Chapter 8-1
Chapter 8-2
ChapterChapter 88ChapterChapter 88
Internal Controland Cash
Internal Controland Cash
Financial Accounting, Sixth 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
ControlControlInternal Internal
ControlControl
The Sarbanes-The Sarbanes-Oxley ActOxley Act
PrinciplesPrinciples
LimitationsLimitations
Cash Cash
ControlsControlsCash Cash
ControlsControlsUse of a BankUse of a BankUse of a BankUse of a Bank
Reporting Reporting
CashCashReporting Reporting
CashCash
Cash Cash equivalentsequivalents
Restricted Restricted cashcash
Compensating Compensating balancesbalances
Making Making depositsdeposits
Writing checksWriting checks
Bank Bank statementsstatements
Reconciling 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 receipts
Control 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
SO 1 Define internal control.SO 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.
Internal ControlInternal ControlInternal ControlInternal Control
SO 1 Define internal control.SO 1 Define internal control.
The Sarbanes-Oxley ActThe Sarbanes-Oxley 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 with
size and nature of the business.
management’s control philosophy.
Internal ControlInternal ControlInternal ControlInternal Control
SO 2 Identify the principles of internal control.SO 2 Identify the principles of internal control.
Principles of Internal ControlPrinciples of Internal Control Illustration 8-1
Chapter 8-8
ESTABLISHMENT OF RESPONSIBILITY
Control is most effective when only one person is responsible for a given task.
Internal ControlInternal ControlInternal ControlInternal Control
SO 2 Identify the principles of internal control.SO 2 Identify the principles of internal control.
Principles of Internal ControlPrinciples of Internal Control
SEGREGATION OF DUTIES
Related duties should be assigned to different individuals.
DOCUMENTATION PROCEDURES
Companies should use prenumbered documents and all documents should be accounted for.
Chapter 8-9
Internal ControlInternal ControlInternal ControlInternal Control
SO 2 Identify the principles of internal control.SO 2 Identify the principles of internal control.
Principles of Internal ControlPrinciples of Internal Control
PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS
Physical
Mechanical and
Electronic
Illustration 8-3
Chapter 8-10
Internal ControlInternal ControlInternal ControlInternal Control
SO 2 Identify the principles of internal control.SO 2 Identify the principles of internal control.
Principles of Internal ControlPrinciples of Internal Control
INDEPENDENT INTERNAL VERIFICATION
1. Records periodically verified by an employee who is independent.
2. Discrepancies reported to management.
OTHER CONTROLS
1. Bond employees.
2. Rotate employees’ duties and require vacations.
3. Conduct background checks.
Chapter 8-11
Internal ControlInternal ControlInternal ControlInternal Control
SO 2 Identify the principles of internal control.SO 2 Identify the principles of internal control.
Limitations of Internal ControlLimitations of Internal Control
Costs should not exceed benefit.
Human element.
Size of the business.
Chapter 8-12
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.
See notes page for discussion
Discussion QuestionDiscussion Question
Cash ControlsCash ControlsCash ControlsCash Controls
SO 2 Identify the principles of internal control.SO 2 Identify the principles of internal control.
Chapter 8-13
Cash ControlsCash ControlsCash ControlsCash Controls
Internal Control over Cash Internal Control over Cash ReceiptsReceipts
SO 3 Explain the applications of internal control principles to cash SO 3 Explain the applications of internal control principles to cash receipts.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 Duties
Different 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 Controls
Store cash in safes and bank vaults; limit access to
storage areas; use cash registers
Other Controls
Bond personnel who handle cash; require employees to take
vacations; deposit all cash in bank daily
Illustration 8-5
Chapter 8-14
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
Cash ControlsCash ControlsCash ControlsCash Controls
SO 3 Explain the applications of internal control principles to cash SO 3 Explain the applications of internal control principles to cash receipts.receipts.
Chapter 8-15
Cash ControlsCash ControlsCash ControlsCash Controls
Cash consists of coins, currency, checks, money orders, and money on hand or on deposit in a bank.
Cash receipts come from:
cash sales
collections on account from customers
receipt of interest, rent, and dividends
investments by owners
bank loans
proceeds from the sale of noncurrent assetsSO 3 Explain the applications of internal control principles to cash SO 3 Explain the applications of internal control principles to cash
receipts.receipts.
Chapter 8-16
Cashier ring up sales
Supervisor
1. reads register totals
2. makes cash counts
3. prepares cash count sheets
Over-the-Counter ReceiptsOver-the-Counter ReceiptsOver-the-Counter ReceiptsOver-the-Counter Receipts
SO 3 Explain the applications of internal control principles to cash SO 3 Explain the applications of internal control principles to cash receipts.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.
SO 3 Explain the applications of internal control principles to cash SO 3 Explain the applications of internal control principles to cash receipts.receipts.
Chapter 8-18
Permitting only designated personnel to handle cash receipts
is an application of the principle of:
a. segregation of duties.
b. establishment of responsibility.
c. independent check.
d. other controls.
Review QuestionReview Question
Cash ControlsCash ControlsCash ControlsCash Controls
SO 3 Explain the applications of internal control principles to cash SO 3 Explain the applications of internal control principles to cash receipts.receipts.
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
Cash ControlsCash ControlsCash ControlsCash Controls
SO 4 Explain the applications of internal SO 4 Explain the applications of internal control principles to cash control principles to cash disbursements.disbursements.
Internal Control over Cash Internal Control over Cash DisbursementsDisbursements
Chapter 8-20
Cash ControlsCash ControlsCash ControlsCash Controls
Internal Control over Cash Internal Control over Cash DisbursementsDisbursements Independent
Internal Verification
Compare checks to invoices; reconcile
bank statement monthly
Establishment of Responsibility
Only designated personnel are
authorized to sign checks (treasurer)
Segregation of Duties
Different 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 Controls
Stamp invoices
PAID
SO 4 Explain the applications of internal SO 4 Explain the applications of internal control principles to cash control principles to cash disbursements.disbursements.
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.
See notes page for discussion
Discussion QuestionDiscussion Question
Cash ControlsCash ControlsCash ControlsCash Controls
SO 4 Explain the applications of internal SO 4 Explain the applications of internal control principles to cash control principles to cash disbursements.disbursements.
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.
Review QuestionReview Question
Cash ControlsCash ControlsCash ControlsCash Controls
SO 4 Explain the applications of internal SO 4 Explain the applications of internal control principles to cash control principles to cash disbursements.disbursements.
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.
Cash ControlsCash ControlsCash ControlsCash Controls
Internal Control over Cash Internal Control over Cash DisbursementsDisbursements
SO 4 Explain the applications of internal SO 4 Explain the applications of internal control principles to cash control principles to cash disbursements.disbursements.
Chapter 8-24
Electronic Funds Transfers (EFT)
Disbursement systems that uses wire, telephone, or computers to transfer cash balances between locations.
Cash ControlsCash ControlsCash ControlsCash Controls
Internal Control over Cash Internal Control over Cash DisbursementsDisbursements
SO 4 Explain the applications of internal SO 4 Explain the applications of internal control principles to cash control principles to cash disbursements.disbursements.
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.
Cash ControlsCash ControlsCash ControlsCash Controls
Internal Control over Cash Internal Control over Cash DisbursementsDisbursements
SO 5 Describe the operation of a petty cash fund.SO 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.
The fund was replenished on March 15 when the fund contained $3 in cash. On March 20, the amount in the fund was increased to $150.
Instructions: Journalize the entries in March that pertain to the operation of the petty cash fund.
Receipt
Date No. For Amount
3/5 1 Stamp inventory 39$
7 2 Freight- out 21
9 3 Miscellaneous expense 6
11 4 Travel expense 24
14 5 Miscellaneous expense 5
Cash ControlsCash ControlsCash ControlsCash Controls
SO 5 Describe the operation of a petty cash fund.SO 5 Describe the operation of a petty cash fund.
Chapter 8-27
E8-8E8-8 The fund was established on March 1 with a balance of $100
Petty cash 100March 1
Cash100
Cash ControlsCash ControlsCash ControlsCash Controls
SO 5 Describe the operation of a petty cash fund.SO 5 Describe the operation of a petty cash fund.
Chapter 8-28
E8-8 E8-8 The fund was replenished on March 15 when the fund contained $3 in cash.
Postage inventory 39March 15
Cash97
Cash ControlsCash ControlsCash ControlsCash Controls
SO 5 Describe the operation of a petty cash fund.SO 5 Describe the operation of a petty cash fund.
Freight-out 21
Miscellaneous expense 11
Travel expense 24
Cash over and short 2
Chapter 8-29
E8-8 E8-8 On March 20, the amount in the fund was increased to $150.
Cash ControlsCash ControlsCash ControlsCash Controls
SO 5 Describe the operation of a petty cash fund.SO 5 Describe the operation of a petty cash fund.
Petty cash 50March 20
Cash50
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
SO 6 Indicate the control features of a bank account.SO 6 Indicate the control features of a bank account.
Chapter 8-31
Making Bank DepositsAuthorized employee should make deposit.
Use of a BankUse of a BankUse of a BankUse of a Bank
SO 6 Indicate the control features of a bank account.SO 6 Indicate the control features of a bank account.
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.
Use of a BankUse of a BankUse of a BankUse of a Bank
SO 6 Indicate the control features of a bank account.SO 6 Indicate the control features of a bank account.
Maker
Payee
Illustration 8-11
Payer
Chapter 8-33
Bank Statements
Debit Memorandum
Bank service charge
NSF (not sufficient funds)
Use of a BankUse of a BankUse of a BankUse of a Bank
SO 6 Indicate the control features of a bank account.SO 6 Indicate the control features of a bank account.
Illustration 8-12
Credit Memorandum
Collect 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.
Review QuestionReview Question
Use of a BankUse of a BankUse of a BankUse of a Bank
SO 6 Indicate the control features of a bank account.SO 6 Indicate the control features of a bank account.
Chapter 8-35
Reconciling the Bank Account
Use of a BankUse of a BankUse of a BankUse of a Bank
SO 7 Prepare a bank reconciliation.SO 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
Use of a BankUse of a BankUse of a BankUse of a Bank
SO 7 Prepare a bank reconciliation.SO 7 Prepare a bank reconciliation.
+ 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
E8-11E8-11 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.
Instructions
a) Prepare a bank reconciliation at July 31.
b) Journalize the adjusting entries at July 31 on the books of Family Video Company.
Use of a BankUse of a BankUse of a BankUse of a Bank
SO 7 Prepare a bank reconciliation.SO 7 Prepare a bank reconciliation.
Chapter 8-38
E8-11 E8-11 a) Prepare a bank reconciliation at July 31.
Use of a BankUse of a BankUse of a BankUse of a Bank
SO 7 Prepare a bank reconciliation.SO 7 Prepare a bank reconciliation.
Cash balance per bank statement $7,288
Add: Deposit in transit 1,500
Less: Outstanding checks (591)Adjusted cash balance per bank $8,172
Cash balance per books $7,284
Add: Collection of notes receivable 900
Collection of interest 36
Less: Bank service charge (28)
Note collection fee (20)
Adjusted cash balance per books $8,172
Chapter 8-39
Cash 888July 31
Bank charge expense 28
Miscellaneous expense 20
Notes receivable
900Interest revenue
36
Use of a BankUse of a BankUse of a BankUse of a Bank
SO 7 Prepare a bank reconciliation.SO 7 Prepare a bank reconciliation.
E8-11 E8-11 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.
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.
Review QuestionReview Question
Use of a BankUse of a BankUse of a BankUse of a Bank
SO 7 Prepare a bank reconciliation.SO 7 Prepare a bank reconciliation.
Chapter 8-41
Reporting CashReporting CashReporting CashReporting Cash
SO 8 Explain the reporting of cash.SO 8 Explain the reporting of cash.
Most liquid asset, listed first in current assets section of balance sheet.
Cash equivalents
Restricted cash
Compensating balances
Illustration 8-16
Chapter 8-42
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.
Review QuestionReview Question
Use of a BankUse of a BankUse of a BankUse of a Bank
SO 8 Explain the reporting of cash.SO 8 Explain the reporting of cash.
Chapter 8-43
What have you done lately to shore up your own personal internal controls?
What can you do to protect yourself?
All About YouAll About YouAll About YouAll About You
Protecting Yourself from Identity TheftProtecting Yourself from Identity Theft
Some Facts:
In a recent year, more than 7 million people were victims of identity theft.
During a single computer-virus outbreak, called the “Hearse,” thieves stole 90,000 pieces of personal data.
The average identity-theft victim spends 600 hours clearing up his or her finances and financial records
Chapter 8-44
Some Facts:
The Victims incur an average of $1,400 in out-of-pocket expenses.
Consumers have $1.7 trillion worth of assets with online brokerage firms. Many of the largest identity theft losses have been the result of thieves completely cleaning out online brokerage accounts.
Identify theft is the No. 1 fraud complaint among consumers. Phoenix and Las Vegas top the list for identity theft per capita.
All About YouAll About YouAll About YouAll About You
Protecting Yourself from Identity TheftProtecting Yourself from Identity Theft
Chapter 8-45
All About YouAll About YouAll About YouAll About You
Chart shows the most common survey responses from victims of identity theft when asked how their information was used by the thieves.
Source: The Identity Theft Resource Center, Identity Theft: The Aftermath 2003.
Chapter 8-46
What Do You Think?What Do You Think?
Do you feel it is safe to store personal financial data (such as Social Security numbers and bank and credit account numbers) on your computer?
All About YouAll About YouAll About YouAll About You
YES: I have anti-virus software that will detect and stop any intruder.
NO: Even the best anti-virus software does not detect every kind of intruder.
Chapter 8-47
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