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Module 7

Module 7. Accounting for Cash. Learning Objectives. Internal Control System. Fundamental Principles of Internal Control. Limitations of Internal Control. Human Error. Human Fraud. The costs of internal controls must not exceed their benefits. Cash. Liquidity. Internal Controls for Cash.

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Module 7

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  1. Module 7 Accounting for Cash

  2. Learning Objectives

  3. Internal Control System

  4. Fundamental Principles of Internal Control

  5. Limitations of Internal Control Human Error Human Fraud The costs of internal controls must not exceed their benefits.

  6. Cash

  7. Liquidity

  8. Internal Controls for Cash

  9. Control of Cash Disbursements

  10. Petty Cash System of Control This is an example of the cost-benefit limitation.

  11. Operating a Petty Cash Fund Entry to establish fund The petty cashier makes payments from this fund for small disbursements Introductory Accounting SAP 2007 / SAP University Alliances

  12. Operating a Petty Cash Fund … and ensures a petty cash receipt is signed by the person receiving the money to easily identify the expenses paid from petty cash. And then makes an entry to record these expenses We use a Cash Over or Short account if needed.

  13. Banking Activities and Services

  14. Bank Credit Card Transactions

  15. Debit Card Transactions

  16. Illustration-Bank Credit Card Transactions • Sample has $200 of credit card sales with a 3% fee and cash is received immediately (assume cost of sales is $100). Introductory Accounting SAP 2007 / SAP University Alliances

  17. Bank Reconciliations

  18. The bank statement provides information about everything that has gone through the bank account for a given period of time. CM – Credit Memo DM – Debit Memo EC – Error Correction IN – Interest Earned NSF – Non-sufficient Funds OD – Overdraft SC – Service Charge Introductory Accounting SAP 2007 / SAP University Alliances

  19. The general ledger, cash receipts, and cash disbursements journals provide information about everything that has gone through our accounting records for a given period of time. Introductory Accounting SAP 2007 / SAP University Alliances

  20. Bank Reconciliation — Example Why are the balances different? Some items are reflected on the bank statement but not in the accounting records and vice versa. *

  21. Reconciling Items Bank Statement • Outstanding cheques. • Deposits in transit. • Bank errors. • General Ledger • Non-sufficient funds cheque (NSF). • Bank service charges. • Interest earned on bank account. • Collections made by the bank. • Book errors. Introductory Accounting SAP 2007 / SAP University Alliances

  22. Let’s prepare the bank reconciliation for Sample Company at the end of October 31, 2005.

  23. On both the cash receipts journal AND the bank statement; therefore, none of these items is a reconciling item. Introductory Accounting SAP 2007 / SAP University Alliances

  24. On both the cash disbursements journal AND the bank statement; therefore, none of these items is a reconciling item. Introductory Accounting SAP 2007 / SAP University Alliances

  25. Only in the cash receipts journal OR the cash disbursements journal OR the bank statement; therefore, each of these items is a reconciling item. Introductory Accounting SAP 2007 / SAP University Alliances

  26. The items that show up only on the bank statement are reconciling items on the book side of the bank reconciliation. Introductory Accounting SAP 2007 / SAP University Alliances

  27. Introductory Accounting SAP 2007 / SAP University Alliances

  28. The items that show up only on the cash receipts or cash disbursements journal are reconciling items on the bank side of the bank reconciliation. Introductory Accounting SAP 2007 / SAP University Alliances

  29. Introductory Accounting SAP 2007 / SAP University Alliances

  30. The Final Product Introductory Accounting SAP 2007 / SAP University Alliances

  31. Recording Adjusting Entries from the Bank Reconciliation • We journalize the items not previously recorded in the accounting records.

  32. Recording Adjusting Entries from Bank Reconciliation

  33. Recording Adjusting Entries from Bank Reconciliation • After posting the reconciling entries the cash account looks like this . . . Adjusted balance on October 31.

  34. Acid Test Ratio

  35. Acid Test Ratio • Acid Test Ratio = Quick assets* Current liabilities * cash, short-term investments, and receivables

  36. Cash Flow Statement

  37. Cash Flow Statement

  38. Cash Equivalents

  39. Classifications of Cash Flows

  40. Classifications of Cash Flows

  41. Classifications of Cash Flows

  42. Operating Activities • Inflowsinclude: • Receipts from customers. • Cash dividends received. • Interest from borrowers. • Other. Cash Flows from Operating Activities • Outflows include: • Salaries and wages. • Payments to suppliers. • Taxes and fines. • Interest paid to lenders. • Other. Introductory Accounting SAP 2007 / SAP University Alliances

  43. Investing Activities • Inflows from: • Selling long-term productive assets. • Selling equity investments. • Collecting of principal on loans. • Other. Cash Flows from Investing Activities • Outflows to: • Purchase long-term productive assets. • Purchase equity investments. • Purchase debt investments. • Make loans.

  44. Inflows from: Issuing its own equity securities. Issuing bonds and notes. Issuing temporary and long-term liabilities. Financing Activities Cash Flows from Financing Activities • Outflows to: • Pay dividends to shareholders. • Purchase treasury shares. • Repay cash loans. • Cover withdrawals by owners. Introductory Accounting SAP 2007 / SAP University Alliances

  45. Non-Cash Investing and Financing Activities

  46. Format of Statement of Cash Flows Introductory Accounting SAP 2007 / SAP University Alliances

  47. Preparing the Cash Flow Statement

  48. Operating Activities

  49. Direct Method of Reporting Operating Cash Flows Adjustments for Changes in Related Balance Sheet Accounts Cash Receipts or Cash Payments Revenue or Expense

  50. Adjustments for Changes in Related Balance Sheet Accounts Revenue or Expense Cash Receipts or Cash Payments { Cash received - Increase in A/R = Sales from customers +Decreasein A/R

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