1. Financial Accounting: Tools for Business Decision Making, 4th Edition
Kimmel, Weygandt, Kieso
CHAPTER 7
Prepared by
Ellen L. Sweatt
Georgia Perimeter College
and
Barbara Muller
Arizona State University West

2. INTERNAL CONTROL AND CASH
Chapter 7
INTERNAL CONTROL AND CASH

3. INTERNAL CONTROL AND CASH
CHAPTER 7
INTERNAL CONTROL AND CASH
After studying this chapter, you should be able to:
Identify the principles of internal control.
Explain the applications of internal control to cash receipts.
Explain the applications of internal control to cash disbursements.
Prepare a bank reconciliation.
Explain the reporting of cash.
Discuss the basic principles of cash management.
Identify the primary elements of a cash budget.

4. PRINCIPLES OF INTERNAL CONTROL11 1
PRINCIPLES OF INTERNAL CONTROL
Internal control
Safeguards an organization’s assets from
Employee theft, robbery, unauthorized use
Enhances the accuracy and reliability of accounting records
Risk of errors and irregularities

5. PRINCIPLES OF INTERNAL CONTROL

6. PRINCIPLES OF INTERNAL CONTROL
Establishment of responsibility:
most effective when only one person is responsible for a given task
Segregation of duties:
the work of one employee should provide a reliable basis for evaluating the work of another employee

7. PRINCIPLES OF INTERNAL CONTROL
Documentation procedures:
documents provide evidence that transactions and events have occurred

8. Physical, Mechanical, and Electronic Controls

9. Independent Internal Verification

10. Independent Internal Verification
Bonding of employees who handle cash
Rotating employee’s duties and requiring employees to take vacations

11. Limitations of Internal Controls
Cost/Benefit - cost of establishing procedure should not exceed expected benefit
Human element - fatigue, carelessness, indifference
Collusion - two or more individuals who work together to get around controls
Size of business

12. Review Segregation of duties means?
Rotating employee duties and requiring vacations.
Reviewing, comparing and reconciling information from two sources.
The responsibility for related activities should be assigned to different individuals.
Physical separation of employees from each other.

13. Review Segregation of duties means?
Rotating employee duties and requiring vacations.
Reviewing, comparing and reconciling information from two sources.
The responsibility for related activities should be assigned to different individuals.
Physical separation of employees from each other.

14. Cash consists of... coins currency checks money orders money on hand
deposits in bank

15. Cash is the most desirable asset...
because it is readily convertible into any other asset.

16. INTERNAL CONTROL OVER CASH RECEIPTS11 2
INTERNAL CONTROL OVER CASH RECEIPTS

17. Review
Which of the following is not an internal control over cash receipts?
Store cash in safes and bank vaults.
Supervisors count cash receipts daily
Bond personnel who handle cash.
Having the same person who receives the cash to be the one that records it.

18. Review
Which of the following is not an internal control over cash receipts?
Store cash in safes and bank vaults.
Supervisors count cash receipts daily
Bond personnel who handle cash.
Having the same person who receives the cash to be the one that records it.

19. INTERNAL CONTROL OVER CASH DISBURSEMENTS11 3
INTERNAL CONTROL OVER CASH DISBURSEMENTS

20. Petty Cash Fund
is a cash fund used to pay relatively small amounts

21. Cash Disbursements ELECTRONIC FUNDS TRANSFER SYSTEM
Check processing is expensive
new methods are being developed to transfer funds among parties without the use of paper
Electronic Funds Transfer (EFT) System
a disbursement system that uses wire, telephone, telegraph, or computer to transfer cash from one location to another

22. Review
Which of the following is not an internal control over cash disbursements?
Stamp invoices paid.
Use prenumbered checks and account for the sequence.
Use cash registers.
Have multiple people available to sign checks so they can be mailed promptly.

23. Review
Which of the following is not an internal control over cash disbursements?
Stamp invoices paid.
Use prenumbered checks and account for the sequence.
Use cash registers.
Have multiple people available to sign checks so they can be mailed promptly.

24. USE OF A BANK The use of a bank
minimizes the amount of currency that must be kept on hand
contributes significantly to good internal control over cash.
A “double” record of cash is maintained, one by the company, one by the bank These two accounts must be reconciled.

25. a copy of the bank’s records sent to the customer for periodic review.
Bank Statement -
a copy of the bank’s records sent to the customer for periodic review.
Bank Statement shows
check & other debits
deposits & other credits
daily cash balance

26. RECONCILING THE BANK ACCOUNT11 4
RECONCILING THE BANK ACCOUNT
Reconciliation
is necessary as the balance per bank and balance per books are seldom in agreement due to time lags and errors
A bank reconciliation
should be prepared by an employee who has no other responsibilities pertaining to cash

27. RECONCILING THE BANK ACCOUNT
Steps in preparing a bank reconciliation:
Determine deposits in transit
Determine outstanding checks
Note any errors discovered
Trace bank memoranda to the records
Each reconciling item used in determining the “Adjusted cash balance per books” should be recorded by the depositor with an adjusting entry

28. BANK RECONCILIATION

29. PowerPoint Slides
Terms
Deposits in transit - deposits recorded by the depositor that have not been recorded by the bank.
Outstanding checks - checks issued and recorded by the company that have not been paid by the bank.
NSF check - a check that is not paid by the bank because of insufficient funds in the customer’s bank account.
Adjusted balance - same as true cash balance, correct cash balance 29

30. BANK RECONCILIATION

31. ENTRIES FROM BANK RECONCILIATION
1035 15
1000 50
Collection of Note Receivable This entry involves four accounts. Interest of $50 has not been accrued and the collection fee is charged to Miscellaneous Expense.

32. ENTRIES FROM BANK RECONCILIATION36
Book Error An examination of the cash disbursements journal shows that check No. 443 was a payment on account to Andrea Company, a supplier. The check, with a correct amount of $1,226.00, was recorded at $1,

33. ENTRIES FROM BANK RECONCILIATION
425.60
NSF Check An NSF check becomes an accounts receivable to the depositor.

34. ENTRIES FROM BANK RECONCILIATION30
Bank Service Charges Check printing charges (DM) and other bank service charges (SC) are debited to Miscellaneous Expense because they are usually nominal in amount.

35. 11 5
REPORTING CASH
Cash
Recorded in both the balance sheet and the statement of cash flows
The balance sheet shows the amount of cash available at a given point in time
The statement of cash flows shows the sources and uses of cash during a period of time.

36. REPORTING CASH Cash Equivalents
Cash equivalents are
Readily convertible to known amounts of cash
So near maturity that their value is relatively insensitive to interest rate changes
Examples include treasury bills, commercial paper, and money market funds

37. Restricted Cash Is cash that is not available for general use.
Is set aside for special purpose.
If not to be used within next year, report as noncurrent asset.

38. MANAGING AND MONITORING CASH
The objective of managing cash is to
Ensure that the company has sufficient cash to meet payments, yet
Minimize the amount of idle cash on hand
The operating cycle of a merchandising company is the average time it takes to go from cash to cash in producing revenues

39. Operating Cycle of a Merchandising Company

40. Basic Principles of Cash Management11 6

41. Cash Budget Cash is vital.
PowerPoint Slides 11 7
Cash Budget
Cash is vital.
Planning the company's cash needs is a key business activity.
Cash budget shows the anticipated cash flows, over a 1 to 2-year period. 42

42. CASH BUDGETING
Cash receipts section includes expected receipts from the company’s principal sources of revenue
Cash disbursements section includes expected payments for direct materials, direct labor, etc.
Financing section shows expected borrowings and their repayment

43. BASIC CASH BUDGET

44. CASH BUDGET

45. JOURNAL Apr 30 Cash 1,035.00 Miscellaneous Expense 15.00
Notes Receivable ,000.00
Interest Revenue
Apr 30 Cash
Accounts Payable
Apr 30 Accounts Receivable-Baron
Cash
Apr 30 Miscellaneous Expense
Cash

46. Review
Which one of the following is not one of the sections of a cash budget?
Cash from operations section.
Cash disbursements section.
Cash receipts section.
Financing section.

47. Review
Which one of the following is not one of the sections of a cash budget?
Cash from operations section.
Cash disbursements section.
Cash receipts section.
Financing section.

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