Cash and Internal Controls

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© 2009 The McGraw-Hill Companies, Inc., All Rights Reserved CASH AND INTERNAL CONTROLS Chapter 8

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Cash and Internal Controls. Chapter 8. Internal control principles common to all companies: Establish responsibilities. Maintain adequate records. Insure assets and bond key employees. Separate recordkeeping from custody of assets. Divide responsibility for related transactions. - PowerPoint PPT Presentation

Transcript of Cash and Internal Controls

Page 1: Cash and Internal  Controls

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved

CASH ANDINTERNAL CONTROLS

Chapter 8

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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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TECHNOLOGY AND INTERNAL CONTROL

ReducedProcessing

Errors

MoreExtensive Testing

of Records

LimitedEvidence ofProcessing

CrucialSeparation of

Duties

Increased e-commerce

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LIMITATIONS OF INTERNAL CONTROL

Human Error

NegligenceFatigue

MisjudgmentConfusion

Human Fraud

Intent todefeat internal

controls forpersonal gain

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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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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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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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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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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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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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OPERATING A PETTY CASH FUND

Petty Cash

CompanyCompanyCashierCashier

Petty Petty CashierCashier

May 1 Petty cash 400 Cash 400

AccountantAccountant

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Petty Cash

Petty Petty CashierCashier

OPERATING A PETTY CASH FUND

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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

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BANKING ACTIVITIES AS CONTROLS

Bank Accounts Signature Cards Deposit Tickets

Checks Electronic Funds Transfer

Bank Statements

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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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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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END OF CHAPTER 8