Acct 230 1st Edition Lecture 14Outline of Last Lecture I. Internal ControlsII. CashOutline of Current Lecture III. Casha. Cash & Cash equivalentsb. Controls over Cash Receipts and Cash DisbursementsCurrent LectureIV. Casha. Cash & Cash Equivalentsi. Cash: 1. includes currency, coins, and balances in savings and checking accounts, as well as items acceptable for deposit in these accounts, such as checks received from customers.ii. Cash equivalents: 1. short-term investments that have a maturity date no longer than three months from the date of purchase. b. Controls over Cash Receipts and Cash Disbursementsi. Cash Controls:1. must safeguard all assets against possible misuse. Again, because cash is especially susceptible to theft, internal control of cash is a key issue.ii. Cash Receipts:1. most businesses receive payment from the sale of products and services either in the form of cash or as a check received immediately or through the mail.iii. Internal control over cash receipts could include the following steps:1. Record all cash receipts as soon as possible. Theft is more difficult once a record of the cash receipt has been made.2. Open mail each day, and make a list of checks received, including the amount and payer’s name.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.3. Designate an employee to deposit cash and checks into the company’s bank account each day, different from the person who receives cash and checks.4. Have another employee record cash receipts in the accountingrecords. Verify cash receipts by comparing the bank deposit slip with the accounting records.5. Accept credit cards or debit cards, to limit the amount of cash employees handle.iv. Acceptance of Debit & Credit Cards1. The term credit card is derived from the fact that the issuer, such as Visa or MasterCard, extends credit (lends money) to the cardholder each time the cardholder uses the card. Cash inthe amount of the sale automatically is deposited in the company’s bank. Credit card companies earn revenues primarily in two ways. First, the cardholder has a specified grace period before he or she has to pay the credit card balance in full. If the balance is not paid by the end of the grace period, the issuing company will charge a fee (interest). Second, credit card companies charge the retailer, not the customer, for the use of the credit card.2. From the seller’s perspective, the only difference between a cash sale and a credit card sale is that the seller must pay a fee to the credit card company for allowing the customer to use a credit card.v. Cash Disbursements1. Managers should design proper control for cash disbursements to prevent any unauthorized payments and ensure proper recording. 2. Consistent with our discussion of cash receipts, cash disbursements include not only disbursing physical cash, but also writing checks and using credit and debit cards. 3. All these forms of payment constitute cash disbursement and require formal internal control procedures. vi. Important elements of a cash disbursement control system include the following steps:1. Make all disbursements, other than very small ones, by check, debit card, or credit card. This provides a permanent record of all disbursements.2. Authorize all expenditures before purchase and verify the accuracy of the purchase itself. The employee who authorizespayment should not also be the employee who prepares the check.3. Make sure checks are serially numbered and signed only by authorized employees. Require two signatures for larger checks.4. Periodically check amounts shown in the debit card and credit card statements against purchase receipts. The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases.5. Set maximum purchase limits on debit cards and credit cards. Give approval to purchase above these amounts only to upper-level employees.6. Employees responsible for making cash disbursements should not also be in charge of cash receipts.c. Reconcile a Bank Statementi. A bank reconciliation matches the balance of cash in the bank accountwith the balance of cash in the company’s own records.ii. A company’s cash balance as recorded in its books rarely equals the cash balance reported in the bank statement. iii. Differences in these balances occur because of either timing differences or errors. iv. It is the possibility of these errors, or even outright fraudulent activities, that make the bank reconciliation a useful cash control tool.v. Timing differences in cash occur when the company records transactions either before or after the bank records the same transaction. vi. Errors can be made either by the company or its bank and may be accidental or intentional. vii. Step 1: Reconciling Bank’s Cash Balance1. Cash transactions recorded by a company, but not yet recorded by its bank, include deposits outstanding and checks outstanding.2. Deposits outstanding are cash receipts of the company that have not been added to the bank’s record of the company’s balance.3. Checks outstanding are checks the company has written that have not been subtracted from the bank’s record of the company’s balance. viii. Step 2: Reconciling the Company’s Cash Balance1. Few examples of cash transactions recorded by the bank, but not yet recorded by the company are - items such as interest earned by the company, collections made by the bank on the company’s behalf, service charges, and charges for NSF checks.2. NSF checks: Checks drawn on nonsufficient funds or “bad” checks from customers. 3. In addition, we adjust the company’s balance for any company errors. ix. Step 3: Adjusting the Company’s Cash Balance1. As a final step in the reconciliation process, a company must update the balance in its cash account, to adjust for the items used to reconcile the company’s cash balance. We record these adjustments once the bank reconciliation is complete. Remember, these are amounts the company didn’t know until it received the bank statement.2. We record items that increase the company’s cash with a debitto cash, Similarly, we record items that decrease the company’s cash by a credit to cash3. Most of the accounts are easy to understand. We credit notes receivable because the note has been received, decreasing that asset account