Cash and Internal Controls
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Transcript of Cash and Internal Controls
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CASH ANDINTERNAL CONTROLS
Chapter 8
McGraw-Hill/Irwin Slide 2McGraw-Hill/Irwin Slide 2
PRINCIPLES OF INTERNAL CONTROL
Internal control principles common to all companies:1. Establish responsibilities.
2. Maintain adequate records.
3. Insure assets and bond key employees.
4. Separate recordkeeping from custody of assets.
5. Divide responsibility for related transactions.
6. Apply technological controls.
7. Perform regular and independent reviews.
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McGraw-Hill/Irwin Slide 3McGraw-Hill/Irwin Slide 3
TECHNOLOGY AND INTERNAL CONTROL
ReducedProcessing
Errors
MoreExtensive Testing
of Records
LimitedEvidence ofProcessing
CrucialSeparation of
Duties
Increased e-commerce
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McGraw-Hill/Irwin Slide 4McGraw-Hill/Irwin Slide 4
LIMITATIONS OF INTERNAL CONTROL
Human Error
NegligenceFatigue
MisjudgmentConfusion
Human Fraud
Intent todefeat internal
controls forpersonal gain
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McGraw-Hill/Irwin Slide 5McGraw-Hill/Irwin Slide 5
CONTROL OF CASH
An effective system of internal control that protects cash and cash equivalents should meet
three basic guidelines:
Handling cashis separated from recordkeeping for
cash.
Cash receiptsare promptly
deposited in a bank.
Cash disbursements are made by
check.
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McGraw-Hill/Irwin Slide 6McGraw-Hill/Irwin Slide 6
CASH, CASH EQUIVALENTS,AND LIQUIDITY
CashCurrency, coins and amounts on deposit in bank accounts, checking accounts, and some savings
accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders.
Cash EquivalentsShort-term, highly liquid investments that are:1. Readily convertible to a known cash amount.2. Close to maturity date and not sensitive to
interest rate changes.
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McGraw-Hill/Irwin Slide 7McGraw-Hill/Irwin Slide 7
InventoryInventory CashCash
LiquidityHow easily an asset can be converted into cash
to be used to pay for services or obligations.
CASH, CASH EQUIVALENTS,AND LIQUIDITY
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McGraw-Hill/Irwin Slide 8McGraw-Hill/Irwin Slide 8
CASH MANAGEMENT
The goals of cash management are twofold:1. Plan cash receipts to meet cash payments when due.
2. Keep a minimum level of cash necessary to operate.
Effective cash management involves applyingthe following cash management principles: Encourage collection of receivables. Delay payment of liabilities. Keep only necessary levels of assets. Plan expenditures. Invest excess cash.
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McGraw-Hill/Irwin Slide 9McGraw-Hill/Irwin Slide 9
CONTROL OF CASH DISBURSEMENTS
All expenditures should be made by check. The only exception is for small payments from petty cash.
Separate authorization for check signing and recordkeeping duties.
Use a voucher system.
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McGraw-Hill/Irwin Slide 10McGraw-Hill/Irwin Slide 10
Cashier
Accounting
Receiving
Supplier (Vendor)
Purchasing
Requesting
CashierAccounting, Requesting& PurchasingAccounting
Supplier (Vendor)
Purchasing andAccounting
Supplier, Requesting, Receiving & Accounting
Check
Invoice Approval
Receiving Report
Invoice
Purchase Order
Purchase Requisition
VoucherVoucher
Sender Receiver
VOUCHER SYSTEM OF CONTROL
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McGraw-Hill/Irwin Slide 11McGraw-Hill/Irwin Slide 11
OPERATING A PETTY CASH FUND
Petty Cash
CompanyCompanyCashierCashier
Petty Petty CashierCashier
May 1 Petty cash 400 Cash 400
AccountantAccountant
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McGraw-Hill/Irwin Slide 12McGraw-Hill/Irwin Slide 12
Petty Cash
Petty Petty CashierCashier
OPERATING A PETTY CASH FUND
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McGraw-Hill/Irwin Slide 13McGraw-Hill/Irwin Slide 13
Receipts
Company Company CashierCashier
$123
To reimbursepetty cash fund
Use a CashOver and Short
account if needed.
May 31 Postage expense 43 Delivery expense 80
Cash 123
AccountantAccountant
Petty Petty CashierCashier
P 2OPERATING A PETTY CASH
FUND
McGraw-Hill/Irwin Slide 14McGraw-Hill/Irwin Slide 14
BANKING ACTIVITIES AS CONTROLS
Bank Accounts Signature Cards Deposit Tickets
Checks Electronic Funds Transfer
Bank Statements
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McGraw-Hill/Irwin Slide 15McGraw-Hill/Irwin Slide 15
BANK RECONCILIATION
Two sections:1. Reconcile bank statement balance to the
adjusted bank balance.2. Reconcile book balance to the adjusted
book balance.The adjusted balances should be equal.
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McGraw-Hill/Irwin Slide 16McGraw-Hill/Irwin Slide 16
DAYS’ SALES UNCOLLECTED
Days’Sales
Uncollected
Accounts Receivable Net Sales × 365=
How much time is likely to pass beforewe receive cash receipts from credit sales.
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McGraw-Hill/Irwin Slide 17McGraw-Hill/Irwin Slide 17
END OF CHAPTER 8