Internal Control and Managing Cash – Chapter 4

1. Internal Control and Managing Cash – Chapter 4 Set up an effective system of internal control.

2. Internal Control Organizational plan and all related measures that an entity adopts • Safeguard assets • Encourage adherence to company policies • Promote operational efficiency • Ensure accurate and reliable accounting records

3. Components of anEffective System • Competent, reliable, and ethical personnel • Assignment of responsibilities • Proper authorization • Separation of duties

4. Audit • Examination of company’s financial statements accounting systems, and internal controls, by an outside party • Internal auditor - employee of the business • External auditor - independent

5. 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

6. The Bank Reconciliation – an internal control device Items that cause differences between bank balance and book balance • Items recorded by the company but not yet recorded by the bank: • Deposits in transit • Outstanding checks

7. The Bank Reconciliation Items that cause differences between bank balance and book balance • 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

8. 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. • The January 30 deposit of $1,591.63 does not appear on the bank statement. • The bank erroneously charged to the account a $100 check (No. 656) written by Business Research Associates.

9. The Bank Reconciliation Illustrated • Five company checks, totaling $1,350.14, issued late in January and recorded in the journal have not been paid by the bank. • The bank received $904.03 by EFT on behalf of Business Research, Inc. • The bank collected on behalf of the company a note receivable, $2,114 (including interest revenue of $214). • The bank statement shows interest revenue of $28.01.

10. The Bank Reconciliation Illustrated • Check number 333 for $150 paid to Brown Company on account was recorded as a cash payment of $510. • The bank service charge for the month was $14.25. • The bank statement shows an NSF check for $52. • Business Research pays insurance expense by EFT and has not recorded this $361 payment.

11. The Bank Reconciliation Illustrated Balance per bank, January 31 $5,931.51 Add deposit in transit 1,591.63 Check erroneously charged 100.00 $7,623.14 Less outstanding checks (1,350.14) Adjusted bank balance $6,273.00

12. The Bank Reconciliation Illustrated Balance per books, January 31 $3,294.21 Add: ETF receipt of rent revenue 904.03 Collection of note receivable 2,114.00 Interest revenue earned 28.01 Correction of book error 360.00 $6,700.25 Less: Service charge $ 14.25 NSF check 52.00 Payment of insurance expense 361.00 ( 427.25) Adjusted book balance $6,273.00

13. Cash receipts and cash payments internal controls Petty Cash - A small amount of cash kept on hand to pay for minor expenses.

14. Using a Budget to Manage Cash • A financial plan that helps coordinate business activities • Cash budget - helps an entity manage cash by planning receipt and payment of cash during a future period

15. Using a Budget to Manage Cash Cash balance, beginning + Budgeted cash receipts - Budgeted cash payments Expected cash balance, ending

16. 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 assets • Time deposits • Certificates of deposit

17. Ethics and Accounting • Company code of ethical and responsible behavior by employees • AICPA Code of Professional Conduct • Standards of Ethical Conduct for Management Accountants