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

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

3. 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:

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

5. 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

6. 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.

7. Example of Reconciliation Balance per statement, June 30 $3,308.59 Add: Deposit in transit 642.30 Bank Statement Adjustments: Deposits

8. 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.

9. Example of Reconciliation Bank Statement Adjustments: Checks Outstanding Balance per statement, June 30 $3,308.59 Add: Deposit in transit 642.30 Deduct: Outstanding checks: No. 496 $ 79.89 No. 501 213.20 No. 502 424.75 (717.84) Adjusted balance, June 30 $3,233.05

10. 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.

11. Example of Reconciliation Cash Account Adjustments: Credit Memoranda Balance per books, June 30 $2,895.82 Add: Customer note collected $500.00 Interest on customer note 50.00 Interest earned during June 15.45 Error in recording check 498 54.00 619.45

12. 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.

13. Example of Reconciliation Cash Account Adjustments: Debit Memoranda Balance per books, June 30 $2,895.82 Add: Customer note collected $500.00 Interest on customer note 50.00 Interest earned during June 15.45 Error in recording check 498 54.00 619.45 Deduct: NSF check $245.72 Collection fee on note 16.50 Service charge for lockbox 20.00 (282.22) Adjusted balance, June 30 $3,233.05

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

15. 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$$$ Adjusted balance$$$

16. Example of Reconciliation Balance per statement, June 30 $3,308.59 Adjusted balance, June 30 $3,233.05 Bank Statement Adjustments Balance per books, June 30 $2,895.82 Adjusted balance, June 30 $3,233.05 Cash Account Adjustments

17. Bank Reconciliation Adjusting Entries Bank Reconciliation Balance per bank$$$ Adjusted balance$$$ Balance per books$$$ Adjusted balance$$$ Book adjustments are the basis for adjusting entries

18. Bank Reconciliation Adjusting Entries Accounts Receivable245.72 Collection Fee Expense 16.50 Rent Expense—Lockbox 20.00 Cash337.23 Notes Receivable500.00 Interest Revenue 65.45 Supplies 54.00 To record bank reconciliation adjustments.

19. Petty Cash A check is written Journalize establishment of fund Disbursement with proper documentation Fund replenished

20. Prepare the journal entry to record the petty cash fund replenishment Petty Cash Transactions for Mickey’s Marathon Sports Original fund balance $200.00 Petty cash expenditures: U.S. Post Office 55.00 Overnight delivery service 69.50 Office supply express 45.30 Coin and currency per count 26.50

21. Accounting for Petty Cash *$200.00 – ($55.00 + 69.50 + 45.30 + 26.50) = $200.00 – $196.30 = $3.70 short Journal Entry to Replenish Fund:

22. 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

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

24. Internal Control Control Environment Accounting System Internal Control Procedures

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

26. 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

27. 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

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

29. 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.

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

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

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

33. 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

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

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

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

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

38. End of Chapter 6