Question

From the work Mark had you complete on his receivables accounts, Mark has now become very aware of how important it is to manage and protect his assets. Mark would like some more information on what can be done to protect his assets in general.

Required

1.Explain to Mark what an internal control system is and discuss the major principles that need to be applied for this type of system to be effective.

Mark has also come to realise that even though he now has better control over his accounts receivable this will no benefit him greatly if his management and control of the cash they bring in is poor. Mark has been doing a little reading and has found that one useful tool in controlling cash is the bank reconciliation statement. Mark’s cousin Randy, who is now helping him out by managing his Deafening Racket Studio, completed a bank reconciliation for Mark at the end of last month but Mark is a little uncertain about its accuracy and would like you to complete this months reconciliation for him.

Required

Using the information below complete a bank reconciliation for Mark for the month of September.

Bank Statement
Date	Particulars	Debits	Credits	Balance
Sep-01				$ 2630 Dr
2			$3470	840 Cr
3	935	$470	1860	2230 Cr
7	936	370	756	2616 Cr
8	937	1060	272
	2300	48		1780 Cr
11	938	2336	1890	1334 Cr
13	2301	138		1196 Cr
16	939	568	658	1286 Cr
18	2303	774	1820	2332 Cr
20			460	2792 Cr
21	941	4620	560	1268 Dr
25			980	288 Dr
30	Ret Cheque	272		560 Dr
	Direct Deposit		1 988	1428 Cr
	Account Fees	76		1352 Cr
	Interest	113		1239 Cr
		TOTAL DEBITS $11 845	TOTAL CREDITS $14 714

Cash Receipts Journal			Cash Payments Journal
Date	Cash at bank		Cheque no.	Cash at bank	The Music MANager
Sep 1	$1 860		936	$370	Bank Reconciliation Statement
4	756		937	1060	as at 31 August
6	272		938	2336	Balance as per bank statement				$2630 Dr
10	1 890		939	568	Less:
12	658		2300	48	Outstanding Deposit				3470
16	1 820		2301	138	Add:
17	460		2302	246	Unpresented	# 2299	884
20	560		2303	74	cheques:	935	470		1354
24	980		940	352
30	15 000		941	4620	Balance as per
TOTAL	$24 256		TOTAL	$9 812	Cash at Bank account			$514 Cr

Additional information reveals that Cheque 2303 is correct in the bank statement but was incorrectly recorded in the Cash Payments Journal.

Cash at Bank

The Music MANager
Bank Reconciliation Statement
as at 30 September

Mark is a little bit happier now and can see the benefit of regularly doing a bank reconciliation, but is still a little concerned about his cash controls. Cheque number 2300 was cashed to reimburse Mark’s petty cash fund. Mark had read about using a petty cash fund to pay for small purchases and has tried to keep his fund under $50 for this purpose. However, Mark had to write out cheque 2301 only a couple of days later as had no cash left. Mark remembers a little bit about good internal control procedures and keeps his petty cash in a locked container in the top drawer of his desk which is also locked. Both keys are hung on a key ring on the back of Marks office door at all times. When anyone needs petty cash they retrieve the keys and leave a note on a scrap of paper in the container stating how much they withdrew. If there is no money in the container when Mark checks next he will cash a cheque to overcome this.

Required

3. Comment on Mark’s use of the petty cash fund and any other issues that are of concern regarding the way Mark is controlling his cash. Suggest some better practices that Mark could employ.

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4. All this focus on protecting cash has jogged Mark’s memory and he recalls working on Cash Flow Statements and Cash Budgets while at University. Mark would like you to explain to him the role of these two items in the protection and management of cash.

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Despite all your efforts Mark is still concerned that he has very little money in the bank according to his bank statement. He has been speaking to his cousin Randy who has shown him some of the records of Deafening Racket which show the studio has a very healthy cash position at the end of September despite writing out a cheque of $15,000 to make sure Mark was liquid enough to pay some upcoming bills.

September Bank Statement
Date	Particulars	Debits	Credits	Balance
Sep-01				$ 5193 Cr
2		363	5992	10822 Cr
3			1560	12382 Cr
9	1568	$3645		8737 Cr
13			7756	16493 Cr
15			5272	21765 Cr
16	1570	2813		18952 Cr
23	1571	5497		13455 Cr
	Direct Deposit		3 988	17443 Cr
	Account Fees	276		17167 Cr
	Interest		87	17254 Cr
		TOTAL DEBITS $12 594	TOTAL CREDITS $24 655

Cash Receipts Journal			Cash Payments Journal
Date	Cash at bank		Cheque no		Cash at bank	Deafening Racket
September						Bank Reconciliation Statement
1	$1560		1568		$3645	as at 30 September
12	7756		1569		2394	Balance as per bank statement					$17254 Cr
16	5272		1570		2813	Add:
29	1830		1571		5497	Outstanding Deposit					1830
TOTAL	$16 418		TOTAL		$14 349
						Less:
October						Unpresented	# 1569				2394
3	1 820			1572	15000	cheques:
7	1460			1573	6850
12	2560			1574	3795	Balance as per
24	6980			1575	4227	Cash at Bank account					$16690 Dr
30	1000			1576	2138
TOTAL	$13 820			TOTAL	$32 010

Deafening Racket had a Debit Balance of $10822 in their Cash at Bank account at the end of August.

5. Examine the records above that Randy has shown Mark and review the bank reconciliation for Deafening Racket for September. Comment on any issues you can identify.

Answer 1

Step-1: Internal Control System:

• Internal controls system include a set of rules, policies, and procedures an organization implements to provide direction, increase efficiency and strengthen adherence to policies.
• These are important for achieving the business objective. 5 components of an internal control system are linked to the organization.
• The internal control structure of a company consists of the policies and procedures established to provide reasonable assurance that specific entity objectives will be achieved.
• Three Element of Internal Control system are:

1. Environment Control: The attitude, alertness, and work-zeal of directors, managers and shareholders are reflected through environment control.
2. Accounting system: Accounting system means some procedures and recordings with which identification of business transactions, classification, summarization, statement preparation and analysis for timely presentation of correct information are performed.
3. Control procedureThe additional policies and procedures adopted by the business authority for ensuring achievement of the specific goal of a business organization are the controlling procedures.

• These control procedures are:

1. Proper delegation of power
2. Segregation of responsibility
3. Preparation and use of documents
4. Adoption of adequate security measures to protect the properties
5. Independent control over the execution of activities

Step-2: Bank Reconciliation Statement Sep -17:

Particulars	Amount (in $)
Balance as per bank statement	1239
Less: Cheques issued but not presented for payment
2299	884
2302	246
Bank Balance As Per Cash Book	109

Step-3: Controls Required over petty cash management:

• Petty cash is a system for keeping track of small, random business purchases that can easily be forgotten and left unrecorded in your bookkeeping system. Petty cash is also useful when paying for items when checks or credit cards, which leave more of a paper trail, are not appropriate. These transactions include purchases from street vendors or fees for parking meters. A functioning petty cash system includes internal controls to ensure that all transactions are recorded and that purchase amounts reconcile with the sum remaining in the fund.
• The following steps can be taken for better control over petty cash handled by the Marks:

1. Petty Cash log: petty cash long is a Notebook or piece of paper that a business keeps in its petty cash fund to record sums of money entering and leaving the fund. Use your petty cash log to list every purchase you make using petty cash funds and every sum you add to replenish the fund. Include the date of the transaction and the vendor, and recalculate the petty cash total by adding or subtracting the relevant amount.
2. Reconciliation: Reconcile your petty cash fund by counting the amount in the box and verifying that the total listed in the log matches the sum you have on hand. Perform this reconciliation periodically, such as weekly or monthly, depending on how frequently you use your petty cash fund. If petty cash amounts do not match the sum you have recorded, recheck the math or establish more careful protocols to determine who has regular access to the fund.
3. Bookkeeping Interface: Your petty cash system should be integrated with your overall bookkeeping system to keep an internal control on the way money flows within your business. Cash a business check each time you replenish the fund to document the transfer of funds from your general bank account to your petty cash fund. Periodically enter each of the expenditures in your petty cash log into your general bookkeeping ledger and allocate it to the appropriate account, such as materials or supplies.
4. Locking the Box: A petty cash fund is a box of money. Depending on the size of your staff and your company culture, you may choose to implement an internal control by locking the box and only allowing access to a limited number of individuals. You may decide to take this step if the amounts in your fund do not match the running total in your log even though all of the calculations are correct.

Step-4: Role of cash flow statement and Cash budjet in protection and management of cash:

• A cash flow statement records a company's cash inflows and outflows -- the amount of cash and cash equivalents entering and leaving a company during a specified period. The cash flow statement enables the owner, managers, bankers and suppliers to view the company’s operations from a cash perspective so they better understand how smoothly the operations are running, where growth funding is coming from and how wisely the money is spent. The cash flow statement shows sources of cash, including operations, financing and investing.
• The cash budget is management’s approximation of cash on hand at the beginning of a budget period and the estimated cash inflows and outflows. The cash inflows may include those that result from cash sales, the sale of assets, the collection of accounts receivable, borrowing cash or stock issuance. The cash outflows may include disbursements for material purchases, debt repayment, asset acquisition, taxes, manufacturing costs and dividends. The cash budget highlights a company’s probable income or deficit for a period, the latter of which the company must address by increasing sales or decreasing expenditures. The importance of the cash budget lies in its ability to identify a company’s future financing needs, highlight the need for corrective actions and evaluate a company’s Performance.

Step-5: As Per Bank Reconciliation statement prepared for the month of Sep Cash Balance as per reconciliation is the cash balance is $16690.So Mark is no need to worry about his liquidity position at the end of September month.