1. Learning Objectives Understand the Business – LO1 Distinguish among service, merchandising, and manufacturing operations. – LO2 Explain common principles and limitations of internal control. Study the accounting methods – LO3 Apply internal control principles to cash receipts and payments. – LO4 Perform the key control of reconciling cash to bank statements. – LO5 Explain the use of a perpetual inventory system as a control. – LO6 Analyze sales transactions under a perpetual inventory system. Evaluate the results – LO7 Analyze a merchandiser’s multistep income statement. Review the chapter 1© McGraw-Hill Ryerson. All rights reserved.

2. Controlling and Reporting Cash Internal control of cash is important because: – The volume of cash transactions is enormous. – Cash is vulnerable to theft because it is valuable and portable. © McGraw-Hill Ryerson. All rights reserved.2 LO3

3. Cash Receipts The primary goal of internal control for cash receipts is to ensure that the business receives the appropriate amount of cash and safely deposits it in the bank. Cash can be received in person or from a remote source. © McGraw-Hill Ryerson. All rights reserved.3 LO3

4. Cash Received in Person © McGraw-Hill Ryerson. All rights reserved.4 Cashiers are responsible for collecting cash and issuing a receipt. A supervisor is responsible for taking custody of the cash and depositing it in the bank. Accounting staff are responsible for matching the receipts with the cash and recording it in the accounting system. Separating the duties ensures that handling cash is separate from recording cash. LO3

5. Journal Entries for Cash Receipts The cash register receipts total $6,100 but cash is only $6,097. The difference will be recorded in an expense account called Cash Shortage or Overage. © McGraw-Hill Ryerson. All rights reserved.5 1 Analyze 2 Record LO3

6. Cash Received from Remote Sources Cheques Received by Mail are processed in the same way as cash receipts except instead of using a cash register, a clerk opens the mail and lists the amounts received. Cash Received Electronically via electronic funds transfers (EFTs) is deposited directly into the company’s bank and only needs a journal entry to record it. © McGraw-Hill Ryerson. All rights reserved.6 LO3

7. Cash Payments The primary goal of internal control for cash payments is to ensure that the business pays only for properly authorized transactions. Cash can be paid by cheque or via electronic funds transfer. © McGraw-Hill Ryerson. All rights reserved.7 LO3

8. Cash Paid by Cheque Most companies use a voucher system to approve and document all purchases and payments on account. © McGraw-Hill Ryerson. All rights reserved.8 LO3

9. Cash Paid by EFT Most companies pay cash to employees using Electronic Funds Transfers (EFTs) also known as direct deposits. To ensure that the bank transfers the correct amount, most companies use an imprest system which controls the total amount that can be paid to others by limiting the total amount of money available. © McGraw-Hill Ryerson. All rights reserved.9 LO3