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Transcript of © 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 4-1...
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-1
CHAPTER 4
Internal Control and
Managing Cash
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-2
INTERNAL CONTROL
• Internal control is the organizational plan and all the related measures that an entity adopts to– Safeguard assets– Encourage adherence to company policies– Promote operational efficiency– Ensure accurate and reliable accounting
records
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-3
INTERNAL CONTROL
• Competent, reliable, and ethical personnel
• Assignment of responsibilities to each employee
• Proper authorization for deviation from standard policy
An effective system of internal control has the following characteristics:
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-4
INTERNAL CONTROL
• Separation of duties– Separation of operations from the
accounting function– Separation of the custody of assets from
accounting for them– Separation of the authorization of
transactions from the custody of related assets
– Separation of duties within the accounting function
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-5
INTERNAL CONTROL• Internal and external audits
– An audit is the examination of the company’s financial statements and the accounting systems, internal controls, and records that produced them
– An internal auditor is an employee of the business who reports directly to the audit committee
– An external auditor is an independent auditor hired by a company to audit the financial statements and the factors affecting them
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-6
AuditAuditCommitteeCommittee
Board of Directors
Vice President,Finance andAccounting
Treasurer
Vice President,Marketing
Vice President,Production
SeniorVice President
President
Collectionsand
Credits
Systems
CashManagement
Investor Relations
BankingRelations
OtherVice Presidents
ExternalExternalAuditingAuditing
Controller
GeneralAccounting Taxes InternalInternal
AuditingAuditing
Budgeting
Organizational
Chart of a
Corporation
Organizational
Chart of a
Corporation
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-7
INTERNAL CONTROL
• Documents and records– Business documents and records include
• Source documents – Invoices, purchase orders, receipts, etc.
• Accounting journals• Accounting ledgers
• Electronic and computer controls– Electronic sensors on merchandise– Control totals
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-8
INTERNAL CONTROL
• Other controls– Fireproof vaults– Burglar alarms– Point of sale terminals– Frequent bank deposits– Bonded cashiers
• A bond is an insurance policy that reimburses the company for losses due to employee theft
– Mandatory vacations– Job rotation
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-9
INTERNAL CONTROL
• The limitations of internal control– A system designed to thwart an individual
employee’s fraud can be beaten by collusion between two or more employees to defraud the system
– A system of internal control that is too complex can hurt efficiency and control
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-10
USING THE BANK ACCOUNT AS A CONTROL DEVICE
• The business should deposit all cash receipts in a bank account and make all cash payments through it. The documents used to control a bank account include the…
• Signature card• Deposit ticket• Check• Bank statement• Bank reconciliation
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-11
USING THE BANK ACCOUNT AS A CONTROL DEVICE
• Signature Card– A card signed by each person authorized
to transact business through an account in a bank
• It protects both the bank and the depositor against forgery
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-12
• Deposit ticket– A form supplied by the bank which serves
as proof of a transaction• Check
– A document instructing the bank to pay the designated person or business a specified amount of money
• The three parties to a check are– The maker– The payee– The bank
USING THE BANK ACCOUNT AS A CONTROL DEVICE
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-13
USING THE BANK ACCOUNT AS A CONTROL DEVICE
California Products
Bay Area National Bank
319 47
Three hundred nineteen and 47/100-----Dollars
Check Serial NumberBank Payee
Maker
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-14
• The bank statement shows the account’s beginning and ending balance and lists the month’s transactions processed by the bank as well as the maker’s canceled checks– An electronic funds transfer (EFT) transfers
cash by electronic communications • EFTs are listed among the deposits and
payments on the bank statement
USING THE BANK ACCOUNT AS A CONTROL DEVICE
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-15
BAY AREA NATIONAL BANK ACCOUNT STATEMENTSOUTH PALO ALTO #136 P.O. BOX 22985 PALO ALTO, CA 94306
Business Research, Inc. CHECKING ACCOUNT 136-2137333814 Glenwood ParkwayPalo Alto, CA 94306
CHECKING ACCOUNT SUMMARY AS OF 01/31/X1
Beginning Balance Total Deposits Total W ithdrawals Service Charges Ending Balance
6,556.12 4,352.64 4,963.00 14.25 5,931.51
CHECKING ACCOUNT TRANSACTIONSDEPOSITS DATE AMOUNTDeposit 01/04 1,000.00Deposit 01/04 112.00Deposit 01/08 194.60EFT-Collection of rent 01/17 904.03Bank Collection 01/26 2,114.00Interest 01/31 28.01
CHARGES DATE AMOUNTService Charge 01/31 14.25Checks:
CHECKS BALANCES Number Date Amount Date Balance Date Balance332 01/12 3,000.00 12/31 6,556.12 01/17 5,264.75656 01/06 100.00 01/04 7,616.12 01/20 4,903.75333 01/12 150.00 01/06 7,416.12 01/26 7,017.75334 01/10 100.00 01/08 7,610.72 01/31 5,931.51335 01/06 100.00 01/12 4,360.72336 01/31 1,100.00
OTHER CHARGES DATE AMOUNTNSF 01/04 52.00EFT-insurance 01/20 361.00
MONTHLY SUMMARY W ithdrawals: 8 Minimum Balance: 4,360.00 Average Balance: 6,091.00
BAY AREA NATIONAL BANK ACCOUNT STATEMENTSOUTH PALO ALTO #136 P.O. BOX 22985 PALO ALTO, CA 94306
Business Research, Inc. CHECKING ACCOUNT 136-2137333814 Glenwood ParkwayPalo Alto, CA 94306
CHECKING ACCOUNT SUMMARY AS OF 01/31/X1
Beginning Balance Total Deposits Total W ithdrawals Service Charges Ending Balance
6,556.12 4,352.64 4,963.00 14.25 5,931.51
CHECKING ACCOUNT TRANSACTIONSDEPOSITS DATE AMOUNTDeposit 01/04 1,000.00Deposit 01/04 112.00Deposit 01/08 194.60EFT-Collection of rent 01/17 904.03Bank Collection 01/26 2,114.00Interest 01/31 28.01
CHARGES DATE AMOUNTService Charge 01/31 14.25Checks:
CHECKS BALANCES Number Date Amount Date Balance Date Balance332 01/12 3,000.00 12/31 6,556.12 01/17 5,264.75656 01/06 100.00 01/04 7,616.12 01/20 4,903.75333 01/12 150.00 01/06 7,416.12 01/26 7,017.75334 01/10 100.00 01/08 7,610.72 01/31 5,931.51335 01/06 100.00 01/12 4,360.72336 01/31 1,100.00
OTHER CHARGES DATE AMOUNTNSF 01/04 52.00EFT-insurance 01/20 361.00
MONTHLY SUMMARY W ithdrawals: 8 Minimum Balance: 4,360.00 Average Balance: 6,091.00
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
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• The bank reconciliation– Explains the difference between the firm’s
cash balance and the bank statement balance on a certain date
– Ensures that all cash transactions have been accounted for and that the bank and book records of cash are correct
USING THE BANK ACCOUNT AS A CONTROL DEVICE
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-17
• Items that cause differences between the bank balance and the book balance are– Items recorded by the company but not yet
recorded by the bank• Deposits in transit - recorded by the company
but not by the bank• Outstanding checks - issued and recorded by
the company, but not yet paid by the bank
USING THE BANK ACCOUNT AS A CONTROL DEVICE
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-18
– Items recorded by the bank but not yet recorded by the company
• Bank collections received on behalf of the business
• Electronic funds transfers paid or received on behalf of the business
• Service charge assessed by the bank for processing the business’s transactions
• Interest revenue on checking account
USING THE BANK ACCOUNT AS A CONTROL DEVICE
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-19
• NSF (nonsufficient funds) checks received from customers which are worthless and returned to the payee
• Checks collected, deposited, and returned to the payee by the bank for reasons other than NSF
• The cost of printed checks
– Errors by either the company or the bank
USING THE BANK ACCOUNT AS A CONTROL DEVICE
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-20
1Maker writes check
to payee
2Payee depositscheck in bank,
which increasespayee’s balance
3Payee’s bank sends
check to Maker’sbank
4Maker’s bank
decreases Maker’sbalance and sendscancelled check to
Maker
1Maker writes check
to payee
2Payee deposits check
in bank, whichincreases Payee’s
balance
4Maker’s bank accountnot sufficient to pay
the check
3Payee’s bank sends check to Maker’s
bank
5 Maker’s bank returns
worthless check toPayee’s bank
6Payee’s bank
decreases payeesbalance and
returns worthlesscheck to payee
7Payee holds
worthless check
The Paths That Two Checks Take
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-21
BANK RECONCILIATION ILLUSTRATED
• The bank statement for Business Research, Inc., on the next slide indicates that the January 31 bank balance is $5,931.51
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-22
BAY AREA NATIONAL BANK ACCOUNT STATEMENTSOUTH PALO ALTO #136 P.O. BOX 22985 PALO ALTO, CA 94306
Business Research, Inc. CHECKING ACCOUNT 136-2137333814 Glenwood ParkwayPalo Alto, CA 94306
CHECKING ACCOUNT SUMMARY AS OF 01/31/X1
Beginning Balance Total Deposits Total W ithdrawals Service Charges Ending Balance
6,556.12 4,352.64 4,963.00 14.25 5,931.51
CHECKING ACCOUNT TRANSACTIONSDEPOSITS DATE AMOUNTDeposit 01/04 1,000.00Deposit 01/04 112.00Deposit 01/08 194.60EFT-Collection of rent 01/17 904.03Bank Collection 01/26 2,114.00Interest 01/31 28.01
CHARGES DATE AMOUNTService Charge 01/31 14.25Checks:
CHECKS BALANCES Number Date Amount Date Balance Date Balance332 01/12 3,000.00 12/31 6,556.12 01/17 5,264.75656 01/06 100.00 01/04 7,616.12 01/20 4,903.75333 01/12 150.00 01/06 7,416.12 01/26 7,017.75334 01/10 100.00 01/08 7,610.72 01/31 5,931.51335 01/06 100.00 01/12 4,360.72336 01/31 1,100.00
OTHER CHARGES DATE AMOUNTNSF 01/04 52.00EFT-insurance 01/20 361.00
MONTHLY SUMMARY W ithdrawals: 8 Minimum Balance: 4,360.00 Average Balance: 6,091.00
BAY AREA NATIONAL BANK ACCOUNT STATEMENTSOUTH PALO ALTO #136 P.O. BOX 22985 PALO ALTO, CA 94306
Business Research, Inc. CHECKING ACCOUNT 136-2137333814 Glenwood ParkwayPalo Alto, CA 94306
CHECKING ACCOUNT SUMMARY AS OF 01/31/X1
Beginning Balance Total Deposits Total W ithdrawals Service Charges Ending Balance
6,556.12 4,352.64 4,963.00 14.25 5,931.51
CHECKING ACCOUNT TRANSACTIONSDEPOSITS DATE AMOUNTDeposit 01/04 1,000.00Deposit 01/04 112.00Deposit 01/08 194.60EFT-Collection of rent 01/17 904.03Bank Collection 01/26 2,114.00Interest 01/31 28.01
CHARGES DATE AMOUNTService Charge 01/31 14.25Checks:
CHECKS BALANCES Number Date Amount Date Balance Date Balance332 01/12 3,000.00 12/31 6,556.12 01/17 5,264.75656 01/06 100.00 01/04 7,616.12 01/20 4,903.75333 01/12 150.00 01/06 7,416.12 01/26 7,017.75334 01/10 100.00 01/08 7,610.72 01/31 5,931.51335 01/06 100.00 01/12 4,360.72336 01/31 1,100.00
OTHER CHARGES DATE AMOUNTNSF 01/04 52.00EFT-insurance 01/20 361.00
MONTHLY SUMMARY W ithdrawals: 8 Minimum Balance: 4,360.00 Average Balance: 6,091.00
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-23
BANK RECONCILIATION ILLUSTRATED
• The detail of Business Research, Inc.’s, cash records is presented on the following slide
• The company’s Cash account has a balance of $3,294.21
Cash
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-24
20X1
Jan 1 Balance 6,556.12
2 Cash receipt 1,112.00 7,668.12
7 Cash receipt 194.60 7,862.72
31 Cash paymentsCash payments 6,160.146,160.14 1,702.58
31 Cash receipt 1,591.63 3,294.21
Ledger:
ACCOUNT Cash
Date Item Debit Credit Balance
332 $3,000.00 337 $286.00333 510.00 338 319.47334 100.00 339 83.00335 100.00 340 203.14336 1,100.00 341 458.53
Cash PaymentsCash PaymentsCheck No. Amount Check No. Amount
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-25
BANK RECONCILIATION ILLUSTRATED
The following reconciling items explain why the two balances differ:
The January 31 deposit of $1,591.63 does not appear on the bank statement
The bank erroneously charged to the account a $100 check (No. 656) written by Business Research Associates
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-26
Five company checks issued late in January and recorded in the journal have not been paid by the bank
BANK RECONCILIATION ILLUSTRATED
Check No. Date Amount
337 Jan. 27 $286.00
338 28 319.47
339 28 83.00
340 29 203.14
341 30 458.53
Check No. Date Amount
337 Jan. 27 $286.00
338 28 319.47
339 28 83.00
340 29 203.14
341 30 458.53
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-27
The bank received $904.03 by EFT on behalf of Business Research, Inc.
The bank collected on behalf of the company a note receivable, $2,114 (including interest of $214)
The bank statement shows interest revenue of $28.01
BANK RECONCILIATION ILLUSTRATED
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-28
Check number 333 for $150 paid to Brown Company on account was recorded as a cash payment of $510
The bank service charge for the month was $14.25
The bank statement shows an NSF check for $52
Business Research pays insurance expense by EFT and has not recorded this $361 payment
BANK RECONCILIATION ILLUSTRATED
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-29
Business Research, Inc.Bank Recondiliation
January 31, 20X1
Bank Books Balance, January 31 $5,931.51 Balance, January 31 $3,294.21Add: Add:1. Deposit of January 30 in transit 1,591.63 4. EFT receipt of rent revenue 904.032. Correction of bank error—Business 5. Bank collection of note receivable, Research Associates check including interest revenue of $214 2,114.00 Erroneously charged against 6. Interest revenue earned on Company account 100.00 bank balance 28.01
7,623.14 7. Correction of book error—overstated amount of check no. 333 360.00
6,700.253. Less: Outstanding checks
No. 337 $286.00 Less:No. 338 319.47 8. Service charge $ 14.25No. 339 83.00 9. NSF check 52.00No. 340 203.14 10. EFT payment ofNo. 344 458.53 (1,350.14) insurance expense 361.00 (427.25)
Adjusted bank balance $6,273.00 Adjusted book balance $6,273.00
Business Research, Inc.Bank Recondiliation
January 31, 20X1
Bank Books Balance, January 31 $5,931.51 Balance, January 31 $3,294.21Add: Add:1. Deposit of January 30 in transit 1,591.63 4. EFT receipt of rent revenue 904.032. Correction of bank error—Business 5. Bank collection of note receivable, Research Associates check including interest revenue of $214 2,114.00 Erroneously charged against 6. Interest revenue earned on Company account 100.00 bank balance 28.01
7,623.14 7. Correction of book error—overstated amount of check no. 333 360.00
6,700.253. Less: Outstanding checks
No. 337 $286.00 Less:No. 338 319.47 8. Service charge $ 14.25No. 339 83.00 9. NSF check 52.00No. 340 203.14 10. EFT payment ofNo. 344 458.53 (1,350.14) insurance expense 361.00 (427.25)
Adjusted bank balance $6,273.00 Adjusted book balance $6,273.00
BANK RECONCILIATION ILLUSTRATED
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-30
• To the bank balance always– Add deposits– Subtract outstanding checks– Add or subtract corrections of bank errors,
as appropriate
BANK RECONCILIATION ILLUSTRATED
Reconciling items are treated as follows:
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-31
• To the book balance always– Add bank collection items, interest
revenue, and EFT receipts– Subtract service charges, NSF checks, and
EFT payments– Add or subtract correction of book errors,
as appropriate
BANK RECONCILIATION ILLUSTRATED
Reconciling items are treated as follows:
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-32
BANK RECONCILIATION ILLUSTRATED
On the basis of the reconciliation, Business Research, Inc., makes the following entries (numbers in parentheses correspond to the reconciling items):
Jan. 31 (4) Cash 904.03
Rent Revenue 904.03
Receipt of monthly rent
Jan. 31 (4) Cash 904.03
Rent Revenue 904.03
Receipt of monthly rent
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-33
BANK RECONCILIATION ILLUSTRATED
Jan. 31 (5) Cash 2,114.00
Notes Receivable 1,900.00
Interest Receivable 214.00
Note receivable collected by bank
Jan. 31 (5) Cash 2,114.00
Notes Receivable 1,900.00
Interest Receivable 214.00
Note receivable collected by bank
Jan. 31 (6) Cash 28.01
Interest Revenue 28.01
Interest earned on bank balance
Jan. 31 (6) Cash 28.01
Interest Revenue 28.01
Interest earned on bank balance
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-34
BANK RECONCILIATION ILLUSTRATED
Jan. 31 (7) Cash 360.00
Accounts Payable -
Brown Co. 360.00
Correction of check no. 333
Jan. 31 (7) Cash 360.00
Accounts Payable -
Brown Co. 360.00
Correction of check no. 333
Jan. 31 (8) Misc. Expense 14.25
Cash 14.25
Bank service charge
Jan. 31 (8) Misc. Expense 14.25
Cash 14.25
Bank service charge
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-35
BANK RECONCILIATION ILLUSTRATED
Jan. 31 (9) Accounts Receivable -
L. Ross 52.00
Cash 52.00
NSF check returned by bank
Jan. 31 (9) Accounts Receivable -
L. Ross 52.00
Cash 52.00
NSF check returned by bank
Jan 31. (10) Insurance Expense 361.00
Cash 361.00
Payment of monthly insurance
Jan 31. (10) Insurance Expense 361.00
Cash 361.00
Payment of monthly insurance
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-36
CashCash
InventoryInventoryAccounts
ReceivableAccounts
Receivable
PurchasesPurchasesCollection Collection of Cashof Cash
Sales on AccountSales on Account
OPERATING CYCLE OF A BUSINESS
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4-37
MANAGING CASH
• Companies – Sell most of their goods on account– Keep a subsidiary accounts receivable
ledger with a separate account for each customer
– Use the accounts receivable ledger to pursue collection from individual customers
Speeding the collection of cash from sales
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-38
Accounts Receivable
Toys “R” Us
Target
Kmart
Bal. 1,800
Bal. 1,000
Bal. 300
Bal. 500
GENERAL LEDGER
ACCOUNTS RECEIVABLE SUDSIDIARY LEDGER
Cash
Bal. XX
Total 1,800
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-39
MANAGING CASH
• Companies offer sales discounts that motivate customers to pay within a specified period
• Credit terms of “2/10, n/30” means the customer can – Take a 2% discount by paying within ten
days of the date of the sale or– Pay the full amount within 30 days
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-40
MANAGING CASHSuppose Fisher-Price makes a $50,000 sale to Toys “R” Us on August 4. If credit terms are 2/10, n/30 and Fisher-Price collects on August 14, Fisher-Price would record the sale and collection with these journal entries:
Aug. 4 Accounts Receivable - Toys “R” Us 50,000
Sales Revenue 50,000
Sale on account
Aug. 4 Accounts Receivable - Toys “R” Us 50,000
Sales Revenue 50,000
Sale on account
Aug. 14 Cash ($50,000 x .98) 49,000
Sales Discount ($50,000 x .02) 1,000
Accounts Receivable - Toys “R” Us 50,000
Collection on account
Aug. 14 Cash ($50,000 x .98) 49,000
Sales Discount ($50,000 x .02) 1,000
Accounts Receivable - Toys “R” Us 50,000
Collection on account
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-41
• Internal control over cash receipts ensures that– All cash receipts are deposited in the bank– The company’s cashier combines them
with any cash received over the counter and prepares the bank deposit
MANAGING CASH
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-42
Competent, reliable, Companies carefully screen employees for ethical personnel undesirable personality traits. They also spend
large sums for training programs.
Assignment of Specific employees are designated as cashiers, responsibilities supervisors of cashiers, or accountants for cash
receipts.
Proper authorization Only designated employees, such as department managers, can grant exceptions for customers, approve check receipts above a certain amount, and allow customers to purchase on credit.
Separation of duties Cashiers and mailroom employees who handle cash do not have access to the accounting records. Accountants who record cash receipts have no opportunity to handle cash.
Element of Internal Control
Internal Controls over Cash Receipts
INTERNAL CONTROLS OVER CASH RECEIPTS
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
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Internal and external Internal auditors examine company transactions audits for agreement with management policies. External
auditors examine the internal controls over cash receipts to determine whether the accounting system produces accurate amounts for revenues, receivables, and other items related to cash receipts.
Documents and records Customers receive receipts as transaction records. Bank statements list cash receipts for
reconciliation with company records (deposit tickets). Customers who pay by mail include a remittance advice showing the amount of cash they sent to the company.
Electronic and computer Cash registers serve as transaction records. Each controls day’s receipts are matched with customer
remittance advices and with the day’s deposit ticket from the bank.
Other controls Cashiers are bonded. Cash is stored in vaults and banks. Employees are rotated among jobs and are required to take vacations.
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
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INTERNAL CONTROL OVER CASH PAYMENTS
Purchase request Sales department Purchasing department (requisition)
Purchase order Purchasing Outside company that department sells the needed
merchandise (supplier or vendor)
Invoice (bill) Outside company Accounting department that sells the needed merchandise (supplier or vendor)
Receiving report Receiving department Accounting department
Disbursement packet Accounting department Officer who signs the check
Business Document Prepared by Sent to
The Purchasing Process
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-45
Purchase RequestPurchase Request
Purchase OrderPurchase Order
InvoiceInvoice
Receiving ReportReceiving Report
INTERNAL CONTROL OVER CASH PAYMENTS
Disbursement Packet
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-46
Competent, reliable, Cash payments are entrusted to high-level ethical personnel employees, with larger amounts paid by the
treasurer or assistant treasurer.
Assignment of Specific employees approve purchase documents responsibilities for payment. Executives examine approvals, then
sign checks.
Proper authorization Large expenditures must be authorized by the company owner or board of directors to ensure agreement with organizational goals.
Separation of duties Computer operators and other employees who handle checks have no access to the accounting records. Accountants who record cash payments have no opportunity to handle cash.
Element of Internal Control
Internal Controls over Cash Payments
INTERNAL CONTROLS OVER CASH PAYMENTS
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-47
Internal and external Internal auditors examine company transactions audits for agreement with management policies. External
auditors examine the internal controls over cash payments to determine whether the accounting system produces accurate amounts for expenses, assets, and other items related to cash disbursement .
Documents and records Suppliers issue invoices that document the need to pay cash. Bank statements list cash payments (checks and EFT disbursements) for reconciliation with company records. Checks are prenumbered in sequence to account for payments.
Electronic, computer, Blank checks are stored in a vault and controlled and other controls by a responsible official with no accounting duties.
Machines stamp the amount on a check in indelible ink. Paid invoices are punched to avoid duplicate payment.
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-48
INTERNAL CONTROL OVER CASH PAYMENTS
Controlling Petty Cash
• The petty cash fund is – A small amount of cash kept on hand to
pay for minor expenses– Opened with a particular amount of cash
• The custodian of the petty cash fund– Cashes a check and places the currency
and coin in the fund– Prepares a petty cash ticket for each petty
cash payment
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-49
INTERNAL CONTROL OVER CASH PAYMENTS
Petty Cash Ticket
Date Mar. 25, 20X4 No. 47
Amount $23.00
For Box of floppy diskettes
Debit Office supplies, Acct. No. 145
Received by Fund Custodian
Petty Cash Ticket
Date Mar. 25, 20X4 No. 47
Amount $23.00
For Box of floppy diskettes
Debit Office supplies, Acct. No. 145
Received by Fund Custodian
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-50
• In an imprest petty cash system– The sum of the cash in the petty cash fund
plus the total of the ticket amounts should equal the opening balance at all times
– The petty cash account keeps its prescribed balance at all times
INTERNAL CONTROL OVER CASH PAYMENTS
© 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren
4-51
USING A BUDGET TO MANAGE CASH
• A budget– Is a quantitative expression of a plan that
helps managers coordinate the entity’s activities
– Helps a company manage its cash by expressing the plan for the receipt and payment of cash during a future period
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USING A BUDGET TO MANAGE CASH
To prepare for future cash needs, managers proceed in four steps:Start with the entity’s cash balance at
the beginning of the periodAdd the budgeted cash receipts and
subtract the budgeted cash payments– Revenue and expense transactions
(operating activities from the income statement)
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– Asset acquisition and sale transactions (investing activities from the statement of cash flows)
– Liability and stockholders’ equity transactions (financing activities from the statement of cash flows)
The beginning balance plus the expected receipts minus the expected payments equals the expected cash balance at the end of the period
USING A BUDGET TO MANAGE CASH
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Compare the expected cash balance to the desired, or budgeted, cash balance at the end of the period– Excess cash can be invested– Cash balances below the budgeted
balance may require additional financing to reach the desired cash balance
• The following slide shows an example of a cash budget for The Gap, Inc.
USING A BUDGET TO MANAGE CASH
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The Gap, Inc.Cash Budget
For the year Ended January 31, 20x2
(1) Cash balance, February 1, 20x1 $ 202.6
Estimated cash receipts: (2) Collections from customers 2,858.3 (3) Interest and dividends on investments 6.2 (4) Sale of store fixtures 4.9
3,072.0 Estimated cash payments: (5) Purchase of inventory $1,906.2 (6) Operating expenses 561.0 (7) Expansion of existing stores 206.4 (8) Opening of new stores 344.6 (9) Payment of long-term debt 148.7(10) Payment of dividends 219.0 3,385.9(11) Cash available (needed) before
new financing (313.9)(12) Budgeted cash balance, January 31, 20x2 (200.0)(13) Cash available for additional
investments or new financing needed $ (513.9)
(In millions)
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REPORTING CASH ON THE BALANCE SHEET
• Companies usually combine all cash amounts into a single total called “Cash and Cash Equivalents” on the balance sheet
• Cash equivalents include liquid assets such as– Time deposits– Certificates of deposit
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AIR & SEA TRAVEL, INC.Balance SheetApril 30, 2001
Assets Liabilities
CCaasshh aanndd ccaasshh eeqquuiivvaalleennttss $$3333,,330000 Accounts payable $ 100Accounts receivable 2,000Office supplies 500 Stockholders’ EquityLand 18,000 Common stock 50,000
Retained earnings 3,700 Total stockholders’ equity 53,700
_______ Total liabilities and Total assets $53,800 stockholders’ equity $53,800
AIR & SEA TRAVEL, INC.Balance SheetApril 30, 2001
Assets Liabilities
CCaasshh aanndd ccaasshh eeqquuiivvaalleennttss $$3333,,330000 Accounts payable $ 100Accounts receivable 2,000Office supplies 500 Stockholders’ EquityLand 18,000 Common stock 50,000
Retained earnings 3,700 Total stockholders’ equity 53,700
_______ Total liabilities and Total assets $53,800 stockholders’ equity $53,800
REPORTING CASH ON THE BALANCE SHEET
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ETHICS AND ACCOUNTING
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CORPORATE AND PROFESSIONAL CODES OF ETHICS
• Most large companies have a code of ethics designed to encourage ethical and responsible behavior by their employees
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• Accountants have additional incentives to behave ethically– Independent accountants must abide by
the AICPA Code of Professional Conduct– Members of the Institute of Management
Accountants are bound by the Standards of Ethical Conduct for Management Accountants
CORPORATE AND PROFESSIONAL CODES OF ETHICS
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ETHICAL ISSUES IN ACCOUNTING
Determine the factsIdentify the ethical issuesSpecify the alternativesIdentify the people involvedAssess the possible outcomesMake the decision
To make ethical decisions, people should proceed in six steps:
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End of Chapter 4