CHAPTER 7 (PART II) – REPORTING AND INTERPRETING SALES
REVENUE, RECEIVABLES, AND CASH
GILDAN ACTIVEWEAR INC.
Control Over Accounts Receivable
To guard against extending credit to non-worthy customers, the following practices can
help minimize bad debts…
1. Require approval of customers’ credit history by a person independent of the
sales and collection funds.
2. Monitor the age of accounts receivable periodically and contact customers
with overdue payments.
3. Reward both sales and collection personnel for speedy collections so that they
work as a team.
Cash: Money or any instrument that banks will accept for deposit and immediate credit to
the company’s account, such as a cheque, money order, or bank draft.
Cash equivalents: Short-term, highly liquid, investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of change in value.
Cash and cash equivalents are usually combined as one amount for financial reports.
Account called: Cash and Cash Equivalents.
Cash Management Responsibilities
1. Accurate accounting so that reports of cash flows and balances may be prepared.
2. Controls to ensure that enough cash is on hand to meet (a) current operating needs,
(b) maturing liabilities, and (c) unexpected emergencies.
3. Prevention of the accumulation of excess amounts of idle cash. Idle cash earns no
revenue; therefore, it is often invested in securities to earn revenue (return) until it is
needed for operations.
Effective internal control of cash should include:
1. Separation of duties related to cash handling and record keeping
a. Complete separation of the tasks of receiving cash and distributing cash
ensures that the individual responsible for depositing cash has no authority to
b. Complete separation of the procedures of accounting for cash receipts and
disbursements ensures, for example, that those handling sales returns do not
create fictitious returns to conceal cash shortages.
c. Complete separation of the physical handling of cash and all phases of the
accounting function ensures that those either receiving or paying cash have no
authority to make accounting entries.
2. Prescribed policies and procedures a. Specific policies and procedures should be established so that the work done
by one individual is compared to the results reported by other individuals.
Bank statement: A monthly report from a bank that shows deposits recorded, cheques
cleared, other debits and credits, and a running bank balance. Lists…
1. Each deposit recorded by the bank during the period
2. Each cheque cleared by the bank during the period
3. The balance in the company’s account
NSF cheque = Not Sufficient Funds.
SC = Bank Service Charge
INT = Interest earned
Bank reconciliation: The process of verifying the accuracy of both the bank statement
and the cash accounts of a business.
Most common differences between ending bank balance and ending book balance of cash
1. Outstanding cheques
2. Deposits in transit
3. Bank service charges
4. NSF cheques
Format for bank reconciliation:
Ending cash balance per books $xxx Ending cash balance per bank statement $xxx
+ Collections by bank xx + Deposits in transit
- NSF cheques/Services charges xx - Outstanding cheques
+ Company errors xx + Bank errors
xx Ending correct cash balance $xxx Ending correct cash balance
Steps to preparing the bank reconciliation:
1. Identify outstanding cheques
2. Identify deposits in transit
3. Record bank charges and credits
4. Determine the impact of errors QUESTIONS
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