cash and internal control 6 powerpoint author: catherine lumbattis copyright © 2011...
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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