CHAPTER 9 CASH. Chapter 9. Copyright 2012 The McGraw-Hill Companies, Inc. All rights reserved.

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1 CHAPTER 9 CASH Chapter Opener: Thinking Critically Office expenditures may include petty cash disbursements for office supplies and postage. Cash expenditures might also include payments for rent and utilities. Receipts might include cash sales for services or payments for services on account. Fast Facts H&R Block worked with the IRS to file the first electronic tax returns in 1986, 22,000 in all. In 2006, over 72 million tax returns were filed electronically. The company s 90,000 tax professionals have an average of five years experience and more than 300 hours of training. In 2007 H&R Block generated $4.0 billion in revenues. Managerial Implications: Thinking Critically Answers will vary, but should recognize the need to weigh the earning power (interest income) and the need for liquidity (access to the cash). Discussion Questions These questions are designed to check students understanding of new terms, concepts, and procedures presented in the chapter. 1. Access to checkbook is restricted; use of prenumbered check forms; checks examined by someone who did not prepare them before they are signed; bank statement reconciled by someone other than employees who handle cash. 2. To record items that have not yet been entered in firm s records. 3. Outstanding checks, deposits in transit, service charges. 4. Balance of Cash account in the general ledger. 5. To reconcile any difference between depositor s checkbook, Cash account, and bank statement. 6. Day-by-day checking account activity, as well as beginning and ending balances. 7. Date, amount, payee, current balance, purpose of check. Stub should be prepared before the check so that it will not be forgotten. 8. Signed, authorized written order instructing a bank to pay a specific sum of money to a designated person. 9. Electronic processing of documents. 10. Restrictive endorsement. 11. Shortages are debited and overages are credited to the Cash Short or Over account. 12. Use only for minor payments; establishment check made out to person to be in charge of funds; keep funds locked; payments made from funds should be documented with signatures of recipient. 13. At month-end or when petty cash is replenished. 14. Written promise to pay amount on specific date. Dr. Cash, Cr. Notes Rec., Cr. Interest Income.

2 15. Payments made by check and issued only with approved invoice; invoices approved only by designated personnel; checks prepared and recorded in the checkbook or check register by someone different from the person who approves the payments; use prenumbered checks. 16. Employees are investigated by an insurance company, and, if their backgrounds are satisfactory, their employer is insured against losses that may occur because of employee theft or mishandling of funds. 17. Only approved employees can handle cash; keep cash in locked location; record cash receipts as they arrive; check funds against receipt log before bank deposits are made; make deposits promptly; separation of cash deposits, recording, reconciliation duties. 18. See Glossary for terms and definitions.

3 EXERCISE 9.1 GENERAL JOURNAL PAGE 1 DATE DESCRIPTION Post Apr. 29 Cash Cash Short and Over Sales Record sales and cash shortage Cash Cash Short and Over Sales Record sales and cash overage EXERCISE 9.2 GENERAL JOURNAL PAGE 1 DATE DESCRIPTION Jan. 2 Petty Cash Fund Cash Establish Petty Cash Fund, Check No Post EXERCISE 9.3 GENERAL JOURNAL PAGE 3 DATE DESCRIPTION Post Jan. 31 Supplies Delivery Expense Miscellaneous Expense Cash Replenish Petty Cash Fund, Check No

4 EXERCISE 9.4 Chin Corporation Bank Reconciliation Statement October 31, 2013 Balance on bank statement Additions: Deposit in transit Deductions for outstanding checks: Check Check Check Total outstanding checks Adjusted bank balance Balance in books Deductions: Bank service charge NSF check Adjusted book balance

5 EXERCISE 9.4 (continued) GENERAL JOURNAL PAGE 14 DATE DESCRIPTION Post Oct. 31 Miscellaneous Expense Cash Bank service charge for October Accounts Receivable/James Dear Cash To record NSF check returned by bank EXERCISE 9.5 Bank Balance Book Balance 1. X 2. X 3. X 4. X 5. X 6. X 7. X Accounting Entry X X X X

6 EXERCISE 9.6 Cantu Office Supply Company Bank Reconciliation Statement March 31, 2013 Balance on bank statement Additions: Deposit in transit Check incorrectly charged Deductions for outstanding checks: Check Check Total outstanding checks Adjusted bank balance Balance in books Additions: Noninterest-bearing note collected by bank Deductions: Bank collection fee for note NSF check Adjusted book balance

7 EXERCISE 9.6 (continued) GENERAL JOURNAL PAGE 8 DATE DESCRIPTION Post March 31 Cash Notes Receivable To record receipt of note collected by bank Miscellaneous Expense Cash To record bank collection fee Accounts Receivable/Wilson Construction Company Cash To record NSF check returned by bank

8 EXERCISE 9.7 Fierro Company Bank Reconciliation Statement November 30, 2013 Balance on bank statement Additions: Check incorrectly charged Check 2782 written for $200; paid by bank as $1, Check 2920 written for $285 paid by the bank twice Deductions: November 22 deposit of $580 credited by bank for $ Outstanding checks Adjusted book balance

9 EXERCISE 9.8 GENERAL JOURNAL PAGE # DATE DESCRIPTION Post Sept. 22 Ronnie Hunter, Drawing Cash To record ATM withdrawal by Ronnie 4 5 Hunter for personal use Cash Accounts Receivable/Edwards UK To record wire-transfer of funds received on 9 10 account from Edwards UK Utilities Expense Cash To record on-line payment to Orange Trash Services Notes Payable Cash To record loan payment to Central Motors. 19

10 PROBLEM 9.1A GENERAL JOURNAL PAGE 1 DATE DESCRIPTION June 25 Cash Cash Short and Over Sales Cash Cash Short and Over Sales Cash Cash Short and Over Sales Cash Cash Short and Over Sales Cash Cash Short and Over Sales Cash Cash Short and Over Sales Post

11 PROBLEM 9.1A (continued) ACCOUNT Cash Short and Over DATE DESCRIPTION Post GENERAL LEDGER ACCOUNT NO June 25 J J J J J J BALANCE Analyze: The $30 debit balance in Cash Short and Over will be reported as expense on the Income Statement.

12 PROBLEM 9.2A GENERAL JOURNAL PAGE 8 DATE DESCRIPTION June 1 Petty Cash Fund Cash Establish Petty Cash Fund, Check No Supplies Delivery Expense Miscellaneous Expense Rosa Calderon, Drawing Cash Replenish Petty Cash Fund, Check No Post

13 PROBLEM 9.2A (continued) PETTY CASH ANALYSIS SHEET PAGE 1 DATE VOU NO. DESCRIPTION RECEIPTS PAYMENTS DISTRIBUTION OF PAYMENTS SUPPLIES DELIVERY EXPENSE MISC. EXPENSE OTHER ACCOUNTS ACCOUNT NAME AMOUNT 2013 June 1 Establish fund Office supplies Postage stamps Delivery service Personal withdrawal Rosa Calderon, Drawing Store windows Delivery service Totals Balance on hand Balance on hand Replenish fund Carried forward Analyze: The total payments from the petty cash fund were $256 in June.

14 PROBLEM 9.3A Vacation Paradise Bank Reconciliation Statement April 30, 2013 Balance on bank statement Additions: Deposit of April 30 in transit Deductions for outstanding checks: Check 1214 of April Check 1215 of April Total outstanding checks Adjusted bank balance Balance in books Deductions: NSF check Bank service charge Adjusted book balance

15 PROBLEM 9.3A (continued) GENERAL JOURNAL PAGE 1 DATE DESCRIPTION Post April 30 Accounts Receivable/Doris Fisher Cash To record NSF check returned by bank Miscellaneous Expense Cash To record bank service charge for April Analyze: Outstanding checks are 1214 and 1215 totaling $33.00.

16 PROBLEM 9.4A Sunoma Inn Bank Reconciliation Statement August 31, 2013 Balance on bank statement Additions: Deposit of August 30 in transit Deposit of August 31 in transit Deductions for outstanding checks: Check Check Check Check Check Check Total outstanding checks Adjusted bank balance Balance in books Additions: Note receivable collected by bank Interest on note receivable Deductions: NSF check Bank service charge Adjusted book balance

17 PROBLEM 9.4A (continued) GENERAL JOURNAL PAGE 10 DATE DESCRIPTION Post Aug. 31 Cash Notes Receivable Interest Income To record receipt of amount due on note 5 6 plus interest collected by bank in August Accounts Receivable/Neal Woodson Cash To record NSF check returned by bank Miscellaneous Expense Cash To record bank service charge for August Analyze: Net effect on the accounting equation of the journal entries recorded as a result of the bank reconciliation was an increase in assets by $55 and an increase in equity by $55 ($63 - $8).

18 PROBLEM 9.5A Fontes Company Bank Reconciliation Statement April 30, 2013 Balance in books Additions: Check 2206 dated April 17 was recorded as $695; check was actually written for $ Deductions: Check 2247 dated April 20 was recorded as $130; check was actually written for $ Adjusted book balance

19 PROBLEM 9.5A (continued) GENERAL JOURNAL PAGE 11 DATE DESCRIPTION Post Apr. 30 Cash Supplies To correct error in entry for check of April Utilities Expense Cash To correct error in entry for check of April Analyze: Net income would have been overstated by $34.

20 PROBLEM 9.6A Far West Imports Bank Reconciliation Statement July 31, 2013 Balance on Bank Statement Additions: Deposit of July 31 in transit Check 1422 for $1,200 incorrectly charged as $1, Deductions for outstanding checks: Check Check Total outstanding checks Adjusted Bank Balance Balance in Books Additions: EFT received on account from Foncier Ricard Deductions: Check 1425 written for $90; incorrectly recorded as $ Online payment on July 31 to CentralComm Adjusted Bank Balance

21 PROBLEM 9.6A (continued) GENERAL JOURNAL PAGE 19 DATE DESCRIPTION Post July 31 Cash Accounts Receivable/Foncier Ricard EFT received on account from Foncier Ricard 4 5 of April Supplies Cash To correct error for Check Telephone Expense Cash To record online payment to CentralComm 13 Analyze: Total expenses increased by $262 as a result of the general journal entries recorded.

22 PROBLEM 9.1B GENERAL JOURNAL PAGE 1 DATE DESCRIPTION April 25 Cash Cash Short and Over Sales Cash Cash Short and Over Sales Cash Cash Short and Over Sales Cash Cash Short and Over Sales Cash Cash Short and Over Sales Cash Cash Short and Over Sales Post

23 PROBLEM 9.1B (continued) ACCOUNT Cash Short and Over DATE DESCRIPTION Post GENERAL LEDGER ACCOUNT NO April 25 J J J J J J BALANCE Analyze: The $4 credit balance in Cash Short and Over will be reported as revenue on the Income Statement.

24 PROBLEM 9.2B GENERAL JOURNAL PAGE 7 DATE DESCRIPTION Sept. 4 Petty Cash Fund Cash Establish Petty Cash Fund, Check No Supplies Delivery Expense Miscellaneous Expense Fred Chin, Drawing Cash Replenish Petty Cash Fund, Check No Post

25 PROBLEM 9.2B (continued) DATE VOU NO. PETTY CASH ANALYSIS SHEET PAGE 1 DESCRIPTION RECEIPTS PAYMENTS DISTRIBUTION OF PAYMENTS SUPPLIES DELIVERY EXPENSE MISC. EXPENSE OTHER ACCOUNTS ACCOUNT NAME AMOUNT 2013 Sept. 4 Establish fund Delivery service Bought office supplies Personal withdrawal Fred Chin, Drawing Bought stamps Delivery service Totals Balance on hand Balance on hand Replenish fund Carried forward Analyze: The balance of the petty cash fund on September 30, after replenishment, is $250.

26 PROBLEM 9.3B Peter Chen, Attorney-at-Law Bank Reconciliation Statement September 30, 2013 Balance on bank statement Additions: Deposit of September 28 in transit Deductions for outstanding checks: Check 108 of September Check 112 of September Total outstanding checks Adjusted bank balance Balance in books Deductions: NSF check Bank service charge Adjusted book balance

27 PROBLEM 9.3B (continued) GENERAL JOURNAL PAGE 1 DATE DESCRIPTION Post Sept. 30 Accounts Receivable/Annette Cole Cash To record NSF check returned by bank Miscellaneous Expense Cash To record bank service charge for September Analyze: Seven checks were paid.

28 PROBLEM 9.4B Stacked Stone Masonry Bank Reconciliation Statement July 31, 2013 Balance on bank statement Additions: Deposit of July 31 in transit Deductions for outstanding checks: Check Check Check Total outstanding checks Adjusted bank balance Balance in books Additions: Note receivable collected by bank Interest on note receivable Deductions: NSF check Bank service charge Adjusted book balance

29 PROBLEM 9.4B (continued) GENERAL JOURNAL PAGE 1 DATE DESCRIPTION Post July 31 Cash Notes Receivable Interest Income To record receipt of amount due on note 5 6 plus interest collected Accounts Receivable/Robert Briggs Cash To record NSF check returned by bank Miscellaneous Expense Cash To record bank service charge for July Analyze: After all journal entries have been posted, the balance in the Cash account is $8,

30 PROBLEM 9.5B Big Guy Movers Bank Reconciliation Statement February 28, 2013 Balance in books Additions: Check 1301 dated February 18 was recorded as $361; check was actually written for $ Deductions: Check 1322 dated February 24 was recorded as $404; check was actually written for $ Adjusted book balance

31 PROBLEM 9.5B (continued) GENERAL JOURNAL PAGE 1 DATE DESCRIPTION Post Feb. 28 Cash Hauling Expense To correct error in entry for check of February Telephone Expense Cash To correct error in entry for check of February Analyze: The net change to the Cash account was an increase of $9.

32 PROBLEM 9.6B Euro Specialty Products Bank Reconciliation Statement November 30, 2013 Balance on Bank Statement Additions: Deposit of November 30 in transit Deductions: Deductions for outstanding checks: Check Check Total outstanding checks Check 4122 written for $1,200, paid by bank as $1, Adjusted Bank Balance Balance in Books Additions: EFT received on account from Cantori Cucine Check 4125 written for $890; incorrectly recorded as $ Deductions: Online payment on November 30 to ClearComm Adjusted book balance

33 PROBLEM 9.6B (continued) GENERAL JOURNAL PAGE 19 DATE DESCRIPTION Post Nov 30 Cash Accounts Receivable/Cantori Cucine EFT received on account from Cantori Cucine Cash Equipment To correct error for Check Telephone Expense Cash To record online payment to ClearComm 12 Analyze: Total assets decreased by $323 as a result of the general journal entries recorded.

34 CRITICAL THINKING PROBLEM DATE CASH COUNT LESS: CHANGE FUND BANK DEPOSIT SALES, PER CASH REGISTER TAPE AMOUNT SHORT August 1 $2, $ $2, $2, $ (126.30) August 2 2, $ , , (183.10) August 3 2, $ , , (252.00) August 4 2, $ , , (90.10) August 5 2, $ , , (91.40) August 6 2, $ , , (95.40) August 7 2, $ , , (63.50) Totals $17, $14, $15, $ (901.80)

35 CRITICAL THINKING PROBLEM 9.1 (continued) 2. GENERAL JOURNAL PAGE 56 DATE DESCRIPTION Post Aug. 7 Cash Cash Short and Over Sales Jim should count the cash in the cash register with George at the end of his shift. Jim should print a cash register tape and compare it with the amount of cash in the cash register, less the $400 change fund. Jim should perform the same procedure with Alice at the end of her shift. Jim should also compare the amount of the sales for the day per the cash register tape with the amount of the bank deposit, and investigate any significant variances.

36 CRITICAL THINKING PROBLEM 9.2 Scavone Builders Bank Reconciliation Statement August 31, 2013 Balance on bank statement Addition: Deposit in transit, August Deductions for outstanding checks: Check Check Check Check Check Check Total outstanding checks Adjusted bank balance Balance in books Deduction: Bank service charge Adjusted book balance Less: Cash shortage Corrected adjusted book balance The cash shortage is the difference between the adjusted bank balance of $15,819 and the adjusted book balance of $18,786. This is the amount needed to have both parts of the bank reconciliation equal. Gloria concealed her theft by omitting checks 1590 ($263), 1680 ($1,918), and 1724 ($486). The total amount of these checks is $2,667. Added to the $300 error made in adding the outstanding checks on Gloria Harris bank reconciliation, the total cash shortage is $2,967. Since Gloria Harris handled all cash records, it was relatively easy for her to conceal her theft. Tony should separate the jobs of receiving cash, making disbursements, maintaining accounting records, and preparing bank reconciliations. If the company is not large enough to permit different people to handle these jobs, then Tony should oversee the cash/accounting functions more closely, including reconciliation of the bank account. If Tony does not have the time to do this, he could hire an independent accountant to review the cash/ accounting records on a monthly basis and then report any discrepancies to him.

37 SOLUTIONS TO BUSINESS CONNECTIONS Managerial Focus: 1. a. No assurance money taken actually accounted for. b. A gap in the control of cash exists, and unauthorized expenditures can be made. c. Increases the opportunity for theft; no current cash position is known. d. Increases risk of theft. e. Weakens internal control over cash receipts. 2. Payment of bills in timely fashion, anticipation of fund shortages or overages, take advantage of investment opportunities. 3. Loss of control and check-and-balance system. 4. a. Yes. Blank endorsements are not secure. b. Yes. Checkbook should be kept in a locked drawer and should be available only to specified employee. c. Yes. To deter fraud, different tasks should be assigned to different employees. d. Yes. Reconciliation should be done soon after receiving bank statement. e. Yes. Financial records should be maintained for a reasonable number of years in case of a tax audit or if records are destroyed. f. No. The task would be impractical for a large firm. 5. Essential assets should be safeguarded against loss and theft. 6. Up-to-date cash position; information for day-to-day business decisions. 7. Insures again losses. 8. Control of cash; audit trail. Ethical Dilemma: Daniel should be sure to pay this $30 to petty cash immediately. He can then record cash short/over the next month. Daniel should be sure to never borrow money from petty cash, as it is not his money. Financial Statement Analysis: % 2. Increased by $902 million. 3. The balance reported for Cash and cash equivalents would be understated by $125,000. Teamwork: A Sales Invoice for each job should be given to each customer with a place to incorporate any additions or subtractions for service. Any changes must be communicated to the home office and an approval number will be given. The Sales Invoice, as well as each change, should be signed by the customer. Only cash and money orders should be allowed since the families have just moved and do not currently have a local bank. Internet Connection: Each bank should list the possible interest rates, both variable and fixed. Most banks will be within a few tenths of points of each other.

38 SOLUTIONS TO PRACTICE TEST Part A True-False 1. TRUE 9. TRUE 2. FALSE 10. TRUE 3. FALSE 11. FALSE 4. FALSE 12. FALSE 5. TRUE 13. TRUE 6. FALSE 14. FALSE 7. FALSE 15. TRUE 8. TRUE 16. FALSE Part B Matching 1. d 8. l 2. i 9. a 3. g 10. j 4. b 11. c 5. f 12. k 6. e 13. m 7. h