Financial and Managerial Accounting, 8e
6-1
CHAPTER 6
CASH, FRAUD, AND INTERNAL CONTROL
Related Assignment Materials
Student Learning Objectives
Questions
Quick Studies*
Exercises*
Problems*
AA
and
BTN
Conceptual objectives:
BTN 6-5,
BTN 6-6
C2. Define cash and cash equivalents
and explain how to report them.
7, 10,11, 12, 13
6-2
6-4, 6-5
AA 6-1,
AA 6-3
Analytical objectives:
A1 Compute the days’ sales uncollected
ratio and use it to assess liquidity.
6-10
6-15
AA 6-1,
AA 6-2,
AA 6-3
Procedural objectives:
P1. Apply internal control to cash
receipts and payments.
9
6-4, 6-5
6-6, 6-7
BTN 6-3,
BTN 6-5
P2. Explain and record petty cash fund
GL 6-1
P3. Prepare a bank reconciliation.
6-7, 6-8, 6-9,
6-13, 6-14
6-11, 6-12,
6-4, 6-5,
SP, ES
payments. (Appendix 6A)
8
6-6
6-8, 6-9,
6-2, 6-3,
*See additional information on next page that pertains to these quick studies, exercises, and problems.
SP refers to the Serial Problem
AA refers to Accounting Analysis
BTN refers to Beyond the Numbers
Financial and Managerial Accounting, 8e
Copyright © 2019 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written consent of McGraw-Hill Education.
6-2
Additional Information on Related Assignment Material
See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in
Connect.
Connect
Available on the instructor’s course-specific website, Connect:
• All numerical Quick Studies, all Exercises and Problems Set A.
o Connect also provides algorithmic versions for Quick Study, Exercises, and Problems.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints
without the video and audio functions for the Guided Examples are also available in the Connect Instructor Library
and Exercise Presentations. These are indicated in the Related Assignment Materials grid on page 1 in blue
bold font.
Need-to-Know Videos
LO
Need–to-Know
Title
Time
Concept Overview Videos
LO
Title
Time
C1
Define internal control and identify its purpose and principles.
Purpose of Internal Control
1:04
Purpose of Internal Control- Internal Control System
0:45
Purpose of Internal Control – Sarbanes-Oxley Act
5:40
Principles of Internal Control
2:02
Technology, Fraud, and Internal Control
1:40
Limitations of Internal Control
C2
Define cash and cash equivalents and explain how to report them.
1:08
1:26
1:02
Days’ Sales Uncollected
1:29
Days’ Sales Uncollected – Illustration
P1
Apply internal control to cash receipts and payments.
1:57
Control of Cash Receipts
1:24
Over –the-Counter Cash Receipts
0:54
Financial and Managerial Accounting, 8e
6-3
Cash Receipts by Mail
1:04
Control of Cash Payments
0:50
Voucher System of Control
1:40
P2
Explain and record petty cash fund transactions.
Petty Cash System of Control
1:55
Petty Cash System of Control – Illustration
1:02
Prepare a bank reconciliation.
Basic Bank Services
1:35
Bank Statement
2:11
Bank Reconciliation
3:43
Bank Reconciliation Steps
1:11
Bank Reconciliation Illustration
3:26
Bank Reconciliation Journal Entries
0:59
P4A
Describe the use of documentation and verification to control cash payments
disbursements.
Documentation and Verification
0:33
Documentation and Verification – Purchase Order
0:54
Documentation and Verification – Invoice
2:03
Documentation and Verification – Voucher
1:31
Synopsis of Chapter Revisions
NEW opener—Care.com and entrepreneurial assignment.
New COSO framework to guide internal control, including COSO cube.
New discussion of internal control failure at Amazon that cost customers $150 million.
Streamlined petty cash discussion.
Simplified bank statement for learning.
Revised bank reconciliation section to separate bank balance adjustments and book balance adjustments.
Financial and Managerial Accounting, 8e
Chapter Outline
I. Fraud and Internal Control
A. Purpose of Internal Control
An internal control system is policies and procedures used to:
1. Protect assets
B. Sarbanes-Oxley Act (SOX)
Requires managers and auditors of companies whose stock is traded on an exchange (called
public companies) to document and verify internal controls.
C. Principles of Internal Control:
1. Establish responsibilities
5. Divide responsibility for related transactions
6. Apply technological controls
7. Perform regular and independent reviews
The Committee of Sponsoring Organizations (COSO) provides a framework for how these
principles improve the quality of financial reporting.
D. Technology, Fraud, and Internal Control
Technology allows quick access to information. Examples of how technology impacts internal
control:
1. Reduced processing errors—technology reduces but does not eliminate errors in processing
information.
2 More extensive testing of records—technology allows large samples to be quickly checked
for accuracy.
5. Increased e-commerce—increases risks of credit card number theft, computer viruses and
E. Limitations of Internal Control
1. Human Element
a. Error: carelessness, misjudgment, or confusion
b. Fraud: opportunity, pressure, rationalization
2. Cost-benefit principle—the costs of internal controls must not exceed their benefits.
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 payments of cash are by check.
1. Liquidity refers to a company’s ability to pay for its current liabilities.
2. Cash includes currency, coins, and deposits in bank.
3. Cash equivalents (examples; short-term U.S. Treasury bills) are short-term, highly liquid
investment assets meeting two criteria:
b. Close enough to their maturity date so that market value will not greatly change.
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 strategies:
a. Encourage collection of receivables
C. Control of Cash Receipts
Procedures for protecting cash received over-the-counter and by mail:
1. Over-the-counter receipts from sales should be recorded on a cash register at the time of each
sale.
the mail creates list.
D. Control of Cash Payments—to safeguard against theft:
1. Use a cash budget to summarize receipts and payments.
2. Require all payments be made by checks. (Exception—small payments made from petty cash
fund.)
4. Voucher system of control establishes procedures for:
(Documents in a voucher system are listed and explained in appendix notes.)
5. 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
established or size of fund is increased or decreased.)
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.
Financial and Managerial Accounting, 8e
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.
1. Bank Reconciliation—a report that explains (reconciles) the difference between the
balance of a checking account according to the depositor’s records and the balance
reported on the bank statement.
2. Purpose of Bank Reconciliation
Factors causing the bank statement balance to differ from the depositor’s book balance
are:
a. Outstanding checks
b. Deposits in transit
e. Errors by either the bank or depositor
3. Steps in preparing the bank reconciliation:
a. Enter the bank balance of the cash account (balance per bank).
b. Add any unrecorded deposits (deposits in transit) and any bank errors that
understate the bank balance.
c. Subtract any outstanding checks and bank errors that overstate the bank balance.
d. Compute the adjusted bank balance.
h. Compute the adjusted book balance.
4. Adjusting entries from a Bank Reconciliation
a. All reconciling additions to book balance are debits to cash. Credit depends on
reason for addition (Example: Credit Notes Receivable when bank collected
note).
IV. Decision Analysis—Days’ Sales Uncollected
A. Also called days’ sales in receivables.
receivable is received in cash. Used to determine if cash is being collected quickly enough
to pay upcoming obligations.
C. Calculated by dividing current balance of accounts receivable by net sales and multiplying
the result by 365.
V. Documentation 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.
Financial and Managerial Accounting, 8e
B. Purchase Order—used by purchasing department to place an order with a vendor (seller or
supplier).
C. Invoice—an itemized statement of goods prepared by the vendor (copy sent to buyer) listing
the customer’s name, items sold, sales prices, and terms of sale.
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Chapter 6 Alternate Demonstration Problem
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.
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.
Financial and Managerial Accounting, 8e
Chapter 6 Solution: Alternate Demonstration Problem
BETSY DOUGH COMPANY
Bank Reconciliation
June 30, 2019
Bank Statement
Bank statement balance ………………………………………
$10,129
Add:
Deposit of June 30 ……………………………………..
400
10,529
Deduct:
Outstanding checks ……………………………………
$ 9,073
Depositor’s Books
Book balance of cash ………………………………………….
$ 9,000
Add:
by bank ………………………………………………………
Error in recording Check No. 141 ………………..
18
Deduct:
NSF check from Frank Ony …………………………
$ 120
Bank service charges …………………………………
25
145
$ 9,073
Adjusting entries Based on the Bank Reconciliation (made by depositor)
Cash…………………………………………………
……………. 218