LU 6 Cash Management and Control
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Chapter 6, Slide #1 Cash and Internal Control LU 1 • Key Issues to be discussed • What are the forms of cash found and reported on a company balance sheet? • What techniques do companies use to control cash? • Why are internal controls important? • What are some basic internal control procedures?
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notes on cash management and control by kathmandu university BBA
Transcript of LU 6 Cash Management and Control
Chapter 5Key Issues to be discussed
What are the forms of cash found and reported on a company balance sheet?
What techniques do companies use to control cash?
Why are internal controls important?
What are some basic internal control procedures?
Chapter 6, Slide #*
Why are checks and invoices sequentially numbered?
Why do you receive a cash register receipt at a departmental store?
Would the person writing the checks prepare the bank reconciliation? Why or why not?
Why internal control over cash disbursements would be more effective when payments are made by check rather than by cash?
Why would a business use a petty cash fund? In what instances would the petty cash fund be used? Develop a system of internal control for petty cash.
Which statement, the balance sheet or the statement of cash flows, provides the user with more information about cash?
Chapter 6, Slide #*
What Constitutes Cash?
Classification as cash indicates that an item is readily available to pay debts.
Coin and currency, Checking, savings, and money market accounts
Undeposited, cashier, and certified checks
Cash equivalents are readily convertible to known amount of cash
original maturity to the investor of less than three months
treasury bills, commercial paper, money market funds
Both cash and cash equivalents included as cash on statement of cash flows
Chapter 6, Slide #*
Cash Management
Necessary to ensure company has neither too little nor too much cash on hand
Tools
Petty cash funds
Chapter 6, Slide #*
Control Over Cash
Cash management is necessary to guarantee that neither too much nor too little cash is on hand.
Internal control over cash is needed to guard against theft and other abuses of cash
Cash alone does not earn anything, but must be invested
Too much cash could make company a takeover target
A bank statement details all activity in an account each month
Canceled checks: an outstanding check was written but not yet presented for payment, and therefore is not on statement
Deposits: on company’s records, a deposit in transit was made in the last day or two of the month, doesn’t show up on statement
NSF check (Not Sufficient Funds) was deposited, but bank could not collect, and deducted from balance
Service charge
Customer note and interest: bank acts as collection agent for company, takes payments directly
Interest earned
Chapter 6, Slide #*
Bank Reconciliation Statement
A bank reconciliation should be prepared as soon as the statement is received, by someone independent of custody, record-keeping, and authorization
Trace deposits listed on bank statement to books, list deposits in transit
Trace canceled checks on bank statement to books, list outstanding checks
List credit memoranda (the bank credits or increases its liability to the company on its books): items credited on bank’s books to company for interest or collections from customers
List debit memoranda (the bank debits or reduces the liability to the company on its books): NSF checks, service charges
Identify errors by bank or company
Establishing a Petty Cash Fund
The petty cash fund is an exception to the “all expenditures by check” rule, for minor amounts.
A check is written for a lump-sum amount and cashed
Custodian of cash is given to one individual (petty cash custodian)
Minor disbursements are reimbursed from it when receipts are presented
Replenish periodically by totaling receipts and writing a check to bring the cash in the fund back to its original amount
Chapter 6, Slide #*
The Control Environment
The success of an internal control system depends on the operating style of management and the competency of the people responsible for the system
Personnel policies and practices are important components of the internal control system
The effectiveness of the internal control system also depends on the board of directors and audit committee
Chapter 6, Slide #*
Internal Control Procedures
Chapter 6, Slide #*
Bank Statements
Interest earned
Canceled checks
NSF checks
Service charges
Bank Reconciliation – Step 1
Deposits in transit: Late period deposits not yet reflected on bank statement
Trace deposits listed on the bank statement to the books. Identify the deposits in transit. Add to the bank balance.
Chapter 6, Slide #*
Example of Reconciliation
Add: Deposit in transit 642.30
Bank Statement Adjustments: Deposits
Bank Reconciliation – Step 2
Trace checks cleared by the bank to the books. Identify outstanding checks. Subtract from the bank balance.
Outstanding checks: Checks written but not yet presented to bank
Chapter 6, Slide #*
Example of Reconciliation
Balance per statement, June 30 $3,308.59
Add: Deposit in transit 642.30
Deduct: Outstanding checks:
No. 496 $ 79.89
No. 501 213.20
1
Credit memoranda: Interest earned, customer notes collected, etc.
List all other additions (credit memoranda) shown on the bank statement. Add to the book balance.
Chapter 6, Slide #*
Example of Reconciliation
Balance per books, June 30 Rs. 2,895.82
Add: Customer note collected Rs. 500.00
Interest on customer note 50.00
Interest earned during June 15.45
Error in recording check 498 54.00 619.45
2
Bank Reconciliation – Step 4
List all other subtractions (debit memoranda) shown on the bank statement. Subtract from the book balance.
Debit memoranda: NSF checks, service charges, etc.
Chapter 6, Slide #*
Example of Reconciliation
Balance per books, June 30 Rs.2,895.82
Add: Customer note collected Rs.500.00
Interest on customer note 50.00
Interest earned during June 15.45
Error in recording check 498 54.00 619.45
Deduct: NSF check Rs.245.72
Service charge for lockbox 20.00 (282.22)
Adjusted balance, June 30 Rs.3,233.05
2
Bank Reconciliation – Step 5
Identify errors made by the bank or the company in recording the transactions during the period.
Chapter 6, Slide #*
Bank Reconciliation – Step 6
Use the information collected in steps 1 through 5 to prepare the bank reconciliation.
Bank Reconciliation
Chapter 6, Slide #*
Example of Reconciliation
Adjusted balance, June 30 Rs.3,233.05
Bank Statement Adjustments
Adjusted balance, June 30 Rs. 3,233.05
Cash Account Adjustments
Chapter 6, Slide #*
What are the forms of cash found and reported on a company balance sheet?
What techniques do companies use to control cash?
Why are internal controls important?
What are some basic internal control procedures?
Chapter 6, Slide #*
Why are checks and invoices sequentially numbered?
Why do you receive a cash register receipt at a departmental store?
Would the person writing the checks prepare the bank reconciliation? Why or why not?
Why internal control over cash disbursements would be more effective when payments are made by check rather than by cash?
Why would a business use a petty cash fund? In what instances would the petty cash fund be used? Develop a system of internal control for petty cash.
Which statement, the balance sheet or the statement of cash flows, provides the user with more information about cash?
Chapter 6, Slide #*
What Constitutes Cash?
Classification as cash indicates that an item is readily available to pay debts.
Coin and currency, Checking, savings, and money market accounts
Undeposited, cashier, and certified checks
Cash equivalents are readily convertible to known amount of cash
original maturity to the investor of less than three months
treasury bills, commercial paper, money market funds
Both cash and cash equivalents included as cash on statement of cash flows
Chapter 6, Slide #*
Cash Management
Necessary to ensure company has neither too little nor too much cash on hand
Tools
Petty cash funds
Chapter 6, Slide #*
Control Over Cash
Cash management is necessary to guarantee that neither too much nor too little cash is on hand.
Internal control over cash is needed to guard against theft and other abuses of cash
Cash alone does not earn anything, but must be invested
Too much cash could make company a takeover target
A bank statement details all activity in an account each month
Canceled checks: an outstanding check was written but not yet presented for payment, and therefore is not on statement
Deposits: on company’s records, a deposit in transit was made in the last day or two of the month, doesn’t show up on statement
NSF check (Not Sufficient Funds) was deposited, but bank could not collect, and deducted from balance
Service charge
Customer note and interest: bank acts as collection agent for company, takes payments directly
Interest earned
Chapter 6, Slide #*
Bank Reconciliation Statement
A bank reconciliation should be prepared as soon as the statement is received, by someone independent of custody, record-keeping, and authorization
Trace deposits listed on bank statement to books, list deposits in transit
Trace canceled checks on bank statement to books, list outstanding checks
List credit memoranda (the bank credits or increases its liability to the company on its books): items credited on bank’s books to company for interest or collections from customers
List debit memoranda (the bank debits or reduces the liability to the company on its books): NSF checks, service charges
Identify errors by bank or company
Establishing a Petty Cash Fund
The petty cash fund is an exception to the “all expenditures by check” rule, for minor amounts.
A check is written for a lump-sum amount and cashed
Custodian of cash is given to one individual (petty cash custodian)
Minor disbursements are reimbursed from it when receipts are presented
Replenish periodically by totaling receipts and writing a check to bring the cash in the fund back to its original amount
Chapter 6, Slide #*
The Control Environment
The success of an internal control system depends on the operating style of management and the competency of the people responsible for the system
Personnel policies and practices are important components of the internal control system
The effectiveness of the internal control system also depends on the board of directors and audit committee
Chapter 6, Slide #*
Internal Control Procedures
Chapter 6, Slide #*
Bank Statements
Interest earned
Canceled checks
NSF checks
Service charges
Bank Reconciliation – Step 1
Deposits in transit: Late period deposits not yet reflected on bank statement
Trace deposits listed on the bank statement to the books. Identify the deposits in transit. Add to the bank balance.
Chapter 6, Slide #*
Example of Reconciliation
Add: Deposit in transit 642.30
Bank Statement Adjustments: Deposits
Bank Reconciliation – Step 2
Trace checks cleared by the bank to the books. Identify outstanding checks. Subtract from the bank balance.
Outstanding checks: Checks written but not yet presented to bank
Chapter 6, Slide #*
Example of Reconciliation
Balance per statement, June 30 $3,308.59
Add: Deposit in transit 642.30
Deduct: Outstanding checks:
No. 496 $ 79.89
No. 501 213.20
1
Credit memoranda: Interest earned, customer notes collected, etc.
List all other additions (credit memoranda) shown on the bank statement. Add to the book balance.
Chapter 6, Slide #*
Example of Reconciliation
Balance per books, June 30 Rs. 2,895.82
Add: Customer note collected Rs. 500.00
Interest on customer note 50.00
Interest earned during June 15.45
Error in recording check 498 54.00 619.45
2
Bank Reconciliation – Step 4
List all other subtractions (debit memoranda) shown on the bank statement. Subtract from the book balance.
Debit memoranda: NSF checks, service charges, etc.
Chapter 6, Slide #*
Example of Reconciliation
Balance per books, June 30 Rs.2,895.82
Add: Customer note collected Rs.500.00
Interest on customer note 50.00
Interest earned during June 15.45
Error in recording check 498 54.00 619.45
Deduct: NSF check Rs.245.72
Service charge for lockbox 20.00 (282.22)
Adjusted balance, June 30 Rs.3,233.05
2
Bank Reconciliation – Step 5
Identify errors made by the bank or the company in recording the transactions during the period.
Chapter 6, Slide #*
Bank Reconciliation – Step 6
Use the information collected in steps 1 through 5 to prepare the bank reconciliation.
Bank Reconciliation
Chapter 6, Slide #*
Example of Reconciliation
Adjusted balance, June 30 Rs.3,233.05
Bank Statement Adjustments
Adjusted balance, June 30 Rs. 3,233.05
Cash Account Adjustments
Chapter 6, Slide #*
