Chapter 8-1

Chapter 8-2 CHAPTER 8 INTERNAL CONTROL AND CASH Accounting Principles, Eighth Edition

Chapter Safeguard assets. From larceny, embezzlement 2.Enhance accuracy and reliability of accounting records. Reduce risk of: a.Errors (unintentional) b.Irregularities (intentional) Internal Control Internal Control adopted to 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 8-4 Companies must develop principles of control over financial reporting. continually verify that controls are working. Internal Control LO 1 Define internal control. The Sarbanes-Oxley Act Independent auditors must attest to the level of internal control. SOX created the Public Company Accounting Oversight Board (PCAOB).

Chapter 8-5 Measures vary with size and nature of the business. management’s control philosophy. Principles of Internal Control LO 2 Identify the principles of internal control. Illustration 8-1

Chapter 8-6 Principles ofInternal Control Principles of Internal Control LO 2 Identify the principles of internal control. ESTABLISHMENT OF RESPONSIBILITY most effective when only one person is responsible for a given task. SEGREGATON OF DUTIES *No overlap of responsibilities, but workers should have an “eye” on one another *DOCUMENTATION PROCEDURES Documents provide evidence that transactions and events have occurred (Receipts, bills of lading, etc.)

Chapter 8-7 Principles ofInternal Control Principles of Internal Control LO 2 Identify the principles of internal control. PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS Illustration 8-3

Chapter 8-8 Internal Control LO 2 Identify the principles of internal control. Principles of Internal Control INDEPENDENT INTERNAL VERIFICATION OTHER CONTROLS

Chapter 8-9 Limitations ofInternal Control Limitations of Internal Control LO 2 Identify the principles of internal control. Costs should not exceed benefit. Human element. Size of the business.

Chapter 8-10

Chapter 8-11 Cash Controls Cash consists of coins, currency, checks, money orders, and money on hand or on deposit in a bank. Cash receipts come from: cash sales collections on account from customers (A/R) receipt of interest, rent, and dividends investments by owners bank loans sale of noncurrent assets LO 3 Explain the applications of internal control principles to cash receipts.

Chapter 8-12 Cashier ring up sales Supervisor 1.reads register totals 2.makes cash counts 3.prepares cash count sheets Over-the-Counter Receipts Prepare daily summary Prepare deposit slip Cashier’s Department Sales Department Bank (deposit) Treasurer (verification) Accounting (record) Illustration 8-7

Chapter 8-13 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 Controls LO 4 Explain the applications of internal control principles to cash disbursements. Internal Control over Cash Disbursements

Chapter 8-14 Cash Controls Internal Control over Cash Disbursements Independent Internal Verification Compare checks to invoices; reconcile bank statement monthly Establishment of Responsibility Only designated personnel are authorized to sign checks (treasurer) Segregation of Duties Different 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 Controls Stamp invoices “PAID” LO 4 Explain the applications of internal control principles to cash disbursements. Illustration 8-8

Chapter 8-15 Accounting for Cash Controlling Cash Cash receipts should be recorded immediately upon receipt and deposited intact daily. Documentation Procedures Cash disbursements should be made by prenumbered check. Invoice for each check. Documentation Procedures Cash disbursements should be made by prenumbered check. Invoice for each check. Establishment of Responsibility Up to date signature card should be maintained. Establishment of Responsibility Up to date signature card should be maintained. A deposit ticket should be used for all deposits. A monthly bank reconciliation should be prepared by an independent party. Independent Internal Verification A monthly bank reconciliation should be prepared by an independent party.

Chapter 8-16 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 Controls Internal Control over Cash Disbursements LO 4 Explain the applications of internal control principles to cash disbursements.

Chapter 8-17 Electronic Funds Transfers (EFT) Checks processing is expensive … companies are moving away from check writing. To…wire, telephone, or computers to transfer cash balances between locations. Cash Controls Internal Control over Cash Disbursements LO 4 Explain the applications of internal control principles to cash disbursements. Protect yourself

Chapter 8-18 Petty Cash Fund - U sed to pay small amounts (3-4 weeks of $$). Involves: 1. establishing the fund, 2. making payments from the fund, and 3. replenishing the fund. Cash Controls Internal Control over Cash Disbursements LO 5 Describe the operation of a petty cash fund.

Chapter 8-19 E8-8 Lincolnville Company uses an 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 5Stamp inventory$39 March 7Freight-out 21 March 9Miscellaneous expense 6 March 11Travel expense 24 March 14Miscellaneous expense 5 The 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 Controls LO 5 Describe the operation of a petty cash fund.

Chapter 8-20 E8-8 E8-8 The fund was established on March 1 with a balance of $100. Cash Controls LO 5 Describe the operation of a petty cash fund.

Chapter 8-21 E8-8 E8-8 The fund was replenished on March 15 when the fund contained $3 in cash. Cash Controls LO 5 Describe the operation of a petty cash fund.

Chapter 8-22 E8-8 E8-8 On March 20, the amount in the fund was increased to $150. Cash Controls LO 5 Describe the operation of a petty cash fund.

Chapter 8-23 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 Bank LO 6 Indicate the control features of a bank account.

Chapter 8-24 Making Bank Deposits Authorized employee should make deposit. Use of a Bank LO 6 Indicate the control features of a bank account. Bank Code Numbers Front Side Reverse Side Illustration 8-10

Chapter 8-25 Writing Checks Written order signed by depositor directing bank to pay a specified sum of money to a designated recipient. Use of a Bank LO 6 Indicate the control features of a bank account. Maker Payee Illustration 8-11 Payer

Chapter 8-26 Bank Statements Debit Memorandum Bank service charge NSF (not sufficient funds) Use of a Bank LO 6 Indicate the control features of a bank account. Illustration 8-12 Credit Memorandum Collect notes receivable. Interest earned.

Chapter 8-27 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 Question Use of a Bank LO 6 Indicate the control features of a bank account.

Chapter 8-28 Reconciling the Bank Statement The bank reconciliation reports on the differences between the balance on the bank statement and the balance in the general ledger cash account. The reconciliation results in the true cash balance that will appear on the balance sheet. Reconciling Items: Deposits in transit. Outstanding checks. Errors. Bank memoranda.

Chapter 8-29 Reconciliation Procedures 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 Illustration 8-13

Chapter 8-30 “Bank service charge not recorded by the depositor $20.” Bank has reduced your balance by $20… you have not…. “A deposit in transit of $800.” Your books show the $800 deposit, the bank does not… “An outstanding check of $450.” Your records show a check written for $450, the bank has no record of it… Bank Reconciliation Items – what should be done to the book side or bank side? LO 7 Prepare a bank reconciliation.

Chapter 8-31 E8-11 E8-11 The following information pertains to Family Video Company. 1. Cash balance per bank, July 31, $7, Cash balance per books, July 31, $7, July bank service charge not recorded by the depositor $ Deposits in transit, July 31, $1, 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. Instructions a)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 Bank LO 7 Prepare a bank reconciliation.

Chapter 8-32 E8-11 E8-11 a) Prepare a bank reconciliation at July 31. Use of a Bank LO 7 Prepare a bank reconciliation. Cash balance per bank statement $7,263 Add: Less: Adjusted cash balance per bank$8,172 Cash balance per books $7,284 Add: Less: Adjusted cash balance per books$8,172

Chapter 8-33 Miscellaneous expense28 July 31 Cash 28 Cash 916 Notes receivable 900 Interest revenue 36 Use of a Bank LO 7 Prepare a bank reconciliation. E8-11 E8-11 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 8-34 Reporting Cash LO 8 Explain the reporting of cash. Most liquid asset, listed first in current assets section of balance sheet. Cash equivalents Restricted cash Compensating balances Illustration 8-16