Ch07

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Ch07

  1. 1. ChapterChapter 77 CashCash Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
  2. 2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.
  3. 3. 1. Describe the nature of cash and the importance of internal control over cash. 2. Summarize basic procedures for achieving internal control over cash receipts. 3. Summarize basic procedures for achieving internal control over cash payments, including the use of a voucher system. 4. Describe the nature of a bank account and its use in controlling cash. ObjectivesObjectivesObjectivesObjectives After studying thisAfter studying this chapter, you shouldchapter, you should be able to:be able to: After studying thisAfter studying this chapter, you shouldchapter, you should be able to:be able to:
  4. 4. 5. Prepare a bank reconciliation and journalize any necessary entries. 6. Account for small cash transactions using a petty cash fund. 7. Summarize how cash is presented on the balance sheet. 8. Compute and interpret the ratio of cash to current liabilities. ObjectivesObjectivesObjectivesObjectives
  5. 5. Control Over CashControl Over Cash  Many companies need several cash accounts to account for different cash categories and funds.  Most companies have multiple bank accounts. The title for each bank account should be: Cash in Bank—(Name of Bank)  Preventive controls protect cash from theft and misuse of cash.  Detective controls are designed to detect theft or misuse of cash and are also preventive in nature.
  6. 6. Retailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of Cash Cash Receipts CASHIER’S DEPARTMENT ACCOUNTING DEPARTMENT Register records Mail Receipts Remittance advices
  7. 7. 1 ACCOUNTING DEPARTMENT Deposit ticket Bank CASHIER’S DEPARTMENT Deposit receipt Retailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of CashRetailers’ Sources of Cash
  8. 8. Controlling Cash ReceivedControlling Cash Received from Cash Salesfrom Cash Sales Controlling Cash ReceivedControlling Cash Received from Cash Salesfrom Cash Sales 19 Cash 3 142 00 Cash Short and Over 8 00 To record cash sales and actual cash on hand. Sales 3 150 00 Cash sales for March 19 totaled $3,150.00 perCash sales for March 19 totaled $3,150.00 per the cash register tape. After removing thethe cash register tape. After removing the change fund, only $3,142.00 was on hand.change fund, only $3,142.00 was on hand. Cash sales for March 19 totaled $3,150.00 perCash sales for March 19 totaled $3,150.00 per the cash register tape. After removing thethe cash register tape. After removing the change fund, only $3,142.00 was on hand.change fund, only $3,142.00 was on hand.
  9. 9. Controlling Cash ReceivedControlling Cash Received in the Mailin the Mail Controlling Cash ReceivedControlling Cash Received in the Mailin the Mail Most companies’ invoices are designed so that customers return a portion of the invoice, call a remittance advice. Most companies’ invoices are designed so that customers return a portion of the invoice, call a remittance advice.
  10. 10. Controlling Cash ReceivedControlling Cash Received in the Mailin the Mail Controlling Cash ReceivedControlling Cash Received in the Mailin the Mail 1. The employee who opens the mail should initially compare the amount received with the amount on the remittance advice. 2. The employee opening the mail stamps checks and money orders “For Deposit Only” in the bank account of the business. 3. All cash is sent to the Cashier’s Department where checks and money orders are combined with receipts from cash sales and a bank deposit ticket is prepared.
  11. 11. Controlling Cash ReceivedControlling Cash Received in the Mailin the Mail Controlling Cash ReceivedControlling Cash Received in the Mailin the Mail 4. The remittance advices and their summary totals are delivered to the Accounting Department where a clerk prepares the records of the transactions and posts them to the customer account. 5. The stamped duplicate copy of the deposit ticket is returned to the Accounting Department where a clerk compares the receipt with the total amount that should have been deposited.
  12. 12. 1.Cash controls must provide assurance that payments are made for only authorized transactions. 2. Cash controls should ensure that cash is used efficiently. 3. A voucher system provides assurance that what is being paid for was properly ordered, received, and billed by the supplier. Internal Control of CashInternal Control of Cash PaymentsPayments
  13. 13. A voucher system is a set of procedures for authorizing and recording liabilities and cash payments. A voucher system is a set of procedures for authorizing and recording liabilities and cash payments. BasicBasic Features ofFeatures of the Voucherthe Voucher SystemSystem 1313
  14. 14. Basic Features of theBasic Features of the Voucher SystemVoucher System Basic Features of theBasic Features of the Voucher SystemVoucher System  A voucher system normally uses vouchers.  The system normally has a file for unpaid vouchers and a file for paid vouchers.  Usually prepared by the Accounting Department after all necessary supporting documents are received (purchase order, supplier’s invoice, and a receiving report).  In preparing the voucher, the accounts payable clerk verifies the quantity, price, and mathematical accuracy of the supporting documents and files the paid voucher.
  15. 15. A summary received from the bank of all account transaction is called a statement of account. A summary received from the bank of all account transaction is called a statement of account.
  16. 16. A bank reconciliation is a listing of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger. A bank reconciliation is a listing of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger.
  17. 17. Reasons for Differences Between Depositor’sReasons for Differences Between Depositor’s Records and the Bank StatementRecords and the Bank Statement Reasons for Differences Between Depositor’sReasons for Differences Between Depositor’s Records and the Bank StatementRecords and the Bank Statement Outstanding checks Deposits in transit Service charges Collections Not-sufficient-funds (NSF) checks Errors Outstanding checks Deposits in transit Service charges Collections Not-sufficient-funds (NSF) checks Errors
  18. 18. Steps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank Reconciliation 1. Compare each deposit listed on the bank statement with unrecorded deposits appearing on the preceding period’s reconciliation and with deposit receipts. 2. Compare paid checks with outstanding checks appearing on the preceding period’s reconciliation and with recorded checks. Add deposits not recorded by the bank to theAdd deposits not recorded by the bank to the balance according to the bank statement.balance according to the bank statement. Add deposits not recorded by the bank to theAdd deposits not recorded by the bank to the balance according to the bank statement.balance according to the bank statement. Deduct checks outstanding that have been paidDeduct checks outstanding that have been paid by the bank from the balance according to theby the bank from the balance according to the bank statement.bank statement. Deduct checks outstanding that have been paidDeduct checks outstanding that have been paid by the bank from the balance according to theby the bank from the balance according to the bank statement.bank statement. 3. Compare bank credit memorandums to entries in the journal. Add credit memorandums that have not beenAdd credit memorandums that have not been recorded to the balance according to therecorded to the balance according to the depositor’s records.depositor’s records. Add credit memorandums that have not beenAdd credit memorandums that have not been recorded to the balance according to therecorded to the balance according to the depositor’s records.depositor’s records.
  19. 19. Steps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank ReconciliationSteps in a Bank Reconciliation 4. Compare bank debit memorandums to entries recording cash payments. 5. List any errors discovered during the preceding steps. Deduct debit memorandums that have not beenDeduct debit memorandums that have not been recorded from the balance according to therecorded from the balance according to the depositor’s records.depositor’s records. Deduct debit memorandums that have not beenDeduct debit memorandums that have not been recorded from the balance according to therecorded from the balance according to the depositor’s records.depositor’s records.
  20. 20. BANK Bank’s books Beginning balance $3,359.78 Depositor’s records Beginning balance $2,549.99 Power Network prepares to reconcile the monthly bank statement as of July 31, 2006 Power Network prepares to reconcile the monthly bank statement as of July 31, 2006
  21. 21. A deposit of $816.20 did not appear on the bank statement. A deposit of $816.20 did not appear on the bank statement. BANK Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.9 8 Depositor’s records Beginning balance $2,549.99
  22. 22. BANK Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.9 8 Depositor’s records Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.9 9 The bank collected a note in the amount of $400 and the related interest of $8 for Power Networking The bank collected a note in the amount of $400 and the related interest of $8 for Power Networking
  23. 23. A deposit of $637.02 did not appear on the bank statement. A deposit of $637.02 did not appear on the bank statement. Three checks that were written during the period did not appear on the bank statement: #812, $1,061; #878, $435.39, #883, $48.60. Three checks that were written during the period did not appear on the bank statement: #812, $1,061; #878, $435.39, #883, $48.60. BANK Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 $4,175.9 8 Depositor’s records Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.9 9
  24. 24. BANK Bank’s books Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Depositor’s records Deduct check returned because of insufficient funds $300.00 Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.9 8 Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.9 9 The bank returned an NSF check from one of the firm’s customers, Thomas Ivey, in the amount of $300. This was a payment on account. The bank returned an NSF check from one of the firm’s customers, Thomas Ivey, in the amount of $300. This was a payment on account.
  25. 25. Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Deduct check return because of insufficient funds $300.00 Bank service charges 18.00 BANK Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 $4,175.9 8 Depositor’s records Beginning balance $2,549.99 Add note and interest collected by bank 408.00 $2,957.9 9 The bank service charges totaled $18.00.The bank service charges totaled $18.00.
  26. 26. BANK Bank’s books Depositor’s records Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 $4,175.9 8 Beginning balance $2,549.99 Add note and interest collected by bank 408.00 Deduct check return because of insufficient funds $300.00 Bank service charges 18.00 $2,957.9 9 Error recording Check No. 879 9.00 Check No. 879 for $732.26 to Taylor Co. on account, erroneously recorded in journal as $723.26. Check No. 879 for $732.26 to Taylor Co. on account, erroneously recorded in journal as $723.26. 327.00
  27. 27. BANK Bank’s books Beginning balance $3,359.78 Add deposit not recorded by bank 816.20 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 $4,175.9 8 Adjusted balance $2,630.99 Depositor’s records Beginning balance $2,549.99 Add note and interest collected by bank 408.00 Deduct check return because of insufficient funds $300.00 Bank service charges 18.00 $2,957.9 9 Adjusted balance $2,630.99 Error recording Check No. 879 9.00 327
  28. 28. Now, if desired, we can prepare a formal statement for Power Networking. Now, if desired, we can prepare a formal statement for Power Networking.
  29. 29. Balance per bank statement $3,359.78 Add: Deposit not recorded by bank 816.20 $4,175.98 Deduct: Outstanding checks No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99 Balance per depositor’s records $2,549.99 Add: Note and interest collected by bank 408.00 $2,957.99 Deduct: NSF check (Thomas Ivey) returned$300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 327.00 Adjusted balance $2,630.99 Power Networking Bank Reconciliation July 31, 2006
  30. 30. Journal entries must be prepared for those items that affected the depositor’s side of the reconciliation. Journal entries must be prepared for those items that affected the depositor’s side of the reconciliation.
  31. 31. Balance per bank statement $3,359.78 Add: Deposit not recorded by bank 816.20 $4,175.98 Deduct: Outstanding checks No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99 Balance per depositor’s records $2,549.99 Add: Note and interest collected by bank 408.00 $2,957.99 Deduct: NSF check (Thomas Ivey) returned $300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 327.00 Adjusted balance $2,630.99 Power Networking Bank Reconciliation July 31, 2006
  32. 32. July 31 Cash 408 00 Note collected by bank. Notes Receivable 400 00 Interest Receivable 8 00 Entries Related to a Bank ReconciliationEntries Related to a Bank ReconciliationEntries Related to a Bank ReconciliationEntries Related to a Bank Reconciliation
  33. 33. Balance per bank statement $3,359.78 Add: Deposit not recorded by bank 816.20 $4,175.98 Deduct: Outstanding checks No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99 Balance per depositor’s records $2,549.99 Add: Note and interest collected by bank 408.00 $2,957.99 Deduct: NSF check (Thomas Ivey) returned $300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 327.00 Adjusted balance $2,630.99 Power Networking Bank Reconciliation July 31, 2006
  34. 34. Entries Related to a Bank ReconciliationEntries Related to a Bank ReconciliationEntries Related to a Bank ReconciliationEntries Related to a Bank Reconciliation July 31 Cash 408 00 Note collected by bank. Notes Receivable 400 00 Interest Receivable 8 00 30 Accounts Receivable—Thomas Ivey 300 00 Miscellaneous Administrative Exp. 18 00 Accounts Payable—Taylor Co. 9 00 Cash 327 00 NSF check, bank service charges, and error in recording Check no. 879.
  35. 35. Petty Cash
  36. 36. Aug. 1 Petty Cash 100 00 Established petty cash fund. Cash 100 00 On August 1, issued Check No. 511 for $100On August 1, issued Check No. 511 for $100 to established a petty cash fund.to established a petty cash fund. On August 1, issued Check No. 511 for $100On August 1, issued Check No. 511 for $100 to established a petty cash fund.to established a petty cash fund.
  37. 37. Aug. 31 Office Supplies 50 00 Replenished petty cash fund. Cash 88 00 At the end of August, the petty cash receiptsAt the end of August, the petty cash receipts indicated expenditures for the following items:indicated expenditures for the following items: office supplies, $28, postage (office supplies),office supplies, $28, postage (office supplies), $22; store supplies, $35, and miscellaneous$22; store supplies, $35, and miscellaneous administrative items, $3.administrative items, $3. At the end of August, the petty cash receiptsAt the end of August, the petty cash receipts indicated expenditures for the following items:indicated expenditures for the following items: office supplies, $28, postage (office supplies),office supplies, $28, postage (office supplies), $22; store supplies, $35, and miscellaneous$22; store supplies, $35, and miscellaneous administrative items, $3.administrative items, $3. Store Supplies 35 00 Miscellaneous Administrative Exp. 3 00
  38. 38. Financial Analysis and InterpretationFinancial Analysis and Interpretation Solvency is the ability of a business to meet its financial obligations (debts) as they are due. Solvency analysis focuses on the ability of a business to pay or otherwise satisfy its current and noncurrent liabilities. This ability is normally assessed by examining balance sheet relationships.
  39. 39. A. Cash and equivalents $100,000 $ 120,000 B. Current liabilities 400,000 1,500,000 Doomsday ratio A / B 0.25 0.08 Doomsday RatioDoomsday RatioDoomsday RatioDoomsday Ratio Laettner Co. Oakley Co. How are these ratios used?How are these ratios used?Use: To indicate the company’s ability to meet creditors obligations in the worst case assumption that should the business cease to exist. Use: To indicate the company’s ability to meet creditors obligations in the worst case assumption that should the business cease to exist. Financial Analysis and InterpretationFinancial Analysis and Interpretation
  40. 40. The EndThe End Chapter 7Chapter 7

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