Chapter 7: Learning Objectives Flashcards
(7 cards)
Internal Control.
- Consists of policies and procedures that managers use to:
- protect assets
- ensure reliable accounting
- promote efficient operations
- encourage adherence to company policies
- Can prevent avoidable losses and monitor company and human performance.
- Principles include:
- establishing responsibilities to ensure custody, authorization and recording of assets are preformed by
separate individuals.
- establishing responsibilities to ensure custody, authorization and recording of assets are preformed by
- Important controls include:
- maintaining adequate records, insuring assets and bonding employees, dividing responsibilities for related transactions, applying technological controls, and preforming regular independent reviews.
Define cash and how it is reported.
Cash consists of cash on hand and demand deposits, including currency and coins, and amounts on deposit in bank, chequing and some savings accounts. It also includes items that are acceptable for deposit in these accounts. Cash equivalents or short term investments are similar to cash; therefore, most companies combine them with cash as a single item on the balance sheet. Cash and cash equivalents are liquid assets because they are converted easily into other assets or used in paying for services or liabilities.
Apply internal control to cash.
Internal control of cash ensures that all cash received is properly recorded and deposited. Cash receipts arise from cash sales, collections of customers’ accounts, receipts of interest and rent, bank loans, sale of assets, and owner investments. Good internal control for cash receipts by mail includes at least two people being assigned to open the mail and prepare a list with each sender’s name, amount of money received, and explanation.
Explain and record petty cash fund transactions.
- A petty cash account is used to avoid writing cheques for small amounts.
- A petty cashier is responsible for the safekeeping of the cash, for making payments from this fund, and for keeping receipts and records.
- A Petty Cash account is debited when it is established on increased in size.
- The cashier presents all receipts to the company’s cashier for reimbursement to restore petty cash to its full amount.
- Petty cash disbursements are recorded whenever the fund is replenished with debits to the expense accounts reflecting receipts and a credit to cash.
Explain and identify banking activities and the control features they provide.
Banks offer several services such as the bank account, the bank deposit, and chequing-that promote the control or safeguarding of cash.
A bank account is set up by a bank and permits a customer to deposit money for safeguarding and cheque withdrawals.
A bank deposit is money added to the account with a deposit slip as proof.
A cheque is a document signed by the depositor instructing the bank to pay a specified amount of money to a designated recipient.
Sales resulting from debit card and credit card transactions are usually deposited into the bank account immediately, less a fee. Electronic funds transfer (EFT) uses electronic communication to transfer cash from one party to another, and it decreases certain risks. Companies increasingly use it because of its convenience and low cost.
Prepare a bank reconciliation and journalize any resulting adjustment(s).
A bank reconciliation is prepared to prove the accuracy of the depositor’s and the bank’s records. In completing a reconciliation, the bank statement balance is adjusted for items such as outstanding cheques and unrecorded deposits made on or before the bank statement date but not reflected on the statement. The depositor’s Cash account balance also often requires adjustment. These adjustments include items such as service charges, bank collections for the depositor, and interest earned on the account balance.
Calculate the quick ratio and explain its use as an indicator of a company’s liquidity.
The quick ratio (also known as acid-test ratio) is calculated as quick assets (cash, short-term investments, and receivables) divided by current liabilities. It is an indicator of a company’s ability to pay its current liabilities with its existing quick assets. A ratio equal to or greater than 1 is often considered adequate.
