Topic 9 Cash Management and Control

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INTRODUCTIONCash is an important asset of a business. It is considered the most liquid asset ofthe business and can be easily transferred from one party to another. Thus,having sufficient cash is crucial for a business to be seen as financially sound,especially for short-term survival. For instance, without cash, a business may not

be able to pay short-term creditors. Likewise, lack of cash may hinder a businessfrom acquiring other assets. Because of its liquidity and unidentifiable nature,cash is seen as a vulnerable asset and always subject to misappropriation. Hence,this topic will focus on the management and internal control of cash to secure

this business asset from fraudulent acts.

COMPOSITION OF CASH

Cash refers to money of any currency used as a medium of exchange, credit cardand electronic funds transfer at point of sale (EFTPOS). Cash also includes itemsthat are acceptable by banks or financial institutions for deposits such astraveller's cheques, bank drafts and money orders. The sum of all these cashitems is normally presented as a single cash item in the balance sheet. In

9.1

TTooppiicc

99 Cash

Managementand Control

LEARNING OUTCOMES

By the end of this topic, you should be able to:

1. Define cash equivalents;

2. Describe cash management principles;

3. Explain the internal control of cash; and

4. Prepare bank reconciliation.


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TOPIC 9 CASH MANAGEMENT AND CONTROL 211

addition, there are companies which report cash and cash equivalent as one itemin their balance sheets. Cash equivalents are defined as highly liquid short-terminvestments that can be easily converted into cash. To be considered as cash

equivalents, the investments must meet these two conditions:(a) They are readily converted into a sum of cash; and

(b) They are very close to maturity date and will not be affected by changes ininterest rates.

Examples of cash equivalents are treasury bills, commercial paper and short-termnotes payable.

CASH MANAGEMENT

Cash management is important to ensure that there is no over surplus orshortage of cash in business. This can be achieved by coordinating the cash

relevant transactions such as receivables, purchase of inventories, payables, etc.This can be done by establishing a proper cash flow system, which oversees theinflow and outflow of cash. In addition to this, businesses should also observethese broad principles of good cash management as set out here:

(a) Efficient Collection Policy of Accounts ReceivableA business should have a reasonable average collection time for receivablesto ensure cash is not tied up. This is important not only to ensure sufficientcash available but also to avoid the potential of having bad debt.

(b) Delayed Payment of Accounts Payable

In this instance, a business should make use the credit terms given by thesuppliers. If the credit term is for 20 days, a business should settle their debtcloser to that due date. This enables the business to use the funds for otherpurposes before settling the debt. In doing so, the business should notundermine the risk of late payment because it may affect its credit ratings infuture.

9.2

Define cash equivalents.

SELF-CHECK 9.1


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TOPIC 9 CASH MANAGEMENT AND CONTROL212

(c) Keeping a Minimum Level of InventorySimilar to receivables, inventories also tie up cash. In addition, holdinginventories may require storage, insurance and manpower, which

consequently increase costs. Thus, a business should minimise its inventorylevel, yet keep it adequate to meet the demands of customers.

(d) Investment of Cash SurplusIf a business has any surplus of funds, the funds should be invested wiselysuch as in any short-term investments available. This is important togenerate more income for businesses.

(e) Proper Planning of Capital ExpenditureCapital expenditure normally requires a large amount of cash, thusrequiring proper planning. In this instance, it is essential to balance up

between internal and external financing to minimise the related costs offunding, such as interest.

INTERNAL CONTROL OF CASH

In order to complement good cash management (as discussed in the previoussubtopic), businesses should also adopt proper internal control to safeguard andensure accuracy of recording cash transactions. This is particularly crucial for

businesses with a large volume of cash transactions as they may have potentialfor making errors. The question is, how do we know that our internal control iseffective to protect business assets? Generally, for internal control to be effective,it should meet these three basic guidelines:

(a) The separation of duties between the one handling cash and record-keepingto minimise the tendency of cash misappropriation.

(b) Prompt deposit of cash receipt to produce a timely independent record.This would prevent the cashier from using business funds for personal use.

(c) Payment by cheques for cash transactions to reduce the risk of cash theft.This approach develops independent record by the bank on cashdisbursement. Also, authorisation by designated personnel for everyissuance of cheque would provide a cross-check on the accuracy of cashrecording.

9.3

EXERCISE 9.1

Describe the principles of good cash management.


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Based on these guidelines, several internal control mechanisms are suggested.These controls are classified into two categories. These are control of cashreceipts and control of cash disbursement. Let us take a look at each category in

detail.

9.3.1 Internal Control of Cash Receipts

Internal controlof cash receipts ensures prompt deposit and proper recording ofcash receipts. Cash receipts normally arise from cash sales, collection of accountsreceivables, disposal of assets, dividend earned, etc. Each type of receipt maydiffer in characteristics, thus requiring different procedures of internal controls.The following are the different procedures of internal controls:

(a) Over the counter Cash SalesFor internal control purpose, cash sales should be recorded on a cashregister. The register prints every single transaction taking place. Thisallows the customer to see the amount of purchase. For businesses, thereceipts printed out from the cash register provide evidence of cash sales. Inaddition, most cash registers nowadays are linked to businesses accountingsystem, reinforcing the internal control system.

Pre-numbered sales dockets are another means of monitoring cash sales.For each cash sales, pre-numbered sales dockets with one duplicate copy

are prepared. The original copy is given to customers while the cashierretains the duplicate copy. At the end of the day, a supervisor calculates thetotal number of sales dockets to ensure that none is missing.

In the event of mismatch between the amount of cash in a cash register andthe record of cash receipts, such difference should be recorded. If a cashregister shows record of RM500 but the cash count in the register is RM490,the entry to record cash sales and its shortage is:

On the other hand, if the cash count exceeds the amount of sales recordedin a cash register, the Cash Over and Short will be credited. To illustrate,assume the cash register shows a record of RM1,000 but the cash count isRM1,010. The journal entry will be:

Cash 490Cash Over and Short 10

Sales 500


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(b) Cash Receipts by MailCash receipts by mail normally involve the postage of cheques or moneyorders. The internal control of such receipts begins with the person whoreceives and opens the mail. Preferably, two staff are assigned the task ofpresenting and opening the mail. The mail received should be duplicated inthree copies to be sent to the cashier, the accounting department and thestaff who opens the mail.

9.3.2 Internal Control of Cash Disbursements

Cash disbursements are normally made for cash purchases, settlement ofpayables, owners withdrawals and payment of expenses. One way of cashdisbursement control is through payment by cheque as this mode of paymentneeds authorisation from designated personnel. The voucher system could beanother way of controlling cash disbursement. Under this system, cashdisbursement needs to undergo two main procedures. These are:

(a) Verifying, approving and recording obligations for cash disbursement; and

(b) Issuing cheques for payment of verified, approved and recordedobligations.

The main element of these procedures is that only approved departments andindividuals have the authority to incur such obligations.

Some business transactions may involve a small amount of cash. Thus, paying bycheque may not be practical. In that instance, businesses may use petty cash. Toestablish petty cash, businesses should make an estimation of the small expensesto be made during the month or week. Then, payment will be transferred fromcash to petty cash. A petty cashier, who is responsible for the petty cash, canmake payments from the funds with all records kept intact. The petty cash is

Cash 1,100

Cash Over and Short 100

Sales 1,000

EXERCISE 9.2

Why is it important to have proper internal control of cash?


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normally reimbursed when it is nearing zero. To illustrate, assume Teja Sdn Bhdestablishes petty cash on October 1 for RM200. The entry for this transactionwould be:

For every payment made out of petty cash, the petty cashier must record them inPetty Cash Payments Report. To illustrate, assume payments were made inOctober for:

(a) Cleaning of RM30;

(b) Postage of RM15; and

(c) Courier service of RM45.

The petty cashier summarises the payments as shown in Figure 9.1.

Figure 9.1 Petty cash payment report

To reimburse the funds, the petty cashier will forward the petty cash paymentreport to the companys cashier. As shown in Figure 9.1, since RM90 was paidfrom the petty cash, that same amount will be reimbursed by the cashier. Afterthe petty cashier cashes the cheque, the amount of cash in the petty cash will beRM200 again.

Petty cash 200

Cash 200


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9.3.3 Bank Statement as Mechanism of InternalControl

When businesses open a current account with banks for their businesses, it iscommon for them to receive a bank statement from the bank, at least once amonth. Even though the format of the statement may differ between banks, all ofthem should include the following information:

(a) Beginning balance of the period;

(b) Cheques and other debits that decrease the account during the period;

(c) Deposits and other credits that increase the account during the period; and

(d) Ending balance for the period.

In theory, the bank statement should reflect exactly the same transactions andevents of the business. Thus, it is expected that the bank statement sent by the

bank should tally with the business Cash at Bank account. However, in reality, itis not always the case. There are three situations that lead the two records (BankStatement and Cash at Bank account) to be in disagreement:

(a) Items that have been recorded in business account are not yet recorded bybanks, such as unpresented or outstanding cheques drawn by the businessand deposits in transit.

(b) Some items originated by the bank such as bank fees, charges and interestand dishonoured cheques.

(c) Errors may have been made by either party.

On 1 November 2011, Teraju Indah Sdn Bhd set up a petty cash fund forRM350. On 28 November, the petty cashier requested to reimburse thefund and submitted the following vouchers and receipts:

(a) Postage of RM15;

(b) Supplies purchased of RM28;

(c) Courier service of RM45; and

(d) Refreshment of RM37.

Prepare the entries to establish the petty cash and to reimburse the fund.

EXERCISE 9.3


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BANK RECONCILIATION

The disagreement between the bank statement and the Cash at Bank accountgives rise to the need for bank reconciliation. In preparing the bankreconciliation, the following information needs to be gathered:

(a) Previous bank reconciliation;

(b) Cash at Bank account;

(c) Opening balance of Cash at Bank account; and

(d) Current Bank Statement which have not been reconciled.

Once all the information is gathered, we may begin preparing the bank

reconciliation by following these procedures:

1. Identify the bank statement balance.

2. Check any outstanding items and errors that understate the bank balance.Add them to the bank balance.

3. Identify any outstanding cheques and errors that overstate the bankbalance. Deduct them from the bank balance.

4. Compute the adjusted bank statement balance, also called the corrected or

reconciled balance.5. Identify the companys Cash at Bank account.

6. Identify any unrecorded credit memoranda from the bank such as fees,charges and errors understating the Cash at Bank account balance. Addthem to the Cash at Bank account.

7. Identify any unrecorded debit memoranda from the bank such as servicecharges, and errors overstating the Cash at Bank Account. Deduct themfrom the balance.

8. Compute the adjusted Cash at Bank account, also known as corrected or

reconciled balance.

9. Verify the two adjusted or reconciled balances. They should be equal if theadjustments are performed accurately.

Assuming Teraju Indah Sdn Bhd had the following Cash at Bank account asshown in Table 9.1 and Bank Statement as shown in Table 9.2, let us prepare the

bank reconciliation using the above procedures.

9.4


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Table 9.1:Bank Account

Table 9.2:Bank Statement

Date Particulars Ref Debit Credit Balance

Oct 1 Balance 2,590.00 Dr

4 Abdullah Cheque No. 304 / 150.00 2,440.00 Dr

6 Aziz / 420.00 2,860.00 Dr

10 Emily Cheque No. 305 / 260.00 2,600.00 Dr

18 Basir / 185.00 2,785.00 Dr

23 Farid Cheque 306 / 410.00 2,375.00 Dr

28 Govind Cheque 307 3 80.00 2,295.00 Dr

29 Chong 2 340.00 2,635.00 Dr 5

MEGA BANK BERHAD

(5729030-K)STATEMENT OF ACCOUNT

ACCOUNT NO. BRANCH DATE PAGE042837928024 SEBERANG JAYA 31 OCTOBER

20111

DATE PARTICULARS DEBIT CREDIT BALANCE

October 1 Balance 2,800.00 Cr6 Cheque 304 150.00 / 2,650.00 Cr7 Cheque 303 210.00 2,440.00 Cr12 Cash deposit 420.00 / 2,860.00 Cr18 Cheque 305 260.00 / 2,600.00 Cr

Cash deposit 185.00 / 2,785.00 Cr23 Cheque 306 410.00 / 2,375.00 Cr25 Dividend ABC

Bhd

150.00 6 2,525.00 Cr

Cheque 101 200.00 3 2,725.00 Cr31 Insurance premium 20.00 7 2,705.00 Cr

Service charge 15.00 7 2,690.00 Cr 1OPENINGBALANCE

WITHDRAWAL DEPOSIT CLOSING BALANCE

NO. TOTAL NO. TOTAL2,800.00 1,065.00 955.00 2,690.00


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Table 9.3 shows the bank reconciliation of Teraju Indah Sdn Bhd.

Table 9.3:Teraju Indah Sdn BhdBank Reconciliation

31 October 2011

Item RM Item RM

1 Bank statement balance 2,690.00 5 Book balance 2,635.00Add: Add:

2 Deposit on 29 Oct in transit 340.00 6 Dividend earned 150.003,030.00 2,785.00

Deduct: Deduct:3 Outstanding cheque 200.00 7 Insurance premium 20.003 Unpresented cheque 80.00 7 Service charge 15.004 Adjusted bank balance 2,750.00 8 Adjusted book balance 2,750.00

Note:Cheque No. 303 amounting to RM210 is not adjusted in the current bankreconciliation as the cheque was paid in the previous month (and not shown inCash at Bank account).

Balances are equal

EXERCISE 9.4

Springfield Enterprise received a bank statement showing a differentbalance than reported in the companys bank account as at 30 June2011. The details of the Bank Statement and Cash at Bank account areas follows:

Bank Account

Date Particulars Ref Debit Credit Balance

June 1 Balance 1,750.00 Dr

4 Mahat - Cheque No. 376 200.00 1,550.00 Dr7 Jamal 120.00 1,670.00 Dr

12 Rajan Cheque No. 377 400.00 1,270.00 Dr

25 Karim 45.00 1,315.00 Dr

27 Omar Cheque No. 378 175.00 1,140.00 Dr

30 Latif 80.00 1,220.00 Dr


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Cash includes short-term investment which can be easily converted into cash,also known as cash equivalents.

Cash management helps businesses to monitor the inflow and outflow ofcash, so that business funds can be used in an optimal manner.

Internal control is important for both cash receipts and cash disbursement.

Bank reconciliation is prepared to reconcile the differences between the BankStatement (provided by banks) and the business Cash at Bank account.

MERCU TANDA BANK BERHAD

(7029030-K)

STATEMENT OF ACCOUNTACCOUNT NO. BRANCH DATE PAGE

08379224146 ALOR SETAR 30 JUNE 2011 1

DATE PARTICULARS DEBIT CREDIT BALANCE

June 1 Balance 1,750.00 Cr

6 Cheque 376 200.00 1,550.00 Cr

7 Cash deposit 120.00 1,670.00 Cr

18 Cheque book 15.00 1,655.00 Cr

25 Dividend HP Bhd 60.00 1,715.00 Cr

26 Cheque 377 400.00 1,315.00 Cr

28 Cash deposit 45.00 1,360.00 Cr

30 Interest 95.00 1,455.00 Cr

OPENINGBALANCE

WITHDRAWAL DEPOSIT CLOSING BALANCE

NO. TOTAL NO. TOTAL

1,750.00 615.00 320.00 1,455.00

Prepare a bank reconciliation statement as at 30 June 2011.


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Bank ReconciliationBank Statement

Cash

Cash Equivalent

Cash ManagementInternal Control

Petty Cash

Reimbursement

Documents

Topic 9 Cash Management and Control