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ACCT 2101 – Introduction to Financial Accounting
Chapter 6 – Reporting and Analyzing Cash and Internal Control
Internal Control
• Purpose of Internal Control
o A properly designed internal control system is a key part of system design, analysis, and
performance.
o Internal controls do not provide guarantees, but they lower the company’s risk of loss.
o Internal control system consists of all policies and procedures managers use to:
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o Sarbanes-Oxley Act requires manager and auditors of public companies to document
and certify that company’s system of internal controls.
▪ _____________ requires that managers document and assess the effectiveness
of all internal control processes that can impact financial reporting.
• Principles of Internal Control
o Internal control procedures increase the ____________________ of accounting records.
o The principles of internal control are to:
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• Technology and Internal Control
o Technology provides rapid access to large quantities of data.
• Limitations of Internal Control
o Internal control policies and procedures are applied by people; the human element
creates several potential limitations:
▪ _____________ – resulting from negligence, fatigue, misjudgment, or confusion.
▪ _______________ – involves intent by people to defeat internal controls.
o Cost-benefit principle – the cost of internal controls must not exceed their benefits.
Control of Cash
• Basic guidelines for control of cash include:
o Handling of cash must be separate from _____________________________.
o Cash receipts are promptly _____________________________.
o Disbursements of cash are made by ___________________________________.
• Cash, Cash Equivalents, and Liquidity
o ________________ – a company’s ability to pay for its near-term obligations.
▪ Cash and similar assets are called liquid assets because they can be readily used
to settle such obligation.
o Cash – includes currency and other items that are _______________________.
o Cash equivalents – short-term, highly liquid investment assets meeting two criteria.
▪ Readily convertible to a ________________________.
▪ Sufficiently close to their maturity date so that their market value is not
sensitive to __________________________.
• Only investments purchased within _____________________ of their
maturity dates usually satisfy these criteria.
• Cash Management
o The goals of cash management are twofold:
▪ Plan cash receipts to meet _________________ when due.
▪ Keep the minimum level of cash necessary to operate.
• Control of Cash Receipts
o Over-the-counter cash receipts
▪ Record on a ____________________ at the time of each sale.
▪ Separate custody from ______________________.
