Internal Control and Cash

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CHAPTER
7
INTERNAL CONTROL AND CASH Chapter 7 Quiz (Unit 3
Quiz1) will occur on Monday, Nov 17 I will allow
only one page formula sheet (double sided) ? It
is not open book nor group quiz
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Summary

• Bank Statement Balance
• You add or subtract items which appeared in the
  book but they did not appear on Bank Statement of
  this month.
• If the item increased Book Balance, then you add
  this item to BSB.
• Book Balance
• You add or subtract items which appeared the bank
  statement, but they did not appear on Book.
• If the item decreased BSB, then you subtract this
  item from Book Balance.

3
Reconciling Journal Entries

• Accounting Books
• Each reconciling item in determining the adjusted
  balance per books MUST be journalized and posted
• Bank Statement
• Do NOT journalize any entries on bank side
  (because they are already recorded in accounting
  records)

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REPORTING CASH

• The term Cash does not mean just cash.
• We debit cash if customer pay by
• 1. Cash (such as coin, bill)
• 2. Check
• 3. Debit card
• 4. Bank credit card
• IOU (informal document indicating who owes whom)
  from employees and stamps are not cash.

5
REPORTING CASH

• Cash reported on the Balance Sheet includes
• 1. Cash on hand
• 2. Cash in banks (checking account and
  savings account)
• 3. Petty cash
• All three forms of cash can be combined and
  reported as Cash in the balance sheet in some
  companies.
• Cash is listed first in the balance sheet because
  it is the most liquid asset.

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CASH EQUIVALENTS

• More than 75 of Canadian public companies
  combine cash with cash equivalents in Balance
  Sheet.
• Cash equivalents are highly liquid investments,
  with maturities of three months or less when
  purchased, that can be converted into a specific
  amount of cash.
• Examples include money market funds, short-term
  notes, (GIC or CD) and treasury bills.

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CASH EQUIVALENTS

• More than 75 of Canadian public companies
  present their cash in this manner in Balance
  Sheet
• Assets
• Current Assets
• Cash and short term investments 875

8
CASH EQUIVALENTS

• Bank overdraft occurs when withdrawals or
  payments (debit payment or check payment) are
  more than the amount in the bank account.
• This becomes a short term loan from the bank.
• Most companies have overdraft protection up to a
  certain amount.

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CASH EQUIVALENTS

• In an overdraft situation, the Cash account shows
  a credit balance in the general ledger and is
  reported as a current liability called bank
  indebtedness.

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USING THE INFORMATION IN THE FINANCIAL STATEMENTS

• Management must perform a difficult balancing act
  to properly manage cash.
• On one hand, it is critical to ensure that enough
  cash is available to pay bills or to buy
  inventory.
• On the other hand, too much cash on hand may
  indicate that management is not maximizing its
  return on assets.

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Classwork / Homework

• P381 E7-9 and E7-10
• P386 P7-7
• Ex 7.13 (P383)