1. Financial Accounting: Tools for Business Decision Making
Kimmel, Weygandt, Kieso, Trenholm
KIMMEL
Prepared by:
Barbara Trenholm
University of New Brunswick

2. Chapter 7 Internal Control and Cash
PowerPoint Slides
After studying Chapter 7, you should be able to:
Identify the principles of internal control.
Explain the applications of internal control to cash receipts.
Explain the applications of internal control to cash disbursements.
Prepare a bank reconciliation. 1

3. Chapter 7 Internal Control and Cash
After studying Chapter 7, you should be able to:
Explain the reporting of cash.
Discuss the basic principles of cash management.
Identify the primary elements of a cash budget.
Identify and interpret measures that evaluate the adequacy of cash.

4. Internal Control
The related methods and measures adopted within a business to
Optimize the use of resources
Prevent and detect errors and irregularities
Safeguard assets
Maintain reliable control systems

5. Illustration 7-1

6. Establishment of Responsibility
Control is most effective when only one person is responsible for a given task

7. Segregation of Duties
Related activities should be assigned to different individuals
Separate recordkeeping from physical custody of the asset

8. Documentation Provide evidence that transactions and events occurred
Shipping documents
Sales invoices
Documents should be prenumbered and accounted for

9. Physical, Mechanical and Electronic Controls
Illustration 7-2

10. Independent Internal Verification
Review, comparison, and reconciliation of data prepared by employees
Periodically or on surprise basis
Done by employee who is independent of the personnel responsible for the information
Discrepancies and exceptions should be reported to management

11. Limitations of Internal Control
Cost/benefit
Human element
Collusion
Size of business

12. Cash Coins Currency Cheques Money orders Money on hand
Deposits in bank

13. Cash Readily convertible into any other asset High value in small bulk
Non-control of owner identification (serial numbers)

14. Internal Control Over Cash Receipts
Illustration 7-4

15. Internal Control Over Cash Disbursements
Illustration 7-5

16. Petty Cash
Imprest (of fixed size) cash fund used to pay relatively small amounts

17. Petty Cash Fund (Appendix)
Operation of the petty cash fund involves
1 Establishing fund
2 Making payments from fund
3 Replenishing fund
Accounting entries are required when
1 Fund is established
2 Fund is replenished
3 Amount of fund is changed

18. Bank Minimizes cash that must be kept on hand
PowerPoint Slides
Bank
Minimizes cash that must be kept on hand
Provides a double record of transactions
One by the business
One by the bank
Safeguards cash by using a bank as a depository and clearinghouse for cheques received and written 24

19. copy of bank’s records sent to the customer for periodic review
Bank statement -
copy of bank’s records sent to the customer for periodic review
Illustration7-6
Bank statement shows
cheque & other debits
deposits & other credits
daily cash balance

20. Differences Between Company Balance and Bank Balance
PowerPoint Slides
Differences Between Company Balance and Bank Balance
Time lags
Time cheque is written and dated and date presented to and paid by the bank
Time receipts recorded by company and time receipts recorded by bank
Time lags occur when the bank mails debit or credit memos to the company
Errors by either party in recording transactions 27

21. Terms Deposits in transit Outstanding cheques Adjusted balance
PowerPoint Slides
Terms
Deposits in transit
Deposits recorded by depositor that have not been recorded by bank
Outstanding cheques
Cheques written (issued) and recorded by company that have not been presented to/paid by bank
Adjusted balance
Reconciled or correct cash balance 29

22. Terms Debit memoranda Credit memoranda
Charges against depositor’s account (e.g. service charges, RC (returned)/NSF (insufficient funds) cheques)
Credit memoranda
Amounts that increase depositor’s account (e.g., interest earned)

23. -cheque printing or other service charges +notes collected by bank
Illustration 7-7
Bank Reconciliation
Procedures
$ Per Bank Statement
-outstanding cheques
+deposits in transit
+/- bank errors
= correct cash amount
$ Per Books
-NSF cheques
-cheque printing or other service charges
+notes collected by
bank
+/- book errors

24. Reconciling Journal Entries
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

25. PowerPoint Slides
Reporting Cash
Cash on hand, cash in banks, cash equivalents, and petty cash are often combined and reported as cash
Cash is recorded in both the balance sheet and the statement of cash flows
Cash is the most liquid asset and listed first in the current asset section of the balance sheet 39

26. 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

27. Restricted Cash Cash not available for general use
Set aside for special purpose
If not to be used within next year, report as noncurrent asset

28. Five Principles of Cash Management
PowerPoint Slides
Five Principles of Cash Management
Illustration 7-12 33

29. Cash Budget Planning company's cash needs is a key business activity
PowerPoint Slides
Cash Budget
Planning company's cash needs is a key business activity
Cash budget shows anticipated cash flows, over a 1 to 2 year period 42

30. Cash Budget Cash receipts section Cash disbursements section
PowerPoint Slides
Cash Budget
Cash receipts section
Cash disbursements section
Financing section 43

31. Assessing Cash Adequacy
PowerPoint Slides
Assessing Cash Adequacy
Cash to daily cash expenses ratio
Free cash flow 50

32. Cash to Daily Cash Expenses Ratio
PowerPoint Slides
Cash to Daily Cash Expenses Ratio
Cash to daily cash expenses ratio =
Cash and cash equivalents
Average daily cash expenses*
* Subtract amortization from total expenses. Divide by 365 days
Measures the number of days of cash expenses that cash on hand can cover 51

33. Free Cash Flow
Free cash flow is amount of discretionary cash flow a company has for
Purchasing additional investments
Reducing debt
Adding liquidity
Cash provided by operating activities
- Capital expenditures
- Dividends paid
= Free cash flow

34. Decision Checkpoints
Does the company have adequate cash to meet its daily needs?
Does the company have any discretionary cash available?
Cash to daily cash expenses ratio
Free cash flow

35. COPYRIGHT
Copyright © 2001 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / 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.