Over the next two months, Front Row Entertainment continued to enjoy success in signing artists and promoting their events. However, the increased business has put considerable stress on keeping timely and up-to-date financial records. In particular, both Cam and Anna are concerned with the accounting and management of the company’s cash. The tour promotion industry is a cash-intensive industry, normally requiring large prepayments to secure venues and arrange advertising. When the number of artists under contract were small, Cam and Anna developed a simple system to manage the company’s cash. Normally, any cash received was put in a file cabinet in the company’s office. If the amount appeared to be getting large, a deposit was made. Similarly, if a large check needed to be written, either Cam or Anna would check the balance in the checkbook. If cash was not sufficient to cover the check, they’d get cash from the file cabinet and deposit the amount necessary to cover the check. However, with the increasing business, they would often forget to make deposits, causing several checks to be returned for nonsufficient funds. In addition, they were in the process of hiring additional office staff who would start work on May 1. They knew that leaving cash in a file cabinet would not be a good idea.
In order to obtain a better understanding of their cash position, Anna decides to perform a bank reconciliation—something she had failed to do since the company was started. According to the accounting records, the cash balance at April 30 was $7,495. Anna obtained the following information from Front Row’s April bank statement and an analysis of canceled checks and deposits:
Balance per bank at April 30 ............... $3,250
Deposits in transit at April 30............... 4,370
Outstanding checks as of April 30 ............. 1,160
Debit memo for April utilities ............. 845
Bank service charge for April............... 50
Interest earned during April ............... 450
NSF check from customer ............... 590
Required:
1. Discuss the purpose of an internal control system. How would the development of an internal control system benefit Front Row Entertainment? In your answer, be sure to highlight any problems that you noted with Front Row Entertainment’s current system of accounting for cash.
2. Prepare a bank reconciliation for Front Row Entertainment for the period ending April 30, 2011.
3. Prepare any adjusting entries necessary because of the bank reconciliation.
4. How did the failure to prepare a bank reconciliation affect the amounts reported on the previous financial statements?