ACIS+2115+Chapter+6+Lecture+Fall+2010+Draft

ACIS+2115+Chapter+6+Lecture+Fall+2010+Draft - ACIS 2115...

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ACIS 2115 Chapter 6 Internal Control and Financial Reporting for Cash and Merchandise Sales
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Operating Cycle 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: Service Companies Merchandising Companies Manufacturing Companies
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Operating Cycle of a Service Company Sell Services Sell Services Receive Cash Receive Cash Incur Operating Expenses Incur Operating Expenses
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Operating Cycle of a Merchandising Company Sell Products Sell Products Receive Cash Receive Cash Incur Operating Expenses Incur Operating Expenses Buy Products Buy Products This chapter focuses on Merchandising Companies.
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Operating Cycle of a Manufacturing Company Sell Products Sell Products Receive Cash Receive Cash Incur Operating Expenses Incur Operating Expenses Buy Raw Materials Buy Raw Materials Makes Products Makes Products
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Internal Control To be successful, companies must have internal To be successful, companies must have internal controls. controls. Internal controls are policies and procedures Internal controls are policies and procedures designed to . . . designed to . . . 1. 1. ensure adequate records are maintained. ensure adequate records are maintained. 2. 2. ensure transactions are authorized and properly ensure transactions are authorized and properly recorded. recorded. 3. 3. prevent or detect unauthorized activities prevent or detect unauthorized activities involving the company’s assets. 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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Control Limitations Internal controls can never completely prevent and detect all errors and fraud. At some point, the cost of implementing an additional internal control exceeds the benefit. Internal controls can fail due to human error or fraud.
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Controlling and Reporting Cash Internal control over cash is extremely important.
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This note was uploaded on 12/20/2011 for the course ACIS 2115 taught by Professor Jayardley during the Fall '07 term at Virginia Tech.

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ACIS+2115+Chapter+6+Lecture+Fall+2010+Draft - ACIS 2115...

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