1. Chapter 6 Cash and Internal Control
Financial Accounting: The Impact on Decision Makers 6/e by
Gary A. Porter and Curtis L. Norton
Copyright © 2009 South-Western, a part of Cengage Learning.

2. Cash Coin and currency Checking, savings, and money market accounts
Undeposited, cashier, and certified checks
LO1

3. Cash Equivalents Readily convertible to cash
Original maturity to investor of three months or less
Examples:
Commercial paper
U.S. Treasury bills
Certain money market funds

4. Cash Management
Necessary to ensure company has neither too little nor too much cash on hand
Tools
Cash flows statement
Bank reconciliations
Petty cash funds
LO2

5. Bank Statements Cash balance, beginning of period +
= Cash balance, end of period
+Deposits
+Customer notes and interest collected by bank
+Interest earned
Canceled checks
NSF checks
Service charges

6. Bank Reconciliation – Step 1
Trace deposits listed on the bank statement to the books. Identify the deposits in transit. Add to the bank balance.
Deposits in transit: Late period deposits not yet reflected on bank statement

7. Example of Reconciliation
Bank Statement Adjustments: Deposits
Balance per statement, June $3,308.59
Add: Deposit in transit 1

8. Bank Reconciliation – Step 2
Trace checks cleared by the bank to the books. Identify outstanding checks. Subtract from the bank balance.
Outstanding checks: Checks written but not yet presented to bank

9. Example of Reconciliation
Bank Statement Adjustments: Checks Outstanding
Balance per statement, June $3,308.59
Add: Deposit in transit
Deduct: Outstanding checks:
No $ No
No (717.84)
Adjusted balance, June $3,233.05 1

10. Bank Reconciliation – Step 3
List all other additions (credit memoranda) shown on the bank statement. Add to the book balance.
Credit memoranda: Interest earned, customer notes collected, etc.

11. Example of Reconciliation
Cash Account Adjustments: Credit Memoranda
Balance per books, June $2,895.82
Add: Customer note collected $500.00
Interest on customer note
Interest earned during June
Error in recording check 2

12. Bank Reconciliation – Step 4
List all other subtractions (debit memoranda) shown on the bank statement. Subtract from the book balance.
Debit memoranda:
NSF checks, service charges, etc.

13. Example of Reconciliation
Cash Account Adjustments: Debit Memoranda
Balance per books, June $2,895.82
Add: Customer note collected $500.00
Interest on customer note
Interest earned during June
Error in recording check
Deduct: NSF check $245.72
Collection fee on note
Service charge for lockbox (282.22)
Adjusted balance, June $3,233.05 2

14. Bank Reconciliation – Step 5
Identify errors made by the bank or the company in recording the transactions during the period.

15. Bank Reconciliation – Step 6
Use the information collected in steps 1 through 5 to prepare the bank reconciliation.
Bank Reconciliation
Balance per bank $$$ :
Adjusted balance $$$
Balance per books $$$
Adjusted balances for book and bank must agree

16. Example of Reconciliation
Bank Statement Adjustments
Balance per statement, June 30 $3,308.59
Adjusted balance, June $3,233.05
Cash Account Adjustments
Balance per books, June $2,895.82
Adjusted balance, June $3,233.05 1

17. Bank Reconciliation Adjusting Entries
Balance per bank $$$ :
Adjusted balance $$$
Balance per books $$$
Book adjustments are the basis for adjusting entries

18. Bank Reconciliation Adjusting Entries
Accounts Receivable
Collection Fee Expense
Rent Expense—Lockbox
Cash
Notes Receivable
Interest Revenue
Supplies
To record bank reconciliation adjustments.

19. Petty Cash Journalize Establishment of A check is written Fund
Disbursement
With proper
documentation
Fund replenished

20. Petty Cash Transactions for Mickey’s Marathon Sports
Original Fund Balance $200.00
Petty Cash Expenditures:
U.S. Post Office
Overnight Delivery Service
Office Supply Express
Coin and currency per count
Prepare the journal entry to record the petty cash fund replenishment

21. Accounting for Petty Cash
Journal Entry to Replenish Fund:
Postage Expense
Delivery Expense
Office Expense
Cash Over and Short*
Cash
*$ – ($ ) =
$ – $ = $3.70 short

22. Internal Control System
Consists of the policies and procedures necessary to ensure:
The safeguarding of an entity’s assets
The reliability of its accounting records
The accomplishment of its overall objectives
LO3

23. Sarbanes-Oxley Act of 2002 (SOX)
Act of Congress intended to bring reform
to corporate accountability and stewardship
in response to corporate scandals

24. Internal Control Control Environment Internal Accounting Control
System
Internal
Control
Procedures

25. The Control Environment
Management’s competence and operating style
Personnel policies and practices
Influence of board of directors

26. The Accounting System
Methods and records used to report transactions and maintain financial information
Can be manual, fully computerized, or a combination of both
Use of journals is an integral part of any system

27. Internal Control Procedures
Independent
Review and
Appraisal
Independent
Verification
The Design and
Use of Business
Documents
Safeguarding
Assets and
Records
Proper
Authorizations
Segregation
of Duties
LO4

28. Proper Authorizations
Authority and responsibility go hand in hand
Segregation of Duties
Separate physical custody from the accounting
for assets

29. Independent Verification
One individual or department acts as a check on the work of another
Safeguarding Assets and Records
Protect assets and accounting records from loss,
theft, unauthorized use, etc.

30. Independent Review and Appraisal
Provide for periodic review and appraisal of the accounting system and the people operating it

31. The Design and Use of Business Documents
Capture all relevant information about a transaction and assist in proper recording and classification.
Are properly controlled

32. Limitations on Internal Control
No system is entirely foolproof
Employees in collusion can override the best controls
Cost vs. benefit tradeoff

33. Computerized Business Documents and Internal Control
Cash receipts should be deposited intact in the bank on a daily basis
All cash disbursements should be made by check
LO5

34. Control Over Cash Receipts
Cash received over the counter (e.g., cash sales)
Cash received in the mail (e.g., credit sales)

35. Controls Over Cash Received Over the Counter
Cash registers
Locked-in cash register tape
Prenumbered customer receipts
Investigate recurring discrepancies

36. Controls Over Cash Received in the Mail
Two employees open mail
Prelist prepared
Monthly customer statements

37. Document Flow for Merchandise
Check
Prepared
Purchase
Requisition
Receiving
Report
Order
Invoice
Approval

38. End of Chapter 6