1. Tools for Business Decision-Making Fourth Canadian Edition Financial Accounting: Prepared by: Peggy Coady Memorial University of Newfoundland & Catherine Seguin University of Toronto

2. Internal Control and Cash Chapter 7

3. 3 Internal Control Reliable financial reporting Effective and efficient operations Compliance with relevant laws and regulations The related methods and measures adopted within a business to help it achieve:

4. Chapter 7 4 Internal Control Good internal control systems have five primary components: –Control environment –Risk assessment –Control activities –Information and communication –Monitoring

5. Control Activities Control activities include: –Authorization of transactions and activities –Segregation of duties –Documentation –Physical controls –Independent checks of performance –Human resource controls Chapter 7 5

6. 6 Discussion Question What are some examples of control activities a movie theatre might have?

7. Limitations of Internal Control Chapter 7 7 Reasonable assurance –Cost / benefit –Human element –Collusion –Size of business

8. Chapter 7 8 Cash Coins Currency Cheques Money orders Money on hand Deposits in bank Debit card slips Bank credit card slips

9. Chapter 7 9 Importance of Cash Most important asset Pervasive impact Vulnerable to theft or misuse Balancing act needed to ensure sufficient, but not excess, quantity

10. Chapter 7 10 Cash Receipts Internal control over cash receipts is more effective when cash receipts are deposited into the bank account daily or are made by electronic funds transfer

11. Chapter 7 11 Cash Receipts Debit and credit card transactions are examples of electronic funds transfers Other examples of control activities over cash receipts?

12. Chapter 7 12 Cash Payments Control activities over cash payments are more effective when payments are made by cheque or by electronic funds transfer, rather than in cash

13. Chapter 7 13 Cash Payments Good control for cheques includes the signing of cheques by an authorized person or persons (cheques often require two signatures) Other examples of control activities over cash payments?

14. Chapter 7 14 Bank Safeguards cash by using a bank as a depository and clearinghouse for cheques received and written Provides a double record of transactions –One by the business –One by the bank

15. Chapter 7 15 Differences Between Company Balance and Bank Balance Time lags –The period after a cheque is written and dated but not yet presented to nor paid by the bank (outstanding cheques) –The period between receipts being recorded by the company and receipts being recorded by the bank (deposits in transit)

16. Chapter 7 16 Differences Between Company Balance and Bank Balance Time lags (continued) –Time lags can occur when the bank records debit or credit memos Errors by either party in recording transactions

17. Chapter 7 17 Understanding Debits and Credits Bank (Your Cash Account is a Liability) Books (Cash is an Asset) ChequeDebit (decrease)Credit (decrease) DepositCredit (increase)Debit (increase)

18. Chapter 7 18 Bank Reconciliation This reconciles the balance in the company’s bank account with the cash balance in the general ledger (makes them agree) Adjusted cash balance = reconciled balance

19. Bank Reconciliation Procedures Chapter 7 19 Illustration 7-5

20. Chapter 7 20 Bank Reconciliation Procedures Books –Each reconciling item in determining the adjusted balance per books MUST be journalized and posted Bank –Do NOT journalize any entries on bank side

21. Chapter 7 21 Discussion Question Why is a bank reconciliation an important part of a company’s internal control over cash?

22. Chapter 7 22 Reporting Cash Cash is recorded in both the balance sheet and the cash flow statement Cash is the most liquid asset and is listed first in the current assets section of the balance sheet

23. Chapter 7 23 Reporting Cash Cash equivalents –Readily convertible to known amount of cash –So near maturity that market value is relatively insensitive to changes in interest rates –Examples Treasury bills Commercial paper Money-market funds

24. Chapter 7 24 Reporting Cash Cash equivalents –Reporting likely to change in the future from cash and cash equivalents to short-term investments Compensating balance –Minimum cash balance

25. Chapter 7 25 Reporting Cash Restricted cash –Cash that is not available for general use; set aside for special purposes –If it is not to be used within the next year, report as noncurrent asset

26. Chapter 7 26 Six Principles of Cash Management

27. Chapter 7 27 Discussion Question Do you use a cash budget? How does/can a cash budget help you manage your cash?

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