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In this chapter, the learning objectives are: Discuss fraud and the principles of internal control, identify the basic concepts of an accounting information system, describe the nature and purpose of a subsidiary ledger, explain how companies use special journals in journalizing.
Chapter 8-1 CHAPTER INTERNAL CONTROL AND CASH Accounting Principles, Eighth Edition Chapter 8-2 Study Objectives Study Objectives Define internal control Identify the principles of internal control Explain the applications of internal control principles to cash receipts Explain the applications of internal control principles to cash disbursements Describe the operation of a petty cash fund Indicate the control features of a bank account Prepare a bank reconciliation Explain the reporting of cash Chapter 8-3 Internal Control and Cash Internal Control and Cash Internal Internal Control Control Cash Cash Controls Controls The SarbanesOxley Act Principles Control over cash receipts Control over cash disbursements Limitations Chapter 8-4 Use Useof ofaa Bank Bank Making deposits Writing checks Bank statements Reconciling the bank account Reporting Reporting Cash Cash Cash equivalents Restricted cash Compensating balances Internal Control Internal Control Methods and measures adopted to: Safeguard assets. Enhance accuracy and reliability of accounting records. Reduce risk of: a Errors (unintentional) b Irregularities (intentional) Under the SarbanesOxley Act, all publicly traded U.S. corporations are required to maintain an adequate system of internal control Chapter 8-5 LO 1 Define internal control Internal Control Internal Control The SarbanesOxley Act Companies must develop principles of control over financial reporting. continually verify that controls are working. Independent auditors must attest to the level of internal control. SOX created the Public Company Accounting Oversight Board (PCAOB) Chapter 8-6 LO 1 Define internal control Internal Control Internal Control Principles of Internal Control Illustration 81 Measures vary with size and nature of the business management’s control philosophy Chapter 8-7 LO 2 Identify the principles of internal control Internal Control Internal Control Principles of Internal Control ESTABLISHMENT OF RESPONSIBILITY Control is most effective when only one person is responsible for a given task SEGREGATON OF DUTIES Related duties, including physical custody and record keeping, should be assigned to different individuals DOCUMENTATION PROCEDURES Companies should use prenumbered documents for all documents should be accounted for Chapter 8-8 LO 2 Identify the principles of internal control Internal Control Internal Control Principles of Internal Control Illustration 83 PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS Physical Mechanical and Electronic Chapter 8-9 LO 2 Identify the principles of internal control Internal Control Internal Control Principles of Internal Control INDEPENDENT INTERNAL VERIFICATION Records periodically verified by an employee who is independent Discrepancies reported to management OTHER CONTROLS Bond employees Rotate employees’ duties and require vacations Conduct background checks Chapter 8-10 LO 2 Identify the principles of internal control Use of a Bank Use of a Bank Contributes to good internal control over cash Minimizes the amount of currency on hand Creates a double record of bank transactions Bank reconciliation Chapter 8-30 LO 6 Indicate the control features of a bank account Use of a Bank Use of a Bank Illustration 810 Making Bank Deposits Authorized employee should make deposit Front Side Chapter 8-31 Bank Code Numbers Reverse Side LO 6 Indicate the control features of a bank account Use of a Bank Use of a Bank Writing Checks Illustration 811 Written order signed by depositor directing bank to pay a specified sum of money to a designated recipient Maker Payee Payer Chapter 8-32 LO 6 Indicate the control features of a bank account Use of a Bank Use of a Bank Bank Statements Illustration 812 Debit Memorandum Bank service charge NSF (not sufficient funds) Credit Memorandum Collect notes receivable Interest earned Chapter 8-33 LO 6 Indicate the control features of a bank account Use of a Bank Use of a Bank Review Question The control features of a bank account do not include: a having bank auditors verify the correctness of the bank balance per books. b minimizing the amount of cash that must be kept on hand c providing a double record of all bank transactions d safeguarding cash by using a bank as a depository Chapter 8-34 LO 6 Indicate the control features of a bank account Use of a Bank Use of a Bank Reconciling the Bank Account Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances Reconciling Items: Deposits in transit Outstanding checks Errors Bank memoranda Chapter 8-35 LO 7 Prepare a bank reconciliation Use of a Bank Use of a Bank Reconciliation Procedures Illustration 813 + Deposit in Transit + Notes collected by bank - - NSF (bounced) checks - Check printing or other service charges Outstanding Checks +- Bank Errors +- Book Errors CORRECT BALANCE Chapter 8-36 CORRECT BALANCE LO 7 Prepare a bank reconciliation Use of a Bank Use of a Bank E811 The following information pertains to Family Video Company E811 Cash balance per bank, July 31, $7,263 Cash balance per books, July 31, $7,284 July bank service charge not recorded by the depositor $28 Deposits in transit, July 31, $1,500 Bank collected $900 note for Family in July, plus interest $36, less fee $20.The collection has not been recorded by Family, and no interest has been accrued Outstanding checks, July 31, $591 Instructions a) Prepare a bank reconciliation at July 31 b) Journalize the adjusting entries at July 31 on the books of Family Video Company Chapter 8-37 LO 7 Prepare a bank reconciliation Use of a Bank Use of a Bank E811 a) Prepare a bank reconciliation at July 31 E811 Cash balance per bank statement Add: Deposit in transit Less: Outstanding checks Adjusted cash balance per bank Cash balance per books Add: Collection of notes receivable Collection of interest Less: Bank service charge Note collection fee Adjusted cash balance per books Chapter 8-38 $7,263 1,500 (591) $8,172 $7,284 900 36 (28) (20) $8,172 LO 7 Prepare a bank reconciliation Use of a Bank Use of a Bank E811 b) Journalize the adjusting entries at July 31 on the books of Family E811 Video Company Dr Cr July 31 Miscellaneous expense 28 July 31 Cash 28 Cash 916 Miscellaneous expense 20 Interest revenue Notes receivable 900 36 Note: Adjusting journal entry includes only the adjustments to the cash Note: balance per books. Chapter 8-39 LO 7 Prepare a bank reconciliation Use of a Bank Use of a Bank Review Question The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is: a. outstanding checks b. deposit in transit c. a bank error d. bank service charges Chapter 8-40 LO 7 Prepare a bank reconciliation Use of a Bank Use of a Bank Review Question Which of the following statements correctly describes the reporting of cash? a Cash cannot be combined with cash equivalents b Restricted cash funds may be combined with Cash c Cash is listed first in the current assets section d Restricted cash funds cannot be reported as a current asset Chapter 8-41 LO 7 Prepare a bank reconciliation Recording Process Recording Process Discussion Question Q820. Lori Figgs is confused about the lack of agreement between the cash balance per books and the balance per the bank. Explain the causes for the lack of agreement to Lori, and give an example of each cause See notes page for discussion Chapter 8-42 LO 7 Prepare a bank reconciliation Reporting Cash Reporting Cash Most liquid asset, listed first in current assets section of balance sheet Illustration 816 Cash equivalents Restricted cash Compensating balances Chapter 8-43 LO 8 Explain the reporting of cash Copyright Copyright “Copyright © 2008 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Chapter 8-44 ... Explain the reporting of? ?cash Chapter 8-3 Internal? ?Control? ?and? ?Cash Internal? ?Control? ?and? ?Cash Internal Internal Control Control Cash Cash Controls Controls The SarbanesOxley Act Principles Control over cash receipts.. .CHAPTER? ? INTERNAL CONTROL AND CASH Accounting? ?Principles, Eighth Edition Chapter 8-2 Study Objectives Study Objectives Define? ?internal? ?control Identify the? ?principles? ?of? ?internal? ?control... Different individuals receive cash, record? ?cash? ?receipts,? ?and? ? hold the? ?cash Store? ?cash? ?in safes? ?and? ?bank vaults; limit access to storage areas; use? ?cash? ? registers Bond personnel who handle cash; require employees to take