Chapter 7: Q18RQ (page 412)
What does the cash ratio help determine, and how is it calculated?
To determine the ability of the company to pay current liabilities.
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Accounting for petty cash transactions
On September 1, Party Salad Dressings creates a little cash fund with an imprest
balance of \(600. During September, Michael Martell, the fund custodian, signs the
following petty cash tickets:
Petty Cash
Ticket Number Item Amount
101 Office supplies \) 60
102 Cab fare for executive 25
103 Delivery of package across town 45
104 Business dinner 55
105 Merchandise inventory 75
On September 30, prior to replenishment, the fund contains these tickets plus cash
of \(355. The accounts affected by petty cash payments are Office Supplies, Travel
Expense, Delivery Expense, Entertainment Expense, and Merchandise Inventory.
Requirements
1. Explain the characteristics and the internal control features of an imprest fund.
2. On September 30, how much cash should the petty cash fund hold before it isreplenished?
3. Journalize all required entries to create the fund and replenish it. Include explanations.
4. Make the October 1 entry to increase the fund balance to \)800. Include an explanationand briefly describe what the custodian does.
Levon Helm was a kind of one-person mortgage broker. He would drive around Tennessee looking for homes that had second mortgages, and if the criteria were favorable, he would offer to buy the second mortgage for “cash on the barrelhead.” Helm bought low and sold high, making sizable profits. Being a small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was an old family friend, and he trusted her so implicitly that he never checked up on the ledgers or the bank reconciliations. At some point, Patterson started “borrowing” from the business and concealing her transactions by booking phony expenses. She intended to pay it back someday, but she got used to the extra cash and couldn’t stop. By the time the scam was discovered, she had drained the company of funds that it owed to many of its creditors. The company went bankrupt, Patterson did some jail time, and Helm lost everything
Requirements
Fill in the missing information concerning how companies control cash received by mail.
a. The ________ opens the mail and sends customer checks to the treasurer.
b. The ________ deposits the customer checks in the bank.
c. The ________ uses the remittance advices to record the journal entries for cash receipts.
d. The ________ compares the bank deposit to the journal entry for cash receipts.
What are the five components of internal control? Briefly explain each component.
What are the steps taken to ensure control over purchases and payments by check?
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