Ch 06 Accounting for Cash and Internal Control

What are the 7 principles of Internal Control?

1. Establish responsibilities 2. Maintain adequate records 3. Insure assets and bond key employees 4. Separate recordkeeping from custody of assets 5. Divide responsibility for related transactions 6. Apply technological controls 7. Perform regular and independent reviews

Three basic guidelines to Cash/Like-cash asset handling are what?

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

What are the 9 steps to bank reconciliation?

1. Identify the bank statement balance 2. List any unrecorded deposits and bank errors understating the balance (Add) 3. List any oustanding checks and any bank errors overstating the balance (Deduct) 4. Compute adjusted bank balance 5. Identify the company's book balance 6. List any unrecorded credits, interest, and errors understating the book balance from the bank (Add) 7. List any unrecorded debits, service charges, and errors overstating the book balance (Deduct) 8. Compute the adjusted book balance 9. Compare

What does final approval imply?

1. Requisition checked 2. Purchase order checked 3. Receiving report checked 4. Invoice checked (Price, calculations, and terms)

What is the final steps for an obligaton once a voucher is reviewed and completed?

A check is written usually on the due date of the invoice.

What is a purchase requisition?

A document that lists the items needed and requested by a person or department.

What is a purchase order?

A document used by a person or department that places an order with a vendor.

What is a receiving report?

A document used within the company to notify the appropriate persons that ordered goods have been received and to desribe the quantities and conditions of the goods.

What is days' sales uncollected (receivables)?

A measure of how quickly a company can convert its accounts receivable into cash.

What is an invoice?

An itemized statement of goods prepared by the vendor listing the customer's name, items sold, sales prices, and terms of sale.

What are some specific requirements of the Sarbanes-Oxley Act?

Auditors must evaluate internal controls and issue an internal control report, Auditors of a client are restricted as to what consulting services they can provide that client, the person leading an audit can serve no more than seven years without a two-year break, Auditors' work is overseen by the Public Company Accounting Oversight Board, Harsh penalties exist for violators (sentences up to 25 years in prison with severe fines.

What are outstanding checks?

Checks that are written by the depositor, deducted on the depositor's records, and sent to the payees but not yet received by the bank for payment.

What is the formula for days' sales uncollected?

Days' sales uncollected = Accounts receivable / net sales X 365

What are deposits in transit (outstanding deposits)?

Deposits made and recorded by the depositor but not yet recorded on the bank statement.

What are the cash management principles?

Encourage collection of receivables, delay payment of liabilities, keep only necessary levels of assets, plan expenditures, and invest excess cash.

What are the two categories of the human element?

Human fatigue and human fraud.

What is the cost-benefit principle of the limitation of Internal Control?

It dictates that the cost of Internal Controls must not exceed their benefits.

What is an invoice approval (check authorization)?

It is a checklist of steps necessary for approving an invoice for recording and payment.

What is a voucher?

It is a record summarizing a transaction and once completed, it authorizes recording an obligation.

What is a bank reconciliation?

It is a report explaining any differences between teh checking account balance according to the depositor's records and the balance reported on the bank statement.

What is a voucher system?

It is a set of procedures and approvals designed to control cash disbursements and the acceptance of obligations.

What do you maintain the petty cash fund?

Maintain all the receipts and records. At the end of the month, a payment will be made into the petty cash fund to maintain it's fund balance.

What are deductions for uncollectible items and for services?

Non-suffiencient funds check that the bank initially credits to the depositors account. Once it's learned that the check is uncollectible, the bank reduces the depositor's account for the amount of the check and usually a fee.

When processing a bank reconciliation, when is an adjustment required?

Only the items reconciling the book balance requires and adjustment.

What drives human fraud?

Opportunity (refers to internal control deficiencies), Pressure (refers to financial, family, society, and other stresses), Rationalization (refers to employees justifying fraudulent behavior)

What are two important types of cash receipts?

Over-the-counter cash receipts and cash receipts by mail.

What is the journal entry for setting up a petty cash fund?

Petty cash - Debit. Cash - Credit.

What are the goals of cash management?

Plan cash receipts to meet cash payments when due and keep a minimum level of cash necessary to operate.

What is the purpose of an Internal Control System?

Protect assets, establish reliable accounting, promote efficient operations, and urge adherence to company policies.

What are advantages of Technology on the Internal Controls?

Reduces processing errors, more extensive tests of records, limits evidence of processing, crucial separation of duties, increases e-commerce.

What is separation of duties?

Responsibility for transactions are divided to two or more people or departments to ensure that the work of one acts as a check on the other.

What are cash-equivalents?

Short-term, highly liquid investment assets that readily convert to a known cash amount and sufficiently close to their due date that their market value is not sensitive to interest rate changes.

The limits of Internal Controls arise from what?

The human element and/or the cost-benefit principle

What are petty cash disbursements?

The small payments required for items such as postage, courier fees, minor repairs, and low-cost supplies.

What are cancelled checks?

They are checks the bank has paid and deducted form the customer's account during the period.

What does collude mean?

Two or more people agree in secret to commit fraud.

The voucher system of control establishes procedures for what?

Verifying, approving and recording obligations for eventual cash disbursement, and issuing checks for payment of verified, approved, and recorded obligations.