1. Accounting II Unit 2 Chapter 8 Sarbanes-Oxley, Internal Control and Cash 1

2. The Sarbanes-Oxley Act of 2002 (referred to simply as Sarbanes-Oxley or SOX) applies only to companies whose stock is traded on public exchanges. Its purpose is to restore public confidence and trust in the financial statements of companies. 2

3. Sarbanes-Oxley requires companies to maintain strong and effective internal control. 3

4. Internal control is broadly defined as the procedures and processes used by a company to safeguard its assets, process information accurately, and ensure compliance with laws and regulations. Objective 2 covers this topic which you can read on your own. 4

5. Objective 3 covers controls for cash receipts and cash payments Cash receipts first. 5

6. Controls for Cash Receipts Cash Received from cash sales Use a cash register! Cash Received in the mail Remittance slips and a separation of duties Cash Received by Electronic Funds Greatly reduces chance of theft since there is no cash handling by employees 6

7. Cash Payments The voucher system – hang on for the next slide on this one Electronic Funds Transfer the other direction, we can pay this way as well –Payroll is the big one here but paying suppliers and vendors is also wise –The less cash and checks floating around the less chance for easy thief 7

8. A voucher system is a set of procedures for authorizing and recording liabilities and cash payments. It may be either manual or computerized. A voucher is any document that serves as proof of authority to pay cash or issue an electronic funds transfer. 8

9. Objective 4: Bank Accounts A major reason that businesses use bank accounts is for control purposes. 9

10. Use of Bank Accounts Bank accounts provide an independent recording of cash transactions that can be used as a verification of the business’s recording of transactions. 10

11. A summary received from the bank of all checking account transaction is called a bank statement. Bank Statements 11

12. A bank reconciliation is an analysis of the items and amounts that cause the cash balance reported in the bank statement to differ from the balance of the cash account in the ledger in order to determine the adjusted cash balance. Bank Reconciliation Objective 5 12

13. The Adjusted Balance (page 368) Must be equal 13

14. Steps in a Bank Reconciliation (continued) 14

15. Steps in a Bank Reconciliation 15

16. Example Exercise 8-3 p 370 Bank Reconciliation The following data were gathered to use in reconciling the bank account of Photo Op. Balance per bank.............................................$14,500 Balance per company records……………….13,875 Bank service charges…………………………75 Deposit in transit……………………………..3,750 NSF check…………………………………….800 Outstanding checks…………………………..5,250 a. What is the adjusted balance on the bank reconciliation? b. Journalize any necessary entries for Photo OP based upon the bank reconciliation. Let’s start with the steps from page 368 16

17. EE 8-3 using steps 1-9 1. Cash balance per bank: $14,500 2. Add deposits: $3,750 3. Deduct outstanding checks: $5,250 4. Determine adjusted bank balance: $14,500 + 3750 – 5250 = $13,000 17

18. EE 8-3 Company Side 5. Cash balance per company: $13,875 6. Add credit memos (money the bank received for company): None in this case. 7. Deduct debit memos (charges to the account): Bank service charge - $75 NSF check - $800 8. Determine adjusted company balance: $13,875 – 75 – 800 = $13,000 9. Verify that you balance! $13K = $13K 18

19. EE 8-3 Questions A.What is the adjusted balance on the bank reconciliation? $13,000 each B.Journalize any necessary entries for Photo Op based on the bank reconciliation. - We only have to journalize the items that adjusted the company balance, right? 19

20. Example Exercise 8-3 Two items changed the cash balance on the book or company side. Both reduced the amount of cash so you know you will credit cash for the total of the two. b.Accounts Receivable…………………800 Misc Exp or Bank Service Charge …75 Cash…………………………………875 20

21. Describe the accounting for special-purpose cash funds. Objective 6 21

22. It is usually not practical for a business to write checks to pay small amounts. Thus, it is desirable to control such payments by using a special cash fund, called a petty cash fund. Petty Cash Fund 22

23. Example Exercise 8-4 p 372 Petty Cash Fund Prepare journal entries for each of the following; a) Issued check to establish a petty cash fund of $500. b) The amount of cash in the petty cash fund is currently $120. Issued a check to replenish the fund, based on the following summary of petty cash receipts: office supplies, $300 and miscellaneous administrative expense, $75. Record any missing funds in the cash short and over account. 23

24. Okay so where do we start? I start by checking to see if the receipts match the amount needed to get the fund back up to it’s original balance of $500. How much do we need to get back up to the beginning fund balance of $500? $500 minus the cash left over of $120 means we should have receipts for how much? 24

25. $500 – 120 = $380. So we should have receipts for $380. What amount do we have in receipts? 25

26. Office supplies $300 plus Misc Administrative expense $75. I came up with $375. We needed $380 so we are short $5 in cash or receipts. After we ask if anyone else has a receipt in their pocket we end up writing the $5 off. 26

27. Example Exercise 8-4 (continued) a)Petty Cash………………………........500 Cash…………………………........500 b)Office Supplies……………………….300 Miscellaneous Admin. Expense…..75 Cash Short and Over………………..5 Cash………………………………..380 Note – we never use the account Petty Cash again unless we are changing the amount in the Petty Cash fund. 27

28. Any Questions? Don’t forget that you need to post to the discussion by Saturday to earn full credit. Unit 2 Textbook Exercises: Problem 8-2A – do 8-2B first. Problem 8-3A – do 8-3B first. The solutions to the B problems are in Doc sharing as are the templates. Remember you must use the templates for your homework. 28