Chapter 6
NSF check
A check written by a customer who does not have enough money in his account to cover the check.
Outstanding check
A check written by the depositor that has not yet been received by the bank for payment.
Check
A document signed by the depositor instructing the bank to pay a specified amount of money
What would appear in the deposits and credits column of a bank statement and would cause an increase in the account's balance
A note collected by the bank on behalf of the account owner Deposits made during the month Interest paid by the bank on the bank account balance
Reasons a petty cash account would experience an overage or shortage
A person receiving a disbursement from the fund failed to return change from a transaction The petty cashier overpaid the amount due The petty cashier failed to get a receipt for payment
Bank account
A record set up by a bank for a customer
Voucher system
A set of procedures and approvals designed to control cash disbursement and acceptance of obligations.
Similarities and differences between the GAAP and IFRS
Accounting definitions for cash are similar Both support enhanced internal controls Both strongly support procedures aimed at controlling cash receipts and disbursements
What is an invoice approval
An invoice approval is completed by the accounting department to approve an invoice for payment
Cash can be
Currency, coins, deposits in bank accounts, checking and saving accounts, checks, money orders
Examples of cash or cash equivalents
Customer checks, Money orders, Certified checks
What can cause a petty cash account to be credited in a journal entry?
Fund amount being reduced Fund is being eliminated
Items added on the book balance adjustments
Interest earned and unrecorded cash receipts Sometimes corrections of book errors note collected by the bank for the depositor
Voucher
Internal document or file used to accumulate information to control cash disbursements and to ensure transactions are properly recorded.
Human fraud
Involves intent by careless people to defeat internal controls for personal gain
Days' sales uncollected ratio assesses
It measures how quickly a company can convert its accounts receivables into cash
How has SOX impacted the internal control of companies
It requires that auditors evaluate internal controls Requires that managers document and assess the effectiveness of all internal control processes that can impact financial reporting
Deposit ticket
Lists currency, coins, and checks deposited into an account
Steps in preparing a bank recollection
compute the adjusted book balance Identify any deposits in transit and add to the balance per bank compute the adjusted bank balance Identify and list any outstanding checks and subtract from the balance per bank
What is the purpose of internal controls
to protect assets and ensure reliable accounting
When is the petty cash fund debited or credited
when it is reduced, increased, or created
Steps of document flow, in a voucher system
1. A purchase requisition is filled out and placed in voucher 2. A purchase order is completed and a copy is placed in the voucher 3. A receiving report is completed when the order arrives and placed in voucher 4. The accounting department approves payment of the invoice and approval is placed in voucher 5. The cashier issues a check for the amount of the invoice
Principles of Internal Controls
1. Establish responsibilities 2. Maintain adequate records 3. Insure assets and bond key employees 4. Separate record keeping for custody of assets 5. Divide responsibility for related transactions 6. Apply technological controls 7. Perform regular and independent reviews
Steps in preparing a monthly bank reconciliation
1. Identify the bank statement balance then add any deposits in transit and subtract any outstanding checks 2. Compute the adjusting bank balance 3. Identify the company's book balance 4. Add any unrecorded credit memo from the bank, interest earned, and errors understating the book balance 5. Identify and list any unrecorded debit memo from the bank, service charges, and errors overstating the book balance 6. Compute the adjusted book balance and compare it to the adjusted bank balance to verify equality
To establish the petty cash fund
A check is drawn by the company cashier
What happens if the Petty Cash account is not replenished
Balance sheet will show an overstated cash asset Expenses would not be recorded in the period they were incurred The income statement would reflect a net income that was too high
Reconciliation items that would require adjustments in the book balance
Bank charges NSF check Collection of note by bank Interest earned
Items subtracted on the book balance adjustments
Bank fees and NSF checks Sometimes correction of book errors
Human error
Can occur from carelessness, misjudgment, or confusion
Liquid assets
Cash and similar assets
What would cause an increase in the monthly bank statement balance
Cash deposit made by the account owner
What would cause a decrease in the monthly bank statement balance
Check written by the account owner
What would show up on a monthly bank statement
Checks and other debits decreasing the account during the period End-of-period balance in the account Beginning-of-period balance in the account Deposits and other credits increasing the account during the period
Examples of internal controls to protect over-the-counter cash receipts
Clerks should be required to enter each sale before wrapping merchandise Clerks should be required to give the customer a receipt for each sale The clerk and the cashier have access to cash, but not to the accounting records.
Items added on the bank balance adjustments
Deposit in transit sometimes corrections of bank errors
Deposit in transit
Deposit made and recorded by the depositor, but not yet recorded on the bank statement.
Cost benefit principle
Dictates that the costs of internal controls must not exceed their benefits
What is the required adjusting entry needed to record a $1000 note receivable collected by the bank less the expense of having the bank perform service ($30).
Dr cash $970, dr collection expense $30, and cr note receivable $1000
Services provided by a bank
Each bank deposit is supported by a deposit ticket A bank account is a record set up by a bank for a customer To withdraw money from an account, the depositor can use a check
Electronic funds transfer
Electronic transfer of cash from one party to another
Remittance advice
Explains the reason for payment
Internal control environment
Management must convey commitment to internal control policies and procedures
Purpose of a purchase requisition
Managers are not allowed to place orders directly with vendors; instead they fill out a purchase requisition They are used to inform the purchasing department of its needs Used for control purposes
What would be in the checks and debits column of a bank statement that would cause a decline in the accounts balance
Monthly service fee charged by the bank Checks written by the account owner A customer's NSF check ATM withdrawals
What would cause the bank statement balance to differ from the depositor's book balance
NSF, check, deposit in transit, interest paid by bank
A receiving report is used for
Notifying accounting that the goods have been received Notifying purchasing that the goods have been received
Items subtracted on the bank balance adjustments
Outstanding checks sometimes corrections of bank errors
Goals and principle of cash management
Plan cash receipts to meet cash payments when due Money should be spent only when available Encourage quick collection of receivables Keep a minimum level of cash necessary to operate
Goals of good cash management
Plan cash receipts to meet payments when due Keep a minimum level of cash necessary to operate
Internal control procedure of maintaining adequate records
Reliable records are a source of information that managers use to monitor activities Keeping detailed records makes it unlikely that assets are lost or stolen without detection
Bank charges
Service fees charged by the bank.
Cash equivalents
Short term, highly liquid, investments.
The internal control principle of applying technological controls
Technological controls such as time clocks and cash registers, improve the effectiveness of controls.
The adjusted bank balance must equal
The adjusted cash balance per books.
Debit memo
The bank notifies the depositor of each deduction to the account
Credit memo
The bank notifies the depositor of each increase to the account
The adjusted book balance and the adjusted bank balance must equal each other on a bank reconciliation; otherwise...
The cash account is not reconciled
The petty cashier is responsible for keeping
The cash fund safe
A cash register tape reflected total sales equaling $100, but the cash register drawer equaled $105. What happens because of this discrepancy
The extra $5 collected will be treated as a misc. rev. The cash account will be dr $105 The sales account will be cr $100 The cash over and short account will be cr for $5
Why are liquid assets needed in a business
The must be readily available to settle near term obligations
Information on the inside and the outside of the voucher
The name of the vendor Date of the invoice The name of the account to debit for the payment Terms of the purchase
Who is the only person responsible for disbursing cash from the fund
The petty cashier
Internal Controls
The policies and procedures managers use to: protect assets, ensure reliable accounting, promote efficient operations, and uphold company policies.
How does the voucher system strengthen the control over cash disbursements
The receiving report in a voucher system shows that items have been selected The person issuing a check to pay the voucher has proof that an obligation has been incurred The purchase requisition in a voucher system and its purchase order confirm the purchase was authorized The invoice approval form in a voucher system verifies that the invoice has been checked
The sum of all petty cash receipts plus the remaining cash should equal
The total of the fund amount at any given time.
What is the internal control principle of performing regular and independent reviews
They are needed to ensure that procedures are followed
The purpose of internal controls
To help managers know if the business is receiving the assets and services it has paid for.
What are examples of good internal controls designed to protect cash received in the mail
Two people are assigned the task of, and are present for, opening the mail The record keeper and the person who reconciles the bank balance do not have access to cash
Examples of internal controls designed to control cash disbursements
Use of a petty cash system Only authorized individuals should be allowed to sign checks Use of a voucher system All disbursements should be made by check
An invoice can be described as an internalized statement of goods prepared by the (buyer/customer/vendor) listing the customer's name, items sold, sale prices and terms of sale.
Vendor
Cash over short
Where differences in cash and the cash receipts are recorded
Liquidity
a company's ability to pay for its near-term obligations.
A person wishing to withdraw funds from a petty cash account must complete...
a petty cash receipt
Error testing includes comparing deposits on the bank statement with deposits in the (accounting/sales/customer) records and comparing (outstanding/canceled) checks on the bank statement with (checks/deposits) recorded in the accounting records.
accounting/canceled/checks
The petty cashier is responsible for
disbursing cash from the fund making payments from the petty cash funds
A depositor's account in a(n) (liability/asset/expense) on the bank's records, but it is a(n) (liability/asset/expense) on the books of the account owner. Because of this, every time the account owner makes a deposit, the bank (credits/debits) the account owner's account.
liability/asset/credits
A petty cash receipt will have a signature line for the person...
receiving a disbursement from the fund
The cash over and short account does what
record the effects of cash overages and cash shortages It is an income statement account A debit balance reflects an expense
The petty cashier must present all paid receipts to the company cashier in order to...
replenish the fund
A bank reconciliation is a(n) (report/entry/charge) explaining any difference between the (checking/subsidiary/sales) account balance according to the depositor's records and the balance reported on the (income/financial/bank) statement.
report/checking/bank
Only the items reconciling the book balance
require adjustment
SOX
requires managers and auditors of companies whose stock is traded on an exchange to document and certify internal control system.
A petty cash fund is used for (small/large) payments in order to (increase/avoid) the time and cost of writing checks for (large/small) amounts.
small/avoid/small
Proper internal control means that responsibility for a (task/shortage/sale) is clearly (posted/established/compensated) and assigned to one person.
task/established
The information on the bank statement reflects the bank's records of
the depositor's account