Financial Accounting:
Tools for Business Decision Making, 4th Edition
Kimmel, Weygandt, Kieso
CHAPTER 7
Prepared by
Dr. Joseph Otto
1
Chapter 7
INTERNAL CONTROL
AND CASH
2
CHAPTER 7
INTERNAL CONTROL AND CASH
After studying this chapter, you should be
able to:







Identify the principles of internal control.
Explain the applications of internal control to
cash receipts.
Explain the applications of internal control to
cash disbursements.
Prepare a bank reconciliation.
Explain the reporting of cash.
Discuss the basic principles of cash
management.
Identify the primary elements of a cash
budget.
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1
PRINCIPLES OF INTERNAL
CONTROL
11
Internal control
Safeguards an organization’s
assets from


Employee theft, robbery,
unauthorized use
Enhances the accuracy and
reliability of accounting records


Risk of errors and irregularities
4
PRINCIPLES OF INTERNAL
CONTROL
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PRINCIPLES OF INTERNAL CONTROL
 Establishment of
responsibility:
 most effective when
only one person is
responsible for a
given task

Segregation of
duties:

the work of one
employee should
provide a reliable
basis for
evaluating the
work of
another employee
PRINCIPLES OF INTERNAL CONTROL
Documentation procedures:
documents provide evidence that
transactions and events have
occurred
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Physical, Mechanical, and
Electronic Controls
Independent Internal Verification
Independent Internal Verification


Bonding of employees
who handle cash
Rotating employee’s
duties and requiring
employees to take
vacations
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Limitations of Internal
Controls




Cost/Benefit - cost of establishing
procedure should not exceed expected
benefit
Human element - fatigue, carelessness,
indifference
Collusion - two or more individuals who
work together to get around controls
Size of business
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Review
a.
b.
c.
d.
Segregation of duties means?
Rotating employee duties and
requiring vacations.
Reviewing, comparing and reconciling
information from two sources.
The responsibility for related activities
should be assigned to different
individuals.
Physical separation of employees from
each other.
12
Review
a.
b.
c.
d.
Segregation of duties means?
Rotating employee duties and
requiring vacations.
Reviewing, comparing and reconciling
information from two sources.
The responsibility for related activities
should be assigned to different
individuals.
Physical separation of employees from
each other.
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Cash consists of...






coins
currency
checks
money orders
money on hand
deposits in bank
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Cash is the most desirable
asset...
because it is
readily
convertible into
any other asset.
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2
11
INTERNAL CONTROL OVER
CASH RECEIPTS
Review
a.
b.
c.
d.
Which of the following is not an
internal control over cash receipts?
Store cash in safes and bank vaults.
Supervisors count cash receipts daily
Bond personnel who handle cash.
Having the same person who receives
the cash to be the one that records it.
17
Review
a.
b.
c.
d.
Which of the following is not an
internal control over cash receipts?
Store cash in safes and bank vaults.
Supervisors count cash receipts daily
Bond personnel who handle cash.
Having the same person who receives
the cash to be the one that records it.
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3
11
INTERNAL CONTROL OVER CASH
DISBURSEMENTS
Petty Cash Fund
is a cash fund used to pay relatively small amounts
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Cash Disbursements
ELECTRONIC FUNDS
TRANSFER SYSTEM

Check processing is expensive
new methods are being developed to
transfer funds among parties without the
use of paper

Electronic Funds Transfer (EFT) System
a disbursement system that uses wire,
telephone, telegraph, or computer to
transfer cash from one location to another
21
Review
a.
b.
c.
d.
Which of the following is not an internal
control over cash disbursements?
Stamp invoices paid.
Use prenumbered checks and account for
the sequence.
Use cash registers.
Have multiple people available to sign
checks so they can be mailed promptly.
22
Review
a.
b.
c.
d.
Which of the following is not an internal
control over cash disbursements?
Stamp invoices paid.
Use prenumbered checks and account for
the sequence.
Use cash registers.
Have multiple people available to sign
checks so they can be mailed promptly.
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USE OF A BANK
 The use of a bank
 minimizes the amount of currency that
must be kept on hand
 contributes significantly to good internal
control over cash.

A “double” record of cash is
maintained, one by the
company, one by the bank.
These two accounts must
be reconciled.
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Bank Statement
a copy of the
bank’s records
sent to the
customer for
periodic review.
Bank
Statement
shows
•check &
other debits
•deposits &
other credits
•daily cash
balance
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4
11
RECONCILING THE BANK
ACCOUNT
Reconciliation

is necessary as the balance per bank
and balance per books are seldom in
agreement due to time lags and errors
A bank reconciliation
 should be prepared by an employee
who has no other responsibilities
pertaining to cash
26
RECONCILING THE
BANK ACCOUNT
 Steps in preparing a bank reconciliation:




Determine deposits in transit
Determine outstanding checks
Note any errors discovered
Trace bank memoranda to the records
Each reconciling item used in determining the
“Adjusted cash balance per books” should be
recorded by the depositor with an adjusting
entry

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BANK RECONCILIATION
Terms




Deposits in transit - deposits recorded by the
depositor that have not been recorded by the
bank.
Outstanding checks - checks issued and recorded
by the company that have not been paid by the
bank.
NSF check - a check that is not paid by the bank
because of insufficient funds in the customer’s
bank account.
Adjusted balance - same as true cash balance,
correct cash balance
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BANK RECONCILIATION
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ENTRIES FROM BANK
RECONCILIATION
GENERAL JOURNAL
Date
Apr. 30
Account Titles and Explanation
Cash
Miscellaneous Expense
Notes Receivable
Interest Revenue
(To record collection of notes
receivable by bank)
Debit
Credit
1035
15
1000
50
Collection of Note Receivable This entry involves four
accounts. Interest of $50 has not been accrued and the
collection fee is charged to Miscellaneous Expense.
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ENTRIES FROM BANK
RECONCILIATION
GENERAL JOURNAL
Date
Apr. 30
Account Titles and Explanation
Cash
Accounts Payable — Andrea
Company
(To correct error in recording
check No. 443)
Debit
Credit
36
36
Book Error An examination of the cash disbursements
journal shows that check No. 443 was a payment on
account to Andrea Company, a supplier. The check, with
a correct amount of $1,226.00, was recorded at $1,262.00.
32
ENTRIES FROM BANK
RECONCILIATION
GENERAL JOURNAL
Date
Apr. 30
Account Titles and Explanation
Accounts Receivable — J. R. Baron
Cash
(To record NSF check)
Debit
Credit
425.60
425.60
NSF Check An NSF check becomes an
accounts receivable to the depositor.
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ENTRIES FROM BANK
RECONCILIATION
GENERAL JOURNAL
Date
Apr. 30
Account Titles and Explanation
Miscellaneous Expense
Cash
(To record charge for printing
company checks)
Debit
Credit
30
30
Bank Service Charges Check printing charges (DM) and other
bank service charges (SC) are debited to Miscellaneous
Expense because they are usually nominal in amount.
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5
REPORTING CASH
11
Cash
Recorded in both the balance sheet
and the statement of cash flows
 The balance sheet shows the
amount of cash available at a given
point in time
 The statement of cash flows shows
the sources and uses of cash during
a period of time.

35
REPORTING CASH
Cash Equivalents
Cash equivalents are
 Readily convertible to known
amounts of cash
 So near maturity that their value is
relatively insensitive to interest
rate changes
 Examples include treasury bills,
commercial paper, and money
market funds
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Restricted Cash



Is cash that is not
available for general
use.
Is set aside for special
purpose.
If not to be used within
next year, report as
noncurrent asset.
37
MANAGING AND MONITORING
CASH




The objective of managing cash is to
Ensure that the company has sufficient
cash to meet payments, yet
Minimize the amount of idle cash on hand
The operating cycle of a
merchandising company is the
average time it takes to go from cash
to cash in producing revenues
38
Operating Cycle of a
Merchandising Company
39
6
11
Basic Principles of Cash
Management
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11
Cash Budget



Cash is vital.
Planning the company's cash
needs is a key business
activity.
Cash budget shows the
anticipated cash flows, over
a 1 to 2-year period.
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CASH BUDGETING
Cash receipts section includes
expected receipts from the company’s
principal sources of revenue
 Cash disbursements section includes
expected payments for direct
materials, direct labor, etc.
 Financing section shows expected
borrowings and their repayment

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BASIC CASH BUDGET
CASH BUDGET
JOURNAL
Apr 30 Cash
Miscellaneous Expense
Notes Receivable
Interest Revenue
Apr 30 Cash
Accounts Payable
Apr 30 Accounts Receivable-Baron
Cash
Apr 30 Miscellaneous Expense
Cash
1,035.00
15.00
1,000.00
50.00
36.00
36.00
425.60
425.60
30.00
30.00
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Review
a.
b.
c.
d.
Which one of the following is not one
of the sections of a cash budget?
Cash from operations section.
Cash disbursements section.
Cash receipts section.
Financing section.
46
Review
a.
b.
c.
d.
Which one of the following is not one
of the sections of a cash budget?
Cash from operations section.
Cash disbursements section.
Cash receipts section.
Financing section.
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Assign #9: E7-4, E7-8
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