CA$H and Internal Controls

Internal Control consists of... all the related methods and measures adopted within a business to: –safeguard its assets Employee and external theft, unauthorized use –enhance accuracy and reliability of accounting of its accounting records. Mistakes, errors, intentional misrepresentations As of 2002, required by law in the Sarbanes- Oxley Act (SOX)

The 6 IC PRINCIPLES 1.Establish responsibility centers  Make individuals or specific groups accountable for specific tasks under their control 1.Establish responsibility centers  Make individuals or specific groups accountable for specific tasks under their control Example: One cashier per register. At end of shift, agree cash received to register tape. If differences, cashier is responsible.

2.Segregate employee duties.  Don’t allow only one person to have both: - Physical custody of asset - Record transactions related to asset  Includes separating a series of related activities. Goal is to have many employees involved so no one can execute and cover up an error or irregularity. 2.Segregate employee duties.  Don’t allow only one person to have both: - Physical custody of asset - Record transactions related to asset  Includes separating a series of related activities. Goal is to have many employees involved so no one can execute and cover up an error or irregularity. Example: Cashier forwards register tape to accountant. Accountant records in books but never has access to cash. Cashier Accountant

3.Independent Internal verification  Periodic management review  Supervision of daily activities 3.Independent Internal verification  Periodic management review  Supervision of daily activities Example: Supervisor agrees cashier’s tapes-cash- accounting entries Supervisor reconciles bank deposits to books Accountant Cashier Review-verify

4.Documentation to provide an audit trail  Provide verifiable evidence of transactions  Pre-number and account for all items in sequence  Originators and reviewers sign-off to indicate responsibility  Matching of related documents, time stamp and secure after all transaction processing is complete Examples: Sales and Purchase orders, invoices Receiving & shipping, bills of lading Change logs Material transfer requests 4.Documentation to provide an audit trail  Provide verifiable evidence of transactions  Pre-number and account for all items in sequence  Originators and reviewers sign-off to indicate responsibility  Matching of related documents, time stamp and secure after all transaction processing is complete Examples: Sales and Purchase orders, invoices Receiving & shipping, bills of lading Change logs Material transfer requests

5.Physical, mechanical and electronic control over assets, Data security Examples: Password access Locks, guards, alarms Data back-up Virus protection Anti-theft systems, scanners Limited authorized check signers 6.Others Examples: Bonding of employees, background checks, rotation of duties, required vacations, approved vendor lists and prices, internal and external independent audits, etc, etc 5.Physical, mechanical and electronic control over assets, Data security Examples: Password access Locks, guards, alarms Data back-up Virus protection Anti-theft systems, scanners Limited authorized check signers 6.Others Examples: Bonding of employees, background checks, rotation of duties, required vacations, approved vendor lists and prices, internal and external independent audits, etc, etc

Reporting Cash Cash and Cash Equivalents –Readily convertible to known amount of cash. Examples: Treasury bills Commercial paper Money Market Funds

Reporting Cash Restricted Cash - Cash set aside for special purpose - Non-current asset if not to be used within a year

Use of a Business Bank account... allows for better separation of business versus personal transactions (especially sole proprietor) provides a double record of all bank transactions –one by the business –one by the bank Requires monthly reconciliation of bank account –Identifies errors, missing items on books or bank

BALANCE PER BANKBALANCE PER BOOKS + Deposits In Transit + Credit Memos - Outstanding Checks - Debit Memos + - Other ADJUSTED BALANCE Make journal entry based on items that haven’t been recorded yet (That is, the balance per books side). Balance sheet will show the Adjusted Balance. Items Bank doesn’t know Items Books don’t know

EXAMPLE: Bank Statement Beginning Balance on 1/01/ Deposits: 1/1/08 = 1200, 1/6/08 = 3200, 1/15/08 = 2000, 1/23/08 = 2800, 1/28/08 = Checks: # # # # # # # # Other: Bank Charges- Debit Memo Bank Statement Ending Balance on 1/31/ Cash in checking 1/1/08 Bal /06/ /15/ /23/ /28/ /31/ # # # # # # # # # # Confirm cash debit last December January DIT 1/31/08 Bal 14151

EXAMPLE: Bank Statement Beginning Balance on 1/01/ Deposits: 1/1/08 = 1200, 1/6/08 = 3200, 1/15/08 = 2000, 1/23/08 = 2800, 1/28/08 = Checks: # # # # # # # # Other: Bank Charges- Debit Memo Bank Statement Ending Balance on 1/31/ Cash in checking 1/31/08 Bal /1/08 Bal /06/ /15/ /23/ /28/ /31/ # # # # # # # # # # Confirm o/s checks last month. Also look for last month that are still o/s. January outstanding checks Total = 3250

EXAMPLE: Bank Statement Beginning Balance on 1/01/ Deposits: 1/1/08 = 1200, 1/6/08 = 3200, 1/15/08 = 2000, 1/23/08 = 2800, 1/28/08 = Checks: # # # # # # # # Other: Bank Charges- Debit Memo Bank Statement Ending Balance on 1/31/

BANK BOOKS DIT O/S Checks Debit Memos Other 9. ADJ BALANCE Bank Fees Expense 15. Cash 15. Cash 9. XXXXXX 9.

Managing Cash Budget for shortages –See Cash Budget discussion Minimize working capital needs: –Speed up A/R collections –Delay A/P payments –Invest idle cash Consider long range needs –Investing activities such as equipment replacement

Cash Budget Planning the company's cash needs is a key business activity. Cash budget shows: –Expected cash received –Projected cash spent –Anticipated shortages (need to borrow)

Cash budget format: Usually prepared monthly, quarterly or annually Period 1 Begin cash + Cash received Available cash - Cash disbursed Excess(deficiency) + borrowing - repayments End cash Example June 09 Rs.120,000 + Cash received + 890,000 Rs.1,010,000 Say sale terms are all n/30. Look at May sales for June receipts. Assume May sales = Rs. 890,000.

Cash budget format: Usually prepared monthly, quarterly or annually Period 1 Begin cash + Cash received Available cash - Cash disbursed Excess(deficiency) + borrowing - repayments End cash Example June 09 Rs.120,000 + Cash received + 890,000 Rs.1,010,000 - Cash disbursed Say ½ payments are due n/30. Other ½ are due upon receipt. Look at May and June expenses. Assume: May exp = Rs.1040,000, June exp = Rs.920,000. ½ x 1040,000 + ½ x 920, ,000

Cash budget format: Usually prepared monthly, quarterly or annually Period 1 Begin cash + Cash received Available cash - Cash disbursed Excess(deficiency) + borrowing - repayments End cash Example June 09 Rs.120, ,000 Rs.1,010, ,000 Rs.30, , Rs. 50,000 Assume the company would like a minimum balance in cash of Rs.50,000.

Cash budget format: Usually prepared monthly, quarterly or annually Period 1 Begin cash + Cash received Available cash - Cash disbursed Excess(deficiency) + borrowing - repayments End cash Example June 09 Rs.120, ,000 Rs.1,010, ,000 Rs.30, , Rs. 50,000 Period 2 Begin cash + Cash received Available cash - Cash disbursed Excess(deficiency) + borrowing - repayments End cash

PETTY CASH System used for items which can’t be paid by check or it’s more convenient to pay cash. Uses IMPREST system: - Establish a Fund with a fixed contribution. - Replenish fund from checking account periodically Petty Cashxxxx Cash xxxx TO SET UP FUND INITIALLY.

Use cash to pay for items. Get receipts. No journal entries made at this time. As cash in fund gets low: Postage Expensexxxx Supply Expensexxxx Travel Expensexxxx Entertainment Expensexxxx Cashxxxx TO REPLENISH PETTY CASH & RECORD EXPENSES.