Act 211, Chapter 4

Views:
 
Category: Entertainment
     
 

Presentation Description

No description available.

Comments

Presentation Transcript

Chapter 4:

Chapter 4 Cash and Internal Controls McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Part A:

Part A Internal Controls 4- 2

Recent Accounting Scandals and Response:

Recent Accounting Scandals and Response FRAUD FIRM FRAUD FIRM AUDIT FIRM Arthur Andersen WorldCom Enron 4- 3

Fraud and Internal Control:

A dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. Fraud and Internal Control Fraud Three factors that contribute to fraudulent activity.

Sarbanes-Oxley Act of 2002 :

Sarbanes-Oxley Act of 2002 Congress passed the Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX. 4- 5

LO1 Discuss the Impact of Accounting Scandals and the Passage of the Sarbanes-Oxley Act:

LO1 Discuss the Impact of Accounting Scandals and the Passage of the Sarbanes-Oxley Act Managers are entrusted with the resources of both the company’s lenders (liabilities) and owners (stockholders' equity). Managers of the company act as stewards or caretakers of the company’s assets. In recent years some managers have shirked their ethical responsibilities. In many cases, top executives misreported accounting information to cover up their company’s poor operating performance and hoped to fool investors into overvaluing the company’s stock. 4- 6

PowerPoint Presentation:

Major Provisions of the Sarbanes-Oxley Act of 2002 4- 7

LO2 Identify the Components, Responsibilities, and Limitations of Internal Control:

LO2 Identify the Components, Responsibilities, and Limitations of Internal Control From a financial accounting perspective, internal control is a company’s plan to: Safeguard the company’s assets. Improve the accuracy and reliability of accounting information Effective internal control builds a wall to prevent misuse of company funds by employees and fraudulent or errant financial reporting 4- 8

PowerPoint Presentation:

i>clicker question

Part B:

Part B Cash 4- 11

LO3 Define Cash and Cash Equivalents:

LO3 Define Cash and Cash Equivalents Cash: includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers. Cash equivalents: short-term investments that have a maturity date no longer than three months from the balance sheet date. 4- 12

Reporting Cash:

Reporting Cash SO 6 Explain the reporting of cash. Most liquid asset listed first. Cash equivalents Restricted cash

LO4 Understand Controls over Cash Receipts and Cash Disbursements:

LO4 Understand Controls over Cash Receipts and Cash Disbursements Cash Controls: management must safeguard all assets against possible misuse. Again, because cash is especially susceptible to theft, internal control of cash is a key issue. Cash Receipts: most businesses receive payment from the sale of products and services either in the form of cash or as a check received immediately or through the mail. 4- 14

Internal control over cash receipts could include the following steps::

Internal control over cash receipts could include the following steps: Record all cash receipts as soon as possible. Theft is more difficult once a record of the cash receipt has been made. Open mail each day, and make a list of checks received, including the amount and payer’s name. Designate an employee to deposit cash and checks into the company’s bank account each day, different from the person who receives cash and checks. Have another employee record cash receipts in the accounting records. Verify cash receipts by comparing the bank deposit slip with the accounting records. Accept credit cards or debit cards, to limit the amount of cash employees handle. 4- 15

Acceptance of Credit/Debit Cards:

Acceptance of Credit/Debit Cards CASH RECEPITS CREDIT CARD DEBIT CARD It does not remove cash from the cardholder’s account after each transaction. It removes cash directly from the cardholder’s bank account at the time of use. 4- 16

Cash Disbursements :

Cash Disbursements Managers should design proper control for cash disbursements to prevent any unauthorized payments and ensure proper recording. Consistent with our discussion of cash receipts, cash disbursements include not only disbursing physical cash, but also writing checks and using credit and debit cards. All these forms of payment constitute cash disbursement and require formal internal control procedures. 4- 17

LO5 Reconcile a Bank Statement:

LO5 Reconcile a Bank Statement A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company’s own records. A company’s cash balance as recorded in its books rarely equals the cash balance reported in the bank statement. Differences in these balances occur because of either timing differences or errors. It is the possibility of these errors, or even outright fraudulent activities, that make the bank reconciliation a useful cash control tool. 4- 18

Control Features: Use of a Bank:

Reconciliation Procedures + 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 Control Features: Use of a Bank

PowerPoint Presentation:

Company Records of Cash Activities Starlight Drive-In Cash Account Records March 1, 2012 to March 31, 2012 Deposits Checks Date Desc. Amount Date No. Desc. Amount 3/5 Sales receipts $3,600 3/6 293 Salaries $2,100 3/22 Sales receipts 1,980 3/11 294 Rent 2,600 3/31 Sales receipts 2,200 3/21 295 Utilities 1,200 3/24 296 Insurance 1,900 3/30 297 Supplies 900 $7,780 $8,700 Summary of Transactions Beginning Cash balance March 1, 2012 Deposits Checks Ending Cash Balance March 31, 2012 $3,800 $7,780 $8,700 $2,880 4- 20

PowerPoint Presentation:

Bank Statement 4- 21

PowerPoint Presentation:

Reconciling the Bank Statement 4- 22

PowerPoint Presentation:

Step 3: Adjusting the Company’s Cash Balance 4- 23

PowerPoint Presentation:

i>clicker question

LO6 Account for Petty Cash:

LO6 Account for Petty Cash Companies like to keep a small amount of cash on hand at the company’s location for minor purchases such as postage, office supplies, delivery charges, and entertainment expense To pay for these minor purchases, companies keep some minor amount of cash on hand in a petty cash fund. Management writes a check for cash against the company’s checking account and puts that amount of withdrawn cash in the hands of an employee who becomes responsible for it. This employee is often referred to as the petty-cash custodian. 4- 25

Account for Petty Cash:

Account for Petty Cash Accounting for the petty cash fund involves recording transactions Establish the fund, Recognize expenditures from the fund, Replenish the fund as the cash balance becomes sufficiently low. Increase or Decrease the fund At any given time, the cash remaining in the fund plus all receipts should equal the amount of the fund. 4- 26

Petty Cash:

Petty Cash Suppose that at the beginning of May, Starlight Drive-In establishes a petty cash fund of $500 to pay for minor purchases. The entry to establish the fund is: Assume Starlight has the following expenditures from the petty cash fund during May: 4- 27

Petty Cash:

Petty Cash By the end of May, the petty cash fund has distributed $330, leaving $170 in the fund along with receipts for $330. However, the company did not record these transactions at the time these expenditures were made. By the end of the period, the expenditures from the petty cash fund must be recorded when the fund is replenished . 4- 28

Operation of the Petty Cash Fund:

Illustration: On March 15 the petty cash custodian requests a check for $ 87 (to replenish a $100 fund). 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 (or Petty Cash) 87 Supplies 38 Miscellaneous expense 5 Operation of the Petty Cash Fund

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 (or Petty Cash) 88 Operation of the Petty Cash Fund

PowerPoint Presentation:

If Petty Cash is credited in previous two examples, then… Replenish Petty Cash with… Petty Cash 87 or 88 Cash 87 or 88

PowerPoint Presentation:

Journal Entries to increase or decrease Petty Cash fund Increase Decrease Petty Cash $$$ Cash $$$ Cash $$$ Petty Cash $$$

PowerPoint Presentation:

i>clicker question

LO7 Identify the Major Inflows and Outflows of Cash:

LO7 Identify the Major Inflows and Outflows of Cash Companies report cash in two ways. First, it is reported as an asset in the balance sheet under current assets and represents cash available for spending at the end of the reporting period. It provides only the final balance for cash. Secondly, reports information about cash receipts and payments during the period in a statement of cash flows. From the statement of cash flows, investors know a company’s cash inflows and cash outflows related operating, investing and financing activities. 4- 34

PowerPoint Presentation:

Operating activities include cash transactions involving revenue and expense events during the period. Investing activities include cash investments in long-term assets and investment securities. Financing activities include transactions designed to raise cash or finance the business. There are two ways to do this: borrow cash from lenders or raise cash from stockholders. Activities on Cash Flows Statement 4- 35

External Transactions of Eagle Golf Academy:

External Transactions of Eagle Golf Academy 4- 36

External Transactions of Eagle Golf Academy:

External Transactions of Eagle Golf Academy 4- 37

Using the Financial Statements:

Using the Financial Statements Using the Statement of Cash Flows SO 5 Use the statement of cash flows to evaluate solvency. Illustration 2-17 Would you feel better about a company’s health if you knew that most of its cash was generated by operating its business rather than by borrowing cash from lenders? ) ) ( (

Using the Financial Statements:

Using the Financial Statements SO 5 Use the statement of cash flows to evaluate solvency. Cash provided by operating activities fails to take into account that a company must invest in new PP&E and must maintain dividends at current levels to satisfy investors. Answers on notes page.

LO8 Assess earnings quality by comparing net income and cash flows:

LO8 Assess earnings quality by comparing net income and cash flows Earnings quality is the ability of current net income to help us predict the future performance of a company. When net income does not provide a good indicator of future performance, the lower its earnings quality is said to be. Comparing the trend in a company’s reported net income to its trend in free cash flow, also provides earnings quality of a company. Companies whose free cash flow is declining relative to the trend in net income are likely to have lower-quality earnings. 4- 40

Comparing Net Income to Free Cash Flows:

Comparing Net Income to Free Cash Flows Net income Income Statement Revenue Expenses Statement of Cash Flows Operating Cash Flow Investing Cash Flow + Free Cash Flows − 4- 41

Comparison of Net Income and Free Cash Flows of Krispy Kreme and Starbucks:

Comparison of Net Income and Free Cash Flows of Krispy Kreme and Starbucks 4- 42

PowerPoint Presentation:

Good Luck on the Chapter 4 Homework!

authorStream Live Help