Presentation on theme: "Cash and Internal Control"— Presentation transcript:
1 Cash and Internal Control Chapter 5Cash andInternal ControlFinancial Accounting, Alternate 4e by Porter and Norton
2 Gap Inc. Consolidated Balance Sheets (partial) ASSETS (in thousands) Feb. 1, Feb 2, 2002Current Assets:Cash and equivalents $3,388,514 $1,035,749Merchandise inventory 2,047, ,768,613Other current assets , ,685Total current assets $5,739,725 $3,136,047higher
3 Gap Inc. Consolidated Balance Sheets (partial) ASSETS (in thousands)Current Assets:Cash and equivalentsKey toclassificationas cash: readilyavailable topay debts
4 Cash Coin & currency Checking, savings & money market accounts Undeposited, cashier, and certified checksPay to the order of:ABC Co.
5 Cash Equivalents and the Statement of Cash Flows Gap Inc.’s Consolidated Balance Sheets (partial)(in thousands) Feb. 1, Feb 2, 2002Current Assets:Cash and equivalents $3,388,514 $1,035,749Merchandise inventory 2,047, ,768,613Other current assets , ,685Total current assets $5,739,725 $3,136,047Gap Inc.’s Consolidated Statement of Cash Flows (partial)Year ended Year ended(in thousands) Feb. 1, Feb 2, 2002Net increase (decrease) in cashand equivalents 2,352, ,955Cash and equivalents at beg. of year 1,035, ,794Cash and equivalents at end of year $3,388,514 $1,035,749
6 Cash Equivalents Readily convertible to cash Original maturity to investor of 3 months or less12345678910111213141516171819202122232425262829303127Commercial paperU.S. Treasury billsCertain money market funds
7 Cash ManagementNecessary to ensure company has neither too little nor too much cash on handTools:Cash Flows StatementCash BudgetsBank ReconciliationsPetty Cash Funds
8 Bank Statements Cash balance, beginning of period + Deposits = Cash balance, end of periodDepositsCustomer notes and interest collected by bankInterest earnedCanceled checksNSF checksService charges
9 Bank Reconciliation - Step 1 Trace deposits on bank statement to books. Identify deposits in transit. Add to bank balance.Deposits in Transit: Late period deposits not yet reflected on bank statement
10 Example of Reconciliation Bank Statement Adjustments: DepositsBalance per statement, June 30 $ 3,308.59Add: Deposit in transit101
11 Bank Reconciliation - Step 2 Trace checks cleared by bank to books. Identify outstanding checks. Subtract from bank balance.Outstanding checks: Checks written but not yet presented to bankABC Co.Pay to the order of:XYZ Co.
12 Example of Reconciliation Bank Statement Adjustments:Checks OutstandingBalance per statement, June 30 $3,308.59Add: Deposit in transitDeduct: Outstanding checks:Check No. 496 $Check NoCheck No (717.84)Adjusted balance, June $3,233.05121
13 Bank Reconciliation - Step 3 List all other additions (credit memoranda) shown on the bank statement. Add to book balance.Credit memoranda: Interest earned, customer notes collected
14 Example of Reconciliation Cash Account Adjustments:Credit MemorandaBalance per books, June $ 2,895.82Add:Note collected $500.00Interest on noteInterest earnedRecording error, #142
15 Bank Reconciliation - Step 4 List all other subtractions (debit memoranda) shown on the bank statement. Subtract from book balance.DateNon-Sufficient FundsDebit memoranda: NSF checks, service charges, etc.
16 Example of Reconciliation Cash Account Adjustments:Debit MemorandaBalance per books, June $ 2,895.82Add: Note collected $500.00Interest on noteInterest earnedRecording error, #Deduct: NSF check $245.72Collection fee – noteService charge (282.22)Adjusted balance, June $ 3,233.052
17 Bank Reconciliation - Step 5 Identify errors made by the bank or the company in recording transactions during the period.
18 Bank Reconciliation - Step 6 Use the information collected in Steps toprepare the bank reconciliation.Bank ReconciliationBalance per bank $$$:Adjusted balance $$$Balance per books $$$Adjusted balances for book and bank must agree
19 Example of Reconciliation Bank Statement AdjustmentsBalance per statement, June $ 3,308.59:Adjusted balance, June $ 3,233.05Cash Account AdjustmentsBalance per books, June $ 2,895.82:Adjusted balance, June $ 3,233.05191
20 Bank Reconciliation Adjusting Entries Balance per bank $$$:Adjusted balance $$$Balance per books $$$Book adjustments are the basis for adjusting entries
21 Petty Cash Dr. Cr. RECEIPT RECEIPT Paycheck for Jane Doe Date Dept. of TreasurerJane DoeRECEIPTDr. Cr.RECEIPT
22 Responsibility for Internal Control AuditorsAuditCommitteeof Board ofDirectorsExternalAuditorsManagement
23 Internal Control Control Environment Internal Accounting Control ProceduresAccountingSystem
24 The Control Environment Management’s competence and operating stylePersonnel policies and practicesInfluence of board of directors
25 The Accounting SystemMethods and records used to report transactions and maintain financial informationCan be manual or automated systems or a combination of bothUse of journals is an integral part of any system