a transaction at all), the error may be detected in
the process of
preparing the
reconciliation. Book errors may likewise
be discovered.
Bank
reconciliation example: Raughley
Company’s bank statement on March 31
indicated a
balance of $6,420. The book balance
on that date was $7,920. The bank
balance did not
include $3,229 of receipts for March 31 that were deposited on that
day but were not
recorded until April 1 by the bank. It
also did not include $450 of
checks written in
March that cleared in April. The
March bank statement revealed
that the bank had
collected $1,500 in March on a note owed to Raughley, a $160
customer check
had been returned for insufficient funds, and service charges totaled
$7. Finally, the company had written a $60
check and recorded it as $6 (it cleared
the bank).
Bank-to-Book
Reconciliation
Bank Balance --
March 31 $6,420
Add: Deposits in
transit $3,229
Service charges 7
NSF check 160
$60 check
recorded as $6 54
|
$3,450
$9,870
Deduct: Outstanding
checks $ 450
Note proceeds 1,500
(1,950)
Book balance -- March 31 $7,920
   
of cash,
also known as a four-column bank reconciliation, is a reconciliation
balances, deposits-receipts,
checks-disbursements, and ending
The proof of
cash adds a time dimension to a bank reconciliation
Instead of
reconciling a balance per bank and a balance per depositor
date, the proof
of cash reconciles the beginning balance, receipts,
and the ending balance for a period according to the bank
the respective
amounts according to the books. The
proof of cash actually
four
reconciliations, as shown below.
|
||||
|
|
Beginning
|
Receipts
|
Disbursements
|
Ending
|
|
Per Bank
|
$XXXX
|
$XXXX
|
$XXXX
|
$XXXX
|
|
Deposits in Transit
Beginning
Ending
|
+ $_____
|
– $_____
+ $_____
|
|
+ $_____
|
|
Outstanding Checks
Beginning
Ending
|
– $_____
|
|
– $_____
+ $_____
|
– $_____
|
|
Bank Charges
|
|
|
– $_____
|
+ $_____
|
|
Per Books
|
$_____
|
$_____
|
$_____
|
$_____
|
e. The
reconciliation may also be done in a two-column format in which the bank
balance
and the book
balance are reconciled to the adjusted (correct) balance.
10. Short-term
marketable securities (e.g., T-bills and CDs) are sometimes held as a
substitute
for cash but are
usually acquired as temporary investments. Most
companies avoid large
cash balances and
prefer borrowing to meet short-term needs. As
temporary investments,
marketable
securities may be purchased so that maturities are timed to meet seasonal
fluctuations, to
pay off a bond issue, to make tax payments, or to satisfy other anticipated
needs.
a. Marketable
securities should be chosen with a view to the risk of default (financial
risk). U.S.
government securities are the least risky.
b. Interest rate
risk should be minimized given the
reasons for holding marketable
securities. Short-term securities are less likely to
fluctuate in value because of
changes in the
general level of interest rates.
c. Changes in the
general price level, which ordinarily are inflationary, determine the
purchasing power
of payments on investments (principal and interest) and thus the
types of
securities chosen and the rates charged.
d. The security’s
degree of marketability determines its liquidity,
that is, the ability to
resell the
security at its quoted market price.
e. The firm’s tax position will influence its choice of securities; for example, a
firm with
net loss
carryforwards may prefer a higher-yielding taxable security to a tax-exempt
municipal bond.
f. Short-term
marketable securities are usually chosen for reasons that make high-yield,
high-risk
investments unattractive. Hence, a
higher return may be forgone in
exchange for
greater safety. Thus, speculative
tactics, such as selling short
(borrowing and
selling securities in the expectation that their price will decline by the
time they must be
replaced) and margin trading (borrowing from a broker to buy
securities) are
avoided.
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