1. Financial Accounting: Tools for Business Decision Making, 3rd Ed.
Kimmel, Weygandt, Kieso
ELS

2. Chapter 7

3. Chapter 7 Internal Control and Cash
PowerPoint Slides
After studying Chapter 7, you should be able to:
Identify the principles of internal control.
Explain the application of internal control to cash receipts.
Explain the application 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. 1

4. Internal Control consists of...
all the related methods and measures adopted within a business to:
safeguard its assets from;
Employee theft
Robbery
Unauthorized Use
enhance accuracy and reliability of its accounting records by reducing:
Risk of Errors
Irregularities

6. Establishment of Responsibility
Control is most effective when only one person is responsible for a given task.

7. Segregation of Duties
Responsibility for related activities should be assigned to different individuals
Responsibility for record keeping for an asset should be separate from the physical custody of the asset

8. Documentation Provide evidence that transactions and events occurred:
Shipping documents
Sales invoices

9. Documentation Procedures
Documents should be pre-numbered.
All documents should be accounted for.
Sources documents should be promptly forwarded to accounting department.

10. Physical, Mechanical and Electronic Controls
OR FINGERPRINT,
EYEBALL Scan

11. Independent Internal Verification
Involves review, comparison, and reconciliation of data prepared by employees
Verification should be made periodically or on surprise basis
Verification should be done by employee who is independent of the personnel responsible for the information
Discrepancies and exceptions should be reported to management

12. Independent Internal Verification

13. Other Controls Bonding of employees who handle cash
Rotating employee’s duties and requiring employees to take vacations

14. 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

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

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

17. Page 297
in book
Internal Control
Over Cash Receipts

18. Over Cash Disbursements
Internal Control
Over Cash Disbursements

19. Electronic Funds Transfer (EFT)
An approach to transfer funds among parties without paper (deposit tickets, checks, etc.)
EFT uses wire, telephone, telegraph or computer to transfer from one location to another.

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

21. Use of a Bank... is good internal control.
PowerPoint Slides
Use of a Bank...
is good internal control.
minimizes the amount of cash that must be kept on hand.
provides a double record of all bank transactions
one by the business
one by the bank
helps a company safeguard its cash by using a bank as a depository and clearinghouse for checks received and written. 24

22. 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.
Apri l 30, 2004
Bank Statement shows
check & other debits
deposits & other credits
daily cash balance

23. Company Balance and Bank Balance of Cash Usually Differ Because...
PowerPoint Slides
Time lags that prevent one of the parties from recording the transaction in the same period.
Days pass between the time a check is written and dated and date it is paid by the bank.
A day may pass between the time receipts are recorded by the company and the time they are recorded by the bank.
A time lag may occur when the bank mails a debit or credit memo to the company.
Errors by either party in recording transactions. 27

24. Reconciliation Procedure
PowerPoint Slides
Reconciliation Procedure
reconcile balance per books and balance per bank to their adjusted or correct balances.
the reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash. 28

25. 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

26. Bank Reconciliation
Procedures
$ Per Bank Statement
-outstanding checks
+deposits
+/- bank errors
correct cash amount
$ Per Books
-NSF Checks
-check printing or other service charge
+notes collected by
bank

27. W.A. Laird Company Bank Reconciliation April 30, 2004
PowerPoint Slides
W.A. Laird Company Bank Reconciliation April 30, 2004
Illustration 7-9
Cash balance per bank statement 15,907.45
Add: Deposits in transit 2,201.40
18,108.85
Less: Outstanding checks
No ,000.00
No ,401.30
No , ,904.00
Adjusted cash balance per bank 12,204.85
Cash balance per books 11,589.45
Add: Collection of N/R for $ 1,000 plus interest
earned $50, less collection fee $ 15 1,035.00
Error on recording check No ,071.00
12,660.45
Less: NSF check
Bank service charge 31

28. For Cash To Show the Correct Balance
Each reconciling item in determining the adjusted balance per books must be journalized and posted.

29. W.A. Laird Company Bank Reconciliation April 30, 2004
PowerPoint Slides
W.A. Laird Company Bank Reconciliation April 30, 2004
Illustration 7-9
Cash balance per bank statement 15,907.45
Add: Deposits in transit 2,201.40
18,108.85
Less: Outstanding checks
No ,000.00
No ,401.30
No , ,904.00
Adjusted cash balance per bank 12,204.85
Cash balance per books 11,589.45
Add: Collection of N/R for $ 1,000 plus interest
earned $50, less collection fee $ 15 1,035.00
Error on recording check No ,071.00
12,660.45
Less: NSF check
Bank service charge 31

30. 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

31. PowerPoint Slides
Reporting Cash
Cash is 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. 38

32. Cash Equivalents Readily convertible to known amount of cash
So near maturity that their market value is relatively insensitive to changes in interest rates
Examples:
Treasury bills
Commercial paper
Money market funds

33. 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.

34. Operating Cycle of a Merchandising Company…is the average time it takes to go from cash to cash in producing revenues.
PowerPoint Slides 33

35. Principles of Cash Management
PowerPoint Slides
Principles of Cash Management
Increase the speed of collection on receivables.
Keep inventory levels low.
Delay payment of liabilities.
Plan the timing of major expenditures.
Invest idle cash. 39

36. Five Principles of Cash Management
PowerPoint Slides 33

37. PowerPoint Slides
Reporting Cash
Cash on hand, cash in banks, and petty cash are often combined and reported as cash.
Cash is the most liquid asset and listed first in the current asset section of the balance sheet. 39

38. Cash Budget Cash is vital.
PowerPoint Slides
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 22-year period. 42

39. Cash Budget The cash budget contains : Cash receipts section;
PowerPoint Slides
Cash Budget
The cash budget contains :
Cash receipts section;
Cash disbursements section;
Financing section. 43

40. PowerPoint Slides
Cash Receipts Section
includes expected receipts from the company's principal source(s) of revenue, such as cash sales and collections from customers on credit sales
also shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant assets, and the company's capital stock 44

41. Cash Disbursements Section
PowerPoint Slides
Cash Disbursements Section
shows expected payments for direct materials, direct labor, manufacturing overhead, and selling and administrative expenses
includes projected payments for income taxes, dividends, investments, and plant assets 45

42. Financing Section shows...
PowerPoint Slides
Financing Section shows...
expected borrowings
the repayment of the borrowings and interest 46