Chapter 7

Human resource control activities

-Bond employees who handle cash -Rotate employees' duties and require employees to take vacations, -thorough background checks

Internal auditors

-Company employees who continuously evaluate the effectiveness of the company's internal control systems. -Large companies often assign independent internal verification to internal auditors.

Deposits in transit (+)

-Deposits recorded by depositor that have not been recorded by bank. -Add these deposits to the balance per bank

Electronic funds transfers (EFT)

-Disbursement systems that use wire, telephone, or computers to transfer cash from one location to another. -Many companies do direct deposit payroll -This often used for utilities, rent, insurance

Outstanding checks (-)

-Issued checks recorded by the company that have not been paid by the bank. -Deduct outstanding checks from balance per bank.

NSF check

-Not sufficient funds - A check that is not paid by a bank because of insufficient funds in a bank account

Book errors (+/-)

-Note any errors made by depositor that have been discovered. -Only errors made by company, not bank, are included as reconciling items in determining adjusted cash balance per books. For example, say company wrote a check to supplier in amount of $1226, but accounting clerk recorded check amount as $1262. $36 error is added to balance per books because company reduced balance per books by $36. too much.

Internal control

-Process designed to provide reasonable assurance regarding achievement of company objectives related to operations, reporting, and compliance. -Five primary components are a control environment, risk assessment, control activities, info and communication, monitoring.

Cash over and short reported how

-Reported as miscellaneous expense when there is a cash shortfall, miscellaneous revenue where there is overage.

Cash disbursements

-Shows expected payments for inventory, labor, overhead, and selling/admin expenses. -Also, includes projected payments for income taxes, dividends, investments, and plant assets. -DOESNOT include depreciation, because it does not use cash

Causes for the need to reconcile bank account

-Time lags prevent one of parties from recording transaction in same period -Errors by either party in recording transcations

Cash budget

-shows anticipated cash flows Contains three sections -Cash receipts -cash disbursements -financing in addition to the beginning and ending cash balances

The operation of a petty cash fund involves...

1. establishing fund 2. making payments from fund 3. replenishing fund

Five basic principles of cash management for company to improve chances of having adequate cash

1. increase speed of receivables collection 2. Keep inventory levels low 3. Monitor payment of liabilities 4. plan timing of major expenditures 5. invest idle cash

Fraud

A dishonest act by an employee that results in personal benefit to employee at cost of employer.

Reasonable assurance

A level of comfort short of a guarantee, but considered adequate given the costs of the control and the likely benefits achieved.

Bank statement

A report of deposits, withdrawals, and bank balances sent to a depositor by a bank

Sarbanes-Oxley Act (SOX)

All publicly traded U.S. corporations are required to maintain adequate system of internal control.

Reconciling items per books

Amounts not yet recorded on company's books and include adjustments from deposits and other amounts added, payments and other amounts deducted, and company errors (if any).

Other payments (-)

Any unrecorded other payments should be deducted from balance per books. For example if bank statement shows service charges, this amount is deducted from balance per books on bank reconciliation to make company's records agree with banks records.

Voucher

Authorization form prepared for each cash expenditure in voucher system. Companies require vouchers for all types of cash disbursements except those from petty cash.

Petty cash fund

Cash fund used to pay relatively small amounts.

Restricted cash

Cash not available for general use but rather restricted for special purpose. Such as maintaining fund in case of getting used or covering clean up costs.

Other deposits (+)

Compare other deposits on bank statement with company records. Any unrecorded amounts should be added to balance per books. For example, if bank statement shows EFT from customers paying accounts online, amounts should be added to balance per books on bank reconciliation.

Bank reconciliation

Comparing bank's balance with the company's balance, and explaining differences to make them agree.

NSF check journal entry

Debit accounts receivable Credit Cash (to record NSF check)

Collection of electronic funds transfer journal entry Note: recorded in same way whether mail or electronic

Debit cash Credit accounts receivable

Book error journal entry

Debit cash Credit accounts payable (to correct error in recording check No.443)

Cash receipts

Includes expected receipts from company's principal sources of cash such as cash sales and collections from customers on credit sales.

Voucher system

Network of approvals by authorized individuals, acting independently, to ensure all disbursements by check are proper.

Bank errors (+/-)

Note any errors made by bank that were discovered in previous steps. For example, if bank processed deposit of $1693 and $1639 in error, $54 difference is added to balance per bank on bank reconciliation.

Reconciling items per bank

On bank side of reconciliation, items to reconcile are deposits in transit (amounts added), outstanding checks (amounts deducted), and bank errors (if any). By adjusting the banks balance for these items, a company brings that balance up to date.

Physical controls

Safeguarding of assets and enhance the accuracy and reliability of the accounting records. Examples include; safes, locked cabinets, passwords, time clocks

Financing section

Shows expected borrowings and repayments of borrowed funds plus interest

Fraud triangle

The three factors that contribute to fraudulent activity by employees: opportunity, financial pressure, and rationalization.

Preparing a voucher

Voucher recorded in journal called "voucher register" -Company issues and sends a check and stamps voucher "paid" -Paid voucher is sent to accounting for recording in check register. -Voucher system involves two journal entries, one to record liability when voucher is issued and second to pay liability that relates to voucher

Cash

coins, currency, checks, money orders, and money on hand or on deposit in bank or similar depository.

Bank charges expense

debit bank charges expense credit cash (to record charges for debit and credit card fees of $120 and bank service charges of$30).

Journal entry for cash shortfall and related cash

debit cash, debit cash over and short, credit sales revenue

Establishing a petty cash fund for $100 journal entry

debit petty cash 100 credit cash 100

If you want to increase size of petty cash fund to 250 journal entry would be...

debit petty cash 150 credit cash 150

On March 15, petty cash custodian requests check for $87. Fund contains $13 cash, and petty cash receipts for postage $44, supplies $38, and misc expenses $5. Journal entry is

debit postage expense 44 debit supplies 38 debit misc expense 5 credit cash (to replenish petty cash fund) 87

Six principles of control activities

establishment of responsibility, segregation of duties, documentation procedures, physical controls, independent internal verification, human resource controls

Independent internal verification

involves the review of data prepared by employee

idle cash

money that is not being invested

Bonding

obtaining insurance protection against theft by employees

Assume custodian had only $12 in cash in fund plus receipts as listed. The request for reimbursement is____ and journal entry is what

request for reimbursement is 88, since fund contained a dollar short, custodian asks for extra dollar. Entry is debit postage expense 44 debit supplies 38 debit misc expense 5 debit cash over and short 1 credit cash (to replenish petty cash fund) 88

Cash equivalents

short term, highly liquid, investments readily convertible to known amounts of cash and so near maturity