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Chapter 5. Cash and Internal Control. Financial Accounting, Alternate 4e by Porter and Norton. higher. Gap Inc. Consolidated Balance Sheets (partial). ASSETS (in thousands) Feb. 1, 2003 Feb 2, 2002 Current Assets: Cash and equivalents $3,388,514 $1,035,749

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chapter 5

Chapter 5

Cash and

Internal Control

Financial Accounting, Alternate 4e by Porter and Norton

gap inc consolidated balance sheets partial

higher

Gap Inc. Consolidated Balance Sheets (partial)

ASSETS (in thousands) Feb. 1, 2003 Feb 2, 2002

Current Assets:

Cash and equivalents $3,388,514 $1,035,749

Merchandise inventory 2,047,879 1,768,613

Other current assets 303,332 331,685

Total current assets $5,739,725 $3,136,047

gap inc consolidated balance sheets partial3
Gap Inc. Consolidated Balance Sheets (partial)

ASSETS (in thousands)

Current Assets:

Cash and equivalents

Key to

classification

as cash: readily

available to

pay debts

slide4

Pay to the order of:

ABC Co.

Cash
  • Coin & currency
  • Checking, savings & money market accounts
  • Undeposited, cashier, and certified checks
cash equivalents and the statement of cash flows
Cash Equivalents and the Statement of Cash Flows

Gap Inc.’s Consolidated Balance Sheets (partial)

(in thousands)Feb. 1, 2003 Feb 2, 2002

Current Assets:

Cash and equivalents $3,388,514 $1,035,749

Merchandise inventory 2,047,879 1,768,613

Other current assets 303,332 331,685

Total current assets $5,739,725 $3,136,047

Gap Inc.’s Consolidated Statement of Cash Flows (partial)

Year ended Year ended

(in thousands) Feb. 1, 2003 Feb 2, 2002

Net increase (decrease) in cash

and equivalents 2,352,765 626,955

Cash and equivalents at beg. of year 1,035,749 408,794

Cash and equivalents at end of year $3,388,514 $1,035,749

cash equivalents

Readily convertible to cash

  • Original maturity to investor of 3 months or less

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Cash Equivalents
  • Commercial paper
  • U.S. Treasury bills
  • Certain money market funds
cash management
Cash Management
  • Necessary to ensure company has neither too little nor too much cash on hand
  • Tools:
    • Cash Flows Statement
    • Cash Budgets
    • Bank Reconciliations
    • Petty Cash Funds
bank statements
Deposits

Customer notes and interest collected by bank

Interest earned

Canceled checks

NSF checks

Service charges

Bank Statements

Cash balance, beginning of period +

= Cash balance, end of period

bank reconciliation step 1
Bank Reconciliation - Step 1

Trace deposits on bank statement to books. Identify deposits in transit. Add to bank balance.

Deposits in Transit: Late period deposits not yet reflected on bank statement

example of reconciliation
Example of Reconciliation

Bank Statement Adjustments: Deposits

Balance per statement, June 30 $ 3,308.59

Add: Deposit in transit 642.30

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bank reconciliation step 2
Bank Reconciliation - Step 2

Trace checks cleared by bank to books. Identify outstanding checks. Subtract from bank balance.

Outstanding checks: Checks written but not yet presented to bank

ABC Co.

Pay to the order of:

XYZ Co.

example of reconciliation12
Example of Reconciliation

Bank Statement Adjustments:

Checks Outstanding

Balance per statement, June 30 $3,308.59

Add: Deposit in transit 642.30

Deduct: Outstanding checks:

Check No. 496 $ 79.89

Check No. 501 213.20

Check No. 502 424.75 (717.84)

Adjusted balance, June 30 $3,233.05

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bank reconciliation step 3
Bank Reconciliation - Step 3

List all other additions (credit memoranda) shown on the bank statement. Add to book balance.

Credit memoranda: Interest earned, customer notes collected

example of reconciliation14
Example of Reconciliation

Cash Account Adjustments:

Credit Memoranda

Balance per books, June 30 $ 2,895.82

Add:

Note collected $500.00

Interest on note 50.00

Interest earned 15.45

Recording error, #498 54.00 619.45

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bank reconciliation step 4

Date

Non-Sufficient Funds

Bank Reconciliation - Step 4

List all other subtractions (debit memoranda) shown on the bank statement. Subtract from book balance.

Debit memoranda: NSF checks, service charges, etc.

example of reconciliation16
Example of Reconciliation

Cash Account Adjustments:

Debit Memoranda

Balance per books, June 30 $ 2,895.82

Add: Note collected $500.00

Interest on note 50.00

Interest earned 15.45

Recording error, #498 54.00 619.45

Deduct: NSF check $245.72

Collection fee – note 16.50

Service charge 20.00 (282.22)

Adjusted balance, June 30 $ 3,233.05

bank reconciliation step 5
Bank Reconciliation - Step 5

Identify errors made by the bank or the company in recording transactions during the period.

bank reconciliation step 6
Use the information collected in Steps 1 - 5 to

prepare the bank reconciliation.

Bank Reconciliation

Balance per bank $$$

:

Adjusted balance $$$

Balance per books $$$

:

Adjusted balance $$$

Adjusted balances for book and bank must agree

Bank Reconciliation - Step 6
example of reconciliation19
Example of Reconciliation

Bank Statement Adjustments

Balance per statement, June 30 $ 3,308.59

:

Adjusted balance, June 30 $ 3,233.05

Cash Account Adjustments

Balance per books, June 30 $ 2,895.82

:

Adjusted balance, June 30 $ 3,233.05

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bank reconciliation adjusting entries

Book adjustments are the basis for adjusting entries

Bank Reconciliation Adjusting Entries

Bank Reconciliation

Balance per bank $$$

:

Adjusted balance $$$

Balance per books $$$

:

Adjusted balance $$$

petty cash

Date

Dept. of Treasurer

Jane Doe

Paycheck for

RECEIPT

Dr. Cr.

RECEIPT

RECEIPT

RECEIPT

Petty Cash
responsibility for internal control

Internal

Auditors

External

Auditors

Audit

Committee

of Board of

Directors

Responsibility for Internal Control

Management

internal control
Internal Control

Control

Environment

Internal

Control

Procedures

Accounting

System

the control environment
The Control Environment
  • Management’s competence and operating style
  • Personnel policies and practices
  • Influence of board of directors
the accounting system
The Accounting System
  • Can be manual or automated systems or a combination of both
  • Use of journals is an integral part of any system

Methods and records used to report transactions and maintain financial information

internal control procedures
Internal Control Procedures

Independent

Review and

Appraisal

Independent

Verification

Design & Use

of Business

Documents

Safeguarding

Assets and

Records

Proper

Authorizations

Segregation

of Duties

26

proper authorizations

LOAN

APPROVED

Proper Authorizations
  • Authority and responsibility go hand in hand
segregation of duties
Segregation of duties
  • Separate physical custody from the accounting for assets
independent verification
Independent Verification
  • One individual or department acts as a check on the work of another
safeguarding assets and records
Safeguarding Assets and Records
  • Protect assets and accounting records from loss, theft, unauthorized use, etc.
independent review and appraisal

Audit

Report

Independent Review and Appraisal
  • Provide for periodic review and appraisal of the accounting system and the people operating it.
design and use of business documents
Design and Use of Business Documents
  • Capture all relevant information about a transaction and assist in proper recording and classification.
  • Are properly controlled
limitations on internal control
Limitations on Internal Control
  • No system is entirely foolproof
    • Employees in collusion can override the best controls
    • Cost vs. benefit tradeoff
controls over cash

Date

Paycheck for

John Doe

Dept. of Treasurer

Date

Jane Doe

Paycheck for

Dept. of Treasurer

Controls Over Cash
  • All cash receipts deposited intact daily
  • All cash disbursements made by check
controls over cash received over the counter
Controls Over Cash Received Over the Counter
  • Cash registers
  • Prenumbered customer receipts
  • Investigation of recurring discrepancies
controls over cash received in the mail
Controls Over Cash Received in the Mail
  • Two employees open mail
  • Prelist prepared
  • Monthly customer statements
appendix

Appendix

Computerized Business Documents and Internal Control

controls over cash disbursements business documents
Controls over Cash Disbursements: Business Documents

Receiving

Report

Purchase

Requisition

Purchase

Order

Invoice

Approval

Purchase

Invoice

Check

prepared