© the mcgraw-hill companies, inc., 2005 mcgraw-hill/irwin chapter 6 reporting and analyzing cash...
TRANSCRIPT
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
Chapter 6Chapter 6
Reporting and Analyzing Cash and Internal Controls
6-1
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-2
Purpose of Internal ControlPurpose of Internal Control
Policies and procedures Policies and procedures managers use to . .managers use to . . . .
Protect assets.Protect assets. Ensure reliable Ensure reliable
accounting. accounting. Promote efficient Promote efficient
operations. operations. Urge adherence to Urge adherence to
company policies. company policies.
Policies and procedures Policies and procedures managers use to . .managers use to . . . .
Protect assets.Protect assets. Ensure reliable Ensure reliable
accounting. accounting. Promote efficient Promote efficient
operations. operations. Urge adherence to Urge adherence to
company policies. company policies.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-3
Principles of Internal ControlPrinciples of Internal Control
Establish responsibilities.Establish responsibilities.
Maintain adequate records.Maintain adequate records.
Insure assets and bond key employees.Insure assets and bond key employees.
Separate recordkeeping from custodySeparate recordkeeping from custodyof assets.of assets.
Divide responsibility for related Divide responsibility for related transactions.transactions.
Apply technological controls.Apply technological controls.
Perform regular and independent Perform regular and independent reviews.reviews.
Establish responsibilities.Establish responsibilities.
Maintain adequate records.Maintain adequate records.
Insure assets and bond key employees.Insure assets and bond key employees.
Separate recordkeeping from custodySeparate recordkeeping from custodyof assets.of assets.
Divide responsibility for related Divide responsibility for related transactions.transactions.
Apply technological controls.Apply technological controls.
Perform regular and independent Perform regular and independent reviews.reviews.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-4
Technology and Internal ControlTechnology and Internal Control
ReducedProcessing
Errors
ReducedProcessing
Errors
MoreExtensive Testing
of Records
MoreExtensive Testing
of Records
LimitedEvidence ofProcessing
LimitedEvidence ofProcessing
CrucialSeparation of
Duties
CrucialSeparation of
Duties
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-5
Limitations of Internal ControlLimitations of Internal Control
Human Error
NegligenceFatigue
MisjudgmentConfusion
Human Fraud
Intent todefeat internal
controls forpersonal gain
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-6
Limitations of Internal ControlLimitations of Internal Control
The costs of internal controls must not exceed their benefits.The costs of internal controls must not exceed their benefits.
CostsBenefits
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-7
Control of CashControl of Cash
An effective system of internal control that protects cash and cash equivalents should meet
three basic guidelines:
An effective system of internal control that protects cash and cash equivalents should meet
three basic guidelines:
Handling cash is separated from
recordkeeping of cash.
Handling cash is separated from
recordkeeping of cash.
Cash receipts are promptly deposited
in a bank.
Cash receipts are promptly deposited
in a bank.
Cash disbursements are made by check.Cash disbursements are made by check.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-8
Cash, Cash Equivalents, and LiquidityCash, Cash Equivalents, and Liquidity
Cash
Currency, coins and amounts on deposit in bank accounts, checking accounts, and some
savings accounts.
Cash
Currency, coins and amounts on deposit in bank accounts, checking accounts, and some
savings accounts.
Cash Equivalents
Short-term, highly liquid investments that are:Readily convertible to a known cash amount.Close to maturity date and not sensitive to
interest rate changes.
Cash Equivalents
Short-term, highly liquid investments that are:Readily convertible to a known cash amount.Close to maturity date and not sensitive to
interest rate changes.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-9
Cash, Cash Equivalents, and LiquidityCash, Cash Equivalents, and Liquidity
Liquidity
How easily an asset can be converted into another asset or be used in paying for services
or obligations.
Liquidity
How easily an asset can be converted into another asset or be used in paying for services
or obligations.
InventoryInventory CashCash
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-10
Control of Cash ReceiptsControl of Cash Receipts
Over-the-Counter Cash Receipts
• Cash register with locked-in record of transactions.
• Compare cash register record with cash reported.
Over-the-Counter Cash Receipts
• Cash register with locked-in record of transactions.
• Compare cash register record with cash reported.
Cash Receipts By Mail
• Two people open the mail.Money to cashier’s
office.List to accounting dept.Copy of list filed.
Cash Receipts By Mail
• Two people open the mail.Money to cashier’s
office.List to accounting dept.Copy of list filed.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-11
Control of Cash DisbursementsControl of Cash Disbursements
• All expenditures made by check. The only exception is for small payments from petty cash.
• Separate authorization, check signing and recordkeeping duties.
• Use a voucher system.
• All expenditures made by check. The only exception is for small payments from petty cash.
• Separate authorization, check signing and recordkeeping duties.
• Use a voucher system.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-12
Voucher System of ControlVoucher System of Control
A voucher system establishes procedures for:
Verifying, approving and recording obligations for eventual cash disbursement.
Issuing checks for payment of verified, approved and recorded obligations.
A voucher system establishes procedures for:
Verifying, approving and recording obligations for eventual cash disbursement.
Issuing checks for payment of verified, approved and recorded obligations.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-13
Voucher System of ControlVoucher System of Control
Cashier
Accounting
Receiving
Supplier (Vendor)
Purchasing
Requesting
CashierAccounting, Requesting& Purchasing
Accounting
Supplier (Vendor)
Purchasing andAccounting
Supplier, Requesting, Receiving & Accounting
Check
Invoice Approval
Receiving Report
Invoice
Purchase Order
Purchase Requisition
VoucherVoucher
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-14
Petty Cash System of ControlPetty Cash System of Control
Small payments required in most companies for items such as postage, courier fees, repairs
and supplies.
Small payments required in most companies for items such as postage, courier fees, repairs
and supplies.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-15
Petty Cash
Operating a Petty Cash FundOperating a Petty Cash Fund
CompanyCompanyCashierCashier
Petty Petty CashierCashier
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-16
Petty Cash
Operating a Petty Cash FundOperating a Petty Cash Fund
CompanyCompanyCashierCashier
Petty Petty CashierCashier
May 1 Petty cash 400 Cash 400
AccountantAccountant
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-17
Petty Cash
Operating a Petty Cash FundOperating a Petty Cash Fund
Petty Petty CashierCashier
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-18
37¢
Stamps$45
Courier$80
Operating a Petty Cash FundOperating a Petty Cash Fund
Petty Petty CashierCashier
A petty cash fund is used only for
business expenses.
A petty cash fund is used only for
business expenses.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-19
Operating a Petty Cash FundOperating a Petty Cash Fund
Receipts
Petty cash receipts with
either no signature or a
forged signature usually indicate misuse of petty
cash.
Petty cash receipts with
either no signature or a
forged signature usually indicate misuse of petty
cash.
Petty Petty CashierCashier
37¢
Stamps$45
Courier$80
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-20
Receipts
Company Company CashierCashier
$125To reimburse
petty cash fund
Use a CashOver and Short
account if needed.
Use a CashOver and Short
account if needed.
Operating a Petty Cash FundOperating a Petty Cash Fund
Petty Petty CashierCashier
May 31 Postage expense 45 Delivery expense 80
Cash 125
AccountantAccountant
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-21
Petty Cash ExamplePetty Cash Example
Tension Co. maintains a petty cash fund of $400. The following summary information was taken
from petty cash vouchers for July:
Travel Expenses $79.30
Customer Business Lunches 93.42
Express Mail Postage 55.00
Miscellaneous Office Supplies 32.48
Let’s look at replenishing the fund if the balance on July 31 was $137.80.
Tension Co. maintains a petty cash fund of $400. The following summary information was taken
from petty cash vouchers for July:
Travel Expenses $79.30
Customer Business Lunches 93.42
Express Mail Postage 55.00
Miscellaneous Office Supplies 32.48
Let’s look at replenishing the fund if the balance on July 31 was $137.80.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-22
Petty Cash ExamplePetty Cash Example
What amount of cash will be required to replenish the petty cash fund?
a. $260.20
b. $262.20
c. $139.80
d. $137.80
What amount of cash will be required to replenish the petty cash fund?
a. $260.20
b. $262.20
c. $139.80
d. $137.80
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-23
Petty Cash ExamplePetty Cash Example
What amount of cash will be required to replenish the petty cash fund?
a. $260.20
b. $262.20
c. $139.80
d. $137.80
What amount of cash will be required to replenish the petty cash fund?
a. $260.20
b. $262.20
c. $139.80
d. $137.80
Let’s prepare the journal entry to replenish the petty cash fund.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-24
Petty Cash ExamplePetty Cash Example
Travel Expense 79.30
Entertainment Expense 93.42
Postage Expense 55.00
Office Supplies Expense 32.48
Cash Over and Short 2.00
Cash 262.20
July 31
Here is the journal entry to replenish the petty cash fund.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-25
Banking Activities as ControlsBanking Activities as Controls
Bank AccountsBank Accounts Signature CardsSignature Cards Deposit TicketsDeposit Tickets
ChecksChecksElectronic
Funds Transfer
Electronic Funds
Transfer
Bank Statements
Bank Statements
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-26
Bank ReconciliationBank Reconciliation
A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank
statement and the cash balance on company’s books.
A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank
statement and the cash balance on company’s books.
First National BankNashville, TN 37459 May 31, 2002
Clothes MartNashville, TN
Acct No 278609
Previous Balance Total Checks
Total Deposits
Current Balance
1488.79 1,367.09 2,604.22 2,725.92
5/1 107 55.00
5/2 1,251.88
5/4 108 279.50
5/7 109 44.75
5/9 110 21.81
5/12 111 37.55
5/15 825.04
5/18 112 175.98
5/21 113 288.31
5/27 114 12.54
5/30 527.30
5/31 115 451.65
Bank Statement
Why are thebalances different?
Why are thebalances different?*
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-27
Reconciling ItemsReconciling Items
Bank Statement Balance
Deduct: Outstanding checks.
Add: Deposits in transit.
Add or Deduct: Bank errors.
Bank Statement Balance
Deduct: Outstanding checks.
Add: Deposits in transit.
Add or Deduct: Bank errors.
Book Balance
Deduct: Nonsufficient funds check (NSF).
Deduct: Bank service charge.
Add: Interest earned on checking account.
Add: Collections made by the bank.
Add or Deduct: Book errors.
Book Balance
Deduct: Nonsufficient funds check (NSF).
Deduct: Bank service charge.
Add: Interest earned on checking account.
Add: Collections made by the bank.
Add or Deduct: Book errors.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-28
Bank ReconciliationBank Reconciliation
Two sections: Reconcile bank statement balance to the
adjusted bank balance. Reconcile book balance to the adjusted
book balance.
The adjusted balances should be equal.
Two sections: Reconcile bank statement balance to the
adjusted bank balance. Reconcile book balance to the adjusted
book balance.
The adjusted balances should be equal.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-29
Bank Reconciliation ExampleBank Reconciliation Example
Let’s prepare a July 31 bank reconciliation statement for the Simmons Company.
• The July 31 bank statement indicated a
balance of $9,610. • The cash general ledger account on that
date shows a balance of $7,430.
Additional information necessary for the reconciliation is shown on the next screen.
Let’s prepare a July 31 bank reconciliation statement for the Simmons Company.
• The July 31 bank statement indicated a
balance of $9,610. • The cash general ledger account on that
date shows a balance of $7,430.
Additional information necessary for the reconciliation is shown on the next screen.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-30
Bank Reconciliation ExampleBank Reconciliation Example
Outstanding checks totaled $2,417.
A $500 check mailed to the bank for deposit had not reached the bank at the statement date.
The bank returned a customer’s NSF check for $225 received as payment on account receivable.
The bank statement showed $30 interest earned during July.
Check No. 781 for supplies expense cleared the bank for $268 but was erroneously recorded in our books as $240.
A $486 deposit by Acme Company was erroneously credited to our account by the bank.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-32
July 31 Cash 30 Interest revenue 30
July 31 Supplies expense 28 Accounts receivable 225
Cash 253
Recording Adjusting Entries from a Bank Reconciliation
Recording Adjusting Entries from a Bank Reconciliation
Only amounts shown on the book portion of the reconciliation require an adjusting entry.
Only amounts shown on the book portion of the reconciliation require an adjusting entry.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-33
Recording Adjusting Entries from a Bank Reconciliation
Recording Adjusting Entries from a Bank Reconciliation
After posting the reconciling entries the cash account looks like this . . .
After posting the reconciling entries the cash account looks like this . . .
Adjusted balance on July 31.Adjusted balance on July 31.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-34
Days’ Sales UncollectedDays’ Sales Uncollected
Days’Sales
Uncollected
Accounts Receivable Net Sales
× 365=
How much time is likely to pass beforewe receive cash receipts from credit sales.
How much time is likely to pass beforewe receive cash receipts from credit sales.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
6-35
End of Chapter 6End of Chapter 6