Nobles Finmgr6 PPT 07 Revised

Horngren’s Financial & Managerial
Accounting
Sixth Edition
Chapter 7
Internal Control and Cash
Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved
Learning Objectives
7.1 Define internal control and describe the components of
internal control and control procedures
7.2 Demonstrate the use of a bank account as a control
device and prepare a bank reconciliation and related
journal entries
7.3 Use the cash ratio to evaluate business performance
Learning Objective 7.1
Define internal control and describe the components of
internal control and control procedures
What Is Internal Control, and How Can
It Be Used to Protect a Company's
Assets?
• A key responsibility of a business manager is to control
operations.
What Is Internal Control, and How Can
It Be Used to Protect a Company's
Assets?
Internal control is the plan and measures designed to:

1. Safeguard assets
2. Encourage employees to follow company policies
3. Promote operational efficiency
4. Ensure accurate, reliable accounting records
The Components of Internal Control
• Control procedures
• Risk assessment
• Information system
• Monitoring of controls
• Environment
Internal controls are monitored by internal auditors and
external auditors.
Demonstrate the use of a bank
account as a control device and
prepare a bank reconciliation and
related journal entries
How Can the Bank Account Be Used as a
Control Device?
Common bank account controls:
•
A signature card is a card that shows each authorized
person’s signature for a bank account.
•
A deposit ticket is a bank form that is completed by the
customer and shows the amount of each deposit.
How Can the Bank Account Be Used as a
Control Device? (2 of 2)
Common bank account controls:
•
A check is a document that instructs a bank to pay the
designated person or business a specified amount of
money.
– The maker is the party who issues the check.
– The payee is the individual or business to whom the
check is paid.
– The routing number identifies the bank upon which the
payment is drawn.
– The account number identifies the account upon which
the payment is drawn.
Exhibit 7-5 Check with Remittance Advice
Bank Statement
• A bank statement reports the activity in a customer’s
account.
– It shows the account’s beginning and ending balances.
– It lists the month’s cash transactions conducted
through the bank account.
• Canceled checks are the physical or scanned copies of
the maker’s cashed (paid) checks.
Exhibit 7-6 Bank Statement
Electronic Funds Transfers
• Electronic funds transfer (EFT) is a system that transfers
cash by electronic communication rather than by paper
documents.
– Many bills are paid with EFT
– EFT is less expensive than mailing a check
– Debit card transactions and direct deposits are EFTs
Bank Reconciliation
• The bank reconciliation compares and explains the
differences between cash on the company’s books and
the bank’s records.
• Differences arise because of a time lag in recording
transactions, called timing differences.
Preparing the Bank Side of the Bank
Reconciliation
The bank side of the reconciliation includes:
• Deposits in transit that are recorded by the company but
not yet by its bank.
• Outstanding checks that are issued by a company and
recorded on its books but not yet paid by its bank.
• Bank errors that either incorrectly increase or decrease
the bank balance.
Preparing the Book Side of the Bank
Reconciliation
Cash receipts the bank has received and recorded but the
company has not recorded on its books.
• Electronic Funds Transfers (EFTs)
• Service charges
• Interest Revenue on a Checking Account
• Nonsufficient funds (NSF) checks are received from
customers for payment of services rendered or merchandise
sold that have turned out to be worthless.
• Book errors that either incorrectly increase or decrease the
cash balance in the company’s general ledger.
Exhibit 7-7 Bank Reconciliation (1 of 3)
Reconciliation Items:
Panel A—Reconciling Items
Bank side: Book side:
1. Deposit in transit, Apr. 30, 3. EFT receipt from customer,
$9,000. $100.
2. Outstanding check no. 204, 4. Interest revenue earned on
$2,000. bank balance, $30.
blank 5. Bank service charge, $20.
blank 6. EFT payment of water bill, $40.
blank 7. NSF check, $1,200.
Bank Reconciliation:
Bank Reconciliation:
Summary Of The Various Reconciling Items:
Bank Balance—always Book Balance—always

• Add deposits in • Add bank collections, interest
transit. revenue, and EFT receipts.
• Subtract outstanding • Subtract service charges,
checks. NSF checks, and EFT
• Add or subtract payments.
corrections of bank • Add or subtract corrections
errors. of book errors.
Bank Side of the Reconciliation
The beginning balance taken from the bank statement is
$12,720.
Additions and subtractions:
• Deposit in transit. The deposit made on April 30 for
$9,000 has not yet been recorded by the bank (must add
to the bank balance).
• Outstanding check. Check number 204 for $2,000 is
outstanding (must subtract from the bank balance).
After all items affecting the bank side have been identified,
the adjusted bank balance is determined.
Book Side of the Reconciliation (1 of 2)
The beginning cash balance taken from the general ledger is
$20,850.
Additions and subtractions:
• Electronic funds transfer (EFT). An EFT receipt from a
customer in the amount of $100 not recorded in the Cash
account (must add to the book balance).
• Interest revenue. A $30 deposit on the bank statement for
interest earned not recorded in the Cash account (must
add to the book balance).
• Service charge. A $20 service charge on the bank
statement not recorded in the company’s Cash account
(must subtract from the book balance).
Book Side of the Reconciliation (2 of 2)
Additions and subtractions (continued):
• Electronic funds transfer (EFT). An EFT payment to
Water Works for $40 not recorded in the company’s Cash
account (must subtract from the book balance).
• Nonsufficient funds (NSF) check. An NSF check from a
customer on the bank statement (must subtract from the
book balance).
After recording all of the items that affect the book balance,
Smart Touch Learning determines the adjusted book
balance and verifies that it equals the adjusted bank
balance.
Journalizing Transactions from the Bank
Reconciliation (1 of 2)
Journalizing Transactions from the Bank
Reconciliation (2 of 2)
The journal entries are posted to the Cash T-account:
The ending balance in the Cash T-account equals the

adjusted book balance and the adjusted bank balance on the
bank reconciliation.
Use the cash ratio to evaluate
business performance
How Can the Cash Ratio Be Used to
Evaluate Business Performance? (1 of 2)
• The cash ratio helps determine a company’s ability to
meet its short-term obligations.
Cash ratio 
 Cash  Cash equivalents 
Total current liabilities
• Cash equivalents are highly liquid investments that can

converted into cash in three months or less.
How Can the Cash Ratio Be Used to
Evaluate Business Performance? (2 of 2)
Kohl’s cash and cash equivalents and total current liabilities
from its balance sheet:
Blank January 30, 2016 January 31, 2015
Cash and cash equivalents $ 707 $ 1,407
Total current liabilities 2,714 2,859
Cash ratio as of January 30, 2015:

$707
Cash ratio   0.26
$2,714
Cash ratio as of January 30, 2016:
$1,407
Cash ratio   0.49
$2,859
Revision Quiz
1. A company which sells merchandise or
services can receive cash from customers
________.
A) over the counter

B) by electronic funds transfer
C) through the mail
D) in any of the above forms
Answer
D) in any of the above forms
2. Which of the following items will NOT
appear as deductions on a bank statement?
A) NSF checks
B) EFT
C) Service Charge
D) Deposits
Answer
D) Deposits
3. The bank recorded a $3,000 deposit as
$300. How would this information be
included on the bank reconciliation?
A) a deduction on the bank side

B) a deduction on the book side
C) an addition on the book side
D) an addition on the bank side
Answer
D) an addition on the bank side
4. A company received a bank statement
showing a balance of $79,000. Reconciling
items included outstanding checks of $2,300
and a deposit in transit of $9,400. What is
the company's adjusted bank balance?
A) $67,300
B) $71,900
C) $86,100
D) $69,600
Answer
Answer: C) Adjusted bank balance = $79,000 + $9,400 -

$2,300 = $86,100
5. A ________ is a document explaining the
reasons for the difference between a
depositor's Cash account in the ledger and
the depositor's cash balance in its bank
account.
A) bank statement
B) deposit receipt
C) bank reconciliation
D) remittance advice
Answer
C) bank reconciliation
6. The bank charged a service fee of $55.
How would this information be included on
the bank reconciliation?
• A) a deduction on the bank side

• B) an addition on the book side
• C) a deduction on the book side
• D) an addition on the bank side
Answer
• C) a deduction on the book side
7. Which of the following would be included
in the journal to record an NSF check?
• A) a debit to Accounts Payable and a credit to Cash

• B) a debit to Accounts Receivable and a credit to Cash
• C) a debit to Cash and a credit to Accounts Receivable
• D) a debit to Bank Expense and a credit to Cash
Answer
• B) a debit to Accounts Receivable and a credit to Cash
8. Journal entries are required for the
reconciling items on the book side because
________.
• A) those transactions have not yet been recorded by the

bank
• B) the adjusted balances on both sides are the same
amounts
• C) the amounts are immaterial
• D) those transactions have not yet been recorded on the
company's books
Answer
• D) those transactions have not yet been recorded on the
company's books
9. Cash and cash equivalents are divided by
________ to determine the cash ratio.
• A) total current liabilities

• B) fixed assets
• C) equity
• D) total long-term liabilities
Answer
• A) total current liabilities
10. The ________ is a measure of a
company's ability to pay its current
liabilities from cash and cash equivalents.
• A) cash conversion cycle

• B) cash ratio
• C) gross profit
• D) debt equity ratio
Answer
• B) cash ratio
Thank You
Any Questions?

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Horngren’s Financial & Managerial

Internal control is the plan and measures designed to:

blank 7. NSF check, $1,200.

Bank Balance—always Book Balance—always

The ending balance in the Cash T-account equals the

• Cash equivalents are highly liquid investments that can

Cash ratio as of January 30, 2015:

A) over the counter

A) a deduction on the bank side

Answer: C) Adjusted bank balance = $79,000 + $9,400 -

• A) a deduction on the bank side

• A) a debit to Accounts Payable and a credit to Cash

• A) those transactions have not yet been recorded by the

• A) total current liabilities

• A) cash conversion cycle

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