Chapter 8.docx study guide PDF

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Chapter 8-Cash •More important than profit •Needed to keep a firm running smoothly • Needed to not only pay employees and vendors, but dividends to investors Internal Control of Cash Segregation of duties • Receiving and posting by different employees both keeping a log • Separate cash handling and bookkeeping • Employees who access cash should not have access to accounting records • Pay for all expenditures by check or by electronic funds transfer (EFT) • Use mechanical devices • Cash registers Prenumbered sales tickets • All tickets accounted for, including voids • Electronic ordering unit • Deposit cash daily • Miscellaneous small expenditures should never be paid for out of the day’s receipts; instead, through the petty cash fund • Employee bonding • Key employees, fidelity bonds to cover losses as a result of fraudulent acts • Periodic audits • Internal and external • Use voucher system • Authorization to make payment Voucher System

•Invoice received initiates voucher • Voucher is sent to employee who checks prices, quantities and term • Usually purchasing and receiving • Manager of department tells what expense account to debit • Accounts payable is credited • When paid cash is credited and accounts payable is debited Petty Cash

•Miscellaneous expenditures are paid out of a small fund of cash called “the petty cash fund”. What account is used to record cash overages and shortages? Petty cash An overage is reported as a credit (revenue) A shortage is reported as a debit (expense) Why are petty cash accounts set up? To record small payments and to avoid writing checks. The sum of all the cash receipts + the remaining cash should total petty cash fund. When should the petty cash fund be reimbursed? As it nears zero and at the end of the accounting period. How is the petty cash fund restored? All receipts turned into record keeper, stamped paid, and new check written to reimburse amount of receipts Who is responsible for the petty cash fund? The petty cash cashier What are four internal control weakness of a petty cash fund? -- missing receipts -- receipt not signees What is a cash equivalent? A highly liquid short-term investment that can be converted into cash immediately True or False: How does the net method of recording purchases differ from the gross method? The gross method, opposed to the net method, records an invoice at full price without regard to any cash discounts offered. In other words, the gross method assumes that the customer will not take advantage of the cash or early payment discount. It records the invoice at the gross price and adjusts for the discount later if the discount was taken. A business starts a petty cash fund cashing a check for an amount it considers adequate to cover small miscellaneous transactions. (true). Any differences in the bank and book balance of cash may be due to any of the following five possible reasons:

1). Deposits in transit - add to bank balance 2). Outstanding Checks- Deduct from bank balance. 3). NSF- (Non-Sufficient Funds)- Checks Company need to book. 4). Bank Service Charges- Company needs to book. 5). Credits for interest earned or receivables collected. What is the Gross method? The gross method assumes that the discount will not be taken and records the purchase without regard to the discount. What is The Net Method? The net method is a way to record purchases of inventory with a cash discount. The net method assumes the retailer always takes advantage of the discounted cash price and records the purchased inventory at the discounted price. If the retailer isn’t able to take advantage of the discounted price, the discount is lost and an entry is made to reverse the discounted take in the original purchase entry. What is Bank Reconciliation? A bank reconciliation or bank rec is a report used to check and explain the differences between the cash balance in a company’s accounting ledger and the bank statement balance. A bank reconciliation is also one of the main ways to prevent fraud and embezzlement of company funds....