Chapter 6: Cash and internal control Flashcards
Why does the purchase of an item classified as a cash equivalent not appear on the statement of cash flows as an investing activity?
A cash equivalent is convertible to a known amount of cash. Therefore, the purchase of a cash equivalent is not considered a significant investing activity to be reported on the statement of cash flows. Cash equivalents are included with cash on the balance sheet, and thus the company is merely trading one cash item for another when it writes a check and uses the proceeds to invest in a cash equivalent.
A friend says to you: ‘’I’m confused. I have a memo included with my bank statement indicating a $20 service charge for printing new checks. If the bank is deducting this amount from my account, why do they call it a ‘debit memoranda’? I thought a decrease in a Cash account would be a credit, not a debit.’’ How can you explain this?
The meaning of a debit or a credit depends on which company is concerned. To the bank, a company’s checking account is a liability. Therefore, when a bank deducts a service charge from a company’s account, it is reducing its liability to the company. A liability is decreased with a debit. Thus, banks refer to charges to a company’s account as debit memoranda.
What circumstances led to the passage of the Sarbanes-Oxley Act in 2002?
The Sarbanes-Oxley Act was passed in the wake of a number of high-profile cases involving questionable accounting practices. Congress decided that action by the federal government was needed to protect the interests of various parties that rely on corporate financial statements in making decisions.
An order clerk fills out a purchase requisition for an expensive item of inventory and the receiving report when the merchandise arrives. The clerk takes the inventory home, then sends the invoice to the accounting department so that the supplier will be paid. What basic internal control procedure could have prevented this misuse of company assets?
This misuse of corporate assets could have been prevented by having a procedure in place for segregation of duties. A single employee should not be allowed to order merchandise, receive it, and approve payment for it.
What two basic procedures are essential to an effective system of internal control over cash?
First, all cash receipts should be deposited intact in a bank on a daily basis. That is, no disbursements should be made from any amounts received prior to their deposit in the bank. Second, all cash disbursements should be made by check. The use of serially numbered checks results in a clear record of all payments.
What is the purpose of comparing a purchase invoice with a purchase order? of comparing a receiving report with a purchase invoice?
A purchase invoice is compared with a purchase order to ensure that the goods were in fact ordered. The comparison of a receiving report with an invoice ensures that all goods that a company is being billed for were in fact received.
Who is responsible for establishing and maintaining an adequate internal control structure for a company?
Management is responsible for establishing and maintaining an adequate internal control structure.
Who provides an independent opinion as to whether management has maintained effective internal control over financial reporting?
The independent auditor provides an opinion as to whether management has maintained effective internal control over financial reporting.
To whom should the independent auditors’ report be directed?
The independent auditors’ report should be directed to the board of directors and the stockholders.
Which committee of the board of directors provides direct contact between stockholders and the independent accounting firm?
The audit committee provides direct contact between stockholders and the independent accounting firm.
List the internal control procedures discussed in the text.
- Proper authorizations
- Segregation of duties
- Independent verification
- Safeguarding of assets and records
- Independent review and appraisal
- Design and use of business documents
