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Financial Accounting: Sixth Edition
Financial Accounting: Sixth Edition
Financial Accounting: Sixth Edition
John J. Wild
Sixth Edition
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 06
6-3
Analytical Learning Objectives
6-4
Procedural Learning Objectives
P1: Apply internal control to cash receipts
and disbursements.
P2: Explain and record petty cash fund
transactions.
P3: Prepare a bank reconciliation.
P4: Appendix 6A – Describe the use of
documentation and verification to
control cash disbursements (see text for
details).
P5: Appendix 6B – Apply the net method to
control purchase discounts (see text for
details).
6-5
C1 Purpose of Internal Control
1. Protect assets.
2. Ensure reliable accounting.
3. Promote efficient operations.
4. Urge adherence to company
policies.
6-6
C1 The Sarbanes-Oxley Act
1. Establish responsibilities.
2. Maintain adequate records.
3. Insure assets and bond key employees.
4. Separate recordkeeping from custody
of assets.
5. Divide responsibility for related transactions.
6. Apply technological controls.
7. Perform regular and independent reviews.
6-8
C1 Technology and Internal Control
Reduced More
Processing Extensive Testing
Errors of Records
Limited Crucial
Evidence of Separation of
Processing Duties
Increased
E-commerce
6-9
C1 Limitations of Internal Control
Negligence Intent to
Fatigue defeat internal
Misjudgment controls for
Confusion personal gain
6-10
C1 Limitations of Internal Control
Benefits Costs
6-11
C1 Control of Cash
Cash disbursements
are made by check.
6-12
Cash, Cash Equivalents, and
C2
Liquidity
Cash
Currency, coins, and amounts on deposit in bank
accounts, checking accounts, and many savings
accounts. Also includes items such as customer
checks, cashier checks, certified checks, and money
orders.
Cash Equivalents
Short-term, highly liquid investments that are:
1. Readily convertible to a known cash amount.
Inventory Cash
6-14
C2 Cash Management Principles
6-15
P1 Control of Cash Receipts
6-16
P1
Control of Cash Disbursements
6-17
P1 Voucher System of Control
6-18
P1 Voucher System of Control
Sender Receiver
Check
Cashier Supplier (Vendor)
Accounting Invoice Approval Cashier
Receiving Report Accounting, Requesting
Receiving
& Purchasing
Supplier (Vendor) Invoice Accounting
Purchasing Purchase Order Supplier, Requesting,
Receiving & Accounting
Purchase Requisition
Requesting Purchasing and
Accounting
Voucher
6-19
P2 Petty Cash System of Control
6-20
P2 Operating a Petty Cash Fund
Petty Cash
Company Petty
Cashier Cashier
Accountant
6-21
P2 Operating a Petty Cash Fund
Petty
Petty Cash
Cashier
6-22
P2 Operating a Petty Cash Fund
39¢
Stamps Courier
$45 $80
6-23
P2 Operating a Petty Cash Fund
Petty cash
receipts with
either no Receipts
Petty
signature or a Cashier
forged signature
usually indicate
misuse of petty 39¢
Receipts
$125
To reimburse
Company petty cash fund Petty
Cashier Cashier
Accountant
6-25
P2 Petty Cash Example
6-26
P2
Petty Cash Example
a. $260.20
b. $262.20
c. $139.80
d. $137.80
6-27
P2 Petty Cash Example
a. $260.20
b. $262.20
c. $139.80
d. $137.80
Dr. Cr.
July 31 Travel Expense 79.30
Entertainment Expense 93.42
Postage Expense 55.00
Office Supplies Expense 32.48
Cash Over and Short 2.00
Cash 262.20
6-29
P1 Banking Activities as Controls
Electronic
Bank
Checks Funds
Statements
Transfer
6-30
P3 Bank Reconciliation
Clothes Mart
Nashville, TN
* balances different?
Acct No 278609
Book Balance
Bank Statement Balance • Add: Collections
Add: made by the bank.
Deposits in transit. • Add: Interest earned
Deduct: on checking account.
Outstanding • Deduct: Nonsufficient
checks funds check (NSF).
Add or Deduct: • Deduct: Bank service
Bank errors. charge.
• Add or Deduct:
Book errors.
6-32
P3 Bank Reconciliation
Two sections:
1. Reconcile bank statement balance to
the adjusted bank balance.
2. Reconcile book balance to the adjusted
book balance.
The adjusted balances should be equal.
6-33
P3 Bank Reconciliation Example
6-34
P3 Bank Reconciliation Example
6-36
Adjusting Entries from a
P3
Bank Reconciliation
Dr. Cr.
July 31 Cash 30
Interest revenue 30
6-38
A1 Days’ Sales Uncollected
Days’
Accounts receivable
sales = × 365
Net sales
uncollected
6-39
End of Chapter 06
6-40