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C7 - 1 Learning Objectives 1. Cash and Cash Controls 2. Internal Control of Cash Receipts 3. Internal Control of Cash Payments 4. Bank Accounts: A Cash Control 5. Bank Reconciliation 6. Petty Cash 7. Balance Sheet Cash Presentation 8. Financial Analysis and Interpretation Chapter 7 Cash

C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Page 1: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

C7 - 1

Learning Objectives

1. Cash and Cash Controls2. Internal Control of Cash Receipts3. Internal Control of Cash Payments4. Bank Accounts: A Cash Control5. Bank Reconciliation6. Petty Cash7. Balance Sheet Cash Presentation8. Financial Analysis and Interpretation

Chapter 7 Cash

Page 2: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

C7 - 2

Cash Accounts and Internal ControlsCash Accounts and Internal Controls

Many companies need several cash accounts to account for different cash categories and funds.

Most companies have multiple bank accounts. The title for each bank account should be:

Cash in Bank – (Name of Bank)Cash in Bank – (Name of Bank) Preventive controls protect cash from theft and

misuse of cash. Detective controls are designed to detect theft or

misuse of cash and are also preventive in nature.

Page 3: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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1. Over the counter from cash customers.

Use of a cash register is an important control.

2. Received in the mail from credit customers.Cash is in the form of checks.

All cash is sent to the Cashier’s Department.

An employee prepares a bank deposit ticket and makes a bank deposit.

The bank deposit record is sent to the Accounting Department where it is recorded.

Internal Control of Cash ReceiptsInternal Control of Cash Receipts

Cash is normally received from two sources:p.281

Page 4: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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DateDate DescriptionDescription DebitDebit CreditCredit

Cash Short and OverCash Short and Over

Cash 3,142.00Cash Short and Over 8.00

Sales 3,150.00

May 08

To record day’s cash sales. Actual cash received is less than cash register receipts.

Cash Short and Over account is included in the income statement:

•Miscellaneous Administrative Expenses•Other Income

Page 5: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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DateDate DescriptionDescription DebitDebit CreditCredit

Cash Short and OverCash Short and Over

Cash in Bank 3,142.00Cash Short and Over 8.00

Sales 3,150.00

May 08

To record day’s cash sales. Actual cash received is less than cash register receipts.

A debit in the Cash Short and Over account represents an expense.

Page 6: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Cash Receipts From Credit CustomersCash Receipts From Credit Customers

Accts. ReceivableSales Cash

PURCHASEORDER

SALESORDER

1

1 A purchase order is received and a sales order is prepared.

Page 7: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Cash Receipts From Credit CustomersCash Receipts From Credit Customers

Accts. ReceivableSales Cash in Bank

PURCHASEORDER

SALESORDER

SHIPPINGREPORT

12

1 A purchase order is received and a sales order is prepared.

2 Merchandise is shipped and a shipping report is prepared.

Page 8: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Cash Receipts From Credit CustomersCash Receipts From Credit Customers

SALESINVOICE

Accts. ReceivableSales Cash

Credit Debit

PURCHASEORDER

SALESORDER

SHIPPINGREPORT

12

3

1 A purchase order is received and a sales order is prepared.

2 Merchandise is shipped and a shipping report is prepared.

3 A sales invoice is prepared and sent to customer.

Page 9: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

C7 - 9

DEPOSITRECORD

Cash Receipts From Credit CustomersCash Receipts From Credit Customers

SALESINVOICE

Accts. ReceivableSales Cash

Credit Debit Credit Debit

PURCHASEORDER

SALESORDER

SHIPPINGREPORT

12

34

1 A purchase order is received and a sales order is prepared.

2 Merchandise is shipped and a shipping report is prepared.

3 A sales invoice is prepared and sent to customer.

4 Cash is received from customer, deposited, and recorded.

Page 10: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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1. Cash controls must provide assurance that payments are made for only authorized transactions.

2. Cash controls should ensure that cash is used efficiently.

3. A voucher system provides assurance that what is being paid for was properly ordered, received, and billed by the supplier.

Internal Control of Cash PaymentsInternal Control of Cash Payments

Page 11: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Cash Payments to SuppliersCash Payments to Suppliers

Accts. PayableCash Merchandise

PURCHASEORDER 1

1 A purchase order is sent to a supplier.

Page 12: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

C7 - 12

Cash Payments to SuppliersCash Payments to Suppliers

Accts. PayableCash Merchandise

PURCHASEORDER

RECEIVINGREPORT

1

2

1 A purchase order is sent to a supplier.

2 Merchandise is received and a receiving report is prepared.

Page 13: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

C7 - 13

VOUCHER

Cash Payments to SuppliersCash Payments to Suppliers

Accts. PayableCash Merchandise

Credit Debit

PURCHASEORDER

PURCHASEINVOICE RECEIVING

REPORT

1

2

3

1 A purchase order is sent to a supplier.

2 Merchandise is received and a receiving report is prepared.

3 A purchase invoice is received and a voucher is prepared.

Page 14: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

C7 - 14

VOUCHER

Cash Payments to SuppliersCash Payments to Suppliers

CHECK

Accts. PayableCash Merchandise

Credit Debit Credit Debit

PURCHASEORDER

PURCHASEINVOICE RECEIVING

REPORT

1

2

34

1 A purchase order is sent to a supplier.

2 Merchandise is received and a receiving report is prepared.

3 A purchase invoice is received and a voucher is prepared.

4 Cash is paid to the supplier and recorded.

Page 15: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Cash Receipts and PaymentsCash Receipts and Payments

CHECK

Accts. PayableCash

Credit Debit

2

1 Cash received on account from customers.

DEPOSITRECORD

Accts. Receivable

Credit Debit

1

Selling Side of BusinessSelling Side of Business Buying Side of BusinessBuying Side of Business

2 Cash paid on account to suppliers.

Page 16: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Bank Reconciliation

Special terms:

1. Signature

2. Deposit ticket

3. A check

4. Drawer

5. Drawee

6. Payee

7. Bank reconciliation

Page 17: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

C7 - 17

Bank Reconciliation

• Exhibit 4 Bank statement

• Exhibit 5 recordings

• To prepare the bank reconciliation– The reconciling items (p.290)

Page 18: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Bank Company

3, 359. 78 2, 549. 99816. 20 408. 00

-1, 061. 00 -300. 00-435. 39 -18. 00-48. 60 -9. 00

Total 2, 630. 99 2, 630. 99

Page 19: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Power NetworkingBank Reconciliation

July 31, 2003

Balance per bank statement $3,359.78Add deposit of July 31, not recorded by bank 816.20

$4,175.98Deduct outstanding checks:

No. 812 $1,061.00No. 878 435.39No. 883 48.60 1,544.99

Adjusted balanceAdjusted balance $2,630.99$2,630.99

Balance per depositor’s records $2,549.99Add note and interest collected by bank 408.00

$2,957.99Deduct: Check NSF check returned $300.00

Bank service charges 18.00Error in recording Check No. 879 9.00

Adjusted balanceAdjusted balance $2,630.99$2,630.99

Page 20: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Power NetworkingBank Reconciliation

July 31, 2003

Balance per bank statement $3,359.78Add deposit in transit 816.20

$4,175.98Deduct outstanding checks:

No. 812 $1,061.00No. 878 435.39No. 883 48.60 1,544.99

Adjusted balance $2,630.99

Balance per depositor’s records $2,549.99Add note and interest collected by bank 408.00

$2,957.99Deduct: Customer NSF check $ 300.00

Bank service charges 18.00Error in recording Check No. 879 9.00 327.00

Adjusted balance $2,630.99

AA

BB

Page 21: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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DateDate DescriptionDescription DebitDebit CreditCredit

Bank Reconciliation Journal EntriesBank Reconciliation Journal Entries

AA

BB

Cash 408Notes Receivable 400Interest Revenue 8

Accounts Receivable - T. Ivey 300Miscellaneous Expense 18Accounts Payable - Taylor Co. 9

Cash 327

Jul. 31

To record note collected by bank.

To record customer’s NSF check, bank service charges, and error in recording Check No. 879.

Jul. 31

p.291

Page 22: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Date Description P.R. Debit Credit

BalanceDate Item P.R. Debit Credit Debit Credit

Account: Cash Account No. 11

General Journal

General Ledger

Page 1

AA

BB

7/31 Balance 2,549.99

Bank Reconciliation - Journal and LedgerBank Reconciliation - Journal and Ledger

7/31 Cash 11 408.00408.00Notes Receivable 400.00Interest Revenue 8.00

7/31 Accts. Receivable - T. Ivey 300.00Miscellaneous Expense 18.00Accts. Payable - Taylor Co. 9.00

Cash 11 327.00327.00

7/31 Balance 2,549.997/31 J1 408.00408.00 2,957.997/31 J1 327.00327.00 2,630.99

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• Petty Cash– A special cash fund is called a petty cash fund

• Example:– Travel expenses for salesperson

• Set up the fund for $100

• Total the expenses $88

• Refund

Petty Cash AccountingPetty Cash Accounting

Page 24: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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DateDate DescriptionDescription DebitDebit CreditCredit

Petty Cash AccountingPetty Cash Accounting

Petty Cash 100.00Cash 100.00

Office Supplies 50.00Store Supplies 35.00Misc. Admin. Expense 3.00

Cash 88.00

Note: No entry in Petty Cash account when the fund is replenished.

Aug. 1

To establish a petty cash fund.

To replenish the petty cash fund.

Aug. 31

Page 25: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Solvency AnalysisSolvency Analysis

Solvency is the ability of a business to meet its financial obligations (debts) as they are due.

Solvency analysis focuses on the ability of a business to pay or otherwise satisfy its current and noncurrent liabilities.

This ability is normally assessed by examining balance sheet relationships.

Page 26: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor

A. Cash and equivalents $100,000 $ 120,000

B. Current liabilities 400,000 1,500,000

Doomsday ratio A / B 0.25 0.08

Doomsday RatioDoomsday RatioDoomsday RatioDoomsday RatioLaettner Co. Oakley Co.

How are these ratios used?How are these ratios used?

Page 27: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor

A. Cash and equivalents $100,000 $ 120,000

B. Current liabilities 400,000 1,500,000

Doomsday ratio A / B 0.25 0.08

Doomsday RatioDoomsday RatioDoomsday RatioDoomsday RatioLaettner Co. Oakley Co.

Use: To indicate the worst case assumption that should the business cease to exist, only the cash on hand is available to meet creditor obligations.

Use: To indicate the worst case assumption that should the business cease to exist, only the cash on hand is available to meet creditor obligations.

Page 28: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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HOME WORK

READING:1. Illustrative problem2. Self- examination questions3. Multiple choice

Writing:1. Exercise: 2. Problem : 7-3A

Discussion: Activity 7-5

Page 29: C7 - 1 Learning Objectives 1.Cash and Cash Controls 2.Internal Control of Cash Receipts 3.Internal Control of Cash Payments 4.Bank Accounts: A Cash Control

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This is the end of Chapter 7. This is the end of Chapter 7.