ACCT 101 Wild 7e CH06 Accessible

Financial & Managerial Accounting
Information for Decisions

Seventh Edition
Chapter 6
Cash, Fraud, and
Internal Controls
© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
Learning Objectives (1 of 2)
CONCEPTUAL
C1 Define internal control and identify its purpose and
principles.
C2 Define cash and cash equivalents and explain how
to report them.
ANALYTICAL
A1 Compute the days’ sales uncollected ratio and use
it to assess liquidity.
PROCEDURAL
P1 Apply internal control to cash receipts and
disbursements.
P2 Explain and record petty cash fund transactions.
© McGraw-Hill Education. 6-2

Learning Objectives (2 of 2)
P3 Prepare a bank reconciliation.
P4 Appendix 6A Describe use of documentation
and verification to control cash
disbursements.

Learning Objective C1: Define
internal control and identify its
purpose and principles.

Internal Control System
Learning Objective C1: Define internal control and identify its
• Policies and procedures managers use to:

– Protect assets.
– Ensure reliable accounting.
– Uphold company policies.
– Promote efficient operations.

Sarbanes-Oxley Act (SOX)
• The Sarbanes-Oxley Act requires managers

and auditors of public companies to
document and certify the system of internal
controls.
• Section 404 of SOX requires that managers
document and assess the effectiveness of all
internal control processes that can impact
financial reporting.

Principles of Internal Control
Internal control principles common to all

companies:
1. Establish responsibilities.
2. Maintain adequate records.
3. Insure assets and bond key employees.
4. Separate recordkeeping from custody of assets.
5. Divide responsibility for related transactions.
6. Apply technological controls.
7. Perform regular and independent reviews.

Technology, Fraud, and Internal
Control
• More Extensive Testing of Records

• Separation of Duties
• Increased E-Commerce
• Limited Evidence of Processing
• Reduced Processing Errors

Limitations of Internal Control
(1 of 2)
• Human Error
– Negligence
– Fatigue
– Misjudgment
– Confusion
• Human Fraud
– Intent to defeat internal controls for personal
gain

Limitations of Internal Control
(2 of 2)
• Human fraud triple-threat: Opportunity,

Pressure, and Rationalization
• The costs of internal controls must not
exceed their benefits.

NEED-TO-KNOW 6-1 (1 of 2)
Identify the following phrases/terms as best

linked with the (a) purposes of an internal
control system,
1) Protect assets
2) Establish responsibilities
3) Human error
4) Maintain adequate records
5) Apply technological controls

6) Ensure reliable accounting

7) Insure assets and bond key employees
8) Human fraud
9) Separate recordkeeping from custody of assets
10) Divide responsibility for related transactions
11) Cost-benefit principle
12) Promote efficient operations
13) Perform regular and independent reviews
14) Uphold adherence to company policies

NEED-TO-KNOW 6-1 – SOLUTION
(1 of 5)
1) Protect assets a) Purpose of internal controls
2) Establish responsibilities b) Principles of internal controls
3) Human error c) Limitations of internal controls
4) Maintain adequate records b) Principles of internal controls
5) Apply technological controls b) Principles of internal controls
6) Ensure reliable accounting a) Purpose of internal controls
7) Insure assets and bond key
b) Principles of internal controls
employees
8) Human fraud c) Limitations of internal controls
9) Separate recordkeeping from
custody of assets

(2 of 5)
10) Divide responsibility for related
transactions
11) Cost-benefit principle c) Limitations of internal controls
12) Promote efficient operations a) Purpose of internal controls
13) Perform regular and independent
reviews
14) Urge adherence to company
a) Purpose of internal controls
policies

(3 of 5)
a) Purposes of internal controls

– Protect assets.
– Promote efficient operations.
– Ensure reliable accounting.
– Urge adherence to company policies.

(4 of 5)

– Establish responsibilities.
– Maintain adequate records.
– Insure assets and bond key employees.
– Separate recordkeeping from custody of assets.
– Divide responsibility for related transactions.
– Apply technological controls.
– Perform regular and independent reviews.

(5 of 5)
c) Limitations of internal controls

– Human elements include:
 Human error.
 Human fraud.
 Cost-benefit principle.

Learning Objective C2: Define
cash and cash equivalents and
explain how to report them.

Control of Cash
Learning Objective C2: Define cash and cash equivalents and
• An effective system of internal control that

protects cash and cash equivalents should
meet three basic guidelines:
– Handling cash is separated from recordkeeping
for cash.
– Cash disbursements are made by check.
– Cash receipts are promptly deposited in a
bank.

Cash, Cash Equivalents, and Liquidity
(1 of 2)
• Cash and similar assets are called liquid assets

because they can be readily used to settle
such obligations.
• Cash
– Currency, coins, and amounts on deposit in
bank accounts, checking accounts, and some
savings accounts. Also includes items such as
customer checks, cashier checks, certified
checks, and money orders.
Cash, Cash Equivalents, and Liquidity
(2 of 2)
• Cash Equivalents
• Short-term, highly liquid investments that
are:
1. Readily convertible to a known cash amount.
2. Close to maturity date and not sensitive to
interest rate changes.

Cash Management (1 of 2)
• The goals of cash management are twofold:

1. Plan cash receipts to meet cash payments
when due.
2. Keep a minimum level of cash necessary to
operate.

Cash Management (2 of 2)
• Effective cash management involves applying

the following cash management principles:
– Encourage collection of receivables.
– Delay payment of liabilities.
– Keep only necessary assets.
– Plan expenditures.
– Invest excess cash.

Learning Objective P1: Apply
internal control to cash receipts
and disbursements.

Over-the-Counter Cash Receipts
Learning Objective P1: Apply internal control to cash receipts and
disbursements.
This graphic illustrates that none of the people

involved can make a mistake or divert cash without
the difference being revealed.

Cash Over and Short (1 of 4)
disbursements.
• Sometimes errors in making change are

discovered from differences between the cash in
the cash register and the record of the amount of
cash receipts.
• If a cash register’s record shows $550 but the
count of cash in the register is $555, we would
prepare the following journal entry:

disbursements.
• Sometimes errors in making change are

discovered from differences between the cash in
the cash register and the record of the amount of
cash receipts.
• On the other hand, if a cash register’s record
shows $625 but the count of cash in the register
is $621, the entry to record cash sales and its
shortage is:

disbursements.
• If petty cashier fails to obtain a receipt for

payment or overpays an amount, cash over or
short will result.
• Petty cash payments report plus cash left in
account will not total to the fund balance.
• Difference is debited, if short, to Cash Over and
Short.
• Difference is credited, if over, to Cash Over and
Short.

disbursements.

Cash Receipts by Mail
disbursements.
• Preferably, two people are assigned the task

of opening the mail.
• The cashier deposits the money in a bank.
• The recordkeeper records the amounts
received in the accounting records.

Control of Cash Disbursements
disbursements.
• Control of cash disbursements is especially

important as most large thefts occur from
payment of fictitious invoices.
• Keys to Controlling Cash Disbursements
– Require all expenditures to be made by check.
– Limit access to checks except for those who
have the authority to sign checks.

Voucher System of Control (1 of 2)
disbursements.
• A voucher system establishes procedures for:

1. Verifying, approving, and recording obligations
for eventual cash disbursements.
2. Issuing checks for payment of verified,
approved, and recorded obligations.

Voucher System of Control (2 of 2)
disbursements.
Exhibit 6.1

disbursements.
A good system of internal control for cash provides

adequate procedures for protecting both cash
receipts and cash disbursements. Which of the
following statements are true regarding the control
of cash receipts and disbursements?
1. Over-the-counter cash receipts from sales should
be recorded on a cash register at the time of
each sale.
– True – All sales should be recorded on a cash
register.

disbursements.
2. Custody over cash should be separate from the

recordkeeping of cash.
– True – Segregation of duties
3. For control of cash receipts that arrive through
the mail, two people should be assigned the task
of, and be present for, opening that mail.
– True – Segregation of duties

disbursements.
4. One key to controlling cash disbursements is to

require that no expenditures be made by check;
instead, all expenditures should be made from
petty cash.
– False – Only small amounts should be paid
from petty cash.
5. A voucher system of control should be applied
only to purchases of inventory and never to other
expenditures.
– False – A voucher system should be applied to
all purchases.
Learning Objective P2: Explain
and record petty cash fund
transactions.

Petty Cash System of Control
Learning Objective P2: Explain and record petty cash fund
transactions.
Small payments required in most companies for

items such as postage, courier fees, repairs,
and supplies.

Operating a Petty Cash Fund (1 of 2)
transactions.
• To establish a petty cash fund:

– Petty Cash is debited to increase
– Cash is credited to decrease

Operating a Petty Cash Fund (2 of 2)
transactions.
Summary of petty cash receipts:

Exhibit 6.3

Reimbursement of Petty Cash Fund
transactions.
• Cash payments report is used in making the

journal entry to reimburse the fund.
• Debit each of the expenses and credit Cash.

Increasing or Decreasing a Petty Cash
Fund
transactions.
To increase, debit Petty Cash Credit Cash.
To decrease, debit Cash and credit Petty Cash

transactions.
Bacardi Company established a $150 petty cash fund

with Eminem as the petty cashier. When the fund
balance reached $19 cash, Eminem prepared a petty
cash payment report, which follows.
Receipt No. Account Charged Approved by Received by
12 Delivery Expense $ 29 Eminem A. Smirnoff
13 Merchandise Inventory 18 Eminem J. Daniels
15 (Omitted) 32 Eminem C. Carlsberg
16 Miscellaneous Expense 41 Eminem J. Walker
Total $ 120

transactions.
Required:
1. Identify four internal control weaknesses from the
payment report.
– Petty cash ticket no. 14 is missing. All petty cash
tickets should be pre-numbered and all numbers
should be accounted for.
– Since total cash on hand is only $19, $131 has
been withdrawn ($150 - $19). Only $120 in
expenditures has been documented. Management
should investigate the $11 cash shortage.

transactions.
– The petty cashier did not sign petty cash

receipt no. 16. Was the expense approved, or
was this an oversight?
– Petty cash receipt no. 15 does not indicate
the account to be charged. If possible,
management should determine the correct
account; if impossible, Miscellaneous Expense
should be charged.

NEED-TO-KNOW 6-3 SOLUTION
(1 of 4)
transactions.
Bacardi Company established a $150 petty cash fund

with Eminem as the petty cashier. When the fund
balance reached $19 cash, Eminem prepared a petty
cash payment report, which follows.
Receipt No. Account Charged Approved by Received by
12 Delivery Expense $ 29 Eminem A. Smirnoff
13 Merchandise Inventory 18 Eminem J. Daniels
15 (Omitted) 32 Eminem C. Carlsberg
16 Miscellaneous Expense 41 Eminem J. Walker
Total $ 120

(2 of 4)
transactions.
2. Prepare general journal entries to record the

establishment of the fund and the
reimbursement of the fund. (Assume that
management was unable to verify the account
number for receipt no. 15.)

(3 of 4)
transactions.

(4 of 4)
transactions.
3. What is the Petty Cash account balance

immediately before reimbursement? $150
Immediately after reimbursement? $150
The balance in Petty cash remains constant
unless the amount of the fund is changed.

Basic Bank Services
transactions.
• Signature Cards
• Deposit Tickets
• Bank Statements
• Electronic Funds Transfer
• Checks
• Bank Accounts

Exhibit 6.6 Bank Statement
transactions.
• Usually once a
month, the bank
sends each
depositor a bank
statement
showing the
activity in the
account.

Learning Objective P3: Prepare
a bank reconciliation.

Bank Reconciliation (1 of 5)
Learning Objective P3: Prepare a bank reconciliation.
A bank reconciliation is prepared periodically to

explain the difference between cash reported on
the bank statement and the cash balance on
company’s books.

The balance of a checking account reported on

the bank statement rarely equals the balance in
the depositor’s accounting records.
Cash Balance per Bank + Deposits in Transit -
Outstanding Checks +/- Errors = Adjusted Cash
Balance
Cash Balance per Book + Collections & Interest -
Uncollectible items +/- Errors = Adjusted Cash
Balance
Adjusting entries are recorded for the reconciling
items on the book side of the reconciliation.
Exhibit 6.7
We follow nine steps in preparing the bank
reconciliation.

We follow nine steps in preparing the bank

reconciliation.
Adjusting entries are recorded for the reconciling

items on the book side of the reconciliation.
Only items reconciling the book balance require

adjustment.

The following information is available to reconcile

Gucci’s book balance of cash with its bank
statement cash balance as of December 31.
Prepare the bank reconciliation for this company as
of December 31.
a. The December 31 cash balance according to the
accounting records is $1,610, and the bank
statement cash balance for that date is $1,900.

b. Gucci’s December 31 daily cash receipts of $800

were placed in the bank’s night depository on
December 31, but do not appear on the
December 31 bank statement.
c. Check No. 6273 for $400 and Check No. 6282 for
$100, both written and entered in the accounting
records in December, are not among the canceled
checks. Two checks, No. 6231 for $2,000 and No.
6242 for $200, were outstanding on the most
recent November 30 reconciliation. Check No.
6231 is listed with the December canceled
checks, but Check No. 6242 is not.
d. When the December checks are compared with

entries in the accounting records, it is found that
Check No. 6267 had been correctly drawn for
$340 to pay for office supplies but was
erroneously entered in the accounting records as
$430.

e. A credit memorandum indicates that the bank

collected $500 cash on a note receivable for the
company, deducted a $30 collection fee, and
credited the balance to the company’s Cash
account. Gucci had not recorded this transaction
before receiving the statement.

f. Two debit memoranda are enclosed with the

statement and are unrecorded at the time of the
reconciliation. One debit memorandum is for
$150 and dealt with an NSF check for $140
received from a customer, Prada Inc., in
payment of its account. The bank assessed a
$10 fee for processing it. The second debit
memorandum is a $20 charge for check printing.
Gucci had not recorded these transactions before
receiving the statement.

(1 of 8)

(2 of 8)
In the case of an error, whichever party made

the error (book or bank) will show the
correction as an adjustment.

(3 of 8)

(4 of 8)
a. The December 31 cash balance according to the

accounting records is $1,610, and the bank
statement cash balance for that date is $1,900.
b. Gucci’s December 31 daily cash receipts of $800
were placed in the bank’s night depository on
December 31, but do not appear on the
December 31 bank statement.

(5 of 8)
c. Check No. 6273 for $400 and Check No. 6282

for $100, both written and entered in the
accounting records in December, are not among
the canceled checks. Two checks, No. 6231 for
$2,000 and No. 6242 for $200, were outstanding
on the most recent November 30 reconciliation.
Check No. 6231 is listed with the December
canceled checks, but Check No. 6242 is not.

(6 of 8)
d. When the December checks are compared with

entries in the accounting records, it is found that
Check No. 6267 had been correctly drawn for
$340 to pay for office supplies but was
erroneously entered in the accounting records as
$430.
e. A credit memorandum indicates that the bank
collected $500 cash on a note receivable for the
company, deducted a $30 collection fee, and
credited the balance to the company’s Cash
account.
(7 of 8)
f. Two debit memoranda are enclosed with the

statement and are unrecorded at the time of the
reconciliation. One debit memorandum is for
$150 and dealt with an NSF check for $140
received from a customer, Prada Inc., in
payment of its account. The bank assessed a
$10 fee for processing it. The second debit
memorandum is a $20 charge for check printing.
Gucci had not recorded these transactions
before receiving the statement.

(8 of 8)

Learning Objective A1: Compute
the days’ sales uncollected ratio and
use it to assess liquidity.

Exhibit 8.9 Days’ Sales Uncollected
Learning Objective A1: Compute the days’ sales uncollected
ratio and use it to assess liquidity.
Indicates how much time is likely to pass before

we receive cash receipts from credit sales.
Accounts receivable
Days' sales uncollected   365
Net sales
Company Figure ($millions) 2015 2014 2013 2012 2011
Hasbro Accounts receivable............... $ 1,218 $ 1,095 $ 1,094 $ 1,030 $ 1,035

Net sales............................. $ 4,448 $ 4,277 $ 4,082 $ 4,089 $ 4,286
Days’ sales uncollected…… 100 days 93 days 98 days 92 days 88 days
Mattel Accounts receivable .............. $ 1,145 $ 1,094 $ 1,260 $ 1,227 $ 1,247
Net sales ............................ $ 5,703 $ 6,024 $ 6,485 $ 6,421 $ 6,266
Days’ sales uncollected…… 73 days 66 days 71 days 70 days 73 days

Learning Objective P4 (Appendix
8-A): Describe use of
documentation and verification to
control cash disbursements.

Appendix 8A: Documentation and
Verification
Learning Objective P4: Describe use of documentation and
verification to control cash disbursements.
• Purchase Requisition
• Purchase Order
• Invoice
• Receiving Report

Invoice Approval
• Accounting department will record purchase and

approve payment after all documents are in
order.
• Information across all documents are verified.
• Invoice approval also called check authorization.
• Checklist of steps necessary for approving invoice
and payment.

Voucher
• Voucher is complete after invoice has been

checked and approved.
• Used to authorize recording obligation.
• Certain information is required on the inside of a
voucher.
• Certain information is also required on the
outside of a voucher.

End of Presentation
© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No
reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 6-77

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Financial & Managerial Accounting

Information for Decisions

© McGraw-Hill Education. 6-2

© McGraw-Hill Education. 6-3

© McGraw-Hill Education. 6-4

• Policies and procedures managers use to:

© McGraw-Hill Education. 6-5

• The Sarbanes-Oxley Act requires managers

© McGraw-Hill Education. 6-6

Internal control principles common to all

© McGraw-Hill Education. 6-7

• More Extensive Testing of Records

© McGraw-Hill Education. 6-8

© McGraw-Hill Education. 6-9

• Human fraud triple-threat: Opportunity,

© McGraw-Hill Education. 6-10

Identify the following phrases/terms as best

© McGraw-Hill Education. 6-11

6) Ensure reliable accounting

© McGraw-Hill Education. 6-12

© McGraw-Hill Education. 6-13

© McGraw-Hill Education. 6-14

a) Purposes of internal controls

© McGraw-Hill Education. 6-15

b) Principles of internal controls

© McGraw-Hill Education. 6-16

c) Limitations of internal controls

© McGraw-Hill Education. 6-17

© McGraw-Hill Education. 6-18

• An effective system of internal control that

© McGraw-Hill Education. 6-19

• Cash and similar assets are called liquid assets

© McGraw-Hill Education. 6-21

• The goals of cash management are twofold:

© McGraw-Hill Education. 6-22

• Effective cash management involves applying

© McGraw-Hill Education. 6-23

© McGraw-Hill Education. 6-24

This graphic illustrates that none of the people

© McGraw-Hill Education. 6-25

• Sometimes errors in making change are

© McGraw-Hill Education. 6-26

• Sometimes errors in making change are

© McGraw-Hill Education. 6-27

• If petty cashier fails to obtain a receipt for

© McGraw-Hill Education. 6-28

© McGraw-Hill Education. 6-29

• Preferably, two people are assigned the task

© McGraw-Hill Education. 6-30

• Control of cash disbursements is especially

© McGraw-Hill Education. 6-31

• A voucher system establishes procedures for:

© McGraw-Hill Education. 6-32

© McGraw-Hill Education. 6-33

A good system of internal control for cash provides

© McGraw-Hill Education. 6-34

2. Custody over cash should be separate from the

© McGraw-Hill Education. 6-35

4. One key to controlling cash disbursements is to

© McGraw-Hill Education. 6-37

Small payments required in most companies for

© McGraw-Hill Education. 6-38

• To establish a petty cash fund:

© McGraw-Hill Education. 6-39