Directory UMM :wiley:Public:college:accounting:kimmel:
Financial Accounting:
Tools for Business Decision Making
Kimmel, Weygandt, Kieso
S
EL
1
Chapter 7
Chapter 7
Internal 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.
3
Chapter 7
Internal Control and Cash
After studying Chapter 7, you should be able to:
Explain the reporting of cash.
Discuss the basic principles of cash management.
Identify the primary elements of a cash budget.
Identify and interpret measures that evaluate the
adequacy of cash.
4
Internal Control consists of...
all the related methods and measures
adopted within a business to:
safeguard its assets;
enhance accuracy and reliability of accounting
of its accounting records.
5
Page 289in book
6
Establishment of
Responsibility
Control is most effective when only
one person is responsible for a
given task.
7
Segregation of Duties
Responsibility of related activities
should be assigned to different
individuals.
Responsibility of keeping the records
of an asset should be separate from
physical custody.
8
Segregation of Duties
Page 290 in the book
•Responsibility for related activities should be assigned to different
individuals
•Responsibility for keeping records for an asset should be separate
from the physical custody of the asset
9
Documentation
Provide evidence that
transactions and
events occurred:
Shipping documents
Sales invoices
10
Documentation Procedures
Documents should be pre-numbered
All documents should be accounted for
Sources documents should be promptly
forwarded to accounting department
11
Physical, Mechanical and
Electronic Controls
12
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
13
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.
14
Independent Internal
Verification
15
Other Controls
Bonding of employees who
handle cash
Rotating employee’s duties
and requiring employees to
take vacations
16
Cash consists of...
coins
currency
checks
money orders
money on hand
deposits in bank
Cash consists of...
coins
currency
checks
money orders
money on hand
deposits in bank
18
Cash is the most desirable
asset...
because it is
readily
convertible into
any other asset.
19
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
20
Page 296 in book
21
Page 297 in book
Internal Control
Over Cash Disbursements
22
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
23
Petty Cash Fund
is a cash fund used to pay
relatively small amounts
24
Petty Cash Fund
A cash fund used
to pay relatively
small amounts.
25
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
a company can safeguard its cash by using a
bank as a depository and clearinghouse for
checks received and written.
26
Bank
Statement a copy of the
bank’s
records sent
to the
customer for
periodic
review.
Bank
Statement
shows
•check &
other debits
•deposits &
other credits
•daily cash
balance
27
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.
28
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
29
Terms
Deposits in transit - deposits recorded by the
depositor that have not been recorded by the
bank.
Outstanding Checks - checks issued and
recorded by the company that have not been paid
by the bank.
NSF Check - a check that is not paid by the bank
because of insufficient funds in the customer’s
bank account.
Adjusted balance - same as true cash balance,
correct cash balance
30
Bank Reconciliation
Procedures
$ Per Bank Statement
-outstanding checks
+deposits
+/- bank errors
correct cash amount
$ Per Books
-NSF Checks
-check printing or
other service charge
+notes collected by
bank
correct cash amount
W.A. Laird Company
Page 302 in book
Bank Reconciliation
April 30, 1998
Cash balance per bank statement
Add: Deposits in transit
Less: Outstanding checks
No. 453
No. 457
No. 460
Adjusted cash balance per bank
Cash balance per books
Add: Collection of N/R for $ 1000 plus interest
earned $50, less collection fee $ 15
Error on recording check No. 443
Less: NSF check
Bank service charge
Adjusted cash balance per bank
15,907.45
2,201.40
18,108.85
3,000.00
1,401.30
1,502.70
5,904.00
12,204.85
11,589.45
1,035.00
36.00
425.60
30.00
1,071.00
12,660.45
455.60
12,204.85
For Cash To Show the
Correct Balance
Each reconciling item in determining
the adjusted balance per books must
be journalized and posted.
33
W.A. Laird Company
Page 302 in book
Bank Reconciliation
April 30, 1998
Cash balance per bank statement
Add: Deposits in transit
Less: Outstanding checks
No. 453
No. 457
No. 460
Adjusted cash balance per bank
Cash balance per books
Add: Collection of N/R for $ 1000 plus interest
earned $50, less collection fee $ 15
Error on recording check No. 443
Less: NSF check
Bank service charge
Adjusted cash balance per bank
15,907.45
2,201.40
18,108.85
3,000.00
1,401.30
1,502.70
5,904.00
12,204.85
11,589.45
1,035.00
36.00
425.60
30.00
1,071.00
12,660.45
455.60
12,204.85
JOURNAL
Apr 30 Cash
Miscellaneous Expense
Notes Receivable
Interest Revenue
Apr 30 Cash
Accounts Payable
Apr 30 Accounts Receivable-Baron
Cash
Apr 30 Miscellaneous Expense
Cash
1,035.00
15.00
1,000.00
50.00
36.00
36.00
425.60
425.60
30.00
30.00
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.
36
Cash Equivalents
Readily convertible to known amount of cash
So near maturity that market value is
relatively insensitive to changes in interest
rates
Examples:
Treasury bills
Commercial paper
Money Market Funds
37
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.
38
Page 306 in book
Operating Cycle of a
Merchandising Company…is
the average time it takes to
go from cash to cash in
producing revenues.
Page 308 in book
Five Principles of Cash
Management
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.
41
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 21-year period.
42
Cash Budget
The cash budget contains :
Cash receipts section;
Cash disbursements section;
Financing section.
43
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
44
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.
45
Financing Section
Shows expected borrowings and the
repayment of the borrowed funds
and interest
46
Adequacy Of Cash
Net cash provided by operating
activities is used to compute two ratios
which measure liquidity and solvency.
47
Liquidity - the ability of a company to pay
obligations that are expected to come due within
the next year.
Current Cash Debt Coverage Ratio
-indicates whether a company can pay off
its current liabilities from current
operations.
Net Cash Provided by Operating
Activities
Current Liabilities
48
Solvency - the ability of a company to pay
interest as it comes due and to repay the face
value of debt at maturity
Cash Debt Coverage Ratio -indicates
whether a company can pay off its total
liabilities from current operations
Net Cash Provided by Operating
Activities
Total Liabilities
49
Additional Tools Used to Measure
the Adequacy of Cash
Two additional tools used to measure
the adequacy of cash are:
ratio of cash to daily cash expenses;
free cash flow.
50
Ratio of Cash to
Daily Cash Expenses
Computes the number of days of cash
expenses the cash on hand can cover
Average daily cash expenses can be
approximated by subtracting
depreciation (a noncash expense) from
total expenses and dividing by 365
days
51
Ratio of Cash to
Daily Cash Expenses
balance in cash and cash equivalent
average daily cash expenses
52
Free Cash Flow
Free cash flow is the amount of discretionary
cash flow a company has for:
purchasing additional investments
paying its debt
adding to its liquidity
Net cash provided by operating activities
$250,000
Less: Capital expenditures
$80,000
Dividends paid
50,000
130,000
53
COP Y R I GHT
Copyright © 1999, John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
Tools for Business Decision Making
Kimmel, Weygandt, Kieso
S
EL
1
Chapter 7
Chapter 7
Internal 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.
3
Chapter 7
Internal Control and Cash
After studying Chapter 7, you should be able to:
Explain the reporting of cash.
Discuss the basic principles of cash management.
Identify the primary elements of a cash budget.
Identify and interpret measures that evaluate the
adequacy of cash.
4
Internal Control consists of...
all the related methods and measures
adopted within a business to:
safeguard its assets;
enhance accuracy and reliability of accounting
of its accounting records.
5
Page 289in book
6
Establishment of
Responsibility
Control is most effective when only
one person is responsible for a
given task.
7
Segregation of Duties
Responsibility of related activities
should be assigned to different
individuals.
Responsibility of keeping the records
of an asset should be separate from
physical custody.
8
Segregation of Duties
Page 290 in the book
•Responsibility for related activities should be assigned to different
individuals
•Responsibility for keeping records for an asset should be separate
from the physical custody of the asset
9
Documentation
Provide evidence that
transactions and
events occurred:
Shipping documents
Sales invoices
10
Documentation Procedures
Documents should be pre-numbered
All documents should be accounted for
Sources documents should be promptly
forwarded to accounting department
11
Physical, Mechanical and
Electronic Controls
12
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
13
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.
14
Independent Internal
Verification
15
Other Controls
Bonding of employees who
handle cash
Rotating employee’s duties
and requiring employees to
take vacations
16
Cash consists of...
coins
currency
checks
money orders
money on hand
deposits in bank
Cash consists of...
coins
currency
checks
money orders
money on hand
deposits in bank
18
Cash is the most desirable
asset...
because it is
readily
convertible into
any other asset.
19
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
20
Page 296 in book
21
Page 297 in book
Internal Control
Over Cash Disbursements
22
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
23
Petty Cash Fund
is a cash fund used to pay
relatively small amounts
24
Petty Cash Fund
A cash fund used
to pay relatively
small amounts.
25
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
a company can safeguard its cash by using a
bank as a depository and clearinghouse for
checks received and written.
26
Bank
Statement a copy of the
bank’s
records sent
to the
customer for
periodic
review.
Bank
Statement
shows
•check &
other debits
•deposits &
other credits
•daily cash
balance
27
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.
28
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
29
Terms
Deposits in transit - deposits recorded by the
depositor that have not been recorded by the
bank.
Outstanding Checks - checks issued and
recorded by the company that have not been paid
by the bank.
NSF Check - a check that is not paid by the bank
because of insufficient funds in the customer’s
bank account.
Adjusted balance - same as true cash balance,
correct cash balance
30
Bank Reconciliation
Procedures
$ Per Bank Statement
-outstanding checks
+deposits
+/- bank errors
correct cash amount
$ Per Books
-NSF Checks
-check printing or
other service charge
+notes collected by
bank
correct cash amount
W.A. Laird Company
Page 302 in book
Bank Reconciliation
April 30, 1998
Cash balance per bank statement
Add: Deposits in transit
Less: Outstanding checks
No. 453
No. 457
No. 460
Adjusted cash balance per bank
Cash balance per books
Add: Collection of N/R for $ 1000 plus interest
earned $50, less collection fee $ 15
Error on recording check No. 443
Less: NSF check
Bank service charge
Adjusted cash balance per bank
15,907.45
2,201.40
18,108.85
3,000.00
1,401.30
1,502.70
5,904.00
12,204.85
11,589.45
1,035.00
36.00
425.60
30.00
1,071.00
12,660.45
455.60
12,204.85
For Cash To Show the
Correct Balance
Each reconciling item in determining
the adjusted balance per books must
be journalized and posted.
33
W.A. Laird Company
Page 302 in book
Bank Reconciliation
April 30, 1998
Cash balance per bank statement
Add: Deposits in transit
Less: Outstanding checks
No. 453
No. 457
No. 460
Adjusted cash balance per bank
Cash balance per books
Add: Collection of N/R for $ 1000 plus interest
earned $50, less collection fee $ 15
Error on recording check No. 443
Less: NSF check
Bank service charge
Adjusted cash balance per bank
15,907.45
2,201.40
18,108.85
3,000.00
1,401.30
1,502.70
5,904.00
12,204.85
11,589.45
1,035.00
36.00
425.60
30.00
1,071.00
12,660.45
455.60
12,204.85
JOURNAL
Apr 30 Cash
Miscellaneous Expense
Notes Receivable
Interest Revenue
Apr 30 Cash
Accounts Payable
Apr 30 Accounts Receivable-Baron
Cash
Apr 30 Miscellaneous Expense
Cash
1,035.00
15.00
1,000.00
50.00
36.00
36.00
425.60
425.60
30.00
30.00
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.
36
Cash Equivalents
Readily convertible to known amount of cash
So near maturity that market value is
relatively insensitive to changes in interest
rates
Examples:
Treasury bills
Commercial paper
Money Market Funds
37
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.
38
Page 306 in book
Operating Cycle of a
Merchandising Company…is
the average time it takes to
go from cash to cash in
producing revenues.
Page 308 in book
Five Principles of Cash
Management
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.
41
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 21-year period.
42
Cash Budget
The cash budget contains :
Cash receipts section;
Cash disbursements section;
Financing section.
43
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
44
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.
45
Financing Section
Shows expected borrowings and the
repayment of the borrowed funds
and interest
46
Adequacy Of Cash
Net cash provided by operating
activities is used to compute two ratios
which measure liquidity and solvency.
47
Liquidity - the ability of a company to pay
obligations that are expected to come due within
the next year.
Current Cash Debt Coverage Ratio
-indicates whether a company can pay off
its current liabilities from current
operations.
Net Cash Provided by Operating
Activities
Current Liabilities
48
Solvency - the ability of a company to pay
interest as it comes due and to repay the face
value of debt at maturity
Cash Debt Coverage Ratio -indicates
whether a company can pay off its total
liabilities from current operations
Net Cash Provided by Operating
Activities
Total Liabilities
49
Additional Tools Used to Measure
the Adequacy of Cash
Two additional tools used to measure
the adequacy of cash are:
ratio of cash to daily cash expenses;
free cash flow.
50
Ratio of Cash to
Daily Cash Expenses
Computes the number of days of cash
expenses the cash on hand can cover
Average daily cash expenses can be
approximated by subtracting
depreciation (a noncash expense) from
total expenses and dividing by 365
days
51
Ratio of Cash to
Daily Cash Expenses
balance in cash and cash equivalent
average daily cash expenses
52
Free Cash Flow
Free cash flow is the amount of discretionary
cash flow a company has for:
purchasing additional investments
paying its debt
adding to its liquidity
Net cash provided by operating activities
$250,000
Less: Capital expenditures
$80,000
Dividends paid
50,000
130,000
53
COP Y R I GHT
Copyright © 1999, John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.