Slide 7 1 Chapter 6 Cash and Investment

Slide 7 -1 Chapter 6 ����� �� (Cash and Investment) Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -2 Cash Coins and paper money Bank credit card sales Cash is defined as any deposit banks will accept. Checks Money orders Travelers’ checks Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -3 Reporting Cash in the Balance Sheet Combined with cash on balance sheet Liquid shortterm investments Cash Equivalents Matures within 90 days of acquisition Stable market values Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -4 Reporting Cash in the Balance Sheet Not available for paying current liabilities Not a current asset Mc. Graw-Hill/Irwin “Restricted” Cash Listed as an investment © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -5 Cash Management l Accurately account for cash. l Prevent theft and fraud. l Assure the availability of adequate amounts of cash. l Avoid unnecessarily large amounts of idle cash. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -6 Internal Control Over Cash l Segregate authorization, custody and recording of cash. l Prepare a cash budget. l Prepare a control listing of cash receipts. l Require daily deposits. l Make all payments by check. l Verify every expenditure before payment. l Promptly reconcile bank statements. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -7 SEGREGATION OF DUTES VS. INDEPENDENT INTERNAL VERIFICATION Segregatio n of Duties Assistant Cashier B Accounting Employee A Maintains cash balance per books Maintains custody of cash on hand Independent Internal Verification Assistant Treasurer C differences © The Mc. Graw-Hill Companies, Inc. , 2003 Mc. Graw-Hill/Irwin. Makes monthly comparisons. Reports

Slide 7 -8 Bank Statements Shows the beginning bank balance, deposits made, checks paid, other debits and credits during the month, and the ending bank balance. Bank Statement Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -9 RECONCILING THE BANK ACCOUNT Ø Reconciliation is necessary because the balance per bank and balance per books are seldom in agreement due to time lags and errors. Ø Reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -10 Reconciling the Bank Statement Balance per Bank Balance per Depositor + Deposits in Transit + Deposits by Bank (credit memos) - Outstanding Checks - Service Charge - NSF Checks ± Bank Errors ± Book Errors = Adjusted Balance Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -11 Reconciling the Bank Statement All reconciling items on the book side require an adjusting entry to the cash account. Balance per Depositor + Deposits by Bank (credit memos) - Service Charge - NSF Checks ± Book Errors = Adjusted Balance Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -12 Reconciling the Bank Statement Example Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank statement indicated a cash balance of $9, 610, while the cash ledger account on that date shows a balance of $7, 430. Additional information necessary for the reconciliation is shown on the next page. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -13 l l l Outstanding checks totaled $2, 417. A $500 check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF check for $225 received as payment of an account receivable. The bank statement showed $30 interest earned on the bank balance for the month of July. Check 781 for supplies cleared the bank for $268 but was erroneously recorded in our books as $240. A $486 deposit by Acme Company was erroneously credited to our account by the bank. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -14 Reconciling the Bank Statement Example Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -15 Reconciling the Bank Statement Example Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -16 Petty Cash Funds Used for minor expenditures. Petty Cash Funds Has one custodian. Mc. Graw-Hill/Irwin Replenished periodically. © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -17 PETTY CASH FUNDS Ø An IMPREST SYSTEM involves: Ø 1 establishing the fund Ø 2 making payments from the fund Ø 3 replenishing the fund Ø Accounting entries are required when: Ø 1 the fund is established Ø 2 the fund is replenished Ø 3 the amount of the fund is changed Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -18 ESTABLISHING THE FUND Ø Two steps to establish a petty cash fund 1 appoint a responsible custodian who will be responsible 2 determine the size of the fund (to cover 3 -4 weeks) 100 The check is written to the custodian. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -19 REPLENISHING THE FUND Ø Custodian initiates request for reimbursement. Ø Custodian prepares a schedule of payments with documentation Ø Treasurer approves replenishment. GENERAL JOURNAL Date Mar. 15 Account Titles and Explanation Postage Expense Freight-out Miscellaneous Expense Cash (To replenish petty cash fund) Debit Credit 44 38 5 87 On March 15 the petty cash custodian requests a check for $87. The fund contains $13 cash and petty cash receipts for postage $44, freight-out $38, and miscellaneous expenses, $5. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -20 Cash Over and Short On May 5, XBAR, Inc. ’s cash drawer was counted and found to be $10 over. Cash Over and Short is debited for shortages and credited for overages. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -21 Cash Over and Short On May 5, XBAR, Inc. ’s cash drawer was counted and found to be $20 short. Cash Over and Short is debited for shortages and credited for overages. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -22 Understanding the Business A company may invest in the securities of another company to: Earn a return on idle funds. (Passive investments) 12 -22 Mc. Graw-Hill/Irwin Influence the other company’s policies and activities. Control the other company. © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -24 Short-Term Investments Bond Investments Readily Marketable Securities are. . . Capital Stock Investments Current Assets Almost As Liquid As Cash Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -25 RECORDING STOCK INVESTMENTS Record investment at cost. Recognize revenue when cash dividends are received. On July 1, 20 x 6, Sanchez Corporation acquires 1, 000 shares (10%) of Beal Corporation common stock for $40 per share plus brokerage fees of $500. The entry for the purchase is: Date July 1 Mc. Graw-Hill/Irwin Account Titles and Explanation Stock Investments Cash (To record purchase of 1, 000 shares of Beal Corporation common stock) Debit Credit 40, 500 © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -26 RECORDING DIVIDENDS On December 31, Sanchez Corporation receives a $2 per share cash dividend. Date Dec. 31 Account Titles and Explanation Cash (1, 000 x $2) Dividend Revenue (To record receipt of a cash dividend) Debit Credit 2, 000 Dividend revenue is reported on the income statement under “Other revenues and gains. ” Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -27 RECORDING A SALE On February 10, 20 x 7, Sanchez Corporation receives net proceeds of $39, 500 on the sale of its Beal stock. The cost of the Beal stock was $40, 500 on July 1, 20 x 6. PROCEEDS – COST = GAIN or LOSS The entry to record the sale and loss is: Date Feb. 10 Mc. Graw-Hill/Irwin Account Titles and Explanation Cash Loss on Sale of Stock Investments (To record sale of Beal common stock) Debit Credit 39, 500 1, 000 40, 500 © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -28 ACCOUNTING FOR DEBT INVESTMENTS Entries required for acquisition, interest revenue, and sale. Cost includes all expenditures to acquire investment. Kuhl Corporation acquires 50 Doan Inc. 8%, 10 -year, $1, 000 bonds on January 1, 20 x 6, for $54, 000, including brokerage fees of $1, 000. The entry to record the investment is: Date Jan. 1 Mc. Graw-Hill/Irwin Account Titles and Explanation Debt Investments Cash (To record purchase of 50 Doan Inc. bonds) Debit Credit 54, 000 © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -29 RECORDING BOND INTEREST The bonds pay $2, 000 interest on July 1 and January 1 ($50, 000 x 8% x ½). The July 1 entry is: Date July 1 Account Titles and Explanation Cash Interest Revenue (To record receipt of interest on Doan Inc. bonds) Debit Credit 2, 000 It is necessary to accrue $2, 000 interest earned since July 1 at year-end. The December 31 entry is: Date Dec. 31 Mc. Graw-Hill/Irwin Account Titles and Explanation Interest Receivable Interest Revenue (To accrue interest on Doan Inc. bonds) Debit Credit 2, 000 © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -30 RECORDING BOND INTEREST When the interest is received on January 1, the entry is: Date Jan. 1 Mc. Graw-Hill/Irwin Account Titles and Explanation Cash Interest Receivable (To record receipt of accrued interest) Debit Credit 2, 000 © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -31 RECORDING SALE OF INVESTMENTS On January 1, 20 x 7, Kuhl Corporation receives net proceeds of $58, 000 on the sale of the Doan Inc. bonds. PROCEEDS – COST = GAIN or LOSS The entry to record the sale and recognize the gain is: Date Jan. 1 Mc. Graw-Hill/Irwin Account Titles and Explanation Cash Debt Investments Gain on Sale of Debt Investments (To record sale of Doan Inc. bonds) Debit Credit 58, 000 54, 000 © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -33 REPORTING CASH ØCash reported on the Balance Sheet includes: 1 Cash on hand (includes petty cash) 2 Cash in banks Ø Cash is the most liquid asset Ø Cash is listed first in the balance sheet. ØCash equivalents are investments with maturities of 3 months or less, such as money market funds, CD’s, and treasury bills and notes. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003

Slide 7 -35 End of Chapter 6 Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2003