Internal Control and Cash

1
Internal Control and Cash
CHAPTER
7
2
Internal Control

• The related methods and measures adopted within a
  business to
• Optimize the use of resources
• Prevent and detect errors and irregularities
• Safeguard assets
• Maintain reliable control systems

3
Establishment of Responsibility

• Control is most effective when only one person is
  responsible for a given task

4
Segregation of Duties

• Related activities should be assigned to
  different individuals
• Separate record keeping from physical custody of
  the asset

5
Documentation

• Provide evidence that transactions and events
  occurred
• Shipping documents
• Sales invoices
• Documents should be pre-numbered and accounted for

6
Physical Controls
Illustration 7-2
7
Independent Internal Verification

• Comparison, reconciliation, and review of data
  prepared by employees
• Periodically or on a random basis
• Done by employee who is independent of the
  personnel responsible for the information
• Discrepancies and exceptions should be reported
  to management

8
Limitations of Internal Control

• Cost / benefit
• Human element
• Collusion
• Size of business

9
Cash

• Coins
• Currency
• Cheques
• Money orders
• Money on hand
• Deposits in bank

10
Cash

• Readily convertible into any other asset
• High value in small bulk
• Non-control of owner identification (serial
  numbers)

11
Bank

• Minimizes cash that must be kept on hand
• Provides a double record of transactions
• One by the business
• One by the bank
• Safeguards cash by using a bank as a depository
  and clearinghouse for cheques received and written

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Illustration 7-6

• Bank Statement
• Copy of banks records sent to the customer for
  periodic review
• Shows cheque and other debits deposits, other
  credits and the
• daily cash balance

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Terms

• Deposits in transit
• Deposits recorded by the depositor that have not
  yet been recorded by the bank
• Outstanding cheques
• Cheques written (issued) and recorded by a
  company but that have not yet been presented
  to/paid by the bank
• Adjusted balance
• Reconciled or correct cash balance

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Terms

• Debit memoranda
• Charges against depositors account e.g. service
  charges, RC (returned) / NSF (insufficient funds)
  cheques
• Credit memoranda
• Amounts that increase depositors account (e.g.,
  interest earned)

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Understanding Debits and Credits
Bank (Your Cash Account is a Liability) Books (Cash is an Asset)
Cheque Debit (decrease) Credit (decrease)
Deposit Credit (increase) Debit (increase)
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Differences Between Company Balance and Bank
Balance

• Time lags
• The period after a cheque is written and dated
  but not yet presented to nor paid by the bank
• The period between receipts being recorded by the
  company and time receipts being recorded by the
  bank
• Time lags occur when the bank mails debit or
  credit memos to the company
• Errors by either party in recording transactions

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Bank Reconciliation

• This reconciles the balance in the companys bank
  account with the cash balance in the general
  ledger

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Reporting Cash

• Cash on hand, cash in banks, cash equivalents,
  and petty cash are often combined and reported as
  cash
• Cash is recorded in both the balance sheet and
  the cash flow statement
• Cash is the most liquid asset and is listed first
  in the current asset section of the balance sheet

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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

20
Restricted Cash

• Cash that is not available for general use set
  aside for special purposes
• If it is not to be used within the next year,
  report as noncurrent asset
• For example, a bank may require a borrower to
  have a compensating balanceminimum cash balance

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Five Principles of Cash Management
Illustration 7-10
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Cash Budgeting

• Planning a company's cash needs is a key business
  activity
• Cash budget shows anticipated cash flows over a
  one-to two-year period

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Cash Budget

• Cash receipts section
• Cash disbursements section
• Financing section