Post on 20-Jan-2016
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Chapter 8
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Cash
Items included in cash are:Cash on handPetty cashCash on deposit in bank and trust companiesCash equivalent (Treasury Bills)
Cash is the most liquid asset of an organizationCash’s liquidity can be considered a disadvantage because
it is the most easily stolen asset
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Learning Objective 1
Define internal control
What is internal control?
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Internal ControlInternal control defined: consists of the process designed
and put in place by management to provide reasonable assurance that the organization will achieve its objectives of reliable financial reporting, effective and efficient operations, and compliance with applicable laws and regulations
Internal control objectives are:Encouraging operational efficiencyPreventing and detecting error and fraudSafeguarding assets and records. Providing accurate, reliable information
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The Sarbanes-Oxley Act (SOX)
Established in the wake of the Enron and WorldCom accounting scandals
Provisions of SOXPublic companies must issue an internal control reportThe Public Company Accounting Oversight Board oversees
auditors of public companiesAccounting firms cannot both audit and provide consulting
services for the same clientStiff penalties for violators
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The Sarbanes-Oxley Act (SOX)
The impact of SOX on Canadian companies:Canadian companies listed on U.S. stock exchanges must
abide by SOXCanadian regulators are implementing some of the SOX
requirementsSOX ensures that managers give careful attention to internal
controls in their companies
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Learning Objective 2
List and describe the components of internal control and control procedures
What should we think about when designing an internal control system?
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The Components of Internal Control
A business can achieve its internal control objectives by applying the following components:Control environmentRisk assessmentControl proceduresMonitoring of controlsInformation system
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Components of Internal ControlControl environment – this is the “tone at the top” of the
business. Owners and its managers must behave honourably to set good examples for employees
Risk assessment – a company must identify its risksControl procedures – these are the rules and procedures
designed to ensure that the business’s goals are achievedMonitoring of controls – companies hire both internal and
external auditors to monitor company controlsInformation system – companies need accurate
information to keep track of assets, and measure profits and losses
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Internal Control Procedures
An effective system of internal controls has these characteristics:Competent, reliable, and ethical personnelAssignment of responsibilitiesProper authorizationSeparation of duties
Separate operations from accounting Separate the custody of assets from accounting Separation of the authorization of transactions from the custody of
related assets
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Internal Controls Procedures, Continued
Characteristics also include:Internal and external auditsUse of documents and recordsUse of electronic devices and computer controlsOther controls
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Internal Controls for E-Commerce
E-commerce pitfalls include:Stolen credit-card numbersComputer viruses and TrojansPhishing expeditions and identity theft
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Security Measures for E-Commerce
Encryption – it is the primary method of achieving confidentiality in e-commerceEncryption rearranges messages by a mathematical process
and the encrypted messages cannot be read by anyone who does not know the process
Firewalls – limits access to a local network to network members who have access through PINs and passwordsUsually several firewalls are built into the system
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The Limitations of Internal Control – Costs and Benefits
Most internal controls can be circumvented or overcomeCollusion, where two or more people work as a team to
defraud the company
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The Bank Account as a Control Device
Cash is the most liquid asset, and can be concealed, it is easy to move, and it is relatively easy to steal
Documents used to control a bank account include:Signature cardDeposit ticketChequeBank statementBank reconciliation
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Learning Objective 3
Prepare a bank reconciliation and the related journal entries
What do we do when the bank statement balance and the cash account balance are not the same?
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The Bank Reconciliation
There are two records of the business’s cash:The Cash account in the company’s general ledgerThe bank statement, which tells the actual amount of cash
the business has in the bankWhat causes the timing differences between the
company’s ledger balance and the bank’s balance?
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The Bank Reconciliation, Continued
Items recorded by a company in the general ledger, but not yet recorded by the bank include:Deposits in transit (outstanding deposits)Outstanding chequesBank errors
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The Bank Reconciliation, Continued
Items recorded by the bank but not yet recorded by the business include:Bank collections Electronic funds transfers (EFT) receipts and paymentsService chargesInterest revenue on chequing accountNonsufficient funds (NSF) chequesCost of printed chequesBook errors
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Bank Reconciliation, Continued
Balance per bank
+ Deposits in transit
– Outstanding cheques
= Adjusted bank balance
Balance per books
+ Bank collections
+/– EFT cash receipts
+ Interest revenue
– Service charges
= Adjusted book balance
Adjusted bank balance must equal Adjusted book balance
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Bank Reconciliation, Example
Business Research Inc.’s books indicate a balance of $3,294.21
The bank statement showed a balance of $5,902.48
Reconciling items include the following:
1.Deposit in transit, $1,591.63
2.Bank error. The bank deducted $100.00 for a cheque written by another company. Add $100.00 to bank balance
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Bank Reconciliation, Example Continued
3. Outstanding cheques: no. 337, $286.00; no. 338, $319.47; no. 339, $83.00; no. 340, $203.14; no. 341, $458.53
4. EFT receipt of rent revenue, $900.00
5. Bank collection of note receivable, $2,114.00, including interest revenue of $114.00
6. Interest earned on bank balance, $28.01
7. Bank error: cheque no. 333 for $150.00 paid to Brown Corp. on account was recorded as $510.00
8. Bank service charges, $39.25 ($25.00 + $14.25)
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Bank Reconciliation, Example Continued
9. NSF cheque from L. Ross, $52.00
10. EFT payment to insurance expense, $361.00
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Bank Reconciliation, Example Continued
Bank Books
Bank balance, January 31, 2014 $5,902.48 Book balance, January 31, 2014 $3,294.21
Add: Add:
1. Deposit, Jan. 31, in transit 1,591.63 4. EFT receipt of rent revenue 900.00
2. Correction of bank error – Business Research cheque erroneously charged against company account 100.00
5. Bank collection of note receivable including interest revenue of $114
2,114.00
3. Less outstanding cheques 6. Interest revenue earned on bank balance
28.01
No. 337 338 339 340 341
286.00319.47
83.00203.14458.53 (1,350.14)
7. Correction of book error – overstated amount of cheque no. 333
360.00
Less:
8. Service charges 39.25
9. NSF Cheque 52.00
10. EFT payment of insurance expense 361.00 (452.25)
Adjusted Bank Balance $6,243.97 Adjusted Book Balance $6,243.97
BUSINESS RESEARCH INC.Bank ReconciliationJanuary, 31, 2014
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Journalizing Transactions from the Reconciliation
The journal entries resulting from the bank reconciliation are as follows:Date Accounts Post
RefDebit Credit
(4) Jan. 31 Cash Rent RevenueReceipt of monthly rent.
900.00900.00
(5) Jan. 31 Cash Notes Receivable Interest RevenueNotes receivable collected by bank.
2,144.002,000.00
114.00
(6) Jan. 31 Cash Interest RevenueInterest earned on bank balance.
28.0128.01
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Journalizing Transactions from the Reconciliation, Continued
Date Accounts Post Ref
Debit Credit
(7) Jan. 31 Cash Accounts Payable – Brown. Corp.Correction of cheque no. 333.
360.00360.00
(8) Jan. 31 Bank Charges Expense CashBank service charges, $25 NSF + 14.25.
39.2539.25
(9) Jan. 31 Accounts Receivable – L. Ross CashNSF cheque returned by bank.
52.0052.00
(10) Jan. 31 Insurance Expense CashPayment of monthly insurance.
361.00361.00
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Learning Objective 4
Apply internal controls to cash receipts
How do we implement internal controls for cash receipts?
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Internal Control over Cash Receipts
Internal control over cash receipts ensures that cash receipts are deposited quickly for safekeeping
1. Cash receipts over the counter:The cash register should be positioned so that customers can
see the amount the cashier enters into the terminalA receipt is issued for each sale recordedThe cash drawer should open only when the clerk enters a
transactionCash needs to be deposited in the bank, and the machine
tape goes to accounting to record daily sales
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Internal Control over Cash Receipts, Continued
2. Cash receipts by mail: All incoming mail is opened by the a mailroom employee Payments are sent to the treasurer, who has the cashier
deposit the funds in the bank Remittance advices and records of payment go to the
accounting department Some companies use a lock-box system and receipts are
sent directly to a box belonging to the bank, which directly deposits it to the customer’s bank account; company personnel never touch incoming cash
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Internal Control over Cash Receipts, Continued
3. Cash Short and Over: An account that accumulates the difference between
actual cash receipts and the day’s record of cash received A net debit/credit balance is shown as Cash Short and
Over, an expense account on the income statement A net credit balance is shown as Cash Over on the income
statement A large balance in Cash Short and Over signals there are
potential internal control issues
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Cash Short and Over, Example
Suppose the tapes from the cash register indicated sales revenue of $15,000, but the cash received was $14,980
The journal entry to record the cash short and over is:
Cash 14,980
Cash Short and Over 20
Sales Revenue 15,000
To record daily cash sales.
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Learning Objective 5
Apply internal controls to cash payments
How do we implement internal controls for cash payments?
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Internal Control over Cash Payments
Payment by cheque is an important internal control because:The cheque provides a record of paymentThe cheque must be signed by an authorized official or
preferably two signaturesThe signing official studies the evidence supporting the
cheque
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Controls over Purchase and Payment
The purchasing and payment process follows these steps:Prepare a purchase order to the supplierThe supplier ships the merchandise and mails the invoiceThe receiving department checks the goods and completes a
receiving reportThe accounting department checks and confirms all the
foregoing documents, then a cheque is issued to the supplier
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Controlling Petty Cash Payments
Petty cash defined: Companies keep cash on hand to pay small amounts
Internal controls over petty cash include:Designating a custodian of the petty cash fundKeeping a specific amount of cash on hand in a secure
locationSupporting all fund payments for expenses with a petty cash
ticket or voucher
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Creating the Petty Cash FundAssume on Feb. 28 the business creates a petty cash fund
of $400The journal entry to start the fund is:
For each petty cash payment, the custodian prepares a petty cash ticket or cash voucher
No journal entries are made for petty cash payments until the fund is replenished
Feb. 28 Petty Cash 400
Cash 400
To open petty cash fund.
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Replenishing the Petty Cash
On March 31, the petty cash fund holds $230 in petty cash and $164 in vouchers; note that there is $6 missing
To replenish the petty cash fund on March 31 and bring the balance back to $400, the journal entry is:
Mar. 31 Office Supplies 46
Delivery Expense 34
Cash Short and Over 6
Selling Expense 84
Cash 170
To replenish the petty cash fund.
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Reporting Cash on the Balance Sheet
Cash is the first asset listed on the balance sheet because it is the most liquid
Businesses usually have several bank accounts and petty cash funds – combined, it is called “Cash and Cash Equivalents”
Cash equivalents include term deposits and certificates of deposit
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Learning Objective 6
Make ethical business judgments
Are there steps we can follow when making ethical business judgments?
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Corporate and Professional Codes of Ethics
Most companies have a code of ethics to encourage employees to behave ethically
Owners and mangers must set a high ethical toneAccountants are expected to adhere to rules of
professional conduct of their organization
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Learning Objective 7
Assess the impact on cash of international financial reporting standards (IFRS)
How does IFRS impact cash?
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The Effects of IFRS on Cash
Because of its liquidity, there is little that is different in the way cash is valued under ASPE and under IFRS
A goal of IFRS is to present balance sheet information as close to fair value as possible
The presentation of cash can be different under IFRS – some organizations may list cash at the end of the asset side of the balance sheet