CHAPTER 7

FUND MANAGEMENT
What is a Cash?
Simply mean money. Money is the standard medium of
exchange in business transactions. It refers to the currency
and coins which are in circulation and legal tender.
But in accounting parlance, the term cash has a special
and broader meaning and it connotes more than money. It
includes money and other negotiable instruments that is
payable in money and acceptable by the bank for deposit
and immediate credit. Example: checks, bank draft and
money orders

We consider these as our cash because these are acceptable
by the bank for deposit or immediate encashment.

What is Unrestricted Cash?
This means that the cash must be readily available in the
payment of current obligations and not be subject to any
restrictions, contractual or otherwise.

The following cash items are included in cash.
1. Cash on hand This includes undeposited cash collections
and other cash items awaiting for deposit such as
customers checks, managers checks, traveler s checks,
bank draft and money orders.
2. Cash in bank This includes demand deposit or checking
account and savings deposit which are unrestricted as to
withdrawal.
3. Cash fund set aside for current purposes such as petty
cash fund, payroll fund and dividend fund.
Cash Equivalents
Defines as short-term and highly liquid investment
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.

Example:
Treasury bills, Time deposits, Money Market
Instruments
Valuation of Cash in the Balance Sheet
Cash is valued at face value.
Cash in foreign currency is valued at the current exchange rate. But
deposit in foreign countries which are subject to foreign
exchange restrictions should be shown separately as non-current
assets with full disclosure.
If a bank or financial institution holding the funds of the company is
in bankruptcy or financial difficulty, cash should be written
down to estimated realizable value if the amount recoverable is
estimated to be lower than the face value.

Example:
1. Valuation of dollar account base on current rate.
2. Base on the amount recoverable from the insurance company,
PDIC.
How do we invest our excess fund?
The control and proper use of cash is an important aspect of cash management. Basically,
the enterprise must maintain sufficient cash for use in current operations. Any cash
accumulated in excess of that needed for current operations should be invested even
temporarily in some type of revenue earning investment.
Accordingly, excess cash may be invested in time deposits, money market instruments and
treasury bills for the purpose of earning interest income.
Classification of Investments:
1. If the term is three months or less, such instruments are classified as cash equivalents
and therefore included in the cash and cash equivalents.
2. If the term is more than three months but within one year, such investments are
classified as short-term or temporary investment and presented separately as current
assets.
3. If the term is more than one year, such investment are classified as long-term
investments. However, if such investment become due within one year from the
balance sheet date, they are reclassified as temporary investments.

Purpose of Funds
1. For current purposes, the funds is set aside for use in current
operations, it is a current assets.
Example: Petty cash fund, payroll fund, travel fund and
dividend fund

2. For non-current purposes, this funds is shown as long-term
investment.
Example: Contingent fund, insurance fund, fund for the
acquisition or construction of property, plant and equipment,
preferred redemption fund, cash in closed bank and blocked
cash (cash is under litigation or frozen by the government)


Type of risks in handling of cash transactions
1. Inherent risks these are the risks that are built-in every
organization. Example, the right classification of cash, the
people handling the transactions
2. Control risks these are the risks with the internal control
mechanism adopted by the company. Internal control
questionnaire.
Example:
a. Is the responsibility of fund vested in one person?
b. Does the fund custodian have a access to cash receipts?
c. Is there a surprise internal audit of each cash fund?
d. Are cash receipts deposited daily and intact.
3. System risk these are the risks associated with the use of
technology in the handling of cash.
Common Misuses of Cash
1. Window dressing is a practice of opening the books
of account beyond the close of the accounting period
for the purpose of showing a better financial position
and operating result. It is deliberate misstatement of
accounts. It is usually accomplished as follows:
a. By recording as of the last day of the accounting
period collections made subsequent to the close of
the period.
b. By recording as of the last day of the accounting
period payments of accounts made subsequent to the
close of the period.

Illustrative example of Window Dressing
Assume that the correct current position of the current year as follows:
Current assets 210,000
Current liabilities 100,000
Current ratio 2.1
Assume that the books of were kept open and two transactions which occurred in
January of the following year were recorded as of the end of the current year.
a. Sale for P50,000 of merchandise costing P20,000
Accounts receivable 50,000
Sales 50,000

Cost of sales 20,000
Merchandise Inventory 20,000



b. Payment of accounts payable, P20,000
Accounts payable 20,000
Cash 20,000

Consequently, the resulting balances would be:

Current assets (210,000 + 50,000 -20,000 -20,000) 220,000
Current liabilities ((100,000 20,000) 80,000
Current ratio 2.75

2. Lapping This is a concealing a cash shortage. It
consists of misappropriating a collection from one
customer and concealing this defalcation by
applying a subsequent collection made from
another customer.
This is possible when the a company has poor
internal control and especially when the
bookkeeper and cashier are one and the same
person.
3. Kiting is another device used to conceal a cash
shortage. This practice is possible when a company
maintains current accounts in different banks.
Kiting is usually employed at the end of the month.
It occurs when a check is drawn against a first bank
and depositing the same check in a second bank to
cover the shortage in the latter bank.
This practice can be discovered by the
simultaneous preparation of bank reconciliation
statements.

Accounting for Overages/Shortages
1. Overages it means that the amount of actual
cash count is more than the cash balance per
book. The cash overage is treated as
miscellaneous income if there is no claim on
the same. But if the overage is properly
found to be the money of the cashier, then
this is payable to cashier.



2. Shortages it means that the amount of actual
cash count is less than the cash balance per
book. The cash shortage is treated as
temporary or suspense account (Due from
Cashier/AR) . But if the shortage despite of
reasonable efforts fails to disclose the cause
of the shortage, then this is chargeable to
Loss from cash shortage.

Petty Cash
While internal control ideally requires that all payments
should be made by means of check, this is sometimes
impossible. There are occasions when the issuance of
checks become impractical or inconvenient such as
when small amounts are paid or things are hurriedly
bought or customers are entertained. In some
instances, it may be more economical and convenient
to pay in cash rather than issue checks.
In view of this, Petty Cash Fund was established to pay
small expenses which cannot be paid conveniently by
mean of check.
Methods of Handling Petty Cash
1. Imprest Fund System Petty cash expenses are recorded upon
replenishment. The amount of the replenishment is normally
equal to the petty cash disbursement.

Illustration:
2012
Nov. 10 The company established an imprest fund of P10,000
Petty cash fund 10,000
Cash in bank 10,000


Nov. 29 Replenished the fund. The petty cash items include the following:
Currency and coin 2,000
Supplies 5,000
Telephone 1,800
Postage 1,200

The entry to record the replenishment is:
Supplies 5,000
Telephone 1,800
Postage 1,200
Cash in bank 8,000
2. Fluctuating fund system meaning the amount of check
drawn to replenish the fund do not necessarily equal the petty
cash disbursements. The replenishment checks are simply
drawn upon the request of the petty cashier. Moreover, petty
cash disbursements are immediately recorded thus resulting in
a fluctuating petty cash balance per book from time to time.
Illustration:
2012
Nov. 10 The company established an imprest fund of P10,000
Petty cash fund 10,000
Cash in bank 10,000

Nov. 11 -28 Petty cash disbursement amounted to P8,000
Expenses 8,000
Petty cash fund 8,000
Nov. 29 Issued a check for P10,000 to replenish the fund.
Petty cash fund 10,000
Cash in bank 10,000

Note at this point, the petty cash balance per book is P12,000.
True or False
1. Cash in foreign currency is valued at the time the current exchange rate.
2. Unless the balance sheet is for a special purpose, it is not necessary to
classify cash to distinguish between currency on hand, undeposited
checks, cash in banks deposit at various locations.
3. Money market placements maturing within one year but which cannot be
pre-terminated are shown as part of Marketable Securities.
4. Amount representing post-dated checks, advances to employees, returned
checks or cash received after the balance sheet date should not be form
part of the cash account.
5. A check received from a customer which bears a date twelve months before
the balance sheet date should be reverted to accounts receivable.
6. If material, deposits in foreign countries which are subject to foreign
exchange restrictions should be shown separately from the cash account
and the restrictions clearly indicated.

7. Unreleased checks should be treated as outstanding checks and should not
be restore to the cash balance.
8. The payroll fund account should not be shown as part of cash but offset
against salaries payable account for which it is intended.
9. A bank overdraft is a current liability and should never be offset against
other demand deposit balances.


Thank you,
for listening and understanding the topic.