HFT 2403 Chapter 8 Cash

Cash ►T►T►T►The most liquid of all current assets ►A►A►A►Also the most vulnerable ►I►I►I►It is cash that runs the business, not income

Included in cash are: ►C►C►C►Currency and coins ►P►P►P►Petty cash ►C►C►C►Cash Equivalents – T-bills, commercial paper ►T►T►T►Time deposits DDDDemand deposits MMMMoney orders CCCCD’s CCCCredit card deposits

Internal Control of Cash ► Segregate cash handling duties ► Bookeeping and cash handling should be separated ► Expenditures should be paid by check as much as possible ► Mechanical devices should be used to safeguard cash ► Servers and cashier should use pre-numbered sales tickets ► Cash should be deposited daily ► Bonding of cash handling employees ► Perform random internal and external audits ► Voucher system

Voucher System ► Written authorization to make a cash payment ► Provides better control over cash disbursements ► Ensures transactions are verified, approved in writing, and recorded by the appropriate employees ► Should be numerically sequenced ► See p 282 for sample of a disbursement voucher

Petty Cash ► Used for small, emergency purchase when producing a check for payment is not possible ► Usually shown as a separate account on the balance sheet or part of the account “Cash on Hand” (cashier banks) ► Petty cash fund is known as an imprest account ► Establish good control procedures

Bank Reconciliation ► Reconciles the variances in the cash account per the company books and what the bank says you have ► Variances may be due to  Deposits in transit  Outstanding checks  NSF checks  Service charges  Credits or debits for interest received or paid

Preparing the Bank Reconciliation ► Verify the deposits and note any that have not cleared the bank ► Verify cancelled checks and note those that have not cleared the bank ► Then:  Start with the closing balance per the bank statement  Add any deposits in transit  Subtract any outstanding checks  Result – Reconciled balance per bank

Preparing the Bank Reconciliation ► Begin with the closing balance per the company books ► Record items from the bank statement that were not previously recorded on the books  Add: Interest received  Subtract: NSF Checks, Service Charges, Check Printing  The result should be the adjusted balance per books and should equal the reconciled bank balance

Gross or Net Method of Recording Purchases ► Some vendors allow for cash discounts on invoice payment ► 2/10, n/30 – 2% discount if paid within 10 days, otherwise payment of invoice is due in full within 30 days ► Use an account called Purchase Discounts

Gross Method of Recording Purchases ► Records the invoice at full value, then records the discount if it is taken upon payment ► Drawback to this method – does not monitor for any discounts lost

Net Method of Recording Purchases ► Records the discount upon receipt of the invoice ► If payment is not made on time, and account called Discounts Lost is debited ► Allows better monitoring on the use of cash discounts.

Homework ► Problem 8 ► Problem 10 ► Problem 11 ► Problem 15