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Internal Control and Managing Cash
Chapter 4
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Learning Objective 1
Set up an effective system of internal control.
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Internal Control
Organizational plan and all related measures that an entity adoptsSafeguard assetsEncourage adherence to company
policiesPromote operational efficiencyEnsure accurate and reliable
accounting records
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Components of anEffective System Competent, reliable, and ethical
personnelAssignment of responsibilitiesProper authorizationSeparation of duties
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Audit
Examination of company’s financial statements accounting systems, and internal controls, by an outside partyInternal auditor - employee of
the businessExternal auditor - independent
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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
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Learning Objective 2
Use a bank reconciliation as a control device.
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The Bank Reconciliation
Items that cause differences between bank balance and book balance
1. Items recorded by the company but not yet recorded by the bank:
• Deposits in transit• Outstanding checks
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The Bank Reconciliation
Items that cause differences between bank balance and book balance
2. 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
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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.
1. The January 30 deposit of $1,591.63 does not appear on the bank statement.
2. The bank erroneously charged to the account a $100 check (No. 656) written by Business Research Associates.
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The Bank Reconciliation Illustrated3. Five company checks, totaling
$1,350.14, issued late in January and recorded in the journal have not been paid by the bank.
4. The bank received $904.03 by EFT on behalf of Business Research, Inc.
5. The bank collected on behalf of the company a note receivable, $2,114 (including interest revenue of $214).
6. The bank statement shows interest revenue of $28.01.
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The Bank Reconciliation Illustrated7. Check number 333 for $150 paid to
Brown Company on account was recorded as a cash payment of $510.
8. The bank service charge for the month was $14.25.
9. The bank statement shows an NSF check for $52.
10.Business Research pays insurance expense by EFT and has not recorded this $361 payment.
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Balance per bank, January 31 $5,931.51Add deposit in transit 1,591.63Check erroneously charged 100.00
$7,623.14Less outstanding checks (1,350.14)Adjusted bank balance $6,273.00
The Bank Reconciliation Illustrated
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Balance per books, January 31 $3,294.21Add: ETF receipt of rent revenue 904.03Collection of note receivable 2,114.00Interest revenue earned 28.01Correction of book error 360.00
$6,700.25Less: Service charge $ 14.25NSF check 52.00Payment of insurance expense 361.00 ( 427.25)Adjusted book balance $6,273.00
The Bank Reconciliation Illustrated
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Learning Objective 3
Apply internal controls to cash receipts and cash payments.
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Petty Cash
A small amount of cash kept on hand to pay for minor expenses.
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Learning Objective 4
Use a budget to manage cash.
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Using a Budget to Manage CashA financial plan that helps
coordinate business activitiesCash budget - helps an entity
manage cash by planning receipt and payment of cash during a future period
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Using a Budget to Manage Cash
Cash balance, beginning
+ Budgeted cash receipts
- Budgeted cash payments
Expected cash balance, ending
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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 assetsTime depositsCertificates of deposit
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Learning Objective 5
Weigh ethical judgment in business.
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Ethics and Accounting
Company code of ethical and responsible behavior by employees
AICPA Code of Professional Conduct
Standards of Ethical Conduct for Management Accountants
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End of Chapter 4