Topic 9- Cash And Internal Controls

Chapter

9

Cash and Internal Controls 100 Shares

Cash???? $1 par value

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Learning Learning Objectives Objectives  Define internal control and identify its purpose and principles  Describe the impact of technology on internal control  Discuss the limitations of internal control

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 Define cash and cash equivalents and explain how to report them  Explain internal control over cash receipts  Describe internal control over cash disbursements  Prepare a bank reconciliation

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Purpose Purpose of of Internal Internal Control Control Policies Policies and and procedures procedures managers managers use use to to .. .. ..  Protect Protect assets. assets.  Ensure Ensure reliable reliable accounting. accounting.  Promote Promote efficient efficient operations. operations.  Urge Urge adherence adherence to to company company policies. policies.

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Principles Principles of of Internal Internal Control Control  Establish Establish responsibilities. responsibilities.  Maintain Maintain adequate adequate records. records.  Insure Insure assets assets and and bond bond key key employees. employees.  Separate Separate recordkeeping recordkeeping from from custody custody of of assets. assets.  Divide Divide responsibility responsibility for for related related transactions. transactions.   Apply Apply technological technological controls. controls.   Perform Perform regular regular and and independent independent reviews. reviews. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Technology Technology and and Internal Internal Control Control Reduced Processing Errors

More Extensive Testing of Records

Limited Evidence of Processing

Crucial Separation of Duties

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Limitations Limitations of of Internal Internal Control Control

Human Error

Human Fraud

Negligence Fatigue Misjudgment Confusion

Intent to defeat internal controls for personal gain

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Limitations Limitations of of Internal Internal Control Control

The costs of internal controls must not exceed their benefits.

Benefits

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Costs © The McGraw-Hill Companies, Inc., 2007

Control Control of of Cash Cash An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines: Handling cash is separated from recordkeeping of cash.

Cash receipts are promptly deposited in a bank.

Cash disbursements are made by check. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Cash, Cash, Cash Cash Equivalents, Equivalents, and and Liquidity Liquidity Cash Currency, coins and amounts on deposit in bank accounts, checking accounts, and some savings accounts.

Cash Equivalents Short-term, highly liquid investments that are: Readily convertible to a known cash amount Close to maturity date and not sensitive to interest rate changes Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Cash, Cash, Cash Cash Equivalents, Equivalents, and and Liquidity Liquidity Liquidity How easily an asset can be converted into another asset or be used in paying for services or obligations.

Inventory Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Cash © The McGraw-Hill Companies, Inc., 2007

Control Control of of Cash Cash Receipts Receipts Over-the-Counter Cash Receipts  Cash register with locked-in record of transactions.  Compare cash register record with cash reported.

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Cash Receipts By Mail  Two people open the mail. • Money to cashier’s office. • List to accounting dept. • Copy of list filed.

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Control Control of of Cash Cash Disbursements Disbursements  All All expenditures expenditures made by check. The only only exception exception is is for for small small payments payments from from petty petty cash. cash.  Separate Separate authorization, authorization, check check signing signing and and recordkeeping recordkeeping duties. duties.  Use Use aa voucher voucher system. system.

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Voucher Voucher System System of of Control Control A voucher system establishes procedures for:  Verifying, Verifying, approving approving and and recording recording obligations obligations for for eventual eventual cash cash disbursement. disbursement.  Issuing Issuing checks checks for for payment payment of of verified, verified, approved approved and and recorded recorded obligations. obligations.

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Voucher Voucher System System of of Control Control Check

Cashier Accounting Receiving Supplier (Vendor) Purchasing Requesting

Invoice Approval Receiving Report Invoice Purchase Order Purchase Requisition

Supplier (Vendor) Cashier Accounting, Requesting & Purchasing Accounting Supplier, Requesting, Receiving & Accounting Purchasing and Accounting

Voucher Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Petty Petty Cash Cash System System of of Control Control Small Small payments payments required in most companies for items items such such as as postage, postage, courier courier fees, fees, minor minor repairs repairs and and low-cost low-cost supplies. supplies.

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Operating Operating aa Petty Petty Cash Cash Fund Fund Petty Cashier

Company Cashier

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Petty Cashier

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Operating Operating aa Petty Petty Cash Cash Fund Fund Petty Cashier

Company Cashier

Petty Cashier

May 1

Accountant Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Petty cash Cash

400 400

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Operating Operating aa Petty Petty Cash Cash Fund Fund Petty cash receipts with either no signature or a forged signature usually indicate misuse of petty cash. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Receipts

Petty Cashier

37¢ Stamps $45

Courier $80

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Operating Operating aa Petty Petty Cash Cash Fund Fund Receipts

$125 Company Cashier

To reimburse petty cash fund

M a y 31

Use a Cash Over and Short account if needed.

Accountant Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

Petty Cashier Posta ge e x pe nse De live ry e x pe nse Ca sh

45 80 125

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Petty Petty Cash Cash Example Example Tension Co. maintains a petty cash fund of $400. The following summary information was taken from petty cash vouchers for July: Travel Expenses $79.30 Customer Business Lunches 93.42 Express Mail Postage 55.00 Miscellaneous Office Supplies 32.48 Let’s look at replenishing the fund if the balance on July 31 was $137.80. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Petty Petty Cash Cash Example Example What What amount amount of of cash cash will will be be required required to to replenish replenish the the petty petty cash cash fund? fund? a. a. b. b. c. c. d. d.

$260.20 $260.20 $262.20 $262.20 $139.80 $139.80 $137.80 $137.80

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Petty Petty Cash Cash Example Example What What amount amount of of cash cash will will be be required required to to replenish replenish the the petty petty cash cash fund? fund? a. a. b. b. c. c. d. d.

$260.20 $260.20 $262.20 $262.20 $139.80 $139.80 $137.80 $137.80

Let’s prepare the journal entry to replenish the petty cash fund. © The McGraw-Hill Companies, Inc., 2007

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Petty Petty Cash Cash Example Example Here is the journal entry to replenish the petty cash fund. July 31 Travel Expense

79.30

Entertainment Expense

93.42

Postage Expense

55.00

Office Supplies Expense

32.48

Cash Over and Short Cash

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2.00 262.20

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Banking Banking Activities Activities as as Controls Controls Bank Accounts

Signature Cards

Deposit Tickets

Checks

Electronic Funds Transfer

Bank Statements

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Bank Bank Reconciliation Reconciliation A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on company’s books. Bank Statement First National Bank Nashville, TN 37459

May 31, 2002

Clothes Mart Nashville, TN Acct No 278609

Previous Balance 1488.79 5/1 5/2 5/4 5/7 5/9 5/12 5/15 5/18 5/21 5/27 5/30 5/31

Total Checks

Total Deposits

1,367.09 107

2,604.22 55.00

108 109 110 111

279.50 44.75 21.81 37.55

112 113 114

175.98 288.31 12.54

115

451.65

*

Why are the balances different?

Current Balance 2,725.92 1,251.88

825.04

527.30

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Reconciling Reconciling Items Items Bank Bank Statement Statement Balance Balance  Deduct: Deduct: Outstanding Outstanding checks. checks.  Add: Add: Deposits Deposits in in transit. transit.  Add Add or or Deduct: Deduct: Bank Bank errors. errors.

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Book Book Balance Balance  Deduct: Deduct: Nonsufficient Nonsufficient funds funds check check (NSF). (NSF).  Deduct: Deduct: Bank Bank service service charge. charge.  Add: Add: Interest Interest earned earned on on checking checking account. account.  Add: Add: Collections Collections made made by by the the bank. bank.  Add Add or or Deduct: Deduct: Book Book errors. errors. © The McGraw-Hill Companies, Inc., 2007

Bank Bank Reconciliation Reconciliation Two sections:  Reconcile Reconcile bank bank statement statement balance balance to to the the

adjusted adjusted bank bank balance. balance.  Reconcile Reconcile book book balance balance to to the the adjusted adjusted book book balance. balance.

The adjusted adjusted balances balances should should be be equal. equal.

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Bank Bank Reconciliation Reconciliation Example Example Let’s Let’s prepare prepare aa July July 31 31 bank bank reconciliation reconciliation statement statement for for the the Simmons Simmons Company. Company.  The The July July 31 31 bank bank statement statement indicated indicated aa balance balance of of $9,610. $9,610.  The The cash cash general general ledger ledger account account on on that that date date shows shows aa balance balance of of $7,430. $7,430. Additional Additional information information necessary necessary for for the the reconciliation reconciliation is is shown shown on on the the next next screen. screen. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Bank Bank Reconciliation Reconciliation Example Example  Outstanding checks totaled $2,417.  A $500 check mailed to the bank for deposit had not reached the bank at the statement date.  The bank returned a customer’s NSF check for $225 received as payment on account receivable.  The bank statement showed $30 interest earned during July.  Check No. 781 for supplies expense cleared the bank for $268 but was erroneously recorded in our books as $240.  A $486 deposit by Acme Company was erroneously credited to our account by the bank.

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SIMMONS COMPANY BANK RECONCILIATION AS AT 31 July 2006 Bank Balance, 31 July Deposit in Transit Bank Error Outstanding Checks Adjusted Balance, 31 July Book Balance, 31 July Interest Recording Error NSF Check Larson, Wild, Chiapetta,Balance, Ropidah, Haslinda, Liana Adjusted 31Aryati, July

$ 9,610 500 $ (486) (2,417) $ 7,207 $ 7,430 $

30 (28) (225)

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  

   Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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Recording Recording Adjusting Adjusting Entries Entries from from aa Bank Bank Reconciliation Reconciliation Only amounts shown on the book portion of the reconciliation require an adjusting entry. July 31

Cash

30 Interest revenue

July 31

Supplies expense Accounts receivable Cash

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30 28 225 253

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Recording Recording Adjusting Adjusting Entries Entries from from Bank Bank Reconciliation Reconciliation After posting the reconciling entries the cash account looks like this . . .

Adjusted Adjusted balance balance on on July July 31. 31. Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Liana

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End of Topic 9

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