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Ch08 - INTERNAL CONTROL AND CASH
Ch08 - INTERNAL CONTROL AND CASH
8-1
CHAPTER 8
INTERNAL
CONTROL
AND CASH
Accounting Principles, Eighth Edition
Chapter
8-2
Study
Study Objectives
Objectives
1. Define internal control.
2. Identify the principles of internal control.
3. Explain the applications of internal control principles
to cash receipts.
4. Explain the applications of internal control principles
to cash disbursements.
5. Describe the operation of a petty cash fund.
6. Indicate the control features of a bank account.
7. Prepare a bank reconciliation.
8. Explain the reporting of cash.
Chapter
8-3
Internal
Internal Control
Control and
and Cash
Cash
Chapter
8-4
Internal
Internal Control
Control
a. Errors (unintentional)
b. Irregularities (intentional)
Chapter
8-7 LO 2 Identify the principles of internal control.
Internal
Internal Control
Control
SEGREGATION OF DUTIES
DOCUMENTATION PROCEDURES
Companies should use prenumbered documents and all
documents should be accounted for.
Chapter
8-8 LO 2 Identify the principles of internal control.
Internal
Internal Control
Control
Physical
Mechanical
and
Electronic
Chapter
8-9 LO 2 Identify the principles of internal control.
Internal
Internal Control
Control
OTHER CONTROLS
1. Bond employees.
2. Rotate employees’ duties and require vacations.
3. Conduct background checks.
Chapter
8-10 LO 2 Identify the principles of internal control.
Internal
Internal Control
Control
Chapter
8-11 LO 2 Identify the principles of internal control.
Cash
Cash Controls
Controls
Discussion Question
Q8-8. The management of Sewell Company asks
you, as the company accountant, to explain (a)
the concept of reasonable assurance in internal
control and (b) the importance of the human
factor in internal control.
Chapter
8-15 LO 3 Explain the applications of internal control principles to cash receipts.
Cashier’s Department
Over-the-Counter
Over-the-Counter Receipts
Receipts
Sales Department
Illustration 8-7
Supervisor
1. reads register totals
2. makes cash counts
3. prepares cash count
sheets Bank Treasurer Accounting
(deposit) (verification) (record)
Chapter
8-16 LO 3 Explain the applications of internal control principles to cash receipts.
Mail
Mail Receipts
Receipts
Control Procedures:
Mail receipts should be opened by two people, a
list prepared, and each check endorsed.
Copy of the list, along with the checks and
remittance advices, sent to cashier’s department.
Cashier adds the checks to the over-the-counter
receipts and prepares a daily cash summary and
makes the daily bank deposit.
Copy of list sent to treasurer’s office for
comparison with total shown on daily cash
summary.
Chapter
8-17 LO 3 Explain the applications of internal control principles to cash receipts.
Cash
Cash Controls
Controls
Review Question
Permitting only designated personnel to handle
cash receipts
is an application of the principle of:
a. segregation of duties.
b. establishment of responsibility.
c. independent check.
d. other controls.
Chapter
8-18 LO 3 Explain the applications of internal control principles to cash receipts.
Cash
Cash Controls
Controls
Chapter
8-25 LO 5 Describe the operation of a petty cash fund.
Cash
Cash Controls
Controls
E8-8 Lincolnville Company uses an imprest petty cash system. The
fund was established on March 1 with a balance of $100. During
March the following petty cash receipts were found in the petty cash
box. Receipt
Date No. For Amount
3/5 1 Stamp inventory $ 39
7 2 Freight-out 21
9 3 Miscellaneous expense 6
11 4 Travel expense 24
14 5 Miscellaneous expense 5
Chapter
8-27 LO 5 Describe the operation of a petty cash fund.
Cash
Cash Controls
Controls
E8-8 The fund was replenished on March 15 when the
fund contained $3 in cash.
Chapter
8-28 LO 5 Describe the operation of a petty cash fund.
Cash
Cash Controls
Controls
E8-8 On March 20, the amount in the fund was
increased to $150.
Chapter
8-29 LO 5 Describe the operation of a petty cash fund.
Use
Use of
of aa Bank
Bank
Chapter
8-30 LO 6 Indicate the control features of a bank account.
Use
Use of
of aa Bank
Bank
Illustration 8-10
Reverse Side
Front Side
Chapter
8-31 LO 6 Indicate the control features of a bank account.
Use
Use of
of aa Bank
Bank
Writing Checks
Illustration 8-11
Maker
Payee
Payer
Chapter
8-32 LO 6 Indicate the control features of a bank account.
Use
Use of
of aa Bank
Bank
Illustration 8-12
Bank Statements
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
Use of
of aa Bank
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
Use of
of aa Bank
Bank
2. Outstanding checks.
3. Errors.
4. Bank memoranda.
Chapter
8-35 LO 7 Prepare a bank reconciliation.
Use
Use of
of aa Bank
Bank
Reconciliation Procedures
Illustration 8-13
Chapter
8-36 LO 7 Prepare a bank reconciliation.
Use
Use of
of aa Bank
Bank
E8-11 The following information pertains to Family Video Company.
1. Cash balance per bank, July 31, $7,263.
2. Cash balance per books, July 31, $7,284.
3. July bank service charge not recorded by the depositor $28.
4. Deposits in transit, July 31, $1,500.
5. 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.
6. 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
Use of
of aa Bank
Bank
E8-11 a) Prepare a bank reconciliation at July 31.
Cash balance per bank statement $7,288
Add: Deposit in transit 1,500
Less: Outstanding checks (591)
Adjusted cash balance per bank $8,172
Chapter
8-39 LO 7 Prepare a bank reconciliation.
Use
Use of
of aa Bank
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.
Reporting
Reporting Cash
Cash
Most liquid asset, listed first in current assets
section of balance sheet.
Illustration 8-16
Cash equivalents
Restricted cash
Compensating balances
Chapter
8-41 LO 8 Explain the reporting of cash.
Use
Use of
of aa Bank
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
8-42 LO 7 Prepare a bank reconciliation.
Recording
Recording Process
Process
Discussion Question
Q2-19. Jim Benes is confused about how accounting
information flows through the accounting system. He
believes the flow of information is as follows.
a. Debits and credits posted to the ledger.
b. Business transaction occurs.
c. Information entered in the journal.
d. Financial statements are prepared.
e. Trial balance is prepared.
Is Jim correct? If not, indicate to Jim the proper flow
of the information.
See notes page for discussion
Chapter
8-43 LO 7 Prepare a trial balance and explain its purposes.
End
End of
of Chapter
Chapter 08
08
Chapter
8-44