Internal Control and

Managing Cash

Chapter 4

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Learning Objective 1

Set up an effective system of

internal control.

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Internal Control
Organizational plan and all related
measures that an entity adopts
 Safeguard assets
 Encourage adherence to company
policies
 Promote operational efficiency
 Ensure accurate and reliable
accounting records
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Components of an
Effective System
Competent, reliable, and ethical
personnel
Assignment of responsibilities
Proper authorization
Separation of duties

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Audit
Examination of company’s
financial statements accounting
systems, and internal controls,
by an outside party
 Internal auditor - employee of
the business
 External auditor - independent
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Limitations of Internal Control
Collusion - two or more
employees working together to
defraud the firm
A system of internal control that
is too complex can hurt
efficiency and control

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Learning Objective 2

Use a bank reconciliation as a

control device.

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 The Bank Reconciliation
Items that cause differences between
bank balance and book balance
1. Items recorded by the company
but not yet recorded by the bank:
• Deposits in transit
• Outstanding checks

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 The Bank Reconciliation
Items that cause differences between
bank balance and book balance
2. Items on a bank statement and not
recorded by the business:
• Bank collections
• Electronic funds transfers
• Service charge
• Interest revenue earned on account
• NSF checks
• Errors
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Bank Reconciliation Illustrated
Business Research, Inc., shows a balance
on its bank statement of $5,931.51 on
January 31. The company Cash account
has a balance of $3,294.21.
1. The January 30 deposit of $1,591.63
does not appear on the bank statement.
2. The bank erroneously charged to the
account a $100 check (No. 656) written
by Business Research Associates.

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 The Bank Reconciliation
Illustrated
3. Five company checks, totaling
$1,350.14, issued late in January and
recorded in the journal have not been
paid by the bank.
4. The bank received $904.03 by EFT on
behalf of Business Research, Inc.
5. The bank collected on behalf of the
company a note receivable, $2,114
(including interest revenue of $214).
6. The bank statement shows interest
revenue of $28.01.
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 The Bank Reconciliation
Illustrated
7. Check number 333 for $150 paid to
Brown Company on account was
recorded as a cash payment of $510.
8. The bank service charge for the month
was $14.25.
9. The bank statement shows an NSF check
for $52.
10.Business Research pays insurance
expense by EFT and has not recorded
this $361 payment.

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 The Bank Reconciliation
Illustrated
Balance per bank, January 31 $5,931.51
Add deposit in transit 1,591.63
Check erroneously charged 100.00
$7,623.14
Less outstanding checks (1,350.14)
Adjusted bank balance $6,273.00

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 The Bank Reconciliation
Illustrated
Balance per books, January 31 $3,294.21
Add: ETF receipt of rent revenue 904.03
Collection of note receivable 2,114.00
Interest revenue earned 28.01
Correction of book error 360.00
$6,700.25
Less: Service charge $ 14.25
NSF check 52.00
Payment of insurance expense 361.00 ( 427.25)
Adjusted book balance $6,273.00
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Learning Objective 3

Apply internal controls to cash

receipts and cash payments.

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Petty Cash

A small amount of cash kept on

hand to pay for minor
expenses.

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Learning Objective 4

Use a budget to manage cash.

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Using a Budget to Manage
Cash
A financial plan that helps
coordinate business activities
Cash budget - helps an entity
manage cash by planning
receipt and payment of cash
during a future period

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Using a Budget to Manage
Cash
Cash balance, beginning
+ Budgeted cash receipts
- Budgeted cash payments
Expected cash balance, ending

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Reporting Cash on
the Balance Sheet
 Companies usually combine all
cash amount into single total called
“Cash and Cash Equivalents” on
the balance sheet.
 Cash equivalents include liquid
assets
 Time deposits
 Certificates of deposit

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Learning Objective 5

Weigh ethical judgment in

business.

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
 Ethics and Accounting
Company code of ethical and
responsible behavior by
employees
AICPA Code of Professional
Conduct
Standards of Ethical Conduct
for Management Accountants
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 End of Chapter 4

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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren