1. Cash and Internal Control
Chapter 5
Cash and
Internal Control
Financial Accounting, Alternate 4e by Porter and Norton

2. Gap Inc. Consolidated Balance Sheets (partial)
ASSETS (in thousands) Feb. 1, Feb 2, 2002
Current Assets:
Cash and equivalents $3,388,514 $1,035,749
Merchandise inventory 2,047, ,768,613
Other current assets , ,685
Total current assets $5,739,725 $3,136,047
higher

3. Gap Inc. Consolidated Balance Sheets (partial)
ASSETS (in thousands)
Current Assets:
Cash and equivalents
Key to
classification
as cash: readily
available to
pay debts

4. Cash Coin & currency Checking, savings & money market accounts
Undeposited, cashier, and certified checks
Pay to the order of:
ABC Co.

5. Cash Equivalents and the Statement of Cash Flows
Gap Inc.’s Consolidated Balance Sheets (partial)
(in thousands) Feb. 1, Feb 2, 2002
Current Assets:
Cash and equivalents $3,388,514 $1,035,749
Merchandise inventory 2,047, ,768,613
Other current assets , ,685
Total current assets $5,739,725 $3,136,047
Gap Inc.’s Consolidated Statement of Cash Flows (partial)
Year ended Year ended
(in thousands) Feb. 1, Feb 2, 2002
Net increase (decrease) in cash
and equivalents 2,352, ,955
Cash and equivalents at beg. of year 1,035, ,794
Cash and equivalents at end of year $3,388,514 $1,035,749

6. Cash Equivalents Readily convertible to cash
Original maturity to investor of 3 months or less 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27
Commercial paper
U.S. Treasury bills
Certain money market funds

7. Cash Management
Necessary to ensure company has neither too little nor too much cash on hand
Tools:
Cash Flows Statement
Cash Budgets
Bank Reconciliations
Petty Cash Funds

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

9. Bank Reconciliation - Step 1
Trace deposits on bank statement to books. Identify deposits in transit. Add to bank balance.
Deposits in Transit: Late period deposits not yet reflected on bank statement

10. Example of Reconciliation
Bank Statement Adjustments: Deposits
Balance per statement, June 30 $ 3,308.59
Add: Deposit in transit 10 1

11. Bank Reconciliation - Step 2
Trace checks cleared by bank to books. Identify outstanding checks. Subtract from bank balance.
Outstanding checks: Checks written but not yet presented to bank
ABC Co.
Pay to the order of:
XYZ Co.

12. Example of Reconciliation
Bank Statement Adjustments:
Checks Outstanding
Balance per statement, June 30 $3,308.59
Add: Deposit in transit
Deduct: Outstanding checks:
Check No. 496 $
Check No
Check No (717.84)
Adjusted balance, June $3,233.05 12 1

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

14. Example of Reconciliation
Cash Account Adjustments:
Credit Memoranda
Balance per books, June $ 2,895.82
Add:
Note collected $500.00
Interest on note
Interest earned
Recording error, # 14 2

15. Bank Reconciliation - Step 4
List all other subtractions (debit memoranda) shown on the bank statement. Subtract from book balance.
Date
Non-Sufficient Funds
Debit memoranda: NSF checks, service charges, etc.

16. Example of Reconciliation
Cash Account Adjustments:
Debit Memoranda
Balance per books, June $ 2,895.82
Add: Note collected $500.00
Interest on note
Interest earned
Recording error, #
Deduct: NSF check $245.72
Collection fee – note
Service charge (282.22)
Adjusted balance, June $ 3,233.05 2

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

18. Bank Reconciliation - Step 6
Use the information collected in Steps to
prepare the bank reconciliation.
Bank Reconciliation
Balance per bank $$$ :
Adjusted balance $$$
Balance per books $$$
Adjusted balances for book and bank must agree

19. Example of Reconciliation
Bank Statement Adjustments
Balance per statement, June $ 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 19 1

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

21. Petty Cash Dr. Cr. RECEIPT RECEIPT Paycheck for Jane Doe Date
Dept. of Treasurer
Jane Doe
RECEIPT
Dr. Cr.
RECEIPT

22. Responsibility for Internal Control
Auditors
Audit
Committee
of Board of
Directors
External
Auditors
Management

23. Internal Control Control Environment Internal Accounting Control
Procedures
Accounting
System

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

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

26. Internal Control Procedures
Independent
Review and
Appraisal
Independent
Verification
Design & Use
of Business
Documents
Safeguarding
Assets and
Records
Proper
Authorizations
Segregation
of Duties 26

27. Proper Authorizations
Authority and responsibility go hand in hand
LOAN
APPROVED

28. 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

30. Safeguarding Assets and Records
Protect assets and accounting records from loss, theft, unauthorized use, etc.

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

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

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

34. Controls Over Cash All cash receipts deposited intact daily
All cash disbursements made by check
Paycheck for
Dept. of Treasurer
John Doe
Date
Jane Doe

35. Controls Over Cash Received Over the Counter
Cash registers
Prenumbered customer receipts
Investigation of recurring discrepancies

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

37. Computerized Business Documents and Internal Control
Appendix
Computerized Business Documents and Internal Control

38. Controls over Cash Disbursements: Business Documents
Purchase
Requisition
Receiving
Report
Purchase
Order
Invoice
Approval
Purchase
Invoice
Check
prepared

39. End of Chapter 5