Cash Coin and currency Checking, savings, and money market accounts Undeposited, cashier, and certified checks LO1
Cash Equivalents Commercial paper U.S. Treasury bills Certain money market funds Readily convertible to cash Original maturity to investor of three months or less Examples:
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
Cash balance, beginning of period + = Cash balance, end of period Bank Statements + Deposits +Customer notes and interest collected by bank +Interest earned Canceled checks NSF checks Service charg es
Bank Reconciliation – Step 1 Deposits in transit: Late period deposits not yet reflected on bank statement Trace deposits listed on the bank statement to the books. Identify the deposits in transit. Add to the bank balance.
Example of Reconciliation Balance per statement, June 30 $3,308.59 Add: Deposit in transit 642.30 Bank Statement Adjustments: Deposits
Bank Reconciliation – Step 2 Outstanding checks: Checks written but not yet presented to bank Trace checks cleared by the bank to the books. Identify outstanding checks. Subtract from the bank balance.
Example of Reconciliation Bank Statement Adjustments: Checks Outstanding Balance per statement, June 30 $3,308.59 Add: Deposit in transit 642.30 Deduct: Outstanding checks: No. 496 $ 79.89 No. 501 213.20 No. 502 424.75 (717.84) Adjusted balance, June 30 $3,233.05
Bank Reconciliation – Step 3 Credit memoranda: Interest earned, customer notes collected, etc. List all other additions (credit memoranda) shown on the bank statement. Add to the book balance.
Example of Reconciliation Cash Account Adjustments: Credit 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
List all other subtractions (debit memoranda) shown on the bank statement. Subtract from the book balance. Bank Reconciliation – Step 4 Debit memoranda: NSF checks, service charges, etc.
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
Bank Reconciliation – Step 5 Identify errors made by the bank or the company in recording the transactions during the period.
Bank Reconciliation – Step 6 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
Example of Reconciliation Balance per statement, June 30 $3,308.59 Adjusted balance, June 30 $3,233.05 Bank Statement Adjustments Balance per books, June 30 $2,895.82 Adjusted balance, June 30 $3,233.05 Cash Account Adjustments
Bank Reconciliation Adjusting Entries Bank Reconciliation Balance per bank$$$ : Adjusted balance$$$ Balance per books$$$ : Adjusted balance$$$ Book adjustments are the basis for adjusting entries
Bank Reconciliation Adjusting Entries A number of adjustments to its records are needed to change the book balance of the cash account To record bank reconciliation adjustments.
Petty Cash A check is written Journalize establishment of fund Disbursement with proper documentation Fund replenished
Petty Cash Transactions Steps in setting up and maintaining a petty cash fund: Write and cash a check for lump sum amount and entrust money to petty cash custodian Make journal entry to record establishment of the fund Make disbursement from fund with proper documentation Periodically replenish fund by writing and cashing check in the amount necessary to bring fund back to original balance Record the replenishment and recognize the expenses
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
Sarbanes-Oxley Act of 2002 (SOX) Act of Congress intended to bring reform to corporate accountability and stewardship in response to corporate scandals
Sarbanes-Oxley Act of 2002 (SOX) Section 404 requires: Management to state its responsibility to establish and maintain an adequate internal control structure and procedures for financial reporting. Assess the effectiveness of its internal control structure and procedures for financial reporting.
Internal Control Control Environment Accounting System Internal Control Procedures
The Control Environment Management’s competence and operating style Personnel policies and practices Influence of board of directors
The Accounting System Can be manual, fully computerized, or a combination of both Use of journals is an integral part of any system Methods and records used to report transactions and maintain financial information
Internal Control Procedures Segregation of Duties Safeguarding Assets and Records Proper Authorizations Independent Verification The Design and Use of Business Documents Independent Review and Appraisal LO4
Proper Authorizations Authority and responsibility go hand in hand Segregation of Duties Separate physical custody from the accounting for assets
Independent Verification One individual or department acts as a check on the work of another Safeguarding Assets and Records Protect assets and accounting records from loss, theft, unauthorized use, etc.
Independent Review and Appraisal Provide for periodic review and appraisal of the accounting system and the people operating it
The Design and Use of Business Documents Capture all relevant information about a transaction and assist in proper recording and classification. Are properly controlled
Limitations on Internal Control No system is entirely foolproof Employees in collusion can override the best controls Cost vs. benefit tradeoff
Computerized Business Documents and Internal Control LO5 Cash receipts should be deposited intact in the bank on a daily basis All cash disbursements should be made by check
Control over Cash Receipts Cash received over the counter (e.g., cash sales) Cash received in the mail (e.g., credit sales)
Controls of Cash Received over the Counter Cash registers Locked-in cash register tape Prenumbered customer receipts Investigate recurring discrepancies
Controls over Cash Received in the Mail Two employees open mail Prelist prepared Monthly customer statements
Document Flow for Merchandise Check Prepared Purchase Requisition Receiving Report Purchase Order Invoice Approval Purchase Invoice