Internal Control and Cash

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ACCOUTING 101
Internal Control and Cash
Chapter 7 Professor Walsh Providence College
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INTERNAL CONTROL AND CASH
You should be able to

• Identify the principles of internal control.
• Explain the applications of internal control to
  cash receipts.
• Explain the applications of internal control to
  cash disbursements.
• Prepare a bank reconciliation.
• Explain the reporting of cash.
• Discuss the basic principles of cash management.
• Identify the primary elements of a cash budget.
• Explain why a cash budget is a component of
  Internal Control.

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PRINCIPLES OF INTERNAL CONTROL

• Internal control (IC) necessary to
• Safeguards on assets
• Enhance the accuracy reliability of
  accounting records
• Reduces risk of errors (unintentional mistakes)
• Reduces risk of irregularities (theft
  misappropriations)

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Internal Control

• Consists of the measures methods
• to safeguard the assets enhance the
• Accuracy
• Reliability
• of its accounting records

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CASH is KING

• Lifeblood
• A Co can not survive over the long-term w/out
  positive cash-flow in
• Must be protected using Internal Controls
• Necessary for viability
• Liquid desirable asset

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PRINCIPLES OF INTERNAL CONTROL Essentials

• Establish responsibility
• Segregation of duties
• Documentation procedures
• Physical, mechanical, electronic controls
• Independent internal verification
• Other controls

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PRINCIPLES OF INTERNAL CONTROL

• Establishment of responsibility
• most effective when only one person is
  responsible for a given task
• Segregation of duties
• the work of one employee should provide a
  reliable basis for evaluating the work of
  another employee
• Documentation procedures
• documents provide evidence that transactions and
  events have occurred

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PRINCIPLES OF INTERNAL CONTROL

• Physical, mechanical, and electronic controls
• safeguarding of assets enhancing accuracy and
  reliability of the accounting records
• Independent internal verification
• reviewing, comparing, and reconciling info from
  at least 2 sources
• Other controls
• bonding of employees who handle cash
• rotating employees duties
• requiring employees to take vacations

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PHYSICAL, MECHANICAL, ELECTRONIC CONTROLS
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COMPARISON OF SEGREGATION OF DUTIES PRINCIPLE
WITH INDEPENDENT INTERNAL VERIFICATION PRINCIPLE
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LIMITATIONS OF INTERNAL CONTROL

• Internal control is designed to provide
  reasonable assurance
• Costs of establishing control procedures should
  not exceed their expected benefits.
• The human element is an important factor in every
  system of internal control.
• A good system can become ineffective through
  employee fatigue, carelessness, or indifference.
• Collusion can occur.
• Two or more individuals work together to get
  around prescribed controls and may
  significantly impair the effectiveness of a
  system.

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CASH CONTROLS

• Cash
• coins, currency, checks, money orders, and money
  on hand or on deposit at a bank or similar
  depository
• Internal control over cash is imperative
• to safeguard cash and assure the accuracy of the
  accounting records

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INTERNAL CONTROL OVER CASH RECEIPTS
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INTERNAL CONTROL OVER CASH DISBURSEMENTS
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Cash Disbursements ELECTRONIC FUNDS TRANSFER
SYSTEM

• Checks processing is expensive
• new methods are being developed to transfer funds
  among parties without the use of paper
• Electronic Funds Transfer (EFT) System
• a disbursement system that uses wire, telephone,
  telegraph, or computer to transfer cash from one
  location to another

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USE OF A BANK

• minimizes the amount of currency that must be
  kept on hand
• contributes significantly to good internal
  control over cash.
• A double record of cash is maintained, one by
  the co, one by the bank. These two accounts are
  reconciled.

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BANK STATEMENTS

• A bank statement shows
• checks paid and other debits charged against the
  account
• deposits and other credits made to the account
• account balance after each days transactions
• The bank statement is a copy of the banks
  records sent to the customer for review

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BANK STATEMENT
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RECONCILING THE BANK ACCOUNT

• Reconciliation
• is necessary as the balance per bank and balance
  per books are seldom in agreement due to time
  lags and errors
• A bank reconciliation
• should be prepared by an employee
  who has no other responsibilities pertaining to
  cash

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RECONCILING THE BANK ACCOUNT

• Steps in preparing a bank reconciliation
• Determine deposits in transit
• Determine outstanding checks
• Note any errors discovered
• Trace bank memoranda to the records
• Each reconciling item used in determining the
  Adjusted cash balance per books should be
  recorded by the depositor

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BANK RECONCILIATION
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BANK RECONCILIATION
The bank statement for the Laird Company shows a
balance per bank of 15,907.45 on April 30, 2005.

• Adjusted cash balance per bank
  
  12,204.85
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
• Adjusted cash balance per books
  
  12,204.85

On this date the balance of cash per books is
11,589.45.
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ENTRIES FROM BANK RECONCILIATION
Collection of Note Receivable This entry
involves four accounts. Interest of 50 has not
been accrued and the collection fee is charged to
Miscellaneous Expense.
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ENTRIES FROM BANK RECONCILIATION
Book Error An examination of the cash
disbursements journal shows that check No. 443
was a payment on account to Andrea Company, a
supplier. The check, with a correct amount of
1,226.00, was recorded at 1,262.00.
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ENTRIES FROM BANK RECONCILIATION
NSF Check An NSF check becomes an accounts
receivable to the depositor.
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ENTRIES FROM BANK RECONCILIATION
Bank Service Charges Check printing charges (DM)
and other bank service charges (SC) are debited
to Miscellaneous Expense because they are usually
nominal in amount.
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REPORTING CASH

• Cash
• 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.

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REPORTING CASHCash Equivalents

• Cash equivalents are
• Readily convertible to known amounts of cash
• So near maturity that their value is relatively
  insensitive to interest rate changes
• Examples include treasury bills, commercial
  paper, and money market funds

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REPORTING CASHRestricted Cash

• Restricted cash is
• Restricted for a special purpose and not
  available for general use
• Reported separately on the balance sheet

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MANAGING MONITORING CASH

• The objective of managing cash is to
• Ensure that the co has sufficient cash to meet
  payments, AND
• Minimizes the amount of idle cash on hand
• The operating cycle of a merchandising co is the
  average time it takes to go from cash to cash

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Operating Cycle of a Merchandising Company
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Basic Principles of Cash Management
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CASH BUDGETING

• Cash is vital
• The cash budget includes
• a cash receipt
• cash disbursements
• financing section
• It shows the anticipated cash flows, over a 1 to
  2-year period

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CASH BUDGETING

• Cash receipts section includes expected receipts
  from the cos principal rev sources
• Cash disbursements section includes expected
  payments for direct materials, direct labor, etc.
• Financing section shows expected borrowings
  their repayment

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Lets Review
Which one of the following is not one of the
sections of a cash budget?
a. cash receipts section.
b. cash disbursements section.
c. financing section.
d. cash from operations section.
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Lets Review
Which one of the following is not one of the
sections of a cash budget?
a. cash receipts section.
b. cash disbursements section.
c. financing section.
d. cash from operations section.