1. ©CourseCollege.com 1 9 Unit 9 Cash Learning Objectives 1.Establish and account for a Change Fund. 2.Establish and account for a Petty Cash Fund. 3.Describe the use of commercial banking services for cash transactions. 4.Analysis: Compute and explain liquidity measures, the doomsday ratio and the quick or acid test ratio

2. ©CourseCollege.com 2 Cash and Cash Equivalents Note that the term “cash” implies both cash and cash equivalent accounts. Cash equivalents: Short term investments that are highly liquid Able to be converted to known amounts of cash. (maturities of 3 months or less) Cash equivalents: Short term investments that are highly liquid Able to be converted to known amounts of cash. (maturities of 3 months or less)

3. ©CourseCollege.com 3 Cash and Cash Equivalents Examples of cash equivalents are Treasury bills Money market funds Bank deposits and *commercial paper *( issued by public corporations) Examples of cash equivalents are Treasury bills Money market funds Bank deposits and *commercial paper *( issued by public corporations)

4. ©CourseCollege.com 4 O9.1 Objective 9.1: Establish and account for a Change Fund.

5. ©CourseCollege.com 5 Establish Change Fund The Chart of Accounts is modified to include a new ledger account “Change Fund” O9.1

6. ©CourseCollege.com 6 Establish Change Fund A journal entry moves the change fund total from Cash to “Change Fund” O9.1

7. ©CourseCollege.com 7 Establish Change Fund O9.1

8. ©CourseCollege.com 8 Change Fund Controls: Some of the important controls to consider when dealing with cash drawers are: Individual responsibility Segregation of duties The cashier must accept responsibility for the change fund and cash received. The cashier should not be allowed to record the results of cash sales activities into the accounting system.

9. ©CourseCollege.com 9 At any point in time, the total of the cash register tape for sales plus the beginning change fund should equal the total ending cash count. Cash Register $ $ Beginning Change Fund Ending Cash Count 10.00 28.00 7.00 98.00 43.00 Sales total 189.00 10.00 28.00 7.00 98.00 43.00 Sales total 189.00 Register Tape Sales total Change Fund Equation O9.1

10. ©CourseCollege.com 10 Register tape sales total for the cashier’s shift $895 Ending cash count$1043 Using the equation, beginning change fund + register tape sales should equal ending cash count however, $150 895 $1045 Therefore, cash is short $2 and the Cash Short and Over account will be used to record this expense (debit). If the cash count exceeded $1045, the Cash Short and Over account would have been used to record the gain (credit). Change Fund Example O9.1 10.00 28.00 7.00 98.00 43.00 Sales total 895.00 10.00 28.00 7.00 98.00 43.00 Sales total 895.00 $

11. ©CourseCollege.com 11 The cash count total of $1,043 is not journalized. We simply record the effect on the regular cash account with a debit for the actual increase in cash $1,043 - $150 = $893 No entry is made to the Change Fund except to increase or decrease it. Journalize Cash Sales O9.1

12. ©CourseCollege.com 12 Change Fund Problem End of day register tape cash sales total is $558.25 Cash count is $759.25 Change Fund is $200 O9.1 Journalize the day’s cash revenue

13. ©CourseCollege.com 13 The cash count total of $759.25 isn’t journalized. The actual increase in cash is: $759.25 minus $200 = $559.25. Record the increase in cash, the day’s sales total and balance the entry with Cash Short & Over as necessary. Journalize Cash Sales O9.1

14. ©CourseCollege.com 14 Objective 9.2: Establish and account for a Petty Cash Fund. O9.2 Cash is called “liquid” for a good reason. It flows easily and must be protected carefully by firms. However small or “petty”, theft of petty cash over time can seriously damage an unsuspecting firm.

15. ©CourseCollege.com 15 Establish Petty Cash The Chart of Accounts is modified to include a new ledger account “Petty Cash” O9.2

16. ©CourseCollege.com 16 Establish Petty Cash A journal entry moves the petty cash amount from Cash to “Petty Cash” O9.2

17. ©CourseCollege.com 17 Establish Petty Cash O9.2

18. ©CourseCollege.com 18 Petty Cash Officer has individual responsibility for Petty Cash. Require vouchers for disbursement of petty cash. Vouchers signed by Petty Cash Officer and the individual in the firm receiving the cash. The Petty Cash Officer not allowed to receive disbursements without second signature. The Petty Cash Officer doesn’t record the reimbursement of petty cash in the accounting system. Petty Cash Controls

19. ©CourseCollege.com 19 At any point in time the total of the cash count plus vouchers in the petty cash drawer should equal the total in the Petty Cash Fund. Petty Cash Drawer Petty Cash Vouchers $ Total of the established Petty Cash Fund (Assumes no decrease or increase in cash due to error or theft.) Petty Cash Equation O9.2

20. ©CourseCollege.com 20 PETTY CASH VOUCHER No. 4 Date: 9-15-07 Paid to: Western Office Supplies $31.25 For: Printer cartridges Account: Office Supplies Approved byCash received by Cass Elliot Mervin Purvis PETTY CASH VOUCHER No. 4 Date: 9-15-07 Paid to: Western Office Supplies $31.25 For: Printer cartridges Account: Office Supplies Approved byCash received by Cass Elliot Mervin Purvis Petty Cash Voucher - Example

21. ©CourseCollege.com 21 Petty Cash fund: $250: Vouchers: 9/14 Paid $111 for postage 9/15 Paid $25 for delivery services 9/20 Paid $87 for office supplies 9/24 Paid $6 for key duplication Vouchers total $229. Total cash count on 9/30 is $20 Using the equation, vouchers + cash count should equal $250, however, $229 20 $249 Therefore, cash is short $1 and the Cash Short and Over account will be used to record this loss (debit). Journal entries follow... Petty Cash Reimbursement O9.2 Petty Cash Vouchers

22. ©CourseCollege.com 22 Journalize Reimbursement of Petty Cash O9.2

23. ©CourseCollege.com 23 Journalize Reimbursement of Petty Cash O9.2

24. ©CourseCollege.com 24 Journalize Reimbursement of Petty Cash O9.2 The Cash Short and Over account is used to balance the entry. If a credit entry is required in Cash Short and Over, a gain is indicated.

25. ©CourseCollege.com 25 Objective 9.3: Describe the use of commercial banking services for cash transactions O9.3

26. ©CourseCollege.com 26 Bank Services involving cash transactions  Deposit Products-checking and savings  Payroll tax deposit services  Electronic funds transfers  Cash management  Online banking O9.3

27. ©CourseCollege.com 27 Show me the money! Objective 9.3 Describe the use of commercial banking services for cash transactions ______ CHECK ______________ $ ______ CHECK ______________ DRAWER PAYEE DRAWEE Restrictive Endorsement Should be used to limit the ability of third parties to cash the check. PAY TO THE ORDER OF COAST NATIONAL BANK FOR DEPOSIT ONLY Penny & Lee Espresso Payment Process Using Checks O9.3

28. ©CourseCollege.com 28 Who is keeping track of the cash? Firms that use bank checking deposit services actually have two parties that keep track of the firm’s cash balances – 1)the firm itself and, 2)the firm’s bank. As a result, the firm must regularly compare the two balances and confirm any reasons for differences. This process is called reconciliation O9.3

29. ©CourseCollege.com 29 Bank Cash BalanceLedger Cash Balance Actual Cash Balance Bank Reconciliation O9.3

30. ©CourseCollege.com 30 Why is there a difference? O9.3 ??

31. ©CourseCollege.com 31 Why is there a difference? The firm’s cash balance (book or ledger balance); and the bank’s cash balance are usually not the same due to timing differences. The firm makes changes to its’ cash balance that will take some time to reach the bank and; The bank make changes to the firm’s deposit balances that take some time to reach the firm The firm’s cash balance (book or ledger balance); and the bank’s cash balance are usually not the same due to timing differences. The firm makes changes to its’ cash balance that will take some time to reach the bank and; The bank make changes to the firm’s deposit balances that take some time to reach the firm O9.3

32. ©CourseCollege.com 32 The firm records: Checks issued -credit to cash Cash received for deposit -debit to cash Until the bank receives this information these changes are called: Outstanding checks Deposits in transit The firm records: Checks issued -credit to cash Cash received for deposit -debit to cash Until the bank receives this information these changes are called: Outstanding checks Deposits in transit O9.3 The Firm What changes does the firm initiate?

33. ©CourseCollege.com 33 What changes* does the bank initiate? The bank may add to the cash balance for: Electronic funds transferred in Interest paid for deposit balances Collection of notes and NSF checks The bank may deduct cash for: Service fees Returned NSF checks previously deposited * These changes are communicated to the firm in the monthly statement The bank may add to the cash balance for: Electronic funds transferred in Interest paid for deposit balances Collection of notes and NSF checks The bank may deduct cash for: Service fees Returned NSF checks previously deposited * These changes are communicated to the firm in the monthly statement O9.3

34. ©CourseCollege.com 34 BANK STATEMENT RECONCILIATION Adjustments to the Bank and the Ledger Balance Must result in the same adjusted cash balance to reconcile. Bank Reconciliation O9.3

35. ©CourseCollege.com 35 O9.3 Journalize adjustments All of the adjustments to the ledger cash balance must be formally entered into the accounting system to complete the bank reconciliation

36. ©CourseCollege.com 36 O9.3 Journalize Adjustments When this posting is complete, the resulting cash balance should reflect all the information to date as to the true cash balance

37. ©CourseCollege.com 37 Objective 9.4: Analysis: Compute and explain liquidity measures, the doomsday ratio and the quick or acid test ratio. O9.4

38. ©CourseCollege.com 38 Analysis: Compute and explain the doomsday ratio and the quick or acid test ratio Cash + cash equivalents Current Liabilities Doomsday ratio Quick ratio Objective 9.4: O9.4 Cash + Short term Investments + Accounts & Notes Receivable Current Liabilities

39. ©CourseCollege.com 39 The doomsday ratio answers the following question: If this business ceased to exist, what portion of current liabilities could be paid by just using existing cash available? Doomsday ratio Cash Current Liabilities Doomesday Ratio O9.4 The doomsday ratio deals with a worst case scenario.

40. ©CourseCollege.com 40 Doomsday Ratio Example 15% of current liabilities could be paid with cash available ?.15 O9.4

41. ©CourseCollege.com 41 The quick ratio answers the following question: How many dollars of cash, short term investments, accounts and notes receivable are available to pay current assets? Quick ratio Current Liabilities Quick Ratio O9.4 Notice Inventory is not included Cash + Short term Investments + Accounts & Notes Receivable

42. ©CourseCollege.com 42 Quick Ratio Example 50% of current liabilities could be paid without relying on Inventory or Supplies O9.4 ?.50

43. ©CourseCollege.com 43 End Unit 9