Cash and Internal Control6

PowerPoint Author: Catherine Lumbattis

COPYRIGHT © 2011 South-Western/Cengage Learning

Introduction to Financial Accounting Information, 7/e

CashCoin and currency

Checking, savings, and money market accounts

Undeposited, cashier, and certified checks

LO1

Cash Equivalents

Commercial paper U.S. Treasury bills Certain money market funds

Readily convertible to cash Original maturity to investor of

three months or less

Examples:

Cash Management Necessary to ensure company has

neither too little nor too much cash on hand

Tools• Cash flow statement• Bank reconciliations• Petty cash funds

LO2

Cash balance, beginning of period

= Cash balance, end of period

Bank Statements

+Deposits+Customer notes

and interest collected by bank

+Interest earned

Canceled checks

NSF checks Service charges

Bank Reconciliation – Step 1

Deposits in transit: Late period deposits not yet reflected on bank

statement

•Trace deposits listed on the bank statement to the books. •Identify the deposits in transit. •Add to the bank balance.

Bank Reconciliation – Step 2

Outstanding checks: Checks written but not yet presented to bank

•Trace checks cleared by the bank to the books. •Identify outstanding checks.• Subtract from the bank balance.

Bank Reconciliation – Step 3

Credit memoranda: Interest earned, customer notes

collected, etc.

List all other additions (credit memoranda) shown on the bank statement. Add to the book balance.

•List all other subtractions (debit memoranda) shown on the bank statement. •Subtract from the book balance.

Bank Reconciliation – Step 4

Debit memoranda: NSF checks, service charges, etc.

Example of ReconciliationCash Account Adjustments: Debit Memoranda

Balance per books, June 30 $2,895.82Add: Customer note collected $500.00

Interest on customer note 50.00 Interest earned during June 15.45 Error in recording check 498 54.00 619.45

Deduct: NSF check $245.72 Collection fee on note 16.50 Service charge for lockbox 20.00 (282.22)

Adjusted balance, June 30 $3,233.05

Bank Reconciliation – Step 5

Identify errors made by the bank or the company in recording the transactions during the period.

Bank Reconciliation – Step 6Use the information collected in steps 1 through 5 to prepare the bank reconciliation.

Bank Reconciliation

Balance per bank $$$

Adjusted balance $$$

Balance per books $$$

Adjusted balance $$$

Example of Reconciliation

Balance per statement, June 30 $3,308.59Adjusted balance, June 30 $3,233.05

Bank Statement Adjustments

Balance per books, June 30 $2,895.82 Adjusted balance, June 30 $3,233.05

Cash Account Adjustments

Bank Reconciliation Adjustments

Bank Reconciliation

Balance per bank $$$

Adjusted balance $$$

Balance per books $$$

Adjusted balance $$$

Book adjustments are the basis

for adjustments

Petty Cash

A check is writtenJournalize

Establishment ofFund

DisbursementWith Proper

Documentation

Fund Replenished

Internal Control System

Consists of the policies and procedures necessary to ensure:• The safeguarding of an entity’s assets• The reliability of its accounting records• The accomplishment of its overall

objectives

LO3

Sarbanes-Oxley Act of 2002 (SOX)

Act of Congress intended to bring reform to corporate accountability and stewardship in response to corporate scandals

Internal Control

Control Environment

AccountingSystem

InternalControl

Procedures

The Control EnvironmentManagement’s competence and

operating stylePersonnel policies and practices Influence of board of directors

The Accounting System

Can be manual, fully computerized, or a combination of both

Use of journals is an integral part of any system

Methods and records used to report transactions and maintain financial

information

Internal Control Procedures

Segregationof Duties

SafeguardingAssets and

Records

ProperAuthorizations

IndependentVerification

The Design and Use of Business

Documents

IndependentReview and

Appraisal

LO4

Proper AuthorizationsAuthority and responsibility go hand in

hand

Segregation of DutiesSeparate physical custody from the accounting for assets

Independent Verification

One individual or department acts as a check on the work of another

Safeguarding Assets and RecordsProtect assets and accounting records from loss,

theft, unauthorized use, etc.

Independent Review and Appraisal

Provide for periodic review and appraisal of the accounting system and the people operating it

The Design and Use of Business Documents

Capture all relevant information about a transaction and assist in proper recording and classification.

Are properly controlled

Limitations on Internal ControlNo system is entirely foolproof

• Employees in collusion can override the best controls

• Cost vs. benefit tradeoff

Computerized Business Documents and Internal

Control

LO5

Cash receipts should be deposited intact in the bank on a daily basis

All cash disbursements should be made by check

Control Over Cash ReceiptsCash received over the counter

(e.g., cash sales)Cash received in the mail (e.g.,

credit sales)

Controls Over Cash Received Over the Counter

Cash registers Locked-in cash register tapePrenumbered customer receipts Investigate recurring discrepancies

Controls Over Cash Received in the Mail

Two employees open mailPrelist preparedMonthly customer statements

Document Flow for Merchandise

CheckPrepared

PurchaseRequisition

Receiving Report

Purchase Order

Invoice Approval

Purchase Invoice

End of Chapter 6