CASH & CASH EQUIVALENTS Cash includes money and any other negotiable instrument that is payable in money

y and acceptable by the bank for deposit and immediate credit. - includes checks, bank drafts and money orders because these are acceptable by the bank for deposit or immediate encashment. The following cash items are included in cash: a. Cash on hand undeposited cash collections and other cash items awaiting deposit. b. Cash in bank demand deposit or checking account and saving deposit which are unrestricted as to withdrawal. c. Cash fund set aside for current purposes such as petty cash fund, payroll fund and dividend fund. Cash equivalents these are short-term and highly liquid investments that are readily convertible into cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Examples: a. Three-month BSP treasury bill b. Three-year BSP treasury bill purchased three months before date of maturity c. Three-month time deposit d. Three-month money market instrument Valuation of cash Cash is valued at face value. Cash in foreign currency is valued at the current exchange rate. Financial statement presentation The caption cash and cash equivalents should be shown as the first item among the current assets. Its details should be disclosed in the notes to financial statements. Bank overdraft When the cash in bank account has a credit balance, it is said to be an overdraft. The credit balance in the cash in bank account results from the issuance of checks in excess of the deposits. A bank overdraft is classified as a current liability and should not be offset against other bank accounts with debit balances. Except if the amount is not material and if the entity maintains two or more accounts in one bank and one accounts results to an overdraft. IMPREST SYSTEM The imprest system is a system of control of cash which requires that all cash receipts should be deposited intact and all cash disbursements should be made by means of a check. While internal control ideally requires that all payments should be made by means of a check, this is sometimes impossible. There are occasions when the issuance of checks becomes impractical or inconvenient. In such instances, it may be more economical and convenient to pay in cash rather than issue checks. Therefore it becomes necessary to establish a petty cash fund money set aside to pay small expenses which cannot be paid conveniently by means of check.
1

Two methods of handling petty cash: a. Imprest fund system b. Fluctuating fund system Accounting Procedures a. Establishment of the fund b. Payment of expenses out of the petty cash fund Imprest Fund System Petty cash fund xx Cash in bank xx No formal journal entries are made. The petty cashier generally requires a signed petty cash voucher for such payments and simply prepares a memorandum entries in the petty cash journal. Expenses xx Cash in bank xx Unreplenished expenses are adjusted in order to state the correct petty cash balance as follows: Expenses xx Petty cash fund xx Petty cash fund xx Cash in bank xx Cash in bank xx Petty cash fund xx Fluctuating Fund System Petty cash fund Cash in bank Expenses Petty cash fund xx xx xx xx

c. Replenishment of petty cash payments d. At the end of the accounting period.

Petty cash fund xx Cash in bank xx No adjustment is necessary because the petty cash expenses are recorded outright.

e. Increase in the fund f. Decrease in the fund

Petty cash fund Cash in bank Cash in bank Petty cash fund

xx xx xx xx

Accounting for cash shortage or overage. The cash short or over account is a temporary or suspense account. It is adjusted upon preparation of financial statements. Note that whether cash shortage or overage, the offsetting account is cash short or over account.
If the cashier or custodian is held responsible for the cash shortage. Due from cashier is a receivable. If reasonable efforts fails to disclose the cause of the shortage.

Adjustment for cash shortage: Due from cashier Cash short or over Loss from cash shortage Cash short or over Adjustment for cash overage: Cash short or over Miscellaneous Income Cash short or over Payable to cashier

xx xx xx xx

The cash overage is treated as miscellaneous income if there is no claim on the same. If the cash overage is found to be the money of the cashier.

xx xx xx xx

BANK RECONCILIATION A bank reconciliation is a statement which brings into agreement the cash balance per book and cash balance per bank. It us usually prepared monthly because the bank provides the depositor with the bank statement at the end of every month. A bank statement is a monthly report of the bank to the depositor showing the cash balance per bank at the beginning, the deposits acknowledged, the checks paid, other charges and credits and the daily cash balance per bank during the month. Reconciling items 1. Book reconciling items: a. Credit memos b. Debit memos c. Errors

2. Bank reconciling items a. Deposits in transit b. Outstanding checks c. Errors

Credit memos items not representing deposits credited by the bank to the account of the depositor but not yet recorded by the depositor as cash receipts. They have the effect of increasing the bank balance. Examples: a. Notes collected by the bank in favor of the depositor & credited to the depositors account. b. Proceeds of bank loan credited to the account of the depositor. Debit memos items not representing checks paid by bank which are charged or debited by the bank to the account of the depositor but not yet recorded by the depositor as cash disbursements. Examples: a. NSF or no sufficient fund checks checks deposited but returned by the bank because of insufficiency of fund. b. Bank service charges include bank charges for interest, collection, checkbook and penalty. c. Reduction of loan amount deducted from the current account of the depositor in payment for loan which the depositor owed to the bank and which has already matured. d. Technically defective checks checks deposited but returned by bank due to technical defects such as mutilated checks, erasures not countersigned, absence of signature or countersignature, etc. Deposits in transit collections already recorded by the depositor as cash receipts but not yet reflected on the bank statement. Outstanding checks checks already recorded by the depositor as cash disbursements but not yet reflected on the bank statement. These include: a. Checks drawn and already given to payees but not yet presented for encashment by the payees. b. Certified checks A certified check is one where the bank has stamped on its face the word accepted or certified indicating sufficiency of fund. When the bank certifies a check, the account of the depositor is immediately debited or charged to insure the eventual payment of the check. Certified checks should be deducted from the total outstanding checks (if included therein) because they are no longer outstanding for bank reconciliation purposes.
3

Forms of bank reconciliation a. Adjusted balance method under this method, the book balance and the bank balance are brought to a correct cash balance that must appear on the balance sheet. This is the preferable method. b. Book to bank method under this method, the book balance is reconciled with the bank balance or the book balance is adjusted to equal the bank balance. c. Bank to book method under this method, the bank balance is reconciled with the book balance or the bank balance is adjusted to equal the book balance. Proforma reconciliation a. Adjusted balance method Book Balance Add: Credit memos Total Less: Debit memos Adjusted book balance Bank balance Add: Deposits in transit Total Less: Outstanding checks Adjusted bank balance b. Book to bank method Book Balance Add: Credit memos Outstanding checks Total Less: Debit memos Deposits in transit Bank balance c. Bank to book method Bank balance Add: Deposits in transit Debit memos Total Less: Outstanding checks Credit memos Book balance xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx

Take note that errors have no definite rule whether these are to be deducted or added. Errors will have to be analyzed for proper treatment. But errors are reconciling items of the party which committed them.

INTERNAL CONTROL Accordingly, an internal control is the process designed and effected by those charged with governance, management, and other personnel to provide reasonable assurance about the achievement of the entitys objectives with regard to the reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations. Every business, whether big or small, needs a system of internal control. Internal control therefore refers to all policies and procedures that are being implemented within an organization in order to (1) protect assets; (2) for efficient operation; (3) encourage adherence to company policies; and (4) ensure reliable reporting. It is not enough that an internal control system is present, it should also be effective. An effective internal control system has the following characteristics: Competent, reliable and ethical personnel. Employees should be competent, reliable, and ethical. Assignment of responsibility. Appropriate methods of assigning responsibility must be implemented to avoid incompatible functions and to minimize the possibility of errors because of too much work load assigned to an employee. Otherwise stated, employees are assigned with responsibilities so that each of them knows his or her duties. This avoids confusion and helps ensure that all jobs get done. Separation of duties. Assigning different people the responsibilities of authorizing transactions, recording transactions, and maintaining custody of assets is intended to reduce the opportunities to allow any person to be in a position to both perpetrate and conceal errors or fraud in the normal course of the persons duties. Internal and External audits. External audits indicates whether the financial statements are fairly presented and in accordance with GAAP. Internal audits on the other hand ensure that employees are following company policies and operations are running efficiently. Documents and records. These provide the details of business transactions. Documents include invoices and purchase orders, and records include the journals and ledgers. Documents should be prenumbered. The use of prenumbered forms helps keep track of all forms issued during a particular period. Electronic devices and computer controls. Accounting systems are relying less on documents and more on digital storage devices. Computers shift the internal controls to the people who write the programs. Programmers then become the focus of internal controls because they can write programs that transfer company assets to themselves. Other controls. Other controls can safeguard assets. This includes fidelity bonds on cashiers where an insurance company reimburses the company for any losses due mainly from employee theft. But before reimbursement, the record of the employee who is responsible for the lost fund is first investigated thoroughly by the insurance company. Other controls also include physical controls, mandatory vacation, job rotation, etc.

BUDGET A budget is a plan, expressed in quantitative terms, on how to acquire and use the resources of an entity during a certain period of time. Some advantages of budgeting 1. It compels periodic planning. 2. It enhances coordination, cooperation and communication. 3. It forces the quantification of plans and proposals. 4. It provides a framework for performance evaluation. 5. It enables the members of the organization to be aware of business costs. Cash budget Maintaining a good cash position is not an easy task. It requires good foresight and careful planning. The objective is not to accumulate as much cash as possible. Instead, good cash management intends to optimize cash balances which means having enough cash to meet liquidity needs, but not an excessive balance for this may sacrifice profitability. Excess cash must be invested in income generating assets or projects and should not keep idle in a vault or in a low-interest paying savings account. In attaining the objectives of good cash management, preparing a cash budget may prove to be useful. This budget shows the expected cash balance at the beginning of the budget period, the projected cash receipts, and disbursements during the period, and the expected ending cash balance. With cash budgeting, appropriate courses of action may be planned even before the occurrence of possible cash shortage or overage. Proforma Cash budget Company Cash Budget For the year ended ______ Cash balance, beginning Add: Estimated cash receipts -total Less: Estimated cash payments -total Cash available (shortage) before financing Less: Budgeted cash balance, ending Cash available for additional investments, or (new financing or borrowings needed) xx xx (xx) xx(xx) (xx) xx(xx)

There is no absolute prescribed form of a cash budget. The format varies depending on the needs of an entity.

CASES: Identifying the characteristics of an effective internal control system. P7-1B. An employee of Mirage Oil Company recently stole thousands of dollars of the companys cash. The company has decided to install a new system of internal controls. Required: As a consultant for Mirage Oil Company, write a memo to the president explaining how a separation of duties helps to safeguard assets. Answer: TO: Company President FROM: Consultant Date: July 27, 2011 RE: Separation of duties within the company. Separation of duties is essential for safeguarding assets. When duties are separated, the work of one employee can act as a check on the work of another employee. Thus, the likelihood of fraud or theft is greatly reduced. To minimize the risk of misappropriation of assets, the following segregation of duties should be implemented: Separation of operation from accounting. The entire accounting function should be completely separate from operating departments. Separation of the custody of assets from accounting. Accountants should not have access to assets, and those that have access to assets (such as the cashier) should not have access to the accounting records. Separation of the authorization of transactions from the custody of related assets. People who authorize transactions should not handle the related asset. Separation of duties within the accounting functions. Different people should perform the various phases of accounting to minimize errors and opportunities for fraud.

Identifying internal control weaknesses. P7-2B. Each of the following situations has an internal control weakness. Required: 1. Identify the missing internal control characteristics in each situation. 2. Identify the businesss possible problem. 3. Propose a solution to the problem.

A. Luann Sorelle employs three professional interior designers in her design studio. She is located in an area with a lot of new construction, and her business is booming. Ordinarily, Sorelle does all the purchasing of draperies, fabrics, and labor needed to complete jobs. During the summer, she takes a long vacation, and in her absence she allows each designer to purchase materials and labor. On her return, Sorelle observes that expenses are much higher and net income much lower than in the past. Answer: Missing Internal Control Characteristics Proper Authorization/ Assignment of Responsibilities. Possible Problem Lower income due to higher expenses (high cost of materials and labor to complete jobs.). Solution In the owners absence, authorize one employee to make purchases, another employee to handle/keep cash, & another employee to keep proofs of purchases.

B. Discount stores such as Target and Sams receive a large portion of their sales revenue in cash, with the remainder in credit-card sales. To reduce expenses, a store manager ceases purchasing fidelity bonds on the cashiers. Answer: Missing Internal Control Characteristics Other controls (Fidelity bonds for cashiers). Possible Problem Theft of cash. Solution Purchase fidelity bonds on all cashiers.

C. The office supply company from which Champs Sporting Goods purchases cash receipt forms recently notified Champs that the last shipped receipts were not prenumbered. Alex Champion, the owner, replied that he did not use the receipt numbers, so the omission is not important. Answer: Missing Internal Control Characteristics Documents (pre-numbered invoices or receipts.). Possible Problem Theft of cash & inefficiency. Solution Have receipts prenumbered.

D. Flowers Computer Program is a software company that specializes in programs with accounting applications. The companys most popular program prepares the journal, accounts receivable subsidiary ledger, and general ledger. In the companys early days, the owner and eight employees wrote the computer programs, sold the products to stores such as ComputerLand and ComputerCraft, and performed the general management and accounting of the company. As the company has grown, the number of employees has increased dramatically. Recently, the development of a new software program stopped while the programmers redesigned Flowerss accounting system. Flowerss accountants could have performed this task.

Answer: Missing Internal Control Characteristics Assignment of responsibilities.

Possible Problem Lost sales due to delay of development of new software program.

Solution Let the programmers continue to develop new software program to be sold. Accountants may help the programmers in redesigning the companys accounting system.

E. Lydia Pink, a widow with no known sources of outside income, has been a trusted employee of Stone Products Company for 15 years. She performs all cash-handling and accounting duties, including opening the mail, preparing the bank deposit, accounting for all aspects cash and accounts receivable, and preparing the bank reconciliation. She has just purchased a new Lexus and a new home in an expensive suburb. Grant Chavez, the owner of the company, wonders how she can afford these luxuries on her salary. Answer: Missing Internal Control Characteristics Separation of duties. Possible Problem Theft of cash. Solution Separate cash handling and accounting duties.

Using the bank reconciliation as a control device. P7-3B. The cash receipts and the cash disbursements of Xircom Resources for March 19x5 are as follows: Cash Receipts Cash Disbursements (Posting Reference is CR) (Posting Reference is CD) Check Date Cash Debit No. Cash Credit Mar. 4 $2,716 1413 $1,465 9 544 1414 1,004 11 1,655 1415 450 14 896 1416 8 17 367 1417 775 25 890 1418 88 31 2,038 1419 4,126 Total $9,106 1420 970 1421 200 1422 2,267 Total $11,353

The Cash account of Xircom Resources shows the following information on March 31, 19x5: Cash Date Mar. 1 31 31 Item Balance Jrnl. Ref. CR. 10 CD. 16 Debit 9,106 11,353 Credit Balance 15,188 24,294 12,941

On March 31, 19x5, Xircom Resources received this bank statement: BANK STATEMENT FOR MARCH 19X5 Beginning Balance -------------------------------Deposits and other Credits Mar. 1 ----------------------$625 EFT 5 ----------------------2,716 10 ----------------------544 11 ----------------------1,655 15 ----------------------896 18 ----------------------367 25 ----------------------890 31 ----------------------1,000 BC Checks and other Debits Mar. 8 ----------------------$441 NSF 9 ----------------------1,465 13 ----------------------1,004 14 ----------------------450 15 ----------------------8 19 ----------------------340 EFT 22 ----------------------775 29 ----------------------88 31 ----------------------4,216 31 ----------------------25 SC Ending Balance *BC-bank collection, EFT-electronic funds transfer NSF-nonsufficient funds check, SC-service charge. $15,188

8,693

(8,812) $15,069

Additional data for the bank reconciliation: a. The EFT deposit was a receipt of monthly rent. The EFT debit was payment of monthly insurance. b. The NSF check was received late in February from Jay Andrews. c. The $1,000 bank collection of a note receivable on March 31 included $122 interest revenue. d. The correct amount of check number 1419, a payment on account, is $4,216. (The Xircom Resources accountant mistakenly recorded the check for $4,126) Required: 1. Prepare the bank reconciliation of Xircom Resources at March 31, 19x5.
10

Solution: A. Adjusted balance method: Xircom Resources Bank Reconciliation March 19x5 Balance per book Add: EFT credit Bank Collection Total Less: NSF check EFT debit Service charge Book error Adjusted book balance Balance per bank Add: Deposit in transit Total Less: Outstanding checks: Check No. 1420 Check No. 1421 Check No. 1422 Adjusted bank balance B. Book to bank method: Xircom Resources Bank Reconciliation March 19x5 Balance per book Add: EFT credit Bank Collection Outstanding checks: Check No. 1420 Check No. 1421 Check No. 1422 Total Less: NSF check EFT debit Service charge Book error Deposit in transit Balance per bank
11

$12,941 625 1,000 441 340 25 90 1,625 $14,566

896 $13,670 $15,069 2,038 $17,107

970 200 2,267

3,437 $13,670

$12,941 625 1,000 970 200 2,267

3,437 441 340 25 90 2,038

5,062 $18,003

2,934 $15,069

B. Bank to book method: Xircom Resources Bank Reconciliation March 19x5 Balance per bank Add: Deposit in transit NSF check EFT debit Service charge Book error Total Less: Outstanding checks: Check No. 1420 Check No. 1421 Check No. 1422 EFT credit Bank collection Balance per book 2,038 441 340 25 90 970 200 2,267 $15,069

2,934 $18,003

3,437 625 1,000

5,062 $12,941

2. Describe how a bank account and the bank reconciliation help Xircom managers control the businesss cash. Answer: A bank account helps control cash by providing a place for safekeeping. The bank also provides a detailed list of the companys cash transactions that managers can compare to the companys own cash records, which allows them to identify and correct any book errors quickly. To take full advantage, the business should deposit all cash receipts in the bank and make all cash payments through the bank except for petty cash transactions. The bank reconciliation helps control cash by ensuring that the company accounts for its cash transactions correctly and that the bank and book records of cash are correct. Also, the bank reconciliation establishes the balance of cash to report on the balance sheet.

12

Accounting for petty cash transactions. P7-6B. Suppose that on April 1, Compak Computers creates a petty cash fund with an imprest balance of $500. During April, Melanie Ford, the fund custodian, signs the following petty cash tickets: Petty Cash Ticket No. 101 102 103 104 105 106 107 Item Office Supplies Car fare for executive Delivery of package across town Dinner money for sales manager entertaining customer Inventory Decorations for office party Six boxes of floppy disks Amount 86.89 25.00 37.75 80.00 85.70 19.22 44.37

On April 30, prior to replenishment, the fund contains these tickets plus $113.66. The accounts affected by petty cash disbursements are Office Supplies Expense, Travel Expense, Delivery Expense, Entertainment Expense, and Freight in. Required: 1. Explain the characteristics and the internal control features of an imprest fund. Answer: Characteristics: proposed use, internal control, and specific limitation; desired amount; security arrangement; physical location of the fund; custodian name(s) and titles; approval of the head of management or assigned employee Even though petty cash payments are small, the business needs to set up controls such as the following: 1. Designate an employee to serve as custodian of the petty cash fund. 2. Keep a specific amount of cash on hand. 3. Support all fund payments with a petty cash ticket. Maintaining the Petty Cash account at its designated balance is the nature of an imprest system. This clearly identifies the amount of cash for which the custodian is responsible, and that is the systems main internal control feature.

13

2. Make the general journal entries to create the fund and to replenish it. Include explanations. Also, briefly describe what the custodian does on these dates. April 1 The company creates a petty cash fund with an imprest fund of $500. Petty cash fund Cash in Bank 30 Replenishment of petty cash payments. Office supplies expense Travel expense Delivery expense Entertainment expense Freight in Cash short or over Cash in bank 131.26 25.00 37.75 99.22 85.70 7.41 386.34 500.00 500.00

Using cash flow information to prepare cash budget. P7-8B. Louis Lipschitz, Chief Financial Officer of Toys R Us, Inc., is responsible for the companys budgeting process. Suppose Lipschitzs staff is preparing the Toys R Us cash budget for 19x9. A key input to the budgeting process is last years statement of cash flows, which provides the following data for 19x8. Cash receipts appear as positive amounts; cash disbursements are negative amounts, denoted within parentheses. TOYS "R" US, INC. Cash Flow Data for 19x8 (In millions) Collections from customers Interest revenue Purchases of inventory Operating expenses Purchases of plant assets Short-term borrowings Long-term borrowings Long-term debt repayments Investments by owners Payments to owners Cash and Cash Equivalents Beginning of year 19x8 End of year 19x8

19x8 $8,089 24 (5,597) (1,859) (614) 119 41 (1) 30 (183) $764 $792

14

Required: 1. Prepare the Toys R Us cash budget for 19x9. Date the budget simply 19x9 and denote the beginning and ending cash balances as beginning and ending. Round the nearest million dollars. Assume the company expects 19x9 to be similar to 19x8, but with the following changes: a. In 19x9, the company expects a 10% increase in collections from customers and an 8% increase in purchases of inventory. b. Lipschitz plans to end the year with a cash balance of $500 million. 2. Based on the cash budget you prepared, how much additional cash does it appear that Toys R Us will have available for additional investments during 19x9? Solution: TOYS "R" US, INC. Cash Budget For the year ended 19x4 Cash balance, beginning Add: Estimated cash receipts: Collections from customers (8,089x110%) Interest revenue Short-term borrowings Long-term borrowings Investment by owners Less: Estimated cash payments: Purchases of inventory (5,597x108%) Operating expenses Purchases of Plant assets Long-term debt repayments Payments to owners Cash available before financing Less: Budgeted cash balance, ending Cash available for additional investments $ 792.00 8,897.90 24.00 119.00 41.00 30.00 6,044.76 1,859.00 614.00 1.00 183.00

9,111.90

(8,701.76) $1,202.14 (500.00) $ 702.14

15

References:

16