Chapter 4 Flashcards
Internal Control System
- Consists of the policies and procedures necessary to ensure operating, reporting, and compliance objectives
- 5 components of Internal Control
- Control Activities: Internal Control Procedures
Operating objectives
operations are effective and efficient safeguarding of assets against loss
Reporting Objectives
the reliability of a company’s reporting (accounting records)
Compliance objective
compliance with laws and regulations
5 components of internal control
- Control environment- company philosophy, personnel policies, overall integrity, and attitudes of everyone in the business
- Risk Assessment- identify, analyze, and manage business risks
- Information and Communication- gather and communicate information
- Monitoring- tracking potential and actual problems in the internal control system
- Control Activities- internal control procedures
Control Activities: Internal Control Procedures
b. Segregation of duties- assure that no one person prepares all the documents & records for an activity
c. Adequate Documents & Records- capture all relevant information about a transaction and assist in proper recording and classification. All documents should be properly controlled
d. Safeguarding assets and Records- protect assets and accounting records from loss, theft, unauthorized use, etc.
Cash
Cash on hand + Cash in Banks + Undeposited Checks
- cash appears on balance sheet & statement of cash flows
Cash Equivalents
short term, highly liquid investments with an original maturity of 3 months or less
Must be BOTH:
1. readily convertible into known amount of cash
2. so near maturity that interest rate changes wont affect their market value
(original maturity of 3 months or less)
Examples of Cash Equivalents
- Treasury Bill (T- Bill)
- Certificate Of Deposit (CD)
- Commercial Paper
- Money Market Fund
(never include stock as a cash equivalent)
Cash Management
necessary to ensure has neither too little nor too much cash on hand
Tools of effective cash management include:
- cash controls over receipts and disbursements
- Preparations of bank reconciliations
- use of petty cash fund
Control of Cash Receipts
- record when received and safeguard
- deposit receipts intact (deposits daily)
- separation of duties- different employees for each of the following: recording, custody, and authorization
Control of Cash Disbursements
- All major disbursements made by check
- pay one small, misc expenditures from petty cash
- prepare bank reconciliation (monthly)
Bank Reconciliation
reconciles timing differences and errors
Debit Memo
bank reduces your cash account, deduction of the bank statement
Credit Memo
bank increases your cash account, addition on the bank statement
Cash Management Principles
- Delaying payments to suppliers so a company can earn as much interest on their cash as possible
- keep inventory low to not tie up cash
- speed collection from customers in order to have cash to invest
- highest return on excess cash
To find true cash balance per bank
balance per bank $ xx
+ DIT (deposits in transit). xx
+ Bank errors. xx
- outstanding checks. xx
- bank errors xx
= True cash balance $ xx
To find true cash balance per book
Bal. per book. $ xx
+ Notes collected. xx
+ Interest collected. xx
+ Book errors. xx
- NSF Checks ( xx )
- Service charges ( xx )
- Overdraft charges. ( xx )
- Book errors ( xx )
= True cash balance $ xx
