Account and Budget Level III: Learning Guide

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CASH AND RECEIVABLES

Account and budget level


III

LEARNING GUIDE
Unit of Competence Balance CASH
Holding
Module Title: Balance CASH
Holding
LG Code: CDS CPM3 M016 0312

TTLM Code: BUF ACB3 10 220

HU, ACCOUNTING and FINANCE DEPARTMENT 1


CASH AND RECEIVABLES

LO 1: Diagnose the business

LO 1, Maintaining accurate cash floats

Information sheet 1
1.1 ,Definition Cash safe box medium of exchange

1.1.1. Introduction

that a bank will accept at face value and immediate credit to the depositors account.
An item to be reported as cash it must fulfill the following criteria’s:
 It should be used as a medium of exchange, i.e. in settlement of transactions.
 It should be available immediately for the payment of current obligations.
 It should be free from any contractual restriction that limits its use in
satisfying debts
Items those are included as Cash:
Coins and Currencies(Paper money)
Money on deposit in a bank that can be drawn without any restriction, i.e.
demand deposits
Negotiable instruments, which are documents that can be transferred from one
party to another as money, like money orders, certified checks or certified
payment orders(CPOs), checks issued by third parties and are available at
cashiers, checks written to third parties but not yet issued, traveler’s checks,
and bank drafts.
Saving accounts
Petty cash funds
Change funds
Credit card sales draft
Some items, however, may initially appear or seem as Cash; but do not meet the
criteria’s. For instance, a check received from a third party, as a payment is not included
as cash if the party issuing the check has not sufficient fund in its bank account. Such
checks are marked as NSF (Not Sufficient Fund) checks and are reported as receivables.
Similarly, Postdated checks, issued by third parties but that will be drawn only in the
future dates reported as receivables. Postage Stamps are items for which cash has been
paid and are expected to be used in the future. They represent office supplies (prepaid
expense items).

Hu, Accounting And Finance Department 2


CASH AND RECEIVABLES

Self cheek
Name __________________________class _____id ____
1,what is the in this some of point Items those are included as Cash:

2, what is item to be reported as cash it must fulfill the following criteria’s:

3, what is NSF

Answer key

Reference in the book and internet


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Information sheet 2 1.2 Regular cash transaction processing and proofing

1.2.1.Introduction

The need to safeguard cash is crucial in most businesses because cash is mostly exposed
to embezzlement. Firms address this problem through the internal control system. An
internal control system is a set of policies and procedures designed to protect assets,
provide accurate accounting records and evaluate performances.
A sound internal control system for cash increases the likely hood that the reported values
for cash are accurate.

HU, ACCOUNTING and FINANCE DEPARTMENT 3


CASH AND RECEIVABLES

Internal control over cash should include the following procedures:


- The individuals who receive cash should not also disburse (pay) cash
- The individuals who handle cash should not access accounting records
- Cash receipts are immediately recorded and deposited and are not used directly to
make payments.
- Disbursements are made by serially numbered checks, only upon proper
authorization by someone other than the person writing the check
- Bank accounts are reconciled monthly.
The following are the most common elements of internal control over cash:
1. Maintaining a bank account system,
2. Maintaining a petty cash fund,
3. A voucher system,
4. Change fund, and
5. Cash short and over.
1. Control over cash through a bank account
One of the major devises/tools for control over cash is maintaining a bank account. The
forms used by a business in connection with a bank account are a signature card, deposit
ticket, check, and record of checks drawn.

Signature Card :At the time the account is opened, an identifying number is assigned to
the account, and a signature card must be signed by each person authorized to sign checks
drawn on the account. The card is used by the bank to determine the authenticity of the
signature on checks presented to it for payment.

Deposit Ticket: The details of a deposit are listed by the depositor on a printed form
supplied by the bank. Deposit tickets may be prepared in duplicate, in which case the
copy is stamped or initialed by the bank’s teller and given to the depositor as a receipt.
The receipt of a deposit may be indicated by means other than a duplicate deposit ticket,
but all methods give the depositor written proof of the date and the total among The
following are some activities that are increases or decreases the cash balance
Activities that increases cash balance Activities that decrease cash balance
(Cash Inflow) (Cash outflow)
 Increasing long- term debt  Decreasing long- term debt
 Increasing equity(selling some stocks)  Decreasing equity
 Increasing current liabilities  Decreasing current liabilities
 Decreasing current assets other than  Increasing current assets other than
cash cash(buying some inventories etc)
 Decreasing fixed assets (selling assets)  Increasing fixed assets (purchase
Building, Furniture etc.)

What are examples of cash inflows


Examples of Cash Inflow
 Customer payments;
 Bank loan receipts;

Hu, Accounting And Finance Department 4


CASH AND RECEIVABLES

 Bank interest;
 Sale of fixed assets;
 Supplier refunds;
 Directors loans to the business;
 Grants & Funding proceeds
What are basic accounting skills?
Basic Accounting Skills Every Professional Accountant Must Have!
 Following is the list of few skills or technical expertise that every management
accountant should be well-versed with:
 1) Interpersonal skills: ...
 2) Taxation. ...
 3) Analysis. ...
 4) Accounting basics. ...
 5) National certification. ...
 6) Accounting Software.

 Cash receipts from sales.


 Cash received from earnings on investments.
 Payments to suppliers and employees.
 Payments for interest and taxes.
 Increases or decreases in accounts receivable, inventory and prepaid expenses.
 Increases or decreases in accounts payable.

What are the three types of checks?


Here's what you need to know about five types of checks beyond personal checks
and when you might encounter them.
 Cashier's, Bank, or Official Check. ...
 Certified Check. ...
 Money order. ...
 Electronic check. ...
 Giant check

What are the 5 basic accounting principles?


5 principles of accounting are;
 Revenue Recognition Principle,
 Historical Cost Principle,
 Matching Principle,
 Full Disclosure Principle, and.
 Objectivity Principle.

Self cheek
Name __________________________class _____id ____
1, What are basic accounting skills?

HU, ACCOUNTING and FINANCE DEPARTMENT 5


CASH AND RECEIVABLES

2, What are the 5 basic accounting principles?

Answerer key

Reference in the book and internet


WWW,COM accounting &Banking

1.3 Cash at close is investigated and corrected in order to balance


Information sheet 3
float

1,3.1 .Introduction

.Motives for Holding Cash (Reasons for Holding Cash)


There are three primary motives (Reasons) for maintaining cash balance:
1. Transaction Motive;
2. Precautionary Motive
3. Speculative Motive
Transaction Motive: An important reason for maintaining cash balance is the
Transaction Motive. This refers to the holding of cash to meet routine cash
requirements to finance the transactions which a firm carries on in the ordinary course
of business. A firm enters into a variety of transactions to accomplish it objectives which
have to be paid for in the form cash. For example, cash payments have to be made for
purchase, wages, operating expenses, financial charges like interest, taxes, dividends, and
so on. Similarly, there is a regular inflow of cash to the firm from the sales operations
returns on outside investment, and so on. These receipts and payments constitute a
continuous two- way flow of cash.

Motive and such motive refers to be holding of cash to met anticipate obligations whose
timing is not perfectly synchronized with cash receipts.
Precautionary Motive: In addition to the non-coincide of anticipated cash receipt and
payments in the ordinary course of business, a firm may have to pay cash for purposes
which cannot be predicted or anticipated. The unexpected cash need at short notice may
be result of:
* Flood, strikes and failure of important customer;
* Bills may be presented for settlement earlier than expected;
* Unexpected slow down in collection of accounts receivable;
* Cancellation of some order for goods as the customer is not satisfied;&

* Sharp increase in cost of raw materials.

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CASH AND RECEIVABLES

The cash balance held in reserve for such random and unforeseen fluctuations in cash
flows are called as precautionary balances. In other words, precautionary motive of
holding cash implies the need to hold cash to meet unpredictable obligations.
Speculative Motive: It refers to the desire of a firm to take advantage of opportunities
which represent themselves at unexpected moments and which are typically outside the
normal course of business. While the precautionary motive is defensive in nature in that
firms must make provision
to tide over unexpected contingencies, the speculative motive represents a positive and
aggressive approach. Firms aim to exploit profitable opportunities and keep cash in
reserve to do so. The speculative motive help to take advantage of:
* An opportunity to purchase raw materials at reduced price on payment of
immediate cash.
* A chance to speculate on interest rate movements by buying securities when.

Self cheek
Name __________________________class _____id ____
1 Explain Motives for Holding Cash (Reasons for Holding Cash)

2, what are continuous two- way flow of cash.

Answerer key

Reference in the book and internet


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1.4 Cash within organization budget is maintained within set


Information sheet 4
limits

1,4.1,.Introduction

HU, ACCOUNTING and FINANCE DEPARTMENT 7


CASH AND RECEIVABLES

* Delay purchase of raw materials on the anticipation of decline in prices and


* Make purchase at favorable prices.
Of the three primary motive of holding cash balance, the most important one is the
Transaction Motive. Business firms normally do not speculate and need not have
speculative balances. The requirement of precautionary balance can be met out of short-
term borrowings.

Benefit of Holding Adequate (Sufficient) Cash Balance


The important advantages of holding adequate cash balances are:
* It prevents insolvency or bankruptcy arising out of the inability of a firm to
meet its obligations.
* The relationship with the bank is not strained (worried).
* It helps in developing good relations with trade creditors and supplier of raw
material, as prompt payment may help their own cash management.
* A cash discount can be availed, if its payment is made within the due date.
* It leads to a strong credit rating which enables the firm to purchase goods on
favorable terms and to maintain its line of credit with banks and other sources of
credit.
* To take an advantage of favorable business opportunities that may be available
periodically and finally.
* The firm can meet unanticipated cash expenditure with a minimum of strain.
Keeping large cash balance, however, implies a high cost.

Objectives of cash Management


The basic objectives of cash management are two- fold:
(a) Meeting payment
(b) Minimizing Funds Committed to Cash Balance
Meeting payment: In the normal course of business, firms have to make payments of
cash on a continuous and regular basis to suppliers of goods, employees and so on. At the
same time, there is a constant inflow of cash through collections from accounts
receivables. A basic objective of cash management is to meet the payment schedule, that
is, to have sufficient cash to meet the cash disbursement needs of a firm.
Minimizing Funds Committed to Cash Balance: The second objective of cash
management is to minimize cash balances. In minimizing cash balance, two conflicting
aspects have to reconcile. A high level of cash balances will, as shown above, ensure
prompt payment together with all the advantages. But it also implies that large funds will
remain idle, as cash is non earning asset and the firm will have to fore go profits. A low
level of cash balance, on the other hand, may mean failure to meet the payment schedule.
The aim of cash management, therefore, should to have an optimal amount of cash
balances.

Hu, Accounting And Finance Department 8


CASH AND RECEIVABLES

Self cheek
Name __________________________class _____id ____

1, explain Objectives of cash Management are two- fold

2, define Meeting payment


3 ,explain minimizing Funds Committed to Cash Balance:

HU, ACCOUNTING and FINANCE DEPARTMENT 9

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