Cash and Internal Control 6 PowerPoint Author: Catherine Lumbattis COPYRIGHT © 2011 South-Western/Cengage Learning 7/e

Cash  Coin and currency  Checking, savings, and money market accounts  Undeposited, cashier, and certified checks LO1

Cash Equivalents  Commercial paper  U.S. Treasury bills  Certain money market funds  Readily convertible to cash  Original maturity to investor of three months or less Examples:

Cash Management  Necessary to ensure company has neither too little nor too much cash on hand  Tools Cash flow statement Bank reconciliations Petty cash funds LO2

Cash balance, beginning of period = Cash balance, end of period Bank Statements +Deposits +Customer notes and interest collected by bank +Interest earned Canceled checks NSF checks Service charges

Bank Reconciliation – Step 1 Deposits in transit: Late period deposits not yet reflected on bank statement Trace deposits listed on the bank statement to the books. Identify the deposits in transit. Add to the bank balance.

Bank Reconciliation – Step 2 Outstanding checks: Checks written but not yet presented to bank Trace checks cleared by the bank to the books. Identify outstanding checks. Subtract from the bank balance.

Bank Reconciliation – Step 3 Credit memoranda: Interest earned, customer notes collected, etc. List all other additions (credit memoranda) shown on the bank statement. Add to the book balance.

List all other subtractions (debit memoranda) shown on the bank statement. Subtract from the book balance. Bank Reconciliation – Step 4 Debit memoranda: NSF checks, service charges, etc.

Example of Reconciliation Cash Account Adjustments: Debit Memoranda Balance per books, June 30 $2, Add: Customer note collected $ Interest on customer note Interest earned during June Error in recording check Deduct: NSF check $ Collection fee on note Service charge for lockbox (282.22) Adjusted balance, June 30 $3,233.05

Bank Reconciliation – Step 5 Identify errors made by the bank or the company in recording the transactions during the period.

Bank Reconciliation – Step 6 Use the information collected in steps 1 through 5 to prepare the bank reconciliation. Bank Reconciliation Balance per bank$$$ Adjusted balance$$$ Balance per books$$$ Adjusted balance$$$

Example of Reconciliation Balance per statement, June 30 $3, Adjusted balance, June 30 $3, Bank Statement Adjustments Balance per books, June 30 $2, Adjusted balance, June 30 $3, Cash Account Adjustments

Bank Reconciliation Adjustments Bank Reconciliation Balance per bank$$$ Adjusted balance$$$ Balance per books$$$ Adjusted balance$$$ Book adjustments are the basis for adjustments

Petty Cash A check is written Journalize Establishment of Fund Disbursement With Proper Documentation Fund Replenished

Internal Control System  Consists of the policies and procedures necessary to ensure: The safeguarding of an entity’s assets The reliability of its accounting records The accomplishment of its overall objectives LO3

Sarbanes-Oxley Act of 2002 (SOX) Act of Congress intended to bring reform to corporate accountability and stewardship in response to corporate scandals

Internal Control Control Environment Accounting System Internal Control Procedures

The Control Environment  Management’s competence and operating style  Personnel policies and practices  Influence of board of directors

The Accounting System  Can be manual, fully computerized, or a combination of both  Use of journals is an integral part of any system Methods and records used to report transactions and maintain financial information

Internal Control Procedures Segregation of Duties Safeguarding Assets and Records Proper Authorizations Independent Verification The Design and Use of Business Documents Independent Review and Appraisal LO4

Proper Authorizations  Authority and responsibility go hand in hand Segregation of Duties  Separate physical custody from the accounting for assets

Independent Verification  One individual or department acts as a check on the work of another Safeguarding Assets and Records  Protect assets and accounting records from loss, theft, unauthorized use, etc.

Independent Review and Appraisal  Provide for periodic review and appraisal of the accounting system and the people operating it

The Design and Use of Business Documents  Capture all relevant information about a transaction and assist in proper recording and classification.  Are properly controlled

Limitations on Internal Control  No system is entirely foolproof Employees in collusion can override the best controls Cost vs. benefit tradeoff

Computerized Business Documents and Internal Control LO5  Cash receipts should be deposited intact in the bank on a daily basis  All cash disbursements should be made by check

Control Over Cash Receipts  Cash received over the counter (e.g., cash sales)  Cash received in the mail (e.g., credit sales)

Controls Over Cash Received Over the Counter  Cash registers  Locked-in cash register tape  Prenumbered customer receipts  Investigate recurring discrepancies

Controls Over Cash Received in the Mail  Two employees open mail  Prelist prepared  Monthly customer statements

Document Flow for Merchandi se Check Prepared Purchase Requisition Receiving Report Purchase Order Invoice Approval Purchase Invoice

End of Chapter 6