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Transcript of 7 - 1 ©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber...
7 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Internal Control, Managing Cash,
and Making Ethical JudgmentsChapter
7
7 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Define internal control.
Objective 1
7 - 3©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Internal Control
What is internal control? It is the organizational plan and all the related
measures that an entity adopts to…– safeguard assets,– encourage adherence to company policies,– promote operational efficiency, and...– ensure accurate and reliable accounting
records.
7 - 4©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Operational ControlsOperational Controls
Financial Reporting ControlsFinancial Reporting Controls
Internal Control
7 - 5©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Identify the characteristics
of an effective systemof internal control.
Objective 2
7 - 6©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Establishing an Effective System of Internal Control
Characteristics of an effective internal control system include:
1 Competent, reliable, and ethical personnel2 Assignment of responsibilities3 Proper authorization4 Separation of duties
7 - 7©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Separation of operations from accountingSeparation of operations from accounting
Separation of the custody of assets from accountingSeparation of the custody of assets from accounting
Separation of the authorization of transactionsfrom the custody of related assets
Separation of the authorization of transactionsfrom the custody of related assets
Separation of duties within the accounting functionSeparation of duties within the accounting function
Separation of Duties
7 - 8©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Stolen credit card numbersStolen credit card numbers
Computer virus and Trojan horsesComputer virus and Trojan horses
Impersonation of companiesImpersonation of companies
Internal Controls for e-Commerce
7 - 9©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Internal Controls for e-Commerce
What is an encryption? It is the primary method of achieving
confidentiality in e-commerce. Plain-text messages are rearranged by some
mathematical process. The encrypted message cannot be read by
anyone who does not know the process.
7 - 10©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Internal Controls for e-Commerce
The Internet Corporate IntranetFirewallFirewall
Network Computers
7 - 11©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Limitations ofInternal Control
Most internal control measures can be circumvented or overcome.
Collusion is when two or more employees work as a team with the purpose to defraud the firm.
7 - 12©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Bank Account as aControl Device
Documents used to control a bank account include:
– signature card– deposit ticket– check– bank statement– bank reconciliation
7 - 13©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Bank Reconciliation
What are two records of a business’s cash?1 Cash account in the business’s own general
ledger.2 The bank statement which tells the actual
amount of cash the business has in the bank.
7 - 14©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Bank Reconciliation
Items recorded by a company not on the bank statement:
– deposit in transit– outstanding checks
7 - 15©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Bank Reconciliation
Items on a bank statement and not recorded by the business:
– bank collections– bank fees– interest earned on account– NSF checks
7 - 16©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Paths That Two Checks Take (Good Check)
akerwrites check
to payee.
akerwrites check
to payee.Payee
deposits checkin bank.
Payeedeposits check
in bank.Payee’s bank
sends check tomaker’s bank.
Payee’s banksends check tomaker’s bank.
Maker’s bankpays the check.Maker’s bank
pays the check.
7 - 17©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Paths That Two Checks Take (NFS Check)
Maker’s bankbalance is notsufficient to
pay the check.
Maker’s bankbalance is notsufficient to
pay the check.Maker’s banksends theworthless
check back topayee’s bank.
Maker’s banksends theworthless
check back topayee’s bank. Payee’s bank
decreases payee’sbalance.
Payee’s bankdecreases payee’s
balance.
Payee holdsworthless
check.
Payee holdsworthless
check.
7 - 18©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Prepare a bank reconciliationand the related journal
entries.
Objective 3
7 - 19©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Bank Reconciliation Example
At the beginning of July, Sahita, Inc. received the June’s bank statement.
It indicated the following: The bank balance was $63,275. The bank had collected a note receivable
from one of Sahita’s customers in the amount of $1,325.
7 - 20©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Bank Reconciliation Example
The bank paid the electric bill of $1,500. There was a $200 check returned for NSF. Interest earned on the account was $265. Bank service charges were $12.
7 - 21©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Bank Reconciliation Example
Sahita’s books indicates a cash balance of $66,647.
A deposit of $11,250 was mailed to the bank on June 30.
Checks issued in June for $8,000 have not yet been paid by the bank.
7 - 22©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Balance per bank, June 30 $63,275
Add deposit in transit 11,250$74,525
Less outstanding check 8,000Adjusted bank balance $66,525
Balance per bank, June 30 $63,275
Add deposit in transit 11,250$74,525
Less outstanding check 8,000Adjusted bank balance $66,525
The Bank Reconciliation Example
7 - 23©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Balance per books, June 30 $66,647Add: Note receivablecollected by the bank 1,325Interest income 265
$68,237Less: Payment of electric bill 1,500NSF check 200Service charge 12Adjusted book balance $ 66,525
Balance per books, June 30 $66,647Add: Note receivablecollected by the bank 1,325Interest income 265
$68,237Less: Payment of electric bill 1,500NSF check 200Service charge 12Adjusted book balance $ 66,525
The Bank Reconciliation Example
7 - 24©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
The Bank Reconciliation Example
Balance per books$66,525
Balance per books$66,525
Balance per bank$66,525
Balance per bank$66,525
Equal amountsEqual amounts
7 - 25©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Record Reconciling Items
June 30, 200xCash 1,325
Notes Receivable 1,325 Notes collected by the bank
June 30, 200xCash 1,325
Notes Receivable 1,325 Notes collected by the bank
June 30, 200xCash 265
Interest Income 265 Interest earned on bank balance
June 30, 200xCash 265
Interest Income 265 Interest earned on bank balance
7 - 26©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Record Reconciling Items
June 30, 200xUtilities Expense 1,500
Cash 1,500Monthly electricity expense
June 30, 200xUtilities Expense 1,500
Cash 1,500Monthly electricity expense
June 30, 200xAccounts Receivable – NSF 200
Cash 200NSF check returned by bank
June 30, 200xAccounts Receivable – NSF 200
Cash 200NSF check returned by bank
7 - 27©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Record Reconciling Items
June 30, 200xBank Service Fees 12
Cash 12
Bank service charges
June 30, 200xBank Service Fees 12
Cash 12
Bank service charges
7 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Apply internal controls
to cash receipts.
Objective 4
7 - 29©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cash ReceiptsOver the Counter
The terminal should be positioned so that customers can see the amount the cashier enters into the cash register.
The cash drawer should open only when the sales clerk enters an amount on the keypad.
The roll of tape locked inside the machine records each sale and cash transaction.
7 - 30©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cash ReceiptsOver the Counter
Pricing merchandise at “uneven” amounts means that the clerk has to open the cash drawer.
This requires entering the amount of the sale on the keypad and so onto the register tape.
7 - 31©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cash ReceiptsOver the Counter
At the end of the day, the cashier deposits the cash in the bank.
The tape goes to accounting.
7 - 32©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cash Receipts by Mail
All incoming mail should be opened by a mailroom employee.
This person should compare the check received with the remittance advice.
Cash receipts should be given to the cashier. The mailroom employee forwards the
remittance advice to accounting.
7 - 33©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cash Receipts by Mail
Many companies use a lock-box system. Customers send their checks directly to an
address that is a bank account. Company personnel do not handle the cash.
7 - 34©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cash 24,980 Cash Short and Over 20 Sales Revenue 25,000 Daily cash sales
Cash 24,980 Cash Short and Over 20 Sales Revenue 25,000 Daily cash sales
Cash Short and Over
Assume that the cash register tapes indicate sales revenue of $25,000.
However, the cash received was $24,980. What entry would record the day’s sales?
7 - 35©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Apply internal controls
to cash payments.
Objective 5
7 - 36©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Control OverApproval of Payments
Purchase Request
Purchase Order
Invoice
Receiving Report
Disbursement Packet
7 - 37©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Control OverApproval of Payments
The accounting department...– combines all of these documents,– checks them for accuracy, and...– forwards this disbursement packet to
designated officers for approval and payment.
7 - 38©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Controlling Petty Cash Payments
On June 15, Sahita Inc. manager decided to establish a $250 petty cash fund.
What is the entry?
June 15, 200xPetty Cash 250
Cash in Bank 250To open the petty cash fund
June 15, 200xPetty Cash 250
Cash in Bank 250To open the petty cash fund
7 - 39©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Controlling Petty Cash Payments
Jose is the petty cash custodian responsible for the fund.
On June 20, he purchased supplies in the amount of $70.
For each disbursement, he prepares a petty cash ticket.
At all times the amount of cash in the petty cash fund plus the petty cash tickets must equal $250.
7 - 40©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Controlling Petty Cash Payments
Jose also spent $20 for delivery charges and $60 for coffee and other miscellaneous expenses.
What is the journal entry to record the replenishment of the fund?
7 - 41©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
June 30, 200xSupplies 70Delivery Expense 20Miscellaneous Expense 60
Cash in Bank 150To replenish the petty cash fund
June 30, 200xSupplies 70Delivery Expense 20Miscellaneous Expense 60
Cash in Bank 150To replenish the petty cash fund
Controlling Petty Cash Payments
7 - 42©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Using a budget to
manage cash.
Objective 6
7 - 43©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cash Budget Example
On June 1, the cash balance of Clara’s Boutique amounted to $20,000.
She expected collections during the month to be $100,000.
Clara budgeted $110,000 cash payments during the month.
She would like to keep a $20,000 balance at all times.
How much money must she borrow?
7 - 44©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cash Budget Example
Beginning balance $ 20,000 Budgeted collections 100,000 Cash available $120,000 Less budgeted payments 110,000 Cash balance $ 10,000 She needs to borrow $10,000.
7 - 45©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Cash Budget Example
Not included in the budgeted collections is a $73,400 sale to a store in Rio de Janeiro.
She expects to collect this amount in July. Assume the exchange rate is 3.67 reals per
dollar. How much does she expect to collect? 73,400 reals ÷ 3.67 = $20,000
7 - 46©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Make ethical judgments
in business.
Objective 7
7 - 47©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Ethics and Accounting
Code ofConduct
88%
Companies
—
0.75 —
0.50 —
0.25 —
0.00
7 - 48©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Professional Code of Ethics
Accountants are held to very high standards of conduct.
There is no compromising. Would you hire an accountant who is
“almost always” honest? Internal controls rely upon basic honesty
and integrity.
7 - 49©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
End of Chapter 7