+ Accounting for Cash & Internal Controls Chapter 6

+ Cash, Cash Equivalents, and Liquidity Cash Currency, coins and amounts on deposit in bank accounts, checking accounts, and many savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders. Cash Currency, coins and amounts on deposit in bank accounts, checking accounts, and many savings accounts. Also includes items such as customer checks, cashier checks, certified checks, and money orders. Cash Equivalents Short-term, highly liquid investments that are: Readily convertible to a known cash amount. Close to maturity date and not sensitive to interest rate changes. Cash Equivalents Short-term, highly liquid investments that are: Readily convertible to a known cash amount. Close to maturity date and not sensitive to interest rate changes. C 2 6-2

+ Cash, Cash Equivalents, and Liquidity Liquidity How easily an asset can be converted into cash to be used to pay for services or obligations. Liquidity How easily an asset can be converted into cash to be used to pay for services or obligations. InventoryCash C 2 6-3

+ Cash Management Principles When companies fail, one of the most common causes is their inability to manage cash. The goals of cash management are: Plan cash receipts to meet cash payments when due. Keep the minimum level of cash necessary to operate. C2 6-4 Collect Quick. Pay Slow!

+ Banking Activities as Controls Bank Accounts Signature Cards Deposit Tickets Checks Electronic Funds Transfer Bank Statements C 3 6-5

+ Bank Reconciliation A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on company ’ s books. Why are the balances different? Why are the balances different? * P3 6-6

+ Reconciling Items Bank Statement Balance Add: Deposits in transit. Deduct: Outstanding Checks Add or Deduct: Bank errors. Bank Statement Balance Add: Deposits in transit. Deduct: Outstanding Checks Add or Deduct: Bank errors. Book Balance Add: Collections made by the bank. Add: Interest earned on checking account. Deduct: Nonsufficient funds check (NSF). Deduct: Bank service charge. Add or Deduct: Book errors. Book Balance Add: Collections made by the bank. Add: Interest earned on checking account. Deduct: Nonsufficient funds check (NSF). Deduct: Bank service charge. Add or Deduct: Book errors. P3 6-7

+ Go over Ex 6-9

+ Go over Ex 6-10

+ Bank Reconciliation Two sections: Reconcile bank statement balance to the adjusted bank balance. Reconcile book balance to the adjusted book balance. The adjusted balances should be equal. Two sections: Reconcile bank statement balance to the adjusted bank balance. Reconcile book balance to the adjusted book balance. The adjusted balances should be equal. P3 6-10

+ Bank Reconciliation Example Let ’ s prepare a July 31 bank reconciliation statement for the Simmons Company. * The July 31 bank statement indicated a balance of $9,610. * The cash general ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is shown on the next screen. Let ’ s prepare a July 31 bank reconciliation statement for the Simmons Company. * The July 31 bank statement indicated a balance of $9,610. * The cash general ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is shown on the next screen. P3 6-11

+ Bank Reconciliation Example 1. Outstanding checks totaled $2, A $500 check mailed to the bank for deposit had not reached the bank at the statement date. 3. The bank returned a customer ’ s NSF check for $225 received as payment on account receivable. 4. The bank statement showed $30 interest earned during July. 5. Check No. 781 for supplies expense cleared the bank for $268 but was erroneously recorded in our books as $ A $486 deposit by Acme Company was erroneously credited to our account by the bank. P3 6-12

+ Bank Reconciliation Example P Only these adjustments require journal entries

+ Recording Adjusting Entries from a Bank Reconciliation Only amounts shown on the book portion of the reconciliation require an adjusting entry. P3 6-14

+ Recording Adjusting Entries from a Bank Reconciliation After posting the reconciling entries the cash account looks like this: Adjusted balance on July 31. P3 6-15

+ Purpose of Internal Control Policies and procedures managers use to: Protect assets. Protect assets. Ensure reliable accounting. Ensure reliable accounting. Promote efficient operations. Promote efficient operations. Urge adherence to company policies. Urge adherence to company policies. Policies and procedures managers use to: Protect assets. Protect assets. Ensure reliable accounting. Ensure reliable accounting. Promote efficient operations. Promote efficient operations. Urge adherence to company policies. Urge adherence to company policies. C

+ Principles of Internal Control Establish responsibilities. Establish responsibilities. Maintain adequate records. Maintain adequate records. Insure assets and bond key employees. Insure assets and bond key employees. Separate recordkeeping responsibilities from custody responsibilities. Separate recordkeeping responsibilities from custody responsibilities. Divide responsibility for related transactions. Divide responsibility for related transactions. Apply technological controls. Apply technological controls. Perform regular and independent reviews. Perform regular and independent reviews. Establish responsibilities. Establish responsibilities. Maintain adequate records. Maintain adequate records. Insure assets and bond key employees. Insure assets and bond key employees. Separate recordkeeping responsibilities from custody responsibilities. Separate recordkeeping responsibilities from custody responsibilities. Divide responsibility for related transactions. Divide responsibility for related transactions. Apply technological controls. Apply technological controls. Perform regular and independent reviews. Perform regular and independent reviews. C1 6-17

+ Limitations of Internal Control The costs of internal controls must not exceed their benefits. The costs of internal controls must not exceed their benefits. CostsBenefits C

+ Limitations of Internal Control Human Error Negligence Fatigue Misjudgment Confusion Human Fraud Intent to defeat internal controls for personal gain C

+ Voucher System of Control A voucher system establishes procedures for: Verifying, approving and recording obligations for eventual cash disbursements. Issuing checks for payment of verified, approved and recorded obligations. A voucher system establishes procedures for: Verifying, approving and recording obligations for eventual cash disbursements. Issuing checks for payment of verified, approved and recorded obligations. P4 6-20

+ Voucher System of Control Cashier Accounting Receiving Supplier (Vendor) Purchasing Requesting Cashier Accounting, Requesting & Purchasing Accounting Supplier (Vendor) Purchasing and Accounting Supplier, Requesting, Receiving & Accounting Check Invoice Approval Receiving Report Invoice Purchase Order Purchase Requisition Voucher P4 Sender Receiver 6-21

+ Technology and Internal Control Reduce Processing Errors Reduce Processing Errors More Extensive Testing of Records More Extensive Testing of Records Limited Evidence of Processing Limited Evidence of Processing Crucial Separation of Duties Crucial Separation of Duties C 1 Increased e-commerce Increased e-commerce 6-22

+ An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines: Control of Cash Handling cash is separate from recordkeeping of cash. Cash receipts are promptly deposited in a bank. Cash disbursements are made by check. C1 6-23

+ Control of Cash Receipts P1 6-24

+ Control of Cash Disbursements All expenditures should be made by check. The only exception is for small payments from petty cash. Separate authorization for check signing and recordkeeping duties. Use a voucher system. All expenditures should be made by check. The only exception is for small payments from petty cash. Separate authorization for check signing and recordkeeping duties. Use a voucher system. P1 6-25

+ Petty Cash System of Control P Small payments required in most companies for items such as postage, courier fees, repairs and supplies.

+ Setting up a Petty Cash Fund Petty Cash (asset) $400 Cash (asset) $400 We write a check from our bank account. Cash it at the bank to get $400 in small bills and place it into our metal box which is then locked in a desk drawer.

+ $20 Postage Receipt & Office Mgr Signs a Voucher Office Manager Purchases $20 of postage To reimburse Employee Operating a Petty Cash Fund Petty Cashier P The Cashier continues to reimburse minor expenditures to employees with cash from the Petty Cash box until there is little cash remaining in the box.

+ Petty Cash Example Tension Co. maintains a petty cash fund of $400. The following summary information was taken from petty cash vouchers for July: Travel Expenses $79.30 Customer Business Lunches Express Mail Postage Miscellaneous Office Supplies Let ’ s look at replenishing the fund if the balance on July 31 was $ Tension Co. maintains a petty cash fund of $400. The following summary information was taken from petty cash vouchers for July: Travel Expenses $79.30 Customer Business Lunches Express Mail Postage Miscellaneous Office Supplies Let ’ s look at replenishing the fund if the balance on July 31 was $ P2 6-29

+ Petty Cash Example What amount of cash will be required to replenish the petty cash fund back to $400? a.$ b.$ c.$ d.$ What amount of cash will be required to replenish the petty cash fund back to $400? a.$ b.$ c.$ d.$ P2 6-30

+ What amount of cash will be required to replenish the petty cash fund back to $400? a.$ b.$ c.$ d.$ What amount of cash will be required to replenish the petty cash fund back to $400? a.$ b.$ c.$ d.$ Petty Cash Example Let’s prepare the journal entry to replenish the petty cash fund. P2 6-31

+ Petty Cash Example Journal entry to replenish petty cash fund P2 6-32

+ Go over Ex 6-5

+ Days ’ Sales Uncollected Days’ Sales Uncollected Accounts Receivable Net Sales × 365= Measures a company’s ability to manage its cash And receivables. How much time is likely to pass before we receive cash receipts from credit sales? Measures a company’s ability to manage its cash And receivables. How much time is likely to pass before we receive cash receipts from credit sales? A1 6-34