1. PRINCIPLES OF FINANCIAL ACCOUNTING CHAPTER 7

2. Internal Control Insists of rules to: Safeguard assets Enhance Accuracy and reliability of its accounting records

3. Principles of Internal Control Establish responsibilities in job descriptions Segregation of Duties The responsibility for related activities should be assigned to different individuals. The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

4. Principles of Internal Control Accountability of Assets The person with custody of the asset should not have access to the accounting records of that asset. Documentation Procedures All documents should be pre-numbered and accounted for All documents should be forwarded to the accounting department for recording.

5. Principles of Internal Control Physical, Mechanical, and Electronic Controls Designed to safeguard assets and to accurately account for them. Computerized reporting and recording saves time and provides more accuracy. Must provide safeguards to that computerized system

6. Principles of Internal Control Independent Internal Verification Internal Auditors Report to the level of management that can take appropriate corrective action. External auditors

7. Other controls Bonding of employees who handle cash. Rotating employees’ duties Requiring employees to take vacations NOTE: No internal control system is fool proof if collusion exists.

8. Control on Cash Deposit all cash receipts Make all disbursements with a check or electronic funds transfer Petty cash – a small cash fund to make small payments. The fund is later is replenished with a check. Bank Reconciliation

9. Other cash issues: Cash equivalents are highly liquid investments that are expected to turn into cash within 90 days Restricted cash – contractual requirements to have cash available for certain reasons. Eg. To maintain a minimum cash level to service debt.

10. Cash Management Cash Budgeting Planning the company’s need of cash to meet obligations Investing excess cash flow Ratio of cash to daily cash expenses: Cash and Cash Equivalents/Average Daily Cash Expenses Free Cash Flow Cash Provided by operations minus (Capital Expenditures and Cash Dividends)