Download Internal Control consists of

Financial Accounting:
Tools for Business Decision Making, 3rd Ed.
Kimmel, Weygandt, Kieso
1
Chapter 7
Chapter 7
Internal Control and Cash
After studying Chapter 7, you should
be able to:
Identify the principles of internal control.
Explain the application of internal control to cash
receipts.
Explain the application of internal control to cash
disbursements.
Prepare a bank reconciliation.
Explain the reporting of cash.
Discuss the basic principles of cash management.
Identify the primary elements of a cash budget.
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Internal Control consists of...
all the related methods and measures
adopted within a business to:
safeguard its assets from;
Employee theft
Robbery
Unauthorized Use
enhance accuracy and reliability of its
accounting records by reducing:
Risk of Errors
Irregularities
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5
Establishment of
Responsibility
Control is most effective when only
one person is responsible for a
given task.
6
Segregation of Duties
•Responsibility for related activities should be assigned to different
individuals
•Responsibility for record keeping for an asset should be separate
from the physical custody of the asset
7
Documentation
Provide evidence that
transactions and
events occurred:
Shipping documents
Sales invoices
8
Documentation Procedures
Documents should be pre-numbered.
All documents should be accounted
for.
Sources documents should be
promptly forwarded to accounting
department.
9
Physical, Mechanical and
Electronic Controls
OR FINGERPRINT,
EYEBALL Scan
10
Independent Internal
Verification
Involves review, comparison, and
reconciliation of data prepared by
employees
•Verification should be made periodically or
on surprise basis
•Verification should be done by employee who
is independent of the personnel responsible
for the information
•Discrepancies and exceptions should be
reported to management
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Independent Internal
Verification
12
Other Controls
Bonding of employees
who handle cash
Rotating employee’s
duties and requiring
employees to take
vacations
13
Limitations of Internal Controls
Cost/Benefit - cost of establishing
procedure should not exceed expected
benefit
Human element - fatigue, carelessness,
indifference
Collusion - two or more individuals who
work together to get around controls
Size of business
14
Cash consists of...
coins
currency
checks
money orders
money on hand
deposits in bank
15
Cash is the most
desirable asset...
because it is
readily
convertible into
any other asset.
16
Internal Control
Over Cash Receipts
Page 297
in book
17
Internal Control
Over Cash Disbursements
18
Electronic Funds
Transfer (EFT)
An approach to transfer funds among
parties without paper (deposit tickets,
checks, etc.)
EFT uses wire, telephone, telegraph or
computer to transfer from one location
to another.
19
Petty Cash Fund
is a cash fund used to pay relatively
small amounts
20
Use of a Bank...
is good internal control.
minimizes the amount of cash that must be kept
on hand.
provides a double record of all bank transactions
one by the business
one by the bank
helps a company safeguard its cash by using a
bank as a depository and clearinghouse for
checks received and written.
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Bank
Statement a copy of the
bank’s
records sent
to the
customer for
periodic
review.
Bank
Statement
shows
•check &
other debits
•deposits &
other credits
•daily cash
balance
Apri l 30, 2004
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Company Balance and Bank Balance of
Cash Usually Differ Because...
 Time lags that prevent one of the parties from
recording the transaction in the same period.
Days pass between the time a check is
written and dated and date it is paid by the
bank.
A day may pass between the time receipts are
recorded by the company and the time they
are recorded by the bank.
A time lag may occur when the bank mails a
debit or credit memo to the company.
 Errors by either party in recording transactions.
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Reconciliation Procedure
reconcile balance per books and
balance per bank to their adjusted or
correct balances.
the reconciliation should be prepared
by an employee who has no other
responsibilities pertaining to cash.
24
Terms
Deposits in transit - deposits recorded by the
depositor that have not been recorded by the
bank.
Outstanding checks - checks issued and
recorded by the company that have not been
paid by the bank.
NSF check - a check that is not paid by the
bank because of insufficient funds in the
customer’s bank account.
Adjusted balance - same as true cash balance,
correct cash balance
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Bank Reconciliation
Procedures
$ Per Bank Statement
-outstanding checks
+deposits
+/- bank errors
correct cash amount
$ Per Books
-NSF Checks
-check printing or
other service charge
+notes collected by
bank
correct cash amount
W.A. Laird Company
Illustration 7-9
Bank Reconciliation
April 30, 2004
Cash balance per bank statement
Add: Deposits in transit
Less: Outstanding checks
No. 453
No. 457
No. 460
Adjusted cash balance per bank
Cash balance per books
Add: Collection of N/R for $ 1,000 plus interest
earned $50, less collection fee $ 15
Error on recording check No. 443
Less: NSF check
Bank service charge
Adjusted cash balance per bank
15,907.45
2,201.40
18,108.85
3,000.00
1,401.30
1,502.70
5,904.00
12,204.85
11,589.45
1,035.00
36.00
425.60
30.00
1,071.00
12,660.45
455.60
12,204.85
For Cash To Show the
Correct Balance
Each reconciling item in determining
the adjusted balance per books must
be journalized and posted.
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W.A. Laird Company
Illustration 7-9
Bank Reconciliation
April 30, 2004
Cash balance per bank statement
Add: Deposits in transit
Less: Outstanding checks
No. 453
No. 457
No. 460
Adjusted cash balance per bank
Cash balance per books
Add: Collection of N/R for $ 1,000 plus interest
earned $50, less collection fee $ 15
Error on recording check No. 443
Less: NSF check
Bank service charge
Adjusted cash balance per bank
15,907.45
2,201.40
18,108.85
3,000.00
1,401.30
1,502.70
5,904.00
12,204.85
11,589.45
1,035.00
36.00
425.60
30.00
1,071.00
12,660.45
455.60
12,204.85
JOURNAL
Apr 30 Cash
1,035.00
Miscellaneous Expense
15.00
Notes Receivable
1,000.00
Interest Revenue
50.00
Apr 30 Cash
36.00
Accounts Payable
36.00
Apr 30 Accounts Receivable-Baron
425.60
Cash
425.60
Apr 30 Miscellaneous Expense
30.00
Cash
30.00
Reporting Cash
Cash is recorded in both the balance
sheet and the statement of cash
flows.
The balance sheet shows the amount
of cash available at a given point
in time.
The statement of cash
flows shows the sources
and
uses of cash during a
period of time.
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Cash Equivalents
Readily convertible to known amount
of cash
So near maturity that their market
value is relatively insensitive to
changes in interest rates
Examples:
Treasury bills
Commercial paper
Money market funds
32
Restricted Cash...
Is cash that is
not available for
general use.
Is set aside for
special purpose.
If not to be used
within next year,
report as
noncurrent asset.
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Operating Cycle of a
Merchandising Company…is
the average time it takes to
go from cash to cash in
producing revenues.
Principles of Cash Management
Increase the speed of collection on
receivables.
Keep inventory levels low.
Delay payment of liabilities.
Plan the timing of major expenditures.
Invest idle cash.
35
Five Principles of Cash
Management
Reporting Cash
Cash on hand, cash in banks, and
petty cash are often combined and
reported as cash.
Cash is the most liquid asset and listed
first in the current asset section of the
balance sheet.
37
Cash Budget
Cash is vital.
Planning the company's
cash needs is a key business
activity.
Cash budget shows the
anticipated cash flows, over
a 1 to 22-year period.
38
Cash Budget
The cash budget contains :
Cash receipts section;
Cash disbursements section;
Financing section.
39
Cash Receipts Section
includes expected receipts from
the company's principal source(s)
of revenue, such as cash sales and
collections from customers on
credit sales
also shows anticipated receipts of
interest and dividends, and
proceeds from planned sales of
investments, plant assets, and the
company's capital stock
40
Cash Disbursements Section
shows expected payments for
direct materials, direct labor,
manufacturing overhead, and
selling and administrative
expenses
includes projected payments
for income taxes, dividends,
investments, and plant assets
41
Financing Section shows...
expected borrowings
the repayment of the
borrowings and interest
42
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