may justify that they have put a lot of effort into
the course and deserve to pass. The student may also rationalize that they have no choice
as they had a bad professor, textbook or blame some other external factor.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 7-3
, Last revised: September 2021
7. If department managers were permitted to deal directly with the suppliers, the amount of
merchandise purchased and the resulting liabilities would not be well controlled. Having
department managers place orders through a purchasing department helps control the
amounts purchased and the resulting liabilities.
8. A petty cash receipt is a document stating that a payment has been made from petty cash.
The person who receives payment signs the receipt.
9. $320,600,000 for 2020 and $115,300,000 for 2019.
10. ( $40,539,000 $2,109,071,000) × 100 = 1.92%.
Solutions Manual to accompany Fundamental Accounting Principles, 17th Canadian Edition. © 2022 McGraw Hill Ltd. 7-4
