HI5001 Accounting for Business Decisions

TOPIC 7
Cash Management & Control
 Introduction
In this session, the following areas will be
discussed:
What constitutes “cash”?
Control of cash
Bank Reconciliations
Use of a Petty cash account
Cash Budgeting
Management of cash
 Cash Defined
•Cash includes
• Money
• Duplicates of credit card and EFTPOS sales
• Negotiable instruments
• Cheque (though this “vehicle” is fast becoming
obsolete due to EFT options being safer, faster,
simpler and cheaper)
• postal note
• that a financial institution will accept
• The sum of all cash is reported (generally) as a single
line item in the current assets section of BS.
 Control of Cash
•Cash is the asset most subject to theft
•Need a good internal control system for handling
cash and recording cash transactions
•3 important principles:
1. Separation of responsibility for handling and
custodianship of cash from maintaining records for
cash
2. Banking intact each day’s cash receipts
3. Making all payments by electronic transfer or by
cheque
 Control of Cash Receipts
•Cash received through the mail
• Control relies heavily on separation of record
keeping and custodianship
•Cash receipts from cash sales
• Use of cash register
• Pre-numbered sales dockets
•Cash short and over
• Cash shortage is recorded when daily sales are
recorded
 Control of Cash Receipts (cont.)
Internal Control Concept Application
Clear responsibility Designated cashiers
Separation of recording Handling cash and
and assets recording receipts
Division of Mail clerk records
responsibility receipts while
supervised
Mechanical and Cash registers and
electronic devices EFTPOS equipment
Physical control Use of a safe to
store cash
 Control of Cash Payments
Internal Control Concept
Clear responsibility
Separation of recording
and assets
Division of responsibility
Mechanical and electronic
devices
Physical control
Application
Authorisation of payment
Signing cheques and
recording payments
Authorisation of payment
and signing of cheque
Cheque printing machine
to prevent changes
Use safe to store blank
cheques
 Bank Accounts & Reconciliation

•Cheque accounts
• Essential element of internal control
• Source documents
•Use of electronic funds transfer
• Reduces processing costs
•The bank statement
• Record of transactions from the bank
NOTE:
The bank statement presents from the bank’s
position, not from the customers. DR to you will
be CR to them.
 Bank Reconciliation
•Balance per books rarely agrees with balance as
per bank statement
•Differences include:
Outstanding cheques
Deposits in transit
Other transactions
• Service and bank charges
• Charges for dishonoured cheques
• Interest
• EFT transactions
 Bank Reconciliation (cont.)
•Reconciliation procedure
•Need to have
• Last bank reconciliation
• Cash receipts and cash payments journals for the
period
• Cash at bank ledger account
• Bank statement for the period since the last
reconciliation
 Bank Reconciliation (cont.)
Steps in process
Check that all items from previous reconciliation
are cleared
Compare the bank statement DRs to cash
payments records and mark off common items
Compare bank statement CRs to cash receipts
records and mark off common items
 Bank Reconciliation (cont.)
•Update cash records:
• i) Unmarked Dr items on the bank statement
•  cash payments journal
• ii) Unmarked Cr items on the bank statement
•  cash receipts journal
•Items in the cash receipts/payments records
remaining unmarked indicate transactions not yet
recorded by the bank
• Outstanding cheques
• Unrecorded deposits
 Bank Reconciliation (cont.)
R. Robson & Son
Bank Reconciliation Statement
30 June 2015
Balance as per bank statement Cr (or Dr) $XXX
Add (or deduct) outstanding deposits XXX
XXX
Deduct (or add) unpresented cheques $XX
XX
XX XXX
Balance as per Cash at Bank account Dr (or Cr) $XXX
 In-class Worked Example
Sandy Bottom (finance advisor) receives her bank statement (as at 30/6/15)
with a credit balance of $95,024. Her “Cash at bank” account shows
$90,902 as at the same date. The following information will assist you to
prepare a bank reconciliation:

1. 30/6/15 receipts for $3,640 not deposited

2. Cheque Nos 856: $2,200, 861: $1,894, 863: $576 and 864: $2,266 not
presented
3. Cheque for $624 returned as dishonoured (I Pore)
4. $1,500 deposit by S. Beach incorrectly credited to S. Bottom account
5. Bank fees amount to $50
 Solution
Balance per Bank statement $95,024
Add: Deposits in transit 3,640
Total $98,664
Less:
Cheques not presented (total) $6,936
Cheque incorrectly recorded 1,500 8,436
Total $90,228

Balance per Cash at bank $90,902

Less:
Dishonoured cheque $624
Bank fees 50 674
$90,228
 Petty Cash
A fund used within a business to streamline
those small activities which cash is required,
generally at short notice and with a limit set.
Petty cash funds usually range from $200-400
(float) and cover such immediate expenses such
as taxi fares, coffee/milk, postage stamps, etc.
Limit of expense set by management but
generally less than $100 for a single transaction.
 The Petty Cash Fund
Establishing the fund
Making payments from the fund
• Petty cash voucher or receipt
• amount
• purpose
• date

Jan 2 Petty cash 100

Cash at bank 100
Petty cash fund established
 The Petty Cash Fund (cont.)
Reimbursing the fund
Jan 31 Stationery expense 15.22
Office supplies expense 12.30
Postage expense 56.47
GST Outlays 8.40
Cash at bank 92.39
Petty cash fund reimbursement

Note: If special journals this entry would be recorded

in the cash payments journal
 Cash Budgeting
•Need for cash budgeting
• Projection of anticipated future receipts and
payments
• Non-cash items excluded
• Will ensure:
• Entity can meet commitments and maintain credit
standing
• Assessment of expenditure
• Borrowings (and interest) minimised
• Surplus funds utilised
 CITY ENTERPRISES
Cash Budget
for 2 months ending 31 December 2015
November December
Cash at bank, beginning of month $ 800 $ 6,614
Expected cash collections from sales:
Cash 36,300 38,500
Credit 34,320 36,080
Total cash from sales 70,620 74,580
Total cash available $ 71,420 $ 81,194
Expected cash payments:
Purchases $ 36,652 $ 38,808
Wages 16,000 16,000
Rent 4,620 4,620
Advertising 3,300 4,400
Purchase of printer 900
GST payable to ATO 2,344 2,258
T. Duncan, drawings 900 900
Total expected payments $ 64,806 $ 66,986
Cash at bank, end of month $ 6,614 $ 14,208
 Cash Management
The final area we look at is cash management
Managing the inflows and outflows of cash is
vitally important. Being profitable does not
always mean that a business is in a good
financial position.
There are a number of considerations for good
cash management (next slide)
 Cash Management (cont.)
•Principles of cash management
• Revenue collection time for accounts receivable
• Postpone payments to accounts payable
• Keep inventory levels to a minimum
• Invest surplus cash
• Plan for capital expenditures
•Analysing adequacy of cash flows
• Short-term cash flow adequacy ratio
• Cash flow adequacy ratio
 Cash Management (cont.)
Revenue collection time for accounts receivable.
This means keeping track of debtors, ensuring
that they adhere to credit terms,
There should be strict credit terms and
conditions such as 30 day terms. Non-payment by
45 days, suspension of credit facility. If 60 days,
then credit facility closed and to a collection
agency.
Also consider discount incentives for early
payment.
 Tutorial
Topic 7
Cash Management & Control
Reading:
Hoggett & Edwards Chapter Eleven

Questions:
Hoggett & Edwards Chapter 11
Discussion Questions: 3, 4 & 11
Exercise 11.1
Problems: 11.1, 11.7, 11.8, 11.9 & 11.10
Decision Case
Ethical Issues
THE END