Accounting principles 8th weygars kieso kimmel chapter 08

Explain the applications of internal control principles to cash receipts.. Explain the applications of internal control principles to cash disbursements.. Cash Controls Use of a BankRepo

Chapter 8-1

CHAPTER 8

INTERNAL CONTROL AND CASH

Accounting Principles, Eighth Edition

Chapter

8-3

1. Define internal control

2. Identify the principles of internal control

3. Explain the applications of internal control principles

to cash receipts

4. Explain the applications of internal control principles

to cash disbursements

5. Describe the operation of a petty cash fund

6. Indicate the control features of a bank account

7. Prepare a bank reconciliation

8. Explain the reporting of cash

Study Objectives

Study Objectives

Cash Controls Use of a Bank

Reporting Cash

Reporting Cash

Cash equivalents Restricted cash

Compensating balances

Making deposits Writing checks Bank

statements Reconciling the bank account

Internal Control and Cash

Internal Control and Cash

Control over cash receipts Control over cash

disbursements

Chapter

8-5

Methods and measures adopted to:

1 Safeguard assets

2 Enhance accuracy and reliability of accounting

records Reduce risk of:

a Errors (unintentional)

b Irregularities (intentional)

Internal Control

Internal Control

LO 1 Define internal control.

Under the Sarbanes-Oxley Act, all publicly traded U.S corporations are required to maintain an adequate system of internal control.

The Sarbanes-Oxley Act

Independent auditors must attest to the level of

internal control

SOX created the Public Company Accounting

Oversight Board (PCAOB).

Chapter

8-7

Measures vary with

size and nature of

Control is most effective when only one person is responsible

for a given task.

SEGREGATON OF DUTIES

Related duties, including physical custody and record

keeping, should be assigned to different individuals.

DOCUMENTATION PROCEDURES

Companies should use prenumbered documents for all

documents should be accounted for.

Chapter

8-9

Internal Control

Internal Control

LO 2 Identify the principles of internal control.

Principles of Internal Control

PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS

Chapter

Internal Control

Internal Control

Principles of Internal Control

INDEPENDENT INTERNAL VERIFICATION

1 Records periodically verified by an employee who is

independent.

2 Discrepancies reported to management.

OTHER CONTROLS

1 Bond employees.

2 Rotate employees’ duties and require vacations.

3 Conduct background checks.

Chapter

8-11

Internal Control

Internal Control

LO 2 Identify the principles of internal control.

Limitations of Internal Control

Costs should not exceed benefit.

Human element.

Size of the business.

cash receipts (cashiers)

Segregation of Duties

Different individuals

receive cash, record

cash receipts, and hold

the cash

Documentation Procedures

Use remittance advice (mail receipts), cash register tapes, and deposit slips

Physical, Mechanical, and Electronic Controls

Store cash in safes and bank vaults; limit access to storage areas; use cash registers

Other Controls

Bond personnel who handle cash; require employees to take vacations; deposit all cash in bank daily

Illustration 8-5

Chapter

8-13

Q8-3 At the corner grocery store, all sales

clerks make change out of one cash register

drawer Is this a violation of internal control?

Chapter

Cash Controls

Cash Controls

Cash consists of coins, currency, checks, money

orders, and money on hand or on deposit in a bank

Cash receipts come from:

cash salescollections on account from customersreceipt of interest, rent, and dividendsinvestments by owners

bank loans proceeds from the sale of noncurrent assets

Chapter

8-15

Q8-8 The management of Sewell Company asks

you, as the company accountant, to explain (a)

the concept of reasonable assurance in internal

control and (b) the importance of the human

factor in internal control.

See notes page for discussion

Chapter

Cashier ring up sales

Supervisor

1 reads register totals

2 makes cash counts

3 prepares cash count

Copy of list sent to treasurer’s office for comparison with total shown on daily cash summary.

LO 3 Explain the applications of internal control principles to cash receipts.

Chapter

8-19

Generally, internal control over cash

disbursements is more effective when

companies pay by check, rather than by cash.

Applications:

Voucher systemElectronic funds transfers (EFT) systemPetty cash fund

Cash Controls

Cash Controls

LO 4 Explain the applications of internal control

principles to cash disbursements.

Internal Control over Cash Disbursements

Establishment of

Responsibility

Only designated

personnel are authorized to sign

Use prenumbered checks and account for them in sequence;

each check must have an approved

invoice Physical, Mechanical, and Electronic

Controls

Store blank checks in safes, with limited access; print check amounts by machine in

Chapter

8-21

Q8-14 Joe Griswold Company’s internal

controls over cash disbursements provide for

the treasurer to sign checks imprinted by a

checkwriting machine in indelible ink after

comparing the check with the approved invoice

Identify the internal control principles that are

present in these controls.

See notes page for discussion

Discussion Question

Cash Controls

Cash Controls

LO 4 Explain the applications of internal control

principles to cash disbursements.

Chapter

The use of prenumbered checks in disbursing

cash is an application of the principle of:

A voucher is an authorization form prepared for each expenditure.

Cash Controls

Cash Controls

Internal Control over Cash Disbursements

LO 4 Explain the applications of internal control

principles to cash disbursements.

Chapter

Electronic Funds Transfers (EFT)

Disbursement systems that uses wire, telephone, or computers to transfer cash balances between locations

Cash Controls

Cash Controls

Internal Control over Cash Disbursements

LO 4 Explain the applications of internal control

Chapter

8-25

Petty Cash Fund - Used to pay small amounts

Involves:

1. establishing the fund,

2. making payments from the fund, and

3. replenishing the fund

Cash Controls

Cash Controls

Internal Control over Cash Disbursements

LO 5 Describe the operation of a petty cash fund.

March 9 Miscellaneous expense 6

March 11 Travel expense 24

March 14 Miscellaneous expense 5

The fund was replenished on March 15 when the fund contained $3 in cash On March 20, the amount in the fund was increased to $150.

Instructions: Journalize the entries in March that pertain to the

operation of the petty cash fund.

Cash Controls

Cash Controls

Cash Controls

Cash Controls

LO 5 Describe the operation of a petty cash fund.

Chapter

fund contained $3 in cash

Postage expense 39March 15

Cash97

Cash Controls

Cash Controls

Miscellaneous expense 11Travel expense 24Cash over and short 2

Chapter

Contributes to good internal control over cash.

Minimizes the amount of currency on hand.

Creates a double record of bank transactions Bank reconciliation.

Use of a Bank

Use of a Bank

Front Side Reverse Side

Illustration 8-10

Chapter

Writing Checks

Written order signed by depositor directing bank to pay

a specified sum of money to a designated recipient

Chapter

The control features of a bank account do not

include:

a having bank auditors verify the correctness of

the bank balance per books

b minimizing the amount of cash that must be kept

LO 7 Prepare a bank reconciliation.

Reconcile balance per books and balance per bank to

their adjusted (corrected) cash balances

Illustration 8-13

Chapter

8-37

E8-11 The following information pertains to Family Video Company.

1 Cash balance per bank, July 31, $7,263.

2 Cash balance per books, July 31, $7,284.

3 July bank service charge not recorded by the depositor $28.

4 Deposits in transit, July 31, $1,500.

5 Bank collected $900 note for Family in July, plus interest $36,

less fee $20.The collection has not been recorded by Family, and

no interest has been accrued.

6 Outstanding checks, July 31, $591.

Instructions

a) Prepare a bank reconciliation at July 31.

b) Journalize the adjusting entries at July 31 on the books of Family

Note collection fee (20) Adjusted cash balance per books

$8,172

Chapter

8-39

Miscellaneous expense 28July 31 Cash 916 Cash 28

Notes receivable 900

Interest revenue36

Use of a Bank

Use of a Bank

LO 7 Prepare a bank reconciliation.

E8-11 b) Journalize the adjusting entries at July 31 on the books of Family Video Company

Note: Adjusting journal entry includes only the

adjustments to the cash balance per books

Dr Cr

Miscellaneous expense 20July 31

Chapter

The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is:

Chapter

8-41

Which of the following statements correctly

describes the reporting of cash?

a Cash cannot be combined with cash equivalents

b Restricted cash funds may be combined with

Chapter

agreement between the cash balance per books and the

balance per the bank Explain the causes for the lack of

agreement to Lori, and give an example of each cause.

See notes page for discussion

Recording Process

Recording Process

Discussion Question

Chapter

8-43

Reporting Cash

Reporting Cash

LO 8 Explain the reporting of cash.

Most liquid asset, listed first in current assets

section of balance sheet

Cash equivalentsRestricted cashCompensating balances

Illustration 8-16

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