Accounting Principle Kieso 8e_Ch08

8/3/2019 Accounting Principle Kieso 8e_Ch08

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Chapter8-1

CHAPTER 8

Internal Control andCash Principles

Accounting Principles, Eighth Edition


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Chapter8-2

1. Define internal control.2. Identify the principles of internal control.3. Explain the applications of internal control principles

to cash receipts.4. Explain the applications of internal control principles

to cash disbursements.5. Describe the operation of a petty cash fund.

6. Indicate the control features of a bank account.7. Prepare a bank reconciliation.8. Explain the reporting of cash.

Study Objectives


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Chapter8-3

InternalControl

The Sarbanes-Oxley ActPrinciplesLimitations

CashControls

Use of a BankReporting

Cash

CashequivalentsRestrictedcashCompensatingbalances

MakingdepositsWriting checksBankstatementsReconciling thebank account

Internal Control and Cash

Control overcash receiptsControl overcashdisbursements


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Chapter8-4

Methods and measures adopted to:1. Safeguard assets.

2. Enhance accuracy and reliability of accountingrecords. Reduce risk of:

a. Errors (unintentional)

b. Irregularities (intentional)

Internal Control

LO 1 Define internal control.

Under the Sarbanes-Oxley Act, all publicly traded U.S. corporationsare required to maintain an adequate system of internal control.


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Chapter8-5

Companies mustdevelop principles of control over financial

reporting.continually verify that controls are working.

Internal Control

LO 1 Define internal control.

The Sarbanes-Oxley Act

Independent auditors must attest to the level of

internal control.SOX created the Public Company AccountingOversight Board (PCAOB) .


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Chapter8-6

Measures vary withsize and nature ofthe business.managements controlphilosophy.

Internal Control

LO 2 Identify the principles of internal control.

Principles of Internal Control Illustration 8-1


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Chapter8-7

ESTABLISHMENT OF RESPONSIBILITY

Control is most effective when only one person is

responsible for a given task.

Internal Control


Principles of Internal Control

SEGREGATION OF DUTIES

DOCUMENTATION PROCEDURESCompanies should use prenumbered documents and alldocuments should be accounted for.


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Chapter8-8

Internal Control


Principles of Internal ControlPHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS

Physical

Mechanicaland

Electronic


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Chapter8-9

Internal Control


Principles of Internal ControlINDEPENDENT INTERNAL VERIFICATION

1. Records periodically verified by an employee who is

independent.2. Discrepancies reported to management.

OTHER CONTROLS

1. Bond employees.2. Rotate employees duties and require vacations. 3. Conduct background checks.


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Chapter8-10

Internal Control


Limitations of Internal ControlCosts should not exceed benefit.

Human element.

Size of the business.


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Chapter8-11

Q8-8 . The management of Sewell Company asks you, as the company accountant, to explain (a)

the concept of reasonable assurance in internalcontrol and (b) the importance of the humanfactor in internal control.

See notes page for discussion

Discussion Question

Cash Controls

LO 3 Explain the applications of internal control principles to cash receipts.


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Chapter8-12

Cash Controls

Internal Control over Cash Receipts


Independent InternalVerification

Supervisors count cashreceipts daily;

treasurer comparestotal receipts to bankdeposits daily

Establishment ofResponsibility

Only designatedpersonnel are

authorized to handlecash receipts(cashiers)

Segregation of DutiesDifferent individualsreceive cash, record

cash receipts, and holdthe cash

DocumentationProcedures

Use remittanceadvice (mail

receipts), cashregister tapes, anddeposit slips

Physical,Mechanical, and

Electronic ControlsStore cash in safes

and bank vaults; limitaccess to storageareas; use cash

registers

Other ControlsBond personnel whohandle cash; requireemployees to take

vacations; deposit allcash in bank daily


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Chapter8-13

Q8-3 . At the corner grocery store, all salesclerks make change out of one cash register

drawer. Is this a violation of internal control?Why?


Discussion Question

Cash Controls



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Chapter8-14

Cash Controls

Cash consists of coins, currency, checks, moneyorders, and money on hand or on deposit in a bank.Cash receipts come from:

cash salescollections on account from customersreceipt of interest, rent, and dividendsinvestments by ownersbank loansproceeds from the sale of noncurrent assets



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Chapter8-15

Cashier ring up sales

Supervisor

1. reads register totals2. makes cash counts3. prepares cash count

sheets

Over-the-Counter Receipts


Prepare daily summary

Prepare deposit slip

Cashiers Department

Sales Department

Bank(deposit)

Treasurer(verification)

Accounting(record)

Illustration 8-7


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Chapter8-16

Mail Receipts

Control Procedures:Mail receipts should be opened by two people, alist prepared, and each check endorsed.Copy of the list, along with the checks andremittance advices, sent to cashiers department.Cashier adds the checks to the over-the-counterreceipts and prepares a daily cash summary andmakes the daily bank deposit.Copy of list sent to treasurers office forcomparison with total shown on daily cashsummary.



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Chapter8-17

Permitting only designated personnel to handlecash receipts

is an application of the principle of:a. segregation of duties.b. establishment of responsibility.

c. independent check.d. other controls.

Review Question

Cash Controls



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Chapter8-18

Generally, internal control over cashdisbursements is more effective whencompanies pay by check, rather than by cash.Applications:

Voucher system

Electronic funds transfers (EFT) system

Petty cash fund

Cash Controls

LO 4 Explain the applications of internal control principles to cash disbursements.

Internal Control over Cash Disbursements


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Chapter8-19

Cash Controls

Internal Control over Cash DisbursementsIndependent Internal

VerificationCompare checks to

invoices; reconcile bankstatement monthly

Establishment ofResponsibility

Only designatedpersonnel are

authorized to signchecks (treasurer)

Segregation of DutiesDifferent individuals

approve and makepayments; checksigners do not record

disbursements

DocumentationProcedures

Use prenumberedchecks and account

for them insequence; each check

must have anapproved invoice Physical, Mechanical,and Electronic

Controls

Store blank checks insafes, with limitedaccess; print check

amounts by machine inindelible ink

Other ControlsStamp invoices

PAID



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Chapter8-20

Q8-14 . Joe Griswold Companys internalcontrols over cash disbursements provide forthe treasurer to sign checks imprinted by acheckwriting machine in indelible ink aftercomparing the check with the approved invoice.Identify the internal control principles that are

present in these controls.


Discussion Question

Cash Controls



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Chapter8-21

The use of prenumbered checks in disbursingcash is an application of the principle of:

a. establishment of responsibility.b. segregation of duties.c. physical, mechanical, and electronic controls.

d. documentation procedures.

Review Question

Cash Controls



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Chapter8-22

Voucher System Network of approvals, by authorizedindividuals, to ensure all disbursements bycheck are proper.

A voucher is an authorization form prepared

for each expenditure.

Cash Controls




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Chapter8-23

Electronic Funds Transfers (EFT) Disbursement systems that uses wire,telephone, or computers to transfer cashbalances between locations.

Cash Controls




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Chapter8-24

Petty Cash Fund - Used to pay small amounts.Involves:

1. establishing the fund,

2. making payments from the fund, and

3. replenishing the fund.

Cash Controls


LO 5 Describe the operation of a petty cash fund.


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Chapter8-25

E8-8 Lincolnville Company uses an imprest petty cash system. Thefund was established on March 1 with a balance of $100. DuringMarch the following petty cash receipts were found in the petty cashbox.

The fund was replenished on March 15 when the fund contained $3 incash. On March 20, the amount in the fund was increased to $150.Instructions: Journalize the entries in March that pertain to theoperation of the petty cash fund.

ReceiptDate No. For Amount

3/5 1 Stamp inventory 39$7 2 Freight-out 21 9 3 Miscellaneous expense 6

11 4 Travel expense 24 14 5 Miscellaneous expense 5

Cash Controls



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Chapter8-26

E8-8 The fund was established on March 1 with abalance of $100

Petty cash 100March 1

Cash 100

Cash Controls



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Chapter8-27

E8-8 The fund was replenished on March 15 when thefund contained $3 in cash.

Postage expense 39March 15

Cash 97

Cash Controls


Freight-out 21Miscellaneous expense 11Travel expense 24Cash over Short 2


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Chapter8-28

E8-8 On March 20, the amount in the fund wasincreased to $150.

Cash Controls


Petty cash 50March 20

Cash 50


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Chapter8-29

Contributes to good internal control over cash.Minimizes the amount of currency on hand.

Creates a double record of bank transactions.

Bank reconciliation.

Use of a Bank

LO 6 Indicate the control features of a bank account.


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Chapter8-30

Making Bank DepositsAuthorized employeeshould make deposit.

Use of a Bank


Bank CodeNumbers

Front Side Reverse Side

Illustration 8-10


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Chapter8-31

Writing ChecksWritten order signed by depositor directing bank to paya specified sum of money to a designated recipient.

Use of a Bank


Maker

Payee

Illustration 8-11

Payer


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Chapter8-32

Bank StatementsDebit Memorandum

Bank service charge

NSF (not sufficientfunds)

Use of a Bank


Illustration 8-12

Credit MemorandumCollect notesreceivable.Interest earned.


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Chapter8-33

The control features of a bank account do not include:

a. having bank auditors verify the correctness ofthe bank balance per books.b. minimizing the amount of cash that must be kept

on hand.

c. providing a double record of all banktransactions.d. safeguarding cash by using a bank as a

depository.

Review Question

Use of a Bank



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Chapter8-34

Reconciling the Bank Account

Use of a Bank

LO 7 Prepare a bank reconciliation.

Reconcile balance per books and balance per bank totheir adjusted (corrected) cash balances.

Reconciling Items:1. Deposits in transit.

2. Outstanding checks.

3. Errors.

4. Bank memoranda.


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Chapter8-35

Reconciliation Procedures

Use of a Bank


+ Deposit in Transit

- Outstanding Checks

+- Bank Errors

+ Notes collected by bank

- NSF (bounced) checks

- Check printing or otherservice charges

+- Book Errors

CORRECT BALANCE CORRECT BALANCE

Illustration 8-13


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Chapter8-36

E8-11 The following information pertains to Family Video Company.1. Cash balance per bank, July 31, $7,263.2. Cash balance per books, July 31, $7,284.3. July bank service charge not recorded by the depositor $28.

4. Deposits in transit, July 31, $1,500.5. Bank collected $900 note for Family in July, plus interest $36,less fee $20.The collection has not been recorded by Family, andno interest has been accrued.

6. Outstanding checks, July 31, $591.Instructionsa) Prepare a bank reconciliation at July 31.b) Journalize the adjusting entries at July 31 on the books of Family

Video Company.

Use of a Bank



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Chapter8-37

E8-11 a) Prepare a bank reconciliation at July 31.

Use of a Bank


Cash balance per bank statement $7,288Add: Deposit in transit 1,500Less: Outstanding checks (591)

Adjusted cash balance per bank $8,172

Cash balance per books $7,284Add: Collection of notes receivable 900

Collection of interest 36Less: Bank service charge (28)

Note collection fee (20)Adjusted cash balance per books $8,172


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Chapter8-38

Cash 788July 31

Bank charge expense 28Miscellaneous expense 20

Notes receivable 900Interest revenue 36

Use of a Bank


E8-11 b) Journalize the adjusting entries at July 31 onthe books of Family Video Company.

Note: Adjusting journal entry includes only theadjustments to the cash balance per books.

Dr. Cr.


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Chapter8-39

The reconciling item in a bank reconciliation thatwill result in an adjusting entry by the depositoris:a. outstanding checks.b. deposit in transit.

c. a bank error.d. bank service charges.

Review Question

Use of a Bank



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Chapter8-40

Reporting Cash

LO 8 Explain the reporting of cash.

Most liquid asset, listed first in current assetssection of balance sheet.

Cash equivalentsRestricted cashCompensating balances

Illustration 8-16


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Chapter8-41

Which of the following statements correctlydescribes the reporting of cash?

a. Cash cannot be combined with cash equivalents.b. Restricted cash funds may be combined withCash.

c. Cash is listed first in the current assetssection.

d. Restricted cash funds cannot be reported as acurrent asset.

Review Question

Use of a Bank



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Chapter8-42

Q2-19 . Jim Benes is confused about how accountinginformation flows through the accounting system. Hebelieves the flow of information is as follows.

a. Debits and credits posted to the ledger.b. Business transaction occurs.c. Information entered in the journal.d. Financial statements are prepared.

e. Trial balance is prepared.Is Jim correct? If not, indicate to Jim the proper flowof the information.


Recording Process

Discussion Question

LO 7 Prepare a trial balance and explain its purposes.


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Chapter

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Accounting Principle Kieso 8e_Ch08

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