chapter 8 : cash Flashcards

1
Q

Explain the term dishonoured cheque

A

A dishonoured cheque is a cheque that is rejected by the bank for a variety of reasons. It is also referred to as a bounced cheque

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2
Q

State the reasons for a dishonoured cheque

A
  • Cheque has expired
  • Cheque is post-dated
  • Information on cheque is not consistent
  • Insufficient funds in payer’s bank account
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3
Q

state the purposes of internal controls

A
  • safeguard assets of the business
  • ensure business transactions are recorded accurately and on a timely basis
  • ensure that the husiness complies with laws and regulations
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4
Q

Explain why internal controls are needed to protect cash

A

As cash is highly portable, it has a high chance of getting stolen: A business should thus implement internal control procedures to safeguard its cash and to reduce the possibility of theft or the likelihood of error to ensure that cash is well-protected and accurately reported.

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5
Q

State the types of internal controls over cash

A
  • Segregation of duties
  • Custody of cash
  • Authorisation
  • Bank reconciliation
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6
Q

Using an example, explain how segregation of duties serve as a form of internal control over cash.

A

Seperate cash handling and cash recording duties among different employees so that no single person has control over the entire cash process. Example, business can ensure different employees :
- receive and deposit cash
- authorise invoices for payment and process payment to suppliers
- write and authorise cheque

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7
Q

Explain how custody of cash serve as a form of internal control over cash

A

To secure cash and cheques in a locked storage :
- to limit access of cash to authorised personnel
- provide combinations, passwords or other access codes to authorised personnel
- deposit cash daily into the bank to minimise the amount of cash kept overnight at the business location

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8
Q

Explain how authorisation
serve as a form of internal control over cash

A

Obtain proper approvals for all payments from authorised personnel :
- require at least two people to review and approve all payments
- require valid supporting douments for all payments.

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9
Q

Explain how bank reconciliation serve as a form of internal control over cash.

A

It serves as a tool to detect errors and fraud involving cash transactions by comparing the business’ records with the bank’s records to identify items that caused the difference between the ending balances in the business cash at bank account and bank statement.

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10
Q

Explain why the business and bank record the transactions in the business’ bank account differently

A

To the business, the money kept within the bank is treated as an asset as the money belongs to the business. As an asset, any increase in the money kept within the bank is debited and any decrease is credited in the cash at bank account
However, from the perspective of the bank, the money deposited in the bank by the business is treated as a liability because the bank has to return this money when the business withdraws it. Hence, on a bank statement, any deposit is recorded as a credit and any withdrawal as a debit. This is the opposite of our cash at bank account.

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11
Q

Explain what causes the differences between the balance in the business’ cash at bank account and the balance in the bank statement

A

Differences are due to the timing of the transactions recorded by the business and the bank, as well as errors in recording made by the business or the bank

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12
Q

Explain the purpose of preparing bank reconciliation

A
  • Identify any errors in the bank statement or cash at bank account as well as acts as deterrence against fraud
  • enable the business to calculate the accurate bank balance after updating the cash at bank account.
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13
Q

state the items which cause the difference between the ending balances of a bank statement and business’ cash at bank account

A
  • direct deposits
  • direct payments
  • cheques not yet presented
  • deposits in transit
  • dishonoured cheques
  • errors made by the business or the bank.
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