Lecture Principles of financial accouting - Chapter 8: Cash and internal controls

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Lecture Principles of financial accouting - Chapter 8: Cash and internal controls

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After completing this chapter you should be able to: Define internal control and identify its purpose and principles, define cash and cash equivalents and explain how to report them, compute the days’ sales uncollected ratio and use it to assess liquidity.

Chapter Cash and Internal Controls PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A Booker, Ph.D., CPA, CIA Cynthia J Rooney, Ph.D., CPA Winston Kwok, Ph.D., CPA McGraw­Hill/Irwin         Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved 8 ­ 2 C1 Internal Control System Policies and procedures managers use to:  Protect assets  Ensure reliable accounting  Promote efficient operations  Urge adherence to company policies 8 ­ 3 C1 Principles of Internal Control Internal control principles common to all companies: Establish responsibilities Maintain adequate records Insure assets and bond key employees Separate recordkeeping from custody of assets Divide responsibility for related transactions Apply technological controls Perform regular and independent reviews 8 ­ 4 C1 Technology and Internal Control Reduced Processing Errors More Extensive Testing of Records Limited Evidence of Processing Crucial Separation of Duties Increased E-Commerce 8 ­ 5 C1 Limitations of Internal Control Human Error Human Fraud Negligence Fatigue Misjudgment Confusion Intent to defeat internal controls for personal gain Human fraud triple-threat: Opportunity, Pressure, and Rationalization 8 ­ 6 C1 Limitations of Internal Control The costs of internal controls must not exceed their benefits Benefits Costs 8 ­ 7 C2 Control of Cash An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines: Handling cash is separated from recordkeeping for cash Cash receipts are promptly deposited in a bank Cash disbursements are made by check 8 ­ 8 C2 Cash, Cash Equivalents, and Liquidity Cash and similar assets are called liquid assets because they can be readily used to settle such obligations Cash Currency, coins and amounts on deposit in bank accounts, checking accounts, and some savings accounts Also includes items such as customer checks, cashier checks, certified checks, and money orders Cash Equivalents Short-term, highly liquid investments that are: Readily convertible to a known cash amount Close to maturity date and not sensitive to interest rate changes 8 ­ 9 C2 Cash Management The goals of cash management are twofold: Plan cash receipts to meet cash payments when due Keep a minimum level of cash necessary to operate Effective cash management involves applying the following cash management principles:  Encourage collection of receivables  Delay payment of liabilities  Keep only necessary levels of assets  Plan expenditures  Invest excess cash 8 ­ 10 P1 Over-the-Counter Cash Receipts This graphic illustrates that none of the people involved can make a mistake or divert cash without the difference being revealed 8 ­ 19 P2 Operating a Petty Cash Fund A petty cash fund is used only for business expenses Petty Cashier Transportation-in Services Supplies Delivery 8 ­ 20 P2 Operating a Petty Cash Fund Petty Cashier Petty cash receipts with either no signature or a forged signature usually indicate misuse of petty cash Transportation-in Services Supplies Delivery 8 ­ 21 P2 Operating a Petty Cash Fund $71.30 Company Cashier Accountant To reimburse petty cash fund Petty Cashier 8 ­ 22 Basic Bank Services Bank Bank Accounts Accounts Checks Checks Signature Signature Cards Cards Deposit Deposit Tickets Tickets Electronic Electronic Funds Funds Transfer Transfer Bank Bank Statements Statements 8 ­ 23 C2 Bank Statement Usually once a month, the bank sends each depositor a bank statement showing the activity in the account 8 ­ 24 P3 Bank Reconciliation A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on company’s books 8 ­ 25 P3 Bank Reconciliation The balance of a checking account reported on the bank statement rarely equals the balance in the depositor’s accounting records Cash Balance per Bank Cash Balance per Book + Deposits in Transit + Collections & Interest - Outstanding Checks - Uncollectible items +/- Errors +/- Errors Adjusted Cash Balance Adjusted Cash Balance = Adjusting entries are recorded for the reconciling items on the book side of the reconciliation 8 ­ 26 P3 Illustration of a Bank Reconciliation We follow nine steps in preparing the bank reconciliation Cash Balance per Bank + Deposits in Transit - Outstanding Checks +/- Errors Adjusted Cash Balance 8 ­ 27 P3 Illustration of a Bank Reconciliation We follow nine steps in preparing the bank reconciliation Cash Balance per Book + Collections & Interest - Uncollectible items +/- Errors Adjusted Cash Balance 8 ­ 28 P3 Illustration of a Bank Reconciliation We follow nine steps in preparing the bank reconciliation Adjusting entries are recorded for the reconciling items on the book side of the reconciliation 8 ­ 29 P3 Illustration of a Bank Reconciliation Only the items reconciling the book balance require adjustment 8 ­ 30 A1 DAYS’ SALES UNCOLLECTED Indicates Indicates how how much much time time is is likely likely to to pass pass before before we we receive receive cash cash receipts receipts from from credit credit sales sales Days’ = Sales Uncollected 56 days = Accounts Receivable Net Sales × 365 $612,000,000 $4,022,000,000 × 365 8 ­ 31 P4 Appendix 8A: Documentation and Verification Purchase Requisition Purchase Order Invoice Receiving Report Voucher 8 ­ 32 P5 Appendix 8B: Control of Purchase Discounts The net method gives management an advantage in controlling and monitoring cash payments involving purchase discounts When purchases are recorded at net amounts, a Discounts Lost expense account is recorded and brought to management’s attention 8 ­ 33 END OF CHAPTER ... Control of Cash An effective system of internal control that protects cash and cash equivalents should meet three basic guidelines: Handling cash is separated from recordkeeping for cash Cash receipts... to defeat internal controls for personal gain Human fraud triple-threat: Opportunity, Pressure, and Rationalization 8 ­ 6 C1 Limitations of Internal Control The costs of internal controls must... of cash management are twofold: Plan cash receipts to meet cash payments when due Keep a minimum level of cash necessary to operate Effective cash management involves applying the following cash

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Mục lục

  • Cash and Internal Controls

  • Internal Control System

  • Principles of Internal Control

  • Technology and Internal Control

  • Limitations of Internal Control

  • Slide 6

  • Control of Cash

  • Cash, Cash Equivalents, and Liquidity

  • Cash Management

  • Over-the-Counter Cash Receipts

  • Cash Over and Short

  • Cash Receipts by Mail

  • Control of Cash Disbursements

  • Voucher System of Control

  • Slide 15

  • Petty Cash System of Control

  • Operating a Petty Cash Fund

  • Slide 18

  • Slide 19

  • Slide 20

  • Slide 21

  • Basic Bank Services

  • Bank Statement

  • Bank Reconciliation

  • Slide 25

  • Illustration of a Bank Reconciliation

  • Slide 27

  • Slide 28

  • Slide 29

  • DAYS’ SALES UNCOLLECTED

  • Appendix 8A: Documentation and Verification

  • Appendix 8B: Control of Purchase Discounts

  • END OF CHAPTER 8

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