accounting chpt 7

petty cash fund

It is usually not practical for a business to write checks to pay small amounts. Thus, it is desirable to control such payments by using a special cash fund, called a petty cash fund.

cash short and over account.

Salespersons may make errors in making change for customers or in ringing up cash sales. As a result, the amount of cash on hand may differ from the amount of cash sales. Such differences are recorded in a cash short and over account.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 (often referred to simply as Sarbanes-Oxley) applies only to companies whose stock is traded on public exchanges. Its purpose is to restore public confidence and trust in the financial statements of companies.

A bank reconciliation is usually divided into two sections as follows:

bank section company section

bank section

begins with the cash balance according to the bank statement and ends with the adjusted balance.

company section

begins with the cash balance according to the company's records and ends with the adjusted balance.

If there had been cash over, Cash Short and Over would have been _____ for the overage.

credited

Cash

includes coins, currency (paper money), checks, and money orders. Money on deposit with a bank or other financial institution that is available for withdrawal is also considered cash. Cash is the asset most likely to be stolen or used improperly in a business.

Internal control

is broadly defined as the procedures and processes used by a company to: Safeguard its assets. Process information accurately. Ensure compliance with laws and regulations.

control environment

is the overall attitude of management and employees about the importance of controls. Three factors influencing a company's control environment are as follows: Management's philosophy and operating style The company's organizational structure The company's personnel policies

Monitoring the internal control system is used to

locate weaknesses and improve controls.

Employee fraud

Employee fraud is the intentional act of deceiving an employer for personal gain.

Businesses normally receive cash from two main sources:

Customers purchasing products or services Customers making payments on account

bank reconciliation

A bank reconciliation is an analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger. This is used to determine the adjusted cash balance.

ratio of cash to monthly cash expenses

A cash ratio that is especially useful for startup companies or companies in financial distress is the ratio of cash to monthly cash expenses.

cash equivalents.

A company's excess cash is normally invested in highly liquid investments. These investments are called cash equivalents.

change fund

A predetermined amount of money that is given to each cash register clerk in a cash drawer is called a change fund.

bank statement

A summary received from the bank (usually monthly) of all checking account transactions is called a bank statement. It shows the beginning balance, additions, deductions, and the ending balance.

voucher

A voucher is any document that serves as proof of authority to pay cash or issue an electronic funds transfer.

voucher system

A voucher system is a set of procedures for authorizing and recording liabilities and cash payments. It may be either manual or computerized.

compensating balance

Banks may require depositors to maintain minimum cash balances in their bank accounts. Such a balance is called a compensating balance.

remittance advice

Cash is received in the mail when customers pay their bills. Most companies design their invoices so that customers return a portion of the invoice, called a remittance advice, with their payment.

electronic funds transfers (EFT)

Cash may also be received from customers through electronic funds transfers (EFT). Customers may authorize automatic electronic transfers from their checking accounts to pay monthly bills.

special-purpose funds.

Companies often use other cash funds for special needs, such as payroll or travel expenses. Such funds are called special-purpose funds.

Management is responsible for designing and applying five elements of internal control to meet the three internal control objectives. These elements are as follows:

Control environment Risk assessment Control procedures Monitoring Information and communication