Internal Control and Managing Cash

Chapter 4

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Learning Objective 1
Set up an effective system of internal control.

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Internal Control
Organizational plan and all related measures that an entity adopts
Safeguard

assets Encourage adherence to company policies Promote operational efficiency Ensure accurate and reliable accounting records
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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Components of an Effective System Competent, reliable, and ethical personnel Assignment of responsibilities Proper authorization Separation of duties

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Audit
Examination of companys

financial statements accounting systems, and internal controls, by an outside party Internal auditor - employee of the business External auditor - independent
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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Limitations of Internal Control

Collusion - two or more

employees working together to defraud the firm A system of internal control that is too complex can hurt efficiency and control
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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Learning Objective 2
Use a bank reconciliation as a control device.

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

The Bank Reconciliation

Items that cause differences between bank balance and book balance 1. Items recorded by the company but not yet recorded by the bank:

Deposits in transit Outstanding checks

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

The Bank Reconciliation

Items that cause differences between bank balance and book balance 2. Items on a bank statement and not recorded by the business:

Bank collections Electronic funds transfers Service charge Interest revenue earned on account NSF checks Errors
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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Bank Reconciliation Illustrated

Business Research, Inc., shows a balance on its bank statement of $5,931.51 on January 31. The company Cash account has a balance of $3,294.21. 1. The January 30 deposit of $1,591.63 does not appear on the bank statement. 2. The bank erroneously charged to the account a $100 check (No. 656) written by Business Research Associates.

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

The Bank Reconciliation Illustrated

3. Five company checks, totaling

$1,350.14, issued late in January and recorded in the journal have not been paid by the bank. 4. The bank received $904.03 by EFT on behalf of Business Research, Inc. 5. The bank collected on behalf of the company a note receivable, $2,114 (including interest revenue of $214). 6. The bank statement shows interest revenue of $28.01.
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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

The Bank Reconciliation Illustrated

7. Check number 333 for $150 paid to

Brown Company on account was recorded as a cash payment of $510. 8. The bank service charge for the month was $14.25. 9. The bank statement shows an NSF check for $52. 10.Business Research pays insurance expense by EFT and has not recorded this $361 payment.
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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

The Bank Reconciliation Illustrated

Balance per bank, January 31 Add deposit in transit Check erroneously charged Less outstanding checks Adjusted bank balance $5,931.51 1,591.63 100.00 $7,623.14 (1,350.14) $6,273.00

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

The Bank Reconciliation Illustrated

Balance per books, January 31 Add: ETF receipt of rent revenue Collection of note receivable Interest revenue earned Correction of book error $3,294.21 904.03 2,114.00 28.01 360.00 $6,700.25

Less: Service charge $ 14.25 NSF check 52.00 Payment of insurance expense 361.00 ( 427.25) Adjusted book balance $6,273.00
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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Learning Objective 3
Apply internal controls to cash receipts and cash payments.

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Petty Cash
A small amount of cash kept on hand to pay for minor expenses.

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Learning Objective 4
Use a budget to manage cash.

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Using a Budget to Manage Cash A financial plan that helps coordinate business activities Cash budget - helps an entity manage cash by planning receipt and payment of cash during a future period
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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Using a Budget to Manage Cash Cash balance, beginning + Budgeted cash receipts - Budgeted cash payments Expected cash balance, ending

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Reporting Cash on the Balance Sheet

Companies usually combine all

cash amount into single total called Cash and Cash Equivalents on the balance sheet. Cash equivalents include liquid assets
Time

deposits Certificates of deposit

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Learning Objective 5
Weigh ethical judgment in business.

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Ethics and Accounting

Company code of ethical and

responsible behavior by employees AICPA Code of Professional Conduct Standards of Ethical Conduct for Management Accountants
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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

End of Chapter 4

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren