1. Internal Control and Managing Cash
Chapter 4

2. Learning Objective 1
Set up an effective system of internal control.

3. Internal Control
Organizational plan and all related measures that an entity adopts
Safeguard assets
Encourage adherence to company policies
Promote operational efficiency
Ensure accurate and reliable accounting records

4. Components of an Effective System
Competent, reliable, and ethical personnel
Assignment of responsibilities
Proper authorization
Separation of duties

5. Audit
Examination of company’s financial statements accounting systems, and internal controls, by an outside party
Internal auditor - employee of the business
External auditor - independent

6. Limitations of Internal Control
Collusion - two or more employees working together to defraud the firm
A system of internal control that is too complex can hurt efficiency and control

7. Learning Objective 2
Use a bank reconciliation as a control device.

8. The Bank Reconciliation
Items that cause differences between bank balance and book balance
Items recorded by the company but not yet recorded by the bank:
Deposits in transit
Outstanding checks

9. The Bank Reconciliation
Items that cause differences between bank balance and book balance
Items on a bank statement and not recorded by the business:
Bank collections
Electronic funds transfers
Service charge
Interest revenue earned on account
NSF checks
Errors

10. Bank Reconciliation Illustrated
Business Research, Inc., shows a balance on its bank statement of $5, on January 31. The company Cash account has a balance of $3,
The January 30 deposit of $1, does not appear on the bank statement.
The bank erroneously charged to the account a $100 check (No. 656) written by Business Research Associates.

11. The Bank Reconciliation Illustrated
Five company checks, totaling $1,350.14, issued late in January and recorded in the journal have not been paid by the bank.
The bank received $ by EFT on behalf of Business Research, Inc.
The bank collected on behalf of the company a note receivable, $2,114 (including interest revenue of $214).
The bank statement shows interest revenue of $28.01.

12. The Bank Reconciliation Illustrated
Check number 333 for $150 paid to Brown Company on account was recorded as a cash payment of $510.
The bank service charge for the month was $14.25.
The bank statement shows an NSF check for $52.
Business Research pays insurance expense by EFT and has not recorded this $361 payment.

13. The Bank Reconciliation Illustrated
Balance per bank, January 31 $5,931.51
Add deposit in transit 1,591.63
Check erroneously charged
$7,623.14
Less outstanding checks (1,350.14)
Adjusted bank balance $6,273.00

14. The Bank Reconciliation Illustrated
Balance per books, January 31 $3,294.21
Add: ETF receipt of rent revenue
Collection of note receivable 2,114.00
Interest revenue earned
Correction of book error
$6,700.25
Less: Service charge $
NSF check 52.00
Payment of insurance expense ( )
Adjusted book balance $6,273.00

15. Learning Objective 3
Apply internal controls to cash receipts and cash payments.

16. Petty Cash
A small amount of cash kept on hand to pay for minor expenses.

17. Learning Objective 4
Use a budget to manage cash.

18. Using a Budget to Manage Cash
A financial plan that helps coordinate business activities
Cash budget - helps an entity manage cash by planning receipt and payment of cash during a future period

19. Using a Budget to Manage Cash
Cash balance, beginning
+ Budgeted cash receipts
- Budgeted cash payments
Expected cash balance, ending

20. Reporting Cash on the Balance Sheet
Companies usually combine all cash amount into single total called “Cash and Cash Equivalents” on the balance sheet.
Cash equivalents include liquid assets
Time deposits
Certificates of deposit

21. Learning Objective 5
Weigh ethical judgment in business.

22. Ethics and Accounting
Company code of ethical and responsible behavior by employees
AICPA Code of Professional Conduct
Standards of Ethical Conduct for Management Accountants

23. End of Chapter 4