chapter 7 review acct 101a

compensating balance

A minimum cash balance required by some banks to be maintained in a bank account.

A bank makes credit entries (issues credit memos) for the following:

Deposits made by electronic funds transfer (EFT) Collections of notes receivable for the company Proceeds for a loan made to the company by the bank Interest earned on the company's account Correction (if any) of bank errors

Cash can also be paid by electronic funds transfer (EFT) systems. (NOT REALLY A QUESTION)

EFT.. Companies also use EFT transfers. For example, many companies pay their employees via EFT. Under such a system, employees authorize the deposit of their payroll checks directly into their checking accounts. Each pay period, the company transfers the employees' net pay to their checking accounts through the use of EFT. Many companies also use EFT systems to pay their suppliers and other vendors.

The control of cash payments should provide reasonable assurance that:

Payments are made for only authorized transactions. Cash is used effectively and efficiently. For example, controls should ensure that all available purchase discounts are taken.

A bank makes debit entries (issues debit memos) for the following:

Payments made by electronic funds transfer (EFT) Service charges Customer checks returned for not sufficient funds Correction (if any) of bank errors

bank reconciliation

The analysis that details the items responsible for the difference between the cash balance reported on the bank statement and the balance of the cash account in the ledger.

Sarbanes-Oxley Act

The purpose of Sarbanes-Oxley is to maintain public confidence and trust in the financial reporting of companies.

the bank statement is prepared from the bank's point of view, a DEBIT memo entry on the bank statement indicates an

a debit memo entry on the bank statement indicates a decrease (a debit) in the company's account.

What causes a difference between the company and the banks balance?

a delay between either the company or bank in recording transactions. Differences may also arise because the bank has debited or credited the company's account for transactions that the company will not know about until the bank statement is received. differences may arise from errors made by either the company or the bank.

A company uses the bank's statement by comparing the

company's record of cash transactions to those recorded by the bank.

If there had been cash over, Cash Short and Over would have been

credited for the overage

Control procedures

provide reasonable assurance that business goals will be achieved, including the prevention of fraud.

petty cash fund

A special cash fund to pay relatively small amounts.

Days' cash on hand

A measure of how long a company could survive if its sources of revenue were to decline significantly, computed as cash and short-term investments divided by daily cash operating expenses.

bank statement

A summary of all checking account transactions mailed to the depositor or made available online by the bank each month.

electronic funds transfer (EFT)

A system in which computers rather than paper (money, checks, etc.) are used to effect cash transactions.

risk assessment

All businesses face risks such as changes in customer requirements, competitive threats, regulatory changes, and changes in economic factors. Management should identify such risks, analyze their significance, assess their likelihood of occurring, and take any necessary actions to minimize them.

Control procedures, which constitute one of the most important elements of internal control, include the following

Competent personnel, rotating duties, and mandatory vacations Separating responsibilities for related operations Separating operations, custody of assets, and accounting Proofs and security measures

five elements of internal control

Control environment Risk assessment Control procedures Monitoring Information and communication

The only time Petty Cash is credited is when the

fund is being decreased or eliminated.

In the preceding example, $470 ($500 less cash on hand of $30) is needed to replenish the petty cash fund. Since the total of the petty cash receipts is $467, Cash Short and Over is debited for $3, as shown in the following entry to replenish the petty cash fund.

aug 31. office supplies 402 store supplies 35 miscellaneous adm. exp 30 cash short and over 3 cash 470

At the end of the accounting period, a credit balance is

included in the "Other revenue" section

the bank statement is prepared from the bank's point of view, a credit memo entry on the bank statement indicates an

increase (a credit) to the company's account

voucher system

is a set of procedures for authorizing and recording liabilities and cash payments

voucher

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

Internal control

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

Employee fraud

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

control environment

is the overall attitude of management and employees about the importance of controls

Monitoring the internal control system is used to

locate weaknesses and improve controls. Monitoring often includes observing employee behavior and the accounting system for indicators of control problems.

At the end of the accounting period, a debit balance in Cash Short and Over is included in

miscellaneous expenses on the income statement.

Depreciation expense is subtracted from the operating expenses because it is a

noncash expense

assume that a petty cash fund of $500 is established on August 1. The entry to journalize this transaction is as follows:

petty cash 500 cash 500

A bank reconciliation is prepared using the following steps (bank section)

step 1: Enter the Cash balance according to bank from the ending cash balance according to the bank statement. step 2: Add deposits not recorded by the bank. Identify deposits not recorded by the bank by comparing each deposit listed on the bank statement with unrecorded deposits appearing in the preceding period's reconciliation and with the current period's deposits. Examples: Deposits in transit at the end of the period. step 3: Deduct outstanding checks that have not been paid by the bank. Identify outstanding checks by comparing paid checks with outstanding checks appearing on the preceding period's reconciliation and with recorded checks. Examples: Outstanding checks at the end of the period. step 4: Determine the Adjusted balance by adding Step 2 and deducting Step 3.

A bank reconciliation is prepared using the following steps (companies section)

step 5: Enter the Cash balance according to company from the ending cash balance in the ledger. step 6: Add credit memos that have not been recorded. Identify the bank credit memos that have not been recorded by comparing the bank statement credit memos to entries in the journal. Examples: A note receivable and interest that the bank has collected for the company step 7: Deduct debit memos that have not been recorded. Identify the bank debit memos that have not been recorded by comparing the bank statement debit memos to entries in the journal. Examples: Customers' not sufficient funds (NSF) checks; bank service charges. step 8: Determine the Adjusted balance by adding Step 6 and deducting Step 7. step 9: Verify that the adjusted balances determined in Steps 4 and 8 are equal.

The only time Petty Cash is debited is when

the fund is initially established or when the fund is being increased

Sarbanes-Oxley requires companies to

to maintain effective internal controls over the recording of transactions and the preparing of financial statements.

cash and short-term investments are taken from the

year-end balance sheet and represent the most liquid assets

The adjusted cash balance determined in the bank reconciliation is reported on the

balance sheet.

The reason for a credit or debit memo entry is indicated on the

bank statement. Following types of credit and debit memo entries: EC: Error correction to correct bank error NSF: Not sufficient funds check SC: Service charge ACH: Automated clearing house entry for electronic funds transfer MS: Miscellaneous item such as collection of a note receivable on behalf of the company or receipt of a loan by the company from the bank

Cash is the asset most likely to

be stolen or used improperly in a business. For this reason, businesses must carefully control cash and cash transactions.

Days' cash on hand is calculated as follows:

cash and short-term investments/ daily cash operating expenses

Customers' checks returned for not sufficient funds, called NSF checks, are

customer checks that were initially deposited but were not paid by the customer's bank.

To enhance internal control, the bank reconciliation should be prepared by an employee who

does not take part in or record cash transactions.

daily cash operating expenses= ....

(operating expenses-depreciation expenses)

Remittance advices may be used to control cash received in the mail as follows:

An employee opens the incoming mail and compares the amount of cash received with the amount shown on the remittance advice. If a customer does not return a remittance advice, the employee prepares one. The remittance advice serves as a record of the cash initially received. It also helps ensure that the posting to the customer's account is for the amount of cash received. The employee opening the mail stamps checks and money orders "For Deposit Only" in the bank account of the business. The remittance advices and their summary totals are delivered to the Accounting Department. All cash and money orders are delivered to the Cashier's Department. The cashier prepares a bank deposit ticket. The cashier deposits the cash in the bank, or the cash is picked up by an armored car service, such as Brinks (BCO). An accounting clerk records the cash received and posts the amounts to the customer accounts. When cash is deposited in the bank, the bank normally stamps a duplicate copy of the deposit ticket with the amount received. This bank receipt is returned to the Accounting Department, where it is compared to the total amount that should have been deposited. This control helps ensure that all cash is deposited and that no cash is lost or stolen on the way to the bank. Any shortages are thus promptly detected.

the three objectives of internal control are to provide reasonable assurance that:

Assets are safeguarded and used for business purposes. Business information is accurate. Employees and managers comply with laws and regulations.

A major reason that companies use bank accounts is for internal control. Some of the control advantages of using bank accounts are as follows

Bank accounts reduce the amount of cash on hand. Bank accounts provide an independent recording of cash transactions. Reconciling the balance of the cash account in the company's records with the cash balance according to the bank is an important control. Use of bank accounts facilitates the transfer of funds using EFT systems.

If the amount to replenish the petty cash fund does not equal the total of the petty cash receipts, the difference is recorded as

Cash Short and Over

special-purpose funds

Cash funds used for a special business need. ex: payroll or travel expenses.

Businesses normally receive cash from two main sources.

Customers purchasing products or services Customers making payments on account

Companies encourage customers to use EFT for the following reasons:

EFTs cost less than receiving cash payments through the mail EFTs enhance internal controls over cash, since the cash is received directly by the bank without any employees handling cash. EFTs reduce late payments from customers and speed up the processing of cash receipts.

cash equivalents

Highly liquid investments that are usually reported with cash on the balance sheet.

The company's records do not need to be updated for any items in the bank section of the reconciliation. (not rlly a question)

However, the bank should be notified of any errors that need to be corrected.

Three factors influencing a company's control environment include the following

Management's philosophy and operating style The company's organizational structure The company's personnel policies

Once approved, the voucher is recorded in the accounts and filed by due date.

Upon payment, the voucher is recorded in the same manner as the payment of an account payable.

A bank reconciliation is usually divided into two sections

The bank section begins with the cash balance according to the bank statement and ends with the adjusted balance. The company section begins with the cash balance according to the company's records and ends with the adjusted balance.

Cash is received in the mail when customers pay their bills.

This cash is usually in the form of checks and money orders. Most companies design their invoices so that customers return a portion of the invoice, called a remittance advice, with their payment.

any bank errors on the bank reconciliation should be

added or deducted and would correct the error by doing a journal entry.