Ch07

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  • 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)
  • Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
  • Question 8-8 (textbook) ( a ) The concept of reasonable assurance rests on the premise that the costs of establishing control procedures should not exceed their expected benefit. (b) The human element is an important factor in a system of internal control. A good system can become ineffective through employee fatigue, carelessness, or in difference. Moreover, internal control may become ineffective as a result of collusion.
  • Question 8-14 (textbook)
  • Question 2-19 (textbook) No, Jim is not correct . The proper sequence is as follows : ( b ) Business transaction occurs. ( c ) Information entered in the journal. ( a ) Debits and credits are posted to the ledger. ( e ) Trial balance is prepared. ( d ) Financial statements are prepared.
  • Ch07

    1. 2. <ul><li>Internal Control </li></ul><ul><li>and Cash </li></ul>Accounting, Third Edition
    2. 3. <ul><li>Define fraud and internal control. </li></ul><ul><li>Identify the principles of internal control activities. </li></ul><ul><li>Explain the applications of internal control principles to cash receipts. </li></ul><ul><li>Explain the applications of internal control principles to cash disbursements. </li></ul><ul><li>Prepare a bank reconciliation. </li></ul><ul><li>Explain the reporting of cash. </li></ul><ul><li>Discuss the basic principles of cash management. </li></ul><ul><li>Identify the primary elements of a cash budget. </li></ul><ul><li>Explain the operation of a petty cash fund. </li></ul>Study Objectives
    3. 4. Fraud and Internal Control Cash Controls Use of a Bank Reporting Cash Managing and Monitoring Cash Fraud, Internal Control, and Cash <ul><li>Fraud </li></ul><ul><li>The Sarbanes-Oxley Act </li></ul><ul><li>Internal control </li></ul><ul><li>Principles of internal control activities </li></ul><ul><li>Limitations </li></ul><ul><li>Cash receipts controls </li></ul><ul><li>Cash disbursements controls </li></ul><ul><li>Bank statements </li></ul><ul><li>Reconciling the bank account </li></ul><ul><li>Cash equivalents </li></ul><ul><li>Restricted cash </li></ul><ul><li>Basic principles </li></ul>
    4. 5. Fraud and Internal Control A dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. SO 1 Define fraud and internal control. Fraud Three factors that contribute to fraudulent activity. Illustration 7-1
    5. 6. Fraud and Internal Control <ul><li>Companies must </li></ul><ul><ul><li>develop principles of control over financial reporting. </li></ul></ul><ul><ul><li>continually verify that controls are working. </li></ul></ul>The Sarbanes-Oxley Act Independent auditors must attest to the level of internal control. SOX created the Public Company Accounting Oversight Board (PCAOB) . SO 1 Define fraud and internal control.
    6. 7. Fraud and Internal Control <ul><li>Methods and measures adopted to: </li></ul><ul><ul><li>Safeguard assets. </li></ul></ul><ul><ul><li>Enhance accuracy and reliability of accounting records. </li></ul></ul><ul><ul><li>Increase efficiency of operations. </li></ul></ul><ul><ul><li>Ensure compliance with laws and regulations. </li></ul></ul>SO 1 Define fraud and internal control. Internal Control
    7. 8. Fraud and Internal Control <ul><li>Five Primary Components: </li></ul><ul><ul><li>Control environment. </li></ul></ul><ul><ul><li>Risk assessment. </li></ul></ul><ul><ul><li>Control activities. </li></ul></ul><ul><ul><li>Information and communication. </li></ul></ul><ul><ul><li>Monitoring. </li></ul></ul>SO 1 Define fraud and internal control. Internal Control
    8. 9. Fraud and Internal Control Establishment of Responsibility Control is most effective when only one person is responsible for a given task. Segregation of Duties Related duties should be assigned to different individuals. Documentation Procedures Companies should use prenumbered documents and all documents should be accounted for. Principles of Internal Control Activities SO 2 Identify the principles of internal control activities.
    9. 10. Fraud and Internal Control Physical Controls Illustration 7-2 Principles of Internal Control Activities SO 2 Identify the principles of internal control activities.
    10. 11. Fraud and Internal Control <ul><li>Independent Internal Verification </li></ul><ul><ul><li>Records periodically verified by an employee who is independent. </li></ul></ul><ul><ul><li>Discrepancies reported to management. </li></ul></ul><ul><li>Human Resource Controls </li></ul><ul><ul><li>Bond employees. </li></ul></ul><ul><ul><li>Rotate employees’ duties and require vacations. </li></ul></ul><ul><ul><li>Conduct background checks. </li></ul></ul>Principles of Internal Control Activities SO 2 Identify the principles of internal control activities.
    11. 13. Fraud and Internal Control Limitations of Internal Control <ul><li>Costs should not exceed benefit. </li></ul><ul><li>Human element. </li></ul><ul><li>Size of the business. </li></ul>SO 2 Identify the principles of internal control activities.
    12. 15. Cash Controls Illustration 7-4 Cash Receipts Controls SO 3 Explain the applications of internal control principles to cash receipts. Independent Internal Verification Supervisors count cash receipts daily; treasurer compares total receipts to bank deposits daily Establishment of Responsibility Only designated personnel are authorized to handle cash receipts (cashiers) Segregation of Duties Different individuals receive cash, record cash receipts, and hold the cash Documentation Procedures Use remittance advice (mail receipts), cash register tapes, and deposit slips Physical, Mechanical, and Electronic Controls Store cash in safes and bank vaults; limit access to storage areas; use cash registers Human Resource Controls Bond personnel who handle cash; require employees to take vacations; conduct background checks
    13. 16. Over-the-Counter Receipts SO 3 Explain the applications of internal control principles to cash receipts. Illustration 7-5 Important internal control principle—segregation of record-keeping from physical custody.
    14. 17. Mail Receipts <ul><li>Control Procedures: </li></ul><ul><ul><li>Mail receipts should be opened by two people, a list prepared, and each check endorsed. </li></ul></ul><ul><ul><li>Each mail clerk signs the list to establish responsibility for the data. </li></ul></ul><ul><ul><li>Original copy of the list, along with the checks, is sent to the cashier’s department. </li></ul></ul><ul><ul><li>A copy of the list is sent to the accounting department for recording. The clerks also keep a copy. </li></ul></ul>SO 3 Explain the applications of internal control principles to cash receipts.
    15. 18. Cash Controls Permitting only designated personnel to handle cash receipts is an application of the principle of: a. segregation of duties. b. establishment of responsibility. c. independent check. d. other controls. Review Question SO 3 Explain the applications of internal control principles to cash receipts.
    16. 19. Cash Controls <ul><li>Generally, internal control over cash disbursements is more effective when companies pay by check, rather than by cash. </li></ul><ul><li>Applications: </li></ul><ul><ul><li>Voucher system </li></ul></ul><ul><ul><li>Petty cash fund </li></ul></ul>SO 4 Explain the applications of internal control principles to cash disbursements. Cash Disbursements Controls
    17. 20. Cash Controls Independent Internal Verification Compare checks to invoices; reconcile bank statement monthly Establishment of Responsibility Only designated personnel are authorized to sign checks (treasurer) Segregation of Duties Different individuals approve and make payments; check signers do not record disbursements Documentation Procedures Use prenumbered checks and account for them in sequence; each check must have an approved invoice; require employees to use corporate credit cards for reimbursable expenses; stamp invoices &quot;paid.&quot; Physical, Mechanical, and Electronic Controls Store blank checks in safes, with limited access; print check amounts by machine in indelible ink Human Resource Controls Bond personnel who handle cash; require employees to take vacations; conduct background checks SO 4 Explain the applications of internal control principles to cash disbursements. Cash Disbursements Controls Illustration 7-6
    18. 22. Cash Controls The use of prenumbered checks in disbursing cash is an application of the principle of: a. establishment of responsibility. b. segregation of duties. c. physical, mechanical, and electronic controls. d. documentation procedures. Review Question SO 4 Explain the applications of internal control principles to cash disbursements.
    19. 23. Cash Controls <ul><li>Voucher System </li></ul><ul><ul><li>Network of approvals, by authorized individuals, to ensure all disbursements by check are proper. </li></ul></ul><ul><ul><li>A voucher is an authorization form prepared for each expenditure. </li></ul></ul>SO 4 Explain the applications of internal control principles to cash disbursements. Cash Disbursements Controls
    20. 24. Cash Controls <ul><li>Petty Cash Fund - U sed to pay small amounts. </li></ul><ul><li>Involves: </li></ul><ul><ul><li>establishing the fund, </li></ul></ul><ul><ul><li>making payments from the fund, and </li></ul></ul><ul><ul><li>replenishing the fund. </li></ul></ul>Cash Disbursements Controls SO 4 Explain the applications of internal control principles to cash disbursements.
    21. 25. Control Features: Use of a Bank <ul><li>Contributes to good internal control over cash. </li></ul><ul><ul><li>Minimizes the amount of currency on hand. </li></ul></ul><ul><ul><li>Creates a double record of bank transactions. </li></ul></ul><ul><ul><li>Bank reconciliation. </li></ul></ul>
    22. 26. Control Features: Use of a Bank <ul><li>Bank Statements </li></ul><ul><li>Debit Memorandum </li></ul><ul><li>Bank service charge </li></ul><ul><li>NSF (not sufficient funds) </li></ul>Illustration 7-7 <ul><li>Credit Memorandum </li></ul><ul><li>Collect notes receivable. </li></ul><ul><li>Interest earned. </li></ul>
    23. 27. Control Features: Use of a Bank <ul><li>The control features of a bank account do not include: </li></ul><ul><ul><li>having bank auditors verify the correctness of the bank balance per books. </li></ul></ul><ul><ul><li>minimizing the amount of cash that must be kept on hand. </li></ul></ul><ul><ul><li>providing a double record of all bank transactions. </li></ul></ul><ul><ul><li>safeguarding cash by using a bank as a depository. </li></ul></ul>Review Question
    24. 28. Control Features: Use of a Bank <ul><li>Reconcile balance per books and balance per bank to their adjusted (corrected) cash balances. </li></ul><ul><li>Reconciling Items: </li></ul><ul><ul><li>Deposits in transit. </li></ul></ul><ul><ul><li>Outstanding checks. </li></ul></ul><ul><ul><li>Bank memoranda. </li></ul></ul><ul><ul><li>Errors. </li></ul></ul>Reconciling the Bank Account SO 5 Prepare a bank reconciliation. Time Lags
    25. 29. Control Features: Use of a Bank Reconciliation Procedures SO 5 Prepare a bank reconciliation. + Deposit in Transit - Outstanding Checks +/- Bank Errors + Notes collected by bank - NSF (bounced) checks - Check printing or other service charges +/- Book Errors CORRECT BALANCE CORRECT BALANCE Illustration 7-8
    26. 30. Control Features: Use of a Bank SO 5 Prepare a bank reconciliation.
    27. 31. Control Features: Use of a Bank Illustration: Prepare a bank reconciliation at April 30. SO 5 Prepare a bank reconciliation. Cash balance per bank statement $15,907.45 Add: Deposit in transit 2,201.40 Less: Outstanding checks (5,904.00) Adjusted cash balance per bank $12,204.85 Cash balance per books $11,589.45 Add: Collection of notes receivable 1,035.00 Error in check No. 443 36.00 Less: NSF check (425.60) Bank service charge (30.00) Adjusted cash balance per books $12,204.85
    28. 32. Control Features: Use of a Bank Cash 615.40 Apr. 30 Miscellaneous expense 45.00 Accounts receivable 425.60 Notes receivable 1,000.00 Interest revenue 50.00 SO 5 Prepare a bank reconciliation. Illustration: Journalize the adjusting entries at April 30 on the books of Laird Company. Dr. Cr. Accounts payable 36.00
    29. 33. Control Features: Use of a Bank The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is: a. outstanding checks. b. deposit in transit. c. a bank error. d. bank service charges. Review Question SO 5 Prepare a bank reconciliation.
    30. 34. Control Features: Use of a Bank <ul><li>Electronic Funds Transfers (EFT) </li></ul><ul><ul><li>Disbursement systems that uses wire, telephone, or computers to transfer cash balances between locations. </li></ul></ul>SO 5 Prepare a bank reconciliation.
    31. 36. Reporting Cash SO 6 Explain the reporting of cash. Most liquid asset, listed first. <ul><li>Cash equivalents </li></ul>Illustration 7-11 <ul><li>Restricted cash </li></ul>
    32. 37. Reporting Cash <ul><li>Which of the following statements correctly describes the reporting of cash? </li></ul><ul><ul><li>Cash cannot be combined with cash equivalents. </li></ul></ul><ul><ul><li>Restricted cash funds may be combined with Cash. </li></ul></ul><ul><ul><li>Cash is listed first in the current assets section. </li></ul></ul><ul><ul><li>Restricted cash funds cannot be reported as a current asset. </li></ul></ul>Review Question SO 6 Explain the reporting of cash.
    33. 38. Managing and Monitoring Cash <ul><li>Increase the speed of receivables collection. </li></ul><ul><li>Keep inventory levels low. </li></ul><ul><li>Delay payment of liabilities. </li></ul><ul><li>Plan the timing of major expenditures. </li></ul><ul><li>Invest idle cash. </li></ul>Basic Principles of Cash Management SO 7 Discuss the basic principles of cash management.
    34. 39. Keeping an Eye on Cash <ul><li>The Cash Budget </li></ul><ul><ul><li>shows anticipated cash flows, usually over a one- to two-year period. </li></ul></ul><ul><ul><li>contributes to more effective cash management. </li></ul></ul>SO 8 Identify the primary elements of a cash budget.
    35. 40. Operation of the Petty Cash Fund <ul><li>Petty Cash Fund - Used to pay small amounts. </li></ul><ul><li>Involves: </li></ul><ul><ul><li>establishing the fund, </li></ul></ul><ul><ul><li>making payments from the fund, and </li></ul></ul><ul><ul><li>replenishing the fund. </li></ul></ul>SO 9 Explain the operation of a petty cash fund. Appendix
    36. 41. Operation of the Petty Cash Fund Illustration: If Laird Company decides to establish a $100 fund on March 1, the entry is: Petty cash 100 March 1 Cash 100 SO 9 Explain the operation of a petty cash fund. Appendix
    37. 42. Operation of the Petty Cash Fund Illustration: On March 15 the petty cash custodian requests a check for $87. The fund contains $13 cash and petty cash receipts for postage $44, supplies $38, and miscellaneous expenses $5. The entry is: Postage inventory 44 March 15 Cash 87 Supplies 38 Miscellaneous expense 5 SO 9 Explain the operation of a petty cash fund. Appendix
    38. 43. Operation of the Petty Cash Fund Illustration: Assume in the preceding example that the custodian had only $12 in cash in the fund plus the receipts as listed. The request for reimbursement would therefore be for $88. The entry is: Postage inventory 44 March 15 Cash over and short 1 Supplies 38 Miscellaneous expense 5 Cash 88 SO 9 Explain the operation of a petty cash fund. Appendix
    39. 44. Copyright “ Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”

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