Chapter 4

Operation Objectives

operations are effective and efficient, safeguarding of assets against loss

Bank Reconciliation

reconciles timing differences and errors

Control of cash Reciepts

record when received, deposit receipts intact, separation of duties

A cash overage

requires a credit to cash over and short

A cash shortage

requires a debit to cash over and short

Collusion

secret agreement or cooperation or fraudulent scheme

The third stage of the operating cycle?

selling inventory

Transactions recorded by the bank but not yet recorded by the business

service charges, non-sufficient funds checks, and debit and credit memos

Internal Control Report

Acknowledge that management is responsible for establishing and maintaining an adequate internal control system and procedures for finical reporting and assess effectiveness of these controls

Internal Control System

All policies and procedures necessary to ensure Operation Objectives, Reporting Objectives, and Compliance Objectives

Cash equivalents

all highly liquid investments with an original maturity of 3 months or less at date of inception

Control of Cash Disbursement

all major disbursements made by check, pay only small misc. expenditures from petty cash, and prepare bank reconciliations

Segregation of Duties

assure that no one person prepares all the documents and records for an activity

Control Environment

the collection of environmental factors that influence the effectiveness of control procedures

Risk Assessment

Identify, analyze, and manage business risks

PEST factors

macro factors such as political, economic, social, and technological

Balance per bank

+ deposits in transit - outstanding checks +/- bank errors

Balance per book

+ interest + notes by bank on our behalf - service charge -NSF checks -Overdraft charges +/- error

Cash equivalents must be

-readily convertible into a known amount of cash -so near maturity that interest rate changes won't affect their market value(3 months or less)

what are the five components of internal control?

1. Control Environment 2. Risk Assessment 3. Control Activities 4. Information and Communication 5. Monitoring

Examples of interest bearing cash equivalents

1. Treasury Bill(T-Bill) 2. Certificate of Deposit(CD) 3. Commercial Paper 4. Money Market Fund

Association of Certified Fraud Examiners (ACFE) studied that

80% of all workplaces frauds involved employee theft of company assets and 90% of the thefts involved cash

Non-Sufficient Funds Checks(NFS)

A check that has been returned to the depositor because funds in the issuers account are not sufficient to pay the check(a bounced check)

Bank reconciliation

A report that accounts for the differences between the bank statement and a checkbook balance

Deposits in transit

An amount received and recorded by the business, but not recorded by the bank to appear on the current bank statement

What are generally the five categories in which control activities can be identified

Authority and responsibility , separation of duties, adequate documents and records, safeguards over assets and records, checks on recorded amounts

What is cash reported on?

Balance sheet and statement of cash flows

3 important areas where the accounting system interacts with the internal control system to strengthen cash controls

Bank reconciliation, cash over and short, and petty cash

What is the first stage of the operating cycle?

Buying inventory

Where are deposits in transit added?

Cash balance from the bank statement

What are the tools of effective cash Management?

Cash controls over receipts and disbursements, preparation of bank reconciliations(monthly), use of petty cash

Delaying payments to suppliers, speeding up collection from customers, and earning the greatest return on any excess cash are all examples of?

Cash management

Cash

Cash on hand + Cash in Banks + Undeposited checks

Internal Controls help control cash

Clearly assigned jobs of collecting, holding, and paying cash Cash records examined by an objective party Record keeping system Safeguard in vaults and banks

Step 1 of Performing a Bank reconciliation

Compare the deposits on bank statement to the deposits debited to the cash account

Step 2 of performing Bank Reconciliation

Compare the paid (cancelled) checks that are electronically returned with the bank statement to the amounts credited to the cash account and the list of outstanding checks from prior month

What is the foundation of internal control system?

Control environment

Cash receipts should be

Deposited in a bank daily

Any deposits debited to the cash account but not on the bank statement

Deposits in Transit

Enterprise Risk Management (ERM)

Designed to identify, analyze, and manage strategic risks and business process risk

Cash Equivalents are both

Easily convertible into known amounts of cash and close enough to maturity that they are relatively insensitive to changes in interest rates.

Business Process Risks

INTERNAL processes of the company - specifically, how the company allocates its resources to meet its objectives

What are the three areas of a companies objective?

Effectiveness and efficiency of operations, reliability or financial reporting, and compliance with applicable laws and regulations.

What is risk assessment procedures called

Enterprise Risk Management(ERM)

Operating cycle consists of

Financial resources are used to purchase inventory and other assets and then you use the inventory assets or sell them, you then collect from the customer and then repeat

Information and Communication

Gather and communicate information

What should happen to any cash surplus in business

Invested back into companies operation to grow company, used to pay debt, returned to shareholders through dividends or stock repurchase.

Income Statement Acoount

Is where a cash over and short is recorded and treated as expense or other revenues

After reconciliation what do you record?

Journal entries for everything on the book side

Step 3 of Bank Reconciliation

Look for items on the bank statement that have not been debited or credited to the cash account

What does the Sarbanes-Oxley Act require?

Management to produce an internal control report

Common business processes include

Materials acquisition, production, logistics and distribution, branding and marketing, and Human Resources

Is stock a cash equivalent?

No, stock is NEVER a cash equivelent.

Where does cash appear?

On balance sheets and statement of cash flows

Why are cash controls more effective when companies pay with check?

Only certain people have authority to sign checks, supporting document are marked opacity to avoid duplicate payments, checks are pre-numbered so you can identify missing checks

Any checks credited to the cash account but not on the bank statement

Outstanding checks

Two types of transactions recorded by a business but not a bank is

Outstanding checks and Deposit in transit

What is the second stage of the operating cycle?

Paying for inventory

What does the control environment include?

Philosophy and operating style of management personnel policies and practices of the business overall integrity, attitude, and actions of everyone in the business concerning the importance of control

Porter's Five Forces

Possible threats to originations success in accomplishing goals and are external to the organization such as: Competitors, customers, substitute products or services, and threat of new competitors

What does selling inventory produce?

Produces more receivables

cash equivalents

Short-term, highly liquid investments with an original maturity of three months or less

What should happen to outstanding checks.

Should be subtracted from the cash balance from the bank statement

Statement of Cash Flows

Shows the sources and uses of cash during the year

Five components of internal controls

The control environment, risk assessment, control activities, information and communication, and monitoring activities

Information and communication

The internal control system must capture and communicate all pertinent information both down and up the organization, as well as communicate information to appropriate external parties.

The more liquid an asset

The more likely it is to be stolen

Reporting objectives

The reliability of a company's reporting(accounting records)

When you see bank service charges, interest payments, NSF checks, automatic payments(debit memos), and bank collections on behalf of the company(credit memos) what should happen

They should all be subtracted from the cash balance from company records, but bank credits should be added to the cash balance from company records

Monitoring

Tracking potential and actual problems in the internal control system

True or false: Issuing checks to pay small amounts is usually more costly then paying cash

True

True or false: The length of the operating cycle influences the classification of assets and liabilities on balance sheet

True

True or false: The longer a company keeps cash the more interest it can collect

True

What does Balance per book and Balance per bank give us?

True cash Balance

When are cash controls more effective?

When companies pay with checks

Does operating cycle play an important role in measurement of income and does the length of the cycle affect the amount of capital a business needs and the policies that govern the sales of its goods and services?

Yes

Cash over and short

an account that records the discrepancies between deposited amounts of actual cash received and the total of the cash register tape

Petty cash

an amount of cash kept on hand and used for making small payments

Credit memos

bank increases your cash account, addition on the bank statement

Debit memos

bank reduces your cash account, deduction of the bank statement

Outstanding check

check issued and recorded by the business that has not been "cashed" by the recipient of the check

Internal control and procedures

clearly defined authority and Responsibility, segregation of duties, adequate documents and records, safeguarding assets and records, checks on recorded amounts

Control Environment

company philosophy. [personnel policies,. over all integrity and attitudes of everyone in the business

Compliance objective

compliance with laws and regulations(GAAP and SEC regulations)

Accounting System

consists of the methods and records used to identify, measure, record, and communicate financial information about a business

Debit and Credit memos

deductions or additions to the cash balance made by the bank

How is separation of duties used in the control of cash receipts?

different employees for recording, custody, and authorization

Service Charges

fees charged by the bank for services provided. Examples include annual maintenance, minimum balance, and foreign transaction fees.

Irregularities

intentional misstatements, theft, or fraud

Cash Management

necessary to ensure company has neither too little nor too much cash on hand

Tone at the top

overall integrity, attitude, and actions of everyone in the business concerning the importance of control

Control Activities

policies and procedures top management establishes to help insure that its objectives are met

Strategic risks

possible threats to the organization's success in accomplishing its objectives that are external to the organization

Operating Cycle

the elapsed time between the purchase of goods for resale and the collection of cash from customers

Internal control systems

the policies and procedures established by top management and the board of directors to provide reasonable assurance that the companies objectives are being met in three areas