1. C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control 5.Bank Reconciliation 6.Petty Cash 7.Balance Sheet Cash Presentation 8.Financial Analysis and Interpretation Chapter 7 Cash

2. C7 - 2 Cash Accounts and Internal Controls  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: 4 Cash in Bank – (Name of Bank) 4 Preventive controls protect cash from theft and misuse of cash. 4 Detective controls are designed to detect theft or misuse of cash and are also preventive in nature.

3. C7 - 3 1.Over the counter from cash customers. Use of a cash register is an important control. 2.Received in the mail from credit customers. Cash is in the form of checks. All cash is sent to the Cashier’s Department. An employee prepares a bank deposit ticket and makes a bank deposit. The bank deposit record is sent to the Accounting Department where it is recorded. Internal Control of Cash Receipts Cash is normally received from two sources: p.281

4. C7 - 4 DateDescriptionDebitCredit DateDescriptionDebitCredit Cash Short and Over Cash3,142.00 Cash Short and Over8.00 Sales3,150.00 May 08 To record day’s cash sales. Actual cash received is less than cash register receipts. Cash Short and Over account is included in the income statement: Miscellaneous Administrative Expenses Other Income

5. C7 - 5 DateDescriptionDebitCredit DateDescriptionDebitCredit Cash Short and Over Cash in Bank3,142.00 Cash Short and Over8.00 Sales3,150.00 May 08 To record day’s cash sales. Actual cash received is less than cash register receipts. A debit in the Cash Short and Over account represents an expense.

6. C7 - 6 Cash Receipts From Credit Customers Accts. ReceivableSalesCash PURCHASE ORDER SALES ORDER 1 1A purchase order is received and a sales order is prepared.

7. C7 - 7 Cash Receipts From Credit Customers Accts. ReceivableSalesCash in Bank PURCHASE ORDER SALES ORDER SHIPPING REPORT 1 2 1A purchase order is received and a sales order is prepared. 2Merchandise is shipped and a shipping report is prepared.

8. C7 - 8 Cash Receipts From Credit Customers SALES INVOICE Accts. ReceivableSalesCash Credit Debit PURCHASE ORDER SALES ORDER SHIPPING REPORT 1 2 3 1A purchase order is received and a sales order is prepared. 2Merchandise is shipped and a shipping report is prepared. 3A sales invoice is prepared and sent to customer.

9. C7 - 9 DEPOSIT RECORD Cash Receipts From Credit Customers SALES INVOICE Accts. ReceivableSalesCash Credit Debit Credit Debit PURCHASE ORDER SALES ORDER SHIPPING REPORT 1 2 3 4 1A purchase order is received and a sales order is prepared. 2Merchandise is shipped and a shipping report is prepared. 3A sales invoice is prepared and sent to customer. 4Cash is received from customer, deposited, and recorded.

10. C7 - 10 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 Cash Payments

11. C7 - 11 Cash Payments to Suppliers Accts. PayableCashMerchandise PURCHASE ORDER 1 1A purchase order is sent to a supplier.

12. C7 - 12 Cash Payments to Suppliers Accts. PayableCashMerchandise PURCHASE ORDER RECEIVING REPORT 1 2 1A purchase order is sent to a supplier. 2Merchandise is received and a receiving report is prepared.

13. C7 - 13 VOUCHER Cash Payments to Suppliers Accts. PayableCashMerchandise Credit Debit PURCHASE ORDER PURCHASE INVOICE RECEIVING REPORT 1 2 3 1A purchase order is sent to a supplier. 2Merchandise is received and a receiving report is prepared. 3A purchase invoice is received and a voucher is prepared.

14. C7 - 14 VOUCHER Cash Payments to Suppliers CHECK Accts. PayableCashMerchandise Credit Debit Credit Debit PURCHASE ORDER PURCHASE INVOICE RECEIVING REPORT 1 2 3 4 1A purchase order is sent to a supplier. 2Merchandise is received and a receiving report is prepared. 3A purchase invoice is received and a voucher is prepared. 4Cash is paid to the supplier and recorded.

15. C7 - 15 Cash Receipts and Payments CHECK Accts. PayableCash Credit Debit 2 1Cash received on account from customers. DEPOSIT RECORD Accts. Receivable Credit Debit 1 Selling Side of Business Buying Side of Business 2Cash paid on account to suppliers.

16. C7 - 16 Bank Reconciliation Special terms: 1.Signature 2.Deposit ticket 3.A check 4.Drawer 5.Drawee 6.Payee 7.Bank reconciliation

17. C7 - 17 Bank Reconciliation Exhibit 4 Bank statement Exhibit 5 recordings To prepare the bank reconciliation –The reconciling items (p.290)

18. C7 - 18

19. C7 - 19 Power Networking Bank Reconciliation July 31, 2003 Balance per bank statement$3,359.78 Add deposit of July 31, not recorded by bank816.20 $4,175.98 Deduct outstanding checks: No. 812$1,061.00 No. 878435.39 No. 88348.601,544.99 Adjusted balance$2,630.99 Balance per depositor’s records$2,549.99 Add note and interest collected by bank408.00 $2,957.99 Deduct: Check NSF check returned$300.00 Bank service charges18.00 Error in recording Check No. 8799.00 Adjusted balance$2,630.99

20. C7 - 20 Power Networking Bank Reconciliation July 31, 2003 Balance per bank statement$3,359.78 Add deposit in transit816.20 $4,175.98 Deduct outstanding checks: No. 812$1,061.00 No. 878435.39 No. 88348.601,544.99 Adjusted balance$2,630.99 Balance per depositor’s records$2,549.99 Add note and interest collected by bank408.00 $2,957.99 Deduct: Customer NSF check$ 300.00 Bank service charges18.00 Error in recording Check No. 8799.00327.00 Adjusted balance$2,630.99 A B

21. C7 - 21 DateDescriptionDebitCredit DateDescriptionDebitCredit Bank Reconciliation Journal Entries A B Cash408 Notes Receivable400 Interest Revenue8 Accounts Receivable - T. Ivey 300 Miscellaneous Expense18 Accounts Payable - Taylor Co.9 Cash 327 Jul. 31 To record note collected by bank. To record customer’s NSF check, bank service charges, and error in recording Check No. 879. Jul. 31 p.291

22. C7 - 22 DateDescriptionP.R.DebitCredit Balance DateItemP.R.DebitCredit DebitCredit Account: Cash Account No. 11 General Journal General Ledger Page 1 A B 7/31Balance2,549.99 Bank Reconciliation - Journal and Ledger 408.00 7/31Cash11408.00 Notes Receivable400.00 Interest Revenue8.00 7/31Accts. Receivable - T. Ivey 300.00 Miscellaneous Expense18.00 Accts. Payable - Taylor Co.9.00 327.00 Cash11 327.00 7/31Balance2,549.99 408.00 7/31J1408.00 2,957.99 327.00 7/31J1327.002,630.99

23. C7 - 23 Petty Cash – A special cash fund is called a petty cash fund Example: –Travel expenses for salesperson Set up the fund for $100 Total the expenses $88 Refund Petty Cash Accounting

24. C7 - 24 DateDescriptionDebitCredit DateDescriptionDebitCredit Petty Cash Accounting Petty Cash100.00 Cash100.00 Office Supplies 50.00 Store Supplies35.00 Misc. Admin. Expense3.00 Cash88.00 Note: No entry in Petty Cash account when the fund is replenished. Aug. 1 To establish a petty cash fund. To replenish the petty cash fund. Aug. 31

25. C7 - 25 Solvency Analysis 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.

26. C7 - 26 Solvency Measures — The Short-Term Creditor A. Cash and equivalents$100,000$ 120,000 B. Current liabilities400,0001,500,000 Doomsday ratio A / B0.25 0.08 Doomsday Ratio Laettner Co. Oakley Co. How are these ratios used?

27. C7 - 27 Solvency Measures — The Short-Term Creditor A. Cash and equivalents$100,000$ 120,000 B. Current liabilities400,0001,500,000 Doomsday ratio A / B0.25 0.08 Doomsday Ratio Laettner Co. Oakley Co. Use:To indicate the worst case assumption that should the business cease to exist, only the cash on hand is available to meet creditor obligations.

28. C7 - 28 HOME WORK READING: 1.Illustrative problem 2.Self- examination questions 3.Multiple choice Writing: 1.Exercise: 2.Problem : 7-3A Discussion: Activity 7-5

29. C7 - 29 This is the end of Chapter 7.