rnal
, Inte
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nesa
Cash
Sarb
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r7
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c. 2014 Cengage Learning.   All Rights Reserved.  May not ...
Learning Objectives
1. Describe the Sarbanes-Oxley Act of 2002 and
its impact on internal controls and financial
reporting...
Learning Objectives

5. Describe and illustrate the use of a bank
reconciliation in controlling cash.
Learning Objectives

5. Describe and illustrate the use of a bank
reconciliation in controlling cash.

6. Describe the acc...
Learning Objectives

5. Describe and illustrate the use of a bank
reconciliation in controlling cash.

6. Describe the acc...
Learning Objectives

5. Describe and illustrate the use of a bank
6.
7.
8.

reconciliation in controlling cash.
Describe t...
Lear
ning
Obje
ctive
Desc
r ibe
the S
a
2002
ar
and banes-O
cont
its im
x
rols
pact ley Act o
and
on in
f
finan
terna
cial...
Sarbanes-Oxley Act of 2002

o

The Sarbanes-Oxley Act of 2002 (often
referred to simply as Sarbanes-Oxley) applies
only to...
Sarbanes-Oxley Act of 2002

o Sarbanes-Oxley requires companies to

maintain strong and effective internal controls
over t...
Sarbanes-Oxley Act of 2002

o

Internal control is broadly defined as the
procedures and processes used by a company
to:
...
SARBANESOXLEY ACT OF
2002
SARBANESOXLEY ACT OF
2002
Lear
ning
Obje
ctive
Desc
obje
r
ctive
i
s and be and i
llustr
el em
at e t
ent s
he
of i n
terna
l
cont
rol.

2

c. 2014 ...
Internal Control
Internal Control

o Employee fraud is the intentional act of

deceiving an employer for personal gain.

c. 2014 Cengage Le...
Elements of Internal Control

o

Management is responsible for designing and
applying five elements of internal control to...
Elements of Internal Control
Control Environment

o The control environment is the overall attitude
of management and employees about the
importance of...
Control Environment
Control Procedures

o

Control procedures provide reasonable
assurance that business goals will be
achieved. Control proce...
Control Procedures
Monitoring

1. Monitoring the internal control system is used
to locate weaknesses and improve controls.
Monitoring

o Monitoring often includes observing employee
behavior and the accounting system for
indicators of control pr...
Monitoring
Monitoring
Limitations of Internal Control

o

Internal controls can provide only reasonable
assurance for safeguarding assets, proce...
Lear
ning
Obje
ctive
Desc
ap
r
plica
i
tion be and il
o f in
terna lustrate t
he
l c on
trols
to
cash
.

3

c. 2014 Cengag...
Cash Controls Over Receipts and Payments

o

Cash includes coins, currency (paper money),
checks, and money orders. Money ...
Control of Cash Receipts

o

Businesses normally receive cash from two
main sources:
 Customers purchasing products or se...
Cash Received from Cash Sales

o

One of the most important controls to protect
cash received in over-the-counter sales is...
CASH RECEIVED
FROM CASH
SALES
Control of Cash Receipts

o

A predetermined amount of money that is
given to each cash register clerk in a cash
drawer is...
Control of Cash Receipts

o Salespersons may make errors in making

change for customers or in ringing up cash
sales. As a...
Cash Received from Cash Sales

o Cash sales for May 3 totaled $35,690 per the

cash register tape. After removing the chan...
Cash Received from Cash Sales

o If there had been cash over, Cash Short and
Over would have been credited for the
overage...
Cash Received in the Mail

o

Cash is received in the mail when customers
pay their bills. Most companies design their
inv...
Cash Received by EFT

o

Cash may also be received from customers
through electronic funds transfers (EFT).
Customers may ...
Cash Received by EFT

o Companies encourage customers to use EFT
for the following reasons:

 EFTs cost less than receivi...
Control of Cash Payments

o

The control of cash payments should provide
reasonable assurance that:
 Payments are made fo...
Voucher System

o

A voucher system is a set of procedures for
authorizing and recording liabilities and cash
payments. It...
Voucher System

o A voucher is any document that serves as proof
of authority to pay cash or issue an electronic
funds tra...
Lear
ning
Obje
ctive
Desc
ribe
ac
coun
t and the natur
e of
its us
a ba
e in
nk
c ont
rollin
g
cash
.

4

c. 2014 Cengage ...
Bank Accounts

o

A major reason that businesses use bank
accounts is for internal control. Some of the
control advantages...
Bank Statement

o

A summary received from the bank (usually
monthly) of all checking account transactions
is called a ban...
Impact of Debit and Credit Memos
Bank Statement

o

The following types of credit or debit memo
entries are found on a bank statement:

c. 2014 Cengage Lea...
Using the Bank Statement as a Control Over
Cash
Lear
ning
Obje
Desc
ctive
ribe
and
bank
illus
r
st
e c on
cilia rate the
tion
in co use of a
ntrol
ling
cash
.

5

c. 2014...
Bank Reconciliation

o

A bank reconciliation is an analysis of the
items and amounts that cause the cash
balance reported...
Bank Reconciliation

o A bank reconciliation is usually divided into
two sections as follows:

 The bank section begins w...
Bank Reconciliation
Steps of a Bank Reconciliation
Steps of a Bank Reconciliation
Power Networking Bank Reconciliation
Step 1

o Power Networking prepares to reconcile the

monthly bank statement as of Ju...
Power Networking Bank Reconciliation

Bank’s Records
Cash balance

Step 1

$3,359.78

Power Networking’s Records
Power Networking Bank Reconciliation
Step 2

o A deposit on July 31 of $816.20 is not recorded
on the bank statement.

c. ...
Power Networking Bank Reconciliation
Power Networking’s Records

Bank’s Records
Cash balance
Add deposit not
recorded by b...
Power Networking Bank Reconciliation
Step 3

o Three checks that were written during the

month did not appear on the bank...
Power Networking Bank Reconciliation
Power Networking’s Records

Bank’s Records
Cash balance
Add deposit not
recorded by b...
Power Networking Bank Reconciliation
Power Networking’s Records

Bank’s Records
Cash balance
Add deposit not
recorded by b...
Power Networking Bank Reconciliation
Step 5

o The cash balance in Power Networking’s
ledger on July 31 is $2,549.99.

c. ...
Power Networking Bank Reconciliation
Power Networking’s Records

Bank’s Records
Cash balance
Add deposit not
recorded by b...
Power Networking Bank Reconciliation
Step 6

o A credit memo on the bank statement indicates
that the bank collected a not...
Power Networking Bank Reconciliation
Power Networking’s Records

Bank’s Records
Cash balance
Add deposit not
recorded by b...
Power Networking Bank Reconciliation
Step 7

o A check from a customer (Thomas Ivey) for

$300 was returned by the bank be...
Power Networking Bank Reconciliation
Bank’s Records

Power Networking’s Records

$3,359.78 Cash balance
Add note and inter...
Power Networking Bank Reconciliation
Error

o Check No. 879 for $732.26 to Taylor Company on

o

account was erroneously r...
Power Networking Bank Reconciliation
Bank’s Records

Power Networking’s Records

$3,359.78 Cash balance
Add note and inter...
Power Networking Bank Reconciliation
Bank’s Records

Power Networking’s Records

$2,549.99
$3,359.78 Cash balance
Add note...
Power Networking Bank Reconciliation
Bank’s Records

Power Networking’s Records

$2,549.99
$3,359.78 Cash balance
Add note...
Power Networking Bank Reconciliation

o The journal entries for Power Networking,
based on the bank reconciliation, are as...
Power Networking Bank Reconciliation
Lear
ning
Obje
ctive
De s c
ribe
sp
th
pecia
e
l-pur accoun
ting
pose
f or
cash
fund
s.

6

c. 2014 Cengage Learning.   Al...
Petty Cash Fund

o

It is usually not practical for a business to
write checks to pay small amounts. Thus, it is
desirable...
Petty Cash Fund

o A petty cash fund of $500 is established on

August 1. The entry to record the transaction is
as follow...
Petty Cash Fund
IMPORTANT!

o The only time Petty Cash is debited is when

the fund is initially established or when the
f...
Petty Cash Fund

o At the end of August, the petty cash receipts

indicate expenditures for the following items:

o The en...
Special-Purpose Funds

o Companies often use other cash funds for
special needs, such as payroll or travel
expenses. Such ...
Lear
ning
Obje
ctive
Desc
ribe
re
a
po r t
ing o nd illustr
equi
valen f cash ate the
and
ts in
cash
t he f
inan
cial
stat...
Financial Statement Reporting of Cash

o

A company’s excess cash is normally invested
in highly liquid investments. These...
Financial Statement Reporting of Cash

o Companies that have invested excess cash in

cash equivalents usually report Cash...
Financial Statement Reporting of Cash

o Banks may require depositors to maintain
minimum cash balances in their bank
acco...
Lear
ning
Obje
Desc
ctive
r ibe
the r
and
illu
atio
e
o
expe
s
nses of cash trate the
com
t
pany to asses o month use of
s...
Ratio of Cash to Monthly Cash Expenses

o

A cash ratio that is especially useful for startup
companies or companies in fi...
Ratio of Cash to Monthly Cash Expenses

o

The cash, including any cash equivalents, is
taken from the balance sheet as of...
rnal
, Inte
xley
O
nesa
Cash
Sarb
, and
ntrol
Co

nd
eE
Th

c. 2014 Cengage Learning.   All Rights Reserved.  May not be c...
Ch07 wrd12e instructor_final
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Ch07 wrd12e instructor_final

  1. 1. rnal , Inte xley O nesa Cash Sarb , and ntrol Co r7 pt e ha C c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  2. 2. Learning Objectives 1. Describe the Sarbanes-Oxley Act of 2002 and its impact on internal controls and financial reporting. 2. Describe and illustrate the objectives and elements of internal control. 3. Describe and illustrate the application of internal controls to cash. 4. Describe the nature of a bank account and its use in controlling cash.
  3. 3. Learning Objectives 5. Describe and illustrate the use of a bank reconciliation in controlling cash.
  4. 4. Learning Objectives 5. Describe and illustrate the use of a bank reconciliation in controlling cash. 6. Describe the accounting for special-purpose cash funds.
  5. 5. Learning Objectives 5. Describe and illustrate the use of a bank reconciliation in controlling cash. 6. Describe the accounting for special-purpose cash funds. 7. Describe and illustrate the reporting of cash and cash equivalents in the financial statements.
  6. 6. Learning Objectives 5. Describe and illustrate the use of a bank 6. 7. 8. reconciliation in controlling cash. Describe the accounting for special-purpose cash funds. Describe and illustrate the reporting of cash and cash equivalents in the financial statements. Describe and illustrate the use of the ratio of cash to monthly cash expenses to assess the ability of a company to continue in business.
  7. 7. Lear ning Obje ctive Desc r ibe the S a 2002 ar and banes-O cont its im x rols pact ley Act o and on in f finan terna cial r l e po r ting. 1 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  8. 8. Sarbanes-Oxley Act of 2002 o The Sarbanes-Oxley Act of 2002 (often referred to simply as Sarbanes-Oxley) applies only to companies whose stock is traded on public exchanges. Its purpose is to restore public confidence and trust in the financial statements of companies. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  9. 9. Sarbanes-Oxley Act of 2002 o Sarbanes-Oxley requires companies to maintain strong and effective internal controls over the recording of transactions and the preparing of financial statements. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  10. 10. Sarbanes-Oxley Act of 2002 o Internal control is broadly defined as the procedures and processes used by a company to:  Safeguard its assets.  Process information accurately.  Ensure compliance with laws and regulations. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  11. 11. SARBANESOXLEY ACT OF 2002
  12. 12. SARBANESOXLEY ACT OF 2002
  13. 13. Lear ning Obje ctive Desc obje r ctive i s and be and i llustr el em at e t ent s he of i n terna l cont rol. 2 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  14. 14. Internal Control
  15. 15. Internal Control o Employee fraud is the intentional act of deceiving an employer for personal gain. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  16. 16. Elements of Internal Control o Management is responsible for designing and applying five elements of internal control to meet the three internal control objectives. These elements are as follows:  Control environment  Risk assessment  Control procedures  Monitoring  Information and communication c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  17. 17. Elements of Internal Control
  18. 18. Control Environment o The control environment is the overall attitude of management and employees about the importance of controls. Three factors influencing a company’s control environment are as follows:  Management’s philosophy and operating style  The company’s organizational structure  The company’s personnel policies c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  19. 19. Control Environment
  20. 20. Control Procedures o Control procedures provide reasonable assurance that business goals will be achieved. Control procedures include the following:  Competent personnel, rotating duties, and mandatory vacations  Separating responsibilities for related operations  Separating operations, custody of assets, and accounting  Proofs and security measures c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  21. 21. Control Procedures
  22. 22. Monitoring 1. Monitoring the internal control system is used to locate weaknesses and improve controls.
  23. 23. Monitoring o Monitoring often includes observing employee behavior and the accounting system for indicators of control problems. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  24. 24. Monitoring
  25. 25. Monitoring
  26. 26. Limitations of Internal Control o Internal controls can provide only reasonable assurance for safeguarding assets, processing accurate information, and compliance with laws and regulations. This is due to the following factors:  The human element of controls  Cost-benefit considerations c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  27. 27. Lear ning Obje ctive Desc ap r plica i tion be and il o f in terna lustrate t he l c on trols to cash . 3 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  28. 28. Cash Controls Over Receipts and Payments o Cash includes coins, currency (paper money), checks, and money orders. Money on deposit with a bank or other financial institution that is available for withdrawal is also considered cash. Cash is the asset most likely to be stolen or used improperly in a business. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  29. 29. Control of Cash Receipts o Businesses normally receive cash from two main sources:  Customers purchasing products or services  Customers making payments on account c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  30. 30. Cash Received from Cash Sales o One of the most important controls to protect cash received in over-the-counter sales is a cash register. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  31. 31. CASH RECEIVED FROM CASH SALES
  32. 32. Control of Cash Receipts o A predetermined amount of money that is given to each cash register clerk in a cash drawer is called a change fund. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  33. 33. Control of Cash Receipts o Salespersons may make errors in making change for customers or in ringing up cash sales. As a result, the amount of cash on hand may differ from the amount of cash sales. Such differences are recorded in a cash short and over account. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  34. 34. Cash Received from Cash Sales o Cash sales for May 3 totaled $35,690 per the cash register tape. After removing the change fund, only $35,668 was left in the cash drawer. The cash sales and shortage would be recorded as follows: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  35. 35. Cash Received from Cash Sales o If there had been cash over, Cash Short and Over would have been credited for the overage. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  36. 36. Cash Received in the Mail o Cash is received in the mail when customers pay their bills. Most companies design their invoices so that customers return a portion of the invoice, called a remittance advice, with their payment. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  37. 37. Cash Received by EFT o Cash may also be received from customers through electronic funds transfers (EFT). Customers may authorize automatic electronic transfers from their checking accounts to pay monthly bills. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  38. 38. Cash Received by EFT o Companies encourage customers to use EFT for the following reasons:  EFTs cost less than receiving cash payments through the mail.  EFTs enhance internal controls over cash since the cash is received directly by the bank without any employees handling cash.  EFTs reduce late payments from customers and speed up the processing of cash receipts. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  39. 39. Control of Cash Payments o The control of cash payments should provide reasonable assurance that:  Payments are made for only authorized transactions.  Cash is used effectively and efficiently. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  40. 40. Voucher System o A voucher system is a set of procedures for authorizing and recording liabilities and cash payments. It may be either manual or computerized. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  41. 41. Voucher System o A voucher is any document that serves as proof of authority to pay cash or issue an electronic funds transfer. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  42. 42. Lear ning Obje ctive Desc ribe ac coun t and the natur e of its us a ba e in nk c ont rollin g cash . 4 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  43. 43. Bank Accounts o A major reason that businesses use bank accounts is for internal control. Some of the control advantages of using bank accounts are as follows:  Bank accounts reduce the amount of cash on hand.  Bank accounts provide an independent recording of cash transactions.  Use of bank accounts facilitates the transfer of funds using EFT systems. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  44. 44. Bank Statement o A summary received from the bank (usually monthly) of all checking account transactions is called a bank statement. It shows the beginning balance, additions, deductions, and the ending balance. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  45. 45. Impact of Debit and Credit Memos
  46. 46. Bank Statement o The following types of credit or debit memo entries are found on a bank statement: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  47. 47. Using the Bank Statement as a Control Over Cash
  48. 48. Lear ning Obje Desc ctive ribe and bank illus r st e c on cilia rate the tion in co use of a ntrol ling cash . 5 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  49. 49. Bank Reconciliation o A bank reconciliation is an analysis 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. This is used to determine the adjusted cash balance. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  50. 50. Bank Reconciliation o A bank reconciliation is usually divided into two sections as follows:  The bank section begins with the cash balance according to the bank statement and ends with the adjusted balance.  The company section begins with the cash balance according to the company’s records and ends with the adjusted balance. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  51. 51. Bank Reconciliation
  52. 52. Steps of a Bank Reconciliation
  53. 53. Steps of a Bank Reconciliation
  54. 54. Power Networking Bank Reconciliation Step 1 o Power Networking prepares to reconcile the monthly bank statement as of July 31. The bank statement shows an ending cash balance of $3,359.78. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  55. 55. Power Networking Bank Reconciliation Bank’s Records Cash balance Step 1 $3,359.78 Power Networking’s Records
  56. 56. Power Networking Bank Reconciliation Step 2 o A deposit on July 31 of $816.20 is not recorded on the bank statement. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  57. 57. Power Networking Bank Reconciliation Power Networking’s Records Bank’s Records Cash balance Add deposit not recorded by bank $3,359.78 816.20 $4,175.98 Step 2
  58. 58. Power Networking Bank Reconciliation Step 3 o Three checks that were written during the month did not appear on the bank statement: No. 812, $1,061; No. 878, $435.39, No. 883, $48.60. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  59. 59. Power Networking Bank Reconciliation Power Networking’s Records Bank’s Records Cash balance Add deposit not recorded by bank Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 Step 3 $3,359.78 816.20 $4,175.98 1,544.99
  60. 60. Power Networking Bank Reconciliation Power Networking’s Records Bank’s Records Cash balance Add deposit not recorded by bank Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 Adjusted balance Step 4 $3,359.78 816.20 $4,175.98 1,544.99 $2,630.99
  61. 61. Power Networking Bank Reconciliation Step 5 o The cash balance in Power Networking’s ledger on July 31 is $2,549.99. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  62. 62. Power Networking Bank Reconciliation Power Networking’s Records Bank’s Records Cash balance Add deposit not recorded by bank Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 Adjusted balance $3,359.78 Cash balance 816.20 $4,175.98 1,544.99 $2,630.99 Step 5 $2,549.99
  63. 63. Power Networking Bank Reconciliation Step 6 o A credit memo on the bank statement indicates that the bank collected a note in the amount of $400 and the related interest of $8 for Power Networking. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  64. 64. Power Networking Bank Reconciliation Power Networking’s Records Bank’s Records Cash balance Add deposit not recorded by bank Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 Adjusted balance $3,359.78 Cash balance Add note and interest collected by bank 816.20 $4,175.98 Step 6 1,544.99 $2,630.99 $2,549.99 408.00 $2,957.99
  65. 65. Power Networking Bank Reconciliation Step 7 o A check from a customer (Thomas Ivey) for $300 was returned by the bank because of insufficient funds (NSF) as indicated by a debit memo. A bank service charge of $18 was also indicated by a debit memo. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  66. 66. Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records $3,359.78 Cash balance Add note and interest collected by bank 816.20 $4,175.98 Deduct outstanding Deduct NSF checks: check $300.00 No. 812 $1,061.00 Bank service No. 878 435.39 charges 18.00 No. 883 48.60 1,544.99 Cash balance Add deposit not recorded by bank Adjusted balance $2,630.99 Step 7 $2,549.99 408.00 $2,957.99
  67. 67. Power Networking Bank Reconciliation Error o Check No. 879 for $732.26 to Taylor Company on o account was erroneously recorded in the journal as $723.26. When an error is made, two questions are asked: (1) Who made the error? (2) Does correcting the error cause the cash account to go up or down? Power Networking made the error, so the item is placed on the company’s side of the reconciliation. By correcting the error, the cash account goes down. (Thus, it is a deduction on the reconciliation.) c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  68. 68. Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records $3,359.78 Cash balance Add note and interest collected by bank 816.20 $4,175.98 Deduct check Deduct outstanding NSF $300.00 checks: No. 812 $1,061.00 Bank service No. 878 435.39 charges 18.00 No. 883 48.60 1,544.99 Error recording Chk. No. 879 9.00 Adjusted balance $2,630.99 Cash balance Add deposit not recorded by bank Error $2,549.99 408.00 $2,957.99
  69. 69. Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records $2,549.99 $3,359.78 Cash balance Add note and interest collected by bank 408.00 816.20 $2,957.99 $4,175.98 Deduct check Deduct outstanding NSF $300.00 checks: No. 812 $1,061.00 Bank service No. 878 435.39 charges 18.00 No. 883 48.60 1,544.99 Error recording Chk. No. 879 9.00 327.00 Adjusted balance $2,630.99 $2,630.99 Adjusted balance Cash balance Add deposit not recorded by bank Step 8
  70. 70. Power Networking Bank Reconciliation Bank’s Records Power Networking’s Records $2,549.99 $3,359.78 Cash balance Add note and interest collected by bank 408.00 816.20 $2,957.99 $4,175.98 Deduct check Deduct outstanding NSF $300.00 checks: No. 812 $1,061.00 Bank service No. 878 435.39 charges 18.00 No. 883 48.60 1,544.99 Error recording Chk. No. 879 9.00 327.00 Adjusted balance $2,630.99 $2,630.99 Adjusted balance Cash balance Add deposit not recorded by bank Step 9
  71. 71. Power Networking Bank Reconciliation o The journal entries for Power Networking, based on the bank reconciliation, are as follows: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  72. 72. Power Networking Bank Reconciliation
  73. 73. Lear ning Obje ctive De s c ribe sp th pecia e l-pur accoun ting pose f or cash fund s. 6 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  74. 74. Petty Cash Fund o It is usually not practical for a business to write checks to pay small amounts. Thus, it is desirable to control such payments by using a special cash fund, called a petty cash fund. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  75. 75. Petty Cash Fund o A petty cash fund of $500 is established on August 1. The entry to record the transaction is as follows: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  76. 76. Petty Cash Fund IMPORTANT! o The only time Petty Cash is debited is when the fund is initially established or when the fund is increased. The only time Petty Cash is credited is when the fund is being decreased. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  77. 77. Petty Cash Fund o At the end of August, the petty cash receipts indicate expenditures for the following items: o The entry to replenish the petty cash fund is shown below. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  78. 78. Special-Purpose Funds o Companies often use other cash funds for special needs, such as payroll or travel expenses. Such funds are called specialpurpose funds. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  79. 79. Lear ning Obje ctive Desc ribe re a po r t ing o nd illustr equi valen f cash ate the and ts in cash t he f inan cial state m en ts. 7 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  80. 80. Financial Statement Reporting of Cash o A company’s excess cash is normally invested in highly liquid investments. These investments are called cash equivalents. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  81. 81. Financial Statement Reporting of Cash o Companies that have invested excess cash in cash equivalents usually report Cash and cash equivalents as one amount on the balance sheet. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  82. 82. Financial Statement Reporting of Cash o Banks may require depositors to maintain minimum cash balances in their bank accounts. Such a balance is called a compensating balance. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  83. 83. Lear ning Obje Desc ctive r ibe the r and illu atio e o expe s nses of cash trate the com t pany to asses o month use of s t he ly ca to co s abili ntinu ty of h e in a busi ne s s . 8 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  84. 84. Ratio of Cash to Monthly Cash Expenses o A cash ratio that is especially useful for startup companies or companies in financial distress is the ratio of cash to monthly cash expenses. The ratio is computed as shown below: Cash as of Year-End Ratio of Cash to Monthly Cash Expenses = Monthly Cash Expenses c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  85. 85. Ratio of Cash to Monthly Cash Expenses o The cash, including any cash equivalents, is taken from the balance sheet as of year-end. The monthly cash expenses, sometimes called cash burn, are estimated from the operating activities section of the statement of cash flows as follows: Negative Cash Flow from Operations Monthly Cash Expenses = 12 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  86. 86. rnal , Inte xley O nesa Cash Sarb , and ntrol Co nd eE Th c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

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