2Cash Coin and currency Checking, savings, and money market accounts Undeposited, cashier, and certified checksLO1
3Cash Equivalents Readily convertible to cash Original maturity to investor of three months or lessExamples:Commercial paperU.S. Treasury billsCertain money market funds
4Cash ManagementNecessary to ensure company has neither too little nor too much cash on handToolsCash flows statementBank reconciliationsPetty cash fundsLO2
5Bank Statements Cash balance, beginning of period + = Cash balance, end of period+Deposits+Customer notes and interest collected by bank+Interest earnedCanceled checksNSF checksService charges
6Bank 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
7Example of Reconciliation Bank Statement Adjustments: DepositsBalance per statement, June $3,308.59Add: Deposit in transit1
8Bank 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
9Example of Reconciliation Bank Statement Adjustments: Checks OutstandingBalance per statement, June $3,308.59Add: Deposit in transitDeduct: Outstanding checks:No $NoNo (717.84)Adjusted balance, June $3,233.051
10Bank 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.
11Example of Reconciliation Cash Account Adjustments: Credit MemorandaBalance per books, June $2,895.82Add: Customer note collected $500.00Interest on customer noteInterest earned during JuneError in recording check2
12Bank 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.
13Example of Reconciliation Cash Account Adjustments: Debit MemorandaBalance per books, June $2,895.82Add: Customer note collected $500.00Interest on customer noteInterest earned during JuneError in recording checkDeduct: NSF check $245.72Collection fee on noteService charge for lockbox (282.22)Adjusted balance, June $3,233.052
14Bank Reconciliation – Step 5 Identify errors made by the bank or the company in recording the transactions during the period.
15Bank Reconciliation – Step 6 Use the information collected in steps 1 through 5 to prepare the bank reconciliation.Bank ReconciliationBalance per bank $$$:Adjusted balance $$$Balance per books $$$Adjusted balances for book and bank must agree
16Example of Reconciliation Bank Statement AdjustmentsBalance per statement, June 30 $3,308.59Adjusted balance, June $3,233.05Cash Account AdjustmentsBalance per books, June $2,895.82Adjusted balance, June $3,233.051
17Bank Reconciliation Adjusting Entries Balance per bank $$$:Adjusted balance $$$Balance per books $$$Book adjustments are the basis for adjusting entries
18Bank Reconciliation Adjusting Entries A number of adjustments to its records are needed to change the book balance of the cash accountTo record bank reconciliation adjustments.
19Petty Cash Journalize establishment of A check is written fund Disbursementwith properdocumentationFund replenished
20Petty Cash Transactions Steps in setting up and maintaining a petty cash fund:Write and cash a check for lump sum amount and entrustmoney to petty cash custodianMake journal entry to record establishment of the fundMake disbursement from fund with proper documentationPeriodically replenish fund by writing and cashing checkin the amount necessary to bring fund back to originalbalanceRecord the replenishment and recognize the expenses
21Internal Control System Consists of the policies and procedures necessary to ensure:The safeguarding of an entity’s assetsThe reliability of its accounting recordsThe accomplishment of its overall objectivesLO3
22Sarbanes-Oxley Act of 2002 (SOX) Act of Congress intended to bring reformto corporate accountability and stewardshipin response to corporate scandals
23Sarbanes-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.
24Internal Control Control Environment Internal Accounting Control SystemInternalControlProcedures
25The Control Environment Management’s competence and operating stylePersonnel policies and practicesInfluence of board of directors
26The Accounting SystemMethods and records used to report transactions and maintain financial informationCan be manual, fully computerized, or a combination of bothUse of journals is an integral part of any system
27Internal Control Procedures IndependentReview andAppraisalIndependentVerificationThe Design andUse of BusinessDocumentsSafeguardingAssets andRecordsProperAuthorizationsSegregationof DutiesLO4
28Proper Authorizations Authority and responsibility go hand in handSegregation of DutiesSeparate physical custody from the accountingfor assets
29Independent Verification One individual or department acts as a check on the work of anotherSafeguarding Assets and RecordsProtect assets and accounting records from loss,theft, unauthorized use, etc.
30Independent Review and Appraisal Provide for periodic review and appraisal of the accounting system and the people operating it
31The Design and Use of Business Documents Capture all relevant information about a transaction and assist in proper recording and classification.Are properly controlled
32Limitations on Internal Control No system is entirely foolproofEmployees in collusion can override the best controlsCost vs. benefit tradeoff
33Computerized Business Documents and Internal Control Cash receipts should be deposited intact in the bank on a daily basisAll cash disbursements should be made by checkLO5
34Control over Cash Receipts Cash received over the counter (e.g., cash sales)Cash received in the mail (e.g., credit sales)
35Controls of Cash Received over the Counter Cash registersLocked-in cash register tapePrenumbered customer receiptsInvestigate recurring discrepancies
36Controls over Cash Received in the Mail Two employees open mailPrelist preparedMonthly customer statements
37Document Flow for Merchandise CheckPreparedPurchaseRequisitionReceivingReportOrderInvoiceApproval