Learning Objectives

• Understand the Business– LO1 Distinguish among service, merchandising, and manufacturing

operations.– LO2 Explain common principles and limitations of internal control.

• Study the accounting methods– LO3 Apply internal control principles to cash receipts and payments.– LO4 Perform the key control of reconciling cash to bank statements.– LO5 Explain the use of a perpetual inventory system as a control.– LO6 Analyze sales transactions under a perpetual inventory system.

• Evaluate the results– LO7 Analyze a merchandiser’s multistep income statement.

• Review the chapter

1© McGraw-Hill Ryerson. All rights reserved.

Internal Control

• Internal Controls:– protect against theft of assets– enhance the reliability of accounting information– promote efficient and effective operations– ensure compliance with applicable laws and

regulations• Limitations of Internal Control:– cost vs. benefit– human error or fraud

© McGraw-Hill Ryerson. All rights reserved. 2LO2

Five Common Principles of Internal Control

© McGraw-Hill Ryerson. All rights reserved. 3LO2

1 Establish responsibilityAssign each task to only one employee.

2Segregate duties

Do not make one employee responsible for all parts of a process.

3 Restrict accessDo not provide access to assets or information unless necessary.

4Document procedures

Prepare documents to show activities that have occurred.

5 Independently verifyCheck other’s work.