University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

167

Pages:

2
Author:

stud_ice13

Cash and Cash Equivalents: Cash includes physical currency, coins, and deposits in bank accounts, as well as items such as customer checks, cashier's checks, certified checks, and money orders that can be deposited in these accounts. Cash equivalents are short-term, highly liquid investments that meet two criteria: 1. They can be readily converted to a known amount of cash. 2. They are close enough to their due date (usually within three months) that their market value is unlikely to change significantly. Examples include U.S. Treasury bills. On the balance sheet, companies typically combine cash and cash equivalents and report them as the most liquid assets. Internal Controls for Cash: To protect cash from theft and fraud, companies follow three internal control guidelines: 1. Separation of duties: Handling cash is separated from recordkeeping to minimize the risk of fraud. This separation requires collusion between two or more people for theft to occur. 2. Prompt cash deposits: All cash receipts should be deposited in a bank immediately, creating an independent record and reducing the risk of theft or loss. 3. Payments by check or electronic funds transfer (EFT): Payments made by check or EFT help create an independent record of transactions, reducing the risk of unauthorized cash outflows. Cash Management: Cash management is crucial for ensuring that a company can meet its obligations and avoid cash shortages, which is a common reason for business failure. Key strategies include: 1. 2. 3. 4. Encouraging the collection of receivables quickly. Delaying the payment of liabilities to maximize the use of available cash. Maintaining only necessary assets to avoid large upfront cash payments. Planning expenditures in line with cash availability. 5. Investing excess cash in productive assets or short-term investments to earn a return. Control of Cash Receipts and Payments: • • • Cash Receipts: Internal controls over cash receipts (both over-the-counter and by mail) ensure proper recording and deposit of cash. Over-the-counter receipts should be recorded on a cash register with a locked-in record, and there should be a separation of duties between cash handlers and recordkeepers. For mail receipts, two employees should open the mail, and records should be cross-verified with bank deposits and accounting records to prevent fraud. Cash Payments: Most large thefts occur via cash payments, often through fake invoices. To control cash payments, businesses should use checks (or EFTs) for payments, rather than cash. A voucher system adds another layer of control by verifying and approving liabilities before payment is made. Cash Over and Short: Differences between recorded cash receipts and actual cash count are recorded in the "Cash Over and Short" account, reflecting either small gains or losses, which are reported on the income statement under miscellaneous expenses or revenues. By using these controls, companies can effectively manage and protect their cash, reducing the risk of errors, theft, and fraud.