HFT 2401

Chapter 8Cash

Cash

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

Included in cash are:

►Currency and coins►Petty cash►Cash Equivalents – T-bills, commercial paper►Time deposits

Demand deposits Money orders CD’s Credit card deposits

Internal Control of Cash

► Segregate cash handling duties► Bookkeeping 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 298 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