Define internal control and identify its purpose and principles. An internal control system consists of the policies and procedures managers use to protect assets, ensure reliable accounting, promote efficient operations, and urge adherence to company policies. It can prevent avoidable losses and help managers both plan operations and monitor company and human performance. Principles of good internal control include establishing responsibilities, maintaining adequate records, insuring assets and bonding employees, separating recordkeeping from custody of assets, dividing responsibilities for related transactions, applying technological controls, and performing regular independent reviews.

Define cash and cash equivalents and explain how to report them. Cash includes currency, coins, and amounts on (or acceptable for) deposit in checking and savings accounts. Cash equivalents are short-term, highly liquid investment assets readily convertible to a known cash amount and sufficiently close to their maturity date so that market value is not sensitive to interest rate changes. Cash and cash equivalents are liquid assets because they are readily converted into other assets or can be used to pay for goods, services, or liabilities.

Identify control features of banking activities. Banks offer several services that promote the control and safeguarding of cash. A bank account is a record set up by a bank permitting a customer to deposit money for safekeeping and to draw checks on it. A bank deposit is money contributed to the account with a deposit ticket as proof. A check is a document signed by the depositor instructing the bank to pay a specified amount of money to a designated recipient.

Compute the days' sales uncollected ratio and use it to assess liquidity. Many companies attract customers by selling to them on credit. This means that cash receipts from customers are delayed until accounts receivable are collected. Users want to know how quickly a company can convert its accounts receivable into cash. The days' sales uncollected ratio, one measure reflecting company liquidity, is computed by dividing the ending balance of receivables by annual net sales, and then multiplying by 365.

Summary Apply internal control to cash receipts and disbursements. Internal control of cash receipts ensures that all cash received is properly recorded and deposited. Attention focuses on two important types of cash receipts: over-the-counter and by mail. Good internal control for over-the-counter cash receipts includes use of a cash register, customer review, use of receipts, a permanent transaction record, and separation of the custody of cash from its recordkeeping. Good internal control for cash receipts by mail includes at least two people assigned to open mail and a listing of each sender's name, amount, and explanation.

Explain and record petty cash fund transactions. Petty cash disbursements are payments of small amounts for items such as postage, courier fees, minor repairs, and supplies. A company usually sets up one or more petty cash funds. A petty fund cashier is responsible for safekeeping the cash, making payments from this fund, and keeping receipts and records. A Petty Cash account is debited only when the fund is established or increased in amount. When the fund is replenished, petty cash disbursements are recorded with debits to expense (or asset) accounts and a credit to cash.

Prepare a bank reconciliation. A bank reconciliation proves the accuracy of the depositor's and the bank's records. The bank statement balance is adjusted for items such as outstanding checks and unrecorded deposits made on or before the bank statement date but not reflected on the statement. The book balance is adjusted for items such as service charges, bank collections for the depositor, and interest earned on the account.

Describe the use of documentation and verification to control cash disbursements. A voucher system is a set of procedures and approvals designed to control cash disbursements and acceptance of obligations. The voucher system of control relies on several important documents, including the voucher and its supporting files. A key factor in this system is that only approved departments and individuals are authorized to incur certain obligations.