1. Financial Accounting: Tools for Business Decision Making
Kimmel, Weygandt, Kieso
ELS 1 1

2. Chapter 7 2

3. Chapter 7 Internal Control and Cash
PowerPoint Slides
After studying Chapter 7, you should be able to:
Identify the principles of internal control.
Explain the application of internal control to cash receipts.
Explain the application of internal control to cash disbursements.
Prepare a bank reconciliation. 3 1 3

4. Chapter 7 Internal Control and Cash
After studying Chapter 7, you should be able to:
Explain the reporting of cash.
Discuss the basic principles of cash management.
Identify the primary elements of a cash budget.
Identify and interpret measures that evaluate the adequacy of cash. 4 4

5. Internal Control consists of...
all the related methods and measures adopted within a business to:
safeguard its assets;
enhance accuracy and reliability of accounting of its accounting records. 5 5

6. Page 289in book 6 6

7. Establishment of Responsibility
Control is most effective when only one person is responsible for a given task. 7 7

8. Segregation of Duties
Responsibility of related activities should be assigned to different individuals.
Responsibility of keeping the records of an asset should be separate from physical custody. 8 8

9. Segregation of Duties
Responsibility for related activities should be assigned to different individuals
Responsibility for keeping records for an asset should be separate from the physical custody of the asset
Page 290 in the book 9 9

10. Documentation Provide evidence that transactions and events occurred:
Shipping documents
Sales invoices 10 10

11. Documentation Procedures
Documents should be pre-numbered
All documents should be accounted for
Sources documents should be promptly forwarded to accounting department 11 11

12. Physical, Mechanical and Electronic Controls12 12

13. Independent Internal Verification
Involves review, comparison, and reconciliation of data prepared by employees
Verification should be made periodically or on surprise basis
Verification should be done by employee who is independent of the personnel responsible for the information
Discrepancies and exceptions should be reported to management 13 13

14. Independent Internal Verification
Involves review, comparison, and reconciliation of data prepared by employees.
Verification should be made periodically or on surprise basis.
Verification should be done by employee who is independent of the personnel responsible for the information.
Discrepancies and exceptions should be reported to management. 14 14

15. Independent Internal Verification15 15

16. Other Controls Bonding of employees who handle cash
Rotating employee’s duties and requiring employees to take vacations 16 16

17. Cash consists of... coins currency checks money orders money on hand
deposits in bank 17

18. Cash consists of... coins currency checks money orders money on hand
deposits in bank 18 18

19. Cash is the most desirable asset...
because it is readily convertible into any other asset. 19 19

20. Limitations of Internal Controls
Cost/Benefit - cost of establishing procedure should not exceed expected benefit
Human element - fatigue, carelessness, indifference
Collusion - two or more individuals who work together to get around controls
Size of business 20 20

21. Page 296 in book 21 21

22. Over Cash Disbursements
Internal Control
Over Cash Disbursements
Page 297 in book 22 22

23. Electronic Funds Transfer (EFT)
An approach to transfer funds among parties without paper (deposit tickets, checks, etc.)
EFT uses wire, telephone,telegraph or computer to transfer from one location to another 23 23

24. Petty Cash Fund is a cash fund used to pay relatively small amounts 24

25. Petty Cash Fund A cash fund used to pay relatively small amounts. 25

26. Use of a Bank... is good internal control.
PowerPoint Slides
Use of a Bank...
is good internal control.
minimizes the amount of cash that must be kept on hand.
provides a double record of all bank transactions
one by the business
one by the bank
a company can safeguard its cash by using a bank as a depository and clearinghouse for checks received and written. 26 24 26

27. a copy of the bank’s records sent to the customer for periodic review.
Bank Statement -
a copy of the bank’s records sent to the customer for periodic review.
Bank Statement shows
check & other debits
deposits & other credits
daily cash balance 27 27

28. Company Balance and Bank Balance of Cash Usually Differ Because...
PowerPoint Slides
Time lags that prevent one of the parties from recording the transaction in the same period.
Days pass between the time a check is written and dated and date it is paid by the bank.
A day may pass between the time receipts are recorded by the company and the time they are recorded by the bank.
A time lag may occur when the bank mails a debit or credit memo to the company.
Errors by either party in recording transactions. 28 27 28

29. Reconciliation Procedure
PowerPoint Slides
Reconciliation Procedure
reconcile balance per books and balance per bank to their adjusted or correct balances
the reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash 29 28 29

30. PowerPoint Slides
Terms
Deposits in transit - deposits recorded by the depositor that have not been recorded by the bank.
Outstanding Checks - checks issued and recorded by the company that have not been paid by the bank.
NSF Check - a check that is not paid by the bank because of insufficient funds in the customer’s bank account.
Adjusted balance - same as true cash balance, correct cash balance 30 29 30

31. -check printing or other service charge +notes collected by bank
Bank Reconciliation
Procedures
$ Per Bank Statement
-outstanding checks
+deposits
+/- bank errors
correct cash amount
$ Per Books
-NSF Checks
-check printing or other service charge
+notes collected by
bank 31

32. W.A. Laird Company Bank Reconciliation April 30, 1998
PowerPoint Slides
W.A. Laird Company Bank Reconciliation April 30, 1998
Page 302 in book
Cash balance per bank statement 15,907.45
Add: Deposits in transit 2,201.40
18,108.85
Less: Outstanding checks
No ,000.00
No ,401.30
No , ,904.00
Adjusted cash balance per bank 12,204.85
Cash balance per books 11,589.45
Add: Collection of N/R for $ 1000 plus interest
earned $50, less collection fee $ 15 1,035.00
Error on recording check No ,071.00
12,660.45
Less: NSF check
Bank service charge 31 32

33. For Cash To Show the Correct Balance
Each reconciling item in determining the adjusted balance per books must be journalized and posted. 33 33

34. W.A. Laird Company Bank Reconciliation April 30, 1998
PowerPoint Slides
W.A. Laird Company Bank Reconciliation April 30, 1998
Page 302 in book
Cash balance per bank statement 15,907.45
Add: Deposits in transit 2,201.40
18,108.85
Less: Outstanding checks
No ,000.00
No ,401.30
No , ,904.00
Adjusted cash balance per bank 12,204.85
Cash balance per books 11,589.45
Add: Collection of N/R for $ 1000 plus interest
earned $50, less collection fee $ 15 1,035.00
Error on recording check No ,071.00
12,660.45
Less: NSF check
Bank service charge 31 34

35. JOURNAL Apr 30 Cash 1,035.00 Miscellaneous Expense 15.00
Notes Receivable ,000.00
Interest Revenue
Apr 30 Cash
Accounts Payable
Apr 30 Accounts Receivable-Baron
Cash
Apr 30 Miscellaneous Expense
Cash 35

36. PowerPoint Slides
Reporting Cash
Cash is recorded in both the balance sheet and the statement of cash flows.
The balance sheet shows the amount of cash available at a given point in time.
The statement of cash flows shows the sources and uses of cash during a period of time. 36 38 36

37. Cash Equivalents Readily convertible to known amount of cash
So near maturity that market value is relatively insensitive to changes in interest rates
Examples:
Treasury bills
Commercial paper
Money Market Funds 37 37

38. Restricted Cash... Is cash that is not available for general use.
Is set aside for special purpose.
If not to be used within next year, report as noncurrent asset. 38 38

39. PowerPoint Slides
Operating Cycle of a Merchandising Company…is the average time it takes to go from cash to cash in producing revenues.
Page 306 in book 39 33

40. Five Principles of Cash Management
PowerPoint Slides
Five Principles of Cash Management
Page 308 in book 40 33

41. PowerPoint Slides
Reporting Cash
Cash on hand, cash in banks, and petty cash are often combined and reported as cash.
Cash is the most liquid asset and listed first in the current asset section of the balance sheet. 41 39 41

42. Cash Budget Cash is vital.
PowerPoint Slides
Cash Budget
Cash is vital.
Planning the company's cash needs is a key business activity.
Cash budget shows the anticipated cash flows, over a 1 to 21-year period. 42 42 42

43. Cash Budget The cash budget contains : Cash receipts section;
PowerPoint Slides
Cash Budget
The cash budget contains :
Cash receipts section;
Cash disbursements section;
Financing section. 43 43 43

44. PowerPoint Slides
Cash Receipts Section
includes expected receipts from the company's principal source(s) of revenue, such as cash sales and collections from customers on credit sales
also shows anticipated receipts of interest and dividends, and proceeds from planned sales of investments, plant assets, and the company's capital stock 44 44 44

45. Cash Disbursements Section
PowerPoint Slides
Cash Disbursements Section
shows expected payments for direct materials, direct labor, manufacturing overhead, and selling and administrative expenses.
includes projected payments for income taxes, dividends, investments, and plant assets. 45 45 45

46. PowerPoint Slides
Financing Section
Shows expected borrowings and the repayment of the borrowed funds and interest 46 46 46

47. PowerPoint Slides
Adequacy Of Cash
Net cash provided by operating activities is used to compute two ratios which measure liquidity and solvency. 47 47 47

48. Net Cash Provided by Operating Activities Current Liabilities
Liquidity - the ability of a company to pay obligations that are expected to come due within the next year.
PowerPoint Slides
Current Cash Debt Coverage Ratio -indicates whether a company can pay off its current liabilities from current operations.
Net Cash Provided by Operating Activities
Current Liabilities 48 48 48

49. Net Cash Provided by Operating Activities Total Liabilities
Solvency - the ability of a company to pay interest as it comes due and to repay the face value of debt at maturity
PowerPoint Slides
Cash Debt Coverage Ratio -indicates whether a company can pay off its total liabilities from current operations
Net Cash Provided by Operating Activities
Total Liabilities 49 48 49

50. Additional Tools Used to Measure the Adequacy of Cash
PowerPoint Slides
Two additional tools used to measure the adequacy of cash are:
ratio of cash to daily cash expenses;
free cash flow. 50 50 50

51. Ratio of Cash to Daily Cash Expenses
PowerPoint Slides
Ratio of Cash to Daily Cash Expenses
Computes the number of days of cash expenses the cash on hand can cover
Average daily cash expenses can be approximated by subtracting depreciation (a noncash expense) from total expenses and dividing by 365 days 51 51 51

52. Ratio of Cash to Daily Cash Expenses
PowerPoint Slides
Ratio of Cash to Daily Cash Expenses
balance in cash and cash equivalent
average daily cash expenses 52 51 52

53. PowerPoint Slides
Free Cash Flow
Free cash flow is the amount of discretionary cash flow a company has for:
purchasing additional investments
paying its debt
adding to its liquidity
Net cash provided by operating activities $250,000
Less: Capital expenditures $80,000
Dividends paid , ,000
Free Cash Flow $120,000 53 52 53

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