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 6-6
AA 6-3
C1. Define internal control and identify
1, 2, 3, 4, 5, 6
6-1, 6-2
6-1, 6-2,
6-1
BTN 6-1,
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
P2. Explain and record petty cash fund
8
6-2, 6-3,
GL 6-1
P3. Prepare a bank reconciliation.
6-13, 6-14
6-4, 6-5,
SP, ES
BTN 6-3,
BTN 6-5
*See additional information on next page that pertains to these quick studies, exercises, and problems.
SP refers to the Serial Problem
Financial and Managerial Accounting, 8e
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.
Hints/Guided Examples
Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints
Need-to-Know Videos
LO
Need–to-Know
Title
Time
C1
6-1
Internal Controls
0:58
6-2
Control of Cash Receipts and Payments
1:04
6-3
Petty Cash System
2:45
6-4
Bank Reconciliation
7:00
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
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
1:18
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
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.
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:
principles improve the quality of financial reporting.
1. Establish responsibilities
2. Maintain adequate records
D. Technology, Fraud, and Internal Control
Technology allows quick access to information. Examples of how technology impacts internal
control:
5. Increased e-commerce—increases risks of credit card number theft, computer viruses and
1. Reduced processing errors—technology reduces but does not eliminate errors in processing
information.
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
1. Liquidity refers to a company’s ability to pay for its current liabilities.
2. Cash includes currency, coins, and deposits in bank.
Financial and Managerial Accounting, 8e
6-5
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
2. Effective cash management strategies:
a. Encourage collection of receivables
b. Delay payment of liabilities until last possible day allowed
C. Control of Cash Receipts
Procedures for protecting cash received over-the-counter and by mail:
the mail creates list.
1. Over-the-counter receipts from sales should be recorded on a cash register at the time of each
sale.
D. Control of Cash Payments—to safeguard against theft:
1. Use a cash budget to summarize receipts and payments.
4. Voucher system of control establishes procedures for:
(Documents in a voucher system are listed and explained in appendix notes.)
2. Require all payments be made by checks. (Exception—small payments made from petty cash
fund.)
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
6-6
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
2. Purpose of Bank Reconciliation
Factors causing the bank statement balance to differ from the depositor’s book balance
3. Steps in preparing the bank reconciliation:
h. Compute the adjusted book balance.
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.
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
IV. Decision Analysis—Days’ Sales Uncollected
receivable is received in cash. Used to determine if cash is being collected quickly enough
to pay upcoming obligations.
A. Also called days’ sales in receivables.
B. Used to estimate how much time is likely to pass before the current amount of accounts
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
6-7
B. Purchase Order—used by purchasing department to place an order with a vendor (seller or
Financial and Managerial Accounting, 8e
6-8
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
2. Checks returned with the bank statement are compared to the checks written
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
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,
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
Deduct:
Outstanding checks ……………………………………
$ 9,073
Depositor’s Books
Book balance of cash ………………………………………….
$ 9,000
Add:
Proceeds of customer note collected
by bank ………………………………………………………
200
Error in recording Check No. 141 ………………..
18
Deduct:
NSF check from Frank Ony …………………………
Bank service charges …………………………………
145
$ 9,073
Adjusting entries Based on the Bank Reconciliation (made by depositor)
Cash…………………………………………………