1. © 2009 The McGraw-Hill Companies, Inc., All Rights Reserved C ASH AND I NTERNAL C ONTROLS Chapter 8

2. McGraw-Hill/Irwin Slide 2 McGraw-Hill/Irwin Slide 2 P URPOSE OF I NTERNAL C ONTROL Policies and procedures managers use to:  Protect assets.  Ensure reliable accounting.  Promote efficient operations.  Urge adherence to company policies. C 1

3. McGraw-Hill/Irwin Slide 3 McGraw-Hill/Irwin Slide 3 P URPOSE OF I NTERNAL C ONTROL The Sarbanes-Oxley Act requires managers and auditors of public companies to document and certify the system of internal controls. Specific requirements related to auditors are:  Auditors must evaluate internal controls and issue internal control reports.  Auditors of a client are restricted as to what consulting services they can perform for that client.  The person leading an audit can serve no more than seven years without a two-year break.  Auditors’ work is overseen by the Public Company Accounting Oversight Board.  Harsh penalties exist for violators – sentences up to 25 years in prison with severe fines. C 1

4. McGraw-Hill/Irwin Slide 4 McGraw-Hill/Irwin Slide 4 P RINCIPLES OF I NTERNAL C ONTROL Internal control principles common to all companies: 1.Establish responsibilities. 2.Maintain adequate records. 3.Insure assets and bond 担保 key employees. 4.Separate recordkeeping from custody 保管 of assets. 5.Divide responsibility for related transactions. 6.Apply technological controls. 7.Perform regular and independent reviews. C 1

5. McGraw-Hill/Irwin Slide 5 McGraw-Hill/Irwin Slide 5 T ECHNOLOGY AND I NTERNAL C ONTROL Reduced Processing Errors Reduced 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 Increased e-commerce Increased e-commerce C 1

6. McGraw-Hill/Irwin Slide 6 McGraw-Hill/Irwin Slide 6 L IMITATIONS OF I NTERNAL C ONTROL Human Error Negligence 忽略 Fatigue 倦怠 Misjudgment 错误判断 Confusion 混淆 Human Fraud Intent to defeat internal controls for personal gain C 1

7. McGraw-Hill/Irwin Slide 7 McGraw-Hill/Irwin Slide 7 L IMITATIONS OF I NTERNAL C ONTROL The costs of internal controls must not exceed their benefits. The costs of internal controls must not exceed their benefits. Costs Benefits C 1

8. McGraw-Hill/Irwin Slide 8 McGraw-Hill/Irwin Slide 8 C ONTROL OF C ASH An effective system of internal control that protects cash and cash equivalents 现金等价物 should meet three basic guidelines: Handling cash is separated from recordkeeping for cash. Cash receipts are promptly deposited in a bank. Cash disbursements are made by check. C 2

9. McGraw-Hill/Irwin Slide 9 McGraw-Hill/Irwin Slide 9 C ASH, C ASH E QUIVALENTS, AND L IQUIDITY Cash Currency, coins and amounts on deposit in bank accounts, checking accounts, and some savings accounts. Also includes items such as customer checks, cashier checks 银行开出的支票, certified checks 保付支票, and money orders 汇票. Cash Equivalents Short-term, highly liquid investments that are: 1.Readily convertible 可转换的 to a known cash amount. 2.Close to maturity date 到期日 and not sensitive to interest rate changes. C 2

10. McGraw-Hill/Irwin Slide 10 McGraw-Hill/Irwin Slide 10 InventoryCash Liquidity How easily an asset can be converted into cash to be used to pay for services or obligations. C ASH, C ASH E QUIVALENTS, AND L IQUIDITY C 2

11. McGraw-Hill/Irwin Slide 11 McGraw-Hill/Irwin Slide 11 C ASH M ANAGEMENT The goals of cash management are twofold: 1.Plan cash receipts to meet cash payments when due. 2.Keep a minimum level of cash necessary to operate. Effective cash management involves applying the following cash management principles:  Encourage collection of receivables.  Delay payment of liabilities.  Keep only necessary levels of assets.  Plan expenditures.  Invest excess cash. C 2

12. McGraw-Hill/Irwin Slide 12 McGraw-Hill/Irwin Slide 12 C ONTROL OF C ASH R ECEIPTS Over-the-Counter Cash Receipts  Cash register 收银机 with locked-in record of transactions.  Compare cash register record with cash reported. Over-the-Counter Cash Receipts  Cash register 收银机 with locked-in record of transactions.  Compare cash register record with cash reported. Cash Receipts by Mail  Two people open the mail. Money to cashier’s 出纳 office. List to accounting dept. Copy of list filed. Cash Receipts by Mail  Two people open the mail. Money to cashier’s 出纳 office. List to accounting dept. Copy of list filed. P 1

13. McGraw-Hill/Irwin Slide 13 McGraw-Hill/Irwin Slide 13 C ASH O VER AND S HORT 现金溢缺 Sometimes errors in making change are discovered from differences between the cash in the cash register and the record of the amount of cash receipts. If a cash register’s record shows $550 but the count of cash in the register is $555, we would prepare the following journal entry: P 1

14. McGraw-Hill/Irwin Slide 14 McGraw-Hill/Irwin Slide 14 C ONTROL OF C ASH D ISBURSEMENTS  All expenditures should be made by check. The only exception is for small payments from petty cash 备用金.  Separate authorization for check signing and recordkeeping duties.  Use a voucher system 凭单制.  All expenditures should be made by check. The only exception is for small payments from petty cash 备用金.  Separate authorization for check signing and recordkeeping duties.  Use a voucher system 凭单制. P 1

15. McGraw-Hill/Irwin Slide 15 McGraw-Hill/Irwin Slide 15 V OUCHER S YSTEM OF C ONTROL 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. P 1

16. McGraw-Hill/Irwin Slide 16 McGraw-Hill/Irwin Slide 16 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 Sender Receiver V OUCHER S YSTEM OF C ONTROL P 1

17. McGraw-Hill/Irwin Slide 17 McGraw-Hill/Irwin Slide 17 P ETTY C ASH S YSTEM OF C ONTROL Small payments required in most companies for items such as postage, courier fees, repairs and supplies. P 2

18. McGraw-Hill/Irwin Slide 18 McGraw-Hill/Irwin Slide 18 O PERATING A P ETTY C ASH F UND Petty Cash Company Cashier Petty Cashier Accountant P 2

19. McGraw-Hill/Irwin Slide 19 McGraw-Hill/Irwin Slide 19 Petty Cash Petty Cashier O PERATING A P ETTY C ASH F UND P 2

20. McGraw-Hill/Irwin Slide 20 McGraw-Hill/Irwin Slide 20 43¢ Stamps $43 Courier $80 Petty Cashier A petty cash fund is used only for business expenses. O PERATING A P ETTY C ASH F UND P 2

21. McGraw-Hill/Irwin Slide 21 McGraw-Hill/Irwin Slide 21 O PERATING A P ETTY C ASH F UND Receipts Petty cash receipts with either no signature or a forged 伪造的 signature usually indicate misuse of petty cash. Petty Cashier 43¢ Stamps $43 Courier $80 P 2

22. McGraw-Hill/Irwin Slide 22 McGraw-Hill/Irwin Slide 22 Receipts Company Cashier $123 To reimburse petty cash fund Use a Cash Over and Short account if needed. Use a Cash Over and Short account if needed. Accountant Petty Cashier P 2 O PERATING A P ETTY C ASH F UND

23. McGraw-Hill/Irwin Slide 23 McGraw-Hill/Irwin Slide 23 P ETTY C ASH E XAMPLE 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 93.42 Express Mail Postage 55.00 Miscellaneous Office Supplies 32.48 Let’s look at replenishing the fund if the balance on July 31 was $137.80. P 2

24. McGraw-Hill/Irwin Slide 24 McGraw-Hill/Irwin Slide 24 What amount of cash will be required to replenish the petty cash fund? a.$260.20 b.$262.20 c.$139.80 d.$137.80 What amount of cash will be required to replenish the petty cash fund? a.$260.20 b.$262.20 c.$139.80 d.$137.80 Let’s prepare the journal entry to replenish the petty cash fund. P ETTY C ASH E XAMPLE P 2

25. McGraw-Hill/Irwin Slide 25 McGraw-Hill/Irwin Slide 25 P ETTY C ASH E XAMPLE Journal entry to replenish petty cash fund P 2

26. McGraw-Hill/Irwin Slide 26 McGraw-Hill/Irwin Slide 26 B ANKING A CTIVITIES AS C ONTROLS Bank Accounts 银行帐户 Bank Accounts 银行帐户 Signature Cards 预留签字卡 Signature Cards 预留签字卡 Deposit Tickets 存款回单 Deposit Tickets 存款回单 Checks 支票 Checks 支票 Electronic Funds Transfer 电子资金转帐 Bank Statements 银行对帐单 Bank Statements 银行对帐单 C 3

27. McGraw-Hill/Irwin Slide 27 McGraw-Hill/Irwin Slide 27 B ANK S TATEMENT Usually once a month, the bank sends each depositor a bank statement showing the activity in the account. * Beginning-of- period balance. End-of-period balance. Checks and other debits. Deposits and other credits. C 3

28. McGraw-Hill/Irwin Slide 28 McGraw-Hill/Irwin Slide 28 B ANK R ECONCILIATION 银行对帐调整 Why are the balances different? Why are the balances different? * 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. P 3

29. McGraw-Hill/Irwin Slide 29 McGraw-Hill/Irwin Slide 29 R ECONCILING I TEMS Bank Statement Balance Add: Deposits in transit 在途 存款. Deduct: Outstanding Checks 未兑现支票 Add or Deduct: Bank errors. Bank Statement Balance Add: Deposits in transit 在途 存款. Deduct: Outstanding Checks 未兑现支票 Add or Deduct: Bank errors. Book Balance Add: Collections made by the bank. Add: Interest earned on checking account. Deduct: Nonsufficient funds check (NSF) 空头支票. 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) 空头支票. Deduct: Bank service charge. Add or Deduct: Book errors. P 3

30. McGraw-Hill/Irwin Slide 30 McGraw-Hill/Irwin Slide 30 B ANK R ECONCILIATION Two sections: 1.Reconcile bank statement balance to the adjusted bank balance. 2.Reconcile book balance to the adjusted book balance. The adjusted balances should be equal. Two sections: 1.Reconcile bank statement balance to the adjusted bank balance. 2.Reconcile book balance to the adjusted book balance. The adjusted balances should be equal. P 3

31. McGraw-Hill/Irwin Slide 31 McGraw-Hill/Irwin Slide 31 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. B ANK R ECONCILIATION E XAMPLE P 3

32. McGraw-Hill/Irwin Slide 32 McGraw-Hill/Irwin Slide 32 1.Outstanding checks totaled $2,417. 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 $240. 6.A $486 deposit by Acme Company was erroneously credited to our account by the bank. B ANK R ECONCILIATION E XAMPLE P 3

33. McGraw-Hill/Irwin Slide 33 McGraw-Hill/Irwin Slide 33  ‘  P 3

34. McGraw-Hill/Irwin Slide 34 McGraw-Hill/Irwin Slide 34  ‘     P 3

35. McGraw-Hill/Irwin Slide 35 McGraw-Hill/Irwin Slide 35 Only amounts shown on the book portion of the reconciliation require an adjusting entry. R ECORDING A DJUSTING E NTRIES FROM A B ANK R ECONCILIATION P 3

36. McGraw-Hill/Irwin Slide 36 McGraw-Hill/Irwin Slide 36 R ECORDING A DJUSTING E NTRIES FROM A B ANK R ECONCILIATION After posting the reconciling entries the cash account looks like this: Adjusted balance on July 31. P 3

37. McGraw-Hill/Irwin Slide 37 McGraw-Hill/Irwin Slide 37 D AYS ’ S ALES U NCOLLECTED 应收帐款回收天数 Days’ Sales Uncollected Accounts Receivable Net Sales × 365= How much time is likely to pass before we receive cash receipts from credit sales. How much time is likely to pass before we receive cash receipts from credit sales. A 1

38. McGraw-Hill/Irwin Slide 38 McGraw-Hill/Irwin Slide 38 E ND OF C HAPTER 8