Plain Background Power Point Slides Chapter 4 Internal Control and Cash3981

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

Internal Control and Managing Cash

Chapter 4

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Learning Objective 1

Set up an effective system of internal control.

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Internal Control

Organizational plan and all related measures that an entity adoptsSafeguard assetsEncourage adherence to company

policiesPromote operational efficiencyEnsure accurate and reliable

accounting records

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Components of anEffective System Competent, reliable, and ethical

personnelAssignment of responsibilitiesProper authorizationSeparation of duties

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Audit

Examination of company’s financial statements accounting systems, and internal controls, by an outside partyInternal auditor - employee of

the businessExternal auditor - independent

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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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Use a bank reconciliation as a control device.

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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

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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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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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The Bank Reconciliation Illustrated3. 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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The Bank Reconciliation Illustrated7. 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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Balance per bank, January 31 $5,931.51Add deposit in transit 1,591.63Check erroneously charged 100.00

$7,623.14Less outstanding checks (1,350.14)Adjusted bank balance $6,273.00

The Bank Reconciliation Illustrated

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

$6,700.25Less: Service charge $ 14.25NSF check 52.00Payment of insurance expense 361.00 ( 427.25)Adjusted book balance $6,273.00

The Bank Reconciliation Illustrated

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Apply internal controls to cash receipts and cash payments.

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Petty Cash

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

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Use a budget to manage cash.

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Using a Budget to Manage CashA financial plan that helps

coordinate business activitiesCash budget - helps an entity

manage cash by planning receipt and payment of cash during a future period

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Using a Budget to Manage Cash

Cash balance, beginning

+ Budgeted cash receipts

- Budgeted cash payments

Expected cash balance, ending

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Reporting Cash onthe Balance Sheet Companies usually combine all

cash amount into single total called “Cash and Cash Equivalents” on the balance sheet.

Cash equivalents include liquid assetsTime depositsCertificates of deposit

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Weigh ethical judgment in business.

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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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End of Chapter 4

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Plain Background Power Point Slides Chapter 4 Internal Control and Cash3981