Chapter 4 Outline (pages 164
Cash and Internal Controls
PART A: Internal Controls
Oxley Act of 2002 (SOX)
Management (Corporate Executives) are
responsible for the financial statements and
effectiveness of its internal control structure
must assess the company’s internal control and report as to its effectiveness. Auditor
must be independent
cannot provide non
audit services. Auditors must retain work papers for
seven years. Lead audit partners are required
to rotate off the audit client every five years.
is a subset of the Board of Directors
they act as a direct contact between the
stockholders and the auditors. The audit committee hires the auditor.
CEO and CFO
must certify the financial
statements fairly represent the financial position and th
results of operations and a statement that the company’s internal controls are adequate.
Purpose of Internal Control
Financial Accounting perspective:
1. Improve the accuracy and reliability of
2. Safeguard the company’s assets.
COSO (Committee on Sponsoring Organizations)
The success of an internal control system depends on the operating style of management and
the competency of the people
responsible for the system
ethical tone of top management
Personnel policies and practices are important components of the internal control system
Continually assessing the risks associated with forces preventing the company from reachi
of duties: should separate “custody
Information and Communication
The purpose of accounting is to provide relevant and reliable information to decision makers.
Providing accurate info
rmation is an important aspect of internal controls.
Monitor the internal control system to make sure it is adequate
Limitations of Internal Control
PART B: Cash
Cash and Cash Equivalents
readily convertible to known amounts of cash
readily available to pay debts
checks from others
Treasury bills (T
bills) with original maturity of three months or less
Money market accounts
l paper (
original maturity of th
ree months or less
Is the following a
Cash and Cash Equivalent
state YES, if NO
, identify the
A cashier’s check
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Control over Cash Receipts
1. Record all cash receipts as soon as possible.
2. Person 1: Open mail each day and make a l
ist of checks received (amount and payer’s name).
3. Person 2: S
hould make daily deposits.
4. Person 3: Records cash receipts in the accounting records (use bank deposit slips to verify).
Control over Cash Disbursements
All cash disbursements should be made by check/debi
t card/credit card.
Expenditures should be authorized before purchase and accuracy of purchase should be
verified. The person who authorizes should not prepare the check.
Use serial numbered checks. Only authorized person(s) should sign the check.
Debit/Credit card statements should be checked against purchase receipts. The person
verifying the statements should not be the person who made the purchases.
Set limits on purchases for credit/debit cards.
Separate the duties of the person respo
nsible for making cash disbursements from the person
in charge of cash receipts.
act like cash
creates a liability
7 on page 17
8 on page 1
(Company Records of Cash Activities)
Outstanding deposits (
deposits in transit
Customer note and interest
Reconciliation of the
Cash Account (L
are recorded in
ARE NOT recorded on
. For example:
are recorded on the
ARE NOT recorde
d in the
. For example:
bank service charge
deposits in transit
+ amounts collected by bank
+ interest earned
Fix errors where they exist
Fix errors where they
The goal is to get both accounts to be the same (
in both accounts).
After the bank reconciliation is completed, make sure to record the changes made to the cash
Madison Company's cash ledger reports the foll
owing for the month ending March 31, 20
Cash receipts 3/26
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Checks 545 and 547 are outstanding.
The deposit on 3/11 includes a customer's check for $400 that did not
clear the bank (NSF
Check 543 was written for $2,800 for office supplies in March. The bank properly recorded
the check for this amount.
An automatic withdrawal for March rent was made on March 4 for $1,500.
Madison's checking account ea
rns interest based on the average daily balance. The amount of
interest earned for March is $50.
Last year, one of Madison's top executives borrowed $4,000 from Madison. On March 24, the
executive paid $4,200 ($4,000 borrowed amount plus $200 interest)
directly to the bank in
payment for the borrowing.
The bank charged the following service fees: $30 for NSF check, $10 for automatic
withdrawal for rent payment, and $20 for collection of the loan amount from the executive.
ation for March 31, 20
record the necessary cash adjustments.
March 31, 20
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Petty cash fund:
money kept on hand for making minor cash purchases. The account is
replenished when necessary. Receipts are kept with the petty cash fund so expenses can
Statement of Cash Flows
starts with net income and makes adjustments to cash flows from operating
relate to items on the income statement in w
hich cash has been
received or paid. Also relate to changes in current assets and current
liabilities based on payment or receipt of cash.
cash paid or received from the purchase or sale of long term assets.
ash received (paid) to raise money for the company or finance the
business. Does not include interest paid.
Of the three activities above, which activity would you expect a company to show “positive cash
flows” consistently over time?
The final a
mount shown on the statement of cash flows should reconcile with the cash shown on
the balance sheet.
low activity Operating, Investing, Financing for each item; use ( ) for cash
. If no cash flow put NONE.
Cash Flow Act
Use ( ) if outflow
Sell common stock to investors
Receive cash from customers
Pay for rent
Purchase a building with
Sold truck used in the business
Paid dividend to stockholders
Provided services to customers on account
Pay interest on loan
Bought supplies on credit
During the year, a company issues common stock for $60,000 and repays previously borrowed
amounts of $100,000. In addition, the company pays dividends of $8,000 to stockholders
he manager a salary of $52,000, pays landlord rent of $14,000
interest of $500 to
. Determine the amount of
financing cash flows
the company would report in the
During the current year, a company provides services on a
ccount for $115,000. By the end of the
year, $85,000 of this amount was received. In addition, cash payments for the year were
employees' salaries, $55,000; office supplies, $8,000;
Determine the amount of
ing cash flows
the company will report in the current year.
Comparing Net Income to Cash Flows
prepared using accrual accounting
Cash flow from operating activities
prepared using cash
: the ability of net income to adequately forecast future cash flow
Free Cash Flows:
Operating cash flow + investing cash flow = free cash flow
shows amount of cash flow available to pay creditors and stockholders
declining free cash flow rela
tive to net income is an indicator o
lower quality of earnings
What are the free cash flows for 20