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Learning Objectives: CHAPTER 4

1. Describe fraud and its impact
2. Explain the objectives and components of internal control
3. Design and use a bank reconciliation
4. Evaluate internal controls over cash receipts and cash payments
5. Construct and use a cash budget
6. Report cash on the balance sheet

EXAMPLE OF WHAT I'M LOOKING FOR:

One thing I found challenging was the credits and debits concept from chapter two and matching them up, (common stock would be a cash debit and stock credit). Once I got it down it was one of those "why didn't it make sense to me sooner" moments but at the time I didn't understand and would switch things. How I approached the chapter was really to make sure I understood all the terms, ie notes payable, accounts receivable, etc. Being able to understand them without going back to the textbook made the process a bit faster and overall easier. Another thing was really taking advantage of the internet and that if there was something in the textbook I didn't understand, looking it up on Google and going through different websites and tutorials. While going through the problems I made sure to take as thorough notes as I could with information that I knew would help me moving forward, targeting the problems that were difficult for me. Being able to go back and read through something that was written in a way that made the most sense to me as an individual definitely proved helpful. I also Skyped a friend who is currently enrolled in a financial accounting class and we would work through problems together.

Answer 1

1. Fraud and its impact

Fraud is the crime of gaining money or financial benefits by a trick or by lying. A fraud is something or someone that deceives people in a way that is illegal or dishonest. Fraud is a deliberate misrepresentation that causes a person or business to suffer damages, often in the form of monetary losses through deception or concealment.

Impact of fraud:

          -   Fewer pay increases
          -   Increased layoffs
          -   Greater pressure to increase revenue
          -   Decreases in employee benefits
          -   Low employee morale
          -   Negative publicity for the organization

          -     Financial Loss

                                            

• External Confidence

• Company Morale

• Increased Audit Costs

2. Objectives and components of internal control

Objectives of Internal control:

• Operations - Refers to the effectiveness and efficiency of the organizations operations, including operations and financial performance goals and safeguarding assets against loss.
• Reporting - Relates to internal and external financial and non-financial reporting and may incorporate reliability, timeliness, transparency, and additional terms as set forth by regulators, recognized standard setters, or the entity’s policies.
• Compliance - Relates to adherence to laws and procedures to which the entity is subject

Internal Control consists of five interrelated components:

• Control Environment
• Risk Assessment
• Control Activities
• Information and Communication
• Monitoring

3. Design and use Bank Reconciliation

Designing Bank Reconciliation:

1. The first step is to compare opening balances of both the bank column of the cash book as well as bank statement; these could be different due to un-credited or un-presented cheques from a previous period.
2. Now, compare credit side of the bank statement with debit side of the bank column of cash book and debit side of the bank statement with the credit side of the bank column of the cash book. Place a tick against all the items appearing in both the records.
3. Analyze the entries both in the bank column of the cash book as well as pass book and look for entries which have been missed to be posted in the bank column of the cash book. Make a list of such entries and make the necessary adjustments in the cash book.
4. Correct if any mistakes or errors appear in cash book.
5. Calculate the corrected and revised balance of cash book’s bank column.
6. Now, start bank reconciliation statement with updated cash book balance.
7. Add the un-presented cheques (cheques which are issued by the business firm to its creditors or suppliers but not presented for payment – Expense) and deduct un-credited cheques (Cheques paid into the bank but not yet collected – Income).
8. Make all the necessary adjustments for the bank errors. In case the bank reconciliation statement begins with the debit balance as per bank column of the cash book, add all the amounts erroneously credited by the bank and deduct all the amounts erroneously credited by the bank. Do vice-versa in case its start with the credit balance.
9. The resultant figure must be equal to the balance as per the bank statement.

Uses of preparing a BRS

Accounting errors could lead to circumstances which are more than just embarrassing when the cheques bounce or companies start getting annoying calls from creditors or suppliers for payments which are already released. Bank reconciliations assist you in spotting fraud and reducing the risk of transactions which could cause penalties and late fees. BRS offers several advantages to a business which includes:

1. Detecting errors
2. Tracking Interest and Fee:
3. Detecting Fraud:
4. Tracking Receivables

4. Evaluate internal controls over cash receipts and cash payments

Evaluating internal control over cash receipts:

• Prepare a record of all cash receipts as soon as cash is received. Most thefts of cash occur before a record is made of the receipt. Once a record is made, it is easier to trace a theft.

• Deposit all cash receipts intact as soon as feasible, preferably on the day they are received or on the next business day. Undeposited cash is more susceptible to misappropriation.
• Arrange duties so that the employee who handles cash receipts does not record the receipts in the accounting records. This control feature follows the general principle of segregation of duties given earlier in the chapter, as does the next principle.
• Arrange duties so that the employee who receives the cash does not disburse the cash. This control measure is possible in all but the smallest companies.

Evaluating internal control over cash payment:

• Make all disbursements by check or from petty cash. Obtain proper approval for all disbursements and create a permanent record of each disbursement. Many retail stores make refunds for returned merchandise from the cash register. When this practice is followed, clerks should have refund tickets approved by a supervisor before refunding cash.
• Require all checks to be serially numbered and limit access to checks to employees authorized to write checks.
• Require two signatures on each check over a material amount so that one person cannot withdraw funds from the bank account.
• Arrange duties so that the employee who authorizes payment of a bill does not sign checks. Otherwise, the checks could be written to friends in payment of fictitious invoices.
• Require approved documents to support all checks issued.

5. Construct and use cash budget

Constructing cash budget:

1. Determine the beginning cash balance. Determine how much cash will be available at the beginning of the period (fiscal year or quarter or month).
2. Add receipts. Determine the expected receipts—collections from customers—that will flow into the cash account each period.
3. Deduct disbursements. Based on expected activity, calculate how much cash will be required to cover disbursements—cash payouts—during the period.
4. Calculate the cash excess or deficiency. To calculate the cash excess or deficiency for a period, subtract the disbursement from the sum of the beginning cash balance and the receipts expected during that period.
5. Determine financing needed. To calculate the cash excess or deficiency for a period, subtract the disbursement from total cash available. If, at the end of the period, there is a cash excess, then financing of operations may be covered by the available cash. If, on the other hand, there is a cash deficiency, then you have to plan on financing the period's cash needs from other sources, such as a bank loan.
6. Establish the ending cash balance. The ending cash balance for each period will include the receipts and loans less the disbursements and financing costs. The ending cash balance becomes the beginning cash balance for the next period.

Use of Cash Budget:

A cash budget details a company's cash inflow and outflow during a specified budget period, such as a month, quarter or year. Its primary purpose is to provide the status of the company’s cash position at any point of time. This helps the company make critical decisions such as creating cash reserves to make arrangements for projected shortages and using excess funds prudently. Additionally, the cash budget helps in prioritizing payments in the budget period. It also helps in analyzing budget-versus-actual variances in cash inflow and outflow.

6. Report cash on Balance sheet

Cash is the most liquid asset, so it will be shown in the asset side of the balance sheet. Whereas negative balance of cash is the Liability.