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Chapter 7 Cash. 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. Learning Objectives.

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Chapter 7 Cash


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    1. Chapter 7 Cash 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 Learning Objectives

    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: • Cash in Bank – (Name of Bank) • Preventive controlsprotect cash from theft and misuse of cash. • Detective controlsare designed to detect theft or misuse of cash and are also preventive in nature.

    3. Internal Control of Cash Receipts Cash is normally received from two sources: p.281 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 AccountingDepartment where it is recorded.

    4. Cash Short and Over Date Description Debit Credit Cash 3,142.00 Cash Short and Over 8.00 Sales 3,150.00 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. Cash Short and Over Date Description Debit Credit Cash in Bank 3,142.00 Cash Short and Over 8.00 Sales 3,150.00 May 08 To record day’s cash sales. Actual cash received is less than cash register receipts. A debit in the Cash Short and Overaccount represents an expense.

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

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

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

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

    10. Internal Control of Cash Payments 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.

    11. Cash Payments to Suppliers Cash Accts. Payable Merchandise PURCHASE ORDER 1 1 A purchase order is sent to a supplier.

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

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

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

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

    16. Bank Reconciliation Special terms: • Signature • Deposit ticket • A check • Drawer • Drawee • Payee • Bank reconciliation

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

    18. Power NetworkingBank ReconciliationJuly 31, 2003 Balance per bank statement $3,359.78 Add deposit of July 31, not recorded by bank 816.20 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99 Balance per depositor’s records $2,549.99 Add note and interest collected by bank 408.00 $2,957.99 Deduct: Check NSF check returned $300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 Adjusted balance $2,630.99

    19. A B Power NetworkingBank ReconciliationJuly 31, 2003 Balance per bank statement $3,359.78 Add deposit in transit 816.20 $4,175.98 Deduct outstanding checks: No. 812 $1,061.00 No. 878 435.39 No. 883 48.60 1,544.99 Adjusted balance $2,630.99 Balance per depositor’s records $2,549.99 Add note and interest collected by bank 408.00 $2,957.99 Deduct: Customer NSF check $ 300.00 Bank service charges 18.00 Error in recording Check No. 879 9.00 327.00 Adjusted balance $2,630.99

    20. A B Bank Reconciliation Journal Entries p.291 Date Description Debit Credit Jul. 31 Cash 408 Notes Receivable 400 Interest Revenue 8 Accounts Receivable - T. Ivey 300 Miscellaneous Expense 18 Accounts Payable - Taylor Co. 9 Cash 327 To record note collected by bank. Jul. 31 To record customer’s NSF check, bank service charges, and error in recording Check No. 879.

    21. A B Bank Reconciliation - Journal and Ledger General Journal Page 1 Date Description P.R. Debit Credit 7/31 Cash 11 408.00 Notes Receivable 400.00 Interest Revenue 8.00 7/31 Accts. Receivable - T. Ivey 300.00 Miscellaneous Expense 18.00 Accts. Payable - Taylor Co. 9.00 Cash 11 327.00 GeneralLedger Account: CashAccount No. 11 Balance Date Item P.R. Debit Credit Debit Credit 7/31 Balance 2,549.99 7/31 Balance 2,549.99 7/31 J1 408.00 2,957.99 7/31 J1 327.00 2,630.99

    22. Petty Cash Accounting • 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

    23. Petty Cash Accounting Date Description Debit Credit Petty Cash 100.00 Cash 100.00 Office Supplies 50.00 Store Supplies 35.00 Misc. Admin. Expense 3.00 Cash 88.00 Note: No entry in Petty Cash account when the fund is replenished. Aug. 1 To establish a petty cash fund. Aug. 31 To replenish the petty cash fund.

    24. 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 currentandnoncurrent liabilities. This ability is normally assessed by examining balance sheetrelationships.

    25. Solvency Measures — The Short-Term Creditor Doomsday Ratio Laettner Co. Oakley Co. A. Cash and equivalents $100,000 $ 120,000 B. Current liabilities 400,000 1,500,000 Doomsday ratio A / B 0.25 0.08 How are these ratios used?

    26. Solvency Measures — The Short-Term Creditor Doomsday Ratio Laettner Co. Oakley Co. A. Cash and equivalents $100,000 $ 120,000 B. Current liabilities 400,000 1,500,000 Doomsday ratio A / B 0.25 0.08 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.

    27. HOME WORK READING: • Illustrative problem • Self- examination questions • Multiple choice Writing: • Exercise: • Problem : 7-3A Discussion: Activity 7-5

    28. This is the end of Chapter 7.