This document provides an overview of cash and highly liquid investments. It discusses the composition of cash, how cash is presented on the balance sheet, cash management controls, bank reconciliations, and petty cash systems. It also covers cash equivalents, strategies to enhance cash flows, proof of cash, and accounting for trading securities.
The document discusses factors that influence a company's capital structure and efficient cash management. It identifies six key factors that determine a company's capital structure: cash flow position, interest coverage ratio, control, stock market conditions, regulatory framework, and tax rates. It also discusses three objectives of cash management - controlling cash levels, controlling cash inflows, and controlling cash outflows. Specific techniques for meeting these objectives include preparing cash budgets, adopting concentration banking and lockbox systems, and playing float to maximize available funds. Overall, the document emphasizes the importance of planning, controlling, and optimizing a company's sources and uses of cash.
This document discusses cash management and provides information on:
1) The importance of cash management and maintaining an optimal level of cash. Excess cash is unproductive while inadequate cash can disrupt operations.
2) Motives for holding cash including transactions, precautionary, speculative, and compensatory motives. Transactions and compensatory motives are most important for businesses.
3) Objectives of cash management which are to meet payment schedules while minimizing cash balances. Firms must balance liquidity and profitability.
4) Strategies for cash management including cash flow projections, determining optimal cash levels, and models like EOQ, stochastic, and probability for determining optimal cash levels.
This document discusses effective cash management strategies for organizations. It outlines that cash management aims to optimize cash as an asset by maintaining adequate liquidity while maximizing interest income on idle funds. Key aspects of cash management include setting cash policies and budgets, determining optimal cash levels, managing cash flows and investments, and implementing strong internal controls over cash. Specialized cash management methods discussed are balance sheet analysis, leveraging bank relationships, identifying cash float, lockbox systems, electronic transfers, compensation balances, and concentration banking.
This document discusses cash and receivable management. It defines cash management as the process of collecting and managing cash flows, which is important for both individuals and businesses. It then discusses various types of cash management including cash flows from operating activities, free cash flow to equity, free cash flow to the firm, and the net change in cash. The document also discusses the importance and functions of cash management, as well as the objectives and benefits of cash management. Finally, it defines receivable management and discusses the receivable management process, including customer invoicing, monitoring, and collection steps.
Cash management techniques help businesses efficiently manage cash inflows and outflows. Some key techniques include budgeting to reduce expenses, investing excess cash, using credit judiciously, and generating additional income. Businesses can also use physical cash management services, electronic funds transfer, controlled disbursement of checks, sweep accounts to maximize interest, and cash concentration. Choosing the appropriate combination of techniques from banks can optimize a business's cash management.
This document discusses 10 sources of cash that businesses can consider to ease cash flow difficulties. It begins by explaining the importance of effective cash management and identifying sources of cash inflows and outflows. It then discusses initial equity/director's loans as a source of start-up funds. It provides tips for collecting payment directly from customers when due, such as negotiating terms, selecting customers carefully, and understanding reasons for non-payment. It also discusses raising cash indirectly from customers through invoice financing, factoring, or invoice discounting arrangements.
Cash flow is the lifeblood of a business and measures its ability to pay bills on time. It depends on the timing and amount of money coming into and going out of the business. Cash inflows include payments from customers, loans, and investments, while cash outflows comprise expenses like materials, wages, taxes, and loan repayments. Cash flow and profit are different - a business can be profitable but still experience cash flow issues. Careful cash flow forecasting and management, like collecting debts promptly or leasing equipment, can help improve a business's cash position over time.
Mastering Cash Flow: The Essential Guide for Sustainable Business Growthdotrupconsulting
In today's dynamic business landscape, mastering cash flow is essential for sustainable growth and long-term success. "Mastering Cash Flow: The Essential Guide for Sustainable Business Growth" is a comprehensive resource designed to address the top pain points of business owners, entrepreneurs, and financial professionals seeking to optimize cash flow management and drive sustainable business growth.
Are you struggling to maintain a healthy cash flow in your business? Do you find yourself constantly juggling expenses, payments, and revenue to keep your operations afloat? If so, you're not alone. Cash flow management is one of the biggest challenges facing businesses of all sizes and industries. Without proper cash flow management, businesses risk facing cash shortages, missed opportunities, and even financial distress.
In "Mastering Cash Flow," you'll discover proven strategies, practical insights, and actionable steps to transform your cash flow management from a source of stress and uncertainty into a strategic asset for driving sustainable business growth. Whether you're a startup looking to scale, an established business seeking to optimize operations, or a financial professional advising clients on cash flow management, this book has something for you.
Imagine having the confidence and clarity to make informed financial decisions, knowing that your cash flow is optimized to support your business goals and fuel your growth ambitions. With the insights and techniques shared in "Mastering Cash Flow," you'll gain the knowledge and skills needed to take control of your cash flow, overcome common challenges, and achieve sustainable business growth.
Inside "Mastering Cash Flow," you'll learn how to:
- Understand the fundamentals of cash flow management and its impact on business performance.
- Identify common cash flow pitfalls and develop strategies to avoid them.
- Implement practical techniques for optimizing cash flow, including receivables and payables management, inventory optimization, and expense control.
- Utilize technology solutions and financial tools to streamline cash flow processes and improve efficiency.
- Develop robust cash flow forecasting models to anticipate future cash flow trends and plan for contingencies.
- Navigate cash flow challenges specific to your industry or business model, whether you're in retail, manufacturing, service-based, or subscription-based businesses.
- Leverage case studies and real-world examples of successful cash flow management to inform your own strategies and decisions.
- Create a long-term cash flow plan that aligns with your business objectives and supports sustainable growth over time.
By implementing the strategies outlined in "Mastering Cash Flow," you'll be empowered to:
- Maintain a healthy cash flow that supports day-to-day operations and strategic initiatives.
- Improve financial resilience and flexibility to withstand economic downturns and market fluctuation.
The document discusses factors that influence a company's capital structure and efficient cash management. It identifies six key factors that determine a company's capital structure: cash flow position, interest coverage ratio, control, stock market conditions, regulatory framework, and tax rates. It also discusses three objectives of cash management - controlling cash levels, controlling cash inflows, and controlling cash outflows. Specific techniques for meeting these objectives include preparing cash budgets, adopting concentration banking and lockbox systems, and playing float to maximize available funds. Overall, the document emphasizes the importance of planning, controlling, and optimizing a company's sources and uses of cash.
This document discusses cash management and provides information on:
1) The importance of cash management and maintaining an optimal level of cash. Excess cash is unproductive while inadequate cash can disrupt operations.
2) Motives for holding cash including transactions, precautionary, speculative, and compensatory motives. Transactions and compensatory motives are most important for businesses.
3) Objectives of cash management which are to meet payment schedules while minimizing cash balances. Firms must balance liquidity and profitability.
4) Strategies for cash management including cash flow projections, determining optimal cash levels, and models like EOQ, stochastic, and probability for determining optimal cash levels.
This document discusses effective cash management strategies for organizations. It outlines that cash management aims to optimize cash as an asset by maintaining adequate liquidity while maximizing interest income on idle funds. Key aspects of cash management include setting cash policies and budgets, determining optimal cash levels, managing cash flows and investments, and implementing strong internal controls over cash. Specialized cash management methods discussed are balance sheet analysis, leveraging bank relationships, identifying cash float, lockbox systems, electronic transfers, compensation balances, and concentration banking.
This document discusses cash and receivable management. It defines cash management as the process of collecting and managing cash flows, which is important for both individuals and businesses. It then discusses various types of cash management including cash flows from operating activities, free cash flow to equity, free cash flow to the firm, and the net change in cash. The document also discusses the importance and functions of cash management, as well as the objectives and benefits of cash management. Finally, it defines receivable management and discusses the receivable management process, including customer invoicing, monitoring, and collection steps.
Cash management techniques help businesses efficiently manage cash inflows and outflows. Some key techniques include budgeting to reduce expenses, investing excess cash, using credit judiciously, and generating additional income. Businesses can also use physical cash management services, electronic funds transfer, controlled disbursement of checks, sweep accounts to maximize interest, and cash concentration. Choosing the appropriate combination of techniques from banks can optimize a business's cash management.
This document discusses 10 sources of cash that businesses can consider to ease cash flow difficulties. It begins by explaining the importance of effective cash management and identifying sources of cash inflows and outflows. It then discusses initial equity/director's loans as a source of start-up funds. It provides tips for collecting payment directly from customers when due, such as negotiating terms, selecting customers carefully, and understanding reasons for non-payment. It also discusses raising cash indirectly from customers through invoice financing, factoring, or invoice discounting arrangements.
Cash flow is the lifeblood of a business and measures its ability to pay bills on time. It depends on the timing and amount of money coming into and going out of the business. Cash inflows include payments from customers, loans, and investments, while cash outflows comprise expenses like materials, wages, taxes, and loan repayments. Cash flow and profit are different - a business can be profitable but still experience cash flow issues. Careful cash flow forecasting and management, like collecting debts promptly or leasing equipment, can help improve a business's cash position over time.
Mastering Cash Flow: The Essential Guide for Sustainable Business Growthdotrupconsulting
In today's dynamic business landscape, mastering cash flow is essential for sustainable growth and long-term success. "Mastering Cash Flow: The Essential Guide for Sustainable Business Growth" is a comprehensive resource designed to address the top pain points of business owners, entrepreneurs, and financial professionals seeking to optimize cash flow management and drive sustainable business growth.
Are you struggling to maintain a healthy cash flow in your business? Do you find yourself constantly juggling expenses, payments, and revenue to keep your operations afloat? If so, you're not alone. Cash flow management is one of the biggest challenges facing businesses of all sizes and industries. Without proper cash flow management, businesses risk facing cash shortages, missed opportunities, and even financial distress.
In "Mastering Cash Flow," you'll discover proven strategies, practical insights, and actionable steps to transform your cash flow management from a source of stress and uncertainty into a strategic asset for driving sustainable business growth. Whether you're a startup looking to scale, an established business seeking to optimize operations, or a financial professional advising clients on cash flow management, this book has something for you.
Imagine having the confidence and clarity to make informed financial decisions, knowing that your cash flow is optimized to support your business goals and fuel your growth ambitions. With the insights and techniques shared in "Mastering Cash Flow," you'll gain the knowledge and skills needed to take control of your cash flow, overcome common challenges, and achieve sustainable business growth.
Inside "Mastering Cash Flow," you'll learn how to:
- Understand the fundamentals of cash flow management and its impact on business performance.
- Identify common cash flow pitfalls and develop strategies to avoid them.
- Implement practical techniques for optimizing cash flow, including receivables and payables management, inventory optimization, and expense control.
- Utilize technology solutions and financial tools to streamline cash flow processes and improve efficiency.
- Develop robust cash flow forecasting models to anticipate future cash flow trends and plan for contingencies.
- Navigate cash flow challenges specific to your industry or business model, whether you're in retail, manufacturing, service-based, or subscription-based businesses.
- Leverage case studies and real-world examples of successful cash flow management to inform your own strategies and decisions.
- Create a long-term cash flow plan that aligns with your business objectives and supports sustainable growth over time.
By implementing the strategies outlined in "Mastering Cash Flow," you'll be empowered to:
- Maintain a healthy cash flow that supports day-to-day operations and strategic initiatives.
- Improve financial resilience and flexibility to withstand economic downturns and market fluctuation.
The document discusses cash management techniques. It explains that cash management involves planning cash inflows and outflows through tools like cash budgets to determine surplus or deficits. It also discusses managing cash collections and disbursements through techniques like lockboxes and concentration banking to accelerate inflows and delay outflows. The optimal cash balance is determined using models that consider costs of holding cash versus transaction costs of liquidating investments. Surplus cash can be invested in marketable securities like T-bills based on safety, liquidity, and maturity considerations.
You need a cash flow statement to understand how much money is coming into and leaving your company. Every time you examine a financial statement, you should look at it from a business standpoint. The purpose of financial documentation is to shed light on an organisation's financial situation and health.
The document discusses cash management in businesses. It defines cash broadly to include not just currency but also bank deposits and short-term investments that can be quickly converted to cash. While cash makes up a small percentage of assets, its management is important. Cash management involves determining the optimal cash level, managing cash flows, collecting receivables and investing surplus cash. It aims to ensure sufficient cash for daily transactions while generating returns from excess cash. Preparing a cash budget is an important part of cash management.
hapter 5 Cash Flow ManagementLearning Objectives· To understan.docxshericehewat
This document provides an overview of cash flow management for entrepreneurial ventures. It discusses key cash flow concepts like working capital, accounts receivable, and the cash flow cycle. The main case study is about a company called De Werks that was very profitable but ran into cash flow issues because clients were not paying on time, negatively impacting cash flow. The document emphasizes that while profits are important, cash flow is critical for a business to pay its bills and salaries. It provides strategies for improving cash management practices like managing accounts receivable, setting credit limits, and taking prompt action on late payments.
chapter 4Cash, Receivables, and ControlsLearning Goals.docxrobertad6
chapter 4
Cash, Receivables, and Controls
Learning Goals
• Define cash and cash equivalents.
• Know cash control principles and concepts.
• Prepare the bank reconciliation and related adjusting entries.
• Know how to establish and control a petty cash system.
• Understand the accounting concepts and methods pertaining to receivables.
• Master basic calculations and accounting techniques for notes receivable.
Copyright Barbara Chase/Corbis/AP Images
waL80144_04_c04_089-110.indd 1 8/29/12 2:43 PM
90
CHAPTER 4Section 4.1 Concepts of Cash
Chapter Outline
4.1 Concepts of Cash
Cash Management and Control
4.2 Bank Reconciliations
4.3 Petty Cash Funds
4.4 Accounts Receivable
4.5 Direct Write-Off Method
Allowance Techniques for Uncollectible Accounts
Writing Off an Account Against an Allowance
Formalized Receivables and Notes
Credit and Debit Card Transactions
Cash is an interesting asset. It is usually not the most important asset a company pos-sesses, and it is not a very productive asset. However, try to operate without it, and
the results are usually and quickly fatal. It is the accepted medium of exchange and rep-
resents the “blood supply” to keep the business functioning. Therefore, proper cash man-
agement and control is highly important to business success.
4.1 Concepts of Cash
Cash includes currency, coins, bank demand deposits that can be freely withdrawn, undeposited checks from customers, and other items that are acceptable to a bank
for deposit. Some items may seem like cash but are not classified that way: certificates of
deposit, IOUs, stamps, and travel advances. These later items are reported as investments,
supplies, or other more descriptive classifications.
Some companies will expand their reporting of cash to include cash equivalents. These
are very short-term (usually interest-earning) financial instruments like government Trea-
sury bills. They are typically deemed secure and will convert back into cash within 90
days. They are close enough to cash that they are considered to be available to satisfy
obligations, and proper cash management strategies tend to discourage hoarding of large
pools of unproductive currency deposits.
Cash Management and Control
Cash management requires a proper balancing to maintain sufficient cash to meet obli-
gations as they come due and to make sure that idle cash is invested to generate returns
on business assets. Larger organizations may create the position of treasurer whose job
is to manage the business’s cash flows. This person may be responsible for preparing a
cash budget, which is a major component of the cash-planning system. It anticipates and
waL80144_04_c04_089-110.indd 2 8/29/12 2:43 PM
91
CHAPTER 4Section 4.1 Concepts of Cash
depicts cash inflows and outflows for a stated period of time. This tool helps identify and
adjust for anticipated periods of cash deficits or surpluses.
Based on advance knowledge gained via the cash-budge.
Cash management is important for working capital management. There are four motives for holding cash: transaction, precautionary, speculative, and compensating. The objectives of cash management are to meet payment schedules and minimize idle cash balances. Cash needs depend on the synchronization of cash inflows and outflows. Forecasting cash flows helps anticipate surplus or deficit periods to avoid issues like late payments or idle surplus cash. Cash can be forecast over different time periods using receipts/disbursements or adjusted net income approaches.
Cash management involves managing a firm's cash flows, balances, and converting surpluses and deficits. It aims to maintain enough cash for transactions while maximizing returns on excess cash. The Miller-Orr model sets upper and lower control limits for cash balances and a return point to buy or sell securities if balances exceed the limits. Firms can accelerate cash collections through decentralized collection centers and lockboxes, and manage disbursements by controlling payment float. Surplus cash can be invested in safe, liquid securities like treasury bills, commercial paper, and certificates of deposit.
The document provides an overview of cash management services offered by banks to large corporate clients. It defines cash management and describes various cash management services including account reconciliation, payment services, collection services, liquidity management, clearing services and more. The purpose of cash management is to ensure efficient utilization and movement of cash resources through accurate forecasting and proper timing of cash inflows and outflows. Standard Chartered Bank offers a comprehensive suite of cash management services to corporate and institutional clients globally.
Short-term financial planning involves forecasting cash flows over the next 12 months to ensure a business has sufficient funds to pay bills. A key part of short-term planning is understanding a business's cash cycle, which is the time between paying for inventory and collecting payment from customers. Cash budgets are an important tool that estimate quarterly cash inflows and outflows. If a cash budget identifies upcoming cash shortfalls, businesses may take steps like negotiating longer credit terms, obtaining short-term bank loans, or selling assets to fund short-term needs.
Cash flow analysis involves analyzing a company's cash flow statement, which is divided into three parts - operating, investing, and financing cash flows. When analyzing cash flow, key items to examine include repayment of loans, increases in working capital due to business expansion, capital expenditure requirements, other commitments, and contingent liabilities as insufficient cash flow is a major reason why companies go bankrupt.
The document discusses the working capital cycle, which measures how quickly a business can convert current assets like inventory and accounts receivable into cash. It explains the typical steps in the working capital cycle as inventory days, receivable days, and payable days. The working capital cycle formula is given as inventory days + receivable days - payable days. An example calculation is provided. The document also discusses strategies for managing working capital, including aggressive versus conservative approaches and sources of working capital financing.
The corporate treasury department manages a company's cash flows, investments, and financial risks. Its key functions include cash forecasting, monitoring working capital, concentrating cash, making investments, raising funds, hedging risks, maintaining banking relationships, and reporting on finances. Treasury aims to ensure the company has sufficient cash flow while maximizing returns on excess cash through safe investment vehicles and hedging activities. Larger companies typically have a treasurer and dedicated treasury team overseeing these functions.
This document discusses cash management. It defines cash and describes the goals of cash management as managing cash flows, maintaining optimal cash balances, and investing surplus cash. It outlines factors that influence a firm's cash holdings such as transaction, precautionary, and speculative motives. Methods of cash forecasting and models for determining optimal cash balances are presented, including the Baumol and Miller-Orr models. Techniques for accelerating cash collections and controlling disbursements are also summarized.
Cash is the most important current asset for business operations and a major function of financial managers is to maintain a sound cash position. Cash management involves managing cash flows into and out of the firm, within the firm, and cash balances. The aim of cash management is to maintain adequate liquidity while using excess cash profitably. Effective cash management requires optimizing operating cash flows, accurate cash forecasting, utilizing cash management techniques, maintaining liquidity, profitably deploying surplus funds, and obtaining economical borrowings.
FIN 534 Week 9 Working Capital ManagementSlide 1Introduction.docxssuser454af01
FIN 534 Week 9: Working Capital Management
Slide 1
Introduction
Welcome to Financial Management. In this lesson we will discuss working capital management.
Next slide
Slide 2
Topics
The following topics will be covered in this lesson:
Current asset holdings;
Current asset financing policies;
The cash conversion cycle;
The cash budget;
Cash management and the target cash balance;
Cash management techniques;
Inventory management;
Receivables management;
Accruals and accounts payable (Trade Credit);
Short-term marketable securities;
Short-term financing;
Short-term bank loans;
Commercial paper; and
Use of security in short-term financing.
Next slide
Slide 3
Current asset holdings
The level of working capital required by the firm answers two questions:
First, what is the correct amount of both total working capital and for each specific account?
Second, how should working capital be financed?
Gross working capital refers to current assets used in operations. Networking capital is given by current assets minus current liabilities. Net operating working capital or NOWC is given by current operating assets minus current operating liabilities. Usually, NOWC consists of cash required in operations, accounts receivable, and inventories minus accounts payable and accruals.
When deciding upon the amount of working capital the firm focuses on operating current assets which consist of cash plus marketable securities, inventories, and accounts receivable. The level of operating current assets is a policy decision on the part of the firm and impacts profitability. Depending on its level of current operating assets the firm may run a relaxed, moderate or restrictive level of operating current assets. The optimal strategy is the one that management believes will maximize the stock’s intrinsic value.
Next slide
Slide 4
Current asset financing policies
Any investment in operating current assets must be financed and the primary sources of funding are bank loans, accounts payable, accrued liabilities, long-term debt, and common equity. Since current assets rarely dropped to zero, companies usually have some level of permanent current operating assets which the firm needs even at the lowest point of the business cycle.
Additionally, the firm has temporary operating assets which increase as sales increase during a cyclical upswing. The difference between permanent and temporary current operating assets and how they are financed is referred to as the current operating assets financing policy.
The firm has three policies it may use to address this issue:
First, a maturity-matching policy requires that the maturities of assets and liabilities match.
Second, an aggressive policy permits the use of short-term financing for some permanent assets.
And third, a conservative policy uses long-term financing for all permanent operating assets and for some of the temporary current assets.
Ultimately the financing method used depends on the ...
This document discusses working capital management. It begins by noting that large companies like Apple, Microsoft, and GE held large cash balances of $142 billion, $89 billion, and $138 billion respectively in early 2015. It then examines reasons why firms hold cash, including the speculative motive to take advantage of opportunities, the precautionary motive as a financial reserve, and the transaction motive to satisfy ongoing operational needs. The document goes on to discuss concepts like float, which is the difference between a firm's book and available cash balances due to outstanding checks, and how firms can benefit from collection and disbursement float during the check clearing process.
The document discusses how to achieve consistent, accurate, and timely cash application. It emphasizes that proper cash application fosters good working capital management and positive cash flow, while improper cash application can lead to cash flow errors, customer account problems, workflow issues, and excessive costs. The document outlines common cash application challenges and provides recommendations for avoiding cash application problems, including developing clear policies and procedures, enforcing separation of duties, training employees, and using technologies to facilitate the process. It stresses the importance of oversight and staying vigilant to catch any danger signs.
Topic 3 tools techniques of managing of receivablesRAJKAMAL282
The document discusses various techniques for managing accounts receivable, including establishing a credit policy, assessing customer creditworthiness, setting credit limits, invoicing promptly and collecting overdue debts, and monitoring the accounts receivable system. It also describes invoice discounting and factoring as methods to speed up the receipt of funds from accounts receivable, outlining the key services provided by invoice discounters and factors as well as the advantages and disadvantages of each approach.
Traditionally, businesses have believed that
profits indicate success. While it is true that
profits are one of the key indicators of success, many are now starting to realize that there is something more fundamental to their very survival; and that is ‘cash’. ‘Cash is King’- And this holds true for every business irrespective
of its size. The availability of cash balances is a key determinant of a company’s competitive ability, because it provides the means to invest in people, technology, and other assets. Efficient Cash Management is therefore indispensable.
This document discusses cash management and cash flow analysis for businesses. It begins by explaining the importance of cash for business operations and objectives of cash management. It then covers key aspects of cash management including cash planning, managing cash inflows and outflows, determining the optimal cash balance, and investing surplus cash. Motives for holding cash and strategies to improve collection and control of disbursements are also summarized. The document concludes by discussing utility of cash flow analysis and how it can help with efficient cash management and internal financial planning.
The document discusses cash management techniques. It explains that cash management involves planning cash inflows and outflows through tools like cash budgets to determine surplus or deficits. It also discusses managing cash collections and disbursements through techniques like lockboxes and concentration banking to accelerate inflows and delay outflows. The optimal cash balance is determined using models that consider costs of holding cash versus transaction costs of liquidating investments. Surplus cash can be invested in marketable securities like T-bills based on safety, liquidity, and maturity considerations.
You need a cash flow statement to understand how much money is coming into and leaving your company. Every time you examine a financial statement, you should look at it from a business standpoint. The purpose of financial documentation is to shed light on an organisation's financial situation and health.
The document discusses cash management in businesses. It defines cash broadly to include not just currency but also bank deposits and short-term investments that can be quickly converted to cash. While cash makes up a small percentage of assets, its management is important. Cash management involves determining the optimal cash level, managing cash flows, collecting receivables and investing surplus cash. It aims to ensure sufficient cash for daily transactions while generating returns from excess cash. Preparing a cash budget is an important part of cash management.
hapter 5 Cash Flow ManagementLearning Objectives· To understan.docxshericehewat
This document provides an overview of cash flow management for entrepreneurial ventures. It discusses key cash flow concepts like working capital, accounts receivable, and the cash flow cycle. The main case study is about a company called De Werks that was very profitable but ran into cash flow issues because clients were not paying on time, negatively impacting cash flow. The document emphasizes that while profits are important, cash flow is critical for a business to pay its bills and salaries. It provides strategies for improving cash management practices like managing accounts receivable, setting credit limits, and taking prompt action on late payments.
chapter 4Cash, Receivables, and ControlsLearning Goals.docxrobertad6
chapter 4
Cash, Receivables, and Controls
Learning Goals
• Define cash and cash equivalents.
• Know cash control principles and concepts.
• Prepare the bank reconciliation and related adjusting entries.
• Know how to establish and control a petty cash system.
• Understand the accounting concepts and methods pertaining to receivables.
• Master basic calculations and accounting techniques for notes receivable.
Copyright Barbara Chase/Corbis/AP Images
waL80144_04_c04_089-110.indd 1 8/29/12 2:43 PM
90
CHAPTER 4Section 4.1 Concepts of Cash
Chapter Outline
4.1 Concepts of Cash
Cash Management and Control
4.2 Bank Reconciliations
4.3 Petty Cash Funds
4.4 Accounts Receivable
4.5 Direct Write-Off Method
Allowance Techniques for Uncollectible Accounts
Writing Off an Account Against an Allowance
Formalized Receivables and Notes
Credit and Debit Card Transactions
Cash is an interesting asset. It is usually not the most important asset a company pos-sesses, and it is not a very productive asset. However, try to operate without it, and
the results are usually and quickly fatal. It is the accepted medium of exchange and rep-
resents the “blood supply” to keep the business functioning. Therefore, proper cash man-
agement and control is highly important to business success.
4.1 Concepts of Cash
Cash includes currency, coins, bank demand deposits that can be freely withdrawn, undeposited checks from customers, and other items that are acceptable to a bank
for deposit. Some items may seem like cash but are not classified that way: certificates of
deposit, IOUs, stamps, and travel advances. These later items are reported as investments,
supplies, or other more descriptive classifications.
Some companies will expand their reporting of cash to include cash equivalents. These
are very short-term (usually interest-earning) financial instruments like government Trea-
sury bills. They are typically deemed secure and will convert back into cash within 90
days. They are close enough to cash that they are considered to be available to satisfy
obligations, and proper cash management strategies tend to discourage hoarding of large
pools of unproductive currency deposits.
Cash Management and Control
Cash management requires a proper balancing to maintain sufficient cash to meet obli-
gations as they come due and to make sure that idle cash is invested to generate returns
on business assets. Larger organizations may create the position of treasurer whose job
is to manage the business’s cash flows. This person may be responsible for preparing a
cash budget, which is a major component of the cash-planning system. It anticipates and
waL80144_04_c04_089-110.indd 2 8/29/12 2:43 PM
91
CHAPTER 4Section 4.1 Concepts of Cash
depicts cash inflows and outflows for a stated period of time. This tool helps identify and
adjust for anticipated periods of cash deficits or surpluses.
Based on advance knowledge gained via the cash-budge.
Cash management is important for working capital management. There are four motives for holding cash: transaction, precautionary, speculative, and compensating. The objectives of cash management are to meet payment schedules and minimize idle cash balances. Cash needs depend on the synchronization of cash inflows and outflows. Forecasting cash flows helps anticipate surplus or deficit periods to avoid issues like late payments or idle surplus cash. Cash can be forecast over different time periods using receipts/disbursements or adjusted net income approaches.
Cash management involves managing a firm's cash flows, balances, and converting surpluses and deficits. It aims to maintain enough cash for transactions while maximizing returns on excess cash. The Miller-Orr model sets upper and lower control limits for cash balances and a return point to buy or sell securities if balances exceed the limits. Firms can accelerate cash collections through decentralized collection centers and lockboxes, and manage disbursements by controlling payment float. Surplus cash can be invested in safe, liquid securities like treasury bills, commercial paper, and certificates of deposit.
The document provides an overview of cash management services offered by banks to large corporate clients. It defines cash management and describes various cash management services including account reconciliation, payment services, collection services, liquidity management, clearing services and more. The purpose of cash management is to ensure efficient utilization and movement of cash resources through accurate forecasting and proper timing of cash inflows and outflows. Standard Chartered Bank offers a comprehensive suite of cash management services to corporate and institutional clients globally.
Short-term financial planning involves forecasting cash flows over the next 12 months to ensure a business has sufficient funds to pay bills. A key part of short-term planning is understanding a business's cash cycle, which is the time between paying for inventory and collecting payment from customers. Cash budgets are an important tool that estimate quarterly cash inflows and outflows. If a cash budget identifies upcoming cash shortfalls, businesses may take steps like negotiating longer credit terms, obtaining short-term bank loans, or selling assets to fund short-term needs.
Cash flow analysis involves analyzing a company's cash flow statement, which is divided into three parts - operating, investing, and financing cash flows. When analyzing cash flow, key items to examine include repayment of loans, increases in working capital due to business expansion, capital expenditure requirements, other commitments, and contingent liabilities as insufficient cash flow is a major reason why companies go bankrupt.
The document discusses the working capital cycle, which measures how quickly a business can convert current assets like inventory and accounts receivable into cash. It explains the typical steps in the working capital cycle as inventory days, receivable days, and payable days. The working capital cycle formula is given as inventory days + receivable days - payable days. An example calculation is provided. The document also discusses strategies for managing working capital, including aggressive versus conservative approaches and sources of working capital financing.
The corporate treasury department manages a company's cash flows, investments, and financial risks. Its key functions include cash forecasting, monitoring working capital, concentrating cash, making investments, raising funds, hedging risks, maintaining banking relationships, and reporting on finances. Treasury aims to ensure the company has sufficient cash flow while maximizing returns on excess cash through safe investment vehicles and hedging activities. Larger companies typically have a treasurer and dedicated treasury team overseeing these functions.
This document discusses cash management. It defines cash and describes the goals of cash management as managing cash flows, maintaining optimal cash balances, and investing surplus cash. It outlines factors that influence a firm's cash holdings such as transaction, precautionary, and speculative motives. Methods of cash forecasting and models for determining optimal cash balances are presented, including the Baumol and Miller-Orr models. Techniques for accelerating cash collections and controlling disbursements are also summarized.
Cash is the most important current asset for business operations and a major function of financial managers is to maintain a sound cash position. Cash management involves managing cash flows into and out of the firm, within the firm, and cash balances. The aim of cash management is to maintain adequate liquidity while using excess cash profitably. Effective cash management requires optimizing operating cash flows, accurate cash forecasting, utilizing cash management techniques, maintaining liquidity, profitably deploying surplus funds, and obtaining economical borrowings.
FIN 534 Week 9 Working Capital ManagementSlide 1Introduction.docxssuser454af01
FIN 534 Week 9: Working Capital Management
Slide 1
Introduction
Welcome to Financial Management. In this lesson we will discuss working capital management.
Next slide
Slide 2
Topics
The following topics will be covered in this lesson:
Current asset holdings;
Current asset financing policies;
The cash conversion cycle;
The cash budget;
Cash management and the target cash balance;
Cash management techniques;
Inventory management;
Receivables management;
Accruals and accounts payable (Trade Credit);
Short-term marketable securities;
Short-term financing;
Short-term bank loans;
Commercial paper; and
Use of security in short-term financing.
Next slide
Slide 3
Current asset holdings
The level of working capital required by the firm answers two questions:
First, what is the correct amount of both total working capital and for each specific account?
Second, how should working capital be financed?
Gross working capital refers to current assets used in operations. Networking capital is given by current assets minus current liabilities. Net operating working capital or NOWC is given by current operating assets minus current operating liabilities. Usually, NOWC consists of cash required in operations, accounts receivable, and inventories minus accounts payable and accruals.
When deciding upon the amount of working capital the firm focuses on operating current assets which consist of cash plus marketable securities, inventories, and accounts receivable. The level of operating current assets is a policy decision on the part of the firm and impacts profitability. Depending on its level of current operating assets the firm may run a relaxed, moderate or restrictive level of operating current assets. The optimal strategy is the one that management believes will maximize the stock’s intrinsic value.
Next slide
Slide 4
Current asset financing policies
Any investment in operating current assets must be financed and the primary sources of funding are bank loans, accounts payable, accrued liabilities, long-term debt, and common equity. Since current assets rarely dropped to zero, companies usually have some level of permanent current operating assets which the firm needs even at the lowest point of the business cycle.
Additionally, the firm has temporary operating assets which increase as sales increase during a cyclical upswing. The difference between permanent and temporary current operating assets and how they are financed is referred to as the current operating assets financing policy.
The firm has three policies it may use to address this issue:
First, a maturity-matching policy requires that the maturities of assets and liabilities match.
Second, an aggressive policy permits the use of short-term financing for some permanent assets.
And third, a conservative policy uses long-term financing for all permanent operating assets and for some of the temporary current assets.
Ultimately the financing method used depends on the ...
This document discusses working capital management. It begins by noting that large companies like Apple, Microsoft, and GE held large cash balances of $142 billion, $89 billion, and $138 billion respectively in early 2015. It then examines reasons why firms hold cash, including the speculative motive to take advantage of opportunities, the precautionary motive as a financial reserve, and the transaction motive to satisfy ongoing operational needs. The document goes on to discuss concepts like float, which is the difference between a firm's book and available cash balances due to outstanding checks, and how firms can benefit from collection and disbursement float during the check clearing process.
The document discusses how to achieve consistent, accurate, and timely cash application. It emphasizes that proper cash application fosters good working capital management and positive cash flow, while improper cash application can lead to cash flow errors, customer account problems, workflow issues, and excessive costs. The document outlines common cash application challenges and provides recommendations for avoiding cash application problems, including developing clear policies and procedures, enforcing separation of duties, training employees, and using technologies to facilitate the process. It stresses the importance of oversight and staying vigilant to catch any danger signs.
Topic 3 tools techniques of managing of receivablesRAJKAMAL282
The document discusses various techniques for managing accounts receivable, including establishing a credit policy, assessing customer creditworthiness, setting credit limits, invoicing promptly and collecting overdue debts, and monitoring the accounts receivable system. It also describes invoice discounting and factoring as methods to speed up the receipt of funds from accounts receivable, outlining the key services provided by invoice discounters and factors as well as the advantages and disadvantages of each approach.
Traditionally, businesses have believed that
profits indicate success. While it is true that
profits are one of the key indicators of success, many are now starting to realize that there is something more fundamental to their very survival; and that is ‘cash’. ‘Cash is King’- And this holds true for every business irrespective
of its size. The availability of cash balances is a key determinant of a company’s competitive ability, because it provides the means to invest in people, technology, and other assets. Efficient Cash Management is therefore indispensable.
This document discusses cash management and cash flow analysis for businesses. It begins by explaining the importance of cash for business operations and objectives of cash management. It then covers key aspects of cash management including cash planning, managing cash inflows and outflows, determining the optimal cash balance, and investing surplus cash. Motives for holding cash and strategies to improve collection and control of disbursements are also summarized. The document concludes by discussing utility of cash flow analysis and how it can help with efficient cash management and internal financial planning.
This presentation was provided by Steph Pollock of The American Psychological Association’s Journals Program, and Damita Snow, of The American Society of Civil Engineers (ASCE), for the initial session of NISO's 2024 Training Series "DEIA in the Scholarly Landscape." Session One: 'Setting Expectations: a DEIA Primer,' was held June 6, 2024.
Exploiting Artificial Intelligence for Empowering Researchers and Faculty, In...Dr. Vinod Kumar Kanvaria
Exploiting Artificial Intelligence for Empowering Researchers and Faculty,
International FDP on Fundamentals of Research in Social Sciences
at Integral University, Lucknow, 06.06.2024
By Dr. Vinod Kumar Kanvaria
Introduction to AI for Nonprofits with Tapp NetworkTechSoup
Dive into the world of AI! Experts Jon Hill and Tareq Monaur will guide you through AI's role in enhancing nonprofit websites and basic marketing strategies, making it easy to understand and apply.
A workshop hosted by the South African Journal of Science aimed at postgraduate students and early career researchers with little or no experience in writing and publishing journal articles.
Macroeconomics- Movie Location
This will be used as part of your Personal Professional Portfolio once graded.
Objective:
Prepare a presentation or a paper using research, basic comparative analysis, data organization and application of economic information. You will make an informed assessment of an economic climate outside of the United States to accomplish an entertainment industry objective.
Strategies for Effective Upskilling is a presentation by Chinwendu Peace in a Your Skill Boost Masterclass organisation by the Excellence Foundation for South Sudan on 08th and 09th June 2024 from 1 PM to 3 PM on each day.
How to Fix the Import Error in the Odoo 17Celine George
An import error occurs when a program fails to import a module or library, disrupting its execution. In languages like Python, this issue arises when the specified module cannot be found or accessed, hindering the program's functionality. Resolving import errors is crucial for maintaining smooth software operation and uninterrupted development processes.
it describes the bony anatomy including the femoral head , acetabulum, labrum . also discusses the capsule , ligaments . muscle that act on the hip joint and the range of motion are outlined. factors affecting hip joint stability and weight transmission through the joint are summarized.
How to Manage Your Lost Opportunities in Odoo 17 CRMCeline George
Odoo 17 CRM allows us to track why we lose sales opportunities with "Lost Reasons." This helps analyze our sales process and identify areas for improvement. Here's how to configure lost reasons in Odoo 17 CRM
1. Chapter6
Cash and Highly-Liquid Investments
goals discussion goals achievement fill in the blanks multiple choice problems check list
and key terms
GOALS
Your goals for this "cash and highly-liquid investments" chapter are to learn about:
The composition of cash and how cash is presented on the balance sheet.
Cash management and controls for receipts and disbursements.
Reconciliation of bank accounts.
The correct operation of a petty cash system.
Accounting for highly-liquid investments known as "trading securities."
DISCUSSION
CASH COMPOSITION
CASH: Given its liquid and vital status, cash is typically listed first within the current asset
section of the balance sheet. But what exactly is cash? This may seem like a foolish question
until one considers the possibilities. Obviously, cash includes coins and currency. But what
about items like money on deposit in bank accounts, undeposited checks from customers,
certificates of deposit, and similar items? Some of these are deemed to be cash and some are
not. What rule shall be followed?
Generalizing, cash includes those items that are acceptable to a bank for deposit and are free
from restrictions (i.e., available for use in satisfying current debts). Cash typically includes
coins, currency, funds on deposit with a bank, checks, and money orders. Items like postdated
checks, certificates of deposit, IOUs, stamps, and travel advances are typically not classified as
cash. The existence of compensating balances (amounts that must be left on deposit and cannot
be withdrawn) should be disclosed; if such amounts are very significant, they are reported
separately from cash. Also receiving separate treatment are "sinking funds" (monies that must be
2. set aside to satisfy debts) and heavily restricted foreign currency holdings (that cannot easily be
converted into dollars). These unique categories of funds may be reported in the long-term
investments category.
CASH EQUIVALENTS: In lieu of reporting "cash," some companies will report "cash and cash
equivalents." Cash equivalents arise when companies place their cash in very short-term
interest-earning financial instruments that are deemed to be highly secure and will convert back
into cash within 90 days. Many short-term government-issued securities (e.g., treasury bills)
meet these conditions. In addition, active markets exist for such securities, and these financial
instruments are usually very marketable in the event the company needs access to funds in
advance of maturity. Cash management strategies dictate that large amounts of cash not be held
in "unproductive" accounts that do not generate interest income. As a result, surplus cash is
often invested in these instruments. Because of their unique nature, they are considered to be
cash equivalents, and are often reported with cash on the balance sheet. Following is an excerpt
from a recent balance sheet of the automotive division of General Motors Corporation. You will
note that the company held over $15 billion in cash:
Cash and cash equivalents (Note 1) $15,187
Note 1 to the financial statements included this additional commentary about cash:
Cash and Cash Equivalent
Cash equivalents are defined as short-term, highly-liquid investments with original maturities of
90 days or less.
3. CASH MANAGEMENT
PLANNING CASH FLOWS: It is very important to ensure that sufficient cash is available to
meet obligations and to make sure that idle cash is appropriately invested to maximize the return
to the company. One function of the company "treasurer" is to examine the cash flows of the
business, and pinpoint anticipated periods of excess or deficit cash flows. A detailed cash budget
is often maintained, and updated on a regular basis. The cash budget is a major component of a
cash planning system and represents the overall plan of activity that depicts cash inflows and
outflows for a stated period of time. A future chapter provides an in-depth look at cash
budgeting.
You may tend to associate cash shortages as a sign of weakness, and, indeed, that may be true.
However, such is not always the case. A very successful company with a great product or
service may be rapidly expanding via new business locations, added inventory levels, growing
receivables, and so forth. All of these events give rise to the need for cash and can create a real
crunch even though the business is fundamentally prospering. To sustain the growth, careful
planning must occur.
STRATEGIES TO ENHANCE CASH FLOWS: As a business looks to improve cash
management or add to the available cash supply, a number of options are available. Some of
these solutions are "external" and some are "internal" in nature.
External solutions include:
Issuing additional shares of stock -- This solution has a definite advantage, because it allows the
company to obtain cash, without a fixed obligation to repay. As a result, this may seem like a
sure-fire costless option. Unfortunately, the existing shareholders do incur a very real detriment,
because the added share count dilutes their ownership proportions. In essence, it is akin to
existing shareholders selling off part of the business; a solution that may be seen as a last resort if
the future is bright.
Borrowing additional funds -- This solution brings no additional shareholders to the table, but
borrowed funds must be repaid along with interest. Thus, the business cost and risk is increased.
4. On a related note, many companies will establish a standing line of credit that enables them to
borrow as needed, and not borrow at all if funds are not needed. This solution provides a ready
source of liquidity, without actually increasing debt levels. Banks typically provide such lines of
credit in exchange for a fee based on the amount of the line of credit.
The company may look within its own operating structure to find internal cash flow
enhancements:
Accelerate cash collections -- If a company can move its customer base to pay more quickly, a
significant source of cash is found! Simple tools include electronic payment, credit cards,
lockbox systems (i.e., the establishment of bank depositories near to the customer for quick
access to funds/thereby avoiding mail and clearing delays), and cash discounts for prompt
payment.
Postponement of cash outflows -- Companies may "drag their feet" on cash outflows, delaying
payment as long as possible. In addition, paying via check sent through the mail allows use of
the "float" to preserve cash on hand. However, you need to know that it is illegal to issue a
check when there are insufficient funds in the bank to cover that item (even if you know a
deposit is forthcoming that will cover the check). Some companies make travel advances to
employees for anticipated costs to be incurred on an upcoming trip; it is better for cash flow to
have the employee incur the cost (perhaps on a credit card) and then submit receipts for
reimbursement.
Cash control -- Systems and procedures should be adopted to safeguard an organization's funds.
Internal control for cash is based on the same general control features introduced in the previous
chapter; access to cash should be limited to a few authorized personnel, incompatible duties
should be separated, and accountability features (like prenumbered checks, etc.) should be
developed.
The control of receipts from cash sales should begin at the point of sale and continue
through to deposit at the bank. Specifically, cash registers (or other point-of-sale
terminals) should be used, actual cash on hand at the end of the day should be compared
5. to register tapes, and daily bank deposits should be made. Any cash shortages or excesses
should be identified and recorded in a Cash Short & Over account.
Control of receipts from customers on account begins when payments are received (in the
mail or otherwise). The person opening the mail should prepare a listing of checks
received and forward the list to the accounting department. The checks are forwarded to a
cashier who prepares a daily bank deposit. The accounting department enters the
information from the listing of checks into the accounting records and compares the
listing to a copy of the deposit slip prepared by the cashier.
The controls over cash disbursements include procedures that allow only authorized
payments for actual expenditures and maintenance of proper separation of duties. Control
features include requiring that significant disbursements be made by check, performance
of periodic bank reconciliations, proper utilization of petty cash systems, and verification
of supporting documentation before disbursing funds.
The bank reconciliation and petty cash systems referred to above have specific accounting
implications to consider, and are the subject of the following sections of this chapter.
BANK RECONCILIATION
BANK RECONCILIATION: One of the most common cash control procedures, and one which
you may already be performing on your own checking account, is the bank reconciliation. In
business, every bank statement should be promptly reconciled by a person not otherwise
involved in the cash receipts and disbursements functions. The reconciliation is needed to
identify errors, irregularities, and adjustments for the Cash account. Having an independent
person prepare the reconciliation helps establish separation of duties and deters fraud by
requiring collusion for unauthorized actions.
There are many different formats for the reconciliation process, but they all accomplish the same
objective. The reconciliation compares the amount of cash shown on the monthly bank
statement (the document received from a bank which summarizes deposits and other credits, and
checks and other debits) with the amount of cash reported in the general ledger. These two
balances will frequently differ. Differences are caused by items reflected on company records
6. but not yet recorded by the bank; examples include deposits in transit (a receipt entered on
company records but not processed by the bank) and outstanding checks (checks written which
have not cleared the bank). Other differences relate to items noted on the bank statement but not
recorded by the company; examples include nonsufficient funds (NSF) checks ("hot" checks
previously deposited but which have been returned for nonpayment), bank service charges, notes
receivable (like an account receivable, but more "formalized") collected by the bank on behalf of
a company, and interest earnings.
The following format is typical of one used in the reconciliation process. Note that the balance
per the bank statement is reconciled to the "correct" amount of cash; likewise, the balance per
company records is reconciled to the "correct" amount. These amounts must agree. Once the
correct adjusted cash balance is satisfactorily calculated, journal entries must be prepared for all
items identified in the reconciliation of the ending balance per company records to the correct
cash balance. These entries serve to record the transactions and events which impact cash but
have not been previously journalized (e.g., NSF checks, bank service charges, interest income,
and so on).
COMPREHENSIVE ILLUSTRATION OF BANK RECONCILIATION:
The following illustration provides a detailed example of a bank statement, additional data, the
reconciliation process, and the corresponding journal entries. Conducting a bank reconciliation
7. requires careful attention to the slightest of details. Even the smallest error will lead to
frustration in trying to bring closure to the reconciliation effort.
ADDITIONAL DATA
The above bank statement is for The Tackle Shop for July of 20X3. The following additional
data is needed to reconcile the account:
The first check listed above, #5454, was written in June but did not clear the bank until
July 2.
There were no other outstanding checks, and no deposits in transit at the end of June.
The EFT (electronic funds transfer) on July 11 relates to the monthly utility bill; The
Tackle Shop has authorized the utility to draft their account directly each month.
The Tackle Shop is optimistic that they will recover the full amount, including the service
charge, on the NSF check ("hot check") that was given to them by a customer during the
month.
8. The bank collected a $5,000 note for The Tackle Shop, plus 9% interest ($5,450).
The Tackle Shop's credit card clearing company remitted funds on July 25; the Tackle
Shop received an email notification of this posting and simultaneously journalized this
cash receipt in the accounting records.
The Tackle Shop made the 2 deposits listed above, and an additional deposit of $3,565.93
late in the afternoon on July 31, 20X3.
The ending cash balance, per the company general ledger, was $47,535.30.
The following check register is maintained by The Tackle Shop, and it corresponds to the
amounts within the Cash account in the general ledger:
BANK RECONCILIATION
The bank reconciliation for July is determined by reference to the above bank statement and
other data. You must carefully study all of the above data to identify deposits in transit,
9. outstanding checks, and so forth. Be advised that tracking down all of the reconciling items can
be a rather tedious, sometimes frustrating, task. Modern bank statements facilitate this process
by providing sorted lists with asterisks beside the check numbers that appear to have gaps in their
sequence numbering. Below is the reconciliation of the balance per bank statement to the
correct cash balance. You should try to identify each item in this reconciliation within the
previously presented data. If you need help - click here!
The reconciliation of the balance per company records to the correct cash balance is presented
at left. This reconciliation will trigger various adjustments to the Cash account in the company
ledger. If you need a little help finding the noted items, click here. The identified items caused
cash to increase by $4,968.21 ($52,503.51 correct balance, less the balance on the company
records of $47,535.30). Most of these amounts are fairly intuitive, except for the $462.06 debit
to Accounts Receivable -- which indicates that The Tackle Shop is going to attempt to collect on
the NSF check and related charge. The interest income of $569.34 reflects that posted by the
bank ($119.34) plus the $450 on the collected note.
10. 7-31-X3 Cash 4,968.21
Utilities Expense 109.07
Accounts Receivable 462.06
Miscellaneous Expense 30.00
Notes Receivable 5,000.00
Interest Income 569.34
To record adjustments necessitated by
bank reconciliation
Even this fairly simple bank reconciliation demonstrates the pressing need for monthly
reconciliations. Without a reconciliation, company records would soon become unreliable as the
process draws attention to various needed adjustments.
PROOF OF CASH: Many a business prepares a reconciliation just like that above. But, you
should note that it leaves one gaping hole in the control process. What if you learned that the
bank statement included a $5,000 check to an employee near the beginning of the month, and a
$5,000 deposit by that employee near the end of the month (and these amounts were not recorded
on the company records)? In other words, the employee took out an unauthorized "loan" for a
while. The reconciliation would not reveal this unauthorized activity because the ending
11. balances are correct and in agreement. To overcome this deficiency, some companies will
reconcile not only the beginning and ending balances, but also the total checks per the bank
statement to the total disbursements per the company records, and the total deposits per the bank
statement to the total receipts on the company accounts. If a problem exists, the totals on the
bank statement will exceed the totals per the company records for both receipts and
disbursements. This added reconciliation technique is termed a proof of cash. It is highly
recommended where the volume of transactions and amount of money involved is very large.
Such unauthorized "borrowing" not only steals company interest income, but it also presents a
risk of loss if the company funds are not replaced. Make no mistake, such schemes are highly
illegal!
Also illegal is "kiting." Kiting occurs when one opens numerous bank accounts at various
locations and then proceeds to write checks on one account and deposit them to another. In turn,
checks are written on that account, and deposited to yet another bank. And, over and over and
over. In time, each of the bank accounts may appear to have money, but it is illusionary, because
there are numerous checks "floating" about that will hit and reduce the accounts. Somewhere in
the process of running this scam, the crook makes off with a cash withdrawal (or writes a check
that appears to be good to an unsuspecting merchant) and skips town. That is why you will often
see bank notices that deposited funds cannot be withdrawn for several days; they have been
burned once too often, and want to be sure that a deposit clears the bank on which it is drawn
before releasing those funds. Now, the point of this discussion is not to give you any ideas -- but
to alert you to be careful in your dealings with others. Kiting is complex and illegal, and many a
person is "doing time" in jail for such dealings. Enhanced electronic clearing procedures adopted
by banks in recent years have made kiting far more difficult to accomplish.
PETTY CASH
PETTY CASH: Petty cash, also known as imprest cash, is a fund established for making small
payments that are impractical to pay by check. Examples include postage due, reimbursement to
employees for small purchases of office supplies, and numerous similar items. The
establishment of a petty cash system begins by making out a check to cash, cashing it, and
placing the cash in a petty cash box:
12. A petty cash custodian should be designated to have responsibility for safeguarding and making
payments from this fund. At the time the fund is established, the following journal entry is
needed. This journal entry, in essence, subdivides the petty cash portion of available funds into a
separate account.
1-31-X4 Petty Cash 1,000
Cash 1,000
To establish a $1,000 petty cash fund
Policies should be established regarding appropriate expenditures (type and amount) that can be
paid from petty cash. When a disbursement is made from the fund by the custodian, a receipt
should always be placed in the petty cash box. The receipt should clearly set forth the amount
and nature of expenditure. The receipts are sometimes known as petty cash vouchers.
Therefore, at any point in time, the receipts plus the remaining cash should equal the balance of
the petty cash fund (i.e., the amount of cash originally placed in the fund and recorded by the
entry above).
REPLENISHMENT OF PETTY CASH: As expenditures occur, cash in the box will be
depleted. Eventually the fund will require replenishment back to its original level. To replenish
13. the fund, a check for cash is prepared in an amount to bring the fund back up to the desired
balance. The check is cashed and the proceeds are placed in the petty cash box. At the same
time, receipts are removed from the petty cash box and formally recorded as expenses.
The journal entry for this action involves debits to appropriate expense accounts as represented
by the receipts, and a credit to Cash for the amount of the replenishment. Notice that the Petty
Cash account is not impacted -- it was originally established as a base amount and its balance has
not been changed by virtue of this activity.
2-28-X4 Supplies Expense 390
Fuel Expense 155
Miscellaneous Expense 70
Cash 615
To replenish petty cash; receipts on
hand of $615 -- office supplies ($390),
gasoline ($155), coffee and drinks
($70). Remaining cash in the fund
was $385, bringing the total to $1,000
($615 + $385).
CASH SHORT AND OVER: Occasionally, errors will occur, and the petty cash fund will be out
of balance. In other words, the sum of the cash and receipts differs from the correct Petty Cash
balance. This might be the result of simple mistakes, such as math errors in making change, or
perhaps someone failed to provide a receipt for an appropriate expenditure. Whatever the cause,
the available cash must be brought back to the appropriate level. The journal entry to record full
replenishment may require an additional debit (for shortages) or credit (for overages) to Cash
14. Short (Over). In the following entry, $635 is placed back into the fund, even though receipts
amount to only $615. The difference is debited to Cash Short (Over):
2-28-X4 Supplies Expense 390
Fuel Expense 155
Miscellaneous Expense 70
Cash Short (Over) 20
Cash 635
To replenish petty cash; receipts on
hand of $615 -- office supplies ($390),
gasoline ($155), coffee and drinks
($70). Remaining cash in the fund
was $365, bringing the total to $980
($615 + $365; a $20 shortage was
noted and replenished.
The Cash Short (Over) account is an income statement type account. It is also applicable to
situations other than petty cash. For example, a retailer will compare daily cash sales to the
actual cash found in the cash register drawers. If a surplus or shortage is discovered, the
difference will be recorded in Cash Short (Over); a debit balance indicates a shortage (expense),
while a credit represents an overage (revenue). As a means of enforcing accountability, some
companies may pressure employees to reimburse cash shortages.
INCREASING THE BASE FUND: As a company grows, it may find a need to increase the base
size of its petty cash fund. The entry to increase the fund would be identical to the first entry
illustrated above; that is, the amount added to the base amount of the fund would be debited to
Petty Cash and credited to Cash. Otherwise, take note that the only entry to the Petty Cash
account occurred when the fund was established -- subsequent reimbursements of the fund did
not change the Petty Cash account balance.
TRADING SECURITIES
15. TRADING SECURITIES: From time to time a business may invest cash in stocks of other
corporations. Or, a company may buy other types of corporate or government securities.
Accounting rules for such investments depend on the "intent" of the investment. If these
investments were acquired for long-term purposes, or perhaps to establish some form of control
over another entity, the investments are classified as noncurrent assets. The accounting rules for
those types of investments are covered in subsequent chapters. But, when the investments are
acquired with the simple intent of generating profits by reselling the investment in the very near
future, such investments are classified as current assets (following cash on the balance sheet).
These investments are appropriately known as "trading securities."
Trading securities are initially recorded at cost (including brokerage fees). However, the value of
these readily marketable items may fluctuate rapidly. Subsequent to initial acquisition, trading
securities are to be reported at their fair value. The fluctuation in value is reported in the income
statement as the value changes. This approach is often called "mark-to-market" or "fair value"
accounting. Fair value is defined as the price that would be received from the sale of an asset in
an orderly transaction between market participants.
AN ILLUSTRATION: Assume that Webster Company's management was seeing a pickup in
their business activity, and believed that a similar uptick was occurring for its competitors as
well. One of its competitors, Merriam Corporation, was a public company, and its stock was
trading at $10 per share. Webster had excess cash earning very low rates of interest, and decided
to invest in Merriam -- intending to sell the investment in the very near future for a quick profit.
The following entry was needed on March 3, 20X6, the day Webster bought stock of Merriam:
3-3-X6 Trading Securities 50,000
Cash 50,000
To record the purchase of 5,000
shares of Merriam stock at $10 per
share
Next, assume that financial statements were being prepared on March 31. Despite Webster's
plans for a quick profit, the stock declined to $9 per share by March 31. Webster still believes in
16. the future of this investment, and is holding all 5,000 shares. But, accounting rules require that
the investment "be written down" to current value, with a corresponding charge against income.
The charge against income is recorded in an account called Unrealized Loss on Investments:
3-31-X6 Unrealized Loss on Investments 5,000
Trading Securities 5,000
To record a $1 per share decrease in
the value of 5,000 shares of Merriam
stock
Notice that the loss is characterized as "unrealized." This term is used to describe an event that is
being recorded ("recognized") in the financial statements, even though the final cash
consequence has not yet been determined. Hence, the term "unrealized."
April had the intended effect, and the stock of Merriam bounced up $3 per share to $12. Still
Webster decided to hang on for more. At the end of April, another entry is needed if financial
statements are again being prepared:
4-30-X6 Trading Securities 15,000
Unrealized Gain on Investments 15,000
To record a $3 per share increase in
the value of 5,000 shares of Merriam
stock
Notice that the three journal entries now have the trading securities valued at $60,000 ($50,000 -
$5,000 + $15,000). This is equal to their market value ($12 X 5,000 = $60,000). The income
statement for March includes a loss of $5,000, but April shows a gain of $15,000. Cumulatively,
the income statements show a total gain of $10,000 ($5,000 loss + $15,000 gain). This
cumulative gain corresponds to the total increase in value of the original $50,000 investment.
17. The preceding illustration assumed a single investment. However, the treatment would be the
same even if the trading securities consisted of a portfolio of many investments. That is, each
and every investment would be adjusted to fair value.
RATIONALE FOR FAIR VALUE ACCOUNTING: The fair value approach is in stark contrast
to the historical cost approach used for other assets like land, buildings, and equipment. The
rationale is that the market value for trading securities is readily determinable, and the periodic
fluctuations have a definite economic impact that should be reported. Given the intent to dispose
of the investments in the near future, the belief is that the changes in value likely have a
corresponding effect on the ultimate cash flows of the company. As a result, the accounting
rules recognize those changes as they happen.
ALTERNATIVE: A VALUATION ADJUSTMENTS ACCOUNT: As an alternative to directly
adjusting the Trading Securities account, some companies may maintain a separate Valuation
Adjustments account that is added to or subtracted from the Trading Securities account. The
results are the same; the reason for using the alternative approach is to provide additional
information that may be needed for more complex accounting and tax purposes. One such
purpose is to determine the "taxable gain or loss" on sale. Tax rules generally require comparing
the sales price to the original cost (you may be surprised to learn that tax rules sometimes differ
from accounting rules -- the mark-to-market approach used for accounting is normally not
acceptable for tax purposes). There are also more involved accounting rules relating to
measurement of the "realized" gains and losses when the securities are in fact sold. Those rules
are ordinarily the subject of more advanced courses.
DIVIDENDS AND INTEREST: Since trading securities are turned over rather quickly, the
amount of interest and dividends received on those investments is probably not very significant.
18. However, any dividends or interest received on trading securities is reported as income and
included in the income statement:
9-15-X5 Cash 75
Dividend Income 75
To record receipt of dividend on
trading security investment
The presence or absence of dividends or interest on trading securities does not change the basic
mark-to-market valuation for the Trading Securities account.
DERIVATIVES: Beyond the rather straight-forward investments in trading securities are an
endless array of more exotic investment options. Among these are commodity futures, interest
rate swap agreements, options related agreements, and so on. These investments are generally
referred to as derivatives, because their value is based upon or derived from something else (e.g.,
a cotton futures contract takes its value from cotton, etc.). The underlying accounting approach
follows that for trading securities. That is, such instruments are initially measured at fair value,
and changes in fair value are recorded in income as they happen.
QUESTIONS
MULTIPLE CHOICE QUESTIONS
Select the appropriate response.
1. The Cash account on the balance sheet should not include which of the following items?
a. Travel advances to employees
b. Currency
c. Money orders
d. Deposits in transit
HELP ME!
2. A credit memorandum accompanying a bank statement would occur for which of the following items?
a. A previously deposited customer check which was returned NSF.
b. Bank service charges for the month.
c. The proceeds of a note collected by the bank are deposited to the account.
d. Each of the above.
19. HELP ME!
3. When reconciling the ending cash balance per the bank statement to the correct adjusted cash
balance, how would deposits in transit be handled?
a. Added to the balance per the bank statement.
b. Subtracted from the balance per the bank statement.
c. Added to the balance per company records.
d. Ignored.
HELP ME!
4. A bank reconciliation sometimes points to the need for adjusting entries. In general, the source of the
adjustments is:
a. the reconciliation of the ending balance per the bank statement to the adjusted cash balance.
b. the reconciliation of the cash balance per the company records to the adjusted cash balance.
c. both a and b.
d. none of the above.
HELP ME!
5. Malory Company provides the following information about the month-end bank reconciliation:
Ending cash per bank statement $1,367
Ending cash per company records 7,383
Monthly bank service charge 25
Deposits in transit at month-end 8,345
Outstanding checks at month-end 2,399
Customer check returned NSF 45
The correct ending cash balance is:
a. $4,914
b. $7,268
c. $7,313
d. $7,383
HELP ME!
6. Malory Company provides the following information about the month-end bank reconciliation:
Ending cash per bank statement $1,367
Ending cash per company records 7,383
Monthly bank service charge 25
Deposits in transit at month-end 8,345
Outstanding checks at month-end 2,399
Customer check returned NSF 45
20. What journal entry should be recorded to cause the company records to be correct?
a. Cash 70
Cash Short & Over 70
b. Miscellaneous Expense 70
Cash 70
c. Miscellaneous Expense 25
Accounts Receivable 45
Cash 70
d. Miscellaneous Expense 2,399
Cash 2,399
HELP ME!
7. When using a petty cash system, the replenishment of the fund would normally include a debit to:
a. Cash.
b. Petty Cash.
c. Revenues.
d. None of the above.
HELP ME!
8. The trading securities owned by a company are:
a. reported on the balance sheet as a current asset.
b. reported on the balance sheet as a noncurrent asset.
c. reported on the balance sheet as a contra-equity account.
d. reported on the balance sheet as a reduction of liabilities.
HELP ME!
9. During its first year of operation, Lenton Company acquired three investments in trading securities.
Investment A cost $50,000 and had a year-end market value of $60,000. Investment B cost $35,000 and
had a year-end market value of $17,000. Investment C cost $26,000 and had a year-end market value of
$24,000. What amount should be reported as a charge against income in Lenton's income statement for
the first year of operation?
a. $0
b. $10,000
c. $20,000
d. $30,000
HELP ME!
10. During its first year of operation, Lenton Company acquired three investments in trading securities.
Investment A cost $50,000 and had a year-end market value of $60,000. Investment B cost $35,000 and
had a year-end market value of $17,000. Investment C cost $26,000 and had a year-end market value of
$24,000. The journal entry to record the decline in market value would include:
21. a. a debit to Unrealized Loss on Trading Securities.
b. a credit to Unrealized Gain on Trading Securities.
c. a debit to Trading Securities.
d. At least two of the above.
HELP ME!
22. 1. a. Travel advances to employees are really a nontrade receivable -- the employee either has to return
the money or provide an accounting to indicate how the money was spent. Currency and money orders
are both cash because they are acceptable to a bank for deposit and can be used to satisfy debts.
Deposits in transit are cash; the bank simply has not posted the deposit to a specific account.
2. c. A credit memorandum issued by a bank indicates that a bank account has been increased. Of the
noted items, only answer "c" relates to a transaction which increases cash.
3. a. Deposits in transit must be added to the balance per the bank statement. These are amounts of
cash which belong to the company, but which have not as yet been recorded by the bank. The balance
per company records should already include these amounts, so answer "c" is incorrect.
4. b. The cash balance per company records is the amount of cash in the general ledger account before
the reconciliation. The correct amount of cash actually possessed by the firm is the adjusted cash
balance, per the reconciliation. Logically, the reconciliation of the cash balance per company records to
the correct amount of cash points to the need for a journal entry to update the Cash account.
5. c. The correct ending cash balance is $7,313:
Ending balance per bank statement $1,367
Add: Deposits in transit 8,345
Deduct: Outstanding checks (2,399)
Adjusted cash balance: bank $7,313
Ending balance per company records $7,383
Deduct:
NSF Check -- 45
Service charge -- 25
(70)
Adjusted cash balance: company records $7,313
23. 6. c. The correct entry is based on the reconciliation of the ending cash balance per company records to
the adjusted cash balance:
Accounts Receivable 45
Miscellaneous Expense 25
Cash 70
To record adjustments necessitated by
bank reconciliation
7. d. Various expense accounts are debited and Cash is credited.
8. a. Trading securities are normally reported as current assets.
9. b. Aggregate cost equals $111,000 ($50,000 + $35,000 + $26,000). Aggregate market value equals
$101,000 ($60,000 + $17,000 + $24,000). The $10,000 difference is a decline which is reported as an
unrealized loss.
10. a. The appropriate entry is to debit Unrealized Loss on Trading Securities and credit Trading
Securities for $10,000. Choice "a" is the only correct choice.
EXAM CHECKLIST
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and
check-off each noted item to be certain that important concepts have not been overlooked in your study.
Know which items are properly classified as cash, and which are not.
Why is cash management important?
Define cash planning and cash control.
Discuss ways in which cash flows can be accelerated or delayed.
What are features of a typical cash control system?
Be able to recite at least three typical control features related to both cash receipts and cash
disbursements.
Why are bank reconciliations necessary?
What items are likely to be included on the company records, but not the bank records?
24. What items are likely to be included on the bank records, but not the company records?
Be able to create and solve a complex problem requiring a bank reconciliation.
Which items on a bank reconciliation require an adjusting journal entry, and why?
What is the benefit of a petty cash system?
Be able to explain the operation of a petty cash system.
Prepare journal entries to establish and replenish a petty cash system, including situations involving
cash shortages.
Be able to explain the enhancement to internal control that results from a petty cash system.
Name several examples of trading securities, how they are initially recorded, and where they are
positioned on the balance sheet.
What method is used to account for trading securities?
Be totally familiar with the operation (journal entries and financial statement impact) of the fair value
method for trading securities, including cases involving increases and decreases in value.
Know how to record dividends received.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
bank reconciliation
A control procedure to establish and verify the correc
balance via identification of errors, irregularities, and
adjustments
bank statement
The document received from a bank which summariz
deposits and other credits, and checks and other deb
bank account
cash
Items acceptable to a bank for deposit and free from
restrictions to satisfying current debts; includes coins
currency, bank deposits, etc.
cash budget
A major component of a cash planning system that d
cash inflows and outflows for a stated period of time
cash equivalents
Short-term interest-earning financial instruments that
deemed to be highly secure and will convert back int
within 90 days
25. compensating balance
An amount that must be left on deposit and cannot b
withdrawn
deposit in transit
Receipts entered on company records but not yet po
the bank
derivatives
Investments accounted for a fair value that generally
their value from some other item; examples include
commodity futures, options, and so forth
fair value accounting
Sometimes called "mark-to-market;" to record an inv
at its fair value and recognize changes in value as it
NSF check
Nonsufficient funds check; a customer check returne
lack of funds (a "hot check")
outstanding checks
Checks entered on company records but not yet clea
the bank
petty cash
A fund established for making small payments that a
impractical to pay by check; also known as imprest c
fund
proof of cash
A detailed bank reconciliation that verifies not only be
and end balances, but also validates deposits and
withdrawals during the month
trading securities
Investments acquired with the intent of generating pr
reselling the investment in the very near future; class
current assets