Topic 8 - Cash

Question 1

What are the internal controls over cash receipts and payments?

Answer 1

• Establishment of responsibility
• Segregation of duties
• Documentation procedures
• Physical, mechanical and electronic controls
• Independent internal verfication

Question 2

How does the use of a bank account contribute to good internal control over cash?

Answer 2

• Minimising the amount of cash that must be kept on hand.
• Providing a double record of all bank transactions:
  one kept by the business
  one kept by the bank.
• Helping a company safeguard its cash by using a bank as a depository and clearinghouse for cheques received and written.

Question 3

What two records of a business’s cash does a bank reconciliation look at?

Answer 3

• Cash at Bank account in its general ledger, and

- Bank Statement, which shows the actual amount of cash the business has in the bank

Question 4

What are the most common causes of differences between the bank statement and CAB account?

Answer 4

-Timing differences occur when the parties record the same transaction in different periods:
Unpresented Cheque – lag between when the cheque is written and dated and the date it is paid by the bank.
Outstanding deposits – lag between when receipts are recorded by the business and when recorded by the bank.

• Errors by either party in recording transactions.

Question 5

Why is a bank reconciliation performed?

Answer 5

To ensure accuracy of the financial records, the accountant must explain all differences between the business’s cash records and the bank statement figures on a certain date.

Question 6

How does the bank reconciliation act as a control device?

Answer 6

It explains the differences between the balance reported on the Bank Statement and the business’s Cash at Bank account balance.

Question 7

Why are items recorded in the business’s journals, the Cash Receipts Journal (CRJ) and and the Cash Payments Journal (CPJ), but not on the bank statement?

Answer 7

• Deposits in transit
• Outstanding / unpresented cheques
• Bank errors

Question 8

Why are items recorded in the bank statement but not in the business’s journals, the Cash Receipts Journal (CRJ) and the Cash Payments Journal (CPJ)?

Answer 8

• Bank collections / direct deposits
• Bank charges
• Interest earned
• Dishonoured cheques
• Errors by the business

Question 9

What are deposits in transit?

Answer 9

the business has recorded money received in the cash receipts journal (CRJ) but the bank has not (e.g. money deposited overnight in the bank night safe).

Question 10

What are outstanding cheques?

Answer 10

a cheque issued / written by the business and recorded in the cash payments journal (CPJ), but the person who receives the cheque (i.e. the payee) has not yet presented the cheque to the bank = unpresented cheque.

Question 11

What are dishonoured cheques?

Answer 11

‘bounced cheques’ which have been recorded in the cash receipts journal (CRJ) but the customer didn’t have enough money in their account to cover the payment so the business has not received the funds.

Question 12

What Items Are Needed to Carry Out a Bank Reconciliation?

Answer 12

1. The most recent bank reconciliation prepared by the business (usually for the previous month).
2. The opening and closing balance of the Cash at Bank account.
3. The cash receipts journal and cash payments journals.
4. The bank statement for the current period.

Always work from the Bank’s records (i.e. the Bank Statement) to the Business’s records (i.e. the relevant cash journals and last month’s bank reconciliation)

Question 13

Who should the bank reconciliation be prepared by?

Answer 13

an employee who has no other responsibilities pertaining to cash.

Question 14

What are the steps of the bank reconciliation process?

Answer 14

1. Compare current Bank Statement to:
   Previous month’s Bank Reconciliation, and
   Current month’s Cash Receipts Journal and Cash Payments Journal.
2. Identify unticked items on bank statement:
   Adjust cashbook for dishonoured cheques and direct deposits and entity’s own errors.
3. Identify unticked items in CPJ and CRJ:
   (outstanding deposits and unpresented cheques)
   List in bank reconciliation.
4. Identify unticked items from opening/previous bank reconciliation:
   Items are carried forward to current bank reconciliation.
5. Total cash journals (CRJ and CPJ) and post to the Cash at Bank account in the ledger.
6. Complete the Bank Reconciliation:
   Outstanding deposits increase the bank account.
   Unpresented cheques decrease the bank account.

Question 15

What are the five basic principles of cash management?

Answer 15

1. Increase the speed of collection of receivables
2. Keep inventory low
3. Don’t pay earlier than necessary
4. Plan timing of major expenditures
5. Invest idle cash

Question 16

What is the purpose of the statement of cash flows?

Answer 16

The Statement of Cash Flows provides answers as to:

• Where did the cash come from during the period?
• What was the cash used for during the period?
• What was the change in the cash balance during the period?
• Is the entity generating sufficient cash flows from operations to meet cash requirements?

Question 17

Why is the cash flow statement important?

Answer 17

• Provides vital information about cash in and cash out for the business
• Important information to use with the Statement of Profit or Loss and the Statement of Financial Position
• Must be able to manage cash to survive, otherwise business will fail (e.g. ABC Learning)

Question 18

What are the classifications in the statement of cash flows?

Answer 18

• Operating Activities:
  Entity’s principal cash revenue-generating activities, and activities not regarded as investing or financing activities (day-to-day cash business transactions).
• Investing Activities:
  Acquisition and disposal of long-term assets (non-current assets) affecting cash.
• Financing Activities:
  Affect the size and composition of contributed equity and borrowing (Debt and Equity) impacting cash.

Question 19

There are two methods to use to report operating activities: direct and indirect. Which are we using?

Answer 19

The direct method presents cash payments as deductions from cash receipts to determine net cash provided (used) by operating activities.

Question 20

How do you record inflows and outflows on the cash flow statement?

Answer 20

• Inflows of cash are positive numbers.

- Outflows of cash are negative numbers (using brackets).

Question 21

What three things are used to prepare the cash flow statement?

Answer 21

1. Statement of Financial Position:
   Comparative for this year and last year.
2. Current period’s Statement of Profit or Loss.
3. Additional information about transactions that occurred during the period that are not shown on the Statements

Question 22

What are the four steps in preparing a cash flow statement?

Answer 22

1. Determine the net increase (decrease) in cash.
2. Determine net cash provided (used) by operating activities.
3. Determine net cash provided (used) by investing activities.
4. Determine net cash provided (used) by financing activities.

Question 23

How do you perform Step 1: Determining the net increase or (decrease) in Cash for the period?

Answer 23

The difference between the beginning and ending cash balances can be easily calculated using the comparative Statement of Financial Position data.
Reports opening cash balance compared to closing balance and we can use these to find the difference.
Calculate the movement in cash balance over the year.

Question 24

How do you perform Step 2: Determining net cash provided or (used) by Operating Activities?

Answer 24

• Non-cash activites are excluded e.g. depreciation, loss or gain on sale of assets and bad debts expense
  ADD:
• Cash receipts from customers with the formula:
  Revenue from sales + decrease in A/C receivable - bad debts written off OR Revenue from sales - increase in A/C receivable - bad debts written off
• Interest, dividend or commission revenue received in cash
  LESS:
• Cash paid to suppliers with the formula:
  Cost of Sales + Increase in inventory (or - decrease in inventory) + decrease in A/C payable (- increase in A/C payable)
• Cash paid for operating expenses
• Cash paid for income tax
• Cash paid for interest
• Cash payments to employees

Question 25

How do you perform Step 3: Determining net cash provided or (used) by Investing Activities?

Answer 25

• Concerned with cash transactions relating to non-current assets e.g. PPE, investments and loans to other entities
• When calculating inflow for sale of PPE or investments use this formula:
  Historical cost of PPE sold - Accumulated depreciation = carrying amount or book value then + gain (- loss) on sale = Cash received from sale of PPE

Question 26

How do you perform Step 4: Determining net cash provided or (used) by Financing Activities?

Answer 26

• Use net profit and notes payable, issued shares and retained earnings accounts.
  cash inflows: issue shares or notes, take out bank loan.
  cash outflows: pay dividends, repay notes, pay back bank loan.