Page 354 - Accounting Principles (A Business Perspective)

8. Control of cash

fund. We would debit all vouchered items. Any discrepancy should be debited or credited to an account called Cash
Short and Over. The Cash Short and Over account is an expense or a revenue, depending on whether it has a debit
or credit balance.

To illustrate, assume in the preceding example that the balance in the fund was only USD 6.10 instead of USD
7.40. Restoring the fund to USD 100 requires a check for USD 93.90. Since the petty cash vouchers total only USD
92.60, the fund is short USD 1.30. The entry for replenishment is:
Delivery Expense 22.75
Postage Expense 50.80
Receivable from Employees 19.05
Cash Short and Over 1.30
Cash 93.90
To replenish a petty cash fund.
Entries in the Cash Short and Over account also result from other change-making activities. For example,
assume that a clerk accidentally shortchanges a customer USD 1 and that total cash sales for the day are USD
740.50. At the end of the day, actual cash is USD 1 over the sum of the sales tickets or the total of the cash register
tape. The journal entry to record the day's cash sales is:

Cash 741.50
Sales 740.50
Cash Short and Over 1.00
To record cash sales for the day.
Analyzing and using the financial results—The quick ratio
The quick ratio measures a company's short-term debt-paying ability. It is the ratio of quick assets (cash,
marketable securities, and net receivables) to current liabilities. When computing quick assets, we do not include
inventories and prepaid expenses because they might not be readily convertible into cash. A rule of thumb is that

the ratio of quick assets to current liabilities should be 1:1 or higher. However, a lower quick ratio is satisfactory in
companies that generate a steady flow of cash in their operations. Short-term creditors are interested in this ratio
since it relates the pool of cash and immediate cash inflows to immediate cash outflows. The formula for the quick
ratio is:
Quick assets
Quick ratio=
Current liabilities
Based on the following information, we can determine that the 2010 and 2009 quick ratios are 6.85 and 6.84,
respectively:
2010 2009
Cash $315,064 $283,913
Short-term investments 119,093 314,872
Net receivables 320,892 177,300
Total quick assets $755,049 $776,085
Current liabilities $110,147 $113,430
Total quick assets $755,049 = 6.85 $776,085 = 6.84
Current liabilities $110,147 $113,430

An ethical perspective:
City club restaurant

The City Club Restaurant is a member-owned entity in Carson City. For 20 years, John Blue has
managed the restaurant and received only minimal salary increases. He believes he is grossly
underpaid in view of the significant inflation that has occurred. A few years ago he began

supplementing his income by placing phony invoices in the petty cash box, writing a petty cash

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