Internal Control and Managing Cash Chapter 4

1
Internal Control and Managing Cash Chapter 4

• Set up an effective system of internal control.

2
Internal Control

• Organizational plan and all related measures that
  an entity adopts
• Safeguard assets
• Encourage adherence to company policies
• Promote operational efficiency
• Ensure accurate and reliable accounting records

3
Components of anEffective System

• Competent, reliable, and ethical personnel
• Assignment of responsibilities
• Proper authorization
• Separation of duties

4
Audit

• Examination of companys financial statements
  accounting systems, and internal controls, by an
  outside party
• Internal auditor - employee of the business
• External auditor - independent

5
Limitations of Internal Control

• Collusion - two or more employees working
  together to defraud the firm
• A system of internal control that is too complex
  can hurt efficiency and control

6
The Bank Reconciliation an internal control
device

• Items that cause differences between bank balance
  and book balance
• Items recorded by the company but not yet
  recorded by the bank
• Deposits in transit
• Outstanding checks

7
The Bank Reconciliation

• Items that cause differences between bank balance
  and book balance
• Items on a bank statement and not recorded by the
  business
• Bank collections
• Electronic funds transfers
• Service charge
• Interest revenue earned on account
• NSF checks
• Errors

8
Bank Reconciliation Illustrated

• Business Research, Inc., shows a balance on its
  bank statement of 5,931.51 on January 31. The
  company Cash account has a balance of 3,294.21.
• The January 30 deposit of 1,591.63 does not
  appear on the bank statement.
• The bank erroneously charged to the account a
  100 check (No. 656) written by Business Research
  Associates.

9
The Bank Reconciliation Illustrated

• Five company checks, totaling 1,350.14, issued
  late in January and recorded in the journal have
  not been paid by the bank.
• The bank received 904.03 by EFT on behalf of
  Business Research, Inc.
• The bank collected on behalf of the company a
  note receivable, 2,114 (including interest
  revenue of 214).
• The bank statement shows interest revenue of
  28.01.

10
The Bank Reconciliation Illustrated

• Check number 333 for 150 paid to Brown Company
  on account was recorded as a cash payment of
  510.
• The bank service charge for the month was 14.25.
• The bank statement shows an NSF check for 52.
• Business Research pays insurance expense by EFT
  and has not recorded this 361 payment.

11
The Bank Reconciliation Illustrated
Balance per bank, January 31 5,931.51 Add
deposit in transit 1,591.63 Check erroneously
charged 100.00 7,623.14 Less outstanding
checks (1,350.14) Adjusted bank balance 6,273.00
12
The Bank Reconciliation Illustrated
Balance per books, January 31 3,294.21 Add ETF
receipt of rent revenue 904.03 Collection of
note receivable 2,114.00 Interest revenue
earned 28.01 Correction of book error
360.00 6,700.25 Less Service charge
14.25 NSF check 52.00 Payment of insurance
expense 361.00 ( 427.25) Adjusted book
balance 6,273.00
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Cash receipts and cash payments internal controls

• Petty Cash - A small amount of cash kept on hand
  to pay for minor expenses.

14
Using a Budget to Manage Cash

• A financial plan that helps coordinate business
  activities
• Cash budget - helps an entity manage cash by
  planning receipt and payment of cash during a
  future period

15
Using a Budget to Manage Cash

• Cash balance, beginning
• Budgeted cash receipts
• - Budgeted cash payments
• Expected cash balance, ending

16
Reporting Cash onthe Balance Sheet

• Companies usually combine all cash amount into
  single total called Cash and Cash Equivalents
  on the balance sheet.
• Cash equivalents include liquid assets
• Time deposits
• Certificates of deposit

17
Ethics and Accounting

• Company code of ethical and responsible behavior
  by employees
• AICPA Code of Professional Conduct
• Standards of Ethical Conduct for Management
  Accountants