Transcript Document

Chapter 6
Accounting Systems,
Internal Controls, and Cash
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
© Copyright 2004 South-Western, a division
of Thomson Learning. All rights reserved.
Task Force Image Gallery clip art included in this
electronic presentation is used with the permission of
1
NVTech Inc.
Objectives
1. Define an accounting system and
describe its implementation.
2. List the three objectives of internal
control, and define and give examples of
the five elements of internal control.
3. Describe the nature of cash and the
importance of internal control over cash.
4. Summarize basic procedures for
achieving internal control over cash
receipts.
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Objectives
5. Summarize basic procedures for achieving
internal control over cash payments,
including the use of a voucher system.
6. Describe the nature of a bank account
and it sue in controlling cash.
7. Prepare a bank reconciliation and
journalize any necessary entries.
8. Account for small cash transactions
using a petty cash fund.
9. Summarize how cash is presented on the
balance sheet.
10. Compute and interpret the ratio of cash
to current liabilities.
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Analysis
Basic
Accounting
System
Design
Implementation
4
Objectives of Internal
Control
To provide reasonable assurance that:
1. assets are safeguarded and used for
business purposes.
2. business information is accurate.
3. employees comply with laws and
regulations.
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Elements of Internal Control
1.
2.
3.
4.
5.
Control environment
Risk assessment
Control procedures
Monitoring
Information and communication
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1. Control environment
Management philosophy and
operating style influences the
control environment.
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2. Risk assessment
Once risks are identified, they can be
analyzed to estimate their significance, to
assess their likelihood of occurring, and to
determine actions that will minimize them.
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3. Control Procedures - a




Competent Personnel
Rotating Duties
Mandatory Vacations
Separating Responsibilities for
Related Operations
 Separating Operations,
Custody of Assets, and
Accounting
 Proofs and Security Measures
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3. Control Procedures - b
Otherwise,Responsibilities
the following
Separating
for
Related
abuses
areOperations
possible:
1. Orders may be placed on the basis of
friendship with a supplier, rather than on
price, quality, and other objective factors.
2. The quantity and quality of supplies received
may not be verified, thus causing payment
for supplies not received or poor-quality
supplies.
3. Supplies may be stolen by the employee.
4. The validity and accuracy of invoices may be
verified carelessly.
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3. Control Procedures - c




Competent Personnel
Rotating Duties
Mandatory Vacations
Separating Responsibilities for
Related Operations
 Separating Operations,
Custody of Assets, and
Accounting
 Proofs and Security Measures
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3. Control Procedures - d
Custody of
Assets
Independent
check
Independent
check
Operations
Accounting
Independent
check
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Clues to Potential Problems
Warning signs with regard to people:
1. Abrupt changes in lifestyle.
2. Close social relationships with suppliers.
3. Refusing to take a vacation.
4. Frequent borrowing from other employees.
5. Excessive use of alcohol or drugs.
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Clues to Potential Problems
Warning signs from the accounting system:
1. Missing documents or gaps in
transaction numbers.
2. An unusual increase in customer
refunds.
3. Differences between daily cash receipts
and bank deposits.
4. Sudden increase in slow payments.
5. Backlog in recording transactions.
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Control Over Cash Receipts

Many companies need several cash accounts to
account for different cash categories and funds.
 Most companies have multiple bank accounts.
The title for each bank account should be:
Cash in Bank—(Name of Bank)
 Preventive controls protect cash from theft and
misuse of cash.
 Detective controls are designed to detect theft or
misuse of cash and are also preventive in nature.
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Retailers’ Sources of Cash
Cash
Receipts
CASHIER’S
DEPARTMENT
Register
records
ACCOUNTING
DEPARTMENT
Remittance
advices
Mail Receipts
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Retailers’ Sources of Cash
CASHIER’S
DEPARTMENT
ACCOUNTING
DEPARTMENT
1
Deposit ticket
Deposit receipt
Bank
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Controlling Cash Received
from Cash Sales
19 Cash
3 142 00
Cash Short and Over
Sales
8 00
3 150 00
To record cash sales and actual
cash on hand.
Cash sales for March 19 totaled $3,150.00 per
the cash register tape. After removing the
change fund, only $3,142.00 was on hand.
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Controlling Cash Received
in the Mail
Most companies’ invoices
are designed so that
customers return a portion
of the invoice, call a
remittance advice.
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Controlling Cash Received
in the Mail
1. The employee who opens the mail should initially
compare the amount received with the amount on the
remittance advice.
2. The employee opening the mail stamps checks and
money orders “For Deposit Only” in the bank account
of the business.
3. All cash is sent to the Cashier’s Department where
checks and money orders are combined with receipts
from cash sales and a bank deposit ticket is prepared.
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Controlling Cash Received
in the Mail
4. The remittance advices and their summary totals are
delivered to the Accounting Department where a clerk
prepares the records of the transactions and posts them
to the customer account.
5. The stamped duplicate copy of the deposit ticket is
returned to the Accounting Department where a clerk
compares the receipt with the total amount that should
have been deposited.
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Internal Control of Cash Payments
1. Cash controls must provide assurance
that payments are made for only
authorized transactions.
2. Cash controls should ensure that cash is
used efficiently.
3. A voucher system provides assurance
that what is being paid for was properly
ordered, received, and billed by the
supplier.
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A voucher system is a set of
procedures for authorizing
and recording liabilities and
cash payments.
Basic
Features of
the Voucher
System
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Basic Features of the
Voucher System




A voucher system normally uses vouchers.
The system normally has a file for unpaid
vouchers and a file for paid vouchers.
Usually prepared by the Accounting Department
after all necessary supporting documents are
received (purchase order, supplier’s invoice, and a
receiving report).
In preparing the voucher, the accounts payable
clerk verifies the quantity, price, and
mathematical accuracy of the supporting
documents and files the paid voucher.
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Bank
Accounts:
Their Nature
and Use as a
Control Over
Cash
A bank reconciliation
is a listing of the items
and amounts that cause
the cash balance
reported in the bank
statement to differ from
the balance of the cash
account in the ledger.
A summary received from the bank of all account
transaction is called a statement of account.
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Reasons for Differences Between Depositor’s
Records and the Bank Statement
 Outstanding checks
 Deposits in transit
 Service charges
 Collections
 Not-sufficient-funds (NSF)
checks
 Errors
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Steps in a Bank Reconciliation
1. Compare each deposit listed on the bank statement
with unrecorded deposits appearing on the preceding
period’s reconciliation and with deposit receipts.
Add deposits not recorded by the bank to the
balance according to the bank statement.
2. Compare paid checks with outstanding checks
appearing on the preceding period’s reconciliation and
with recorded checks.
Deduct checks outstanding that have been paid
by the bank from the balance according to the
bank statement.
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Steps in a Bank Reconciliation
3. Compare bank credit memorandums to entries in the
journal.
Add credit memorandums that have not been
recorded to the balance according to the
depositor’s records.
4. Compare bank debit memorandums to entries
recording cash payments.
Deduct debit memorandums that have not been
recorded from the balance according to the
depositor’s records.
5. List any errors discovered during the preceding steps.28
BANK
Bank’s
books
Beginning balance
$3,359.78
Depositor’s
records
Beginning balance
$2,549.99
Power Network prepares to reconcile the
monthly bank statement as of July 31, 2006
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BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
Depositor’s
records
Beginning balance
$2,549.99
816.20
$4,175.98
A deposit of $816.20 did not
appear on the bank statement.
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BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Depositor’s
records
Beginning balance
Add note and interest
collected by bank
$2,549.99
408.00
$2,957.99
The bank collected a note in the
amount of $400 and the related
interest of $8 for Power Networking
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BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Depositor’s
records
Beginning balance
$2,549.99
Add note and interest
collected by bank
408.00
$2,957.99
Deduct outstanding
checks:
No. 812 $1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
deposit of
$637.02
did not appear
ThreeAchecks
that
were written
during the
on appear
the bankon
statement.
period did not
the bank statement:
#812, $1,061; #878, $435.39, #883, $48.60.
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BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
Depositor’s
records
Beginning balance
$2,549.99
Add note and interest
collected by bank
408.00
$2,957.99
Deduct check returned
because of insufficient
funds
$300.00
The bank returned an NSF check from one of the
firm’s customers, Thomas Ivey, in the amount of
$300. This was a payment on account.
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BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
Depositor’s
records
Beginning balance
$2,549.99
Add note and interest
collected by bank
408.00
$2,957.99
Deduct check return
because of insufficient
funds
$300.00
Bank service
charges
18.00
The bank service charges totaled $18.00.
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BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
Depositor’s
records
Beginning balance
$2,549.99
Add note and interest
collected by bank
408.00
$2,957.99
Deduct check return
because of insufficient
funds
$300.00
Bank service
charges
18.00
Error recording
Check No. 879 9.00
327.00
Check No. 879 for $732.26 to Taylor Co. on account,
erroneously recorded in journal as $723.26.
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BANK
Bank’s
books
Beginning balance
Add deposit not
recorded by bank
$3,359.78
816.20
$4,175.98
Deduct outstanding
checks:
No. 812
$1,061.00
No. 878
435.39
No. 883
48.60 1,544.99
Adjusted balance
$2,630.99
Depositor’s
records
Beginning balance
$2,549.99
Add note and interest
collected by bank
408.00
$2,957.99
Deduct check return
because of insufficient
funds
$300.00
Bank service
charges
18.00
Error recording
Check No. 879
9.00
327
Adjusted balance
$2,630.99
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Now, if desired, we can
prepare a formal
statement for Power
Networking.
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Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement
Add: Deposit not recorded by bank
$3,359.78
816.20
$4,175.98
Deduct: Outstanding checks
No. 812
No. 878
No. 883
Adjusted balance
$1,061.00
435.39
48.60
Balance per depositor’s records
Add: Note and interest collected by bank
Deduct: NSF check (Thomas Ivey) returned
Bank service charges
Error in recording Check No. 879
Adjusted balance
1,544.99
$2,630.99
$2,549.99
408.00
$2,957.99
$300.00
18.00
9.00
327.00
$2,630.99
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Journal entries must be prepared
for those items that affected the
depositor’s side of the
reconciliation.
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Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement
Add: Deposit not recorded by bank
$3,359.78
816.20
$4,175.98
Deduct: Outstanding checks
No. 812
No. 878
No. 883
Adjusted balance
$1,061.00
435.39
48.60
Balance per depositor’s records
Add: Note and interest collected by bank
Deduct: NSF check (Thomas Ivey) returned
Bank service charges
Error in recording Check No. 879
Adjusted balance
1,544.99
$2,630.99
$2,549.99
408.00
$2,957.99
$300.00
18.00
9.00
327.00
$2,630.99
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Entries Related to a Bank Reconciliation
July 31 Cash
Notes Receivable
Interest Receivable
Note collected by bank.
408 00
400 00
8 00
41
Power Networking
Bank Reconciliation
July 31, 2006
Balance per bank statement
Add: Deposit not recorded by bank
$3,359.78
816.20
$4,175.98
Deduct: Outstanding checks
No. 812
No. 878
No. 883
Adjusted balance
$1,061.00
435.39
48.60
Balance per depositor’s records
Add: Note and interest collected by bank
Deduct: NSF check (Thomas Ivey) returned
Bank service charges
Error in recording Check No. 879
Adjusted balance
1,544.99
$2,630.99
$2,549.99
408.00
$2,957.99
$300.00
18.00
9.00
327.00
$2,630.99
42
Entries Related to a Bank Reconciliation
July 31 Cash
408 00
Notes Receivable
400 00
Interest Receivable
Note collected by bank.
30 Accounts Receivable—Thomas Ivey
Miscellaneous Administrative Exp.
Accounts Payable—Taylor Co.
Cash
NSF check, bank service
charges, and error in
recording Check no. 879.
8 00
300 00
18 00
9 00
327 00
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Petty
Cash
44
On August 1, issued Check No. 511 for $100
to established a petty cash fund.
Aug. 1 Petty Cash
Cash
100 00
100 00
Established petty cash fund.
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At the end of August, the petty cash receipts
indicated expenditures for the following items:
office supplies, $28, postage (office supplies),
$22; store supplies, $35, and miscellaneous
administrative items, $3.
Aug. 31 Office Supplies
Store Supplies
Miscellaneous Administrative Exp.
Cash
Replenished petty cash fund.
50 00
35 00
3 00
88 00
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Financial Analysis and Interpretation
Solvency is the ability of a business to meet its
financial obligations (debts) as they are due.
Solvency analysis focuses on the ability of a
business to pay or otherwise satisfy its current
and noncurrent liabilities.
This ability is normally assessed by examining
balance sheet relationships.
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Financial Analysis and Interpretation
Doomsday Ratio
Laettner Co. Oakley Co.
A. Cash and equivalents
B. Current liabilities
Doomsday ratio A / B
$100,000 $ 120,000
400,000 1,500,000
0.25
0.08
Use: To indicate
thethese
company’s
ability to
How are
ratios used?
meet creditors obligations in the
worst case assumption that should
the business cease to exist.
THE END
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