ACCT 201 FINANCIAL REPORTING Chapter 8 Dr. Lale Guler Office: CAS 102 E-Mail: LGuler@ku.edu.tr

CHAPTER8 Fraud, Internal Control, and Cash Study Objectives Define fraud and internal control Internal control for cash disbursements Petty fund Bank reconciliation Reporting of cash

Three factors that contribute to fraudulent activity. Fraud and Internal Control Fraud Dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. Three factors that contribute to fraudulent activity.

Fraud and Internal Control Methods and measures adopted to: Safeguard assets. Enhance accuracy and reliability of accounting records. Increase efficiency of operations. Ensure compliance with laws and regulations.

Cash Controls Cash Disbursements Controls Generally, internal control over cash disbursements is more effective when companies pay by check, rather than by cash. Applications: Voucher system Petty cash fund

Cash Controls Cash Disbursements Controls Illustration 8-6 SO 4

Cash Controls Cash Disbursements Controls Illustration 8-6

Cash Controls Cash Disbursements Controls Petty Cash Fund - Used to pay small amounts. Involves: establishing the fund (journal entry) making payments from the fund (no journal entry), and replenishing the fund (journal entry).

Cash Controls Illustration: If Laird Company decides to establish a $100 fund on March 1, the journal entry is:

Cash Controls Illustration: Assume that on March 15 Laird’s petty cash custodian requests a check for $87. The fund contains $13 cash and petty cash receipts for postage $44, freight-out $38, and miscellaneous expenses $5. The general journal entry to record the check is:

Cash Controls Illustration: Occasionally, the company may need to recognize a cash shortage or overage. Assume that Laird’s petty cash custodian has only $12 in cash in the fund plus the receipts as listed. The request for reimbursement would, therefore, be for $88, and Laird would make the following entry:

Cash Controls Illustration: If Laird’s petty cash custodian has $14 in cash, the request for reimbursement would be for $86. The company would make the following entry:

Control Features: Use of a Bank Contributes to good internal control over cash. Minimizes the amount of currency on hand. Creates a double record of bank transactions. Bank reconciliation.

Control Features: Use of a Bank Making Bank Deposits Illustration 8-8 Authorized employee should make deposit. Bank Code Numbers Reverse Side Front Side

Control Features: Use of a Bank Writing Checks Written order signed by depositor directing bank to pay a specified sum of money to a designated recipient. Illustration 8-9 Maker Payee Payer

Control Features: Use of a Bank Bank Statements Illustration 8-10 Debit Memorandum Bank service charge. NSF (not sufficient funds). Credit Memorandum Collect notes receivable. Interest earned.

Control Features: Use of a Bank Reconciling the Bank Account Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances. Reconciling Items: Deposits in transit. Outstanding checks. Bank memoranda. Errors. Time Lags

Control Features: Use of a Bank Reconciliation Procedures Illustration 8-11 + Deposit in Transit - Outstanding Checks +/- Bank Errors + Notes collected by bank - NSF (bounced) checks - Check printing or other service charges +/- Book Errors CORRECT BALANCE CORRECT BALANCE

Control Features: Use of a Bank

Control Features: Use of a Bank Illustration: Prepare a bank reconciliation at April 30. Cash balance per bank statement $15,907.45 Deposit in transit Outstanding checks Adjusted cash balance per bank Cash balance per books $11,589.45 Error in check No. 443 NSF check Bank service charge Collection of notes receivable Adjusted cash balance per books

Control Features: Use of a Bank Company records each reconciling item used to determine the adjusted cash balance per books. Collection of Note Receivable: Assuming interest of $50 has not been accrued and collection fee of $15 is charged to Miscellaneous Expense, the entry is: Apr. 30

Control Features: Use of a Bank Book Error: The cash disbursements journal shows that check no. 443 was a payment on account to Andrea Company, a supplier. The correcting entry is: Apr. 30 NSF Check: An NSF check becomes an account receivable to the depositor. The entry is: Apr. 30

Control Features: Use of a Bank Bank Service Charges: Depositors debit check printing charges (DM) and other bank service charges (SC) to Miscellaneous Expense. The entry is: Apr. 30 Illustration 8-13

Control Features: Use of a Bank Electronic Funds Transfer (EFT) System Disbursement systems that uses wire, telephone, or computers to transfer cash balances between locations. EFT transfers normally result in better internal control since no cash or checks are handled by company employees.

Reporting Cash Cash Equivalents Restricted Cash Cash equivalents are short-term, highly liquid investments that are both: Readily convertible to cash, and So near their maturity that their market value is relatively insensitive to changes in interest rates. Restricted Cash - Cash that is not available for general use but rather is restricted for a special purpose. - Should be reported separately on the balance sheet as restricted cash.

Reporting Cash Illustration 8-14

Reporting Cash Review Question Which of the following statements correctly describes the reporting of cash? Cash cannot be combined with cash equivalents. Restricted cash funds may be combined with Cash. Cash is listed first in the current assets section. Restricted cash funds cannot be reported as a current asset.