chapter 7 - fund management

8/12/2019 Chapter 7 - Fund Management

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CHAPTER 7

FUND MANAGEMENT


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What is a Cash?

Simply mean money. Money is the standard medium ofexchange in business transactions. It refers to the currencyand 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. Itincludes money and other negotiable instruments that ispayable in money and acceptable by the bank for depositand immediate credit. Example: checks, bank draft andmoney orders

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


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What is Unrestricted Cash?

This means that the cash must be readily available in thepayment of current obligations and not be subject to anyrestrictions, contractual or otherwise.

The following cash items are included in cash.1. Cash on handThis includes undeposited cash collections

and other cash items awaiting for deposit such ascustomers checks, managers checks, traveler s checks,bank draft and money orders.

2. Cash in bankThis includes demand deposit or checkingaccount and savings deposit which are unrestricted as towithdrawal.

3. Cash fundset aside for current purposes such as pettycash fund, payroll fund and dividend fund.


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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 MarketInstruments


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Valuation of Cash in the Balance Sheet

Cash is valued at face value.

Cash in foreign currency is valued at the current exchange rate. Butdeposit in foreign countries which are subject to foreignexchange restrictions should be shown separately as non-currentassets with full disclosure.

If a bank or financial institution holding the funds of the company isin bankruptcy or financial difficulty, cash should be writtendown to estimated realizable value if the amount recoverable isestimated 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.


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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.


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Purpose of Funds

1. For current purposes, the funds is set aside for use in currentoperations, it is a current assets.

Example: Petty cash fund, payroll fund, travel fund anddividend fund

2. For non-current purposes, this funds is shown as long-terminvestment.

Example: Contingent fund, insurance fund, fund for theacquisition or construction of property, plant and equipment,

preferred redemption fund, cash in closed bank and blockedcash (cash is under litigation or frozen by the government)


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Type of risks in handling of cash transactions

1. Inherent risksthese are the risks that are built-in everyorganization. Example, the right classification of cash, the

people handling the transactions

2. Control risksthese are the risks with the internal control

mechanism adopted by the company. Internal controlquestionnaire.

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 riskthese are the risks associated with the use of

technology in the handling of cash.


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Common Misuses of Cash

1. Window dressingis a practice of opening the booksof account beyond the close of the accounting periodfor the purpose of showing a better financial position

and operating result. It is deliberate misstatement ofaccounts. It is usually accomplished as follows:

a. By recording as of the last day of the accountingperiod collections made subsequent to the close of

the period.b. By recording as of the last day of the accountingperiod payments of accounts made subsequent to theclose of the period.


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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


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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 ((100,00020,000) 80,000

Current ratio 2.75


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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 fromanother 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.


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3. Kiting is another device used to conceal a cashshortage. This practice is possible when a companymaintains 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 bankand depositing the same check in a second bank tocover the shortage in the latter bank.

This practice can be discovered by thesimultaneous preparation of bank reconciliationstatements.


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Accounting for Overages/Shortages

1. Overagesit 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.


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2. Shortagesit 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 toLoss from cash shortage.


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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 aswhen 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.


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Methods of Handling Petty Cash

1. Imprest Fund SystemPetty 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 10,000Cash in bank 10,000


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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


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2. Fluctuating fund system meaning the amount of checkdrawn to replenish the fund do not necessarily equal the pettycash disbursements. The replenishment checks are simplydrawn upon the request of the petty cashier. Moreover, petty

cash disbursements are immediately recorded thus resulting ina fluctuating petty cash balance per book from time to time.

Illustration:

2012

Nov. 10 The company established an imprest fund of P10,000Petty cash fund 10,000

Cash in bank 10,000


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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.


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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 toclassify cash to distinguish between currency on hand, undepositedchecks, cash in banks deposit at various locations.

3. Money market placements maturing within one year but which cannot bepre-terminated are shown as part of Marketable Securities.

4. Amount representing post-dated checks, advances to employees, returnedchecks 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 foreignexchange restrictions should be shown separately from the cash accountand the restrictions clearly indicated.


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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 againstother demand deposit balances.


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Thank you,

for listening and understanding the topic.

chapter 7 - fund management

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