John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
6-1
CHAPTER 6
REPORTING AND ANALYZING CASH, FRAUD AND
INTERNAL CONTROLS
Related Assignment Materials
Student Learning Objectives
Questions
Quick
Studies*
Exercises*
Problems*
Beyond the
Numbers
Conceptual objectives:
C1. Define internal control and its
purpose and principles.
1, 2, 3, 4, 5,
6
6-1, 6-10
6-1, 6-2
6-1
6-3, 6-4, 6-5,
6-6, 6-7, 6-8
C2. Define cash and cash
equivalents and explain how to
report them.
7, 10,11, 12,
13
6-2
6-3
6-1, 6-9
Analytical objectives:
A1 Compute the days’ sales
uncollected ratio and use it to
assess liquidity.
6-8
6-12
6-1, 6-2, 6-9
Procedural objectives:
P1. Apply internal control to cash
receipts and disbursements.
9
6-3, 6-10
6-4, 6-7
6-5, 6-4,6-7
fund transactions.
GL 6-1
P3. Prepare a bank reconciliation.
6-5, 6-6, 6-7
6-8, 6-9,
6-10, 6-11
6-4, 6-5,
SP 6
disbursements. (Appendix 6A)
6-9
6-13
*See additional information on next page that pertains to these quick studies, exercises and problems.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
6-2
Additional Information on Related Assignment Material
Connect
Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all Exercises
and Problems Set A. Connect also provides algorithmic versions for Quick Study, Exercises and
Problems. It allows instructors to monitor, promote, and assess student learning. It can be used in
practice, homework, or exam mode.
The Serial Problem for Success Systems continues in this chapter.
General Ledger
Assignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post
from the general journal all the way through the financial statements. Critical thinking and analysis components are
added to each GL problem to ensure understanding of the entire process. GL problems are auto–graded and provide
instant feedback to the student.
Synopsis of Chapter Revisions
• UPDATED opener—Google
• New image included for bonding certificate.
• New discussion of controls over social media with reference to Facebook’s ‘mood’ posts.
• New discussion of how fraud is detected.
• New evidence on how cash is stolen from companies.
• Added T-account in margin of bank statement to aid learning.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
6-3
Chapter Outline
Notes
I. Fraud and Internal Control
A. Purpose of Internal Control
An internal control system consists of policies and procedures
managers use to:
1. Protect assets.
B. Sarbanes Oxley Act (SOX)
Section 404 of SOX requires the managers and auditors of
companies whose stock is traded on an exchange (called public
companies) to document and certify the system of internal
controls.
C. Principles of Internal Control:
The Committee of Sponsoring Organizations (COSO) provides a
framework for how these principles improve the quality of
financial reporting.
1. Establish responsibilities.
2. Maintain adequate records.
3. Insure assets and bond key employees.
D. Technology, Fraud, and Internal Control
Technology provides quick access to databases and information.
Examples of how technology impacts internal control:
5. Increased e-commerce increases risks of credit card theft,
1. Reduced processing errors.
2 More extensive testing of records.
3. Limits evidence of processing steps but can electronically
store additional evidence.
E. Limitations of Internal Control
2. Cost-benefit principle—the costs of internal controls must not
1. Human Element
a. Error: negligence, fatigue, misjudgment, r confusion
b. Fraud: opportunity, pressure, rationalization
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
Chapter Outline
Notes
II. Control of Cash—Basic guidelines for control of cash and cash
equivalents include: handling of cash must be separate from
recordkeeping of cash, cash receipts are promptly deposited in bank,
and disbursements of cash are by check.
A. Cash, Cash Equivalents, and Liquidity
1. Liquidity refers to a company’s ability to pay for its near term
obligations.
Note: Only investments purchased within three months of
2. Cash includes currency and coins, deposits in bank and
checking accounts (called demand deposits), many savings
accounts (called time deposits), and items that are acceptable
for deposit in those accounts (customers checks, cashier
checks, certified checks, and money orders).
B. Cash Management
1. Goals of Cash Management
a. Plan cash receipts to meet cash payments when due
b. Keep minimum level of cash necessary to operate.
2. Effective cash management principles:
a. Encourage collection of receivables
C. Control of Cash Receipts
Procedures for protecting cash received over-the-counter and by
mail:
1. Apply internal control principles.
2. Record cash shortages and overages in an income statement
account called Cash Over and Short.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
6-5
Chapter Outline
Notes
3. Voucher system of control establishes procedures for:
a. verifying, approving and recording obligations for
4. Petty cash system of control:
a. Write and cash a check to establish petty cash fund.
Record as a debit to Petty Cash and credit to Cash.
(Use the Petty Cash account only when the fund is
III. Banking Activities as Controls
A. Basic Bank Services
Bank accounts permit depositing money for safeguarding and
helps control withdrawals. Electronic Funds Transfer (EFT) is an
electronic communication transfer of cash from one party to
another.
2. Factors causing the bank statement balance to differ from the
B. Bank Statement
Shows activities of a bank account and is used to prove the
accuracy of the depositor’s cash records in preparing a bank
reconciliation.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
6-6
Chapter Outline
Notes
3. Steps in preparing the bank reconciliation:
a. Identify the bank balance of the cash account (balance per
bank).
b. Identify and list any unrecorded deposits (deposits in
transit) and any bank errors understating the bank balance.
Add them to the bank balance.
c. Identify and list any outstanding checks and any bank
errors overstating the bank balance. Deduct them from the
bank balance.
the bank, any interest earned, and errors that understated
the book balance. Add them to the book balance.
the bank, service charges, and errors that overstated the
book balance. Deduct them from the book balance.
accuracy and missing data to achieve reconciliation.
d. Compute the adjusted bank balance, also called corrected
or reconciled balance.
4. Adjusting entries from a bank reconciliation
charge and Accounts Receivable/customer for NSF
checks.).
a. All reconciling additions to book balance are debits to
cash. Credit depends on reason for addition (Examples:
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
6-7
Chapter Outline
Notes
IV Global View—Compares U.S. GAAP to IFRS
A. Internal control purposes, principles and procedures are basically
the same across the globe.
IV. Decision Analysis—Days’ Sales Uncollected
A. Also called days’ sales in receivables.
B. Used to evaluate the liquidity of a company; estimates how
quickly a company will convert its accounts receivable into cash.
C. Calculated by dividing current balance of accounts receivable by
net sales and multiplying the result by 365.
V. Documents and Verification —Appendix 6A
Important documents of a voucher system of control include:
A. Purchase Requisition—lists the merchandise needed and requests
that it be purchased.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
6-8
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
VISUAL #6-1
BANK RECONCILIATION
Reasons for discrepancies between
bank statement balance and checkbook
balance: Handle as follows:
Unrecorded deposits Add to Bank Balance
Outstanding checks Deduct from Bank Balance
Bank service charges Deduct from Book Balance
Debit memos Deduct from Book Balance
Credit memos Add to Book Balance
NSF checks Deduct from Book Balance
Interest Add to Book Balance
Errors Must analyze individually
(bank errors affect bank
balance and book errors
affect book balance)
6-10
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
6-11
Alternate Demonstration Problem
Chapter 6
The Betsy Dough Company wants to prepare a bank reconciliation for the
month of June. When the bank statement for the month of June arrives
from the bank, the following steps are performed:
1. The deposits to the bank account, as recorded on the bank statement,
are compared to the deposit slips retained by the company. It is noted
that the last deposit, of $400, occurred after banking hours on the day of
the bank statement and therefore has not been recorded by the bank on
this bank statement.
2. Checks returned with the bank statement are compared to the checks
written and listed in checkbook. This comparison shows that there are
checks outstanding amounting to $1,456.
3. The ending balances on the statement and in the company’s books are
determined. The ending bank statement balance is exactly $10,129
whereas the books show $9,000.
4. Other information contained on the bank statement, not previously
known to the company, is determined. This includes the following: (a) a
note of $180 plus $20 interest from a customer for a total of $200 has
been collected by the bank and credited to our account; (b) a check
from Frank Ony for $120 previously deposited by us has been returned
for lack of sufficient funds; (c) the bank has charged us $25 for its
services (this includes a $10 fee for the NSF check). The $10 fee for the
NSF check will be charged to the customer.
5. A bank reconciliation is prepared; it does not balance! The difference is
$18, so a transposition error is looked for (whenever the difference is a
multiple of 9, there is a very good chance that there has been an
inadvertent exchange of two digits (for example, writing 29 when it
should have been 92). An error is found. Check number 141 was written
for $235 for Advertising Expense and cleared the bank for $235, but was
recorded in the company records as $253.
Required:
Prepare a bank reconciliation for the Betsy Dough Company at June 30,
20XX.
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition
6-12
Solution: Alternate Demonstration Problem
Chapter 6
BETSY DOUGH COMPANY
Bank Reconciliation
June 30, 20XX
Bank Statement
Bank statement balance ………………………………………
Depositor’s Books
NSF check from Frank Ony …………………………
Bank service charges …………………………………
Adjusting entries Based on the Bank Reconciliation (made by depositor)
John J. Wild, Financial Accounting: Information for Decisions, 8th Edition