CHAPTER 7

Internal Control, Managing Cash, and Making Ethical Judgments

 

Chapter Outline

Objective 4: Apply internal controls to cash receipts

  1. Internal control over cash receipts ensures that all cash is deposited and that the accounting records are correct. Exhibit 7-8 summarizes these controls.
  2. Point-of-sale terminals (cash registers) can provide control for cash receipts over the counter.
    1. The register should be positioned so that the customer can see the amounts entered.
    2. A receipt should be issued for each sale recorded by the register.
    3. The cash drawer should open only when the clerk enters an amount so that all transactions will be recorded on the register tape.
    4. The merchandise should be priced at "uneven" amounts to require that the clerk make change from the cash drawer.
    5. The cashier should deposit the cash, with the register tape being sent to the accounting department.
  1. A mailroom employee who compares the amount of the check with the remittance advice should handle cash received in the mail.
    1. The remittance advices are forwarded to the accounting department and the checks are forwarded to the cashier.

2. The controller then compares the cash receipts with the control tape from the mailroom, the bank deposit slip from the cashier, and the debit to Cash from the accounting department.

3. Many companies use a lock-box system to separate cash duties and establish control over receipts. Customers send their checks directly to the bank.
  1. A Cash Short and Over account is used to record shortages or overages in the daily cash sales. The balance of this account should be small.

Objective 5: Apply internal controls to cash payments

  1. Internal control over cash payments is at least as important as controlling cash receipts. These controls are summarized in Exhibit 7-11.
  2. Checks are an important control because a check acts as a source document and requires an authorized signature.

C. The purchasing process, outlined in Exhibit 7-9, requires the following steps.

1. Sales department prepares a purchase requisition.

2. The purchasing department locates the merchandise and prepares a purchase order.

3. The supplier fills the order, ships the goods, and mails an invoice to the purchaser.

4. When the goods arrive, a receiving report is prepared.

5. The accounting department combines all the documents, checks them for accuracy, and forwards this disbursement packet (Exhibit 7-10) to the appropriate officer for approval and payment.

6. Before payment, the documents should be compared to ensure that the business pays cash only for the goods ordered and received. A voucher, a document that authorizes payment, is prepared.

E. Establishing a petty cash fund allows control over expenditures too small to pay by check.

    1. The following controls should be established over the petty cash fund.
    1. Designate an employee to administer the fund.
    2. Keep a specific amount on hand (an imprest system).
    3. Support all fund payments with a petty cash ticket.
    4. Replenish the fund through normal cash disbursement procedures.
    2. The entry to establish the fund is:

      3. Petty Cash XX

      Cash in Bank XX

    3. A petty cash ticket is prepared like the one illustrated in Exhibit 7-11 whenever a disbursement is made from petty cash. No journal entry is made at this time.
    4. When the fund is replenished, all petty cash payments are recorded in a summary entry such as the one illustrated below:

Office Supplies XX

Postage Expense XX

Delivery Expense XX

Cash Short and Over XX

Cash in Bank XX

Objective 6: Use a budget to manage cash

  1. A budget is a quantitative expression of a plan that helps managers coordinate the entity’s activities.
  2. A cash budget helps a business manage its cash by helping determine how much cash is needed and how much cash will be provided by operations.
  3. The cash budget (Exhibit 7-13) is prepared using the following format:

Beginning cash balance

+ Budgeted cash receipts

Collections from customers

Interest and dividends received

Sale of assets

Purchases of inventory

Operating expenses

Purchase of assets

Payment of debt/payment to owners

= Cash available (needed) before new financing

Minimum desired balance

= Cash available for additional investments or new financing needed
  1. International transactions increase the complexity of managing cash because a company must also manage the effect of the changing value of currencies.
  2. Cash and Cash Equivalents is the first current asset listed of the balance sheet of most companies.
    1. Cash equivalents are liquid assets such as time deposits and certificates of deposit.

2. Restricted cash, such as compensating balances, should not be reported as a current asset if the company does not expect to spend the cash within a year or the operating cycle, if longer than a year.

Objective 7: Make ethical judgements in business

  1. Most large companies have a code of ethics designed to encourage employees to act ethically.

B. Accountants who are members of the AICPA must also abide by the AICPA Code of Professional Ethics. Accountants who are members of the IMA must also abide by the Standards of Ethical Conduct for Management Accountants.

C. The following framework, found in the Decision Guidelines, is a guide to making ethical decisions.
    1. Determine the facts.
    2. Identify the ethical issues.
    3. Specify the alternatives.
    4. Identify the people involved.
    5. Assess the possible outcomes.
    6. Make the decision.

D. External controls, such as IRS audits, loan agreements, U.S. laws, also encourage ethical behavior.

Appendix

A. A voucher is a document authorizing a cash disbursement (Exhibit 7A-1).

B. The payee, due date, terms, description, and invoice amount are all found on the voucher, as well as places for recording the account debited, date paid, and check number.

C. The voucher is prepared by the accounting department after all the documents (shown in Exhibit 7A-2) have been compared. The voucher provides evidence that supports a cash disbursement. (See Exhibit 7A-3.)

 

 

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