Chapter

8-1
 CHAPTER 8

INTERNAL
CONTROL
AND CASH
Accounting Principles, Eighth Edition

Chapter
8-2
 Study
Study Objectives
Objectives
1. Define internal control.
2. Identify the principles of internal control.
3. Explain the applications of internal control principles
to cash receipts.
4. Explain the applications of internal control principles
to cash disbursements.
5. Describe the operation of a petty cash fund.
6. Indicate the control features of a bank account.
7. Prepare a bank reconciliation.
8. Explain the reporting of cash.
Chapter
8-3
 Internal
Internal Control
Control and
and Cash
Cash

Internal Cash Reporting

Use of a Bank
Control Controls Cash

The Sarbanes- Control over Making Cash

Oxley Act cash receipts deposits equivalents
Principles Control over Writing checks Restricted
Limitations cash Bank cash
disbursements statements Compensating
Reconciling the balances
bank account

Chapter
8-4
 Internal
Internal Control
Control

Methods and measures adopted to:

1. Safeguard assets.

2. Enhance accuracy and reliability of accounting

records. Reduce risk of:

a. Errors (unintentional)

b. Irregularities (intentional)

Under the Sarbanes-Oxley Act, all publicly traded U.S. corporations

are required to maintain an adequate system of internal control.
Chapter
8-5 LO 1 Define internal control.
 Internal
Internal Control
Control

The Sarbanes-Oxley Act

Companies must
develop principles of control over financial
reporting.
continually verify that controls are working.

Independent auditors must attest to the level of

internal control.
SOX created the Public Company Accounting
Oversight Board (PCAOB).

Chapter
8-6 LO 1 Define internal control.
 Internal
Internal Control
Control

Principles of Internal Control Illustration 8-1

Measures vary with

size and nature of
the business.
managements control
philosophy.

Chapter
8-7 LO 2 Identify the principles of internal control.
 Internal
Internal Control
Control
Principles of Internal Control
ESTABLISHMENT OF RESPONSIBILITY
Control is most effective when only one person is responsible
for a given task.

SEGREGATON OF DUTIES
Related duties, including physical custody and record
keeping, should be assigned to different individuals.

DOCUMENTATION PROCEDURES
Companies should use prenumbered documents for all
documents should be accounted for.
Chapter
8-8 LO 2 Identify the principles of internal control.
 Internal
Internal Control
Control

Principles of Internal Control Illustration 8-3

PHYSICAL, MECHANICAL, AND ELECTRONIC CONTROLS

Physical

Mechanical
and
Electronic
Chapter
8-9 LO 2 Identify the principles of internal control.
 Internal
Internal Control
Control

Principles of Internal Control

INDEPENDENT INTERNAL VERIFICATION
1. Records periodically verified by an employee who is
independent.
2. Discrepancies reported to management.

OTHER CONTROLS
1. Bond employees.
2. Rotate employees duties and require vacations.
3. Conduct background checks.
Chapter
8-10 LO 2 Identify the principles of internal control.
 Internal
Internal Control
Control

Limitations of Internal Control

Costs should not exceed benefit.
Human element.
Size of the business.

Chapter
8-11 LO 2 Identify the principles of internal control.
 Cash
Cash Controls
Controls
Internal Control over Cash Receipts
Establishment of Documentation Independent Internal
Responsibility Procedures Verification
Only designated Use remittance Supervisors count cash
personnel are advice (mail receipts daily;
authorized to handle receipts), cash treasurer compares
cash receipts register tapes, and total receipts to bank
(cashiers) deposit slips deposits daily

Segregation of Duties Physical, Other Controls

Different individuals Mechanical, and Bond personnel who
receive cash, record Electronic Controls handle cash; require
cash receipts, and hold Store cash in safes employees to take
the cash and bank vaults; limit vacations; deposit all
access to storage cash in bank daily
Illustration 8-5 areas; use cash
registers
Chapter
8-12 LO 3 Explain the applications of internal control principles to cash receipts.
 Cash
Cash Controls
Controls

Discussion Question
Q8-3. At the corner grocery store, all sales
clerks make change out of one cash register
drawer. Is this a violation of internal control?
Why?

See notes page for discussion

Chapter
8-13 LO 3 Explain the applications of internal control principles to cash receipts.
 Cash
Cash Controls
Controls
Cash consists of coins, currency, checks, money
orders, and money on hand or on deposit in a bank.
Cash receipts come from:
cash sales
collections on account from customers
receipt of interest, rent, and dividends
investments by owners
bank loans
proceeds from the sale of noncurrent assets

Chapter
8-14 LO 3 Explain the applications of internal control principles to cash receipts.
 Cash
Cash Controls
Controls

Discussion Question
Q8-8. The management of Sewell Company asks
you, as the company accountant, to explain (a)
the concept of reasonable assurance in internal
control and (b) the importance of the human
factor in internal control.

See notes page for discussion

Chapter
8-15 LO 3 Explain the applications of internal control principles to cash receipts.
 Cashiers Department
Over-the-Counter
Over-the-Counter Receipts
Receipts
Sales Department
Illustration 8-7

Prepare daily summary

Prepare deposit slip

Cashier ring up sales

Supervisor
1. reads register totals
2. makes cash counts
3. prepares cash count
sheets Bank Treasurer Accounting
(deposit) (verification) (record)
Chapter
8-16 LO 3 Explain the applications of internal control principles to cash receipts.
 Mail
Mail Receipts
Receipts
Control Procedures:
Mail receipts should be opened by two people, a
list prepared, and each check endorsed.
Copy of the list, along with the checks and
remittance advices, sent to cashiers department.
Cashier adds the checks to the over-the-counter
receipts and prepares a daily cash summary and
makes the daily bank deposit.
Copy of list sent to treasurers office for
comparison with total shown on daily cash
summary.
Chapter
8-17 LO 3 Explain the applications of internal control principles to cash receipts.
 Cash
Cash Controls
Controls

Review Question
Permitting only designated personnel to handle
cash receipts
is an application of the principle of:
a. segregation of duties.
b. establishment of responsibility.
c. independent check.
d. other controls.

Chapter
8-18 LO 3 Explain the applications of internal control principles to cash receipts.
 Cash
Cash Controls
Controls

Internal Control over Cash Disbursements

Generally, internal control over cash
disbursements is more effective when
companies pay by check, rather than by cash.
Applications:
Voucher system
Electronic funds transfers (EFT) system
Petty cash fund

Chapter LO 4 Explain the applications of internal control

8-19
principles to cash disbursements.
 Cash
Cash Controls
Controls
Internal Control over Cash Disbursements
Establishment of Documentation Independent Internal
Responsibility Procedures Verification
Only designated Use prenumbered Compare checks to
personnel are checks and account invoices; reconcile bank
authorized to sign for them in statement monthly
checks (treasurer) sequence; each check
must have an
Physical, Mechanical,
approved invoice
Segregation of Duties and Electronic
Different individuals Controls
approve and make Other Controls Store blank checks in
payments; check Stamp invoices safes, with limited
signers do not record PAID access; print check
disbursements amounts by machine in
indelible ink
Illustration 8-8
Chapter LO 4 Explain the applications of internal control
8-20
principles to cash disbursements.
 Cash
Cash Controls
Controls

Discussion Question
Q8-14. Joe Griswold Companys internal
controls over cash disbursements provide for
the treasurer to sign checks imprinted by a
checkwriting machine in indelible ink after
comparing the check with the approved invoice.
Identify the internal control principles that are
present in these controls.

See notes page for discussion

Chapter LO 4 Explain the applications of internal control
8-21
principles to cash disbursements.
 Cash
Cash Controls
Controls

Review Question
The use of prenumbered checks in disbursing
cash is an application of the principle of:
a. establishment of responsibility.
b. segregation of duties.
c. physical, mechanical, and electronic controls.
d. documentation procedures.

Chapter LO 4 Explain the applications of internal control

8-22
principles to cash disbursements.
 Cash
Cash Controls
Controls

Internal Control over Cash Disbursements

Voucher System
Network of approvals, by authorized
individuals, to ensure all disbursements by
check are proper.
A voucher is an authorization form prepared
for each expenditure.

Chapter LO 4 Explain the applications of internal control

8-23
principles to cash disbursements.
 Cash
Cash Controls
Controls

Internal Control over Cash Disbursements

Electronic Funds Transfers (EFT)
Disbursement systems that uses wire,
telephone, or computers to transfer cash
balances between locations.

Chapter LO 4 Explain the applications of internal control

8-24
principles to cash disbursements.
 Cash
Cash Controls
Controls

Internal Control over Cash Disbursements

Petty Cash Fund - Used to pay small amounts.
Involves:
1. establishing the fund,

2. making payments from the fund, and

3. replenishing the fund.

Chapter
8-25 LO 5 Describe the operation of a petty cash fund.
 Cash
Cash Controls
Controls
E8-8 Lincolnville Company uses an imprest petty cash system. The
fund was established on March 1 with a balance of $100. During
March the following petty cash receipts were found in the petty cash
box.
March 5 Stamp inventory $39
March 7 Freight-out 21
March 9 Miscellaneous expense 6
March 11 Travel expense 24
March 14 Miscellaneous expense 5
The fund was replenished on March 15 when the fund contained $3 in
cash. On March 20, the amount in the fund was increased to $150.
Instructions: Journalize the entries in March that pertain to the
operation of the petty cash fund.

Chapter
8-26 LO 5 Describe the operation of a petty cash fund.
 Cash
Cash Controls
Controls
E8-8 The fund was established on March 1 with a
balance of $100.

March 1 Petty cash 100

Cash 100

Chapter
8-27 LO 5 Describe the operation of a petty cash fund.
 Cash
Cash Controls
Controls
E8-8 The fund was replenished on March 15 when the
fund contained $3 in cash.

March 15 Postage expense 39

Freight-out 21
Miscellaneous expense 11
Travel expense 24
Cash over and short 2
Cash 97

Chapter
8-28 LO 5 Describe the operation of a petty cash fund.
 Cash
Cash Controls
Controls
E8-8 On March 20, the amount in the fund was
increased to $150.

March 20 Petty cash 50

Cash 50

Chapter
8-29 LO 5 Describe the operation of a petty cash fund.
 Use
Use of
of aa Bank
Bank

Contributes to good internal control over cash.

Minimizes the amount of currency on hand.
Creates a double record of bank transactions.
Bank reconciliation.

Chapter
8-30 LO 6 Indicate the control features of a bank account.
 Use
Use of
of aa Bank
Bank
Illustration 8-10
Making Bank Deposits
Authorized employee Bank Code
Numbers
should make deposit.

Reverse Side
Front Side
Chapter
8-31 LO 6 Indicate the control features of a bank account.
 Use
Use of
of aa Bank
Bank
Writing Checks Illustration 8-11

Written order signed by depositor directing bank to pay

a specified sum of money to a designated recipient.

Maker

Payee

Payer

Chapter
8-32 LO 6 Indicate the control features of a bank account.
 Use
Use of
of aa Bank
Bank
Illustration 8-12
Bank Statements
Debit Memorandum
Bank service charge
NSF (not sufficient
funds)

Credit Memorandum
Collect notes
receivable.
Interest earned.

Chapter
8-33 LO 6 Indicate the control features of a bank account.
 Use
Use of
of aa Bank
Bank

Review Question
The control features of a bank account do not
include:
a. having bank auditors verify the correctness of
the bank balance per books.
b. minimizing the amount of cash that must be kept
on hand.
c. providing a double record of all bank
transactions.
d. safeguarding cash by using a bank as a
depository.
Chapter
8-34 LO 6 Indicate the control features of a bank account.
 Use
Use of
of aa Bank
Bank

Reconciling the Bank Account

Reconcile balance per books and balance per bank to
their adjusted (corrected) cash balances.
Reconciling Items:
1. Deposits in transit.

2. Outstanding checks.

3. Errors.

4. Bank memoranda.

Chapter
8-35 LO 7 Prepare a bank reconciliation.
 Use
Use of
of aa Bank
Bank
Reconciliation Procedures
Illustration 8-13

+ Deposit in Transit + Notes collected by bank

- Outstanding Checks - NSF (bounced) checks
+- Bank Errors - Check printing or other
service charges
+- Book Errors
CORRECT BALANCE CORRECT BALANCE

Chapter
8-36 LO 7 Prepare a bank reconciliation.
 Use
Use of
of aa Bank
Bank
E8-11 The following information pertains to Family Video Company.
1. Cash balance per bank, July 31, $7,263.
2. Cash balance per books, July 31, $7,284.
3. July bank service charge not recorded by the depositor $28.
4. Deposits in transit, July 31, $1,500.
5. Bank collected $900 note for Family in July, plus interest $36,
less fee $20.The collection has not been recorded by Family, and
no interest has been accrued.
6. Outstanding checks, July 31, $591.
Instructions
a) Prepare a bank reconciliation at July 31.
b) Journalize the adjusting entries at July 31 on the books of Family
Video Company.
Chapter
8-37 LO 7 Prepare a bank reconciliation.
 Use
Use of
of aa Bank
Bank
E8-11 a) Prepare a bank reconciliation at July 31.
Cash balance per bank statement $7,263
Add: Deposit in transit 1,500
Less: Outstanding checks (591)
Adjusted cash balance per bank $8,172

Cash balance per books $7,284

Add: Collection of notes receivable 900
Collection of interest 36
Less: Bank service charge (28)
Note collection fee (20)
Adjusted cash balance per books $8,172

Chapter
8-38 LO 7 Prepare a bank reconciliation.
 Use
Use of
of aa Bank
Bank
E8-11 b) Journalize the adjusting entries at July 31 on
the books of Family Video Company. Dr. Cr.
July 31 Miscellaneous expense 28
Cash 28
July 31 Cash 916
Miscellaneous expense 20
Interest revenue 36
Notes receivable 900
Note: Adjusting journal entry includes only the
adjustments to the cash balance per books.

Chapter
8-39 LO 7 Prepare a bank reconciliation.
 Use
Use of
of aa Bank
Bank

Review Question
The reconciling item in a bank reconciliation that
will result in an adjusting entry by the depositor
is:
a. outstanding checks.
b. deposit in transit.
c. a bank error.
d. bank service charges.

Chapter
8-40 LO 7 Prepare a bank reconciliation.
 Use
Use of
of aa Bank
Bank

Review Question
Which of the following statements correctly
describes the reporting of cash?
a. Cash cannot be combined with cash equivalents.
b. Restricted cash funds may be combined with
Cash.
c. Cash is listed first in the current assets
section.
d. Restricted cash funds cannot be reported as a
current asset.
Chapter
8-41 LO 7 Prepare a bank reconciliation.
 Recording
Recording Process
Process

Discussion Question
Q8-20. Lori Figgs is confused about the lack of
agreement between the cash balance per books and the
balance per the bank. Explain the causes for the lack of
agreement to Lori, and give an example of each cause.

See notes page for discussion

Chapter
8-42 LO 7 Prepare a bank reconciliation.
 Reporting
Reporting Cash
Cash
Most liquid asset, listed first in current assets
section of balance sheet.
Illustration 8-16

Cash equivalents
Restricted cash
Compensating balances
Chapter
8-43 LO 8 Explain the reporting of cash.
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Chapter
8-44