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Accounting for Cash & Internal Controls
Chapter 6
+ Cash, Cash Equivalents, and Liquidity
Cash Currency, coins and amounts on deposit in bank
accounts, checking accounts, and many savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders.
Cash Currency, coins and amounts on deposit in bank
accounts, checking accounts, and many savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders.
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.
C 2
6-2
+Cash, Cash Equivalents, and Liquidity
Liquidity How easily an asset can be converted into
cash to be used to pay for services or obligations.
Liquidity How easily an asset can be converted into
cash to be used to pay for services or obligations.
InventoryInventory CashCash
C 2
6-3
+Cash Management
PrinciplesWhen companies fail, one of the most common
causes is their inability to manage cash. The goals of cash management are:
Plan cash receipts to meet cash payments when due.
Keep the minimum level of cash necessary to operate.
C2
6-4
Collect Quick. Pay Slow!
+Banking Activities as Controls
Bank AccountsBank Accounts Signature CardsSignature Cards Deposit TicketsDeposit Tickets
ChecksChecksElectronic
Funds Transfer
Electronic Funds
Transfer
Bank Statements
Bank Statements
C 3
6-5
+Bank 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.
Why are thebalances different?
Why are thebalances different?*
P3
6-6
+ Reconciling Items
Bank Statement Balance
Add: Deposits in transit.Deduct:
Outstanding ChecksAdd or Deduct:
Bank errors.
Bank Statement Balance
Add: Deposits in transit.Deduct:
Outstanding ChecksAdd or Deduct:
Bank errors.
Book Balance
•Add: Collections made by the bank.
•Add: Interest earned on checking account.
•Deduct: Nonsufficient funds check (NSF).
•Deduct: Bank service charge.
•Add or Deduct: Book errors.
Book Balance
•Add: Collections made by the bank.
•Add: Interest earned on checking account.
•Deduct: Nonsufficient funds check (NSF).
•Deduct: Bank service charge.
•Add or Deduct: Book errors.
P3
6-7
+Go over Ex 6-9
+Go over Ex 6-10
+Bank 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.
P3
6-10
+ Bank 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.
P3
6-11
+ Bank Reconciliation Example
1. Outstanding checks totaled $2,417.
2. A $500 check mailed to the bank for deposit had not reached the bank at the statement date.
3. The bank returned a customer’s NSF check for $225 received as payment on account receivable.
4. The bank statement showed $30 interest earned during July.
5. Check No. 781 for supplies expense cleared the bank for $268 but was erroneously recorded in our books as $240.
6. A $486 deposit by Acme Company was erroneously credited to our account by the bank.
P3
6-12
+ Bank Reconciliation ExampleP3
6-13
Only these adjustments
require journal entries
+ 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.
P3
6-14
+ 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.
P3
6-15
+ Purpose of Internal Control
Policies and procedures managers use Policies and procedures managers use to: to:
• Protect assets.Protect assets.• Ensure reliable accounting.Ensure reliable accounting.• Promote efficient operations.Promote efficient operations.• Urge adherence to company Urge adherence to company
policies. policies.
Policies and procedures managers use Policies and procedures managers use to: to:
• Protect assets.Protect assets.• Ensure reliable accounting.Ensure reliable accounting.• Promote efficient operations.Promote efficient operations.• Urge adherence to company Urge adherence to company
policies. policies.
C 1
6-16
+ Principles 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 responsibilities from custodySeparate recordkeeping responsibilities from custodyresponsibilities.responsibilities.
• Divide responsibility for related transactions.Divide responsibility for related transactions.
• Apply technological controls.Apply technological controls.
• Perform regular and independent reviews.Perform regular and independent 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 responsibilities from custodySeparate recordkeeping responsibilities from custodyresponsibilities.responsibilities.
• Divide responsibility for related transactions.Divide responsibility for related transactions.
• Apply technological controls.Apply technological controls.
• Perform regular and independent reviews.Perform regular and independent reviews.
C1
6-17
+ Limitations of Internal Control
The costs of internal controls must not exceed their benefits.The costs of internal controls must not exceed their benefits.
CostsBenefits
C 1
6-18
+ Limitations of Internal Control
Human Error
NegligenceFatigue
MisjudgmentConfusion
Human Fraud
Intent todefeat internal
controls forpersonal gain
C 1
6-19
+ Voucher System of Control
A voucher system establishes procedures for:Verifying, approving and recording
obligations for eventual cash disbursements.
Issuing checks for payment of verified, approved and recorded obligations.
A voucher system establishes procedures for:Verifying, approving and recording
obligations for eventual cash disbursements.
Issuing checks for payment of verified, approved and recorded obligations.
P4
6-20
+ Voucher 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
P4
SenderSender ReceiverReceiver
6-21
+ Technology and Internal Control
ReduceProcessing
Errors
ReduceProcessing
Errors
MoreExtensive Testing
of Records
MoreExtensive Testing
of Records
LimitedEvidence ofProcessing
LimitedEvidence ofProcessing
CrucialSeparation of
Duties
CrucialSeparation of
Duties
C 1
Increased e-commerce
Increased e-commerce
6-22
+
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:
Control of Cash
Handling cash is separate from
recordkeeping of cash.
Handling cash is separate 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.
C1
6-23
+Control 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.
P1
6-24
+Control of Cash Disbursements
• All expenditures should be made by check. The only exception is for small payments from petty cash.
• Separate authorization for check signing and recordkeeping duties.
• Use a voucher system.
• All expenditures should be made by check. The only exception is for small payments from petty cash.
• Separate authorization for check signing and recordkeeping duties.
• Use a voucher system.
P1
6-25
+Petty Cash System of ControlP2
6-26
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.
+Setting up a Petty Cash Fund
Petty Cash (asset) $400
Cash (asset) $400
We write a check from our bank account. Cash it at the bank to get $400 in small bills and place it into our metal box which is then locked in a desk drawer.
+
$20 Postage Receipt &Office Mgr Signs a Voucher
Office Manager Office Manager Purchases $20 of Purchases $20 of
postagepostage
To reimburseEmployee
Operating a Petty Cash Fund
Petty Petty CashierCashier
P2
6-28
The Cashier continues to reimburse minor expenditures to employees with cash from the Petty Cash box until there is
little cash remaining in the box.
+ Petty 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 $79.30Customer Business Lunches 93.42Express Mail Postage 55.00Miscellaneous 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 $79.30Customer Business Lunches 93.42Express Mail Postage 55.00Miscellaneous Office Supplies 32.48
Let’s look at replenishing the fund if the balance on July 31 was $137.80.
P2
6-29
+Petty Cash Example
What amount of cash will be required to replenish the petty cash fund back to $400?a. $260.20b. $262.20c. $139.80d. $137.80
What amount of cash will be required to replenish the petty cash fund back to $400?a. $260.20b. $262.20c. $139.80d. $137.80
P2
6-30
+
What amount of cash will be required to replenish the petty cash fund back to $400?a. $260.20b. $262.20c. $139.80d. $137.80
What amount of cash will be required to replenish the petty cash fund back to $400?a. $260.20b. $262.20c. $139.80d. $137.80
Petty Cash Example
Let’s prepare the journal entry to replenish the petty cash fund.
P2
6-31
+Petty Cash Example
Journal entry to replenish petty cash fund
P2
6-32
+Go over Ex 6-5
+ Days’ Sales Uncollected
Days’Sales
Uncollected
Accounts Receivable Net Sales
× 365=
Measures a company’s ability to manage its cash And receivables. How much time is likely to pass before we receive cash receipts from credit sales?
Measures a company’s ability to manage its cash And receivables. How much time is likely to pass before we receive cash receipts from credit sales?
A1
6-34
