© The McGraw-Hill Companies, Inc., 2002 Slide 9-1 McGraw-Hill/Irwin 9 Internal Control and Cash.

© The McGraw-Hill Companies, Inc., 2002

Slide 9-1

McGraw-Hill/Irwin

9 Internal Control and Cash


Slide 9-2

McGraw-Hill/Irwin

Purpose of Internal Control

All policies and All policies and procedures procedures

managers use to . .managers use to . . . . Protect assets.Protect assets. Ensure reliable Ensure reliable

accounting.accounting. Promote efficient Promote efficient

operations.operations. Urge adherence to Urge adherence to

company policies. company policies.

All policies and All policies and procedures procedures

managers use to . .managers use to . . . . Protect assets.Protect assets. Ensure reliable Ensure reliable

accounting.accounting. Promote efficient Promote efficient

operations.operations. Urge adherence to Urge adherence to

company policies. company policies.


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Principles of Internal Control

Establish responsibilities.Establish responsibilities.

Maintain adequate records.Maintain adequate records.

Insure assets and bond employees.Insure assets and bond employees.

Separate recordkeeping and custodySeparate recordkeeping and custodyover assets.over assets.

Divide responsibility for related Divide responsibility for related transactions.transactions.

Apply technological controls.Apply technological controls.

Perform regular and independent reviews.Perform regular and independent reviews.

Establish responsibilities.Establish responsibilities.

Maintain adequate records.Maintain adequate records.

Insure assets and bond employees.Insure assets and bond employees.

Separate recordkeeping and custodySeparate recordkeeping and custodyover assets.over assets.

Divide responsibility for related Divide responsibility for related transactions.transactions.

Apply technological controls.Apply technological controls.

Perform regular and independent reviews.Perform regular and independent reviews.


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Technology and Internal Control

ReducedReducedProcessingProcessing

ErrorsErrors

ReducedReducedProcessingProcessing

ErrorsErrors

MoreMoreExtensive TestingExtensive Testing

of Recordsof Records

MoreMoreExtensive TestingExtensive Testing

of Recordsof Records

LimitedLimitedEvidence ofEvidence ofProcessingProcessing

LimitedLimitedEvidence ofEvidence ofProcessingProcessing

CrucialCrucialSeparation ofSeparation of

DutiesDuties

CrucialCrucialSeparation ofSeparation of

DutiesDuties


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Limitations of Internal Control

Human Error

NegligenceFatigue

MisjudgmentConfusion

Human Fraud

Intent todefeat internal

controls forpersonal gain


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Limitations of Internal Control

The costs of internal controls The costs of internal controls must not exceed their benefits.must not exceed their benefits.The costs of internal controls The costs of internal controls must not exceed their benefits.must not exceed their benefits.

CostsCostsBenefitsBenefits


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Cash, Cash Equivalents, and Liquidity

CashCurrency, coins and amounts on deposit in bank account,

checking accounts, and some savings accounts.

CashCurrency, coins and amounts on deposit in bank account,

checking accounts, and some savings accounts.

Cash Equivalents

Short-term, highly liquid investments that are:Readily convertible to a known cash amountClose to maturity date and not sensitive to

interest rate changes

Cash Equivalents

Short-term, highly liquid investments that are:Readily convertible to a known cash amountClose to maturity date and not sensitive to

interest rate changes


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Cash, Cash Equivalents, and Liquidity

LiquidityLiquidity

How easily an asset can be converted into How easily an asset can be converted into another asset or be used in paying for another asset or be used in paying for

services or obligations.services or obligations.

LiquidityLiquidity

How easily an asset can be converted into How easily an asset can be converted into another asset or be used in paying for another asset or be used in paying for

services or obligations.services or obligations.

InventoryInventory CashCash


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Control of Cash

Segregate handling of cash from Segregate handling of cash from recordkeeping of cash. recordkeeping of cash.

Cash receipts are promptly (daily) deposited in Cash receipts are promptly (daily) deposited in a bank.a bank.

Cash disbursements are made by check.Cash disbursements are made by check.

Segregate handling of cash from Segregate handling of cash from recordkeeping of cash. recordkeeping of cash.

Cash receipts are promptly (daily) deposited in Cash receipts are promptly (daily) deposited in a bank.a bank.

Cash disbursements are made by check.Cash disbursements are made by check.


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Control of Cash Receipts

Over-the-Counter Cash Over-the-Counter Cash ReceiptsReceipts

Cash register with locked-Cash register with locked-in record of transactions.in record of transactions.

Compare cash register Compare cash register record with cash reported.record with cash reported.

Over-the-Counter Cash Over-the-Counter Cash ReceiptsReceipts

Cash register with locked-Cash register with locked-in record of transactions.in record of transactions.

Compare cash register Compare cash register record with cash reported.record with cash reported.

Cash Receipts By MailCash Receipts By MailTwo people open the mailTwo people open the mail..

• Money to cashier’s officeMoney to cashier’s office

• List to accounting dept.List to accounting dept.

• Copy of list filedCopy of list filed

Cash Receipts By MailCash Receipts By MailTwo people open the mailTwo people open the mail..

• Money to cashier’s officeMoney to cashier’s office

• List to accounting dept.List to accounting dept.

• Copy of list filedCopy of list filed


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Control of Cash Disbursements

All expenditures made by check. The only All expenditures made by check. The only exception is for small payments from petty exception is for small payments from petty cash.cash.

Separate authorization, check signing and Separate authorization, check signing and recordkeeping duties.recordkeeping duties.

Apply a voucher system.Apply a voucher system.

All expenditures made by check. The only All expenditures made by check. The only exception is for small payments from petty exception is for small payments from petty cash.cash.

Separate authorization, check signing and Separate authorization, check signing and recordkeeping duties.recordkeeping duties.

Apply a voucher system.Apply a voucher system.


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Voucher System of Control

A voucher system establishes procedures for:A voucher system establishes procedures for: Accepting obligations resulting in cash disbursements.Accepting obligations resulting in cash disbursements.

Verifying, approving and recording obligations.Verifying, approving and recording obligations.

Issuing checks for payment of verified, approved and Issuing checks for payment of verified, approved and recorded obligations.recorded obligations.

Requiring obligations be recorded when incurred.Requiring obligations be recorded when incurred.

Treating each purchase as an independent transaction.Treating each purchase as an independent transaction.

A voucher system establishes procedures for:A voucher system establishes procedures for: Accepting obligations resulting in cash disbursements.Accepting obligations resulting in cash disbursements.

Verifying, approving and recording obligations.Verifying, approving and recording obligations.

Issuing checks for payment of verified, approved and Issuing checks for payment of verified, approved and recorded obligations.recorded obligations.

Requiring obligations be recorded when incurred.Requiring obligations be recorded when incurred.

Treating each purchase as an independent transaction.Treating each purchase as an independent transaction.


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Check

Invoice Approval

Receiving Report

Invoice

Purchase Order

Voucher System of Control

Purchase Requisition

VoucherVoucher

Cashier’s Office

Accounting Dept.

Receiving Dept.

Supplier (Vendor)

Purchasing Dept.

Requesting Dept.

Cashier’s OfficeAccounting, Requesting,

Purchasing Depts.

Accounting Dept.

Supplier (Vendor)

Purchasing andAccounting Depts.

Supplier (Vendor)


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Copy 2Purchasing

RequestingDepartment

Accounting

One copyOne copyof purchaseof purchaserequisitionrequisition

used toused toprepare theprepare the

voucher.voucher.

One copyOne copyof purchaseof purchaserequisitionrequisition

used toused toprepare theprepare the

voucher.voucher.

Clothes Mart No. 1167

From: Shoe DepartmentTo: Purchasing

Request purchase of the following item(s):Model No. Description Quantity

ABA32 Sandals - black 25

C1287 Sandals - white 25

Reason for Request: Refill stock

Approved by: Andy Taylor


















Copy 1


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Clothes Mart No. M47

Nashville, TN

To: Westcoast Shoes35 Sunset PlaceSan Clemente, CA 90277

Model No. Description Quantity Price Amount

ABA32 Sandals - black 25 8.00$ 200.00$

C1287 Sandals - white 25 8.00 200.00

All shipments and invoices must include PO number

Order by: B.T. Fife

Purchase Order


Nashville, TN




C1287 Sandals - white 25 8.00 200.00


Order by: B.T. Fife

Purchase Order


Nashville, TN




C1287 Sandals - white 25 8.00 200.00


Order by: B.T. Fife

Purchase Order


Nashville, TN




C1287 Sandals - white 25 8.00 200.00


Order by: B.T. Fife

Purchase Order

Copy 1

Copy 3

Copy 2

Retained in Purchasing

Accounting

Vendor

Requesting Dept.


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Clothes Mart Voucher No. 2718

Nashville, Tennessee

Date: May 22, 2002Pay to: Westcoast Shoes

City: San Clemente State: CA

For the following:(attach all invoices and supporting documents)

Invoice Date Terms Invoice No. and Details Amount05/18/02 2/10, n/30 Invoice 2718 400.00$ 05/28/02 2/10, n/30 Less discount 8.00

Net amount payable 392.00$

Payment approval:

Bart ThurmanAuditor

Inside of a VoucherInside of a Voucher


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Account Debited AmountMerchandise inventory 392.00 Due dateStore supplies Pay to: Westcoast ShoesOffice supplies City: San ClementeSelling expense State: CAGeneral expeneOther: Summary of charges:

Total charges 400.00$ Discount 8.00 Net payment 392.00$

Record of payment:

Voucher Payable Credit 392.00 Paid Check No.

Accounting Distribution

Outside of a VoucherOutside of a Voucher


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Petty Cash System of Control

Small payments required in most companies for Small payments required in most companies for items such as postage, courier fees, repairs items such as postage, courier fees, repairs

and supplies.and supplies.

Small payments required in most companies for Small payments required in most companies for items such as postage, courier fees, repairs items such as postage, courier fees, repairs

and supplies.and supplies.


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Operating a Petty Cash Fund

Petty Cashier

Treasurer andTreasurer andAccountantAccountant

Petty CashierPetty Cashier

GENERAL JOURNAL Page 4Date Description PR Debit Credit

May 1 Petty Cash 400

Cash 400


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Petty Cashier




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34¢

Stamps Courier



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34¢

Stamps Courier


ReceiptsReceipts


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Receipts

Treasurer andTreasurer andAccountantAccountant


May 15 Postage Expense 45

Courier Expense 80

Cash 125

$125To reimburse

petty cash fund

We use a We use a CashCashOver and ShortOver and Short

account if needed.account if needed.

We use a We use a CashCashOver and ShortOver and Short

account if needed.account if needed.



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Petty Cash Example

Tension Co. maintains a petty cash fund of $400. The Tension Co. maintains a petty cash fund of $400. The following summary information was taken from petty following summary information was taken from petty

cash vouchers for July:cash vouchers for July:

Travel ExpensesTravel Expenses $79.30$79.30

Customer Business LunchesCustomer Business Lunches 93.42 93.42

Express Mail PostageExpress Mail Postage 55.00 55.00

Miscellaneous Office SuppliesMiscellaneous Office Supplies 32.48 32.48

Let’s look at replenishing the fund if the balance on July Let’s look at replenishing the fund if the balance on July 31 was $137.80. 31 was $137.80.

Tension Co. maintains a petty cash fund of $400. The Tension Co. maintains a petty cash fund of $400. The following summary information was taken from petty following summary information was taken from petty

cash vouchers for July:cash vouchers for July:

Travel ExpensesTravel Expenses $79.30$79.30

Customer Business LunchesCustomer Business Lunches 93.42 93.42

Express Mail PostageExpress Mail Postage 55.00 55.00

Miscellaneous Office SuppliesMiscellaneous Office Supplies 32.48 32.48

Let’s look at replenishing the fund if the balance on July Let’s look at replenishing the fund if the balance on July 31 was $137.80. 31 was $137.80.


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Petty Cash Example

What amount of cash will be required to replenish the petty cash fund?

a. $260.20

b. $262.20

c. $139.80

d. $137.80


a. $260.20

b. $262.20

c. $139.80

d. $137.80


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Petty Cash Example


a. $260.20

b. $262.20

c. $139.80

d. $137.80


a. $260.20

b. $262.20

c. $139.80

d. $137.80


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Petty Cash Example


Jul 31 Travel Expense 79.30

Entertainment Expense 93.42

Postage Expense 55.00

Office Supplies Expense 32.48

Cash Over and Short 2.00

Cash 262.20

Let’s make the journal entry to replenish the petty cash fund.


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PurchasePurchaseDiscountsDiscountsPurchasePurchaseDiscountsDiscounts

Control of Purchase Discounts

Let’s takea closerlook at

purchasediscounts.


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Previously we have recorded purchases of Merchandise Previously we have recorded purchases of Merchandise Inventory at the gross amount. Discounts were not Inventory at the gross amount. Discounts were not

recognized until payment was made.recognized until payment was made.

Previously we have recorded purchases of Merchandise Previously we have recorded purchases of Merchandise Inventory at the gross amount. Discounts were not Inventory at the gross amount. Discounts were not

recognized until payment was made.recognized until payment was made.


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As an alternative, we may record the purchase As an alternative, we may record the purchase net of any discount. We assume that all net of any discount. We assume that all

discounts will be taken.discounts will be taken.

As an alternative, we may record the purchase As an alternative, we may record the purchase net of any discount. We assume that all net of any discount. We assume that all

discounts will be taken.discounts will be taken.


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When we use the net method, attention is drawn When we use the net method, attention is drawn when available discounts are not taken.when available discounts are not taken.

When we use the net method, attention is drawn When we use the net method, attention is drawn when available discounts are not taken.when available discounts are not taken.

Discounts Lost is anDiscounts Lost is anexpense account and is includedexpense account and is included

on the income statement.on the income statement.

Discounts Lost is anDiscounts Lost is anexpense account and is includedexpense account and is included

on the income statement.on the income statement.


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Bank Reconciliation

A bank reconciliation is prepared periodically to explain A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank the difference between cash reported on the bank

statement and the cash balance on company’s books.statement and the cash balance on company’s books.

A bank reconciliation is prepared periodically to explain A bank reconciliation is prepared periodically to explain the difference between cash reported on the bank the difference between cash reported on the bank

statement and the cash balance on company’s books.statement and the cash balance on company’s books.

First National BankNashville, TN 37459 May 31, 2002

Clothes MartNashville, TN

Acct No 278609

Previous Balance Total Checks

Total Deposits

Current Balance

1488.79 1,367.09 2,604.22 2,725.92

5/1 107 55.00

5/2 1,251.88

5/4 108 279.50

5/7 109 44.75

5/9 110 21.81

5/12 111 37.55

5/15 825.04

5/18 112 175.98

5/21 113 288.31

5/27 114 12.54

5/30 527.30

5/31 115 451.65

Why are theWhy are thebalances different?balances different?

Why are theWhy are thebalances different?balances different?*


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Reconciling Items

Bank Statement BalanceBank Statement Balance Deduct: Outstanding

checks. Add: Deposits in

transit. Add or Deduct: Bank

errors.

Bank Statement BalanceBank Statement Balance Deduct: Outstanding

checks. Add: Deposits in

transit. Add or Deduct: Bank

errors.

Book BalanceBook Balance Deduct:

Nonsufficient funds check (NSF).

Deduct: Bank service charge.

Add: Interest earned on checking account.

Add: Collections made by the bank.

Add or Deduct: Book errors.

Book BalanceBook Balance Deduct:

Nonsufficient funds check (NSF).

Deduct: Bank service charge.

Add: Interest earned on checking account.

Add: Collections made by the bank.

Add or Deduct: Book errors.


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Bank Reconciliation

Two sections:Two sections: Reconcile bank statement balance to the adjusted Reconcile bank statement balance to the adjusted

bank balance.bank balance. Reconcile book balance to the adjusted book Reconcile book balance to the adjusted book

balance.balance.

The adjusted balances should be equal.The adjusted balances should be equal.

Two sections:Two sections: Reconcile bank statement balance to the adjusted Reconcile bank statement balance to the adjusted

bank balance.bank balance. Reconcile book balance to the adjusted book Reconcile book balance to the adjusted book

balance.balance.

The adjusted balances should be equal.The adjusted balances should be equal.


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Bank Reconciliation Example

Let’s prepare a July 31 bank reconciliation Let’s prepare a July 31 bank reconciliation statement for the Simmons Company. The statement for the Simmons Company. The

July 31 bank statement indicated a balance of July 31 bank statement indicated a balance of $9,610$9,610, while the cash general ledger account , while the cash general ledger account

on that date shows a balance of on that date shows a balance of $7,430$7,430..

Additional information necessary for the Additional information necessary for the reconciliation is shown on the next screen. reconciliation is shown on the next screen.

Let’s prepare a July 31 bank reconciliation Let’s prepare a July 31 bank reconciliation statement for the Simmons Company. The statement for the Simmons Company. The

July 31 bank statement indicated a balance of July 31 bank statement indicated a balance of $9,610$9,610, while the cash general ledger account , while the cash general ledger account

on that date shows a balance of on that date shows a balance of $7,430$7,430..

Additional information necessary for the Additional information necessary for the reconciliation is shown on the next screen. reconciliation is shown on the next screen.


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Outstanding checks totaled $2,417.Outstanding checks totaled $2,417.

A $500 check mailed to the bank for deposit had not A $500 check mailed to the bank for deposit had not reached the bank at the statement date.reached the bank at the statement date.

The bank returned a customer’s NSF check for $225 The bank returned a customer’s NSF check for $225 received as payment on account receivable.received as payment on account receivable.

The bank statement showed $30 interest earned The bank statement showed $30 interest earned during July.during July.

Check No. 781 for supplies expense cleared the bank Check No. 781 for supplies expense cleared the bank for $268 but was erroneously recorded in our books for $268 but was erroneously recorded in our books as $240.as $240.

A $486 deposit by Acme Company was erroneously A $486 deposit by Acme Company was erroneously credited to our account by the bank.credited to our account by the bank.

Bank Reconciliation Example


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Bank Reconciliation ExampleSimmons CompanyBank Reconciliation

July 31, 2002


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Bank Reconciliation ExampleSimmons CompanyBank Reconciliation

July 31, 2002


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Recording Adjusting Entries from Bank Reconciliation

Only amounts shown on the book portion of the Only amounts shown on the book portion of the reconciliation require an adjusting entry.reconciliation require an adjusting entry.



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After posting the reconciling entries the cash After posting the reconciling entries the cash account looks like this . . .account looks like this . . .

After posting the reconciling entries the cash After posting the reconciling entries the cash account looks like this . . .account looks like this . . .

Adjusted balance on July 31.Adjusted balance on July 31.Adjusted balance on July 31.Adjusted balance on July 31.


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Days’ Sales Uncollected

Days’Sales

Uncollected

Accounts Receivable Net Sales

× 365=

How much time is likely to pass beforeHow much time is likely to pass beforewe receive cash receipts from credit sales.we receive cash receipts from credit sales.

How much time is likely to pass beforeHow much time is likely to pass beforewe receive cash receipts from credit sales.we receive cash receipts from credit sales.


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End of Chapter 9

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