1. 1 PowerPointPresentation PowerPoint Presentation © 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 LEARNING GOALS When you finish this chapter, you should be able to

3. 3 1.Describe Sarbanes-Oxley Act, 2002, its impact on internal control, reporting. 2.Describe, illustrate objectives, elements of internal control. 3.Describe, illustrate application of internal controls to cash. LEARNING GOALS Continued

4. 4 LEARNING GOALS 4. Describe nature of bank account, its use in controlling cash. 5.Describe, illustrate use of bank reconciliation in controlling cash. 6.Describe accounting for special-purpose cash funds. Continued

5. 5 LEARNING GOALS 7.Describe, illustrate reporting cash, cash equivalents in financial statements. 8.Interpret cash flow to net income ratio, cash to monthly cash expense ratio.

6. 6 WALT DISNEY COMPANY Walt Disney Company  Has extensive cash collection, control activities to protect against fraud, errors  Cash collected, counted, deposited from all activities  Collections in form of cash, credit cards, checks, electronic funds

7. 7 LEARNING GOALS 1 Describe Sarbanes- Oxley Act, 2002, its impact on internal control, reporting.

8. 8 BEFORE SARBANES- OXLEY ACT

9. 9 SARBANES-OXLEY ACT 2002 Congress’ attempt to restore public confidence Requires public companies to improve internal controls that safeguard assets LG 1

10. 10 LEARNING GOALS 2 Describe, illustrate objectives, elements of internal control.

11. 11 INTERNAL CONTROL OBJECTIVES LG 2

12. 12 How does management achieve its internal control objectives? LG 2 INTERNAL CONTROL?

13. 13 5 ELEMENTS OF INTERNAL CONTROL Control environment Risk assessment Control procedures Information & communication Monitoring LG 2

14. 14 LG 2 EXHIBIT 2

15. 15 Control environment includes management and employee attitudes about the importance of internal control LG 2 CONTROL ENVIRONMENT Continued

16. 16 Respect Competency Honesty Respect Competency Honesty LG 2 CONTROL ENVIRONMENT

17. 17 Risk assessment identifies risks so management can take steps to control them. LG 2 RISK ASSESSMENT

18. 18 Control Procedures Competent personnel Separating responsibilities Separating operations Security measures LG 2 CONTROL PROCEDURES

19. 19 LG 2 EXHIBIT 4 Information & Communications

20. 20 Monitoring LG 2 MONITORINGMONITORING To locate weaknesses & improve control effectiveness

21. 21 LEARNING GOALS 3 Describe, illustrate application of internal controls to cash.

22. 22 CONTROL: CASH RECEIPTS To protect cash from theft when –Customers buy products, services –Customers pay on account LG 3

23. 23 Cash deposits Cash Records LG 3 CASH RECEIPTS

24. 24 LG 3 RECORDING PROCESS Continued

25. 25 LG 3 CASH DEPOSITS

26. 26 CASH PAYMENTS Payment made through Voucher system EFT LG 3

27. 27 LEARNING GOALS 4 Describe nature of bank account, its use in controlling cash.

28. 28 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

29. 29 BANK RECONCILIATION Bank Statement Company Cash Records LG 5

30. 30 EXHIBIT 6 LG 5 Beginning Balance$XXX AdditionsXX DeductionsX Ending BalanceXXX Bank StatementPower Networking Records Beginning Balance$XXX DepositsXX ChecksX Ending BalanceXXX

31. 31 LEARNING GOALS 5 Describe, illustrate use of bank reconciliation in controlling cash.

32. 32 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

33. 33 EXERCISE 7-16a Which of the following adds to the bank balance? 1.$300 check recorded by company as $3,000 2.NSF check $775 returned 3.Bank service charge $35 4.Bank incorrectly charged a $129 check as $219 5.Outstanding checks, $6,137.68 6.Deposit in transit, $7500 7.Note collected by bank, $12,000 Click the button to skip this exercise

34. 34 EXERCISE 7-16b Which of the following deducts from the bank balance? 1.$300 check recorded by company as $3,000 2.NSF check $775 returned 3.Bank service charge $35 4.Bank incorrectly charged a $129 check as $219 5.Outstanding checks, $6,137.68 6.Deposit in transit, $7500 7.Note collected by bank, $12,000 Click the button to skip this exercise

35. 35 EXERCISE 7-16c Which of the following adds to the company balance? 1.$300 check recorded by company as $3,000 2.NSF check $775 returned 3.Bank service charge $35 4.Bank incorrectly charged a $129 check as $219 5.Outstanding checks, $6,137.68 6.Deposit in transit, $7500 7.Note collected by bank, $12,000 Click the button to skip this exercise

36. 36 EXERCISE 7-16d Which of the following deducts from the company balance? 1.$300 check recorded by company as $3,000 2.NSF check $775 returned 3.Bank service charge $35 4.Bank incorrectly charged a $129 check as $219 5.Outstanding checks, $6,137.68 6.Deposit in transit, $7500 7.Note collected by bank, $12,000 Click the button to skip this exercise

37. 37 EXHIBIT 7 (partial) LG 5 Beginning Balance$2,549.99 + Note & interest(1) 408.00 $2957.99 - Returned check$300.00 - Service Charge18.00 - Recording error9.00(2) 327.00 Adjusted Balance$2,630.99 Adjustments to Power Networking Records

38. 38 CASH ADJUSTMENTS 1 Increases cash flow operations Net increase assets, increases equity on balance sheet Increases revenue on income statement Continued LG 5 7/31 Cash Notes Receivable Interest Income 408 400 8 Adjusted cash for items added by bank SCFBSIS R

39. 39 CASH ADJUSTMENTS 2 Decreases cash flow operations Net decrease assets, decreases liabilities, equity on balance sheet Increases expenses on income statement LG 5 7/31 Acct Receivable Misc Expense Acct Payable Cash 300 18 9 327 Adjusted cash for items deducted by bank SCFBSIS E

40. 40 LEARNING GOALS 6 Describe accounting for special-purpose cash funds.

41. 41 PETTY CASH For small payments in office Funded from bank account LG 6

42. 42 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

43. 43 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

44. 44 LEARNING GOALS 7 Describe, illustrate reporting cash, cash equivalents in financial statements.

45. 45 CASH EQUIVALENTS Includes Money market mutual funds Commercial paper Certificates of deposit Government & municipal securities Corporate notes, bonds LG 7

46. 46 LEARNING GOALS 8 Interpret cash flow to net income ratio, cash to monthly cash expense ratio.

47. 47 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

48. 48 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

49. 49 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

50. 50 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 Monthly Cash Expenses = Negative Cash Flow from Operations / 12 months

51. 51 GATEWAY ANALYSIS Negative cash flow from operations Cash + cash equivalents $ 383.0 Ratio = 383.0/[ /12] = 10.6 Gateway will run out of cash in less than 11 months Ratio = 383.0/[ /12] = 10.6 Gateway will run out of cash in less than 11 months

52. 52 THE END CHAPTER 7