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Chapter 7 Internal Control and Cash

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Title: Chapter 7 Internal Control and Cash


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Chapter 7Internal Control and Cash
  • After studying Chapter 7, you should be able to
  • Identify the principles of internal control.
  • Explain the application of internal control to
    cash receipts.
  • Explain the application of internal control to
    cash disbursements.
  • Prepare a bank reconciliation.
  • Explain the reporting of cash.
  • Discuss the basic principles of cash management.
  • Identify the primary elements of a cash budget.

3
Internal Control consists of...
  • all the related methods and measures adopted
    within a business to
  • safeguard its assets from
  • Employee theft
  • Robbery
  • Unauthorized Use
  • enhance accuracy and reliability of its
    accounting records by reducing
  • Risk of Errors
  • Irregularities

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Establishment of Responsibility
  • Control is most effective when only one person
    is responsible for a given task.

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Documentation
  • Provide evidence that transactions and events
    occurred
  • Shipping documents
  • Sales invoices

8
Documentation Procedures
  • Documents should be pre-numbered.
  • All documents should be accounted for.
  • Sources documents should be promptly forwarded to
    accounting department.

9
Physical, Mechanical and Electronic Controls
OR FINGERPRINT, EYEBALL Scan
10
Independent Internal Verification
  • Involves review, comparison, and reconciliation
    of data prepared by employees
  • Verification should be made periodically or on
    surprise basis
  • Verification should be done by employee who is
    independent of the personnel responsible for the
    information
  • Discrepancies and exceptions should be reported
    to management

11
Independent Internal
Verification
12
Other Controls
  • Bonding of employees who handle cash

  • Rotating employees duties and requiring
    employees to take vacations

13
Limitations of Internal Controls
  • Cost/Benefit - cost of establishing procedure
    should not exceed expected benefit
  • Human element - fatigue, carelessness,
    indifference
  • Collusion - two or more individuals who work
    together to get around controls
  • Size of business

14
Cash consists of...
  • coins
  • currency
  • checks
  • money orders
  • money on hand
  • deposits in bank

15
Cash is the most desirable asset...
  • because it is readily convertible into any other
    asset.

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Electronic Funds Transfer (EFT)
  • An approach to transfer funds among parties
    without paper (deposit tickets, checks, etc.)
  • EFT uses wire, telephone, telegraph or computer
    to transfer from one location to another.

19
Petty Cash Fund
  • is a cash fund used to pay relatively small
    amounts

20
Use of a Bank...
  • is good internal control.
  • minimizes the amount of cash that must be kept on
    hand.
  • provides a double record of all bank transactions
  • one by the business
  • one by the bank
  • helps a company safeguard its cash by using a
    bank as a depository and clearinghouse for checks
    received and written.

21
Bank Statement - a copy of the banks records
sent to the customer for periodic review.
Apri l 30, 2004
  • Bank Statement shows
  • check other debits
  • deposits other credits
  • daily cash balance

22
Company Balance and Bank Balance of Cash Usually
Differ Because...
  • Time lags that prevent one of the parties from
    recording the transaction in the same period.
  • Days pass between the time a check is written and
    dated and date it is paid by the bank.
  • A day may pass between the time receipts are
    recorded by the company and the time they are
    recorded by the bank.
  • A time lag may occur when the bank mails a debit
    or credit memo to the company.
  • Errors by either party in recording transactions.

23
Reconciliation Procedure
  • reconcile balance per books and balance per bank
    to their adjusted or correct balances.
  • the reconciliation should be prepared by an
    employee who has no other responsibilities
    pertaining to cash.

24
Terms
  • Deposits in transit - deposits recorded by the
    depositor that have not yet been recorded by the
    bank.
  • Outstanding checks - checks issued and recorded
    by the company that have not yet been paid by the
    bank.
  • NSF check - a check that is not paid by the bank
    because of insufficient funds in the customers
    bank account.
  • Adjusted balance - same as true cash balance,
    correct cash balance

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Illustration 7-9
W.A. Laird CompanyBank ReconciliationApril 30,
2004
Cash balance per bank statement 15,907.45 Add
Deposits in transit 2,201.40 18,108.85 Les
s Outstanding checks No. 453 3,000.00 No.
457 1,401.30 No. 460 1,502.70
5,904.00 Adjusted cash balance per
bank 12,204.85 Cash balance per
books 11,589.45 Add Collection of N/R for
1,000 plus interest earned 50, less
collection fee 15 1,035.00 Error on recording
check No. 443 36.00 1,071.00 12,660.4
5 Less NSF check 425.60 Bank service
charge 30.00 455.60 Adjusted cash
balance per bank 12,204.85
27
For Cash To Show the Correct Balance
Each reconciling item in determining the
adjusted balance per books must be journalized
and posted.
28
Illustration 7-9
W.A. Laird CompanyBank ReconciliationApril 30,
2004
Cash balance per bank statement 15,907.45 Add
Deposits in transit 2,201.40 18,108.85 Les
s Outstanding checks No. 453 3,000.00 No.
457 1,401.30 No. 460 1,502.70
5,904.00 Adjusted cash balance per
bank 12,204.85 Cash balance per
books 11,589.45 Add Collection of N/R for
1,000 plus interest earned 50, less
collection fee 15 1,035.00 Error on recording
check No. 443 36.00 1,071.00 12,660.4
5 Less NSF check 425.60 Bank service
charge 30.00 455.60 Adjusted cash
balance per bank 12,204.85
29
JOURNAL
  • Apr 30 Cash
    1,035.00
  • Miscellaneous Expense 15.00
  • Notes Receivable 1,000.00
  • Interest Revenue 50.00
  • Apr 30 Cash 36.00
  • Accounts Payable 36.00
  • Apr 30 Accounts Receivable-Baron 425.60
  • Cash 425.60
  • Apr 30 Miscellaneous Expense 30.00
  • Cash 30.00

30
Reporting Cash
  • Cash is recorded in both the balance sheet and
    the statement of cash flows.
  • The balance sheet shows the amount of cash
    available at a given point in time.
  • The statement of cash flows
    shows the sources and uses of
    cash during a period of time.

31
Cash Equivalents
  • Readily convertible to known amount of cash
  • So near maturity that their market value is
    relatively insensitive to changes in interest
    rates
  • Examples
  • Treasury bills
  • Commercial paper
  • Money market funds

32
Restricted Cash...
  • Is cash that is not available for general use.
  • Is set aside for special purpose.
  • If not to be used within next year, report as
    noncurrent asset.

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34
Principles of Cash Management
  • Increase the speed of collection on receivables.
  • Keep inventory levels low.
  • Delay payment of liabilities.
  • Plan the timing of major expenditures.
  • Invest idle cash.

35
Reporting Cash
  • Cash on hand, cash in banks, and petty cash are
    often combined and reported as cash.
  • Cash is the most liquid asset and listed first in
    the current asset section of the balance sheet.

36
Cash Budget
  • Cash is vital.
  • Planning the company's cash needs is a key
    business activity.
  • Cash budget shows the anticipated cash flows,
    over a 1 to 22-year period.

37
Cash Budget
  • The cash budget contains
  • Cash receipts section
  • Cash disbursements section
  • Financing section.

38
Cash Receipts Section
  • includes expected receipts from the company's
    principal source(s) of revenue, such as cash
    sales and collections from customers on credit
    sales
  • also shows anticipated receipts of interest and
    dividends, and proceeds from planned sales of
    investments, plant assets, and the company's
    capital stock

39
Cash Disbursements Section
  • shows expected payments for direct materials,
    direct labor, manufacturing overhead, and selling
    and administrative expenses
  • includes projected payments for income taxes,
    dividends, investments, and plant assets

40
Financing Section shows...
  • expected borrowings
  • the repayment of the borrowings and interest
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