8-1

CHAPTER 8CHAPTER 8

CONTROL OF CASH

8-2

Cash Receipts CycleCash Receipts Cycle

8-3

Internal ControlInternal Control

A company’s (1) plan of organization (1) plan of organization and (2) all procedures and actions (2) all procedures and actions it takes to: Protect its assets against thefttheft and waste.

My research on fraud

Comply with its policies and federal law.

Evaluate personnel performance and promote efficient operations.

Ensure accurate and reliable operating data and accounting reports.

296

8-4

(1) Example of Plan of Organization(1) Example of Plan of OrganizationCorporate Organization Chart

Production Secretary Treasurer Vice President Vice President

Sales

President/CEO

Board of Directors

Stockholders

437

Internal ControlInternal Control

8-5

(1) Example of Plan of Organization(1) Example of Plan of Organization

(2) Examples of Procedures and Actions(2) Examples of Procedures and Actions Discussed throughout this chapter, but covered

in much more depth in auditing course

Corporate Organization Chart

Production Secretary Treasurer Vice President Vice President

Sales

President/CEO

Board of Directors

Stockholders

437

Internal ControlInternal Control

8-6

Internal ControlInternal ControlProtection of AssetsProtection of Assets

Segregation of employee duties Asset custody and record keeping separate E.g., Who prepares bank reconciliation? “War story” - My one fraud

296 - 297

$

Assignment of specific duties to each employee E.g., Posting to customers’ accounts. .

8-7

Internal ControlInternal ControlProtection of AssetsProtection of Assets

Rotation of employee job assignments E.g., Required vacation

296 - 297

Use of mechanical devices E.g., Check protectors and cash registers

8-8

Internal ControlInternal Control ComplianceCompliance

Hire c

ompet

ent

emplo

yees

. Train

employees.

Provide clear

job descriptions.Pro

mote

awar

enes

s

of Fore

ign C

orrupt

Pract

ices

Act

.

8-9

Internal Control Internal Control ResponsibilityResponsibility

Management demonstrates ethical behavior and integrity

Board of Directors provides management with guidance and oversight

Internal auditors evaluate internal control structure

8-10

Internal ControlInternal ControlInternal vs. External AuditorsInternal vs. External Auditors

Internal Auditors Test effectiveness of controls Evaluate compliance with company policies

and procedures Encourage operating efficiency

External Auditors Primary responsibility?

Giving an opinion on the fairnessof the company’s financial statements

8-11

To ensure accuracy Hire and train honest,

competent employees

Perform periodic evaluations to ensure adherence to proper procedures

What can happen when accounting records are not accurate? Undetected theft (Mentioned in text)

Bad business decisions (Not mentioned)

Internal ControlInternal ControlAccuracy of Accounting RecordsAccuracy of Accounting Records

8-12

“Unfortunately, even though a company implements all of these features in its internal control structure, theft may still occur.” [Bottom p. 298]

What is the one thing that a company can never completely guard against?

Collusion

The key to preventing collusion is what?Hiring honest employees!

Internal ControlInternal ControlTheft PreventionTheft Prevention

8-13

Purchase Requisition

Purchase Order

Invoice

Receiving Report

Purchase Requisition

Purchase Order

Invoice

Receiving Report

Internal ControlInternal ControlExamples of Accounting RecordsExamples of Accounting Records

Know purpose of each.See examples on pp. 298-300.

8-14

Internal Control Internal Control Flow of DocumentsFlow of Documents

301

The accounting department winds up with what three

documents?

Purchase order

Invoice

Receiving Report

8-15

CashCash A readily available medium of exchange Many businesses maintain several cash

accounts at the bank and in the ledger e.g., checking accounts, savings accounts

and petty cash funds

8-16

Cash ExamplesCash Examples

CashCash

Checking, savings, and

money market accounts

Certificates of Deposit

Bank Drafts and Money

OrdersUndeposited

Checks

Coins and Currency

302

8-17

ChecksChecks “A written order to pay a specific sum of

money to the payee…” (p.305) A check is a negotiable instrument under the

Uniform Commercial Code Three parties involved in all checks?

Payee, drawer and bank ILL. 8.8 (p. 306) - Remittance advice is

common only on which checks?Business Checks

Who keeps remittance advice?Payee

8-18

CashCashAssumption in This CourseAssumption in This Course

P. 303 - “Some merchandising companies receive all their cash receipts [i.e., checks]

on a delayed basis as payments on accounts receivable.”

Unless told otherwise, assume companies only make payments by check and only receive

payments by check.

8-19

CashCashAssumption in This CourseAssumption in This Course

P. 303 - “Some merchandising companies receive all their cash receipts [i.e., checks]

on a delayed basis as payments on accounts receivable.”

Unless told otherwise, assume companies only make payments by check and only receive

payments by check.

8-20

Four Principles forFour Principles forControlling Cash ReceiptsControlling Cash Receipts

Record all cash receiptsas soon as received

Record all cash receiptsas soon as received

Deposit all cash receiptsintact daily

Deposit all cash receiptsintact daily

Segregate cash receipt and recording functions

Segregate cash receipt and recording functions

Person receiving cash does not disburse cash

Person receiving cash does not disburse cash

303

8-21

Ten Principles forTen Principles forControlling Cash DisbursementsControlling Cash Disbursements

Make all disbursements by check or from petty cash

Make all disbursements by check or from petty cash

Separate payment authorization and check signing duties.

Separate payment authorization and check signing duties.

Use pre-numbered checks whichare issued serially

Use pre-numbered checks whichare issued serially

303 - 304

8-22

Receiving report. Purchase order.Purchase requisition. Proper approvals.

E. Barry Rice 1,000,000One million & 00/100

Bob Jones

Patty Jones

Require two signatures and proper supporting documentation for all checks

Require two signatures and proper supporting documentation for all checks

VOID

Ten Principles forTen Principles forControlling Cash DisbursementsControlling Cash Disbursements

8-23

Bank StatementBank StatementSee example in chapter!See example in chapter!

Note how beginning balance, additions, subtractions and ending balance works

Service “charge” of $8 Does this make sense? Your account balance on

bank’s books is dr. or cr.?

307

NSF check of $102 What does “NSF” mean? How does this work?

8-24

NSF Check ExplanationNSF Check Explanation

GAP

Your Bank GAP’s Bank

NSF

NSF

8-25

Bank ReconciliationBank ReconciliationConceptsConcepts

Definition of “Reconciliation”Webster says a reconciliation is ...

Bank reconciliations are prepared periodically to: Explain the difference between cash

reported on bank statement and cash balance on company’s books.

Provide information for adjusting journal entries.

8-26

What are the major causes of reconciliation items?

Timing differences

Bank ReconciliationBank ReconciliationConceptsConcepts

P. 308 (last paragraph) - “Information that the depositor did not know before receiving the bank statement ... requires new journal entries on the company’s books... In this chapter [and on tests], we assume no entries have been made for these items unless otherwise stated.”

P. 308 (last paragraph) - “Information that the depositor did not know before receiving the bank statement ... requires new journal entries on the company’s books... In this chapter [and on tests], we assume no entries have been made for these items unless otherwise stated.”

8-27

Two sections of reconciliation: Reconcile bank statement balance

to adjusted (correct) balance. Reconcile ledger (bookbook) balance

to adjusted (correct) balance.

The adjusted balances above must equal.

All reconciling items in book balance section require adjusting journal entries.

Must understand the logic!

Bank ReconciliationBank ReconciliationConceptsConcepts

8-28

Bank ReconciliationBank Reconciliation Balance per Bank

+ Deposits in Transit

- Outstanding Checks

± Bank Errors

= Adjusted Balance

Balance per Books

+ Deposits by Bank (credit memos)

- Service Charge - NSF Checks

± Book Errors

= Adjusted Balance

8-29

Bank ReconciliationBank Reconciliation

All reconciling items in the

book section require an adjusting

entry to the cash account

Balance per Book

+ Deposits by Bank (credit memos)

- Service Charge - NSF Checks

± Book Errors

= Adjusted Balance

8-30

Ending bank balance, July 31 9,610$ Additions: Deposit in transit 500 Deductions: Bank error 486$ Outstanding checks 2,417 2,903 Correct cash balance 7,207$

Ending book balance, July 31 7,430$ Additions: Interest 30 Deductions: Recording error 28$ NSF check 225 253 Correct cash balance 7,207$

Adjusted Adjusted balances balances must be must be equal.equal.

Bank ReconciliationBank ReconciliationExample as of July 31Example as of July 31

8-31

Ending bank balance, July 31 9,610$ Additions: Deposit in transit 500 Deductions: Bank error 486$ Outstanding checks 2,417 2,903 Correct cash balance 7,207$

Ending book balance, July 31 7,430$ Additions: Interest 30 Deductions: Recording error 28$ NSF check 225 253 Correct cash balance 7,207$

We are notfinished untilwe make thenecessaryadjustingentries.

Bank ReconciliationBank ReconciliationExample as of July 31Example as of July 31

8-32

QuestionIn the previous example, after posting the adjusting entry to the cash account, what should be the cash account balance on the books? (i.e., the cash amount on the balance sheet?) Click correct amount.

Bank ReconciliationBank ReconciliationAdjusting Journal EntriesAdjusting Journal Entries

IMPORTANT!Always do a single compound adjusting entry rather than multiple entries (p. 311) because ...

$9,610 $7,207 $7,430

8-33

GENERAL JOURNAL Page 56Date Description PR Debit Credit

Jul 31

Interest Revenue 30

Supplies Inventory (Error)* 28

Accounts Receivable 225

Cash 223

Bank ReconciliationBank ReconciliationAdjusting Journal EntriesAdjusting Journal Entries

*Details of error were not provided.

8-34

After posting the reconciling entries to the cash account, what is the cash balance?

Bank ReconciliationBank ReconciliationAdjusting Journal EntriesAdjusting Journal Entries

GENERAL LEDGER

ACCOUNT NAME: Cash ACCOUNT No. 100

Date Description PR Debit Credit Balance

7/31 Prior Balance 7,430

8-35

After posting the reconciling entries to the cash account, what is the cash balance?

GENERAL LEDGER

ACCOUNT NAME: Cash ACCOUNT No. 100

Date Description PR Debit Credit Balance

7/31 Balance 7,430

Adjusting entry G1 223 7,207

Bank ReconciliationBank ReconciliationAdjusting Journal EntriesAdjusting Journal Entries

Need to see the reconciliation again?

8-36

Petty CashPetty Cash

Fund used to make small

amounts of cash available for immediate payment of

miscellaneous expenditures

such as:

32¢

•Postage

•Office supplies

•Minor Delivery charges

8-37

Petty Cash BoxPetty Cash Box

Paid

Petty C

ash

Vo

uch

er

$23.97

Sally

Sm

ith

.

8-38

Petty Cash FundPetty Cash FundEstablishingEstablishing

Establish the fund with a debitdebit to Petty Cash and creditcredit to Cash for the imprestimprest (i.e., desired or set) amount of the fund.

Additional entries to the Petty Cash account are required only when the fund balance is changed!

8-39

Petty Cash FundPetty Cash FundDisbursingDisbursing

8-40

Disbursements from Petty Cash fund require no journal entries at the time of disbursement.

The transactions are recorded when the fund is replenished.

Receipts for disbursements, called petty cash voucherspetty cash vouchers,are kept in the petty cash box.

Petty Cash FundPetty Cash FundDisbursingDisbursing P

aid

Petty C

ash

Vo

uch

er

$23.97

8-41

Petty Cash FundPetty Cash FundReplenishingReplenishing P

aid

Petty C

ash

Vo

uch

er

$23.97

8-42

At end of period or when the balance is low, replenish box with cash from checking account.

Debit assets or expenses depending on the expenditure shown on Petty Cash voucher, and credit the regular Cash account, not the Petty Cash account. e.g., Bottom p. 313

“At the end of an accounting period, ...”

Petty Cash FundPetty Cash FundReplenishingReplenishing

8-43

Petty CashPetty CashJournal EntriesJournal Entries

Again! The only entries Again! The only entries to the Petty Cash ledger to the Petty Cash ledger account are to. . .account are to. . .Establish the fundIncrease the fund

balanceDecrease the fund

balanceClose the fund

Establish the fundIncrease the fund

balanceDecrease the fund

balanceClose the fund

8-44

8-45

Jackson Company maintains a petty cash fund of $400. The following summary information was taken from petty cash vouchers paid in July:

Travel Expenses $79.30 Customer Business Lunches 93.42

Express Mail Postage 55.00 Miscellaneous Office Supplies 32.48

Petty Cash ExamplePetty Cash Example

Prepare the journal entry to record replenishing the fund if the amount of cash in the petty cash box

on July 31 was $137.80.

8-46

What amount of cash will be required to replenish the petty cash fund?

a. $260.20

b. $262.20

c. $139.80

d. $137.80

What amount of cash will be required to replenish the petty cash fund?

a. $260.20

b. $262.20

c. $139.80

d. $137.80

Petty Cash ExamplePetty Cash Example

8-47

What amount of cash will be required to replenish the petty cash fund?

a. $260.20

b. $262.20

c. $139.80

d. $137.80

What amount of cash will be required to replenish the petty cash fund?

a. $260.20

b. $262.20

c. $139.80

d. $137.80

Desired Balance 400.00$

Amount of Cash in Box 137.80

Amount Needed 262.20$

Petty Cash ExamplePetty Cash Example

8-48

Petty Cash ExamplePetty Cash Example

GENERAL JOURNAL Page: 30

Date Description PR Debit Credit

7/31

8-49

GENERAL JOURNAL Page: 30

Date Description PR Debit Credit

7/31 Travel Expense 79.30

Entertainment Expense 93.42

Postage Expense 55.00

Office Supplies Expense 32.48

Cash Short and Over 2.00

Cash 262.20

To Replenish Petty Cash Fund

Petty Cash ExamplePetty Cash Example

The Cash Short and Over account is usedto balance the petty cash fund. It is only

needed when the amount of cash requestedis different from the amount of paid vouchers.

The Cash Short and Over account is usedto balance the petty cash fund. It is only

needed when the amount of cash requestedis different from the amount of paid vouchers.

If the Cash Short and Over account has a debit balance at year end, what is the

nature of the account?

If the Cash Short and Over account has a debit balance at year end, what is the

nature of the account?

8-50

End of Chapter 8End of Chapter 8

I’m out of here!(After I do the virtual keypads)