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Cash

Cash. Coin and currency Checking, savings, and money market accounts Undeposited, cashier, and certified checks. LO1. Cash Equivalents. Readily convertible to cash Original maturity to investor of three months or less. Commercial paper U.S. Treasury bills Certain money market funds.

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Cash

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  1. Cash • Coin and currency • Checking, savings, and money market accounts • Undeposited, cashier, and certified checks LO1

  2. Cash Equivalents • Readily convertible to cash • Original maturity to investor of three months or less • Commercial paper • U.S. Treasury bills • Certain money market funds Examples:

  3. Cash Management • Necessary to ensure company has neither too little nor too much cash on hand • Tools • Cash flows statement • Bank reconciliations • Petty cash funds LO2

  4. +Deposits +Customer notes and interest collected by bank +Interest earned Canceled checks NSF checks Service charges Bank Statements Cash balance, beginning of period = Cash balance, end of period

  5. Bank Reconciliation – Step 1 • Trace deposits listed on the bank statement to • the books. • Identify the deposits in transit. • Add to the bank balance. Deposits in transit: Late period deposits not yet reflected on bank statement

  6. Bank Reconciliation – Step 2 • Trace checks cleared by the bank to the books. • Identify outstanding checks. • Subtract from the bank balance. Outstanding checks: Checks written but not yet presented to bank

  7. Bank Reconciliation – Step 3 List all other additions (credit memoranda) shown on the bank statement. Add to the book balance. Credit memoranda: Interest earned, customer notes collected, etc.

  8. Bank Reconciliation – Step 4 • List all other subtractions (debit memoranda) • shown on the bank statement. • Subtract from the book balance. Debit memoranda: NSF checks, service charges, etc.

  9. Example of Reconciliation Cash Account Adjustments: Debit Memoranda Balance per books, June 30 $2,895.82 Add: Customer note collected $500.00 Interest on customer note 50.00 Interest earned during June 15.45 Error in recording check 498 54.00 619.45 Deduct: NSF check $245.72 Collection fee on note 16.50 Service charge for lockbox 20.00 (282.22) Adjusted balance, June 30 $3,233.05

  10. Bank Reconciliation – Step 5 Identify errors made by the bank or the company in recording the transactions during the period.

  11. Use the information collected in steps 1 through 5 to prepare the bank reconciliation. Bank Reconciliation Balance per bank $$$ Adjusted balance $$$ Balance per books $$$ Adjusted balance $$$ Adjusted balances for book and bank must agree Bank Reconciliation – Step 6

  12. Example of Reconciliation Bank Statement Adjustments Balance per statement, June 30 $3,308.59 Adjusted balance, June 30 $3,233.05 Cash Account Adjustments Balance per books, June 30 $2,895.82 Adjusted balance, June 30 $3,233.05

  13. Book adjustments are the basis for adjusting entries Bank Reconciliation Adjusting Entries Bank Reconciliation Balance per bank $$$ Adjusted balance $$$ Balance per books $$$ Adjusted balance $$$

  14. Bank Reconciliation Adjusting Entries Accounts Receivable 245.72 Collection Fee Expense 16.50 Rent Expense—Lockbox 20.00 Cash 337.23 Notes Receivable 500.00 Interest Revenue 65.45 Supplies 54.00 To record bank reconciliation adjustments.

  15. Petty Cash Journalize establishment of fund A check is written Disbursement with proper documentation Fund replenished

  16. Petty Cash Transactions for Mickey’s Marathon Sports Original fund balance $200.00 Petty cash expenditures: U.S. Post Office 55.00 Overnight delivery service 69.50 Office supply express 45.30 Coin and currency per count 26.50 Prepare the journal entry to record the petty cash fund replenishment

  17. Accounting for Petty Cash Journal Entry to Replenish Fund: *$200.00 – ($55.00 + 69.50 + 45.30 + 26.50) = $200.00 – $196.30 = $3.70 short Postage Expense 55.00 Delivery Expense 69.50 Office Expense 45.30 Cash Over and Short*3.70 Cash 173.50

  18. Internal Control System • Consists of the policies and procedures necessary to ensure: • The safeguarding of an entity’s assets • The reliability of its accounting records • The accomplishment of its overall objectives LO3

  19. Sarbanes-Oxley Act of 2002 (SOX) Act of Congress intended to bring reform to corporate accountability and stewardship in response to corporate scandals

  20. Internal Control Control Environment Accounting System Internal Control Procedures

  21. The Control Environment • Management’s competence and operating style • Personnel policies and practices • Influence of board of directors

  22. The Accounting System Methods and records used to report transactions and maintain financial information • Can be manual, fully computerized, or a combination of both • Use of journals is an integral part of any system

  23. Internal Control Procedures Independent Review and Appraisal Independent Verification The Design and Use of Business Documents Safeguarding Assets and Records Proper Authorizations Segregation of Duties LO4

  24. Proper Authorizations • Authority and responsibility go hand in hand Segregation of Duties • Separate physical custody from the accounting for assets

  25. Independent Verification • One individual or department acts as a check on the work of another Safeguarding Assets and Records • Protect assetsand accounting records from loss, theft, unauthorized use, etc.

  26. Independent Review and Appraisal • Provide for periodic review and appraisal of the accounting system and the people operating it

  27. The Design and Use of Business Documents • Capture all relevant information about a transaction and assist in proper recording and classification. • Are properly controlled

  28. Limitations on Internal Control • No system is entirely foolproof • Employees in collusion can override the best controls • Cost vs. benefit tradeoff

  29. Cash receipts should be deposited intact in the bank on a daily basis • All cash disbursements should be made by check Computerized Business Documents and Internal Control LO5

  30. Control over Cash Receipts • Cash received over the counter (e.g., cash sales) • Cash received in the mail (e.g., credit sales)

  31. Controls over Cash Received over the Counter • Cash registers • Locked-in cash register tape • Prenumbered customer receipts • Investigate recurring discrepancies

  32. Controls over Cash Received in the Mail • Two employees open mail • Prelist prepared • Monthly customer statements

  33. Receiving Report Purchase Requisition Purchase Order Invoice Approval Purchase Invoice Check Prepared Document Flow for Merchandise

  34. End of Chapter 6

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