D. J. Fletcher, a trusted employee of Bluestem Products, found himself in personal financial dif-
ficulties and decided to “borrow” $3,000 from the company and to conceal his theft.
As a first step, Fletcher removed $3,000 in currency from the cash register. This amount repre-
sented the bulk of the cash received in over-the-counter sales during the three business days since the
last bank deposit. Fletcher then removed a $3,000 check from the day’s incoming mail; this check
had been mailed in by a customer, Michael Adams, in full payment of his account. Fletcher made
no journal entry to record the $3,000 collection from Adams, but deposited the check in Bluestem
Products’s bank account in place of the $3,000 over-the-counter cash receipts he had stolen.
In order to keep Adams from protesting when his month-end statement reached him, Fletcher
made a journal entry debiting Sales Returns and Allowances and crediting Accounts Receivable—
Michael Adams. Fletcher posted this entry to the two general ledger accounts affected and to
Adams’s account in the subsidiary ledger for accounts receivable.
a. Did these actions by Fletcher cause the general ledger to be out of balance or the subsidiary
ledger to disagree with the control account? Explain.
b. Assume that Bluestem Products prepares financial statements at the end of the month without
discovering the theft. Would any items in the balance sheet or the income statement be in
error? Explain.
c. Several weaknesses in internal control apparently exist in Bluestem Products. Indicate three
specific changes needed to strengthen internal control over cash receipts.
