The document discusses internal controls over cash, including controls over cash receipts and payments. It describes how businesses use bank accounts to help control cash. A key control is the bank reconciliation, which is an analysis of the differences between the bank statement balance and the company's cash records. It involves adjusting the bank balance for items like deposits in transit and outstanding checks to calculate the adjusted cash balance. Preparing regular bank reconciliations helps ensure accurate recording of cash transactions.
2. Learning Objectives
1. Describe the Sarbanes-Oxley Act of 2002 and
its impact on internal controls and financial
reporting.
2. Describe and illustrate the objectives and
elements of internal control.
3. Describe and illustrate the application of
internal controls to cash.
4. Describe the nature of a bank account and its
use in controlling cash.
4. Learning Objectives
5. Describe and illustrate the use of a bank
reconciliation in controlling cash.
6. Describe the accounting for special-purpose
cash funds.
5. Learning Objectives
5. Describe and illustrate the use of a bank
reconciliation in controlling cash.
6. Describe the accounting for special-purpose
cash funds.
7. Describe and illustrate the reporting of cash
and cash equivalents in the financial
statements.
6. Learning Objectives
5. Describe and illustrate the use of a bank
6.
7.
8.
reconciliation in controlling cash.
Describe the accounting for special-purpose
cash funds.
Describe and illustrate the reporting of cash
and cash equivalents in the financial
statements.
Describe and illustrate the use of the ratio of
cash to monthly cash expenses to assess the
ability of a company to continue in business.
7. Lear
ning
Obje
ctive
Desc
r ibe
the S
a
2002
ar
and banes-O
cont
its im
x
rols
pact ley Act o
and
on in
f
finan
terna
cial r
l
e po r
ting.
1
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
8. Sarbanes-Oxley Act of 2002
o
The Sarbanes-Oxley Act of 2002 (often
referred to simply as Sarbanes-Oxley) applies
only to companies whose stock is traded on
public exchanges. Its purpose is to restore
public confidence and trust in the financial
statements of companies.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
9. Sarbanes-Oxley Act of 2002
o Sarbanes-Oxley requires companies to
maintain strong and effective internal controls
over the recording of transactions and the
preparing of financial statements.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
10. Sarbanes-Oxley Act of 2002
o
Internal control is broadly defined as the
procedures and processes used by a company
to:
Safeguard its assets.
Process information accurately.
Ensure compliance with laws and regulations.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
13. Lear
ning
Obje
ctive
Desc
obje
r
ctive
i
s and be and i
llustr
el em
at e t
ent s
he
of i n
terna
l
cont
rol.
2
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
15. Internal Control
o Employee fraud is the intentional act of
deceiving an employer for personal gain.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
16. Elements of Internal Control
o
Management is responsible for designing and
applying five elements of internal control to
meet the three internal control objectives.
These elements are as follows:
Control environment
Risk assessment
Control procedures
Monitoring
Information and communication
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
18. Control Environment
o The control environment is the overall attitude
of management and employees about the
importance of controls. Three factors
influencing a company’s control environment
are as follows:
Management’s philosophy and operating style
The company’s organizational structure
The company’s personnel policies
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
20. Control Procedures
o
Control procedures provide reasonable
assurance that business goals will be
achieved. Control procedures include the
following:
Competent personnel, rotating duties, and
mandatory vacations
Separating responsibilities for related
operations
Separating operations, custody of assets, and
accounting
Proofs and security measures
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
23. Monitoring
o Monitoring often includes observing employee
behavior and the accounting system for
indicators of control problems.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
26. Limitations of Internal Control
o
Internal controls can provide only reasonable
assurance for safeguarding assets, processing
accurate information, and compliance with
laws and regulations. This is due to the
following factors:
The human element of controls
Cost-benefit considerations
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
27. Lear
ning
Obje
ctive
Desc
ap
r
plica
i
tion be and il
o f in
terna lustrate t
he
l c on
trols
to
cash
.
3
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
28. Cash Controls Over Receipts and Payments
o
Cash includes coins, currency (paper money),
checks, and money orders. Money on deposit
with a bank or other financial institution that is
available for withdrawal is also considered
cash. Cash is the asset most likely to be stolen
or used improperly in a business.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
29. Control of Cash Receipts
o
Businesses normally receive cash from two
main sources:
Customers purchasing products or services
Customers making payments on account
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
30. Cash Received from Cash Sales
o
One of the most important controls to protect
cash received in over-the-counter sales is a
cash register.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
32. Control of Cash Receipts
o
A predetermined amount of money that is
given to each cash register clerk in a cash
drawer is called a change fund.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
33. Control of Cash Receipts
o Salespersons may make errors in making
change for customers or in ringing up cash
sales. As a result, the amount of cash on hand
may differ from the amount of cash sales. Such
differences are recorded in a cash short and
over account.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
34. Cash Received from Cash Sales
o Cash sales for May 3 totaled $35,690 per the
cash register tape. After removing the change
fund, only $35,668 was left in the cash drawer.
The cash sales and shortage would be
recorded as follows:
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
35. Cash Received from Cash Sales
o If there had been cash over, Cash Short and
Over would have been credited for the
overage.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
36. Cash Received in the Mail
o
Cash is received in the mail when customers
pay their bills. Most companies design their
invoices so that customers return a portion of
the invoice, called a remittance advice, with
their payment.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
37. Cash Received by EFT
o
Cash may also be received from customers
through electronic funds transfers (EFT).
Customers may authorize automatic electronic
transfers from their checking accounts to pay
monthly bills.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
38. Cash Received by EFT
o Companies encourage customers to use EFT
for the following reasons:
EFTs cost less than receiving cash payments through
the mail.
EFTs enhance internal controls over cash since the
cash is received directly by the bank without any
employees handling cash.
EFTs reduce late payments from customers and
speed up the processing of cash receipts.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
39. Control of Cash Payments
o
The control of cash payments should provide
reasonable assurance that:
Payments are made for only authorized
transactions.
Cash is used effectively and efficiently.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
40. Voucher System
o
A voucher system is a set of procedures for
authorizing and recording liabilities and cash
payments. It may be either manual or
computerized.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
41. Voucher System
o A voucher is any document that serves as proof
of authority to pay cash or issue an electronic
funds transfer.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
42. Lear
ning
Obje
ctive
Desc
ribe
ac
coun
t and the natur
e of
its us
a ba
e in
nk
c ont
rollin
g
cash
.
4
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
43. Bank Accounts
o
A major reason that businesses use bank
accounts is for internal control. Some of the
control advantages of using bank accounts are
as follows:
Bank accounts reduce the amount of cash on
hand.
Bank accounts provide an independent
recording of cash transactions.
Use of bank accounts facilitates the transfer of
funds using EFT systems.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
44. Bank Statement
o
A summary received from the bank (usually
monthly) of all checking account transactions
is called a bank statement. It shows the
beginning balance, additions, deductions, and
the ending balance.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
47. Bank Statement
o
The following types of credit or debit memo
entries are found on a bank statement:
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
49. Lear
ning
Obje
Desc
ctive
ribe
and
bank
illus
r
st
e c on
cilia rate the
tion
in co use of a
ntrol
ling
cash
.
5
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
50. Bank Reconciliation
o
A bank reconciliation is an analysis of the
items and amounts that cause the cash
balance reported in the bank statement to
differ from the balance of the cash account in
the ledger. This is used to determine the
adjusted cash balance.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
51. Bank Reconciliation
o A bank reconciliation is usually divided into
two sections as follows:
The bank section begins with the cash balance
according to the bank statement and ends with the
adjusted balance.
The company section begins with the cash balance
according to the company’s records and ends with
the adjusted balance.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
55. Power Networking Bank Reconciliation
Step 1
o Power Networking prepares to reconcile the
monthly bank statement as of July 31. The bank
statement shows an ending cash balance of
$3,359.78.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
56. Power Networking Bank Reconciliation
Bank’s Records
Cash balance
Step 1
$3,359.78
Power Networking’s Records
57. Power Networking Bank Reconciliation
Step 2
o A deposit on July 31 of $816.20 is not recorded
on the bank statement.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
58. Power Networking Bank Reconciliation
Power Networking’s Records
Bank’s Records
Cash balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Step 2
59. Power Networking Bank Reconciliation
Step 3
o Three checks that were written during the
month did not appear on the bank statement:
No. 812, $1,061; No. 878, $435.39, No. 883,
$48.60.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
60. Power Networking Bank Reconciliation
Power Networking’s Records
Bank’s Records
Cash balance
Add deposit not
recorded by bank
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60
Step 3
$3,359.78
816.20
$4,175.98
1,544.99
61. Power Networking Bank Reconciliation
Power Networking’s Records
Bank’s Records
Cash balance
Add deposit not
recorded by bank
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60
Adjusted balance
Step 4
$3,359.78
816.20
$4,175.98
1,544.99
$2,630.99
62. Power Networking Bank Reconciliation
Step 5
o The cash balance in Power Networking’s
ledger on July 31 is $2,549.99.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
63. Power Networking Bank Reconciliation
Power Networking’s Records
Bank’s Records
Cash balance
Add deposit not
recorded by bank
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60
Adjusted balance
$3,359.78 Cash balance
816.20
$4,175.98
1,544.99
$2,630.99
Step 5
$2,549.99
64. Power Networking Bank Reconciliation
Step 6
o A credit memo on the bank statement indicates
that the bank collected a note in the amount of
$400 and the related interest of $8 for Power
Networking.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
65. Power Networking Bank Reconciliation
Power Networking’s Records
Bank’s Records
Cash balance
Add deposit not
recorded by bank
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60
Adjusted balance
$3,359.78 Cash balance
Add note and interest
collected by bank
816.20
$4,175.98
Step 6
1,544.99
$2,630.99
$2,549.99
408.00
$2,957.99
66. Power Networking Bank Reconciliation
Step 7
o A check from a customer (Thomas Ivey) for
$300 was returned by the bank because of
insufficient funds (NSF) as indicated by a debit
memo. A bank service charge of $18 was also
indicated by a debit memo.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
67. Power Networking Bank Reconciliation
Bank’s Records
Power Networking’s Records
$3,359.78 Cash balance
Add note and interest
collected by bank
816.20
$4,175.98
Deduct outstanding
Deduct NSF
checks:
check
$300.00
No. 812
$1,061.00
Bank service
No. 878
435.39
charges
18.00
No. 883
48.60 1,544.99
Cash balance
Add deposit not
recorded by bank
Adjusted balance
$2,630.99
Step 7
$2,549.99
408.00
$2,957.99
68. Power Networking Bank Reconciliation
Error
o Check No. 879 for $732.26 to Taylor Company on
o
account was erroneously recorded in the journal
as $723.26. When an error is made, two questions
are asked: (1) Who made the error? (2) Does
correcting the error cause the cash account to go
up or down?
Power Networking made the error, so the item is
placed on the company’s side of the reconciliation.
By correcting the error, the cash account goes
down. (Thus, it is a deduction on the
reconciliation.)
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
69. Power Networking Bank Reconciliation
Bank’s Records
Power Networking’s Records
$3,359.78 Cash balance
Add note and interest
collected by bank
816.20
$4,175.98
Deduct check
Deduct outstanding
NSF
$300.00
checks:
No. 812
$1,061.00
Bank service
No. 878
435.39
charges
18.00
No. 883
48.60 1,544.99
Error recording
Chk. No. 879
9.00
Adjusted balance
$2,630.99
Cash balance
Add deposit not
recorded by bank
Error
$2,549.99
408.00
$2,957.99
70. Power Networking Bank Reconciliation
Bank’s Records
Power Networking’s Records
$2,549.99
$3,359.78 Cash balance
Add note and interest
collected by bank
408.00
816.20
$2,957.99
$4,175.98
Deduct check
Deduct outstanding
NSF
$300.00
checks:
No. 812
$1,061.00
Bank service
No. 878
435.39
charges
18.00
No. 883
48.60 1,544.99
Error recording
Chk. No. 879
9.00
327.00
Adjusted balance
$2,630.99
$2,630.99
Adjusted balance
Cash balance
Add deposit not
recorded by bank
Step 8
71. Power Networking Bank Reconciliation
Bank’s Records
Power Networking’s Records
$2,549.99
$3,359.78 Cash balance
Add note and interest
collected by bank
408.00
816.20
$2,957.99
$4,175.98
Deduct check
Deduct outstanding
NSF
$300.00
checks:
No. 812
$1,061.00
Bank service
No. 878
435.39
charges
18.00
No. 883
48.60 1,544.99
Error recording
Chk. No. 879
9.00
327.00
Adjusted balance
$2,630.99
$2,630.99
Adjusted balance
Cash balance
Add deposit not
recorded by bank
Step 9
72. Power Networking Bank Reconciliation
o The journal entries for Power Networking,
based on the bank reconciliation, are as
follows:
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
74. Lear
ning
Obje
ctive
De s c
ribe
sp
th
pecia
e
l-pur accoun
ting
pose
f or
cash
fund
s.
6
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
75. Petty Cash Fund
o
It is usually not practical for a business to
write checks to pay small amounts. Thus, it is
desirable to control such payments by using a
special cash fund, called a petty cash fund.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
76. Petty Cash Fund
o A petty cash fund of $500 is established on
August 1. The entry to record the transaction is
as follows:
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
77. Petty Cash Fund
IMPORTANT!
o The only time Petty Cash is debited is when
the fund is initially established or when the
fund is increased. The only time Petty Cash is
credited is when the fund is being decreased.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
78. Petty Cash Fund
o At the end of August, the petty cash receipts
indicate expenditures for the following items:
o The entry to replenish the petty cash fund is
shown below.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
79. Special-Purpose Funds
o Companies often use other cash funds for
special needs, such as payroll or travel
expenses. Such funds are called specialpurpose funds.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
80. Lear
ning
Obje
ctive
Desc
ribe
re
a
po r t
ing o nd illustr
equi
valen f cash ate the
and
ts in
cash
t he f
inan
cial
state
m en
ts.
7
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
81. Financial Statement Reporting of Cash
o
A company’s excess cash is normally invested
in highly liquid investments. These
investments are called cash equivalents.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
82. Financial Statement Reporting of Cash
o Companies that have invested excess cash in
cash equivalents usually report Cash and cash
equivalents as one amount on the balance
sheet.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
83. Financial Statement Reporting of Cash
o Banks may require depositors to maintain
minimum cash balances in their bank
accounts. Such a balance is called a
compensating balance.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
84. Lear
ning
Obje
Desc
ctive
r ibe
the r
and
illu
atio
e
o
expe
s
nses of cash trate the
com
t
pany to asses o month use of
s t he
ly ca
to co
s
abili
ntinu
ty of h
e in
a
busi
ne s s
.
8
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
85. Ratio of Cash to Monthly Cash Expenses
o
A cash ratio that is especially useful for startup
companies or companies in financial distress
is the ratio of cash to monthly cash expenses.
The ratio is computed as shown below:
Cash as of Year-End
Ratio of Cash to
Monthly Cash Expenses = Monthly Cash Expenses
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
86. Ratio of Cash to Monthly Cash Expenses
o
The cash, including any cash equivalents, is
taken from the balance sheet as of year-end.
The monthly cash expenses, sometimes called
cash burn, are estimated from the operating
activities section of the statement of cash flows
as follows:
Negative Cash Flow
from Operations
Monthly Cash Expenses =
12
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
