Internal

Control and
Cash
CHAPTER

7
Electronic Presentations in Microsoft®
PowerPoint® to accompany
Fundamental Accounting Principles, 16ce
Prepared by
© 2019 McGraw-Hill Education
Lise Wall, Red River College
 Learning Objectives
1. Define, explain the purpose, and identify
1
the principles of internal control. (LO )
2. Define cash and explain how it is
reported. (LO2)
3
3. Apply internal control to cash. (LO )
4. Explain and record petty cash fund
transactions. (LO4)

© 2019 McGraw-Hill Education

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 Learning Objectives
5. Explain and identify banking activities and
the control features they provide. (LO5)
6. Prepare a bank reconciliation and
journalize any resulting adjustment(s).
(LO6)
7. Calculate the quick ratio and explain its
use as an indicator of a company’s
7
liquidity. (LO )
© 2019 McGraw-Hill Education
7-3
 Vignette Video
Lori Joyce is one part of the duo that built the successful
bakery, Cupcakes. After being raised by her hardworking
parents on a organic farm in Victoria, BC, she learned the
importance of feeding her two boys good quality foods.
To fill a gap, she has created new company, Betterwith
Foods, with a focus on delivering high-quality, clean and
simple ice cream. Cash management has been critical in
managing her new start-up.
[Link]
eature=[Link]

© 2019 McGraw-Hill Education 7-4

 Internal Control System
All policies and procedures used to :
• Protect assets

• Ensure reliable accounting

• Promote efficient operations

• Encourage adherence to company policies

© 2019 McGraw-Hill Education

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 Principles of Internal Control

1. Establish a separation of duties.

2. Ensure transactions and activities are

authorized.

3. Maintain records.

4. Insure assets and bond key employees.

© 2019 McGraw-Hill Education 7-6

 Principles of Internal Control

6. Apply technological controls.

7. Perform internal and external audits.

Internal controls will vary based on the nature

and size of the organization.

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 Three Drivers of Fraud

The Fraud Triangle

© 2019 McGraw-Hill Education 7-8

 Fraud Prevention Methods
1. Reduced processing errors using
technology.
2. Testing system electronic controls.
3. Limited evidence of processing
documents and more focus on design and
operation of information systems.
4. Increased E commerce.

© 2019 McGraw-Hill Education 7-9

 Limitations of Internal Control
Human Error Includes:
✔ Negligence ✔ Fatigue

✔ Misjudgment ✔ Confusion

Human Fraud
Intent to defeat internal controls for personal gain.
Costs vs. Benefits
The costs of internal control must not exceed their
benefits.

© 2019 McGraw-Hill Education 7-10

 Cash
• Is an important asset for every company.
• Control of cash on hand and access to it is
critical.
Cash includes:
• Currency
• Coins
• Deposits in bank accounts
• Other items acceptable for deposit

© 2019 McGraw-Hill Education 7-11

 Liquidity
• Refers to how easily an asset can be
converted into another asset or used in
paying for services or obligations.

• Cash and cash equivalents are called

liquid assets.

• Companies must maintain a certain level

of liquid assets to pay their bills on time.
© 2019 McGraw-Hill Education 7-12
 Internal Control for Cash
Guidelines:
1. Separate handling of cash from
recordkeeping of cash.
2. Deposit cash receipts daily.
3. Make cash disbursements by cheque.

© 2019 McGraw-Hill Education 7-13

 Control of Cash Receipts
Internal control over cash receipts ensures that all
cash received is properly recorded and deposited.
These controls include:
•The use of cash registers for over-the-counter cash
sales.
•Control of mailed in cash receipts.

•The separation of recordkeeping and custody of cash.

EXHIBIT 7.1

© 2019 McGraw-Hill Education 7-14

 Control of Cash Disbursements
• All expenditures should be made by cheque.
The only exception is for small payments from
petty cash.
• Separate authorization, cheque signing, and
recordkeeping duties.
• Apply a voucher system.
• Three-way match – approved purchase order,
receiving report and invoice.
© 2019 McGraw-Hill Education 7-15
 Mini-Quiz
An internal control system is all policies
and procedures managers use to:
a) Protect assets.
b) Ensure reliable accounting.
c) Promote efficient operations.
d) Urge adherence to company policies.
e) All of the above.

© 2019 McGraw-Hill Education 7-16

 Mini-Quiz
An internal control system is all policies
and procedures managers use to:
a) Protect assets.
b) Ensure reliable accounting.
c) Promote efficient operations.
d) Urge adherence to company policies.
e) All of the above.

© 2019 McGraw-Hill Education 7-17

Petty Cash System of Internal Control

Good internal control procedures require

cash disbursements be made by cheque.
The exception:
Small payments required in most
companies for items such as postage,
courier fees, repairs, and supplies.

© 2019 McGraw-Hill Education 7-18

 Operating a Petty Cash Fund

Cashier’s Prepares cheque

Office to establish petty Petty Cashier
cash fund.

© 2019 McGraw-Hill Education

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 Operating a Petty Cash Fund
The petty cashier makes payments from this fund for
small disbursements.

… and ensures a petty cash receipt is signed by the

person receiving the money to easily identify the
expenses paid from petty cash. Exhibit 7.2
EXHIBIT 7.2

© 2019 McGraw-Hill Education 7-20

 Operating a Petty Cash Fund
A cheque is issued and the fund is replenished
when the amount of cash on hand becomes
low. There was only $2.20 remaining in the
$75 petty cash fund when it was replenished.

A cash over and

short account is
used if needed.

© 2019 McGraw-Hill Education 7-21

Operating a Petty Cash Fund

To replenish petty cash:

Cash required to
replenish petty cash
= Fund Size ₋ Cash Remaining

To calculate cash over/(short):

Total of Cash required to
₋ replenish petty
Cash over/(short) = petty cash
receipts cash.

© 2019 McGraw-Hill Education 7-22

 Banking Activities as Controls
Basic Bank Services
• Bank account

• Bank deposits and cheques

• Electronic funds transfer

• Credit card transactions
• Debit card transactions
• Interac Flash Tap and Pay Technology

© 2019 McGraw-Hill Education 7-23

 Credit Card Transactions
• Many companies allow customers to use
credit cards for their purchases.
• The risk of bad debts is transferred to the
credit card company.
• The company collects cash from the sale
quickly.
• The credit card companies charge a fee to the
vendor.

© 2019 McGraw-Hill Education 7-24

 Illustration-Credit Card
Transaction
TechCom has $100 of credit card sales with a 4%
fee and cash is received immediately (assume
cost of sales is $40).

© 2019 McGraw-Hill Education 7-25

 Debit Card Transactions
• Many companies allow customers to use
debit cards for their purchases.
• The bank transfers funds from the
customer’s account to the vendor’s bank
account.
• The bank charges a fee to the vendor.
• The entries are identical to a credit card
sale.
© 2019 McGraw-Hill Education 7-26
 Illustration - Debit Card
Transaction
A customer purchases a $100 of service on Oct 1st
and pays using a debit card with a $.04 fee per
transaction. The entry required by the company:

© 2019 McGraw-Hill Education 7-27

 Interac Flash

• Debit cards that allow customer to pay

using contactless debit technology.
• Merchants can service customers more
efficiently.
• Enhanced security against issues like
skimming and counterfeiting.
• The bank charges a fee to the vendor.

© 2019 McGraw-Hill Education 7-28

 Bank Reconciliations
Bank reconciliations are:
• Prepared periodically to explain the
difference between cash reported on the
bank statement and the cash balance on
company’s books.

• An important element of internal control.

© 2019 McGraw-Hill Education 7-29

 The bank statement
provides information
about everything that
has gone through the
bank account for a
given period of time.

CM – Credit Memo
DM – Debit Memo
EC – Error Correction
IN – Interest Earned
NSF – Non-sufficient Funds
OD – Overdraft
SC – Service Charge

© 2019 McGraw-Hill Education 7-30

 The general ledger,
cash receipts, and cash
disbursements journals
provide information
about everything that
has gone through our
accounting records for
a given period of time.

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Bank Reconciliation - Example
Why are the balances
different?
Some items are reflected on
the bank statement but not
* in the accounting records
and vice versa.

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 Reconciling Items
Bank Statement General Ledger
• Outstanding • Non-sufficient funds
cheques. cheque (NSF).
• Deposits in transit. • Bank service charges.
• Bank errors. • Interest earned on bank
account.
• Collections made by the
bank.
• Book errors.

© 2019 McGraw-Hill Education 7-33

Let’s prepare the bank reconciliation for
MovieFlix Company at the end of
October 31, 2020.

© 2019 McGraw-Hill Education 7-34

 These items appear
on both the Cash
Receipts Journal and
the bank statement;
therefore, none of
these items is a
reconciling item.

© 2019 McGraw-Hill Education 7-35

These items appear
on both the Cash
Disbursements
Journal AND the
bank statement;
therefore, none of
these items is a
reconciling item.

© 2019 McGraw-Hill Education 7-36

 These items appear
only in the Cash
Receipts Journal OR the
Cash Disbursements
Journal OR the bank
statement; therefore,
each of these items is a
reconciling item.

© 2019 McGraw-Hill Education 7-37

 The items that show up
only on the bank
statement are
reconciling items on
the book side of the
bank reconciliation.

© 2019 McGraw-Hill Education 7-38

© 2019 McGraw-Hill Education 7-39
© 2019 McGraw-Hill Education 7-40
The items that show up
only on the Cash Receipts
or Cash Disbursements
Journal are reconciling
items on the bank side of
the bank reconciliation.

© 2019 McGraw-Hill Education 7-41

© 2019 McGraw-Hill Education
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The Final Product

© 2019 McGraw-Hill Education 7-43

 Recording Adjusting Entries
from the Bank Reconciliation

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 Recording Adjusting Entries
from the Bank Reconciliation

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 Recording Adjusting Entries
from Bank Reconciliation
After posting the reconciling entries the cash account
looks like this . . .

Adjusted balance on October 31

© 2019 McGraw-Hill Education 7-46
 Review
Discuss the purpose of a bank reconciliation.
A bank reconciliation is a procedure designed to
explain the differences between the balance in a firm's
bank account and the balance on the period's bank
statement. The reconciliation procedure examines the
differences based on the information available to each
party and adjusts for the differences. It also serves as a
format for the discovery and correction of recording
errors.

© 2019 McGraw-Hill Education

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 Review
Identify the principles of internal control.

Principles of internal control include the following:

• establishing responsibilities
• maintaining adequate records
• insuring assets and bonding key employees
• separating recordkeeping from custody of assets
• dividing responsibilities for related transactions
• applying technological controls
• performing regular independent reviews

© 2019 McGraw-Hill Education

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 Using the Information
Quick Ratio
• A measure of a company’s liquidity.

• Similar to current ratio but excludes less liquid

assets.
• Ratio will vary from industry to industry.
• Note: Also called the acid-test ratio.
EXHIBIT 7.11

Quick ratio ₌ Quick assets*

Current liabilities
*Quick assets are assets that can be readily converted to cash and include cash, short-term investments, and receivables. Current asset
accounts that are excluded from the quick ratio would include any restricted cash balances and prepaid expenses.

© 2019 McGraw-Hill Education 7-49

 Summary
1. Define, explain the purpose, and
identify the principles of internal
control.
2. Define cash and explain how it is
reported.
3. Apply internal control to cash.
4. Explain and record petty cash fund
transactions.
© 2019 McGraw-Hill Education
7-50
 Summary

5. Explain and identify banking activities

and the control features they provide.
6. Prepare a bank reconciliation and
journalize any resulting adjustment(s).
7. Calculate the quick ratio and explain its
use as an indicator of a company’s
liquidity.

© 2019 McGraw-Hill Education 7-51

End of Chapter

© 2019 McGraw-Hill Education

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