1. Learning Objectives Understand the Business – LO1 Distinguish among service, merchandising, and manufacturing operations. – LO2 Explain common principles and limitations of internal control. Study the accounting methods – LO3 Apply internal control principles to cash receipts and payments. – LO4 Perform the key control of reconciling cash to bank statements. – LO5 Explain the use of a perpetual inventory system as a control. – LO6 Analyze sales transactions under a perpetual inventory system. Evaluate the results – LO7 Analyze a merchandiser’s multistep income statement. Review the chapter 1© McGraw-Hill Ryerson. All rights reserved.

2. Bank Procedures and Reconciliation Banks help control cash by: © McGraw-Hill Ryerson. All rights reserved.2 LO4 Restricting access Documenting procedures Independently verifying activity It is common for the balance on the bank statement and the balance in the cash account to be different. A bank reconciliation is an internal report prepared to verify the accuracy of both the bank statement and the cash account of the business.

3. The Bank Statement © McGraw-Hill Ryerson. All rights reserved.3 LO4 Deposits Made have been received by the bank. Other transactions include service changes and interest. Cheques cleared have been deposited by the payee and paid by the bank. Notice that bank statements are presented from the bank’s point of view. The business considers cash in the bank an asset (debit), but to the bank the cash is a liability (credit).

4. © McGraw-Hill Ryerson. All rights reserved.4 The bank may not know about: The business may not know about: Electronic Funds Transfer (EFT) Interest Deposited Book ErrorsNSF Cheques Service Charges Time LagsBank Errors Compare the activity listed on the bank statement with the activity listed in the company’s Cash Account and note any differences. LO4

5. The Bank Reconciliation 1.Identify the deposits in transit. 2.Identify the outstanding cheques. 3.Record other transactions on the bank statement including interest received, electronic funds transfers, NSF cheques and services charges. 4.Determine the impact of errors. © McGraw-Hill Ryerson. All rights reserved.5 LO4

6. After the bank reconciliation is completed, the reconciling items on the company’s books side of the reconciliation need to be recorded. © McGraw-Hill Ryerson. All rights reserved.6 Record LO4

7. Reporting Cash and Cash Equivalents Cash is money or any instrument that banks will accept for deposit and immediately increase a company’s account. Cash Equivalents are short-term, highly liquid investments purchased within three months of maturity. © McGraw-Hill Ryerson. All rights reserved.7 LO4