Chapter 4

Differences in balances can occur because of either

timing differences or errors

True or false: a company's cash balance should be high enough to ensure that it can pay debts as they become due, but not so high that cash is idle and not being used effectively

true

In step 3, how do we update the company's cash account

Adjust for the items used to reconcile the company's cash balance

Company's auditors provide what each year?

An opinion on management's assessment

What asset is most commonly involved with fraudulent activity

Cash

Checks outstanding

Cash disbursements that have been recorded in the company's accounting records but are not yet recorded by the bank

Investing activities

Cash investments in long-term assets and investment securities

Deposit outstanding

Cash receipts of the company that have not been added to the banks records of the company's balance

A framework for designing an internal control system was provided by the ______

Committee of Sponsoring Organizations (COSO) of the Treadway Commission

The framework for designing an internal control system is provided by the

Committee of Sponsoring Organizations (COSO) of the Treadway Commission

Purchase cards

Company-issues debit cards or credit cards that allow authorized employees to make purchases on behalf of the company

Using a debit card will result in a

Decrease in your cash account

EFT

Electronic funds transfer. Automatic transfers from one bank account to another

When a bank views a company's deposit how do they view/record it

Increase in the amount owed to the company or a liability, recorded as a credit

When a company makes a deposit how do they view/record it

Increase to cash and records it a debit to the cash account

Bank reconciliation

Matches the balance of cash in the bank account with the balance of cash in the company's own records.

Cash equivalents

Short-term investments that have a maturity date no longer than 3 months from the date of purchase

Petty cash fund

Small amount of cash kept on hand to pay for minor purchases

The ending balance in cash is reported in which financial statement(s)?

The balance sheet and statement of cash flows

Control activities

The policies and procedures that help ensure that management's directives are carried out including authorization, reconciliations, separation of duties

For the reconciliation to be complete, what must happen

The reconciled bank balance must equal the reconciled company balance

From the seller's perspective, the only difference between a cash sale and a credit card sale is what

The seller must pay a fee to the credit card company allowing the customer to use a credit card

Occupational fraud

The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources

Who must take final responsibility for a company's establishment and success?

Top executives

Financing activities

Transactions designed to raise cash or finance the business by borrowing cash from lenders or raise cash from stockholders, liabilities and stockholders equity

In a bank reconciliation, a deposit outstanding is

added to the bank balance

How do we adjust the bank's cash balance per bank statement

adding deposits outstanding and subtracting checks outstanding

Operating activities

cash transactions involving revenues and expenses during the period

Bank statements refer to an increase (deposit) in the cash balance as a

credit

The bank will show a customer's deposit on bank statements as a

credit, because a deposit is a liability from the bank's point of view

Control environment

include a variety of policies and procedures used to protect a company's assets

Risk assessment

includes consideration of internal and external risk factors

Examples of detective controls

reconciliations, performance reviews, audits

Monitoring

Continual monitoring of internal activities and reporting of deficiencies is required

Cash

Currency, coins, balances in savings and checking accounts, items acceptable for deposit in these accounts (such as checks received from customers), credit card and debit card sales, and cash equivalents

Eagle issues common stock for $250,000 cash. What is debited and what is credited?

Record a debit to cash and a credit to common stock. debit cash because its an asset account and asset balances increase with a debit. We credit common stock because its a stockholders equity account and these balances increase with a credit

The key provisions of the Sarbanes-Oxley Act include

Restricting activities of auditors to prevent conflicts of interest. Requiring that corporate executives certify financial statements. Requiring documentation and assessing effectiveness of internal controls.

True or false: A company does not need to adjust the cash account for deposits outstanding, checks outstanding, or a bank errors because these items related to reconciling the banks balance are already properly recorded in the company's accounting records

True

True or false: only transactions involving cash affect a company's cash flows

True

CEO and CFO sign a report each assessing what?

Whether internal controls are adequate

Bank statements refer to a decrease (withdrawal) as a

debit

In step 2, how do we reconcile the company's cash balance

per general ledger by determining which cash transactions have been recorded by the bank but not yet recorded by the company

The sum of the three activities in the statement of cash flows =

the change in total cash from one period to the next in the balance sheet

Timing differences in cash occurs when

the company records transactions either before or after the bank records the same transaction

NSF check

A check received and deposited by a company that is later determines by the bank to have non sufficient funds. Also known as a bad check from a customer

Internal controls

A company's plans to (1) safeguard the company's assets and (2) improve the accuracy and reliability of accounting information

The amount of cash is recorded in a company's what

Balance sheet

Margot, a prospective investor, wants to know how much cash Ziegler Inc. has on December 31. Margot can find the information in Ziegler's

Balance sheet Statement of cash flows

What two items can increase a companys cash balance

Bank collection and interest earned

How is fraud prevented

By not allowing the same person to be responsible for both controlling the asset and accounting for the asset

For reconciliation items that decrease the company's balance of cash what do we credit?

Cash

Deposit outstanding

Cash receipts that have been recorded in the company's accounting records but are not yet recorded by the bank

Checks outstanding

Checks the company has written that have not been subtracted from the bank's record of the company's balance

Melon Corp. noticed that a check written by the company for $2,100 for advertising expense was incorrectly recorded in the accounting records as $1,200. What needs to be recorded to correct this error?

Debit Advertising Expense $900; credit Cash $900.

Record advertising payment, NSF checks, supplies purchase, bank service fee, and check correction for rent

Debit adverting expense Debit accounts receivable Debit supplies Debit service fee expense Debit rent expense Credit cash

Purchase advertising with cash, check, or debit card

Debit adverting expense, credit cash

Purchase advertising with credit card

Debit advertising expense, credit accounts payable

For reconciliation items that increase the company's balance of cash what do we debit/credit (record note collected and interest earned)

Debit cash Credit notes receivable Credit Interest revenue (from note) Credit Interest revenue (from bank account)

Sell tickets and receive cash or check

Debit cash; credit service revenue

Record loss of $100 cash

Debit miscellaneous expense Credit cash

Establish the petty cash fund

Debit petty cash ; credit cash

Sarbanes-Oxley Act of 2002

Known as the Public Company Accounting Reform and Investor Protesting act, commonly referred to as SOX; the act established a variety of guidelines related to auditor-client relations and internal control procedures

Cash receipts and cash disbursements

Monthly activity from the company

Bank statement

Monthly record of the company's activity from the bank

Collusion

Occurs when two or more people acting in coordination to circumvent internal controls

Fraud triangle

Opportunity - the situation allows the fraud to occur Motivation - someone feels the need to commit fraud, such as the need for money Rationalization - justification for the deceptive act by the one committing the fraud

Night Corporation establishes a petty cash account for $200. During the month, Night used petty cash to purchase postage for $50 and supplies for $100. At the end of the month, Night recognizes the related expense and replenishes petty cash. The journal entry to replenish petty cash is

debit Petty Cash $150 credit Cash (checking account) $150

To replenish a petty cash fund, the company will

debit petty cash; credit cash.

The bank will show a customer's withdrawal as a _____

debit, because a withdrawal decreases its liability from the bank's point of view

A withdrawal of cash from the bank is viewed by the company as a

decrease to the amount owed to the company, debit its liability

In a bank reconciliation, an outstanding check is

deducted from the bank balance

Preventive controls

designed to keep errors or fraud from occurring in the first pace Example: separation of duties

In step 1, how to we reconcile the banks cash balance

determine which cash transactions have been recorded by the company but not yet recorded by the bank