Establish and maintain cash accouting

Cash and Internal Control

 Cash
 Cash:
 Readily available to pay debts
 Various forms of cash:
 Coin and currency on hand
 Cash on deposit in the form of checking and savings
accounts
 Undeposited, cashier, and certified checks

LO 1
 Cash Equivalents
 Investment readily convertible to known
amount of cash
 Maturity—three months or less
 Example:
 Commercial paper
 Treasury bills issued by the federal government
 Money market funds
 Six-month bank certificate of deposit would not
be a cash equivalent
Exhibit 6.1—Cash and Cash Equivalents on the
Balance Sheet and the Statement of Cash Flows
 Cash Management
 Tools of cash management:
 Cash flows statement
 Cash budgets
 Bank reconciliations
 Petty cash funds

LO 2
 Reading a Bank Statement
 Bank statement : a detailed list, provided by the
bank, of all activity for a particular account
during the month.
 Outstanding check : check written by a
company but not yet presented to the bank for
payment
 Deposit in transit : deposit recorded on the
books but not yet reflected on the bank
statement
 Bank Reconciliation
 Reconcile or resolve any differences between
balance on the bank statement with balance
shown in the accounting records
 Steps used in preparing a bank reconciliation:
1. Prepare a list of the deposits in transit
2. Prepare a list of the outstanding checks
3. Prepare a list of credit memoranda
4. Prepare a list of debit memoranda
5. Identify any errors
 Credit Memoranda and Debit
Memoranda
 Credit memoranda
 Additions on a bank statement for such items as
interest paid on the account and notes collected by
the bank for the customer
 Debit memoranda
 Deductions on a bank statement for items such as
NSF checks and various service charges
Step 1: Prepare a list of the deposits
in transit
 Trace deposits listed on the bank statement to
the books
 Identify the deposits in transit
 Any depositsrecorded on the books but not yet
shown on the bank statement
 Add to the bank balance
 Step 2: Prepare a List of the
Outstanding Checks
 Arrange the canceled checks in numerical order
 Trace each of them to the books
 Any checks recorded on the books but not yet listed
on the bank statement are outstanding
 Subtract from the bank balance
 Step 3: Prepare a List of Credit
Memoranda
 List all items,
other than deposits, shown as
additions on the bank statement
 Interest
paid by the bank
 Amounts collected by the bank for the customer

 For these items, bank increases, or credits, its

liability to the company on its own books
 Step 4: Prepare a List of Debit
Memoranda
 List all amounts,
other than canceled checks,
shown as subtractions on the bank statement
 NSF checks
 Service charges

 A liability
is created on the books of the bank
when a company deposits money in a bank
 Bank reduces the amount of its liability for these
various items and debits the liability on its own
books
 Step 5: Identify any Errors
 Identify
any errors made by the bank or by the
company in recording cash transactions
 Bank Reconciliation

Bank Reconciliation
Adjusted
Balance per bank $$$
balances
Adjusted balance $$$ for book
and bank
Balance per books $$$ must
agree
Adjusted balance $$$
Example 6.2—Preparing a Bank
Reconciliation
 Need for Adjustments to the Records

Book
adjustments
are basis for
adjusting
entries
 Petty Cash fund
 Money kept on hand for making minor
disbursements rather than by writing checks
 Periodically, the fund is replenished
 When fund is replenished, an adjustment is
made to record its replenishment and to
recognize the various expenses incurred
 Internal Control System
 Policies and procedures necessary to ensure:
 Safeguarding of an entity’s assets
 Reliability of accounting records
 Accomplishment of overall company objectives

LO 3
 Sarbanes-Oxley Act of 2002—SOX
 An act of Congress in 2002
 Intended to bring reform to corporate
accountability and stewardship in the wake of a
number of major corporate scandals
 Sarbanes-Oxley Act of 2002—SOX
(continued)
 Internal control report: a report required by
Section 404 of the Sarbanes-Oxley Act
 Maintain an adequate internal control structure
 Assesses effectiveness of internal control structure

 Outside
auditors must issue report on
company’s internal control
 Sarbanes-Oxley Act of 2002—SOX
(continued)
 Public
Company Accounting Oversight Board
(PCAOB): five-member body created by SOX
 Set auditing standards in the United States
 Board of directors: consists of key officers of a
corporation and outside members responsible for
general oversight of the affairs of the entity
 Audit committee: a subset of the board of
directors
 Provides direct contact between the stockholders and
the independent accounting firm
 The Control Environment
 Factors that influence internal control:
 Management’s competence and operating style
 Personnel policies and practices
 Board of directors, particularly audit committee
 The Accounting System
 Methods and records used to accurately report
entity’s transactions and maintain accountability
for assets and liabilities
 Use of a journal is an integral part of all
accounting systems
 Can be completely manual, fully computerized,
or a mixture of both
 Internal Control Procedures
 Administrative controls:
 Procedures concerned with efficient operation of
the business and adherence to managerial policies
 Accounting controls:
 Procedures concerned with safeguarding the assets
or the reliability of the financial statements

LO 4
 Internal Control System
 Important internal control procedures:
 Proper authorizations
 Segregation ofduties
 Independent verification
 Safeguarding of assets and records
 Independent review and appraisal
 Design and use of business documents
 Internal audit staff
 Department responsible for monitoring and
evaluating the internal control system
 Business Documents
 Crucial link between economic transactions
entered into by an entity and the accounting
record of those events
 Often called source documents
 Key feature:
 Sequential numbering system
 Multiple copies
 Limitations on Internal Control
 Not totally
foolproof
 Does not ensure prevention of collusion
 Maintenance of controls can be costly
 Small businesses cannot afford
 Human errors can weaken the system
 Misunderstood instructions, carelessness, fatigue,
and distraction can lead to errors
Computerized Business Documents
and Internal Control
 All cash receipts should be deposited intact in
the bank on a daily basis
 Intactmeans that no disbursements should be made
from the cash received from customers
 All cash disbursements should be made by
check

LO 5
 Control over Cash Receipts
 Most merchandisers receive checks and
currency from customers in two ways
 Cash received over the counter from cash sales
 Cash received in the mail from credit sales

 Cash discrepancies
 Discrepanciesoccur occasionally due to theft by
dishonest employees and to human error
Role of Computerized Business Documents
in Controlling Cash Disbursements
 Purchase Requisition
A form a department uses to initiate a request to
order merchandise
 Purchase order
A form sent by the purchasing department to the
supplier
Exhibit 6.5—Document Flow for the
Purchasing Function
Exhibit 6.6—Purchase Requisition
Exhibit 6.7—Computer-Generated Purchase
Order
 Exhibit 6.8—Invoice
 A form sent by the seller to the buyer as evidence of a sale
Exhibit 6.9—Computer-Generated Receiving
Report
 Blind Receiving Report
 A form used by the receiving department to
account for the quantity and condition of
merchandise received from a supplier
 Exhibit 6.10—Invoice Approval Form
 A form the accounting department uses before making payment
to document the accuracy of all information about a purchase
Exhibit 6.11—Check with Remittance Advice
 A form used by the receiving department to account for the
quantity and condition of merchandise received from a supplier
End of Chapter 6
 The Accounting System
 Methods and records used to accurately report
entity’s transactions and maintain accountability
for assets and liabilities
 Use of a journal is an integral part of all
accounting systems
 Can be completely manual, fully computerized,
or a mixture of both
 Internal Control Procedures
 Administrative controls:
 Procedures concerned with efficient operation of
the business and adherence to managerial policies
 Accounting controls:
 Procedures concerned with safeguarding the assets
or the reliability of the financial statements

LO 4
 Internal Control System
 Important internal control procedures:
 Proper authorizations
 Segregation ofduties
 Independent verification
 Safeguarding of assets and records
 Independent review and appraisal
 Design and use of business documents
 Internal audit staff
 Department responsible for monitoring and
evaluating the internal control system
 Business Documents
 Crucial link between economic transactions
entered into by an entity and the accounting
record of those events
 Often called source documents
 Key feature:
 Sequential numbering system
 Multiple copies
 Limitations on Internal Control
 Not totally
foolproof
 Does not ensure prevention of collusion
 Maintenance of controls can be costly
 Small businesses cannot afford
 Human errors can weaken the system
 Misunderstood instructions, carelessness, fatigue,
and distraction can lead to errors
Computerized Business Documents
and Internal Control
 All cash receipts should be deposited intact in
the bank on a daily basis
 Intactmeans that no disbursements should be made
from the cash received from customers
 All cash disbursements should be made by
check

LO 5
 Control over Cash Receipts
 Most merchandisers receive checks and
currency from customers in two ways
 Cash received over the counter from cash sales
 Cash received in the mail from credit sales

 Cash discrepancies
 Discrepanciesoccur occasionally due to theft by
dishonest employees and to human error
Role of Computerized Business Documents
in Controlling Cash Disbursements
 Purchase Requisition
A form a department uses to initiate a request to
order merchandise
 Purchase order
A form sent by the purchasing department to the
supplier
Exhibit 6.5—Document Flow for the
Purchasing Function
Exhibit 6.6—Purchase Requisition
Exhibit 6.7—Computer-Generated Purchase
Order
 Exhibit 6.8—Invoice
 A form sent by the seller to the buyer as evidence of a sale
Exhibit 6.9—Computer-Generated Receiving
Report
 Blind Receiving Report
 A form used by the receiving department to
account for the quantity and condition of
merchandise received from a supplier
 Exhibit 6.10—Invoice Approval Form
 A form the accounting department uses before making payment
to document the accuracy of all information about a purchase
Exhibit 6.11—Check with Remittance Advice
 A form used by the receiving department to account for the
quantity and condition of merchandise received from a supplier
End of Chapter 6