Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Prepared by: Debbie Musil Kwantlen University College Chapter 7 Internal Control and Cash

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Agenda Learning goals Learning goals Vocabulary Vocabulary Chapter 7-internal controls and cash Chapter 7-internal controls and cash

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Learning Goals Explain the activities that help achieve internal control Explain the activities that help achieve internal control Apply control activities to cash receipts Apply control activities to cash receipts Apply control activities to cash disbursements Apply control activities to cash disbursements Operate and account for a petty cash fund Operate and account for a petty cash fund Describe the control features of a bank account Describe the control features of a bank account Prepare a bank reconciliation Prepare a bank reconciliation Report cash on the balance sheet Report cash on the balance sheet

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Vocabulary Bank overdraft Bank service charge Bank statement Cash equivalents Cash receipts journal Clearing Compensating balances Credit memoranda Debit memorandum Deposits in transit Electronic funds transfer External auditors Fidelity insurance Internal auditors Internal control Not sufficient funds Outstanding cheques Petty cash fund Restricted cash Segregation of duties

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Internal Control Internal control : is the process that management design and implements to help an organization achieve: Internal control : is the process that management design and implements to help an organization achieve: Reliable financial reportingReliable financial reporting Effective and efficient operationsEffective and efficient operations Compliance with relevant laws and regulationCompliance with relevant laws and regulation

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Control Activities Establishment of responsibility Establishment of responsibility Specific employees responsible for specific tasksSpecific employees responsible for specific tasks Segregation of duties Segregation of duties Duties need to be divided so one person can not committee a fraud and cover it up.Duties need to be divided so one person can not committee a fraud and cover it up. Documentation procedures (rules) Documentation procedures (rules) Documents give evidence that transaction and events have happened.Documents give evidence that transaction and events have happened.

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Control Activities Physical controls Physical controls Over access to and use of assets and recordsOver access to and use of assets and records Such as safes, locks…time clocksSuch as safes, locks…time clocks Performance reviews Performance reviews Internal reviews by independent employees or internal auditInternal reviews by independent employees or internal audit Independent external reviews by external auditorsIndependent external reviews by external auditors Other controls Other controls Bonding, rotation of duties, requiring vacationsBonding, rotation of duties, requiring vacations Bonding means getting insurance protection called fidelity insurance – against theft of assets by dishonest employeesBonding means getting insurance protection called fidelity insurance – against theft of assets by dishonest employees

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Limitations of Internal Control Cost/benefit: a system of internal control can only give reasonable assurance Cost/benefit: a system of internal control can only give reasonable assurance Human element: fatigue, carelessness, lack of training Human element: fatigue, carelessness, lack of training Collusion: two or more employees working together to overcome segregation control Collusion: two or more employees working together to overcome segregation control Size of business: effective controls are more difficult in smaller organizations Size of business: effective controls are more difficult in smaller organizations

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Control Over Cash Receipts Look on page 348 illustration 7-3 Look on page 348 illustration 7-3 Responsibility Responsibility Segregation of duties Segregation of duties Documentation procedures: Documentation procedures: Use remittance advices, cash register tapes, deposit slipsUse remittance advices, cash register tapes, deposit slips Physical controls: Physical controls: Store cash in safes and bank vaultsStore cash in safes and bank vaults Limit accessLimit access Use cash registersUse cash registers Performance reviews: Performance reviews: Daily cash counts and comparisons of receiptsDaily cash counts and comparisons of receipts Other controls: Other controls: Deposit cash daily; bonding; require vacationsDeposit cash daily; bonding; require vacations

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Debit Card Transactions Credit Card Transactions

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Mail-in Receipts When billing customers, many companies state “Pay by cheque; do not send cash through the mail.” This is done to reduce the risk of cash receipts being misappropriated when they are received. When billing customers, many companies state “Pay by cheque; do not send cash through the mail.” This is done to reduce the risk of cash receipts being misappropriated when they are received.

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Electronic Receipts ETF : Electronic Fund Transfer, system transfer funds between parties without the use of paper. Example: debit and bank credit cards, online banking, preauthorized monthly payment. ETF : Electronic Fund Transfer, system transfer funds between parties without the use of paper. Example: debit and bank credit cards, online banking, preauthorized monthly payment. Record it by debiting cash and credit sales Record it by debiting cash and credit sales

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Control Over Cash Disbursements Made by cheque, EFT or petty cash Made by cheque, EFT or petty cash Responsibility: only designated individuals can sign cheques Responsibility: only designated individuals can sign cheques Segregation of duties: Segregation of duties: Different people approve and make paymentsDifferent people approve and make payments Documentation procedures: Documentation procedures: pre-numbered cheques and account for numerical continuitypre-numbered cheques and account for numerical continuity Supported by approved invoice or similarSupported by approved invoice or similar Physical controls: Physical controls: Secure blank cheques,restrict access, print cheques electronically or use writerSecure blank cheques,restrict access, print cheques electronically or use writer Performance reviews: Performance reviews: Compare cheques to invoicesCompare cheques to invoices Reconcile bank statement regularlyReconcile bank statement regularly Other controls: Other controls: Stamp invoices PAIDStamp invoices PAID

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Petty Cash Fund Used to pay small amounts Used to pay small amounts Establish a petty cash fund: Establish a petty cash fund: Making payments from the fund: Making payments from the fund: No accounting entry when payment is madeNo accounting entry when payment is made

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Petty Cash Fund 2 Replenishing the fund: Prepares a summary of payments, supported by receipts and other documentsPrepares a summary of payments, supported by receipts and other documents Used as a basis for accounting entryUsed as a basis for accounting entry

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Practice Questions BE7-1 – 7 BE7-1 – 7 E7-3 E7-3

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Reconciling the Bank Account Bank balance almost never agrees to depositor’s balance Bank balance almost never agrees to depositor’s balance Due to time lags and errors in recording transactionsDue to time lags and errors in recording transactions The two balances must be reconciled The two balances must be reconciled Called preparing a bank reconciliationCalled preparing a bank reconciliation Done by an employee who has no responsibilities related to cashDone by an employee who has no responsibilities related to cash Balance per books and per bank are both reconciled to their adjusted (correct) balance Balance per books and per bank are both reconciled to their adjusted (correct) balance

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Reconciling Items Balance per bank +Deposits in transit Deposits recorded by depositor that have not been recorded by bankDeposits recorded by depositor that have not been recorded by bank -Outstanding cheques Cheques issued & recorded by company that have not been presented to bankCheques issued & recorded by company that have not been presented to bank ±Bank errors =Adjusted cash balance per bank Balance per books +Credit memoranda Amounts credited to company by bank, such as interest earnedAmounts credited to company by bank, such as interest earned -Debit memoranda Charges levied by bank against depositor’s account – service charges, NSF charges, etc.Charges levied by bank against depositor’s account – service charges, NSF charges, etc. ±Company errors =Adjusted cash balance per books

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Entries from Bank Reconciliation Each reconciling item required to calculate adjusted cash balance per books must be journalized Each reconciling item required to calculate adjusted cash balance per books must be journalized To ensure that these are accounted for by companyTo ensure that these are accounted for by company Each reconciling item required to calculate adjusted cash balance per bank is NOT journalized Each reconciling item required to calculate adjusted cash balance per bank is NOT journalized Will be recorded by bank when receivedWill be recorded by bank when received

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Important terms Clearing: a term used when a cheque or deposit is accepted by the maker’s bank. Clearing: a term used when a cheque or deposit is accepted by the maker’s bank. Bank statement: shows the depositor’s bank transaction and balances Bank statement: shows the depositor’s bank transaction and balances Bank charge: a monthly fee the bank charger for it’s service Bank charge: a monthly fee the bank charger for it’s service Debit memorandum: document explaining the charges on the bank statement Debit memorandum: document explaining the charges on the bank statement

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Important terms NSF (not sufficient funds): is when the issuer of the cheque doesn’t have enough money in the bank to fulfill the obligatory amount. NSF (not sufficient funds): is when the issuer of the cheque doesn’t have enough money in the bank to fulfill the obligatory amount. Credit memoranda (CM): identify interest earned on the bank account, electronic funds…. Credit memoranda (CM): identify interest earned on the bank account, electronic funds…. Outstanding cheques: cheques recorded by a company that have not yet cleared the bank. Outstanding cheques: cheques recorded by a company that have not yet cleared the bank. Deposits in transit: deposits recorded by the company that have not yet been recorded by the bank. Deposits in transit: deposits recorded by the company that have not yet been recorded by the bank.

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Reporting Cash Cash: consistent of coins, currency, cheques, money orders, travellers cheques, and money on deposit in a bank. Cash: consistent of coins, currency, cheques, money orders, travellers cheques, and money on deposit in a bank. The general rule is if the bank accepts it for deposit = cash The general rule is if the bank accepts it for deposit = cash Cash and petty cash is reported together as cash on the balance sheet Cash and petty cash is reported together as cash on the balance sheet

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Reporting Cash Cash equivalents: are short term, highly liquid investments. Usually mature in 3 months

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Reporting Cash Bank overdraft: occurs when withdrawals or payments are more than the amount in the bank, becomes a temporary liability Bank overdraft: occurs when withdrawals or payments are more than the amount in the bank, becomes a temporary liability Restricted cash: cash that has a restricted use, such as cash being held for the purchase of real estate. Restricted cash: cash that has a restricted use, such as cash being held for the purchase of real estate. Compensating balances: is when a bank makes a loan they might require you to keep a minimum balance Compensating balances: is when a bank makes a loan they might require you to keep a minimum balance

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Using Financial Statement Information Management must properly manage cash: Management must properly manage cash: Too little cash and cannot pay bills when dueToo little cash and cannot pay bills when due Too much cash is not productiveToo much cash is not productive Cash flow statement Cash flow statement Helps assess the management of cashHelps assess the management of cash Management report Management report States management’s responsibility for internal controlsStates management’s responsibility for internal controls

Weygandt, Kieso, Kimmel, Trenholm, Kinnear Accounting Principles, Third Canadian Edition © 2009 John Wiley & Sons Canada, Ltd. Practice Questions E7-11, 12, 13 E7-11, 12, 13 P 7-4A P 7-4A