Ch.6 exam 2 - Chapter 6 Internal Control and Financial...

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Click to edit Master subtitle style Chapter 6 Internal Control and Financial Reporting for Cash and Merchandising Operations
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Learning Objective 1 Distinguish service, merchandising, and manufacturing operations.
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Operating Cycle n The series of activities that a company undertakes to generate sales and, ultimately, cash.
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Basic Types of Businesses Based on operating cycle, there are 3 different types of businesses: n Service Companies n Merchandising Companies n Manufacturing Companies
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Operating Cycle of a Service Company Sell Services Receive Cash Incur Operating Expenses
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Operating Cycle of a Manufacturing Company Sell Products Receive Cash Incur Operating Expenses Buy Raw Materials Makes Products
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Learning Objective 2 Explain common principles of internal control.
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Internal Control To be successful, companies must have internal controls. Internal controls are policies and procedures designed to . . . 1. ensure adequate records are maintained. 2. ensure transactions are authorized and properly recorded. 3. prevent or detect unauthorized activities involving the company’s assets.
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Exhibit 6.2 Principles of Internal Control Principle Explanation Example 1) Establish responsibility Assign each task to only one person. Each Wal-Mart cashier uses a different cash drawer 2) Segregate duties Do not make one employee responsible for all parts of a transaction. The Time Warner clerk who deposits cash in the bank does not also open the mail. 3) Restrict access Do not provide access to assets or information unless it is needed to fulfill assigned responsibilities. Bank of America uses a vault and electronic controls (passwords, firewalls). 4) Document procedures Prepare documents to show activities that have occurred. AMC Entertainment pays movie distributors using prenumbered checks. 5) Independently verify Check others' work. Ebay compares cash balances in its accounting records to the cash balances reported by its bank, and accounts for any differences
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1. Cash handling is segregated from cash recordkeeping. 2. Cash receipts are promptly (daily) deposited in a bank. 3. Cash disbursements are made by check. 4. Bank reconciliations are prepared. Controlling and Reporting Cash
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Learning Objective 3 Perform the key control of reconciling to bank statements.
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Control over Cash Bank reconciliation - identifies differences between the book balance for cash and the cash in the bank account.
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Exhibit 6 .3 Reconciling Differences Obj101 You may not know about . . . 3. Interest the bank has put into your account. 4. Electronic funds transfer (EFT). 5. Service charges taken out of your account. 6. Customer checks you deposited but that bounced (NSF checks). 7. Errors made by you.
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Unadjusted bank balance Add + Deposits in transit Deduct - Outstanding checks +/-Bank Errors Equals = Adjusted or "Up-to-date" cash balance Adjustment to the Bank Balance Unadjusted book balance Add + Receivable collections or EFTs from customers Add + Interest earned Deduct
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Ch.6 exam 2 - Chapter 6 Internal Control and Financial...

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