CASH MANAGEMENT

Chapter 8

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved
Chapter 8 - Preview

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved
 CASH, CASH EQUIVALENTS,
AND LIQUIDITY
TIỀN, CÁC KHOẢN TƯƠNG ĐƯƠNG TIỀN VÀ TÍNH THANH KHOẢN

Cash
Currency, coins and amounts on deposit in bank
accounts, checking accounts, and some savings
accounts. Also includes items such as customer checks,
cashier checks, certified checks, and money orders.

Cash Equivalents
Short-term, highly liquid investments that are:
1. Readily convertible to a known cash amount.
2. Close to maturity date and not sensitive to
interest rate changes.

McGraw-Hill/Irwin Slide 3
 CASH, CASH EQUIVALENTS,
AND LIQUIDITY
Liquidity
How easily an asset can be converted into cash
to be used to pay for services or obligations.

Inventor Cas
McGraw-Hill/Irwin Slide 4
 CASH MANAGEMENT
The goals of cash management are twofold:
1. Plan cash receipts to meet cash payments when
due.
▪ Handling cash is separated from recordkeeping for cash.
(Segregation of Duties)
▪ Encourage collection of receivables.
▪ Cash receipts are promptly deposited in a bank
▪ Cash disbursements are made by check.
▪ Delay payment of liabilities

2. Keep a minimum level of cash necessary to

operate.
▪ Plan expenditures.
▪ Invest excess cash.

McGraw-Hill/Irwin Slide 5
 CONTROL OF CASH RECEIPTS
Over-the-Counter Cash Receipts

McGraw-Hill/Irwin Slide 6
 CONTROL OF CASH RECEIPTS
Cash over and short
Cash Over and Short account, also called Cash Short and Over, which is an income
statement account recording the income effects of cash overages and cash shortages

• if a cash register’s record shows $550 but the count of cash in the register is $555,
the entry to record cash sales and its overage is:

• if a cash register’s record shows $625 but the count of cash in the register is $621,
the entry to record cash sales and its shortage is

McGraw-Hill/Irwin Slide 7
 CONTROL OF CASH DISBURSEMENT

McGraw-Hill/Irwin Slide 8
 VOUCHER SYSTEM OF CONTROL
A voucher system is a set of procedures and approvals designed to control cash
disbursements and the acceptance of obligations. The voucher system
of control establishes procedures for:
•Verifying, approving, and recording obligations for eventual cash disbursement.
•Issuing checks for payment of verified, approved, and recorded obligations.

Voucher
McGraw-Hill/Irwin Slide 9
 VOUCHER SYSTEM OF CONTROL
Sender
Sender Receiver
Receiver
Check
Cashier Supplier (Vendor)
Accounting Invoice Approval Cashier
Receiving Report Accounting, Requesting
Receiving
& Purchasing
Supplier (Vendor) Invoice Accounting
Purchasing Purchase Order Supplier, Requesting,
Receiving & Accounting
Purchase
Requesting Purchasing and
Requisition
Accounting

Voucher
McGraw-Hill/Irwin Slide 10
 VOUCHER SYSTEM OF CONTROL

McGraw-Hill/Irwin Slide 11
 BANKING ACTIVITIES AS CONTROLS
QUẢN LÝ BẰNG CÁC HOẠT ĐỘNG NGÂN HÀNG

�Additional internal control can be achieved by

comparing the bank statement with the deposit
and withdrawal records
�Bank statement and bank reconciliation are used

McGraw-Hill/Irwin Slide 12
 BANK STATEMENT

Usually once a month, the bank sends each depositor

a bank statement showing the activity in the account.

Beginning-of- End-of-period
period balance. balance.
*

Checks and other Deposits and other

debits. credits.

McGraw-Hill/Irwin Slide 13
 BANK RECONCILIATION
BẢNG ĐIỀU GIẢI NGÂN HÀNG

A bank reconciliation is prepared periodically to explain

the difference between cash reported on the bank
statement and the cash balance on company’s books.

Why are the

*
balances different?

McGraw-Hill/Irwin Slide 14
 RECONCILING ITEMS
Outstanding checks.
are checks written (or drawn) by the depositor, deducted on the depositor’s records,
and sent to the payees but not yet received by the bank for payment at the bank
statement date
Deposits in transit
are deposits made and recorded by the depositor but not yet recorded on the bank
statement.
Deductions for uncollectible items and for services.
A company sometimes deposits another party’s check that is uncollectible (usually
meaning the balance in that party’s account is not large enough to cover the check)

Additions for collections and for interest

McGraw-Hill/Irwin Slide 15
 RECONCILING ITEMS
Errors

Both banks and depositors can make errors. Bank errors might not be dis covered until
the depositor prepares the bank reconciliation. Also, depositor errors are sometimes
discovered when the bank balance is reconciled. Error testing includes:
(a)comparing deposits on the bank statement with deposits in the accounting records
and
(b)comparing canceled checks on the bank statement with checks recorded in the
accounting records

McGraw-Hill/Irwin Slide 16
 RECONCILING ITEMS
Ending balance as per bank statement: X
+ Deposits in transit (outstanding deposit) X
– Outstanding Cheques (X)
+ / – Bank errors X
= Adjusted cash balance: Bank Statement X

Ending Balance as per Cash at Bank Ledger X

+ Receipts reported on bank statement but not in ledger, direct credits
X Should
be the
- Disbursements reported in bank statement (i.e. bank fees & charges,
same
direct debit) (X)
- Nonsufficient funds check (NSF) (X)
+ / – accounting record errors X
+ Interest earned on checking account X
= Adjusted cash balance: Cash at Bank Ledger
McGraw-Hill/Irwin
X Slide 17
 BANK RECONCILE EXAMPLE

McGraw-Hill/Irwin Slide 18
 BANK RECONCILIATION EXAMPLE
Adjusting Entries from a Bank Reconciliation
A bank reconciliation often identifies unrecorded items that need recording by the
company. In VideoBuster’s reconciliation, the adjusted balance of $1,845 is the correct
balance as of October 31. But the company’s accounting records show a $1,404.58
balance. We must prepare journal entries to adjust the book balance to the correct
balance.
It is important to remember that only the items reconciling the book balance require
adjustment.

Collection of note. The first entry is to record the proceeds of its note receivable
collected by the bank less the expense of having the bank perform that service.

McGraw-Hill/Irwin Slide 21
 BANK RECONCILIATION EXAMPLE
Adjusting Entries from a Bank Reconciliation
A bank reconciliation often identifies unrecorded items that need recording by the
company. In VideoBuster’s reconciliation, the adjusted balance of $1,845 is the correct
balance as of October 31. But the company’s accounting records show a $1,404.58
balance. We must prepare journal entries to adjust the book balance to the correct
balance.
It is important to remember that only the items reconciling the book balance require
adjustment.

Interest earned. The second entry records interest credited to its account by the bank.

McGraw-Hill/Irwin Slide 22
 BANK RECONCILIATION EXAMPLE
Adjusting Entries from a Bank Reconciliation
A bank reconciliation often identifies unrecorded items that need recording by the
company. In VideoBuster’s reconciliation, the adjusted balance of $1,845 is the correct
balance as of October 31. But the company’s accounting records show a $1,404.58
balance. We must prepare journal entries to adjust the book balance to the correct
balance.
It is important to remember that only the items reconciling the book balance require
adjustment.

Check printing. The third entry records expenses for the check printing charge.

McGraw-Hill/Irwin Slide 23
 BANK RECONCILIATION EXAMPLE
Adjusting Entries from a Bank Reconciliation
It is important to remember that only the items reconciling the book balance require
adjustment.

NSF check. The fourth entry records the NSF check that is returned as uncollectible. The
$20 check was originally received from T. Woods in payment of his account and then
deposited. The bank charged $10 for handling the NSF check and deducted $30 total
from VideoBuster’s account. This means the entry must reverse the effects of the original
entry made when the check was received and must record (add) the $10 bank fee.

McGraw-Hill/Irwin Slide 24
 PRACTICE
Prepare a bank reconciliation for Jamboree Enterprises for the month ended November 30,
2011. The following information is available to reconcile Jamboree Enterprises’ book balance of
cash with its bank statement balance as of November 30, 2011:
a. After all posting is complete on November 30, the company’s book balance of Cash has a $16,380
debit balance, but its bank statement shows a $38,520 balance.
b. Checks No. 2024 for $4,810 and No. 2026 for $5,000 are outstanding.
c. In comparing the canceled checks on the bank statement with the entries in the accounting
records, it is found that Check No. 2025 in payment of rent is correctly drawn for $1,000 but is
erroneously entered in the accounting records as $880.
d. The November 30 deposit of $17,150 was placed in the night depository after banking hours on
that date, and this amount does not appear on the bank statement.
e. In reviewing the bank statement, a check written by Jumbo Enterprises in the amount of $160 was
erroneously drawn against Jamboree’s account.
f. A credit memorandum enclosed with the bank statement indicates that the bank collected a
$30,000 note and $900 of related interest on Jamboree’s behalf. This transaction was not recorded
by Jamboree prior to receiving the statement.
g. A debit memorandum for $1,100 lists a $1,100 NSF check received from a customer, Marilyn
Welch. Jamboree had not recorded the return of this check before receiving the statement.
h. Bank service charges for November total $40. These charges were not recorded by Jamboree
before receiving the statement.

McGraw-Hill/Irwin Slide 25
 PRACTICE

McGraw-Hill/Irwin Slide 26
 PRACTICE

McGraw-Hill/Irwin Slide 27
 CASH FLOW STATEMENT

�What can users learn from the statement of cash

flows?
⚫Ability to generate cash and cash equivalents
⚫Trends in capital expenditures
⚫Ability to pay dividends and meet financial
commitments
⚫Clues about earnings quality

McGraw-Hill/Irwin Slide 34
 BUSINESS ACTIVITIES

�Cash flows must be classified as arising from

either:
Operating activities:
Involve using resources to research, develop, and purchase,
produce, distribute, and market products and services.
Investing activities:
Are the acquiring and disposing of resources (assets) that an
organization uses to acquire and sell its products or services

Financing activities:
Provide the means organizations use to pay for resources

McGraw-Hill/Irwin Slide 35
 DIRECT CASH-FLOW STATEMENT

�Prepare a Statement of Cash flows for Genis

using given information:
Cash – 1 Jan 2011 20,000
Purchase of building 60,000 Investing activities
Payment of dividend 5,000 Financing activities
Payment to Suppliers 35,000 Operating activities
Issues Shares 75,000 Financing activities
Payment of Salaries 24,000 Operating activities
Receipt from customers 82,000 Operating activities
Borrowings 23,000 Financing activities
Purchase of equipment 35,000 Investing activities

McGraw-Hill/Irwin Slide 36
 GENIS
STATEMENT OF CASH FLOWS
FOR THE MONTH ENDED 31 JANUARY
Cash flows from operating activities
Cash receipt from customers 82,000
Cash Paid to Suppliers (35,000)
Cash paid for Salaries (24,000)
Net cash changes from operating activities 23,000
Cash flows from investing activities
Purchase of equipment (35,000)
Purchase of building (60,000)
Net cash changes from investing activities (95,000)
Cash flows from financing activities
Cash receipt from issuing Shares 75,000
Cash paid for dividends (5,000)
Cash receipt from borrowings 23,000
Net cash changes from financing activities 93,000
Net changes in cash 21,000
Cash balance at prior month end 20,000
Cash balance at current month end 41,000
McGraw-Hill/Irwin Slide 37
 RECONCILING CASH-FLOW
STATEMENT
�Converting accrual basic accounting figures to
cash basic accounting figures
Accrual basic accounting Cash basic accounting
Sales Cash receipt from customers
+ Decrease in Acc. Receivable
– Increase in A.R
COGS Cash payment for Inventories
+ Increase in Inventories + Decrease in A.P
– Decrease in Inventories – Increase in A.P
Salaries expenses Cash paid to employees
+ Decrease in Salaries payable
- Increase in Salaries payable
Other operating expenses (not including salaries exp and Cash for other operating
depreciation expense) expenses
+ Increase in Prepaid exp + Decrease in Accrued expense
- Decrease in Prepaid exp - Increase in accrued exp

McGraw-Hill/Irwin Slide 39
 INDIRECT CASH-FLOW STATEMENT
Cash flows from operating activities
Net income X
Adjustments to reconcile net income to net cash provided by
operating activities
Add Decrease in noncash current assets (A.R, Prepaid x
expenses, inventories,...)
Deduct Increase in noncash current assets (A.R, Prepaid (x)
expenses, inventories,...)
Add Increases in current liabilities x
Deduct Decrease in current Liabilities (x)
Add Expenses with no cash outflows (Depreciation, bad debt x
expense,... )
Deduct Revenues with no cash inflows (x)
Add Non-operating losses (loss on disposal of fix assets) x

Deduct non-operating gain (gain on disposal of fix assets) (x)

Net cash provided by operating activities X

McGraw-Hill/Irwin Slide 40
 END OF CHAPTER 8

Thank you!

McGraw-Hill/Irwin Slide 41