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Chapter 6Cash and Internal Control
Copyright © 2009 South-Western, a part of Cengage Learning.
Using Financial Accounting Information:The Alternative to Debits and Credits , 6/e
byGary A. Porter and Curtis L. Norton
Cash
Coin 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 flows 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.
Example of Reconciliation
Balance per statement, June 30 $3,308.59Add: Deposit in transit
642.30
Bank Statement Adjustments: Deposits
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.
Example of Reconciliation
Bank Statement Adjustments: Checks Outstanding
Balance per statement, June 30 $3,308.59Add: Deposit in transit 642.30Deduct: Outstanding checks:
No. 496 $ 79.89No. 501 213.20No. 502 424.75
(717.84) Adjusted balance, June 30 $3,233.05
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.
Example of Reconciliation Cash Account Adjustments: Credit Memoranda
Balance per books, June 30 $2,895.82
Add: 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
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 Reconciliation Cash Account Adjustments: Debit Memoranda
Balance per books, June 30 $2,895.82
Add: 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 $$$:
Adjusted balance $$$
Adjusted balances for book and bank
must agree
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 Adjusting Entries
Bank Reconciliation
Balance per bank $$$:
Adjusted balance $$$
Balance per books $$$:
Adjusted balance $$$
Book adjustments are the basis
for adjusting
entries
Bank Reconciliation Adjusting Entries
A number of adjustments to its records are needed to change the book balance of the cash account
To record bank reconciliation adjustments.
Petty Cash
A check is writtenJournalize
establishment offund
Disbursementwith proper
documentation
Fund replenished
Petty Cash Transactions Steps in setting up and maintaining a petty cash fund: Write and cash a check for lump sum amount and entrust money to petty cash custodian Make journal entry to record establishment of the fund Make disbursement from fund with proper documentation Periodically replenish fund by writing and cashing check in the amount necessary to bring fund back to original balance Record the replenishment and recognize the expenses
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
Sarbanes-Oxley Act of 2002 (SOX)
Section 404 requires:
Management to state its responsibility to establish and maintain an adequate internal control structure and procedures for financial reporting.
Assess the effectiveness of its internal control structure and procedures for financial reporting.
Internal Control
Control Environment
AccountingSystem
InternalControl
Procedures
The Control Environment
Management’s competence and operating style
Personnel 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 andAppraisal
LO4
Proper Authorizations
Authority and responsibility go hand in hand
Segregation of Duties
Separate 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 Control
No 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 Receipts
Cash received over the counter (e.g., cash sales)
Cash received in the mail (e.g., credit sales)
Controls of Cash Received over the Counter
Cash registers Locked-in cash register tape Prenumbered customer receipts
Investigate recurring discrepancies
Controls over Cash Received in the Mail
Two employees open mail Prelist prepared Monthly customer statements
Document Flow for Merchandise
CheckPrepared
PurchaseRequisition
Receiving Report
Purchase Order
Invoice Approval
Purchase Invoice
End of Chapter 6