1. Chapter 8-1

2. Chapter 8-2 CHAPTER 8 INTERNAL CONTROL AND CASH Accounting Principles, Eighth Edition

3. Chapter 8-3 1. 1.Define internal control. 2. 2.Identify the principles of internal control. 3. 3.Explain the applications of internal control principles to cash receipts. 4. 4.Explain the applications of internal control principles to cash disbursements. 5. 5.Describe the operation of a petty cash fund. 6. 6.Indicate the control features of a bank account. 7. 7.Prepare a bank reconciliation. 8. 8.Explain the reporting of cash. Study Objectives

4. Chapter 8-4 Internal Control The Sarbanes- Oxley Act PrinciplesLimitations Cash Controls Use of a Bank Reporting Cash Cash equivalents Restricted cash Compensating balances Making deposits Writing checks Bank statements Reconciling the bank account Internal Control and Cash Control over cash receipts Control over cash disbursements

5. Chapter 8-5 Methods and measures adopted to: 1.Safeguard assets. 2.Enhance accuracy and reliability of accounting records. Reduce risk of: a.Errors (unintentional) b.Irregularities (intentional) Internal Control LO 1 Define internal control. Under the Sarbanes-Oxley Act, all publicly traded U.S. corporations are required to maintain an adequate system of internal control.

6. Chapter 8-6 Companies must develop principles of control over financial reporting. continually verify that controls are working. Internal Control LO 1 Define internal control. The Sarbanes-Oxley Act Independent auditors must attest to the level of internal control. SOX created the Public Company Accounting Oversight Board (PCAOB).

7. Chapter 8-7 Measures vary with size and nature of the business. management’s control philosophy. Internal Control LO 2 Identify the principles of internal control. Principles of Internal Control Illustration 8-1

8. Chapter 8-8 ESTABLISHMENT OF RESPONSIBILITY Control is most effective when only one person is responsible for a given task. Internal Control LO 2 Identify the principles of internal control. Principles of Internal Control SEGREGATION OF DUTIES DOCUMENTATION PROCEDURES Companies should use prenumbered documents and all documents should be accounted for.

9. Chapter 8-9 Internal Control LO 2 Identify the principles of internal control. Principles of Internal Control PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS Physical Mechanical and Electronic

10. Chapter 8-10 Internal Control LO 2 Identify the principles of internal control. Principles of Internal Control INDEPENDENT INTERNAL VERIFICATION 1.Records periodically verified by an employee who is independent. 2. Discrepancies reported to management. OTHER CONTROLS 1.Bond employees. 2.Rotate employees’ duties and require vacations. 3.Conduct background checks.

11. Chapter 8-11 Internal Control LO 2 Identify the principles of internal control. Limitations of Internal Control Costs should not exceed benefit. Human element. Size of the business.

12. Chapter 8-12 Q8-8. The management of Sewell Company asks you, as the company accountant, to explain (a) the concept of reasonable assurance in internal control and (b) the importance of the human factor in internal control. See notes page for discussion Discussion Question Cash Controls LO 3 Explain the applications of internal control principles to cash receipts.

13. Chapter 8-13 Cash Controls Internal Control over Cash Receipts LO 3 Explain the applications of internal control principles to cash receipts. Independent Internal Verification Supervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily Establishment of Responsibility Only designated personnel are authorized to handle cash receipts (cashiers) Segregation of Duties Different individuals receive cash, record cash receipts, and hold the cash Documentation Procedures Use remittance advice (mail receipts), cash register tapes, and deposit slips Physical, Mechanical, and Electronic Controls Store cash in safes and bank vaults; limit access to storage areas; use cash registers Other Controls Bond personnel who handle cash; require employees to take vacations; deposit all cash in bank daily

14. Chapter 8-14 Q8-3. At the corner grocery store, all sales clerks make change out of one cash register drawer. Is this a violation of internal control? Why? See notes page for discussion Discussion Question Cash Controls LO 3 Explain the applications of internal control principles to cash receipts.

15. Chapter 8-15 Cash Controls Cash consists of coins, currency, checks, money orders, and money on hand or on deposit in a bank. Cash receipts come from: cash sales collections on account from customers receipt of interest, rent, and dividends investments by owners bank loans proceeds from the sale of noncurrent assets LO 3 Explain the applications of internal control principles to cash receipts.

16. Chapter 8-16 Cashier ring up sales Supervisor 1.reads register totals 2.makes cash counts 3.prepares cash count sheets Over-the-Counter Receipts LO 3 Explain the applications of internal control principles to cash receipts. Prepare daily summary Prepare deposit slip Cashier’s Department Sales Department Bank (deposit) Treasurer (verification) Accounting (record) Illustration 8-7

17. Chapter 8-17 Mail Receipts Control Procedures: Mail receipts should be opened by two people, a list prepared, and each check endorsed. Copy of the list, along with the checks and remittance advices, sent to cashier’s department. Cashier adds the checks to the over-the-counter receipts and prepares a daily cash summary and makes the daily bank deposit. Copy of list sent to treasurer’s office for comparison with total shown on daily cash summary. LO 3 Explain the applications of internal control principles to cash receipts.

18. Chapter 8-18 Permitting only designated personnel to handle cash receipts is an application of the principle of: a. segregation of duties. b. establishment of responsibility. c. independent check. d. other controls. Review Question Cash Controls LO 3 Explain the applications of internal control principles to cash receipts.

19. Chapter 8-19 Generally, internal control over cash disbursements is more effective when companies pay by check, rather than by cash. Applications: Voucher system Electronic funds transfers (EFT) system Petty cash fund Cash Controls LO 4 Explain the applications of internal control principles to cash disbursements. Internal Control over Cash Disbursements

20. Chapter 8-20 Cash Controls Internal Control over Cash Disbursements Independent Internal Verification Compare checks to invoices; reconcile bank statement monthly Establishment of Responsibility Only designated personnel are authorized to sign checks (treasurer) Segregation of Duties Different individuals approve and make payments; check signers do not record disbursements Documentation Procedures Use prenumbered checks and account for them in sequence; each check must have an approved invoice Physical, Mechanical, and Electronic Controls Store blank checks in safes, with limited access; print check amounts by machine in indelible ink Other Controls Stamp invoices PAID LO 4 Explain the applications of internal control principles to cash disbursements.

21. Chapter 8-21 Q8-14. Joe Griswold Company’s internal controls over cash disbursements provide for the treasurer to sign checks imprinted by a checkwriting machine in indelible ink after comparing the check with the approved invoice. Identify the internal control principles that are present in these controls. See notes page for discussion Discussion Question Cash Controls LO 4 Explain the applications of internal control principles to cash disbursements.

22. Chapter 8-22 The use of prenumbered checks in disbursing cash is an application of the principle of: a. establishment of responsibility. b. segregation of duties. c. physical, mechanical, and electronic controls. d. documentation procedures. Review Question Cash Controls LO 4 Explain the applications of internal control principles to cash disbursements.

23. Chapter 8-23 Voucher System Network of approvals, by authorized individuals, to ensure all disbursements by check are proper. A voucher is an authorization form prepared for each expenditure. Cash Controls Internal Control over Cash Disbursements LO 4 Explain the applications of internal control principles to cash disbursements.

24. Chapter 8-24 Electronic Funds Transfers (EFT) Disbursement systems that uses wire, telephone, or computers to transfer cash balances between locations. Cash Controls Internal Control over Cash Disbursements LO 4 Explain the applications of internal control principles to cash disbursements.

25. Chapter 8-25 Petty Cash Fund - U sed to pay small amounts. Involves: 1. establishing the fund, 2. making payments from the fund, and 3. replenishing the fund. Cash Controls Internal Control over Cash Disbursements LO 5 Describe the operation of a petty cash fund.

26. Chapter 8-26 E8-8 Lincolnville Company uses an imprest petty cash system. The fund was established on March 1 with a balance of $100. During March the following petty cash receipts were found in the petty cash box. The fund was replenished on March 15 when the fund contained $3 in cash. On March 20, the amount in the fund was increased to $150. Instructions: Journalize the entries in March that pertain to the operation of the petty cash fund. Cash Controls LO 5 Describe the operation of a petty cash fund.

27. Chapter 8-27 E8-8 E8-8 The fund was established on March 1 with a balance of $100 Petty cash100March 1 Cash100 Cash Controls LO 5 Describe the operation of a petty cash fund.

28. Chapter 8-28 E8-8 E8-8 The fund was replenished on March 15 when the fund contained $3 in cash. Postage expense39March 15 Cash97 Cash Controls LO 5 Describe the operation of a petty cash fund. Freight-out21 Miscellaneous expense11 Travel expense24 Cash over Short2

29. Chapter 8-29 E8-8 E8-8 On March 20, the amount in the fund was increased to $150. Cash Controls LO 5 Describe the operation of a petty cash fund. Petty cash50March 20 Cash50

30. Chapter 8-30 Contributes to good internal control over cash. Minimizes the amount of currency on hand. Creates a double record of bank transactions. Bank reconciliation. Use of a Bank LO 6 Indicate the control features of a bank account.

31. Chapter 8-31 Making Bank Deposits Authorized employee should make deposit. Use of a Bank LO 6 Indicate the control features of a bank account. Bank Code Numbers Front Side Reverse Side Illustration 8-10

32. Chapter 8-32 Writing Checks Written order signed by depositor directing bank to pay a specified sum of money to a designated recipient. Use of a Bank LO 6 Indicate the control features of a bank account. Maker Payee Illustration 8-11 Payer

33. Chapter 8-33 Bank Statements Debit Memorandum Bank service charge NSF (not sufficient funds) Use of a Bank LO 6 Indicate the control features of a bank account. Illustration 8-12 Credit Memorandum Collect notes receivable. Interest earned.

34. Chapter 8-34 The control features of a bank account do not include: a.having bank auditors verify the correctness of the bank balance per books. b.minimizing the amount of cash that must be kept on hand. c.providing a double record of all bank transactions. d.safeguarding cash by using a bank as a depository. Review Question Use of a Bank LO 6 Indicate the control features of a bank account.

35. Chapter 8-35 Reconciling the Bank Account Use of a Bank LO 7 Prepare a bank reconciliation. Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances. Reconciling Items: 1. Deposits in transit. 2. Outstanding checks. 3. Errors. 4. Bank memoranda.

36. Chapter 8-36 Reconciliation Procedures Use of a Bank LO 7 Prepare a bank reconciliation. + Deposit in Transit - Outstanding Checks +- Bank Errors +Notes collected by bank -NSF (bounced) checks -Check printing or other service charges +-Book Errors CORRECT BALANCE Illustration 8-13

37. Chapter 8-37 E8-11 E8-11 The following information pertains to Family Video Company. 1. Cash balance per bank, July 31, $7,263. 2. Cash balance per books, July 31, $7,284. 3. July bank service charge not recorded by the depositor $28. 4. Deposits in transit, July 31, $1,500. 5. Bank collected $900 note for Family in July, plus interest $36, less fee $20.The collection has not been recorded by Family, and no interest has been accrued. 6. Outstanding checks, July 31, $591. Instructions a)Prepare a bank reconciliation at July 31. b)Journalize the adjusting entries at July 31 on the books of Family Video Company. Use of a Bank LO 7 Prepare a bank reconciliation.

38. Chapter 8-38 E8-11 E8-11 a) Prepare a bank reconciliation at July 31. Use of a Bank LO 7 Prepare a bank reconciliation. Cash balance per bank statement $7,288 Add: Deposit in transit1,500 Less:Outstanding checks(591) Adjusted cash balance per bank$8,172 Cash balance per books $7,284 Add: Collection of notes receivable900 Collection of interest36 Less:Bank service charge(28) Note collection fee(20) Adjusted cash balance per books$8,172

39. Chapter 8-39 Cash788July 31 Bank charge expense28 Miscellaneous expense20 Notes receivable900 Interest revenue36 Use of a Bank LO 7 Prepare a bank reconciliation. E8-11 E8-11 b) Journalize the adjusting entries at July 31 on the books of Family Video Company. Note: Note: Adjusting journal entry includes only the adjustments to the cash balance per books. Dr.Cr.

40. Chapter 8-40 The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is: a. outstanding checks. b. deposit in transit. c. a bank error. d. bank service charges. Review Question Use of a Bank LO 7 Prepare a bank reconciliation.

41. Chapter 8-41 Reporting Cash LO 8 Explain the reporting of cash. Most liquid asset, listed first in current assets section of balance sheet. Cash equivalents Restricted cash Compensating balances Illustration 8-16

42. Chapter 8-42 Which of the following statements correctly describes the reporting of cash? a.Cash cannot be combined with cash equivalents. b.Restricted cash funds may be combined with Cash. c.Cash is listed first in the current assets section. d.Restricted cash funds cannot be reported as a current asset. Review Question Use of a Bank LO 7 Prepare a bank reconciliation.

43. Chapter 8-43 Q2-19. Jim Benes is confused about how accounting information flows through the accounting system. He believes the flow of information is as follows. a. Debits and credits posted to the ledger. b. Business transaction occurs. c. Information entered in the journal. d. Financial statements are prepared. e. Trial balance is prepared. Is Jim correct? If not, indicate to Jim the proper flow of the information. See notes page for discussion Recording Process Discussion Question LO 7 Prepare a trial balance and explain its purposes.

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