Internal Control and Managing Cash Chapter 4

Learning Objective 1 Set up an effective system of internal control.

Internal Control Organizational plan and all related measures that an entity adopts Safeguard assets Encourage adherence to company policies Promote operational efficiency Ensure accurate and reliable accounting records

Components of an Effective System Competent, reliable, and ethical personnel Assignment of responsibilities Proper authorization Separation of duties

Audit Examination of company’s financial statements accounting systems, and internal controls, by an outside party Internal auditor - employee of the business External auditor - independent

Limitations of Internal Control Collusion - two or more employees working together to defraud the firm A system of internal control that is too complex can hurt efficiency and control

Learning Objective 2 Use a bank reconciliation as a control device.

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

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

Bank Reconciliation Illustrated Business Research, Inc., shows a balance on its bank statement of $5,931.51 on January 31. The company Cash account has a balance of $3,294.21. The January 30 deposit of $1,591.63 does not appear on the bank statement. The bank erroneously charged to the account a $100 check (No. 656) written by Business Research Associates.

The Bank Reconciliation Illustrated Five company checks, totaling $1,350.14, issued late in January and recorded in the journal have not been paid by the bank. The bank received $904.03 by EFT on behalf of Business Research, Inc. The bank collected on behalf of the company a note receivable, $2,114 (including interest revenue of $214). The bank statement shows interest revenue of $28.01.

The Bank Reconciliation Illustrated Check number 333 for $150 paid to Brown Company on account was recorded as a cash payment of $510. The bank service charge for the month was $14.25. The bank statement shows an NSF check for $52. Business Research pays insurance expense by EFT and has not recorded this $361 payment.

The Bank Reconciliation Illustrated Balance per bank, January 31 $5,931.51 Add deposit in transit 1,591.63 Check erroneously charged 100.00 $7,623.14 Less outstanding checks (1,350.14) Adjusted bank balance $6,273.00

The Bank Reconciliation Illustrated Balance per books, January 31 $3,294.21 Add: ETF receipt of rent revenue 904.03 Collection of note receivable 2,114.00 Interest revenue earned 28.01 Correction of book error 360.00 $6,700.25 Less: Service charge $ 14.25 NSF check 52.00 Payment of insurance expense 361.00 ( 427.25) Adjusted book balance $6,273.00

Learning Objective 3 Apply internal controls to cash receipts and cash payments.

Petty Cash A small amount of cash kept on hand to pay for minor expenses.

Learning Objective 4 Use a budget to manage cash.

Using a Budget to Manage Cash A financial plan that helps coordinate business activities Cash budget - helps an entity manage cash by planning receipt and payment of cash during a future period

Using a Budget to Manage Cash Cash balance, beginning + Budgeted cash receipts - Budgeted cash payments Expected cash balance, ending

Reporting Cash on the Balance Sheet Companies usually combine all cash amount into single total called “Cash and Cash Equivalents” on the balance sheet. Cash equivalents include liquid assets Time deposits Certificates of deposit

Learning Objective 5 Weigh ethical judgment in business.

Ethics and Accounting Company code of ethical and responsible behavior by employees AICPA Code of Professional Conduct Standards of Ethical Conduct for Management Accountants

End of Chapter 4