1、 Your goals for this “cash” 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 inve

2、stments known as “trading securities.”CashCash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately (as in the case of m

3、oney market accounts). 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 not classified as cash.The existence of compensating balances (amounts that must be left

4、on deposit and not withdrawn) should be disclosed and, if significant, reported separately from cash. Also receiving separate treatment are sinking funds (monies that must be set aside to satisfy debts) and restricted foreign currency holdings (that cannot easily be transferred or converted into ano

5、ther currency). These unique categories of funds may be reported in the long-term investments category. CashCash equivalents arise when companies place their cash in very short-term financial instruments that are deemed to be highly secure and will convert back into cash within 90 days (e.g., short-

6、term government-issued treasury bills). These financial instruments are usually very marketable in the event the company has an immediate need for cash.Cash ManagementIt is very important to ensure that sufficient cash is available to meet obligations and that idle cash is appropriately invested. On

7、e 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

8、 the overall plan that depicts cash inflows and outflows for a stated period of time. A future chapter provides an in-depth look at cash budgeting.Cash ManagementAlthough cash shortages may be a sign of weakness, such is not always the case. Successful companies may need cash for new business locati

9、ons, added inventory levels, growing receivables, and so forth. To sustain growth careful cash 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 exter

10、nal and some are internal in nature. External solutions include:Issuing additional shares of stock - This solution allows a company to obtain cash, without a fixed obligation to repay. Unfortunately, the existing shareholders do incur a detriment, because the added share count dilutes the ownership

11、proportions. In essence, existing shareholders are selling off part of the business.Borrowing additional funds - This solution brings no shareholder dilution, but borrowed funds must be repaid along with interest. Thus, the business cost and risk is increased. Many companies will pay a fee to establ

12、ish a standing line of credit that enables them to borrow as needed. Internal solutions include:Accelerate cash collections - If customers pay more quickly, a significant source of cash is found. Simple tools include electronic payment, credit cards, and cash discounts for prompt payment.Postponemen

13、t of cash outflows - Companies may delay payment as long as possible. Paying via check sent through the mail allows use of the float to preserve cash on hand. However, one needs to know that it is illegal to issue a check when there are insufficient funds in the bank to cover that item.Cash control

14、- 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.Contr

15、ol of receipts from cash sales should begin at the point of sale and continue through to deposit at the bank. Specifically, point-of-sale terminals should be used, actual cash on hand at the end of the day should be compared to register reports, and daily bank deposits should be made. Control of rec

16、eipts by mail begins with the person opening the mail. They 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 che

17、cks into the accounting records and compares the listing to a copy of the deposit slip prepared by the cashier. Controls over cash disbursements include procedures that allow only authorized payments and maintenance of proper separation of duties. Control features include making disbursements by che

18、ck, performance of periodic bank reconciliations, proper utilization of petty cash systems, and verification of supporting documentation before disbursing funds.Bank ReconciliationOne of the most common cash control procedures is the bank reconciliation. In business, every bank statement should be p

19、romptly 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

20、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 su

21、mmarizes 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 as shown in the following illustration: Differences are caused by items reflected on company records but not yet recorded by the bank; e

22、xamples 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 nonsuffici

23、ent 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 us

24、ed 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, jo

25、urnal 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 ch

26、arges, interest income, and so on).EXAMPLEThe following pages include a detailed illustration of the bank reconciliation process. Begin by carefully reviewing the bank statement for The Tackle Shop found on the next page. Then look at the companys check register spreadsheet that follows. Information

27、 found on that spreadsheet would correlate precisely to activity in the companys Cash account within the general ledger. The following additional information must also be considered:Check #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 wil