Accounting Principles - Internal Control and Cash
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Transcript of 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.
Internal ControlInternal ControlInternal ControlInternal Control
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.
Internal ControlInternal ControlInternal ControlInternal Control
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
Internal ControlInternal ControlInternal ControlInternal Control
LO 2 Identify the principles of internal control.LO 2 Identify the principles of internal control.
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
Internal ControlInternal ControlInternal ControlInternal Control
LO 2 Identify the principles of internal control.LO 2 Identify the principles of internal control.
Principles of Internal ControlPrinciples of Internal ControlPHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS
Physical
Mechanical and
Electronic
Illustration 8-3
Chapter 8-10
Internal ControlInternal ControlInternal ControlInternal Control
LO 2 Identify the principles of internal control.LO 2 Identify the principles of internal control.
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
Internal ControlInternal ControlInternal ControlInternal Control
LO 2 Identify the principles of internal control.LO 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
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
Cash ControlsCash ControlsCash ControlsCash Controls
LO 3 Explain the applications of internal control principles to cash receipts.LO 3 Explain the applications of internal control principles to cash receipts.
Chapter 8-14
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 salescollections on account from customersreceipt of interest, rent, and dividendsinvestments by owners bank loans proceeds from the sale of noncurrent assets
LO 3 Explain the applications of internal control principles to cash receipts.LO 3 Explain the applications of internal control principles to cash receipts.
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.
See notes page for discussion
Discussion QuestionDiscussion Question
Cash ControlsCash ControlsCash ControlsCash Controls
LO 3 Explain the applications of internal control principles to cash receipts.LO 3 Explain the applications of internal control principles to cash receipts.
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
LO 3 Explain the applications of internal control principles to cash receipts.LO 3 Explain the applications of internal control principles to cash 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.
LO 3 Explain the applications of internal control principles to cash receipts.LO 3 Explain the applications of internal control principles to cash receipts.
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
Cash ControlsCash ControlsCash ControlsCash Controls
LO 3 Explain the applications of internal control principles to cash receipts.LO 3 Explain the applications of internal control principles to cash 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
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
Cash ControlsCash ControlsCash ControlsCash Controls
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
LO 4 Explain the applications of internal control LO 4 Explain the applications of internal control principles to cash disbursements.principles to cash 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
LO 4 Explain the applications of internal control LO 4 Explain the applications of internal control principles to cash disbursements.principles to cash 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
LO 4 Explain the applications of internal control LO 4 Explain the applications of internal control principles to cash disbursements.principles to cash 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 DisbursementsInternal Control over Cash Disbursements
LO 4 Explain the applications of internal control LO 4 Explain the applications of internal control principles to cash disbursements.principles to cash 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 DisbursementsInternal Control over Cash Disbursements
LO 4 Explain the applications of internal control LO 4 Explain the applications of internal control principles to cash disbursements.principles to cash 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 DisbursementsInternal Control over Cash Disbursements
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.
Cash ControlsCash ControlsCash ControlsCash Controls
LO 5 Describe the operation of a petty cash fund.LO 5 Describe the operation of a 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
Cash ControlsCash ControlsCash ControlsCash Controls
LO 5 Describe the operation of a petty cash fund.LO 5 Describe the operation of a petty cash fund.
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
Cash ControlsCash ControlsCash ControlsCash Controls
LO 5 Describe the operation of a petty cash fund.LO 5 Describe the operation of a petty cash fund.
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.
Cash ControlsCash ControlsCash ControlsCash Controls
LO 5 Describe the operation of a petty cash fund.LO 5 Describe the operation of a petty cash fund.
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.
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.
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
LO 6 Indicate the control features of a bank account.LO 6 Indicate the control features of a bank account.
Maker
Payee
Illustration 8-11
Payer
Chapter 8-33
Bank Statements
Debit MemorandumBank service chargeNSF (not sufficient funds)
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.
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.
Review QuestionReview Question
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 8-35
Reconciling the Bank Account
Use of a BankUse of a BankUse of a BankUse of a Bank
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
Use of a BankUse of a BankUse of a BankUse of a Bank
LO 7 Prepare a bank reconciliation.LO 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
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.
Use of a BankUse of a BankUse of a BankUse of a Bank
LO 7 Prepare a bank reconciliation.LO 7 Prepare a bank reconciliation.
Chapter 8-38
E8E8--11 11 a) Prepare a bank reconciliation at July 31.
Use of a BankUse of a BankUse of a BankUse of a Bank
LO 7 Prepare a bank reconciliation.LO 7 Prepare a bank reconciliation.
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
Use of a BankUse of a BankUse of a BankUse of a Bank
LO 7 Prepare a bank reconciliation.LO 7 Prepare a bank reconciliation.
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.
Review QuestionReview Question
Use of a BankUse of a BankUse of a BankUse of a Bank
LO 7 Prepare a bank reconciliation.LO 7 Prepare a bank reconciliation.
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.
Review QuestionReview Question
Use of a BankUse of a BankUse of a BankUse of a Bank
LO 7 Prepare a bank reconciliation.LO 7 Prepare a bank reconciliation.
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.
See notes page for discussion
Recording ProcessRecording ProcessRecording ProcessRecording Process
Discussion QuestionDiscussion Question
LO 7 Prepare a bank reconciliation.LO 7 Prepare a bank reconciliation.
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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