chapter 7 and 8.docx

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University of Toronto Scarborough
Financial Accounting
Mark Fitzpatrick

Chapter 7 – Internal Controls and Cash Internal Control - The process that management designs and implements to achieve: reliable financial reporting, effective/efficient operations, and compliance with laws/regulations - Responsibility of management - Principles of Internal Control: authorization, safeguarding assets and records, segregation of duties, independent verification, documentation procedures, other controls Establishment of Responsibilities - Make specific employees responsible for specific tasks - Most effective when only one person is responsible for a single task Segregation of Duties - Employees with similar jobs should be separated from each other to prevent collusion - Physical counting and theoretical counting should not be responsibilities of one person Documentation Procedures - Documentation should be used to support the transactions in regards to merchandise and cash - Signatures increase the reliability of documentation - Pre-numbering documents will improve efficiency Physical Controls - Mechanical/electronic controls to protect assets can be used - Vaults, warehouses, passwords, alarms, sensors, and time clocks are all measures of physical control Performance Reviews - Periodic/surprise reviews will maximize effectiveness - Reviews should be conducted by people with very little relations to the employee being reviewed - Exceptions should be reported to management to correct the situation Internal Reviews - Done by someone within the company - Internal auditors belong to the company and conduct evaluations of employees External Reviews - Done by someone outside the company - Person conducting evaluations must be completely independent from the company and are professional accountants Other Controls - Bonding employees to protect them in the case of theft with insurance - This insurance is referred to as fidelity insurance and covers against the theft of assets by dishonest employees - Rotating duties/forcing vacations will expose any changes in daily operations - Embezzlement is commonly found in banks when employees are on vacation/assigned to new positions Limitations of Internal Control - The cost of internal controls should not be greater than the expected benefit - Improper training, collusion, and a large business size can limit the abilities of internal control methods Cash Controls - Same internal controls are applied to cash to prevent theft - A special journal is often used by companies to make cash controls more efficient - Cash Receipts Journals are used to record all cash receipts - Special Journals are used depending on what type of transactions occur the most Debit/Credit Card Transactions - Debit card sales are considered cash transactions - Debit card transactions can be compared to a personal cheque transaction - Depending on the seller, debit card expenses may be paid by either the buyer or seller - Bank credit card sales are often considered cash transactions - Credit card expenses are often paid by the seller Electronic Receipts - EFT (electronic funds transfer) systems are used to transfer cash electronically - Debit and credit cards are forms of electronic payment methods - Pre-authorized payments are another example of electronic funds Cash Disbursements - Same control methods listed above should be used for cash disbursements - Companies requiring many cash disbursements often use a special journal called a cash payments journal - Electronic payments are also used but result in no cheque/source document Petty Cash - Used for small payments - To establish the fund: DR Petty Cash, CR Cash - Petty cash receipts should be used as source documents - Payments from the petty cash should not be recorded until the petty cash fund is refilled - To replenish the fund: DR Expenses, CR Cash Banks - Bank deposits increase the bank account - Cheques decrease the bank account - Clearing refers to when a cheque/deposit is accepted by the bank - Clearing often takes a few days - Bank statements show transactions and balances - Debits on the bank statement are actually credits to the company and credits on the bank statement are actually debits to the company - The bank statement is shown from the bank’s perspective Memorandums - Debit memos are issued by the bank to signify any decreases in the company’s balance - Banks can charge a monthly bank service charge - NSF cheques are also notified to companies through a debit memo - NSF cheques occur when a deposit of a cheque does not clear because the customer does not have enough money to pay the cheque - Credit memos are issued to the bank to signify any increases in the company’s balance - Often used for interest earned, or EFT transactions Bank Reconciliations - Done to show the true balances of cash on the bank statement and in the general ledger - Bank balance may be off due to outstanding cheques (cheques not yet cleared), deposits in transit or error made by the bank - Balance in the ledger may be off due to NSF cheques, unrecorded debit/credit memos or ledger errors - When the correct balance is made, adjusting entries must be made in the journal Extra Vocabulary Cash: coins, currency, cheques, money orders, travellers’ cheques, and money on deposit in a bank Cash Equivalents: short-term, high liquidity investments – often combined with cash Bank Overdraft: withdrawals are more than the amount in the bank account Restricted Cash: cash reserved for a special use (e.g. deposits to purchase a large item) Compensating Balances: minimum balances kept by banks to support their loans Chapter 8 – Accounting for Receivables Accounts Receivable - A/R is recognized whenever services/sales are made on account - A subsidiary ledger is used to keep track of individual A/R’s while a single A/R account is used on the balance sheet to summarize the subsidiary ledger - Interest can be appli
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