330 Chapter 7 Sarbanes-Oxley, Internal Control, and Cash
balance is adjusted for the bank’s changes in cash that do not
appear on the company’s records and for any company’s
errors. The adjusted balances for the two sections must be
equal. No entries are necessary on the company’s records as
a result of the information included in the bank section of
the bank reconciliation. However, the items in the company
section must be journalized on the company’s records.Describe the accounting for special-purpose cash
funds.Businesses often use special-purpose cash funds,
such as a petty cash fund or travel funds, to meet specific
needs. Each fund is initially established by cashing a check
for the amount of cash needed. The cash is then given to a
custodian who is authorized to disburse monies from the
fund. At periodic intervals or when it is depleted or reaches
a minimum amount, the fund is replenished and the
disbursements recorded.Bank reconciliationThe analysis of the items responsible
for the difference between the cash balance reported in
the bank statement and the balance of the cash account in the
company’s ledger in order to determine the adjusted cash
balance.Bank statementA summary of all transactions is mailed to
the depositor by the bank each month.CashCoins, currency (paper money), checks, money orders,
and money on deposit that is available for unrestricted with-
drawal from banks and other financial institutions.Cash equivalentsHighly liquid investments that are usu-
ally reported with cash on the balance sheet.Cash short and over accountAn account used to record
the difference between the amount of cash in a cash register
and the amount of cash that should be on hand according to
the records.Electronic funds transfer (EFT)A system in which com-
puters rather than paper (money, checks, etc.) are used to ef-
fect cash transactions.Elements of internal controlThe control environment,
risk assessment, control activities, information and communi-
cation, and monitoring.Employee fraudThe intentional act of deceiving an em-
ployer for personal gain.Internal controlsThe procedures and processes used by a
company to safeguard its assets, process information accu-
rately, and ensure compliance with laws and regulations.Petty cash fundA special-purpose cash fund to pay rela-
tively small amounts.Sarbanes-Oxley Act of 2002An act passed by Congress
to restore public confidence and trust in the financial state-
ments of companies.Special-purpose fundA cash fund used for a special busi-
ness need.VoucherAny document that serves as proof of authority to
pay cash.Voucher systemA set of procedures for authorizing and
recording liabilities and cash payments.Describe and illustrate the reporting of cash and cash
equivalents in the financial statements.Cash is listed
as the first asset in the Current Assets section of the balance
sheet. Companies that have invested excess cash in highly
liquid investments usually report Cash and cash equivalents
on the balance sheet.Describe, illustrate, and interpret the cash flow to net
income ratio and the cash to monthly cash expenses
ratio.Two cash ratios useful for analyzing and interpreting
operating performance are (1) cash flow to net income and
(2) cash to monthly cash expenses. The effect of accruals and
deferrals on net income can be measured by the ratio of net
cash flows from operations to net income. The ratio of cash to
monthly cash expenses is useful for assessing how long a
company can continue to operate without additional financing
or without generating positive cash flows from operations.6
7
8
GLOSSARY
ILLUSTRATIVE ACCOUNTING APPLICATION PROBLEM
The bank statement for Urethane Company for June 30, 2007, indicates a balance of
$9,143.11. All cash receipts are deposited each evening in a night depository, after banking
hours. The accounting records indicate the following summary data for cash receipts and pay-
ments for June: