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PRINCIPLES OF FINANCIAL ACCOUNTING

PRINCIPLES OF FINANCIAL ACCOUNTING. CHAPTER 7. Internal Control. Insists of rules to: Safeguard assets Enhance Accuracy and reliability of its accounting records. Principles of Internal Control. Establish responsibilities in job descriptions Segregation of Duties

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PRINCIPLES OF FINANCIAL ACCOUNTING

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  1. PRINCIPLES OF FINANCIAL ACCOUNTING CHAPTER 7

  2. Internal Control • Insists of rules to: • Safeguard assets • Enhance Accuracy and reliability of its accounting records

  3. Principles of Internal Control • Establish responsibilities in job descriptions • Segregation of Duties • The responsibility for related activities should be assigned to different individuals. • The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

  4. Principles of Internal Control • Accountability of Assets • The person with custody of the asset should not have access to the accounting records of that asset. • Documentation Procedures • All documents should be pre-numbered and accounted for • All documents should be forwarded to the accounting department for recording.

  5. Principles of Internal Control • Physical, Mechanical, and Electronic Controls • Designed to safeguard assets and to accurately account for them. • Computerized reporting and recording saves time and provides more accuracy. • Must provide safeguards to that computerized system

  6. Principles of Internal Control • Independent Internal Verification • Internal Auditors • Report to the level of management that can take appropriate corrective action. • External auditors

  7. Other controls • Bonding of employees who handle cash. • Rotating employees’ duties • Requiring employees to take vacations • NOTE: No internal control system is fool proof if collusion exists.

  8. Control on Cash • Deposit all cash receipts • Make all disbursements with a check or electronic funds transfer • Petty cash – a small cash fund to make small payments. The fund is later is replenished with a check. • Bank Reconciliation

  9. Other cash issues: • Cash equivalents are highly liquid investments that are expected to turn into cash within 90 days • Restricted cash – contractual requirements to have cash available for certain reasons. • Eg. To maintain a minimum cash level to service debt.

  10. Cash Management • Cash Budgeting • Planning the company’s need of cash to meet obligations • Investing excess cash flow • Ratio of cash to daily cash expenses: • Cash and Cash Equivalents/Average Daily Cash Expenses • Free Cash Flow • Cash Provided by operations minus (Capital Expenditures and Cash Dividends)

  11. Assignment • E 7-2 • E 7-3 • E 7-10 • P 7-3 • BYP 7-2 Parts a and b only • BYP 7-10

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