Chapter 7 Internal Control and Cash

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Chapter 7Internal Control and Cash

• After studying Chapter 7, you should be able to
  
• Identify the principles of internal control.
• Explain the application of internal control to
  cash receipts.
• Explain the application of internal control to
  cash disbursements.
• Prepare a bank reconciliation.
• Explain the reporting of cash.
• Discuss the basic principles of cash management.
• Identify the primary elements of a cash budget.

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Internal Control consists of...

• all the related methods and measures adopted
  within a business to
• safeguard its assets from
• Employee theft
• Robbery
• Unauthorized Use
• enhance accuracy and reliability of its
  accounting records by reducing
• Risk of Errors
• Irregularities

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Establishment of Responsibility

• Control is most effective when only one person
  is responsible for a given task.

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Documentation

• Provide evidence that transactions and events
  occurred
• Shipping documents
• Sales invoices

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Documentation Procedures

• Documents should be pre-numbered.
• All documents should be accounted for.
• Sources documents should be promptly forwarded to
  accounting department.

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Physical, Mechanical and Electronic Controls
OR FINGERPRINT, EYEBALL Scan
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Independent Internal Verification

• Involves review, comparison, and reconciliation
  of data prepared by employees
• Verification should be made periodically or on
  surprise basis
• Verification should be done by employee who is
  independent of the personnel responsible for the
  information
• Discrepancies and exceptions should be reported
  to management

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Independent Internal
Verification
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Other Controls

• Bonding of employees who handle cash
• 
  
• Rotating employees duties and requiring
  employees to take vacations

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Limitations of Internal Controls

• Cost/Benefit - cost of establishing procedure
  should not exceed expected benefit
• Human element - fatigue, carelessness,
  indifference
• Collusion - two or more individuals who work
  together to get around controls
• Size of business

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Cash consists of...

• coins
• currency
• checks
• money orders
• money on hand
• deposits in bank

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Cash is the most desirable asset...

• because it is readily convertible into any other
  asset.

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Electronic Funds Transfer (EFT)

• An approach to transfer funds among parties
  without paper (deposit tickets, checks, etc.)
• EFT uses wire, telephone, telegraph or computer
  to transfer from one location to another.

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Petty Cash Fund

• is a cash fund used to pay relatively small
  amounts

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Use of a Bank...

• is good internal control.
• minimizes the amount of cash that must be kept on
  hand.
• provides a double record of all bank transactions
• one by the business
• one by the bank
• helps a company safeguard its cash by using a
  bank as a depository and clearinghouse for checks
  received and written.

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Bank Statement - a copy of the banks records
sent to the customer for periodic review.
Apri l 30, 2004

• Bank Statement shows
• check other debits
• deposits other credits
• daily cash balance

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Company Balance and Bank Balance of Cash Usually
Differ Because...

• Time lags that prevent one of the parties from
  recording the transaction in the same period.
• Days pass between the time a check is written and
  dated and date it is paid by the bank.
• A day may pass between the time receipts are
  recorded by the company and the time they are
  recorded by the bank.
• A time lag may occur when the bank mails a debit
  or credit memo to the company.
• Errors by either party in recording transactions.

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Reconciliation Procedure

• reconcile balance per books and balance per bank
  to their adjusted or correct balances.
• the reconciliation should be prepared by an
  employee who has no other responsibilities
  pertaining to cash.

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Terms

• Deposits in transit - deposits recorded by the
  depositor that have not yet been recorded by the
  bank.
• Outstanding checks - checks issued and recorded
  by the company that have not yet been paid by the
  bank.
• NSF check - a check that is not paid by the bank
  because of insufficient funds in the customers
  bank account.
• Adjusted balance - same as true cash balance,
  correct cash balance

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Illustration 7-9
W.A. Laird CompanyBank ReconciliationApril 30,
2004
Cash balance per bank statement 15,907.45 Add
Deposits in transit 2,201.40 18,108.85 Les
s Outstanding checks No. 453 3,000.00 No.
457 1,401.30 No. 460 1,502.70
5,904.00 Adjusted cash balance per
bank 12,204.85 Cash balance per
books 11,589.45 Add Collection of N/R for
1,000 plus interest earned 50, less
collection fee 15 1,035.00 Error on recording
check No. 443 36.00 1,071.00 12,660.4
5 Less NSF check 425.60 Bank service
charge 30.00 455.60 Adjusted cash
balance per bank 12,204.85
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For Cash To Show the Correct Balance
Each reconciling item in determining the
adjusted balance per books must be journalized
and posted.
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Illustration 7-9
W.A. Laird CompanyBank ReconciliationApril 30,
2004
Cash balance per bank statement 15,907.45 Add
Deposits in transit 2,201.40 18,108.85 Les
s Outstanding checks No. 453 3,000.00 No.
457 1,401.30 No. 460 1,502.70
5,904.00 Adjusted cash balance per
bank 12,204.85 Cash balance per
books 11,589.45 Add Collection of N/R for
1,000 plus interest earned 50, less
collection fee 15 1,035.00 Error on recording
check No. 443 36.00 1,071.00 12,660.4
5 Less NSF check 425.60 Bank service
charge 30.00 455.60 Adjusted cash
balance per bank 12,204.85
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JOURNAL

• Apr 30 Cash
  1,035.00
• Miscellaneous Expense 15.00
• Notes Receivable 1,000.00
• Interest Revenue 50.00
• Apr 30 Cash 36.00
• Accounts Payable 36.00
• Apr 30 Accounts Receivable-Baron 425.60
• Cash 425.60
• Apr 30 Miscellaneous Expense 30.00
• Cash 30.00

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Reporting Cash

• Cash is recorded in both the balance sheet and
  the statement of cash flows.
• The balance sheet shows the amount of cash
  available at a given point in time.
• The statement of cash flows
  shows the sources and uses of
  cash during a period of time.

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Cash Equivalents

• Readily convertible to known amount of cash
• So near maturity that their market value is
  relatively insensitive to changes in interest
  rates
• Examples
• Treasury bills
• Commercial paper
• Money market funds

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Restricted Cash...

• Is cash that is not available for general use.
• Is set aside for special purpose.
• If not to be used within next year, report as
  noncurrent asset.

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Principles of Cash Management

• Increase the speed of collection on receivables.
• Keep inventory levels low.
• Delay payment of liabilities.
• Plan the timing of major expenditures.
• Invest idle cash.

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Reporting Cash

• Cash on hand, cash in banks, and petty cash are
  often combined and reported as cash.
• Cash is the most liquid asset and listed first in
  the current asset section of the balance sheet.

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Cash Budget

• Cash is vital.
• Planning the company's cash needs is a key
  business activity.
• Cash budget shows the anticipated cash flows,
  over a 1 to 22-year period.

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Cash Budget

• The cash budget contains
• Cash receipts section
• Cash disbursements section
• Financing section.

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Cash Receipts Section

• includes expected receipts from the company's
  principal source(s) of revenue, such as cash
  sales and collections from customers on credit
  sales
• also shows anticipated receipts of interest and
  dividends, and proceeds from planned sales of
  investments, plant assets, and the company's
  capital stock

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Cash Disbursements Section

• shows expected payments for direct materials,
  direct labor, manufacturing overhead, and selling
  and administrative expenses
• includes projected payments for income taxes,
  dividends, investments, and plant assets

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Financing Section shows...

• expected borrowings
• the repayment of the borrowings and interest