1. 1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN 7 Sarbanes-Oxley, Internal Control, & Cash

2. 2 SARBANES-OXLEY ACT 2002 Congress’ attempt to restore public confidence Requires public companies to improve internal controls that safeguard assets LG 1

3. 3 INTERNAL CONTROL OBJECTIVES LG 2

4. 4 5 ELEMENTS OF INTERNAL CONTROL Control environment Risk assessment Control procedures Information & Communication Monitoring LG 2

5. 5 EXHIBIT 2

6. 6 Control environment is management, employee attitudes about importance of internal control LG 2 CONTROL ENVIRONMENT Continued

7. 7 Respect Competency Honesty Respect Competency Honesty LG 2 CONTROL ENVIRONMENT

8. 8 Risk assessment identifies risks so management can take steps to control them. LG 2 RISK ASSESSMENT

9. 9 Control Procedures Competent personnel Separating responsibilities Separating operations Security measures LG 2 CONTROL PROCEDURES

10. 10 LG 2 EXHIBIT 4 Information & Communications

11. 11 Monitoring LG 2 MONITORINGMONITORING To locate weaknesses & improve control effectiveness

12. 12 BANK ACCOUNTS Bank accounts control accounts by Safeguarding cash Providing double recording of cash transactions Providing comparison with business records Bank accounts control accounts by Safeguarding cash Providing double recording of cash transactions Providing comparison with business records LG 4

13. 13 BANK RECONCILIATION Bank Statement Company Cash Records LG 5

14. 14 EXHIBIT 6 LG 5 Beginning Balance$XXX AdditionsXX DeductionsX Ending BalanceXXX Bank StatementPower Networking Records Beginning Balance$XXX DepositsXX ChecksX Ending BalanceXXX

15. 15 LEARNING GOALS 5 Describe, illustrate use of bank reconciliation in controlling cash.

16. 16 RECONCILIATION PROCESS 1.Add deposits not recorded to bank balance 2.Deduct checks not paid from bank balance 3.Add credit memos not recorded to company balance 4.Deduct debit memos not recorded from company balance 5.Correct all errors LG 5

17. 17 PETTY CASH For small payments in office Funded from bank account LG 6

18. 18 ENTRY TO INCREASE PETTY CASH To create petty cash Has no effect on cash flows Has no net effect on balance sheet Has no effect on income statement LG 6 8/1 Petty Cash Cash 500 SCFBSIS

19. 19 ENTRY TO REPLENISH PETTY CASH To replenish petty cash, recognize expenses Increases cash flow operations Net increase assets, increases equity on balance sheet Increases revenue on income statement LG 6 8/31 Office Supplies Store supplies Misc. Exp. Cash 402 35 30 467 SCFBSIS E

20. 20 CASH EQUIVALENTS Includes Money market mutual funds Commercial paper Certificates of deposit Government & municipal securities Corporate notes, bonds LG 7

21. 21 CASH FLOW TO NET INCOME RATIO Compares cash flow to reported profit under accrual method (GAAP) Trends analyzed Net cash flow, Operations/ Net Income Compares cash flow to reported profit under accrual method (GAAP) Trends analyzed Net cash flow, Operations/ Net Income LG 8

22. 22 WALT DISNEY: TRENDS 20042003 Net CF-Operations$4,370$2,901 Net Income$2,345$1,267 Cash flow ratio 1.862.29 What does the cash flow ratio suggest? LG 8

23. 23 ANALYSIS Trend for cash flow to net income ratio is negative Without good cash cushion & business model, this trend would suggest a problem with operations Trend for cash flow to net income ratio is negative Without good cash cushion & business model, this trend would suggest a problem with operations LG 8

24. 24 CASH TO MONTHLY CASH EXPENSES Used to assess how long a business in financial distress can continue Cash + cash equivalents Monthly cash expenses Used to assess how long a business in financial distress can continue Cash + cash equivalents Monthly cash expenses

25. 25 GATEWAY ANALYSIS Negative cash flow from operations Cash + cash equivalents $ 383.0 Ratio = /383.0 = 10.6 Gateway will run out of cash in less than 11 months Ratio = /383.0 = 10.6 Gateway will run out of cash in less than 11 months

26. 26 Visits always give pleasure—if not the arrival, the departure. Never hold a dust buster and a cat at the same time. K, age 9