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Financial accounting the impact on decision makers 9e chapter 6

Chapter 6
Cash and Internal Control


Cash
 Cash:
 Readily

available to pay debts

 Various forms of

cash:

 Coin and

currency on hand
 Cash on deposit in the form of checking and savings
accounts
 Undeposited, cashier, and certified checks


LO 1


Cash Equivalents
 Investment

readily convertible to known
amount of cash
 Maturity—three

months or less

 Example:
 Commercial paper
 Treasury

bills issued by the federal government
 Money market funds
 Six-month

bank certificate of deposit would not
be a cash equivalent


Exhibit 6.1—Cash and Cash Equivalents on the
Balance Sheet and the Statement of Cash Flows


Cash Management
 Tools of

cash management:

 Cash

flows statement
 Cash budgets
 Bank reconciliations
 Petty cash funds


LO 2


Reading a Bank Statement
 Bank statement

: a detailed list, provided by the
bank, of all activity for a particular account
during the month.
 Outstanding check : check written by a
company but not yet presented to the bank for
payment
 Deposit in transit : deposit recorded on the
books but not yet reflected on the bank
statement


Bank Reconciliation
 Reconcile

or resolve any differences between
balance on the bank statement with balance
shown in the accounting records
 Steps used in preparing a bank reconciliation:
1.
2.
3.
4.
5.

Prepare a list of the deposits in transit
Prepare a list of the outstanding checks
Prepare a list of credit memoranda
Prepare a list of debit memoranda
Identify any errors


Credit Memoranda and Debit
Memoranda
 Credit memoranda
 Additions

on a bank statement for such items as
interest paid on the account and notes collected by
the bank for the customer

 Debit

memoranda

 Deductions

on a bank statement for items such as
NSF checks and various service charges


Step 1: Prepare a list of the
deposits in transit
 Trace

deposits listed on the bank statement to
the books
 Identify the deposits in transit
 Any

deposits recorded on the books but not yet
shown on the bank statement

 Add

to the bank balance


Step 2: Prepare a List of the
Outstanding Checks
 Arrange

the canceled checks in numerical order
 Trace each of them to the books
 Any

checks recorded on the books but not yet listed
on the bank statement are outstanding

 Subtract

from the bank balance


Step 3: Prepare a List of Credit
Memoranda
 List all

items, other than deposits, shown as
additions on the bank statement
 Interest

paid by the bank
 Amounts collected by the bank for the customer
 For these

items, bank increases, or credits, its
liability to the company on its own books


Step 4: Prepare a List of Debit
Memoranda
 List all

amounts, other than canceled checks,
shown as subtractions on the bank statement
 NSF

checks
 Service charges
A

liability is created on the books of the bank
when a company deposits money in a bank
 Bank reduces the amount of its liability for
these various items and debits the liability on its
own books


Step 5: Identify any Errors
 Identify

any errors made by the bank or by the
company in recording cash transactions


Bank Reconciliation
Bank Reconciliation
Balance per bank

$$$

Adjusted balance

$$$

Balance per books

$$$

Adjusted balance

$$$


Example 6.2—Preparing a Bank
Reconciliation


Need for Adjustments to the Records

Book
adjustments
are basis for
adjusting
entries


Petty Cash fund
 Money

kept on hand for making minor
disbursements rather than by writing checks
 Periodically, the fund is replenished
 When fund is replenished, an adjustment is
made to record its replenishment and to
recognize the various expenses incurred


Internal Control System
 Policies

and procedures necessary to ensure:

 Safeguarding

of an entity’s assets
 Reliability of accounting records
 Accomplishment of overall company objectives

LO 3


Sarbanes-Oxley Act of 2002—SOX
 An

act of Congress in 2002
 Intended to bring reform to corporate
accountability and stewardship in the wake of a
number of major corporate scandals


Sarbanes-Oxley Act of 2002—SOX
(continued)
 Internal control report: a

report required by
Section 404 of the Sarbanes-Oxley Act
 Maintain an adequate

internal control structure
 Assesses effectiveness of internal control structure
 Outside

auditors must issue report on
company’s internal control


Sarbanes-Oxley Act of 2002—SOX
(continued)
 Public Company

Accounting Oversight Board
(PCAOB): five-member body created by SOX
 Set

auditing standards in the United States

 Board

of directors: consists of key officers of a
corporation and outside members responsible
for general oversight of the affairs of the entity
 Audit committee: a subset of the board of
directors
 Provides

direct contact between the stockholders
and the independent accounting firm


The Control Environment
 Factors

that influence internal control:

 Management’s

competence and operating style
 Personnel policies and practices
 Board of directors, particularly audit committee


The Accounting System
 Methods

and records used to accurately report
entity’s transactions and maintain
accountability for assets and liabilities
 Use of a journal is an integral part of all
accounting systems
 Can be completely manual, fully computerized,
or a mixture of both


Internal Control Procedures
 Administrative

controls:

 Procedures

concerned with efficient operation of
the business and adherence to managerial policies

 Accounting

controls:

 Procedures

concerned with safeguarding the assets
or the reliability of the financial statements

LO 4


Internal Control System
 Important internal control procedures:
 Proper

authorizations
 Segregation of duties
 Independent verification
 Safeguarding of assets and records
 Independent review and appraisal
 Design and use of business documents


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