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Internal Control, Managing Cash, and Making Ethical Judgments

Internal Control, Managing Cash, and Making Ethical Judgments. Chapter 7. Define internal control. Objective 1. Internal Control. What is internal control? It is the organizational plan and all the related measures that an entity adopts to… safeguard assets,

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Internal Control, Managing Cash, and Making Ethical Judgments

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  1. Internal Control, Managing Cash,and Making Ethical Judgments Chapter 7

  2. Define internal control. Objective 1

  3. Internal Control • What is internal control? • It is the organizational plan and all the related measures that an entity adopts to… • safeguard assets, • encourage adherence to company policies, • promote operational efficiency, and... • ensure accurate and reliable accounting records.

  4. Internal Control Operational Controls Financial Reporting Controls

  5. Identify the characteristics of an effective system of internal control. Objective 2

  6. Establishing an Effective System of Internal Control • Characteristics of an effective internal control system include: • Competent, reliable, and ethical personnel • Assignment of responsibilities • Proper authorization • Separation of duties

  7. Separation of Duties Separation of operations from accounting Separation of the custody of assets from accounting Separation of the authorization of transactions from the custody of related assets Separation of duties within the accounting function

  8. Internal Controls for e-Commerce Stolen credit card numbers Computer virus and Trojan horses Impersonation of companies

  9. Internal Controls for e-Commerce • What is an encryption? • It is the primary method of achieving confidentiality in e-commerce. • Plain-text messages are rearranged by some mathematical process. • The encrypted message cannot be read by anyone who does not know the process.

  10. Internal Controls for e-Commerce Firewall The InternetCorporate Intranet Network Computers

  11. The Limitations ofInternal Control • Most internal control measures can be circumvented or overcome. • Collusion is when two or more employees work as a team with the purpose to defraud the firm.

  12. The Bank Account as aControl Device • Documents used to control a bank account include: • signature card • deposit ticket • check • bank statement • bank reconciliation

  13. The Bank Reconciliation • What are two records of a business’s cash? • Cash account in the business’s own general ledger. • The bank statement which tells the actual amount of cash the business has in the bank.

  14. The Bank Reconciliation • Items recorded by a company not on the bank statement: • deposit in transit • outstanding checks

  15. The Bank Reconciliation • Items on a bank statement and not recorded by the business: • bank collections • bank fees • interest earned on account • NSF checks

  16. The Paths That Two Checks Take (Good Check) Maker writes check to payee. Maker’s bank pays the check. Payee deposits check in bank. Payee’s bank sends check to maker’s bank.

  17. The Paths That Two Checks Take (NFS Check) Maker’s bank balance is not sufficient to pay the check. Maker’s bank sends the worthless check back to payee’s bank. Payee holds worthless check. Payee’s bank decreases payee’s balance.

  18. Prepare a bank reconciliation and the related journal entries. Objective 3

  19. The Bank Reconciliation Example • At the beginning of July, Sahita, Inc. received the June’s bank statement. • It indicated the following: • The bank balance was $63,275. • The bank had collected a note receivable from one of Sahita’s customers in the amount of $1,325.

  20. The Bank Reconciliation Example • The bank paid the electric bill of $1,500. • There was a $200 check returned for NSF. • Interest earned on the account was $265. • Bank service charges were $12.

  21. The Bank Reconciliation Example • Sahita’s books indicates a cash balance of $66,647. • A deposit of $11,250 was mailed to the bank on June 30. • Checks issued in June for $8,000 have not yet been paid by the bank.

  22. The Bank Reconciliation Example Balance per bank, June 30 $63,275 Add deposit in transit 11,250 $74,525 Less outstanding check 8,000 Adjusted bank balance $66,525

  23. The Bank Reconciliation Example Balance per books, June 30 $66,647 Add: Note receivable collected by the bank 1,325 Interest income 265 $68,237 Less: Payment of electric bill 1,500 NSF check 200 Service charge 12 Adjusted book balance $ 66,525

  24. The Bank Reconciliation Example Balance per books $66,525 Balance per bank $66,525 Equal amounts

  25. Record Reconciling Items June 30, 200x Cash 1,325 Notes Receivable 1,325 Notes collected by the bank June 30, 200x Cash 265 Interest Income 265 Interest earned on bank balance

  26. Record Reconciling Items June 30, 200x Utilities Expense 1,500 Cash 1,500 Monthly electricity expense June 30, 200x Accounts Receivable – NSF 200 Cash 200 NSF check returned by bank

  27. Record Reconciling Items June 30, 200x Bank Service Fees 12 Cash 12 Bank service charges

  28. Apply internal controls to cash receipts. Objective 4

  29. Cash ReceiptsOver the Counter • The terminal should be positioned so that customers can see the amount the cashier enters into the cash register. • The cash drawer should open only when the sales clerk enters an amount on the keypad. • The roll of tape locked inside the machine records each sale and cash transaction.

  30. Cash ReceiptsOver the Counter • Pricing merchandise at “uneven” amounts means that the clerk has to open the cash drawer. • This requires entering the amount of the sale on the keypad and so onto the register tape.

  31. Cash ReceiptsOver the Counter • At the end of the day, the cashier deposits the cash in the bank. • The tape goes to accounting.

  32. Cash Receipts by Mail • All incoming mail should be opened by a mailroom employee. • This person should compare the check received with the remittance advice. • Cash receipts should be given to the cashier. • The mailroom employee forwards the remittance advice to accounting.

  33. Cash Receipts by Mail • Many companies use a lock-box system. • Customers send their checks directly to an address that is a bank account. • Company personnel do not handle the cash.

  34. Cash Short and Over • Assume that the cash register tapes indicate sales revenue of $25,000. • However, the cash received was $24,980. • What entry would record the day’s sales? Cash 24,980 Cash Short and Over 20 Sales Revenue 25,000 Daily cash sales

  35. Apply internal controls to cash payments. Objective 5

  36. Control OverApproval of Payments Purchase Request Purchase Order Invoice Receiving Report Disbursement Packet

  37. Control OverApproval of Payments • The accounting department... • combines all of these documents, • checks them for accuracy, and... • forwards this disbursement packet to designated officers for approval and payment.

  38. Controlling Petty Cash Payments • On June 15, Sahita Inc. manager decided to establish a $250 petty cash fund. • What is the entry? June 15, 200x Petty Cash 250 Cash in Bank 250 To open the petty cash fund

  39. Controlling Petty Cash Payments • Jose is the petty cash custodian responsible for the fund. • On June 20, he purchased supplies in the amount of $70. • For each disbursement, he prepares a petty cash ticket. • At all times the amount of cash in the petty cash fund plus the petty cash tickets must equal $250.

  40. Controlling Petty Cash Payments • Jose also spent $20 for delivery charges and $60 for coffee and other miscellaneous expenses. • What is the journal entry to record the replenishment of the fund?

  41. June 30, 200x Supplies 70 Delivery Expense 20 Miscellaneous Expense 60 Cash in Bank 150 To replenish the petty cash fund Controlling Petty Cash Payments

  42. Using a budget to manage cash. Objective 6

  43. Cash Budget Example • On June 1, the cash balance of Clara’s Boutique amounted to $20,000. • She expected collections during the month to be $100,000. • Clara budgeted $110,000 cash payments during the month. • She would like to keep a $20,000 balance at all times. • How much money must she borrow?

  44. Cash Budget Example • Beginning balance $ 20,000 • Budgeted collections 100,000 • Cash available $120,000 • Less budgeted payments 110,000 • Cash balance $ 10,000 • She needs to borrow $10,000.

  45. Cash Budget Example • Not included in the budgeted collections is a $73,400 sale to a store in Rio de Janeiro. • She expects to collect this amount in July. • Assume the exchange rate is 3.67 reals per dollar. • How much does she expect to collect? • 73,400 reals ÷ 3.67 = $20,000

  46. Make ethical judgments in business. Objective 7

  47. Ethics and Accounting 1.00 — 0.75 — 0.50 — 0.25 — 0.00 Code of Conduct 88% Companies

  48. Professional Code of Ethics • Accountants are held to very high standards of conduct. • There is no compromising. • Would you hire an accountant who is “almost always” honest? • Internal controls rely upon basic honesty and integrity.

  49. End of Chapter 7

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