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Chapter 6 Reporting and Analyzing Cash and Internal Controls

by: Jessica Copenhaver

Chapter 6 Reporting and Analyzing Cash and Internal Controls ACCT 2101 A

Marketplace > University of Georgia > Accounting > ACCT 2101 A > Chapter 6 Reporting and Analyzing Cash and Internal Controls
Jessica Copenhaver
GPA 4.0
Principles of Accounting
Swati Bhandakar

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About this Document

This week notes include a detailed outline of chapter six as well as important notes and examples from the lectures.
Principles of Accounting
Swati Bhandakar
Class Notes
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This 9 page Class Notes was uploaded by Jessica Copenhaver on Sunday October 4, 2015. The Class Notes belongs to ACCT 2101 A at University of Georgia taught by Swati Bhandakar in Summer 2015. Since its upload, it has received 75 views. For similar materials see Principles of Accounting in Accounting at University of Georgia.

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Date Created: 10/04/15
Chapter 6 Reporting and Analyzing Cash and Internal Controls consist of the policies and procedures managers use to 0 Protect assets 0 Ensure reliable accounting 0 Promote efficient operations Urge adherence to company policies 0 Can prevent avoidable losses help managers plan operations and monitor company and employee performance SarbanesOxley Act SOX requires the managers and auditors of companies whose stock is traded on an exchange to document and certify the system of internal controls 0 Public Company Accounting Oversight Board PCAOB oversees auditor s work 0 Section 404 requires that managers document and assess the effectiveness of all internal control processes that can impact nancial reporting very expensive to comply minimize the risk of fraud and theft and increase the reliability and accuracy of accounting records 0 Establish responsibilities 0 Responsibility for a task must be clearly established and assigned to one person 0 Maintain adequate records 0 Good record keeping helps protect assets and ensures that employees use prescribed procedures 0 Source of information that managers use to monitor company activities so that items are less likely to be lost or stolen without detection Insure assets and bond key employees 0 Bonded when a company purchases an insurance policy against losses from theft by that employee reduces the risk of loss and discouraging theft 0 Separate recordkeeping from custody of assets 0 a person who controls an asset must not keep that asset s accounting records 0 to steal an asset and hide the theft from records two or more people must collude agree in secret to commit fraud 0 Divide responsibility for related transactions 0 Separation of duties divide responsibility for a transaction to ensure that the work of one individual acts as a check on the other 0 Apply technological controls 0 Devices can improve the ef ciency of internal control 0 Perform regular and independent reviews 0 Regular review of internal control systems by internal auditors not directly involved in the activities to ensure that procedures are followed Technology Impacts on Internal Control 0 Reduced processing errors 0 More extensive testing of records 0 Information is easily and rapidly accessed 0 Limited Evidence of Processing Crucial Separation of Duties o Technological advances often yield job eliminations Increased ECommerce o 3 risks Credit card number theft Computer viruses Impersonation 0 Companies use rewalls and encryption to combat these risks Limitations of Internal Control internal control policies and procedures are applied by people 0 Human error can occur from negligence fatigue misjudgment or confusion 0 Human fraud involves intent by people to defeat internal controls 0 Management override o Collusion to thwart the separation of duties Human Fraud driven by the triple threat of fraud 0 Opportunity internal control de ciencies in the workplace 0 Pressure nancial family society and other stresses to succeed o Rationalization employees justifying fraudulent behavior the costs of internal controls must not exceed their bene ts 0 Managers must establish internal control policies and procedures with a net bene t to the company 1 Handling cash is separate from recordkeeping of cash 2 Cash receipts are promptly deposited in a bank 3 Cash disbursements are made by check Cash Cash Equivalents and Liduiditv Liquidity a company39s ability to pay for its nearterm obligations Liquid assets cash and similar assets because they can be readily used to settle such obligations Cash currency and coins along with the amounts on deposit in bank accounts checking accounts demand deposits many savings accounts time deposits customer checks cashier39s checks certi ed checks and money orders 0 Cash Equivalents short term highly liquid investment assets meeting two criteria 0 Readily convertible to a known cash amount 0 Suf ciently close to their due date so that their market value is not sensitive to interest rate changes Cash Management 1 Plan cash receipts to meet cash payments when due 2 Keep a minimum level of cash necessary to operate Treasurer in charge of cash management and following cash management principles Encourage collection of receivables Delay payment of liabilities Keep only necessary levels of assets Plan expenditures money should be spent only when it is available lnvest excess cash Control of Cash Receipts OvertheCounter Cash Receipts recorded on a cash register at the time of each sale Clerk gt Cashier access to cash but not accounting records gt Supervisor access to records but not cash difference between cash in cash register and the record of cash receipts is reported in this account 0 Income statement account 0 Entry to record overage of cash in register and a shortage of cash in register pg 271 0 Usually has a debit balance since customers are more likely to dispute being shortchanged than being given too much change 0 Reported on income statement as part of general and administrative expenses miscellaneous expenses or miscellaneous revenues if credit balance Cash Receipts by Mail when bank balance is reconciled by another person errors or acts of fraud by the mail clerks the cashier or the recordkeeper are revealed Control of Cash Disbursements All expenditures are required to be made by check except for petty cash Deny access to the accounting records to anyone other than the owner who has the authority to sign checks Cash Budget summarizes projected cash receipts and cash disbursements Companies want to minimize the cash they hold because of its risk of theft and low return establishes procedures for Verifying approving and recording obligations for eventual cash disbursements Issuing checks for payment of veri ed approved and recorded obligations Procedures for purchasing receiving and paying for merchandise are divided among several departments or individuals 0 One requesting the purchase the purchasing department the receiving department and the accounting department 0 Voucher internal document used to accumulate information to control cash disbursements and the ensure that a transaction is properly recorded small payments required for items such as postage courier fees minor repairs and lowcost supplies 0 Petty cash fund instead of voucher system 0 Petty cash account asset account Petty cashier in charge of petty cashbox Petty cash receipt is placed in the petty cashbox when money is withdrawn Sum of receipts remaining cash total fund amount 0 After the petty cash fund is established the Petty Cash account is not debited or credited again unless the amount of the fund is changed EX PG 275 LHAHT Welt Eash Payments ep rt Iiiiimliamenm Experases NW1 2 Emming n pariah Eli t l Hm Tilt cemming 1 1 1 1 1 1 1 5 15 3 EH1nerthmdii5e Ii ilii i39it rjf 39till E tip f i il Him 5 Tmspurt nim r ndis purchased 1 1 1 1 1 1 1 1 EEE Metal mn r uni marchandise purchased 1 1 1 1 1 I 113 ms i ei i ery Expense IE Cu t il39l kErE package dialime 1 1 1 1 1 1 11 1 1 1 1 1 1 1 1 1 1 Supplies Expense MW 5 BurntMg an af ne sump1m immedi teiy used 1 1 1 1 1 1 1135 I Mi zglhnems Expanses 1 1 1 1 1 415E Herthaandi a ilnvemmrigr 1 1 1 1 11 1 1 1 1 1 1 I595 DEli ml y Expense Ef e Suppa lies Expense 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 13quot5 Cash 1111 FLEIS T petty Banks safeguard cash provide detailed and independent records of cash transactions and are a source of cash nancing BankAccount a record set up by a bank for a customer permitting them to deposit money Signature Card bank employees use to verify signatures on checks Deposit Checks list items such as currency coins and checks deposited along with their corresponding dollar amounts bank gives as proof of deposit Check depositor used this to withdraw money 0 Three parties a maker who signs the check a payee who is the recipient and a bank or payer on which the check is drawn Electronic Funds Transfer EFT the electronic transfer of cash from one party to another with a journal entry 0 Automated teller machines ATMs form of EFT which allows bank customers to deposit withdraw and transfer cash Bank Statement shows the activity in the account to depositors 1 Beginning of period balance of the depositor s account 2 Checks and other debits decreasing the account during the period 3 Deposits and other credits increasing the account during the period 4 End of period balance of the depositor s account a depositor s account is a on the 0 Debit memos from the bank produce credits on the depositor s books and credit memos form the bank produce debits on the depositor s books Canceled Checks checks the bank has paid and deducted from the customer s account during the period Addition Deductions include Service charges and fees assessed by the bank Checks deposited that are uncollectible Corrections of previous errors Withdrawals through automated teller machines ATMs Period payments arranged in advance by a depositor a report explaining any differences between the checking account balance according to the depositor s records and the balance reported on the bank statement 0 Outstanding Checks checks written by the depositor deducted on the depositor s records and sent to the payees but not yet received by the bank for payment at the bank statement datebanks balance higher 0 Deposits in transit the book balance is higher since the deposit has not gone through the bank 0 Non Suf cient Funds Check checks that we receive that have not gone through the bank since the other party39s check is uncollectible book balance higher 0 Additions for collections and for interests bank balance higher 0 Errors compare deposits on the bank statement with deposits in the accounting records and compare canceled checks on the bank statement with checks recorded in the accounting records 0 Important Note only the items reconciling the book balance require adjustment entries E w the it GEME ilgtiiiuiriviji atuii mifs Initialea 39 u luv1 Fl 7 1 Tar 1F 77 b E E A gime withfhg bank W 39 i i 39 hels kg 2 We check was remaiva as pawn 39Er 23311 sales e The had i l l y debited HIE aiit r 39 i far 5335 fth madam 311mm if 551395 39 6 WC p Eur chick Imeiwd fmm a i lj 39 ml autumn ll was inmne ly rem tee sum 5 as E W1 El l i k was im mlly awarded in th b ks as Eh k WE mitten a5 VF f i quot f r plmhas Elf suppliregf The Bank Siaten1en gnawed aud fixquot 5H 35 239 mm No


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