Internal control managing cash and making ethical judgments
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Internal Control, Managing Cash, and Making Ethical Judgments. Chapter 7. Define internal control. Objective 1. Internal Control. What is internal control? It is the organizational plan and all the related measures that an entity adopts to… safeguard assets,

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Internal control managing cash and making ethical judgments

Internal Control, Managing Cash,and Making Ethical Judgments

Chapter 7


Objective 1

Define internal control.

Objective 1


Internal control

Internal Control

  • What is internal control?

  • It is the organizational plan and all the related measures that an entity adopts to…

  • safeguard assets,

  • encourage adherence to company policies,

  • promote operational efficiency, and...

  • ensure accurate and reliable accounting records.


Internal control1

Internal Control

Operational Controls

Financial Reporting Controls


Objective 2

Identify the characteristics

of an effective system

of internal control.

Objective 2


Establishing an effective system of internal control

Establishing an Effective System of Internal Control

  • Characteristics of an effective internal control system include:

  • Competent, reliable, and ethical personnel

  • Assignment of responsibilities

  • Proper authorization

  • Separation of duties


Separation of duties

Separation of Duties

Separation of operations from accounting

Separation of the custody of assets from accounting

Separation of the authorization of transactions

from the custody of related assets

Separation of duties within the accounting function


Internal controls for e commerce

Internal Controls for e-Commerce

Stolen credit card numbers

Computer virus and Trojan horses

Impersonation of companies


Internal controls for e commerce1

Internal Controls for e-Commerce

  • What is an encryption?

  • It is the primary method of achieving confidentiality in e-commerce.

  • Plain-text messages are rearranged by some mathematical process.

  • The encrypted message cannot be read by anyone who does not know the process.


Internal controls for e commerce2

Internal Controls for e-Commerce

Firewall

The InternetCorporate Intranet

Network

Computers


The limitations of internal control

The Limitations ofInternal Control

  • Most internal control measures can be circumvented or overcome.

  • Collusion is when two or more employees work as a team with the purpose to defraud the firm.


The bank account as a control device

The Bank Account as aControl Device

  • Documents used to control a bank account include:

  • signature card

  • deposit ticket

  • check

  • bank statement

  • bank reconciliation


The bank reconciliation

The Bank Reconciliation

  • What are two records of a business’s cash?

  • Cash account in the business’s own general ledger.

  • The bank statement which tells the actual amount of cash the business has in the bank.


The bank reconciliation1

The Bank Reconciliation

  • Items recorded by a company not on the bank statement:

  • deposit in transit

  • outstanding checks


The bank reconciliation2

The Bank Reconciliation

  • Items on a bank statement and not recorded by the business:

  • bank collections

  • bank fees

  • interest earned on account

  • NSF checks


The paths that two checks take good check

The Paths That Two Checks Take (Good Check)

Maker

writes check

to payee.

Maker’s bank

pays the check.

Payee

deposits check

in bank.

Payee’s bank

sends check to

maker’s bank.


The paths that two checks take nfs check

The Paths That Two Checks Take (NFS Check)

Maker’s bank

balance is not

sufficient to

pay the check.

Maker’s bank

sends the

worthless

check back to

payee’s bank.

Payee holds

worthless

check.

Payee’s bank

decreases payee’s

balance.


Objective 3

Prepare a bank reconciliation

and the related journal entries.

Objective 3


The bank reconciliation example

The Bank Reconciliation Example

  • At the beginning of July, Sahita, Inc. received the June’s bank statement.

  • It indicated the following:

  • The bank balance was $63,275.

  • The bank had collected a note receivable from one of Sahita’s customers in the amount of $1,325.


The bank reconciliation example1

The Bank Reconciliation Example

  • The bank paid the electric bill of $1,500.

  • There was a $200 check returned for NSF.

  • Interest earned on the account was $265.

  • Bank service charges were $12.


The bank reconciliation example2

The Bank Reconciliation Example

  • Sahita’s books indicates a cash balance of $66,647.

  • A deposit of $11,250 was mailed to the bank on June 30.

  • Checks issued in June for $8,000 have not yet been paid by the bank.


The bank reconciliation example3

The Bank Reconciliation Example

Balance per bank, June 30$63,275

Add deposit in transit 11,250

$74,525

Less outstanding check 8,000

Adjusted bank balance$66,525


The bank reconciliation example4

The Bank Reconciliation Example

Balance per books, June 30$66,647

Add: Note receivable

collected by the bank 1,325

Interest income 265

$68,237

Less: Payment of electric bill 1,500

NSF check 200

Service charge 12

Adjusted book balance$ 66,525


The bank reconciliation example5

The Bank Reconciliation Example

Balance per books

$66,525

Balance per bank

$66,525

Equal amounts


Record reconciling items

Record Reconciling Items

June 30, 200x

Cash 1,325

Notes Receivable 1,325

Notes collected by the bank

June 30, 200x

Cash 265

Interest Income 265

Interest earned on bank balance


Record reconciling items1

Record Reconciling Items

June 30, 200x

Utilities Expense 1,500

Cash 1,500

Monthly electricity expense

June 30, 200x

Accounts Receivable – NSF 200

Cash 200

NSF check returned by bank


Record reconciling items2

Record Reconciling Items

June 30, 200x

Bank Service Fees 12

Cash 12

Bank service charges


Objective 4

Apply internal controls

to cash receipts.

Objective 4


Cash receipts over the counter

Cash ReceiptsOver the Counter

  • The terminal should be positioned so that customers can see the amount the cashier enters into the cash register.

  • The cash drawer should open only when the sales clerk enters an amount on the keypad.

  • The roll of tape locked inside the machine records each sale and cash transaction.


Cash receipts over the counter1

Cash ReceiptsOver the Counter

  • Pricing merchandise at “uneven” amounts means that the clerk has to open the cash drawer.

  • This requires entering the amount of the sale on the keypad and so onto the register tape.


Cash receipts over the counter2

Cash ReceiptsOver the Counter

  • At the end of the day, the cashier deposits the cash in the bank.

  • The tape goes to accounting.


Cash receipts by mail

Cash Receipts by Mail

  • All incoming mail should be opened by a mailroom employee.

  • This person should compare the check received with the remittance advice.

  • Cash receipts should be given to the cashier.

  • The mailroom employee forwards the remittance advice to accounting.


Cash receipts by mail1

Cash Receipts by Mail

  • Many companies use a lock-box system.

  • Customers send their checks directly to an address that is a bank account.

  • Company personnel do not handle the cash.


Cash short and over

Cash Short and Over

  • Assume that the cash register tapes indicate sales revenue of $25,000.

  • However, the cash received was $24,980.

  • What entry would record the day’s sales?

Cash24,980

Cash Short and Over 20 Sales Revenue 25,000

Daily cash sales


Objective 5

Apply internal controls

to cash payments.

Objective 5


Control over approval of payments

Control OverApproval of Payments

Purchase Request

Purchase Order

Invoice

Receiving Report

Disbursement Packet


Control over approval of payments1

Control OverApproval of Payments

  • The accounting department...

  • combines all of these documents,

  • checks them for accuracy, and...

  • forwards this disbursement packet to designated officers for approval and payment.


Controlling petty cash payments

Controlling Petty Cash Payments

  • On June 15, Sahita Inc. manager decided to establish a $250 petty cash fund.

  • What is the entry?

June 15, 200x

Petty Cash 250

Cash in Bank 250

To open the petty cash fund


Controlling petty cash payments1

Controlling Petty Cash Payments

  • Jose is the petty cash custodian responsible for the fund.

  • On June 20, he purchased supplies in the amount of $70.

  • For each disbursement, he prepares a petty cash ticket.

  • At all times the amount of cash in the petty cash fund plus the petty cash tickets must equal $250.


Controlling petty cash payments2

Controlling Petty Cash Payments

  • Jose also spent $20 for delivery charges and $60 for coffee and other miscellaneous expenses.

  • What is the journal entry to record the replenishment of the fund?


Controlling petty cash payments3

June 30, 200x

Supplies70

Delivery Expense20

Miscellaneous Expense60

Cash in Bank150

To replenish the petty cash fund

Controlling Petty Cash Payments


Objective 6

Using a budget to

manage cash.

Objective 6


Cash budget example

Cash Budget Example

  • On June 1, the cash balance of Clara’s Boutique amounted to $20,000.

  • She expected collections during the month to be $100,000.

  • Clara budgeted $110,000 cash payments during the month.

  • She would like to keep a $20,000 balance at all times.

  • How much money must she borrow?


Cash budget example1

Cash Budget Example

  • Beginning balance$ 20,000

  • Budgeted collections 100,000

  • Cash available $120,000

  • Less budgeted payments 110,000

  • Cash balance$ 10,000

  • She needs to borrow $10,000.


Cash budget example2

Cash Budget Example

  • Not included in the budgeted collections is a $73,400 sale to a store in Rio de Janeiro.

  • She expects to collect this amount in July.

  • Assume the exchange rate is 3.67 reals per dollar.

  • How much does she expect to collect?

  • 73,400 reals ÷ 3.67 = $20,000


Objective 7

Make ethical judgments

in business.

Objective 7


Ethics and accounting

Ethics and Accounting

1.00 —

0.75 —

0.50 —

0.25 —

0.00

Code of

Conduct

88%

Companies


Professional code of ethics

Professional Code of Ethics

  • Accountants are held to very high standards of conduct.

  • There is no compromising.

  • Would you hire an accountant who is “almost always” honest?

  • Internal controls rely upon basic honesty and integrity.


End of chapter 7

End of Chapter 7


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