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PowerPointPowerPoint PresentationPresentation
© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star
Logo, and South-Western are trademarks used herein under license.
FINANCIAL ACCOUNTING
2ND EDITION
BY
DUCHAC, REEVE, & WARREN
7 Sarbanes-Oxley, Internal Control, &
Cash
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LEARNING GOALS
When you finish this chapter, you should be able to
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1. Describe Sarbanes-Oxley Act, 2002, its impact on internal control, reporting.
2. Describe, illustrate objectives, elements of internal control.
3. Describe, illustrate application of internal controls to cash.
LEARNING GOALSLEARNING GOALS
Continued
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LEARNING GOALSLEARNING GOALS
4. Describe nature of bank account, its use in controlling cash.
5. Describe, illustrate use of bank reconciliation in controlling cash.
6. Describe accounting for special-purpose cash funds.
Continued
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LEARNING GOALSLEARNING GOALS
7. Describe, illustrate reporting cash, cash equivalents in financial statements.
8. Interpret cash flow to net income ratio, cash to monthly cash expense ratio.
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WALT DISNEY COMPANY
Walt Disney Company
Has extensive cash collection, control activities to protect against fraud, errors
Cash collected, counted, deposited from all activities
Collections in form of cash, credit cards, checks, electronic funds
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LEARNING GOALSLEARNING GOALS
1Describe Sarbanes-Oxley Act, 2002, its impact on internal control, reporting.
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BEFORE SARBANES-BEFORE SARBANES-OXLEY ACTOXLEY ACT
BEFORE SARBANES-BEFORE SARBANES-OXLEY ACTOXLEY ACT
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SARBANES-OXLEY ACT 2002
Congress’ attempt to restore public confidence
Requires public companies to improve internal controls that
safeguard assets
LG 1
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LEARNING GOALSLEARNING GOALS
2Describe, illustrate objectives, elements of internal control.
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INTERNAL CONTROL INTERNAL CONTROL OBJECTIVESOBJECTIVES
INTERNAL CONTROL INTERNAL CONTROL OBJECTIVESOBJECTIVES
LG 2
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How does management achieve its internal control
objectives?
LG 2
INTERNAL CONTROL?
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5 ELEMENTS OF INTERNAL CONTROL
•Control environment
•Risk assessment
•Control procedures
•Information & communication
•Monitoring
LG 2
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LG 2
EXHIBIT EXHIBIT 22
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Control environment includes management and employee attitudes about
the importance of internal control
LG 2
CONTROL ENVIRONMENTCONTROL ENVIRONMENT CONTROL ENVIRONMENTCONTROL ENVIRONMENT
Continued
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Respect
Competency
Honesty
Respect
Competency
Honesty
LG 2
CONTROL ENVIRONMENTCONTROL ENVIRONMENT CONTROL ENVIRONMENTCONTROL ENVIRONMENT
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Risk assessment identifies risks so management can
take steps to control them.
LG 2
RISK ASSESSMENTRISK ASSESSMENT RISK ASSESSMENTRISK ASSESSMENT
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Control Procedures Competent personnel
Separating responsibilities
Separating operations
Security measures
LG 2
CONTROL PROCEDURESCONTROL PROCEDURES CONTROL PROCEDURESCONTROL PROCEDURES
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LG 2
EXHIBIT EXHIBIT 44
Information & Communications
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Monitoring
LG 2
MONITORINGMONITORING MONITORINGMONITORING
To locate weaknesses & improve control effectiveness
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LEARNING GOALSLEARNING GOALS
3Describe, illustrate application of internal controls to cash.
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CONTROL: CASH CONTROL: CASH RECEIPTSRECEIPTS
CONTROL: CASH CONTROL: CASH RECEIPTSRECEIPTS
•To protect cash from theft when
–Customers buy products, services
–Customers pay on account
LG 3
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Cash deposits
Cash Records
LG 3
CASH RECEIPTSCASH RECEIPTS
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LG 3
RECORDING PROCESSRECORDING PROCESS RECORDING PROCESSRECORDING PROCESS
Continued
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LG 3
CASH DEPOSITSCASH DEPOSITS CASH DEPOSITSCASH DEPOSITS
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CASH PAYMENTSCASH PAYMENTS
Payment made through
•Voucher system
•EFT
LG 3
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LEARNING GOALSLEARNING GOALS
4Describe nature of bank account, its use in controlling cash.
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BANK ACCOUNTS
Bank accounts control accounts bySafeguarding cash
Providing double recording of cash transactions
Providing comparison with business records
Bank accounts control accounts bySafeguarding cash
Providing double recording of cash transactions
Providing comparison with business records
LG 4
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BANK RECONCILIATIONBANK RECONCILIATION
Bank Statement Company
Cash Records
LG 5
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EXHIBIT EXHIBIT 66
LG 5
Beginning Balance $XXX
Additions XX
Deductions X
Ending Balance XXX
Bank Statement Power Networking RecordsBeginning Balance $XXX
Deposits XX
Checks X
Ending Balance XXX
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LEARNING GOALSLEARNING GOALS
5Describe, illustrate use of bank reconciliation in controlling cash.
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RECONCILIATION PROCESS
RECONCILIATION PROCESS
1. Add deposits not recorded to bank balance
2. Deduct checks not paid from bank balance
3. Add credit memos not recorded to company balance
4. Deduct debit memos not recorded from company balance
5. Correct all errors
LG 5
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EXERCISE 7-16aEXERCISE 7-16a
Which of the following adds to the bank balance?
1. $300 check recorded by company as $3,000
2. NSF check $775 returned
3. Bank service charge $35
4. Bank incorrectly charged a $129 check as $219
5. Outstanding checks, $6,137.68
6. Deposit in transit, $7500
7. Note collected by bank, $12,000
Click the button to skip this exercise
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EXERCISE 7-16bEXERCISE 7-16b
Which of the following deducts from the bank balance?
1. $300 check recorded by company as $3,000
2. NSF check $775 returned
3. Bank service charge $35
4. Bank incorrectly charged a $129 check as $219
5. Outstanding checks, $6,137.68
6. Deposit in transit, $7500
7. Note collected by bank, $12,000
Click the button to skip this exercise
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EXERCISE 7-16cEXERCISE 7-16c
Which of the following adds to the company balance?
1. $300 check recorded by company as $3,000
2. NSF check $775 returned
3. Bank service charge $35
4. Bank incorrectly charged a $129 check as $219
5. Outstanding checks, $6,137.68
6. Deposit in transit, $7500
7. Note collected by bank, $12,000
Click the button to skip this exercise
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EXERCISE 7-16dEXERCISE 7-16d
Which of the following deducts from the company balance?
1. $300 check recorded by company as $3,000
2. NSF check $775 returned
3. Bank service charge $35
4. Bank incorrectly charged a $129 check as $219
5. Outstanding checks, $6,137.68
6. Deposit in transit, $7500
7. Note collected by bank, $12,000
Click the button to skip this exercise
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EXHIBIT EXHIBIT 7 7 (partial)(partial)
LG 5
Beginning Balance $2,549.99
+ Note & interest (1) 408.00
$2957.99
- Returned check $300.00
- Service Charge 18.00
- Recording error 9.00 (2) 327.00
Adjusted Balance $2,630.99
Adjustments to Power Networking Records
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CASH ADJUSTMENTS 1
Increases cash flow operations
Net increase assets, increases equity on balance sheet
Increases revenue on income statement
Continued
LG 5
7/31 Cash
Notes Receivable
Interest Income
408
400
8
Adjusted cash for items added by bank
SCF BS IS
R
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CASH ADJUSTMENTS 2
Decreases cash flow operations
Net decrease assets, decreases liabilities, equity on balance sheet
Increases expenses on income statement
LG 5
7/31 Acct Receivable
Misc Expense
Acct Payable
Cash
300
18
9
327
Adjusted cash for items deducted by bank
SCF BS IS
E
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LEARNING GOALSLEARNING GOALS
6Describe accounting for special-purpose cash funds.
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PETTY CASHPETTY CASH
For small payments in office
Funded from bank account
LG 6
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ENTRY TO INCREASE PETTY CASH
To create petty cash
Has no effect on cash flows
Has no net effect on balance sheet
Has no effect on income statement
LG 6
8/1 Petty Cash
Cash
500
500
SCF BS IS
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ENTRY TO REPLENISH PETTY CASH
To replenish petty cash, recognize expenses
Increases cash flow operations
Net increase assets, increases equity on balance sheet
Increases revenue on income statement
LG 6
8/31 Office Supplies
Store supplies
Misc. Exp.
Cash
402
35
30
467
SCF BS IS
E
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LEARNING GOALSLEARNING GOALS
7Describe, illustrate reporting cash, cash equivalents in financial statements.
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CASH EQUIVALENTSCASH EQUIVALENTS
Includes
•Money market mutual funds
•Commercial paper
•Certificates of deposit
•Government & municipal securities
•Corporate notes, bonds
LG 7
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LEARNING GOALSLEARNING GOALS
8Interpret cash flow to net income ratio, cash to monthly cash expense ratio.
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CASH FLOW TO NET INCOME RATIO
CASH FLOW TO NET INCOME RATIO
Compares cash flow to reported profit under accrual method (GAAP)
Trends analyzed
Net cash flow, Operations / Net Income
Compares cash flow to reported profit under accrual method (GAAP)
Trends analyzed
Net cash flow, Operations / Net Income
LG 8
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WALT DISNEY: TRENDSWALT DISNEY: TRENDS
2004 2003
Net CF-Operations $4,370 $2,901
Net Income $2,345 $1,267
Cash flow ratio 1.86 2.29
What does the cash flow ratio suggest?
LG 8
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ANALYSISANALYSIS
Trend for cash flow to net income ratio is negative
Without good cash cushion & business model, this trend would suggest a problem with operations
Trend for cash flow to net income ratio is negative
Without good cash cushion & business model, this trend would suggest a problem with operations
LG 8
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CASH TO MONTHLY CASH EXPENSES
CASH TO MONTHLY CASH EXPENSES
Used to assess how long a business in financial distress can continue
Cash + cash equivalents
Monthly cash expenses
Used to assess how long a business in financial distress can continue
Cash + cash equivalents
Monthly cash expenses
Monthly Cash Expenses = Negative Cash Flow from Operations / 12 months
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GATEWAY ANALYSISGATEWAY ANALYSIS
Negative cash flow from operations
Cash + cash equivalents
$<434.2>
383.0
Ratio = 383.0/[<434.2>/12] = 10.6
Gateway will run out of cash in less than 11 months
Ratio = 383.0/[<434.2>/12] = 10.6
Gateway will run out of cash in less than 11 months
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THE END
CHAPTER 7