accounting principles - internal control and cash

Chapter 8-1

Chapter 8-2

CHAPTER CHAPTER 88

INTERNAL INTERNAL CONTROLCONTROLAND CASHAND CASHAccounting Principles, Eighth Edition

Chapter 8-3

1. Define internal control.2. Identify the principles of internal control.3. Explain the applications of internal control principles

to cash receipts.4. Explain the applications of internal control principles

to cash disbursements.5. Describe the operation of a petty cash fund.6. Indicate the control features of a bank account.7. Prepare a bank reconciliation.8. Explain the reporting of cash.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 8-4

Internal Internal ControlControl

The SarbanesThe Sarbanes--Oxley ActOxley ActPrinciplesPrinciplesLimitationsLimitations

Cash Cash ControlsControls Use of a BankUse of a Bank

Reporting Reporting CashCash

Cash Cash equivalentsequivalentsRestricted Restricted cashcashCompensating Compensating balancesbalances

Making Making depositsdepositsWriting checksWriting checksBank Bank statementsstatementsReconciling the Reconciling the bank accountbank account

Internal Control and CashInternal Control and CashInternal Control and CashInternal Control and Cash

Control over Control over cash receiptscash receiptsControl over Control over cash cash disbursementsdisbursements

Chapter 8-5

Methods and measures adopted to:

1. Safeguard assets.

2. Enhance accuracy and reliability of accounting records. Reduce risk of:

a. Errors (unintentional)

b. Irregularities (intentional)

Internal ControlInternal ControlInternal ControlInternal Control

LO 1 Define internal control.LO 1 Define internal control.

Under the Sarbanes-Oxley Act, all publicly traded U.S. corporations are required to maintain an adequate system of internal control.

Chapter 8-6

Companies must develop principles of control over financial reporting. continually verify that controls are working.


LO 1 Define internal control.LO 1 Define internal control.

The SarbanesThe Sarbanes--Oxley ActOxley Act

Independent auditors must attest to the level of internal control. SOX created the Public Company Accounting Oversight Board (PCAOB).

Chapter 8-7

Measures vary withsize and nature of the business.management’s control philosophy.


LO 2 Identify the principles of internal control.LO 2 Identify the principles of internal control.

Principles of Internal ControlPrinciples of Internal Control Illustration 8-1

Chapter 8-8



Principles of Internal ControlPrinciples of Internal ControlESTABLISHMENT OF RESPONSIBILITYESTABLISHMENT OF RESPONSIBILITY

Control is most effective when only one person is responsible Control is most effective when only one person is responsible for a given task.for a given task.

SEGREGATON OF DUTIESSEGREGATON OF DUTIES

Related duties, including physical custody and record Related duties, including physical custody and record keeping, should be assigned to different individuals.keeping, should be assigned to different individuals.

DOCUMENTATION PROCEDURESDOCUMENTATION PROCEDURES

Companies should use prenumbered documents for all Companies should use prenumbered documents for all documents should be accounted for.documents should be accounted for.

Chapter 8-9



Principles of Internal ControlPrinciples of Internal ControlPHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS

Physical

Mechanical and

Electronic

Illustration 8-3

Chapter 8-10



Principles of Internal ControlPrinciples of Internal ControlINDEPENDENT INTERNAL VERIFICATION

1. Records periodically verified by an employee who is independent.

2. Discrepancies reported to management.

OTHER CONTROLS1. Bond employees.2. Rotate employees’ duties and require vacations.3. Conduct background checks.

Chapter 8-11



Limitations of Internal ControlLimitations of Internal Control

Costs should not exceed benefit.

Human element.

Size of the business.

Chapter 8-12

Cash ControlsCash ControlsCash ControlsCash Controls

Internal Control over Cash ReceiptsInternal Control over Cash Receipts

LO 3 Explain the applications of internal control principles to cash receipts.LO 3 Explain the applications of internal control principles to cash receipts.

Independent Internal Verification

Supervisors count cash receipts daily;

treasurer compares total receipts to bank

deposits daily

Establishment of Responsibility

Only designated personnel are

authorized to handle cash receipts

(cashiers)

Segregation of DutiesDifferent individuals receive cash, record

cash receipts, and hold the cash

Documentation Procedures

Use remittance advice (mail

receipts), cash register tapes, and

deposit slips

Physical, Mechanical, and

Electronic ControlsStore cash in safes

and bank vaults; limit access to storage areas; use cash

registers

Other ControlsBond personnel who handle cash; require employees to take

vacations; deposit all cash in bank daily

Illustration 8-5

Chapter 8-13

Q8-3. At the corner grocery store, all sales clerks make change out of one cash register drawer. Is this a violation of internal control? Why?

See notes page for discussion

Discussion QuestionDiscussion Question



Chapter 8-14


Cash consists of coins, currency, checks, money orders, and money on hand or on deposit in a bank. Cash receipts come from:

cash salescollections on account from customersreceipt of interest, rent, and dividendsinvestments by owners bank loans proceeds from the sale of noncurrent assets


Chapter 8-15

Q8-8. The management of Sewell Company asks you, as the company accountant, to explain (a) the concept of reasonable assurance in internal control and (b) the importance of the human factor in internal control.





Chapter 8-16

Cashier ring up sales

Supervisor

1. reads register totals

2. makes cash counts

3. prepares cash count sheets

OverOver--thethe--Counter ReceiptsCounter ReceiptsOverOver--thethe--Counter ReceiptsCounter Receipts


Prepare daily summary

Prepare deposit slip

Cashier’s Department

Sales Department

Bank(deposit)

Treasurer(verification)

Accounting(record)

Illustration 8-7

Chapter 8-17

Mail ReceiptsMail ReceiptsMail ReceiptsMail Receipts

Control Procedures:Mail receipts should be opened by two people, a list prepared, and each check endorsed. Copy of the list, along with the checks and remittance advices, sent to cashier’s department. Cashier adds the checks to the over-the-counter receipts and prepares a daily cash summary and makes the daily bank deposit. Copy of list sent to treasurer’s office for comparison with total shown on daily cash summary.


Chapter 8-18

Permitting only designated personnel to handle cash receiptsis an application of the principle of:a. segregation of duties.b. establishment of responsibility.c. independent check.d. other controls.

Review QuestionReview Question



Chapter 8-19

Generally, internal control over cash disbursements is more effective when companies pay by check, rather than by cash.

Applications:

Voucher system

Electronic funds transfers (EFT) system

Petty cash fund


LO 4 Explain the applications of internal control LO 4 Explain the applications of internal control principles to cash disbursements.principles to cash disbursements.

Internal Control over Cash DisbursementsInternal Control over Cash Disbursements

Chapter 8-20


Internal Control over Cash DisbursementsInternal Control over Cash DisbursementsIndependent Internal

VerificationCompare checks to

invoices; reconcile bank statement monthly

Establishment of Responsibility

Only designated personnel are

authorized to sign checks (treasurer)

Segregation of DutiesDifferent individuals

approve and make payments; check

signers do not record disbursements

Documentation Procedures

Use prenumbered checks and account

for them in sequence; each check

must have an approved invoice Physical, Mechanical,

and Electronic Controls

Store blank checks in safes, with limited access; print check

amounts by machine in indelible ink

Other ControlsStamp invoices

PAID


Illustration 8-8

Chapter 8-21

Q8-14. Joe Griswold Company’s internal controls over cash disbursements provide for the treasurer to sign checks imprinted by a checkwriting machine in indelible ink after comparing the check with the approved invoice. Identify the internal control principles that are present in these controls.





Chapter 8-22

The use of prenumbered checks in disbursing cash is an application of the principle of:a. establishment of responsibility.b. segregation of duties.c. physical, mechanical, and electronic controls.d. documentation procedures.




Chapter 8-23

Voucher System

Network of approvals, by authorized individuals, to ensure all disbursements by check are proper.

A voucher is an authorization form prepared for each expenditure.




Chapter 8-24

Electronic Funds Transfers (EFT)

Disbursement systems that uses wire, telephone, or computers to transfer cash balances between locations.




Chapter 8-25

Petty Cash Fund - Used to pay small amounts.

Involves:

1. establishing the fund,

2. making payments from the fund, and

3. replenishing the fund.



LO 5 Describe the operation of a petty cash fund.LO 5 Describe the operation of a petty cash fund.

Chapter 8-26

E8-8 Lincolnville Company uses an imprest petty cash system. The fund was established on March 1 with a balance of $100. During March the following petty cash receipts were found in the petty cash box.March 5 Stamp inventory $39March 7 Freight-out 21March 9 Miscellaneous expense 6March 11 Travel expense 24March 14 Miscellaneous expense 5The fund was replenished on March 15 when the fund contained $3 in cash. On March 20, the amount in the fund was increased to $150.Instructions: Journalize the entries in March that pertain to the operation of the petty cash fund.



Chapter 8-27

E8E8--88 The fund was established on March 1 with a balance of $100.

Petty cash 100March 1Cash 100



Chapter 8-28

E8E8--8 8 The fund was replenished on March 15 when the fund contained $3 in cash.

Postage expense 39March 15

Cash 97



Freight-out 21Miscellaneous expense 11Travel expense 24Cash over and short 2

Chapter 8-29

E8E8--8 8 On March 20, the amount in the fund was increased to $150.



Petty cash 50March 20Cash 50

Chapter 8-30

Contributes to good internal control over cash.

Minimizes the amount of currency on hand.

Creates a double record of bank transactions.

Bank reconciliation.

Use of a BankUse of a BankUse of a BankUse of a Bank

LO 6 Indicate the control features of a bank account.LO 6 Indicate the control features of a bank account.

Chapter 8-31

Making Bank DepositsAuthorized employee should make deposit.



Bank Code Numbers

Front Side Reverse Side

Illustration 8-10

Chapter 8-32

Writing ChecksWritten order signed by depositor directing bank to pay a specified sum of money to a designated recipient.



Maker

Payee

Illustration 8-11

Payer

Chapter 8-33

Bank Statements

Debit MemorandumBank service chargeNSF (not sufficient funds)



Illustration 8-12

Credit MemorandumCollect notes receivable.Interest earned.

Chapter 8-34

The control features of a bank account do not include:a. having bank auditors verify the correctness of

the bank balance per books. b. minimizing the amount of cash that must be kept

on hand.c. providing a double record of all bank

transactions.d. safeguarding cash by using a bank as a

depository.




Chapter 8-35

Reconciling the Bank Account


LO 7 Prepare a bank reconciliation.LO 7 Prepare a bank reconciliation.

Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances.

Reconciling Items:

1. Deposits in transit.

2. Outstanding checks.

3. Errors.

4. Bank memoranda.

Chapter 8-36

Reconciliation Procedures



+ Deposit in Transit

- Outstanding Checks

+- Bank Errors

+ Notes collected by bank

- NSF (bounced) checks

- Check printing or other service charges

+- Book Errors

CORRECT BALANCE CORRECT BALANCE

Illustration 8-13

Chapter 8-37

E8E8--1111 The following information pertains to Family Video Company.1. Cash balance per bank, July 31, $7,263.2. Cash balance per books, July 31, $7,284.3. July bank service charge not recorded by the depositor $28.4. Deposits in transit, July 31, $1,500.5. Bank collected $900 note for Family in July, plus interest $36,

less fee $20.The collection has not been recorded by Family, and no interest has been accrued.

6. Outstanding checks, July 31, $591.Instructionsa) Prepare a bank reconciliation at July 31.b) Journalize the adjusting entries at July 31 on the books of Family

Video Company.



Chapter 8-38

E8E8--11 11 a) Prepare a bank reconciliation at July 31.



Cash balance per bank statement $7,263Add: Deposit in transit 1,500Less: Outstanding checks (591)Adjusted cash balance per bank $8,172

Cash balance per books $7,284Add: Collection of notes receivable 900

Collection of interest 36Less: Bank service charge (28)

Note collection fee (20)Adjusted cash balance per books $8,172

Chapter 8-39

Miscellaneous expense 28

July 31Cash 28

Cash 916

Notes receivable 900Interest revenue 36



E8E8--11 11 b) Journalize the adjusting entries at July 31 on the books of Family Video Company.

Note: Note: Adjusting journal entry includes only the adjustments to the cash balance per books.

Dr. Cr.

Miscellaneous expense 20

July 31

Chapter 8-40

The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is:a. outstanding checks.b. deposit in transit.c. a bank error.d. bank service charges.




Chapter 8-41

Which of the following statements correctly describes the reporting of cash?a. Cash cannot be combined with cash equivalents.b. Restricted cash funds may be combined with

Cash.c. Cash is listed first in the current assets

section.d. Restricted cash funds cannot be reported as a

current asset.




Chapter 8-42

Q8-20. Lori Figgs is confused about the lack of agreement between the cash balance per books and the balance per the bank. Explain the causes for the lack of agreement to Lori, and give an example of each cause.


Recording ProcessRecording ProcessRecording ProcessRecording Process



Chapter 8-43

Reporting CashReporting CashReporting CashReporting Cash

LO 8 Explain the reporting of cash.LO 8 Explain the reporting of cash.

Most liquid asset, listed first in current assets section of balance sheet.

Cash equivalentsRestricted cashCompensating balances

Illustration 8-16

Chapter 8-44

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accounting principles - internal control and cash

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