CHAPTER
7
Internal Control and Cash
Internal Control
• The related methods and measures adopted
within a business to:
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Optimize the use of resources
Prevent and detect errors and irregularities
Safeguard assets
Maintain reliable control systems
Establishment of Responsibility
• Control is most effective
when only one person is
responsible for a given task
Segregation of Duties
• Related activities should be assigned to different
individuals
• Separate record keeping from physical custody
of the asset
Documentation
• Provide evidence that transactions and
events occurred
– Shipping documents
– Sales invoices
• Documents should be pre-numbered and
accounted for
Illustration 7-2
Physical Controls
Independent Internal Verification
• Comparison, reconciliation, and review of
data prepared by employees
– Periodically or on a random basis
– Done by employee who is independent of the
personnel responsible for the information
– Discrepancies and exceptions should be
reported to management
Limitations of Internal Control
•
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•
Cost / benefit
Human element
Collusion
Size of business
Cash
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•
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•
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Coins
Currency
Cheques
Money orders
Money on hand
Deposits in bank
Cash
• Readily convertible into any other asset
• High value in small bulk
• Non-control of owner identification (serial
numbers)
Bank
• Minimizes cash that must be kept
on hand
• Provides a double record of
transactions
– One by the business
– One by the bank
• Safeguards cash by using a bank
as a depository and clearinghouse
for cheques received and written
Illustration 7-6
Bank Statement
•Copy of bank’s
records sent to the
customer for periodic
review
•Shows cheque and
other debits deposits,
other credits and the
daily cash balance
Terms
• Deposits in transit
– Deposits recorded by the depositor that have
not yet been recorded by the bank
• Outstanding cheques
– Cheques written (issued) and recorded by a
company but that have not yet been presented
to/paid by the bank
• Adjusted balance
– Reconciled or correct cash balance
Terms
• Debit memoranda
– Charges against depositor’s account [e.g.
service charges, RC (returned) / NSF
(insufficient funds) cheques]
• Credit memoranda
– Amounts that increase depositor’s account
(e.g., interest earned)
Understanding Debits and Credits
Bank
Books
(Your Cash
Account is a
Liability)
(Cash is an
Asset)
Cheque
Debit
(decrease)
Credit
(decrease)
Deposit
Credit
(increase)
Debit
(increase)
Differences Between Company
Balance and Bank Balance
• Time lags
– The period after a cheque is written and dated
but not yet presented to nor paid by the bank
– The period between receipts being recorded
by the company and time receipts being
recorded by the bank
– Time lags occur when the bank mails debit or
credit memos to the company
• Errors by either party in recording
transactions
Bank Reconciliation
• This reconciles the balance in the company’s
bank account with the cash balance in the
general ledger
Reporting Cash
• Cash on hand, cash in banks,
cash equivalents, and petty
cash are often combined and
reported as cash
• Cash is recorded in both the
balance sheet and the cash
flow statement
• Cash is the most liquid asset
and is listed first in the current
asset section of the balance
sheet
Cash Equivalents
• Readily convertible to known amount of cash
• So near maturity that market value is
relatively insensitive to changes in interest
rates
• Examples
– Treasury bills
– Commercial paper
– Money market funds
Restricted Cash
• Cash that is not available for
general use; set aside for
special purposes
• If it is not to be used within the
next year, report as noncurrent
asset
• For example, a bank may
require a borrower to have a
compensating balance—
minimum cash balance
Five Principles of Cash Management
Illustration 7-10
Cash Budgeting
• Planning a company's
cash needs is a key
business activity
• Cash budget shows
anticipated cash flows
over a one-to two-year
period
Cash Budget
• Cash receipts section
• Cash disbursements
section
• Financing section