Chapter 4 Flashcards
Internal Control System
A. Policies and procedures necessary to ensure:
1. Operations objectives: safeguarding of assets & day-to-day operations are effective.
2. Reporting objectives: reliability of accounting records.
3. Compliance objectives: compliance with laws and regulations.
B. Parts:
1. **Control Environment (culture, tones, ethical concerns…etc.)
2. **Risk Assessment
3. Information & Communication
4. Monitoring
5. **Control Activities: Internal Control Procedures
- defined authority and responsibility
- **segregation of duties; assures no one person prepares all the documents and records for an activity
- adequate docs & records; captures all relevant info about a transaction and assists in proper recording and classification
- **safeguarding assets & records - protects assets and accounting records from loss, theft, unauthorized use
- independent review and appraisal; periodic review of system and people operating it to ensure amounts and are correct and correspond to properly authorized activities
Cash
Cash on Hand + Cash in Banks + Undeposited Checks
Appears on BS
Cash Equivalents
Short-term, highly liquid investments
- Readily convertible into a known amount of cash AND
- So near maturity that interest rate changes won’t affect market value (3 months or less)
Examples: Certificates of deposit, treasury bills, commercial papers, money market fund
NEVER STOCK!!
Cash Management
Necessary to ensure the company has neither too little nor too much cash on hand.
A. Cash Receipts Control
- record when received & safeguard
- deposit (physical) receipts intact
- separation of duties - recording, custody, authorization
B. Cash Disbursements Control
- all major disbursements made by check
- only small, misc. expenditures from Petty Cash
- prepare bank reconciliation
C. Bank Reconciliation
- reconciles timing differences and errors
Balance Per Bank
- from bank statement @ month end
ADD:
- deposits in transit
- bank errors
LESS:
- outstanding checks (hasn’t been deposited by the person we bought from)
- bank errors
Balance Per Books
- from general ledger and balance sheet
- requires journal entries!!! STUDY THIS
ADD:
- notes collected
- interest collected
- book errors
(new info we didn’t know we had until we received the bank statement)
LESS:
- NSF checks (their check was invalid)
- service charges
- overdraft charges (we take more money than we thought we had)
- book errors)
Memos
Debit - bank REDUCES cash account
ex: [ misc exp.
cash]
Credit - bank INCREASES cash account
Operating Cycle
- time between good purchased for resale (inventory) and collection of cash from customers
- can affect classification of A+L
A. Cash Management
1. Delays payments to suppliers (earning interest).
2. Keep inventory low to reduce storage costs.
3. Speed collection from customers (invest cash/reduce financing).
4. Highest return on excess cash.
