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needs enough cash to pay its bills!
© The McGraw-Hill Companies, Inc., 2005
How Much Cash Should a Business 7-3 Have?
Financial Assets
Cash
McGraw-Hill/Irwin
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Outstanding checks totaled $2,417.
7-20
A $500 check mailed to the bank for deposit had not reached the bank at the statement date.
McGraw-Hill/Irwin
© The McGraw-HillБайду номын сангаасCompanies, Inc., 2005
7-14
Cash Over and Short
On May 5, XBAR, Inc.’s cash drawer was counted and found to be $10 over.
balance in depositor’s accounting records.
Provides information for reconciling journal entries.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
the ending bank balance.
McGraw-Hill/Irwin
Bank Statement
© The McGraw-Hill Companies, Inc., 2005
7-16
Reconciling the Bank Statement
Explains the difference between cash reported on bank statement and cash
© The McGraw-Hill Companies, Inc., 2005
7-5
The Valuation of Financial Assets
Basis for Valuation in
Type of Financial Assets the Balance Sheet
Cash (and cash equivalents) Face amount
adequate amounts of cash. Avoid unnecessarily large
amounts of idle cash.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
7-12
Using Excess Cash Balances Efficiently
7-17
Reconciling the Bank Statement
Balance per Bank
Balance per Depositor
+ Deposits in Transit - Outstanding Checks ± Bank Errors
+ Deposits by Bank (credit memos)
7-1
Chapter
7 FINANCIAL ASSETS
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
How Much Cash Should a Business 7-2 Have?
$
McGraw-Hill/Irwin
Every business
Unused line of credit is disclosed
in notes.
© The McGraw-Hill Companies, Inc., 2005
7-10
The Statement of Cash Flows
Statement of Cash Flows
Summarizes cash transactions for an accounting period.
Includes cash and cash equivalents.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
7-11
Cash Management
Accurately account for cash. Prevent theft and fraud. Assure the availability of
Cash Equivalents
Stable market values
Matures within 90 days of acquisition
© The McGraw-Hill Companies, Inc., 2005
7-8
Reporting Cash in the Balance Sheet
Short-term investments
Current market value
(marketable securities)
Receivables
Net realizable value
Estimated collectible amount
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
- Service Charge - NSF Checks
± Book Errors
= Adjusted Balance
McGraw-Hill/Irwin
= Adjusted Balance
© The McGraw-Hill Companies, Inc., 2005
7-18
Reconciling the Bank Statement
stockholders.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
7-13
Internal Control Over Cash
Segregate authorization, custody and recording of cash.
GENERAL JOURNAL
Da te
Account Titles and Explanation
May 5 Cash
Cash Over and Short
De bit 10
Cre dit 10
Cash Over and Short is debited for shortages and credited for overages.
Coins and paper money
Bank credit card sales
7-6
Cash
Cash is defined as any deposit banks will
accept.
Checks Money orders
Travelers’ checks
McGraw-Hill/Irwin
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
7-15
Bank Statements
Shows the beginning bank balance, deposits made, checks paid, other debits and credits in the month, and
7-9
Reporting Cash in the Balance Sheet
Bank agrees in advance to lend
money.
Lines of Credit
Liability is incurred when line of credit is used.
McGraw-Hill/Irwin
Not available for paying current liabilities
Not a current asset
“Restricted ” Cash
Listed as an investment
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Prepare a cash budget. Prepare a control listing of cash receipts. Require daily deposits. Make all payments by check. Verify every expenditure before payment. Promptly reconcile bank statements.
Short-term Investments
Receivables
© The McGraw-Hill Companies, Inc., 2005
How Much Cash Should a Business 7-4 Have?
Accounts receivable
McGraw-Hill/Irwin
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.
© The McGraw-Hill Companies, Inc., 2005
7-7
Reporting Cash in the Balance Sheet
Liquid shortterm
investments
McGraw-Hill/Irwin
Combined with cash on balance sheet
All reconciling items on the book side require an adjusting entry to the cash account.
McGraw-Hill/Irwin
Balance per Depositor
+ Deposits by Bank (credit memos)
- Service Charge - NSF Checks
± Book Errors
= Adjusted Balance
© The McGraw-Hill Companies, Inc., 2005
7-19
Reconciling the Bank Statement
Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank
Cash available for long-term investment may be used to finance growth and expansion of the business, or to
repay debt.
Cash not needed for business purposes should be distributed to the company’s
Collections from
customers
Cash (and cash equivalents)
Cash payments
“Excess” cash is invested
temporarily
Investments are sold as
cash is needed Marketable securities (short-term investments)
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.
© The McGraw-Hill Companies, Inc., 2005
How Much Cash Should a Business 7-3 Have?
Financial Assets
Cash
McGraw-Hill/Irwin
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Outstanding checks totaled $2,417.
7-20
A $500 check mailed to the bank for deposit had not reached the bank at the statement date.
McGraw-Hill/Irwin
© The McGraw-HillБайду номын сангаасCompanies, Inc., 2005
7-14
Cash Over and Short
On May 5, XBAR, Inc.’s cash drawer was counted and found to be $10 over.
balance in depositor’s accounting records.
Provides information for reconciling journal entries.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
the ending bank balance.
McGraw-Hill/Irwin
Bank Statement
© The McGraw-Hill Companies, Inc., 2005
7-16
Reconciling the Bank Statement
Explains the difference between cash reported on bank statement and cash
© The McGraw-Hill Companies, Inc., 2005
7-5
The Valuation of Financial Assets
Basis for Valuation in
Type of Financial Assets the Balance Sheet
Cash (and cash equivalents) Face amount
adequate amounts of cash. Avoid unnecessarily large
amounts of idle cash.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
7-12
Using Excess Cash Balances Efficiently
7-17
Reconciling the Bank Statement
Balance per Bank
Balance per Depositor
+ Deposits in Transit - Outstanding Checks ± Bank Errors
+ Deposits by Bank (credit memos)
7-1
Chapter
7 FINANCIAL ASSETS
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
How Much Cash Should a Business 7-2 Have?
$
McGraw-Hill/Irwin
Every business
Unused line of credit is disclosed
in notes.
© The McGraw-Hill Companies, Inc., 2005
7-10
The Statement of Cash Flows
Statement of Cash Flows
Summarizes cash transactions for an accounting period.
Includes cash and cash equivalents.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
7-11
Cash Management
Accurately account for cash. Prevent theft and fraud. Assure the availability of
Cash Equivalents
Stable market values
Matures within 90 days of acquisition
© The McGraw-Hill Companies, Inc., 2005
7-8
Reporting Cash in the Balance Sheet
Short-term investments
Current market value
(marketable securities)
Receivables
Net realizable value
Estimated collectible amount
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
- Service Charge - NSF Checks
± Book Errors
= Adjusted Balance
McGraw-Hill/Irwin
= Adjusted Balance
© The McGraw-Hill Companies, Inc., 2005
7-18
Reconciling the Bank Statement
stockholders.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
7-13
Internal Control Over Cash
Segregate authorization, custody and recording of cash.
GENERAL JOURNAL
Da te
Account Titles and Explanation
May 5 Cash
Cash Over and Short
De bit 10
Cre dit 10
Cash Over and Short is debited for shortages and credited for overages.
Coins and paper money
Bank credit card sales
7-6
Cash
Cash is defined as any deposit banks will
accept.
Checks Money orders
Travelers’ checks
McGraw-Hill/Irwin
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
7-15
Bank Statements
Shows the beginning bank balance, deposits made, checks paid, other debits and credits in the month, and
7-9
Reporting Cash in the Balance Sheet
Bank agrees in advance to lend
money.
Lines of Credit
Liability is incurred when line of credit is used.
McGraw-Hill/Irwin
Not available for paying current liabilities
Not a current asset
“Restricted ” Cash
Listed as an investment
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Prepare a cash budget. Prepare a control listing of cash receipts. Require daily deposits. Make all payments by check. Verify every expenditure before payment. Promptly reconcile bank statements.
Short-term Investments
Receivables
© The McGraw-Hill Companies, Inc., 2005
How Much Cash Should a Business 7-4 Have?
Accounts receivable
McGraw-Hill/Irwin
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.
© The McGraw-Hill Companies, Inc., 2005
7-7
Reporting Cash in the Balance Sheet
Liquid shortterm
investments
McGraw-Hill/Irwin
Combined with cash on balance sheet
All reconciling items on the book side require an adjusting entry to the cash account.
McGraw-Hill/Irwin
Balance per Depositor
+ Deposits by Bank (credit memos)
- Service Charge - NSF Checks
± Book Errors
= Adjusted Balance
© The McGraw-Hill Companies, Inc., 2005
7-19
Reconciling the Bank Statement
Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank
Cash available for long-term investment may be used to finance growth and expansion of the business, or to
repay debt.
Cash not needed for business purposes should be distributed to the company’s
Collections from
customers
Cash (and cash equivalents)
Cash payments
“Excess” cash is invested
temporarily
Investments are sold as
cash is needed Marketable securities (short-term investments)
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.