Learning Objectives Understand the Business – LO1 Distinguish among service, merchandising, and manufacturing operations. – LO2 Explain common principles and limitations of internal control. Study the accounting methods – LO3 Apply internal control principles to cash receipts and payments. – LO4 Perform the key control of reconciling cash to bank statements. – LO5 Explain the use of a perpetual inventory system as a control. – LO6 Analyze sales transactions under a perpetual inventory system. Evaluate the results – LO7 Analyze a merchandiser’s multistep income statement. Review the chapter 1© McGraw-Hill Ryerson. All rights reserved.

Internal Control Internal Controls: – protect against theft of assets – enhance the reliability of accounting information – promote efficient and effective operations – ensure compliance with applicable laws and regulations Limitations of Internal Control: – cost vs. benefit – human error or fraud © McGraw-Hill Ryerson. All rights reserved.2 LO2

Five Common Principles of Internal Control © McGraw-Hill Ryerson. All rights reserved.3 LO2 1 Establish responsibility Assign each task to only one employee. 2 Segregate duties Do not make one employee responsible for all parts of a process. 3 Restrict access Do not provide access to assets or information unless necessary. 4 Document procedures Prepare documents to show activities that have occurred. 5 Independently verify Check other’s work.