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