8-1 CHAPTER 8 C ONTROL OF C ASH

8-2 Cash Receipts Cycle

8-3 Internal Control (1) plan of organization (2) all procedures and actions A company’s (1) plan of organization and (2) all procedures and actions it takes to: theft u Protect its assets against theft and waste. My research on fraud u Comply with its policies and federal law. u Evaluate personnel performance and promote efficient operations. u Ensure accurate and reliable operating data and accounting reports. 296

8-4 (1) Example of Plan of Organization Corporate Organization Chart Production Secretary TreasurerVice President Sales President/CEO Board of Directors Stockholders Internal Control

8-5 (1) Example of Plan of Organization (2) Examples of Procedures and Actions Discussed throughout this chapter, but covered in much more depth in auditing course Corporate Organization Chart Production Secretary TreasurerVice President Sales President/CEO Board of Directors Stockholders Internal Control

8-6 Internal Control Protection of Assets l Segregation of employee duties u Asset custody and record keeping separate u E.g., Who prepares bank reconciliation? u “War story” - My one fraud $ l Assignment of specific duties to each employee u E.g., Posting to customers’ accounts.

8-7 Internal Control Protection of Assets l Rotation of employee job assignments u E.g., Required vacation l Use of mechanical devices u E.g., Check protectors and cash registers

8-8 Internal Control Compliance Hire competent employees. Train employees. Provide clear job descriptions. Promote awareness of Foreign Corrupt Practices Act.

8-9 Internal Control Responsibility l Management demonstrates ethical behavior and integrity l Board of Directors provides management with guidance and oversight l Internal auditors evaluate internal control structure

8-10 Internal Control Internal vs. External Auditors l Internal Auditors u Test effectiveness of controls u Evaluate compliance with company policies and procedures u Encourage operating efficiency l External Auditors u Primary responsibility? Giving an opinion on the fairness of the company’s financial statements

8-11 l To ensure accuracy u Hire and train honest, competent employees u Perform periodic evaluations to ensure adherence to proper procedures l What can happen when accounting records are not accurate? u Undetected theft (Mentioned in text) u Bad business decisions (Not mentioned) Internal Control Accuracy of Accounting Records

8-12 “Unfortunately, even though a company implements all of these features in its internal control structure, theft may still occur.” [Bottom p. 298] What is the one thing that a company can never completely guard against? Collusion The key to preventing collusion is what? Hiring honest employees! Internal Control Theft Prevention

8-13 Purchase Requisition Purchase Order Invoice Receiving Report Purchase Requisition Purchase Order Invoice Receiving Report Internal Control Examples of Accounting Records Know purpose of each. See examples on pp

8-14 Internal Control Flow of Documents 301 The accounting department winds up with what three documents? Purchase order Invoice Receiving Report

8-15Cash l A readily available medium of exchange l Many businesses maintain several cash accounts at the bank and in the ledger e.g., checking accounts, savings accounts and petty cash funds

8-16 Cash Examples Cash Checking, savings, and money market accounts Certificates of Deposit Bank Drafts and Money Orders Undeposited Checks Coins and Currency 302

8-17Checks l “A written order to pay a specific sum of money to the payee…” (p.305) A check is a negotiable instrument under the Uniform Commercial Code l Three parties involved in all checks? Payee, drawer and bank l ILL. 8.8 (p. 306) - Remittance advice is common only on which checks? Business Checks Who keeps remittance advice? Payee

8-18 Cash Assumption in This Course P “Some merchandising companies receive all their cash receipts [i.e., checks] on a delayed basis as payments on accounts receivable.” Unless told otherwise, assume companies only make payments by check and only receive payments by check.

8-19 Cash Assumption in This Course P “Some merchandising companies receive all their cash receipts [i.e., checks] on a delayed basis as payments on accounts receivable.” Unless told otherwise, assume companies only make payments by check and only receive payments by check.

8-20 Four Principles for Controlling Cash Receipts Record all cash receipts as soon as received Record all cash receipts as soon as received Deposit all cash receipts intact daily Deposit all cash receipts intact daily Segregate cash receipt and recording functions Segregate cash receipt and recording functions Person receiving cash does not disburse cash Person receiving cash does not disburse cash 303

8-21 Ten Principles for Controlling Cash Disbursements Make all disbursements by check or from petty cash Make all disbursements by check or from petty cash Separate payment authorization and check signing duties. Separate payment authorization and check signing duties. Use pre-numbered checks which are issued serially Use pre-numbered checks which are issued serially

8-22  Receiving report.  Purchase order.  Purchase requisition.  Proper approvals. E. Barry Rice1,000,000 One million & 00/100 Bob Jones Patty Jones Require two signatures and proper supporting documentation for all checks Require two signatures and proper supporting documentation for all checks VOID Ten Principles for Controlling Cash Disbursements

8-23 Bank Statement See example in chapter! l Note how beginning balance, additions, subtractions and ending balance works l Service “charge” of $8 u Does this make sense? u Your account balance on bank’s books is dr. or cr.? 307 l NSF check of $102 u What does “NSF” mean? u How does this work?

8-24 NSF Check Explanation GAP Your BankGAP’s Bank NSF

8-25 Bank Reconciliation Concepts l Definition of “Reconciliation” Webster says a reconciliation is... l Bank reconciliations are prepared periodically to: u Explain the difference between cash reported on bank statement and cash balance on company’s books. u Provide information for adjusting journal entries.

8-26 What are the major causes of reconciliation items? Timing differences Bank Reconciliation Concepts P. 308 (last paragraph) - “Information that the depositor did not know before receiving the bank statement... requires new journal entries on the company’s books... In this chapter [and on tests], we assume no entries have been made for these items unless otherwise stated.” P. 308 (last paragraph) - “Information that the depositor did not know before receiving the bank statement... requires new journal entries on the company’s books... In this chapter [and on tests], we assume no entries have been made for these items unless otherwise stated.”

8-27 l Two sections of reconciliation: u Reconcile bank statement balance to adjusted (correct) balance. book u Reconcile ledger (book) balance to adjusted (correct) balance. l The adjusted balances above must equal. l All reconciling items in book balance section require adjusting journal entries. l Must understand the logic! Bank Reconciliation Concepts

8-28 Bank Reconciliation Balance per Bank + Deposits in Transit - Outstanding Checks ± Bank Errors = Adjusted Balance Balance per Books + Deposits by Bank (credit memos) - Service Charge - NSF Checks ± Book Errors = Adjusted Balance

8-29 Bank Reconciliation All reconciling items in the book section require an adjusting entry to the cash account Balance per Book + Deposits by Bank (credit memos) - Service Charge - NSF Checks ± Book Errors = Adjusted Balance

8-30 Ending bank balance, July 319,610$ Additions: Deposit in transit500 Deductions: Bank error486$ Outstanding checks2,417 2,903 Correct cash balance7,207$ Ending book balance, July 317,430$ Additions: Interest30 Deductions: Recording error28$ NSF check Correct cash balance7,207$ Adjusted balances must be equal. Bank Reconciliation Example as of July 31

8-31 Ending bank balance, July 319,610$ Additions: Deposit in transit500 Deductions: Bank error486$ Outstanding checks2,417 2,903 Correct cash balance7,207$ Ending book balance, July 317,430$ Additions: Interest30 Deductions: Recording error28$ NSF check Correct cash balance7,207$ We are not finished until we make the necessary adjusting entries. Bank Reconciliation Example as of July 31

8-32 l Question In the previous example, after posting the adjusting entry to the cash account, what should be the cash account balance on the books? (i.e., the cash amount on the balance sheet?) Click correct amount. Bank Reconciliation Adjusting Journal Entries l IMPORTANT! Always do a single compound adjusting entry rather than multiple entries (p. 311) because... $9,610$7,207$7,430

8-33 GENERAL JOURNAL Page 56 DateDescriptionPRDebitCredit Jul31 Interest Revenue30 Supplies Inventory (Error)*28 Accounts Receivable225 Cash223 Bank Reconciliation Adjusting Journal Entries * Details of error were not provided.

8-34 After posting the reconciling entries to the cash account, what is the cash balance? Bank Reconciliation Adjusting Journal Entries GENERAL LEDGER ACCOUNT NAME: CashACCOUNT No.100 DateDescriptionPRDebitCreditBalance 7/31Prior Balance7,430

8-35 After posting the reconciling entries to the cash account, what is the cash balance? GENERAL LEDGER ACCOUNT NAME: CashACCOUNT No.100 DateDescriptionPRDebitCreditBalance 7/31Balance7,430 Adjusting entryG1 2237,207 Bank Reconciliation Adjusting Journal Entries Need to see the reconciliation again?

8-36 Petty Cash Fund used to make small amounts of cash available for immediate payment of miscellaneous expenditures such as: 32¢ Postage Office supplies Minor Delivery charges

8-37 Petty Cash Box.

8-38 Petty Cash Fund Establishing debit creditimprest l Establish the fund with a debit to Petty Cash and credit to Cash for the imprest (i.e., desired or set) amount of the fund. l Additional entries to the Petty Cash account are required only when the fund balance is changed!

8-39 Petty Cash Fund Disbursing

8-40 l Disbursements from Petty Cash fund require no journal entries at the time of disbursement. l The transactions are recorded when the fund is replenished. petty cash vouchers l Receipts for disbursements, called petty cash vouchers, are kept in the petty cash box. Petty Cash Fund Disbursing Paid Petty Cash Voucher $23.97

8-41 Petty Cash Fund Replenishing Paid Petty Cash Voucher $23.97

8-42 l At end of period or when the balance is low, replenish box with cash from checking account. l Debit assets or expenses depending on the expenditure shown on Petty Cash voucher, and credit the regular Cash account, not the Petty Cash account. u e.g., Bottom p. 313 l “At the end of an accounting period,...” Petty Cash Fund Replenishing

8-43 Petty Cash Journal Entries Again! The only entries to the Petty Cash ledger account are to...  Establish the fund  Increase the fund balance  Decrease the fund balance  Close the fund  Establish the fund  Increase the fund balance  Decrease the fund balance  Close the fund

8-44

8-45 Jackson Company maintains a petty cash fund of $400. The following summary information was taken from petty cash vouchers paid in July: Travel Expenses$79.30 Customer Business Lunches Express Mail Postage Miscellaneous Office Supplies Petty Cash Example Prepare the journal entry to record replenishing the fund if the amount of cash in the petty cash box on July 31 was $

8-46 What amount of cash will be required to replenish the petty cash fund? a.$ b.$ c.$ d.$ What amount of cash will be required to replenish the petty cash fund? a.$ b.$ c.$ d.$ Petty Cash Example

8-47 What amount of cash will be required to replenish the petty cash fund? a.$ b.$ c.$ d.$ What amount of cash will be required to replenish the petty cash fund? a.$ b.$ c.$ d.$ Desired Balance400.00$ Amount of Cash in Box Amount Needed $ Petty Cash Example

8-48 Petty Cash Example GENERAL JOURNAL Page: 30 DateDescriptionPRDebitCredit 7/31

8-49 GENERAL JOURNAL Page: 30 DateDescriptionPRDebitCredit 7/31Travel Expense79.30 Entertainment Expense93.42 Postage Expense55.00 Office Supplies Expense32.48 Cash Short and Over2.00 Cash To Replenish Petty Cash Fund Petty Cash Example The Cash Short and Over account is used to balance the petty cash fund. It is only needed when the amount of cash requested is different from the amount of paid vouchers. The Cash Short and Over account is used to balance the petty cash fund. It is only needed when the amount of cash requested is different from the amount of paid vouchers. If the Cash Short and Over account has a debit balance at year end, what is the nature of the account? If the Cash Short and Over account has a debit balance at year end, what is the nature of the account?

8-50 End of Chapter 8 I’m out of here! (After I do the virtual keypads)