Bài giảng Financial Accounting - Chapter 4: Cash and Internal Controls

Cash andInternal ControlsChapter 4 Learning ObjectivesDiscuss the impact of accounting scandals and the passage of the Sarbanes-Oxley ActIdentify the components, responsibilities, and limitations of internal controlDefine cash and cash equivalentsUnderstand controls over cash receipts and cash disbursementsReconcile a bank statementLearning ObjectivesAccount for petty cashIdentify the major inflows and outflows of cashAssess earnings quality by comparing net income and cash flowsPart AInternal Controls4-4Incorrect Financial StatementsReasonsErrors—accidental errors in recording transactions or applying accounting principlesFraud—a person intentionally deceives another person for personal gain or to damage that personOccupational fraud: the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employer’s resources.The Fraud TriangleInternal ControlsEliminate opportunityRepresent plans to:Safeguard the assetsImprove accuracy and reliability of informationLearning Objective 1Discuss the impact of accounting scandals and the passage of the Sarbanes-Oxley Act4-8Accounting Scandals and Response by CongressManagers are entrusted with the resources of both the company’s lenders and ownersManagers act as stewards or caretakers of the company’s assetsSome managers have shirked their ethical responsibilitiesTop executives misreported and fooled investors into overvaluing the company’s stockAccounting fraud in U.S. historyWorldCom Enron Avoided reporting billions in debt and lossesMisclassified expenditures to overstate assets and profitabilitySarbanes-Oxley Act of 2002Passed by CongressAlso known as the Public Company Accounting Reform and Investor Protection Act of 2002Applies to all companies that are required to file financial statements with the SECEstablished guidelines on:Internal control proceduresAuditor-client relationsMajor Provisions of the Sarbanes-Oxley Act of 2002Oversight boardCorporate executive accountabilityNonaudit servicesRetention of work papersAuditor rotationConflicts of interestHiring of auditorInternal controlLearning Objective 2Identify the components, responsibilities, and limitations of internal control4-13Control ActivitiesPreventive controlsSeparation of dutiesPhysical controlsProper authorizationEmployee managementE-commerce controlsDetective controlsReconciliationsPerformance reviewsAuditsResponsibilities for Internal ControlThe CEO and CFO to sign a report each year assessing adequacy of internal controlsAuditors to provide an opinion on management’s assessmentAuditor to express its own opinion on company’s internal control over financial reportingLimitations of Internal ControlBad employee cannot be turned into a good oneInternal control systems are especially susceptible to collusionCollusion: two or more people acting together to circumvent internal controls.Top-level employees who can override internal control procedures can commit fraudEffective internal controls and ethical employees cannot ensure success or even survivalPart BCash4-17Learning Objective 3Define cash and cash equivalents4-18Cash and Cash EquivalentsCashCurrencyCoinsBalances in savings and checking accountsChecksCash equivalents—mature within three monthsMoney market fundsTreasury billsCertificates of depositLearning Objective 4Understand controls over cash receipts and cash disbursements4-20Cash ControlsControls over cash receiptsSeparate duties of handling cash and verifying receiptsDeposit cash dailyPrefer credit cards or debit cardsControls over cash disbursementsPrefer payments by check, debit card, or credit cardSeparate duties of authorizing payments and verifying purchasesVerify records against purchase receiptsPlace authorization and documentation proceduresSeparate disbursement and collections dutiesLearning Objective 5Reconcile a bank statement4-22Bank ReconciliationBank reconciliation: matching the balance of cash in the bank account with the balance of cash in the company’s own recordsIllustration 4.6—Bank ReconciliationTiming differencesErrorsStep 1: Reconciling the Bank’s Cash BalanceDeposits outstanding: cash receipts of the company that have not been added to the bank’s record of the company’s balanceChecks outstanding: checks the company has written that have not been subtracted from the bank’s record of the company’s balanceStep 2: Reconciling the Company’s Cash BalanceInterest earned by the companyCollections made by the bank on the company’s behalfService feesCharges for NSF checks NSF checks: Customers’ checks written on “nonsufficient funds,” otherwise known as “bad” checksStep 3: Adjusting the Company’s Cash Account BalanceUpdate the balance in its Cash account:To adjust for the items used to reconcile the company’s cash balanceLearning Objective 6Account for petty cash4-28Petty Cash FundPetty cash fund: small amount of cash kept on hand to pay for minor purchasesAccounting for the petty cash fund involves recording for:Establishing the fundRecognizing expenditures from the fundReplenishing the fundLearning Objective 7Identify the major inflows and outflows of cash4-30Reporting CashBalance sheetStatement of Cash FlowsActivities on Cash Flows StatementOperating activitiesCash transactions involving revenues and expensesInvesting activitiesCash investments in long-term assets and investment securitiesFinancing activitiesTransactions designed to finance the business through borrowing and owner investmentLearning Objective 8Assess earnings quality by comparing net income and cash flows4-33Comparing Net Income toCash FlowFree cash flow: operating cash flows + investing cash flows during the periodEarnings quality: the ability of current net income to help us predict the future performance of a companyDeclining free cash flow in relation to the trend in net income indicates lower-quality earningsEnd of Chapter 44-35