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Lecture Principles of financial accouting - Chapter 8: Cash and internal controls

After completing this chapter you should be able to: Define internal control and identify its purpose and principles, define cash and cash equivalents and explain how to report them, compute the days’ sales uncollected ratio and use it to assess liquidity. | Chapter 8 Cash and Internal Controls Chapter 8: Cash and Internal Controls Internal Control System Policies and procedures managers use to: Protect assets. Ensure reliable accounting. Promote efficient operations. Urge adherence to company policies. C1 Managers (or owners) of small businesses often control the entire operation. These managers usually purchase all assets, hire and manage employees, negotiate all contracts, and sign all checks. They know from personal contact and observation whether the business is actually receiving the assets and services paid for. Most companies, however, cannot maintain this close personal supervision. They must delegate responsibilities and rely on formal procedures, rather than personal contact in controlling business activities. Managers use an internal control system to monitor and control business activities. An internal control system consists of the policies and procedures managers use to: Protect assets. Ensure reliable accounting. . | Chapter 8 Cash and Internal Controls Chapter 8: Cash and Internal Controls Internal Control System Policies and procedures managers use to: Protect assets. Ensure reliable accounting. Promote efficient operations. Urge adherence to company policies. C1 Managers (or owners) of small businesses often control the entire operation. These managers usually purchase all assets, hire and manage employees, negotiate all contracts, and sign all checks. They know from personal contact and observation whether the business is actually receiving the assets and services paid for. Most companies, however, cannot maintain this close personal supervision. They must delegate responsibilities and rely on formal procedures, rather than personal contact in controlling business activities. Managers use an internal control system to monitor and control business activities. An internal control system consists of the policies and procedures managers use to: Protect assets. Ensure reliable accounting. Promote efficient operations. Urge adherence to company policies. Principles of Internal Control Internal control principles common to all companies: Establish responsibilities. Maintain adequate records. Insure assets and bond key employees. Separate recordkeeping from custody of assets. Divide responsibility for related transactions. Apply technological controls. Perform regular and independent reviews. C1 Internal control policies and procedures vary from company to company according to such factors as the nature of the business and its size. Certain fundamental internal control principles apply to all companies. The principles of internal control are to Establish responsibilities. Proper internal control means that responsibility for a task is clearly established and assigned to one person. Maintain adequate records. Good recordkeeping is part of an internal control system. It helps protect assets and ensures that employees use prescribed procedures. Insure assets and bond key .