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Tools for Business Decision-Making Fourth Canadian Edition Financial Accounting: Prepared by: Peggy Coady Memorial University of Newfoundland & Catherine Seguin University of Toronto
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Internal Control and Cash Chapter 7
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3 Internal Control Reliable financial reporting Effective and efficient operations Compliance with relevant laws and regulations The related methods and measures adopted within a business to help it achieve:
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Chapter 7 4 Internal Control Good internal control systems have five primary components: –Control environment –Risk assessment –Control activities –Information and communication –Monitoring
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Control Activities Control activities include: –Authorization of transactions and activities –Segregation of duties –Documentation –Physical controls –Independent checks of performance –Human resource controls Chapter 7 5
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6 Discussion Question What are some examples of control activities a movie theatre might have?
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Limitations of Internal Control Chapter 7 7 Reasonable assurance –Cost / benefit –Human element –Collusion –Size of business
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Chapter 7 8 Cash Coins Currency Cheques Money orders Money on hand Deposits in bank Debit card slips Bank credit card slips
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Chapter 7 9 Importance of Cash Most important asset Pervasive impact Vulnerable to theft or misuse Balancing act needed to ensure sufficient, but not excess, quantity
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Chapter 7 10 Cash Receipts Internal control over cash receipts is more effective when cash receipts are deposited into the bank account daily or are made by electronic funds transfer
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Chapter 7 11 Cash Receipts Debit and credit card transactions are examples of electronic funds transfers Other examples of control activities over cash receipts?
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Chapter 7 12 Cash Payments Control activities over cash payments are more effective when payments are made by cheque or by electronic funds transfer, rather than in cash
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Chapter 7 13 Cash Payments Good control for cheques includes the signing of cheques by an authorized person or persons (cheques often require two signatures) Other examples of control activities over cash payments?
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Chapter 7 14 Bank Safeguards cash by using a bank as a depository and clearinghouse for cheques received and written Provides a double record of transactions –One by the business –One by the bank
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Chapter 7 15 Differences Between Company Balance and Bank Balance Time lags –The period after a cheque is written and dated but not yet presented to nor paid by the bank (outstanding cheques) –The period between receipts being recorded by the company and receipts being recorded by the bank (deposits in transit)
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Chapter 7 16 Differences Between Company Balance and Bank Balance Time lags (continued) –Time lags can occur when the bank records debit or credit memos Errors by either party in recording transactions
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Chapter 7 17 Understanding Debits and Credits Bank (Your Cash Account is a Liability) Books (Cash is an Asset) ChequeDebit (decrease)Credit (decrease) DepositCredit (increase)Debit (increase)
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Chapter 7 18 Bank Reconciliation This reconciles the balance in the company’s bank account with the cash balance in the general ledger (makes them agree) Adjusted cash balance = reconciled balance
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Bank Reconciliation Procedures Chapter 7 19 Illustration 7-5
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Chapter 7 20 Bank Reconciliation Procedures Books –Each reconciling item in determining the adjusted balance per books MUST be journalized and posted Bank –Do NOT journalize any entries on bank side
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Chapter 7 21 Discussion Question Why is a bank reconciliation an important part of a company’s internal control over cash?
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Chapter 7 22 Reporting Cash Cash is recorded in both the balance sheet and the cash flow statement Cash is the most liquid asset and is listed first in the current assets section of the balance sheet
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Chapter 7 23 Reporting Cash 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
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Chapter 7 24 Reporting Cash Cash equivalents –Reporting likely to change in the future from cash and cash equivalents to short-term investments Compensating balance –Minimum cash balance
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Chapter 7 25 Reporting Cash Restricted cash –Cash that is not available for general use; set aside for special purposes –If it is not to be used within the next year, report as noncurrent asset
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Chapter 7 26 Six Principles of Cash Management
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Chapter 7 27 Discussion Question Do you use a cash budget? How does/can a cash budget help you manage your cash?
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Copyright Notice Copyright © 2009 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.
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