Financial Accounting: Tools for Business Decision Making, 4th Edition
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1 Financial Accounting: Tools for Business Decision Making, 4th Edition Kimmel, Weygandt, KiesoCHAPTER 7Prepared byEllen L. SweattGeorgia Perimeter CollegeandBarbara MullerArizona State University West
2 INTERNAL CONTROL AND CASH Chapter 7INTERNAL CONTROL AND CASH
3 INTERNAL CONTROL AND CASH CHAPTER 7INTERNAL CONTROL AND CASHAfter studying this chapter, you should be able to:Identify the principles of internal control.Explain the applications of internal control to cash receipts.Explain the applications 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.
4 PRINCIPLES OF INTERNAL CONTROL 111PRINCIPLES OF INTERNAL CONTROLInternal controlSafeguards an organization’s assets fromEmployee theft, robbery, unauthorized useEnhances the accuracy and reliability of accounting recordsRisk of errors and irregularities
6 PRINCIPLES OF INTERNAL CONTROL Establishment of responsibility:most effective when only one person is responsible for a given taskSegregation of duties:the work of one employee should provide a reliable basis for evaluating the work of another employee
7 PRINCIPLES OF INTERNAL CONTROL Documentation procedures:documents provide evidence that transactions and events have occurred
10 Independent Internal Verification Bonding of employees who handle cashRotating employee’s duties and requiring employees to take vacations
11 Limitations of Internal Controls Cost/Benefit - cost of establishing procedure should not exceed expected benefitHuman element - fatigue, carelessness, indifferenceCollusion - two or more individuals who work together to get around controlsSize of business
12 Review Segregation of duties means? Rotating employee duties and requiring vacations.Reviewing, comparing and reconciling information from two sources.The responsibility for related activities should be assigned to different individuals.Physical separation of employees from each other.
13 Review Segregation of duties means? Rotating employee duties and requiring vacations.Reviewing, comparing and reconciling information from two sources.The responsibility for related activities should be assigned to different individuals.Physical separation of employees from each other.
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 112INTERNAL CONTROL OVER CASH RECEIPTS
17 ReviewWhich of the following is not an internal control over cash receipts?Store cash in safes and bank vaults.Supervisors count cash receipts dailyBond personnel who handle cash.Having the same person who receives the cash to be the one that records it.
18 ReviewWhich of the following is not an internal control over cash receipts?Store cash in safes and bank vaults.Supervisors count cash receipts dailyBond personnel who handle cash.Having the same person who receives the cash to be the one that records it.
19 INTERNAL CONTROL OVER CASH DISBURSEMENTS 113INTERNAL CONTROL OVER CASH DISBURSEMENTS
20 Petty Cash Fundis a cash fund used to pay relatively small amounts
21 Cash Disbursements ELECTRONIC FUNDS TRANSFER SYSTEM Check processing is expensivenew methods are being developed to transfer funds among parties without the use of paperElectronic Funds Transfer (EFT) Systema disbursement system that uses wire, telephone, telegraph, or computer to transfer cash from one location to another
22 ReviewWhich of the following is not an internal control over cash disbursements?Stamp invoices paid.Use prenumbered checks and account for the sequence.Use cash registers.Have multiple people available to sign checks so they can be mailed promptly.
23 ReviewWhich of the following is not an internal control over cash disbursements?Stamp invoices paid.Use prenumbered checks and account for the sequence.Use cash registers.Have multiple people available to sign checks so they can be mailed promptly.
24 USE OF A BANK The use of a bank minimizes the amount of currency that must be kept on handcontributes significantly to good internal control over cash.A “double” record of cash is maintained, one by the company, one by the bank These two accounts must be reconciled.
25 a copy of the bank’s records sent to the customer for periodic review. Bank Statement -a copy of the bank’s records sent to the customer for periodic review.Bank Statement showscheck & other debitsdeposits & other creditsdaily cash balance
26 RECONCILING THE BANK ACCOUNT 114RECONCILING THE BANK ACCOUNTReconciliationis necessary as the balance per bank and balance per books are seldom in agreement due to time lags and errorsA bank reconciliationshould be prepared by an employee who has no other responsibilities pertaining to cash
27 RECONCILING THE BANK ACCOUNT Steps in preparing a bank reconciliation:Determine deposits in transitDetermine outstanding checksNote any errors discoveredTrace bank memoranda to the recordsEach reconciling item used in determining the “Adjusted cash balance per books” should be recorded by the depositor with an adjusting entry
29 PowerPoint SlidesTermsDeposits 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 balance29
31 ENTRIES FROM BANK RECONCILIATION 103515100050Collection of Note Receivable This entry involves four accounts. Interest of $50 has not been accrued and the collection fee is charged to Miscellaneous Expense.
32 ENTRIES FROM BANK RECONCILIATION 36Book Error An examination of the cash disbursements journal shows that check No. 443 was a payment on account to Andrea Company, a supplier. The check, with a correct amount of $1,226.00, was recorded at $1,
33 ENTRIES FROM BANK RECONCILIATION 425.60NSF Check An NSF check becomes an accounts receivable to the depositor.
34 ENTRIES FROM BANK RECONCILIATION 30Bank Service Charges Check printing charges (DM) and other bank service charges (SC) are debited to Miscellaneous Expense because they are usually nominal in amount.
35 115REPORTING CASHCashRecorded in both the balance sheet and the statement of cash flowsThe balance sheet shows the amount of cash available at a given point in timeThe statement of cash flows shows the sources and uses of cash during a period of time.
36 REPORTING CASH Cash Equivalents Cash equivalents areReadily convertible to known amounts of cashSo near maturity that their value is relatively insensitive to interest rate changesExamples include treasury bills, commercial paper, and money market funds
37 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.
38 MANAGING AND MONITORING CASH The objective of managing cash is toEnsure that the company has sufficient cash to meet payments, yetMinimize the amount of idle cash on handThe operating cycle of a merchandising company is the average time it takes to go from cash to cash in producing revenues
41 Cash Budget Cash is vital. PowerPoint Slides117Cash BudgetCash is vital.Planning the company's cash needs is a key business activity.Cash budget shows the anticipated cash flows, over a 1 to 2-year period.42
42 CASH BUDGETINGCash receipts section includes expected receipts from the company’s principal sources of revenueCash disbursements section includes expected payments for direct materials, direct labor, etc.Financing section shows expected borrowings and their repayment