Cash and Internal Controls

1. Cash andInternal Controls Chapter 8 Chapter 8: Accounting for Cash and Internal ControlsChapter 8: Accounting for Cash and Internal Controls

2. Principles of Internal Control Internal control principles common to all companies: Establish responsibilities. Maintain adequate records. Insure assets and bond key employees. Separate recordkeeping from custody of assets. Divide responsibility for related transactions. Apply technological controls. Perform regular and independent reviews. Principles of internal control include: Establish responsibilities. Proper internal control means that responsibility for a task is clearly established and assigned to one person. Maintain adequate records. Good recordkeeping is part of an internal control system. It helps protect assets and ensures that employees use prescribed procedures. Insure assets and bond key employees. Good internal control means that assets are adequately insured against casualty and that employees handling large amounts of cash and easily transferable assets are bonded. Separate recordkeeping from custody of assets. A person who controls or has access to an asset must not keep that asset’s accounting records. Divide responsibility for related transactions. Good internal control divides responsibility for a transaction or a series of related transactions between two or more individuals or departments. Apply technological controls. Cash registers, check protectors, time clocks, and personal identification scanners are examples of devices that can improve internal control. Perform regular and independent reviews. Changes in personnel, technological advances, and normal business pressures for performance necessitate reviews to ensure that proper procedures are being followed on a consistent basis. Principles of internal control include: Establish responsibilities. Proper internal control means that responsibility for a task is clearly established and assigned to one person. Maintain adequate records. Good recordkeeping is part of an internal control system. It helps protect assets and ensures that employees use prescribed procedures. Insure assets and bond key employees. Good internal control means that assets are adequately insured against casualty and that employees handling large amounts of cash and easily transferable assets are bonded. Separate recordkeeping from custody of assets. A person who controls or has access to an asset must not keep that asset’s accounting records. Divide responsibility for related transactions. Good internal control divides responsibility for a transaction or a series of related transactions between two or more individuals or departments. Apply technological controls. Cash registers, check protectors, time clocks, and personal identification scanners are examples of devices that can improve internal control. Perform regular and independent reviews. Changes in personnel, technological advances, and normal business pressures for performance necessitate reviews to ensure that proper procedures are being followed on a consistent basis.

3. Technology and Internal Control The use of technology has an impact on internal controls. Technology can help reduce processing errors and allow more extensive testing of records. However, it can also limit evidence of processing because of the lack of a paper trail. Because more work can be performed by one person, it can also create situations that cause a lack of separation of duties. Technology has encouraged the growth of e-commerce, which has greatly enhanced the need for strong internal controls. The use of technology has an impact on internal controls. Technology can help reduce processing errors and allow more extensive testing of records. However, it can also limit evidence of processing because of the lack of a paper trail. Because more work can be performed by one person, it can also create situations that cause a lack of separation of duties. Technology has encouraged the growth of e-commerce, which has greatly enhanced the need for strong internal controls.

4. Limitations of Internal Control Any internal control system has limitations. Because humans are involved in the internal control system, our negligence, fatigue, misjudgment, and confusion can negatively impact the goals of the system. Also, an internal control system can be circumvented by individuals who desire to commit fraud and who are willing to work together to do so. Any internal control system has limitations. Because humans are involved in the internal control system, our negligence, fatigue, misjudgment, and confusion can negatively impact the goals of the system. Also, an internal control system can be circumvented by individuals who desire to commit fraud and who are willing to work together to do so.

5. Control of Cash Control of cash focuses on three areas: Those who handle cash should be separate from those who keep records of cash. Cash receipts should be deposited daily in the bank. Cash disbursements should be made by check. Control of cash focuses on three areas: Those who handle cash should be separate from those who keep records of cash. Cash receipts should be deposited daily in the bank. Cash disbursements should be made by check.

6. Cash, Cash Equivalents,and Liquidity On a balance sheet, cash is combined with cash equivalents. Cash includes currency, coins and amounts on deposit in bank accounts, checking accounts, and savings accounts. Cash equivalents include short-term, highly liquid investments that are easily converted into a known cash amount and that are close to maturity and are not sensitive to interest rate changes. On a balance sheet, cash is combined with cash equivalents. Cash includes currency, coins and amounts on deposit in bank accounts, checking accounts, and savings accounts. Cash equivalents include short-term, highly liquid investments that are easily converted into a known cash amount and that are close to maturity and are not sensitive to interest rate changes.

7. Cash, Cash Equivalents,and Liquidity Liquidity refers to how easily an asset can be converted into cash to be used to pay for services and obligations. Cash and similar assets are called liquid assets because they can be readily used to settle obligations. Cash includes currency and coins along with the amounts on deposit in bank accounts, checking accounts, and many savings accounts. Cash equivalents are short-term, highly liquid investment assets. Liquidity refers to how easily an asset can be converted into cash to be used to pay for services and obligations. Cash and similar assets are called liquid assets because they can be readily used to settle obligations. Cash includes currency and coins along with the amounts on deposit in bank accounts, checking accounts, and many savings accounts. Cash equivalents are short-term, highly liquid investment assets.

8. Cash Management Part I. The goals of cash management are twofold: 1. Plan cash receipts to meet cash payments when due. 2. Keep a minimum level of cash necessary to operate. Part II. Effective cash management involves applying the following cash management principles: Encourage collection of receivables. Delay payment of liabilities. Keep only necessary levels of assets. Plan expenditures. Invest excess cash. Part I. The goals of cash management are twofold: 1. Plan cash receipts to meet cash payments when due. 2. Keep a minimum level of cash necessary to operate. Part II. Effective cash management involves applying the following cash management principles: Encourage collection of receivables. Delay payment of liabilities. Keep only necessary levels of assets. Plan expenditures. Invest excess cash.

9. Control of Cash Disbursements All expenditures should be made by check. The only exception is for small payments from petty cash. Separate authorization for check signing and recordkeeping duties. Use a voucher system. Requiring all disbursements to be made by check is a common internal control policy. Other controls include the separation of the following duties: authorization for the disbursement, check signing, and recordkeeping. Use of a voucher system also provides a good control over disbursements. Let’s look at the voucher system described on the next slide. Requiring all disbursements to be made by check is a common internal control policy. Other controls include the separation of the following duties: authorization for the disbursement, check signing, and recordkeeping. Use of a voucher system also provides a good control over disbursements. Let’s look at the voucher system described on the next slide.

10. Voucher System of Control In a voucher system, a purchase requisition initiates the process for a purchase. If approved, the purchase requisition triggers the issuance of a purchase order. An invoice is received from the vendor once a purchase is made. A receiving report indicates that we actually received the goods. The invoice approval indicates that we ordered the goods, we received the goods we ordered, and that we were billed for the goods we ordered and received. The invoice approval triggers the check preparation for a valid purchase. Copies of all of these documents are kept as supporting documentation for the disbursement in the voucher file. In a voucher system, a purchase requisition initiates the process for a purchase. If approved, the purchase requisition triggers the issuance of a purchase order. An invoice is received from the vendor once a purchase is made. A receiving report indicates that we actually received the goods. The invoice approval indicates that we ordered the goods, we received the goods we ordered, and that we were billed for the goods we ordered and received. The invoice approval triggers the check preparation for a valid purchase. Copies of all of these documents are kept as supporting documentation for the disbursement in the voucher file.

11. Operating a Petty Cash Fund Part I. Here is how a petty cash system works. The company cashier processes a check for the petty cash amount and gives it to the petty cashier. Part II. The accountant makes an entry to debit Petty Cash and credit Cash for the amount of the check. Part I. Here is how a petty cash system works. The company cashier processes a check for the petty cash amount and gives it to the petty cashier. Part II. The accountant makes an entry to debit Petty Cash and credit Cash for the amount of the check.

12. Operating a Petty Cash Fund The petty cashier takes the check to the bank and cashes it. The cash is brought back and placed in a secure location. The petty cashier takes the check to the bank and cashes it. The cash is brought back and placed in a secure location.

13. Operating a Petty Cash Fund When the petty cash fund is low, the petty cashier takes the receipts to the company cashier and requests a check in that amount to replenish the petty cash fund. When the check is issued, the accountant makes an entry to debit the expenses or assets indicated on the receipts and credits cash. Let’s look at a petty cash example. When the petty cash fund is low, the petty cashier takes the receipts to the company cashier and requests a check in that amount to replenish the petty cash fund. When the check is issued, the accountant makes an entry to debit the expenses or assets indicated on the receipts and credits cash. Let’s look at a petty cash example.

14. Banking Activities as Controls Banks offer certain protections for your cash. For example, use of a bank account is a more secure place for your cash than a safe at the office. Signature cards are used so the bank knows whose signature is approved for use on checks. Deposit tickets provide support for deposits to your account. Checks provide authorization for disbursements from your account. Electronic funds transfers limit the number of people who have their hands on the cash and so it reduces theft and fraud. Bank statements are provided so customers can reconcile their accounts in a timely manner and notice any unusual or unauthorized activity. Banks offer certain protections for your cash. For example, use of a bank account is a more secure place for your cash than a safe at the office. Signature cards are used so the bank knows whose signature is approved for use on checks. Deposit tickets provide support for deposits to your account. Checks provide authorization for disbursements from your account. Electronic funds transfers limit the number of people who have their hands on the cash and so it reduces theft and fraud. Bank statements are provided so customers can reconcile their accounts in a timely manner and notice any unusual or unauthorized activity.

15. Bank Reconciliation Two sections: Reconcile bank statement balance to the adjusted bank balance. Reconcile book balance to the adjusted book balance. The adjusted balances should be equal. When we prepare a bank reconciliation, there are two sections. In one section, we reconcile the bank statement balance to an adjusted bank balance. In the other section, we reconcile the book balance to an adjusted book balance. The adjusted balances in both sections should be equal. Now, let’s look at an example of a bank reconciliation. When we prepare a bank reconciliation, there are two sections. In one section, we reconcile the bank statement balance to an adjusted bank balance. In the other section, we reconcile the book balance to an adjusted book balance. The adjusted balances in both sections should be equal. Now, let’s look at an example of a bank reconciliation.

16. Days’ Sales Uncollected The Days’ Sales Uncollected ratio indicates how much time is likely to pass before we receive cash receipts from credit sales. It is calculated as Accounts Receivable divided by Net Sales times 365 days. The Days’ Sales Uncollected ratio indicates how much time is likely to pass before we receive cash receipts from credit sales. It is calculated as Accounts Receivable divided by Net Sales times 365 days.

17. End of Chapter 8 End of Chapter 8.End of Chapter 8.