Internal Control and Accounting for Cash

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CHAPTER 4

• Internal Control and Accounting for Cash

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Exam Results Review

• High 96
• Low 54
• Mean 76.84( Low)
• As 7
• Bs 19
• Cs 23
• Ds 9
• Fs 4
• Ns 8

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Sarbanes Oxley Act

• Enron and Worldcom
• Public outcry Lots of people lost savings!
• Public Company Accounting Oversight Board
• Consulting Services
• Internal Control report attested by Auditors

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Internal Control-a set of procedures in an
organization to..
4 Objectives

• Safeguard assets
• Encourage adherence to company policies
• Promote operational efficiency
• Ensure accurate and reliable accounting records

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Components of anEffective System

• Competent, reliable, and ethical personnel
• Assignment of responsibilities
• Proper authorization
• Separation of duties

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Internal Control Issues

• Conscious effort by all organization employees
• from the Chief Executive Officer (CEO) to the
  most recently-hired groundskeeper
• Benefits gt costs to implement
• No system is foolproof
• Employees working together (colluding) might
  break system

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IC Focus Protecting Cash

• Important asset
• Target of fraud
• Remove temptation
• Bank account

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The Bank Reconciliation

• Bank has cash and keeps track.
• Accounting system keeps track in Cash account.
• Cash balance according to bank statement
  generally differs from cash balance reflected in
  companys ledger account
• WHY?

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The Bank Reconciliation

• Items that cause differences between bank balance
  and book balance
• Items recorded by the company but not yet
  recorded by the bank
• Deposits in transit
• Outstanding checks

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The Bank Reconciliation

• Items that cause differences between bank balance
  and book balance
• Items on a bank statement and not recorded by the
  business
• Bank collections
• Electronic funds transfers
• Service charge
• Interest revenue earned on account
• NSF checks
• Errors

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Preparing the Bank Reconciliation-Example

• BAL PER BANK 325
• ADD DEPOSITS
• IN TRANSIT 125
• DEDUCT
• OUTSTANDING
• CHECKS ( 75)
• ADJ BANK
• BALANCE 375

• BAL PER BOOKS 350
• ADD BANK
• COLLECTIONS 325
• INTEREST 50
• DEDUCT RETURNED
• ITEMS (200 )
• EFT PMTS (110 )
• BANK FEES -
• SERV CHG (15 )
  
• PRINT CK CHGS ( 25 )
• ADJ BOOK BAL 375

AMOUNTS ARE IN AGREEMENT
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Accounting for Transactions from the
Reconciliation

• BAL PER BOOKS 350
• ADD BANK
• COLLECTIONS 325
• INTEREST 50
• DEDUCT RETURNED
• ITEMS (200 )
• EFT PMTS (110 )
• BANK FEES -
• SERV CHG (15 )
  
• PRINT CK CHGS ( 25 )
• ADJ BOOK BAL 375

• THESE ITEMS NEED TO BE RECORDED IN THE COMPANY
  ACCOUNTS

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Controlling Petty Cash Disbursements

• Petty cash fund small cash fund generally
  maintained by cashier
• Used to pay minor cash expenses

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Managing Cash

• Businesses require cash to run operations
• Cash is necessary for paying wages, rent, taxes,
  supplies, and buying inventory

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The Operating Cycle of a Business

• Business operating cycle is period of time it
  takes company to convert from
• cash, to
• inventory, and back to
• cash!

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Managing Cash

• Excess cash invested to earn more revenue than
  would be earned in checking or savings account
• Managers arrange for additional financing
  if cash balance insufficient to cover
  operating expenses

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Using a Budget to Manage Cash

• Budget is a plan of business activities
• Expressed in dollars

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Using a Budget to Manage Cash

• Cash balance, beginning
• Budgeted cash receipts
• - Budgeted cash payments
• Expected cash balance, ending
• Textbook Exhibit 4-14 p. 197 shows a cash budget.

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Chapter lecture End!