ACG 2021 ACG2021 StudyGuide (1) – Chapter 6 – Everest College

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ACG 2021 ACG2021 StudyGuide (1) – Chapter 6 – Everest College

Chapter 6

Cash and InternalControl

After studying this chapter, students should be able to:

Identify and describe the various forms of cash reported on a balance sheet (Module 1–LO1).

Describe the various techniques that companies use to control cash (Module 1–LO2).

Explain the importance of internal control to a business and the significance of the Sarbanes-OxleyAct of 2002 (Module 2–LO3).

Describe the basic internal control procedures (Module 2–LO4).

Describe the various documents used in recording purchases and their role in controlling cashdisbursements (Module 2–LO5).

MODULE 1 ACCOUNTING AND CONTROLLING FOR CASH

Module 1LO 1Accounting and Controlling for Cash Classification as cash indicates that an item is readily available to pay debts.

Cash includes coin, currency, cash on hand, checking and savings accounts, cashier checks,certified checks and undeposited checks from customers.

Key to classification as cash is that it be readily available to pay debts.

Savings accounts (time deposits) are normally classified as cash since bank rarely exercises itsright to be notified before a withdrawal is made.

Certificate of deposit is not classified as cash since it has a specific maturity date and carries apenalty for early withdrawal.

See Example 6-1.Cash Equivalents and the Statement of Cash Flows

Cash equivalents are investments that are readily convertible to a known amount of cash and havean original maturity to the investor of three months or less.

Treasury bills, commercial paper, money market funds.

Both cash and cash equivalents included as cash on statement of cash flows and balance sheet.

IFRS definition of cash equivalents is very similar to U.S. GAAP.Module 1LO 2Control Over CashControl over cash is critical for any size business, since cash is universally accepted as a medium ofexchange.Cash Management

Internal control over cash is needed to guard against theft and other abuses of cash.

Also necessary to guarantee that neither too much nor too little cash is on hand.

Must have enough cash on hand to pay bills.

Cash alone does not earn anything, but must be invested, so don’t want an excess amountofcash on hand.

The cash flows statement, cash budgets, bank reconciliations, and petty cash funds are all tools tohelp control cash

Reading a bank statement

Two fundamental principles of internal control apply to cash:

All cash receipts should be deposited intact daily.

All cash payments should be made by check.

Checking accounts allow companies to monitor and control cash receipts and payments

ACG 2021 ACG2021 StudyGuide (1) – Chapter 6 – Everest College

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