Chapter 06 – Reporting and Analyzing Cash and Internal Controls
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Chapter Outline
4. Adjusting Entries From A Bank Reconciliation: A bank
reconciliation often identifies unrecorded items that need
recording. Only the items reconciling the book balance require
adjustment.
a. All reconciling additions to book balance are debits to
cash. Credit depends on reason for addition.
Notes
b. All reconciling subtractions from book balance are credits
to cash. Debit depends on reason for subtraction.
IV. Global View
A. Internal Control Purposes, Principles and Procedures – both
GAAP and IFRS aim for high quality reporting. The purposes and
principles of internal control systems are fundamentally the same
across the globe.
B. Control of Cash – Accounting definitions for cash are similar for
GAAP and IFRS and the basic techniques explained in this chapter are
part of those control procedures.
C. Banking Activities as Controls – Companies utilize banking services
as part of their effective control procedures and bank statements are
used along with bank reconciliations to control and monitor cash.
V. Decision Analysis – Days’ Sales Uncollected
A. One measure of the receivables’ nearness to cash is the days’ sales
uncollected ratio (also called days’ sales in receivables).
B. It is calculated by dividing accounts receivable by net sales and
multiplying the result by 365.
C. It is used to estimate how much time is likely to pass before the
current amount of accounts receivable is received in cash.
VI. Documentation and Verification (Appendix 6A)
A. Purchase Requisition
B. Purchase Order
C. Invoice
D. Receiving Report
E. Invoice Approval
F. Voucher
VII. Controls of Purchase Discounts (Appendix 6B)
It is very important for a company to take advantage of purchases
discounts.
A. Recording inventory purchases using net method provides more
control than the gross method, which was described in Chapter 4.
B. The gross method of recording purchases initially records the
invoice at its gross amount ignoring any cash discount.
C. The net method records the invoice at its net amount of any cash
Chapter 06 – Reporting and Analyzing Cash and Internal Controls
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Chapter Outline
discount. The net method gives management an advantage in
controlling and monitoring cash payments involving purchase
discounts. Any discounts not taken advantage of are recorded in a
Discounts Lost expense account. Entries to record the:
1. Purchase of inventory on credit: debit Merchandise Inventory,
credit Accounts Payable (for the amount of the invoice net of
the discount).
2. Payment of the invoice within the discount period: debit
Accounts Payable, credit Cash (for the amount of the invoice
net of the discount).
3. Payment of the invoice after the discount period has expired:
a. As of the date corresponding to the end of the discount
period: debit Discounts Lost, credit Accounts Payable (for
the amount of the discount).
b. As of the date of payment: debit Accounts Payable, credit
Cash for amount of the payment, gross invoice amount.
Notes
Chapter 06 – Reporting and Analyzing Cash and Internal Controls
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VISUAL #6-1
BANK RECONCILIATION
Reasons for differences
between bank statement
and checkbook balance: Handle as follows:
Unrecorded deposits Add to Bank Balance
Outstanding checks Deduct from Bank Balance
Bank service charges Deduct from Book Balance
Debit memos Deduct from Book Balance
Credit memos Add to Book Balance
NSF checks Deduct from Book Balance
Interest Add to Book Balance
Errors Must analyze individually
(bank errors affect bank
balance and book errors
affect book balance)
Chapter 06 – Reporting and Analyzing Cash and Internal Controls
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Chapter 6 – Alternate Demonstration Problem #1
The Betsy Dough Company wants to prepare a bank reconciliation for
the month of June. When the bank statement for the month of June
arrives from the bank, the following steps are performed:
1. The deposits to the bank account, as recorded on the bank statement,
are compared to the deposit slips retained by the company. It is noted
that the last deposit, of $400, occurred after banking hours on the day
of the bank statement and therefore has not been recorded by the
bank on this bank statement.
2. Checks returned with the bank statement are compared to the checks
written and listed in checkbook. This comparison shows that there
are checks outstanding amounting to $1,456.
3. The ending balances on the statement and in the company’s books
are determined. The ending bank statement balance is exactly $10,129
whereas the books show $9,000.
4. Other information contained on the bank statement, not previously
known to the company, is determined. This includes the following: (a)
a note from a customer for $200 has been collected by the bank and
credited to our account; (b) a check from Frank Ony for $120
previously deposited by us has been returned for lack of sufficient
funds; (c) the bank has charged us $25 for its services (this includes
a $10 fee for the NSF check).
5. A bank reconciliation is prepared; it does not balance! The difference
is $18, so a transposition error is looked for (whenever the difference
is a multiple of 9, there is a very good chance that there has been an
inadvertent exchange of two digits (for example, writing 29 when it
should have been 92)). An error is found. Check number 141 was
written for $235 and cleared the bank for $235, but was recorded in
the company records as $253.
Required:
Prepare a bank reconciliation for the Betsy Dough Company at June 30,
2013.
Chapter 06 – Reporting and Analyzing Cash and Internal Controls
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Solution: Chapter 6 – Alternate Demonstration Problem #1
BETSY DOUGH COMPANY
Bank Reconciliation
June 30, 2013
Bank Statement
Bank statement balance ………………………………………
Add:
Deposit of June 30 ……………………………………..
Deduct:
Outstanding checks ……………………………………
Adjusted bank balance
Depositor’s Books
Book balance ……………………………………………………..
Add:
Collection of customer note ……………………….
Error in recording Check No. 141 ………………..
Deduct:
NSF check from Frank Ony …………………………
Bank service charges …………………………………
Adjusted bank book balance
Chapter 06 – Reporting and Analyzing Cash and Internal Controls
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Chapter 6 – Alternate Demonstration Problem #2
On January 1, Landen Company established a petty cash fund in the
amount of $200. During the month, the following petty cash transactions
occurred:
Delivery expense: $35
Supplies expense: $70
Miscellaneous expense: $10
At the end of the month, $83 was left in the petty cash fund.
Prepare the general journal entries to record:
1. Establishment of the fund
2. Reimbursement of the fund
Chapter 06 – Reporting and Analyzing Cash and Internal Controls
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Solution: Chapter 6 – Alternate Demonstration Problem #2
1. Petty cash 200
Cash 200
2. Delivery expense 35
Supplies expense 70
Miscellaneous expense 10
Cash over and short 2
Cash 117