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1. Fundamental Financial Accounting Concepts Fourth Edition by Edmonds, McNair, Milam, Olds PowerPoint® presentation by
J. Lawrence Bergin
2. 6- 2 Chapter 6 Internal Control
and
Accounting
for Cash
3. 6- 3 What Is Internal Control? The policies and procedures by which management protects the assets and assures the accuracy and reliability of the accounting records.
4. 6- 4 Goals of an internal control system: Resources of the business are safeguarded
Policies of management are followed
Designed to prevent errors and fraud
5. 6- 5 Elements of Internal Control Separation of duties
Quality of employees
Bonded employees
Periods of absence
Procedures manual
Clear lines of authority & responsibility
Prenumbered documents
Physical control over assets
Performance evaluations
6. 6- 6 Separation of duties Whenever possible, the functions of authorization, recording and custody should be exercised by separate individuals.
This minimizes the likelihood of errors and embezzlement.
7. 6- 7 Quality of employees Hire and keep employees that are:
Competent
Honest
Trained to do a variety of tasks.
8. 6- 8 Bonded Employees A Fidelity Bond is insurance coverage to protect the employer if an employee is dishonest (embezzles).
9. 6- 9 Periods of Absence Require vacations and rotate employees.
Illegal activities are often uncovered when someone else performs the offender’s duties for a few days.
10. 6- 10 Procedures Manual Provide Procedures Manuals detailing the correct procedures for processing transactions.
These procedures should be designed to promote accuracy and internal control.
11. 6- 11 Clear lines of authority & responsibility Make sure employees understand the extent of their authority and responsibilities.
Define and communicate the appropriate chain of command.
12. 6- 12 Prenumbered documents Reduces the likelihood of unauthorized transactions.
Reduces the likelihood of embezzlements.
Be sure to account for the sequence of documents periodically
13. 6- 13 Physical control over assets Safeguard all assets--cash, equipment, inventory, etc.
Be sure to keep all records and supporting documents in a fireproof safe.
14. 6- 14 Performance Evaluations Independent verification of performance.
Includes such things as an external audit by an independent CPA (Certified Public Accountant), the internal audit function, count of inventory, etc.
15. 6- 15 Internal Control in Computer Systems Basic internal controls apply to both manual and computerized systems.
Some controls are specific to computerized systems.
Tests of reasonableness
Audit around the computer
Proper documentation and system (both program and data) backup are essential.
Significant technical expertise may be needed.
16. 6- 16 Controlling CASH Cash has universal appeal and ownership is difficult to prove.
Both cash receipts and cash payments should be recorded immediately when received and made. (Deposit daily, intact.)
Checks should be prenumbered and kept secure.
17. 6- 17 Accounting for Cash: Reconciling the Bank Statement An important part of internal control
Need for calculating a true cash balance
Two “sections” to be reconciled
balance per bank
balance per books
If there are any mistakes or transactions that have not been recorded in the company’s books, adjusting journal entries will be needed.
18. 6- 18 An example of a reconciliation: A review of the bank statement dated April 30 and the cash ledger
account balance on that date revealed:
a. April 30 balance according to the bank statement = $8,750.
b. April 30 balance according to our cash T-account = $6,900.
Our comparison of the “books” and bank statement revealed the following inconsistencies:
c. Checks #150 for $800 and #156 for $580 have not “cleared” yet.
d. The bank statement showed a $30 service charge for the month.
e. A $400 deposit made at 8PM, April 30 is not on the bank statement.
f. The bank returned a customer’s NSF check for $100 that was
part of our April 29th deposit.
g. With the bank statement was a credit memo telling us that the
bank was successful in collecting a $900 note and $100 interest
for us (total collected $1,000).
19. 6- 19 Balance per bank section of reconciliation: Balance per bank $
Plus:
Less:
“True” Cash Balance $
20. 6- 20 Balance per books section of reconciliation: Balance per books (ledger) $
Plus:
Less:
“True” Cash Balance $
21. 6- 21 An example of a reconciliation: A review of the bank statement dated April 30 and the cash ledger
account balance on that date revealed:
a. April 30 balance according to the bank statement = $8,750.
22. 6- 22 Balance per bank section of reconciliation: Balance per bank $ 8,750
Plus:
Less:
“True” Cash Balance $
23. 6- 23 An example of a reconciliation: A review of the bank statement dated April 30 and the cash ledger
account balance on that date revealed:
a. April 30 balance according to the bank statement = $8,750.
b. April 30 balance according to our cash T-account = $6,900.
24. 6- 24 Balance per books section of reconciliation: Balance per books (ledger) $ 6,900
Plus:
Less:
“True” Cash Balance $
25. 6- 25 An example of a reconciliation: A review of the bank statement dated April 30 and the cash ledger
account balance on that date revealed:
a. April 30 balance according to the bank statement = $8,750.
b. April 30 balance according to our cash T-account = $6,900.
Our comparison of the “books” and bank statement revealed the following inconsistencies:
c. Checks #150 for $800 and #156 for $580 have not “cleared” yet.
26. 6- 26 Balance per bank section of reconciliation: Balance per bank $ 8,750
Plus:
Less: Outstanding Checks
#150 (800)
#156 (580)
“True” Cash Balance $
27. 6- 27 An example of a reconciliation: A review of the bank statement dated April 30 and the cash ledger
account balance on that date revealed:
a. April 30 balance according to the bank statement = $8,750.
b. April 30 balance according to our cash T-account = $6,900.
Our comparison of the “books” and bank statement revealed the following inconsistencies:
c. Checks #150 for $800 and #156 for $580 have not “cleared” yet.
d. The bank statement showed a $30 service charge for the month.
28. 6- 28 Balance per books section of reconciliation: Balance per books (ledger) $ 6,900
Plus:
Less:
Bank Service Charge Exp. (30)
“True” Cash Balance $
29. 6- 29 An example of a reconciliation: A review of the bank statement dated April 30 and the cash ledger
account balance on that date revealed:
a. April 30 balance according to the bank statement = $8,750.
b. April 30 balance according to our cash T-account = $6,900.
Our comparison of the “books” and bank statement revealed the following inconsistencies:
c. Checks #150 for $800 and #156 for $580 have not “cleared” yet.
d. The bank statement showed a $30 service charge for the month.
e. A $400 deposit made at 8PM, April 30 is not on the bank statement.
30. 6- 30 Balance per bank section of reconciliation: Balance per bank $ 8,750
Plus: Deposit in Transit 400
Less: Outstanding Checks
#150 (800)
#156 (580)
“True” Cash Balance $
31. 6- 31 An example of a reconciliation: A review of the bank statement dated April 30 and the cash ledger
account balance on that date revealed:
a. April 30 balance according to the bank statement = $8,750.
b. April 30 balance according to our cash T-account = $6,900.
Our comparison of the “books” and bank statement revealed the following inconsistencies:
c. Checks #150 for $800 and #156 for $580 have not “cleared” yet.
d. The bank statement showed a $30 service charge for the month.
e. A $400 deposit made at 8PM, April 30 is not on the bank statement.
f. The bank returned a customer’s NSF check for $100 that was part
of our April 29th deposit.
32. 6- 32 Balance per books section of reconciliation: Balance per books (ledger) $ 6,900
Plus:
Less:
Bank Service Charge Exp. (30)
Customer’s NSF check (100)
“True” Cash Balance $
33. 6- 33 An example of a reconciliation: A review of the bank statement dated April 30 and the cash ledger
account balance on that date revealed:
a. April 30 balance according to the bank statement = $8,750.
b. April 30 balance according to our cash T-account = $6,900.
Our comparison of the “books” and bank statement revealed the following inconsistencies:
c. Checks #150 for $800 and #156 for $580 have not “cleared” yet.
d. The bank statement showed a $30 service charge for the month.
e. A $400 deposit made at 8PM, April 30 is not on the bank statement.
f. The bank returned a customer’s NSF check for $100 that was part
of our April 29th deposit.
g. With the bank statement was a credit memo telling us that the
bank was successful in collecting a $900 note and $100 interest
for us (total collected $1,000).
34. 6- 34 Balance per books section of reconciliation: Balance per books (ledger) $ 6,900
Plus:
Note Receivable Collected 900
Interest Revenue Collected 100
Less:
Bank Service Charge Exp. (30)
Customer’s NSF check (100)
“True” Cash Balance $
35. 6- 35 There is one true cash balance... Bank balance per statement is reconciled to the TRUE cash balance
Book balance (general ledger balance) is reconciled to the TRUE cash balance
36. 6- 36 Balance per bank section of reconciliation: Balance per bank $ 8,750
Plus: Deposit in Transit 400
Less: Outstanding Checks
#150 (800)
#156 (580)
“True” Cash Balance $ 7,770
37. 6- 37 Balance per books section of reconciliation: Balance per books (ledger) $ 6,900
Plus:
Note Receivable Collected 900
Interest Revenue Collected 100
Less:
Bank Service Charge Exp. (30)
Customer’s NSF check (100)
“True” Cash Balance $ 7,770
38. 6- 38 Our accounting records… Our goal is to have the correct CASH balance in the General Ledger. So, all adjustments noted on the “books” part of the reconciliation require an adjusting journal entry (and posting) in our journal and ledger.
39. 6- 39 Journal entries…. Only those journal entries (and postings) needed to correct our book balance are recorded.
Every item on the book side of the reconciliation will require a journal entry.
40. 6- 40 Journal Entries to correct “Books”
41. 6- 41 Cash account after posting
42. 6- 42 What about the “bank” side? If the bank has made an error, we can’t fix their books... but we will call them to let them know!
43. 6- 43 Accounting for Cash: Petty Cash Needed for small payments that need to be paid in cash--postage, taxi fares, etc.
Usually maintained on an imprest basis--that means that fund is replenished periodically.
To start the fund, DEBIT Petty Cash and CREDIT Cash.
As the fund is used, receipts are kept (and employees usually sign voucher).
44. 6- 44 Petty Cash continued... When the fund is replenished, two entries are needed:
DEBIT Each Expense incurred or Asset purchased, CREDIT Petty Cash.
DEBIT Petty Cash, CREDIT Cash.
45. 6- 45 Cash Short and Over Sometimes the actual petty cash balance is not what the vouchers indicate it should be.
A special account called CASH SHORT AND OVER is used to absorb the difference.
It can be a Debit or Credit--i.e., a little expense (debit) or revenue (credit). At year end it will be closed out to retained earnings.
46. 6- 46 Petty cash example: ABC Company decided to establish a petty cash fund of $150.
What is the journal entry to establish the fund?
47. 6- 47 Petty cash example: ABC Company decided to establish a petty cash fund of $150.
What is the journal entry to establish the fund?
Petty Cash $150
Cash $150
48. 6- 48 Petty cash continued... When the fund gets low, let’s say $30, the fund custodian counts the receipts in the box.
How much should the receipts total?
$120 ($150 - $30 in box)
The cash and the receipts should total $150 (the petty cash fund balance) at all times.
49. 6- 49 Petty cash example: The receipts were for:
Taxi fare to go to supplier to pick up items that our customer has requested at our store, $10.
C.O.D charge on merchandise delivered, $60.
Paid $45 to run an advertisement in today’s newspaper.
What is the journal entry to replenish the fund?
There are two parts:
A journal entry to record (Debit) the expenses and costs and (Credit) reduce the petty cash fund.
A journal entry to record the cash reimbursement to the fund.
50. 6- 50 Petty cash example: REMEMBER:
Always check for a Cash Short or Over when you replenish the Petty Cash fund!
51. 6- 51 Petty cash example... (Assume use of Periodic Inventory system.)
Transportation In $ 10
Purchases 60
Advertising Expense 45
Cash short and over 5
Petty Cash $120
and
Petty Cash $120
Cash $120
52. 6- 52 Using Accounting Information Current versus non-current
What is a current asset?
one which will be converted into cash or consumed in one year or less (from the balance sheet date) or an operating cycle, whichever is longer.
What is a current liability?
one which will be paid, using current assets, in one year or less (from the balance sheet date) or an operating cycle, whichever is longer.
53. 6- 53 Current vs. noncurrent... Classified balance sheet
separation of current and noncurrent items
enhances the usefulness of the information
54. 6- 54 Winona Co. Balance Sheet at Dec. 31
55. 6- 55 Operating cycle the average time it takes a business to convert cash into inventory, inventory into AR, and AR back into cash.
Cash
Inventory
56. 6- 56 Operating cycle the average time it takes a business to convert cash into inventory, inventory into AR, and AR back into cash.
Cash
AR
Inventory
57. 6- 57 Operating cycle the average time it takes a business to convert cash into inventory, inventory into AR, and AR back into cash.
Cash
AR
Inventory
58. 6- 58 The Current Ratio Used to evaluate a company’s liquidity (a company’s ability to generate short term cash flows)
Current Assets
Current Liabilities
59. 6- 59 Winona Co. Balance Sheet at Dec. 31
60. 6- 60 Winona Co. Balance Sheet at Dec. 31
61. 6- 61 The Current Ratio Rough “Rule of Thumb” is 2 to 1, but varies by industry. (Many successful companies have a current ratio significantly less than 2.0.)
62. 6- 62 Winona Co. Balance Sheet at Dec. 31
63. 6- 63 The Quick (Acid-Test) Ratio A STRICTER test of a company’s liquidity.
The numerator only includes cash, short term receivables and short-term investments (never includes inventory, supplies or prepaids).
Quick Assets
Current Liabilities
64. 6- 64 Dec. 31 Balance Sheet data
65. 6- 65 Balance Sheet Analysis
66. 6- 66 Chapter 6:
