CASH MANAGEMENT

Chapter 8

© 2009 The McGraw-Hill Companies, Inc.,

All Rights Reserved
 CASH, CASH EQUIVALENTS,
AND LIQUIDITY
TIềN, CÁC KHOảN TƯƠNG ĐƯƠNG TIềN VÀ TÍNH THANH
KHOảN

Cash
Currency, coins and amounts on deposit in bank
accounts, checking accounts, and some savings
accounts. Also includes items such as customer checks,
cashier checks, certified checks, and money orders.

Cash Equivalents
Short-term, highly liquid investments that are:
1. Readily convertible to a known cash amount.
2. Close to maturity date and not sensitive to
interest rate changes.

McGraw-Hill/Irwin Slide 2
 CASH, CASH EQUIVALENTS,
AND LIQUIDITY
Liquidity
How easily an asset can be converted into cash
to be used to pay for services or obligations.

Inventory Cash
McGraw-Hill/Irwin Slide 3
 CASH MANAGEMENT
The goals of cash management are twofold:
1. Plan cash receipts to meet cash payments when
due.
 Handling cash is separated from recordkeeping for cash.
(Segregation of Duties)
 Encourage collection of receivables.
 Cash receipts are promptly deposited in a bank
 Cash disbursements are made by check.
 Delay payment of liabilities

2. Keep a minimum level of cash necessary to

operate.
 Plan expenditures.
 Invest excess cash.

McGraw-Hill/Irwin Slide 4
 VOUCHER SYSTEM OF
CONTROL
Sender Receiver
Check
Cashier Supplier (Vendor)
Accounting Invoice Approval Cashier
Receiving Report Accounting, Requesting
Receiving
& Purchasing
Supplier (Vendor) Invoice Accounting
Purchasing Purchase Order Supplier, Requesting,
Receiving & Accounting
Purchase Requisition
Requesting Purchasing and
Accounting

Voucher
McGraw-Hill/Irwin Slide 5
 BANKING ACTIVITIES AS CONTROLS
QUảN LÝ BằNG CÁC HOạT ĐộNG NGÂN HÀNG

 Additionalinternal control can be achieved by

comparing the bank statement with the deposit
and withdrawal records
 Bank statement and bank reconciliation are used

McGraw-Hill/Irwin Slide 6
 BANK STATEMENT

Usually once a month, the bank sends each depositor

a bank statement showing the activity in the account.
Bank Statement
First National Bank
Beginning-of- Nashville, TN 37459 May 31, 2009 End-of-period
period balance. Clothes Mart balance.
Nashville, TN *
Acct No 278609

Previous Total Current

Balance Total Checks Deposits Balance
1488.79 1,367.09 2,604.22 2,725.92
5/1 107 55.00
5/2 1,251.88
5/4 108 279.50
5/7 109 44.75

Checks and other 5/9

5/12
110
111
21.81
37.55 Deposits and other
debits. 5/15 825.04
credits.
5/18 112 175.98
5/21 113 288.31
5/27 114 12.54
5/30 527.30
5/31 115 451.65
McGraw-Hill/Irwin Slide 7
 BANK RECONCILIATION
BảNG ĐIềU GIảI NGÂN HÀNG

A bank reconciliation is prepared periodically to explain

the difference between cash reported on the bank
statement and the cash balance on company’s books.
Bank Statement
First National Bank
Nashville, TN 37459 M ay 31, 2006

Why are the

Clothes Mart
*
Na shville, TN
Acct No 278609 balances different?
Previous Total Current
Balance Total Checks Deposits Balance
1488.79 1,367.09 2,604.22 2,725.92
5/1 107 55.00
5/2 1,251.88
5/4 108 279.50
5/7 109 44.75
5/9 110 21.81
5/12 111 37.55
5/15 825.04
5/18 112 175.98
5/21 113 288.31
5/27 114 12.54
5/30 527.30
5/31 115 451.65

McGraw-Hill/Irwin Slide 8
 RECONCILING ITEMS
Ending balance as per bank statement: X
+ Deposits in transit (outstanding deposit) X
– Outstanding Cheques (X)
+ / – Bank errors X
= Adjusted cash balance: Bank Statement X

Ending Balance as per Cash at Bank Ledger X

+ Receipts reported on bank statement but not in ledger, direct credits X
- Disbursements reported in bank statement (i.e. bank fees & charges, direct
debit) (X) Should
be the
- Nonsufficient funds check (NSF) (X)
same
+ / – accounting record errors X
+ Interest earned on checking account X
= Adjusted cash balance: Cash at Bank Ledger X

McGraw-Hill/Irwin Slide 9
 BANK RECONCILIATION
EXAMPLE
Let’s prepare a July 31 bank reconciliation
statement for the Simmons Company.

 The July 31 bank statement indicated a

balance of $9,610.
 The cash general ledger account on that
date shows a balance of $7,430.

Additional information necessary for the

reconciliation is shown on the next screen.

McGraw-Hill/Irwin Slide 10
 BANK RECONCILIATION
EXAMPLE

1. Outstanding checks totaled $2,417.

2. A $500 check mailed to the bank for deposit had not
reached the bank at the statement date.
3. The bank returned a customer’s NSF check for $225
received as payment on account receivable.
4. The bank statement showed $30 interest earned during
July.
5. Check No. 781 for supplies expense cleared the bank for
$268 but was erroneously recorded in our books as $240.
6. A $486 deposit by Acme Company was erroneously
credited to our account by the bank.

McGraw-Hill/Irwin Slide 11
 
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

McGraw-Hill/Irwin Slide 12
 







McGraw-Hill/Irwin Slide 13
 RECORDING ADJUSTING
ENTRIES FROM A BANK
RECONCILIATION
Only amounts shown on the book portion of
the reconciliation require an adjusting entry.

Dr. Cr.
July 31 Cash 30
Interest revenue 30

July 31 Supplies expense 28

Accounts receivable 225
Cash 253
McGraw-Hill/Irwin Slide 14
 RECORDING ADJUSTING
ENTRIES FROM A BANK
RECONCILIATION
After posting the reconciling entries the cash account
looks like this:

Adjusted balance on July 31.

McGraw-Hill/Irwin Slide 15
 CASH FLOW STATEMENT

 What can users learn from the statement of cash

flows?
 Ability to generate cash and cash equivalents
 Trends in capital expenditures
 Ability to pay dividends and meet financial
commitments
 Clues about earnings quality

McGraw-Hill/Irwin Slide 16
 BUSINESS ACTIVITIES

 Cash flows must be classified as arising from

either:

 Operating activities: Involve using resources to research,

develop, and purchase, produce, distribute, and market products
and services.
 Investing activities: Are the acquiring and disposing of
resources (assets) that an organization uses to acquire and
sell its products or services
 Financing activities: Provide the means organizations use to
pay for resources

McGraw-Hill/Irwin Slide 17
 DIRECT CASH-FLOW STATEMENT

 Prepare a Statement of Cash flows for Genis

using given information:
Cash – 1 Jan 2011 20,000
Purchase of building 60,000
Payment of dividend 5,000
Payment to Suppliers 35,000
Issues Shares 75,000
Payment of Salaries 24,000
Receipt from customers 82,000
Borrowings 23,000
Purchase of equipment 35,000

McGraw-Hill/Irwin Slide 18
 GENIS
STATEMENT OF CASH FLOWS
FOR THE MONTH ENDED 31 JANUARY
Cash flows from operating activities
Cash receipt from customers 82,000
Cash Paid to Suppliers (35,000)
Cash paid for Salaries (24,000)
Net cash changes from operating activities 23,000
Cash flows from investing activities
Purchase of equipment (35,000)
Purchase of building (60,000)
Net cash changes from investing activities (95,000)
Cash flows from financing activities
Cash receipt from issuing Shares 75,000
Cash paid for dividends (5,000)
Cash receipt from borrowings 23,000
Net cash changes from financing activities 93,000
Net changes in cash 21,000
Cash balance at prior month end 20,000
McGraw-Hill/Irwin Slide 19
 PREPARE CASH-FLOW STATEMENT

 Cash flows from operating activities:

+ Cash receipts from customers x
+ interest received x

+ dividends received x
- payments to suppliers for inventory (x)
- payments to employees and other expenses (x)

- interest paid (x)

- tax paid (x)
= Net cash provided by operating activities x
McGraw-Hill/Irwin Slide 20
 RECONCILING CASH-FLOW
STATEMENT
 Converting accrual basic accounting figures to
cash basic accounting figures
Accrual basic accounting Cash basic accounting
Sales Cash receipt from customers
+ Decrease in Acc. Receivable
– Increase in A.R
COGS Cash payment for Inventories
+ Increase in Inventories + Decrease in A.P
– Decrease in Inventories – Increase in A.P
Salaries expenses Cash paid to employees
+ Decrease in Salaries payable
- Increase in Salaries payable
Other operating expenses (not including salaries exp and Cash for other operating
depreciation expense) expenses
+ Increase in Prepaid exp + Decrease in Accrued expense
- Decrease in Prepaid exp - Increase in accrued exp

McGraw-Hill/Irwin Slide 21
 INDIRECT CASH-FLOW STATEMENT
Cash flows from operating activities
Net income X
Adjustments to reconcile net income to net cash provided by
operating activities
Add Decrease in noncash current assets (A.R, Prepaid x
expenses, inventories,...)
Deduct Increase in noncash current assets (A.R, Prepaid (x)
expenses, inventories,...)
Add Increases in current liabilities x
Deduct Decrease in current Liabilities (x)
Add Expenses with no cash outflows (Depreciation, bad debt x
expense,... )
Deduct Revenues with no cash inflows (x)
Add Non-operating losses (loss on disposal of fix assets) x

Deduct non-operating gain (gain on disposal of fix assets) (x)

Net cash provided by operating activities X

McGraw-Hill/Irwin Slide 22
 END OF CHAPTER 8

Thank you!

McGraw-Hill/Irwin Slide 23