Chapter 5: Reporting and Safeguarding Cash Flashcards
Cash and Cash Equivalents Definition
Definition: Cash is money or instruments accepted by banks for immediate credit.
Cash includes cash on hand, cash in banks, and similar instruments.
Cash Equivalents: Short-term, highly liquid investments easily convertible to cash with minimal risk of value changes.
Examples of Cash Equivalents: Bank certificates of deposit, Treasury bills.
International Accounting Standard 7
Definition: International Accounting
Standard 7 (IAS 7) Statement of Cash Flows defines cash equivalents as highly liquid investments readily convertible to cash with insignificant risk.
IAS 7 Criteria for Cash Equivalents: Short-term, easily convertible, and low risk of value fluctuations.
Examples of IAS 7 Cash Equivalents: Bank certificates of deposit, government Treasury bills.
Financial Reporting
Consolidation: All cash accounts and cash equivalents combined for financial reporting.
Example: Gildan reports a single account, “cash and cash equivalents,” with a balance of $505.3 million as of January 3, 2021.
Specification: Gildan specifies cash equivalents as investments maturing within three months from acquisition.
Importance of Cash Management
Purpose: Safeguarding cash from theft, fraud, or loss is crucial.
Responsibilities of Cash Management:
Accurate Accounting: Maintain precise records for cash flows and balances.
Cash Controls: Ensure enough cash for current needs, maturing liabilities, and emergencies.
Preventing Idle Cash: Excess idle cash is invested in securities to earn revenue until operational use.
Cash Management Strategies
Accurate Accounting: Detailed records for cash inflows and outflows facilitate financial planning.
Cash Controls: Systems to monitor cash reserves for operational requirements, liabilities, and unforeseen circumstances.
Idle Cash Management: Investments in securities to generate revenue until needed for business operations.
Separation of Duties in Cash Handling
Importance: Cash handling and recordkeeping should be separated to deter theft and fraud.
Examples of Separation:
Receiving and Disbursing Cash: Separate individuals handle cash receipts and cash disbursements.
Accounting for Cash: Individuals handling sales returns are different from those recording cash receipts.
Physical Handling vs. Accounting Entries: Employees receiving or paying cash cannot make accounting entries.
Importance of Separation of Duties
Deterrence of Theft: Requires collusion of multiple persons to steal cash and conceal theft in records.
Illustration: Separate tasks minimize the risk of fraudulent activities.
Audit Reliability: External auditors review internal control levels, enhancing financial statement reliability.
Prescribed Policies and Procedures
Purpose: Establish specific policies for cross-verification of work and reported results.
Control Mechanisms: Policies like reconciliation of cash accounts with bank statements prevent fraudulent disbursements.
Collusion Deterrence: Complex procedures make concealing fraudulent activities difficult without collusion.
Cash Budget
Definition: A financial plan outlining expected cash receipts and disbursements over a specific period.
Purpose: Helps in managing cash flow, making informed financial decisions, and preventing cash shortages.
Cash Receipts and Payments
Daily Cash Receipts: Maintain a daily record of cash receipts (e.g., cash register receipts or incoming cheques) for accurate tracking.
Daily Deposits: All cash receipts should be deposited in a bank daily to minimize theft risk.
Cash Payments Approval: Separate approval for purchases and expenditures; assign approval and cheque-signing to different individuals.
Control Measures: Use pre-numbered cheques and monitor electronic funds transfers to prevent misappropriation of funds.
Independent Internal Verification
Purpose: Ensures transparency and accuracy in financial transactions.
Verification Measures:
Cash vs. Bank Deposits: Independent supervisor compares cash receipts with bank deposits.
Cheques vs. Invoices: Cross-verify issued cheques with invoices to prevent discrepancies.
Monthly Reconciliation: Reconcile bank accounts monthly with the company’s cash accounts for early error detection.
Rotation of Duties
Purpose: Prevents economic crimes by interrupting ongoing fraudulent activities.
Implementation: Employees should take vacations and rotate their duties, creating opportunities for others to detect and report any irregularities.
Content of a Bank Statement
Information Provided:
Deposits: Paper or electronic deposits recorded by the bank.
Cheques: Paper or electronic cheques cleared by the bank.
Bank Charges: Deductions like service charges made directly to the company’s account.
Account Balance: The ending balance in the company’s account.
Example Codes:
EFT: Electronic funds transfers.
NSF: Not sufficient funds (returned cheque).
SC: Bank service charges.
INT: Interest earned.
Handling NSF Cheques
Definition: NSF (Not Sufficient Funds) cheques occur when a deposited cheque lacks funds.
Action: Company treats NSF cheques as receivables, making journal entries to debit accounts receivable and credit cash for the amount.
Bank Service Charges and Interest Earned
Bank Service Charges: Deductions like service charges require journal entries to debit relevant expense account (e.g., bank service expense) and credit cash.
Interest Earned: Interest credited to the account requires journal entries to debit cash and credit interest revenue.
Need for Reconciliation
Definition: A bank reconciliation is a schedule explaining the difference between the ending cash balance in the company’s records and the ending cash balance reported by the bank on the monthly statement.
Frequency: Should be completed for each separate chequing account at the end of each month.
Purpose: Resolves discrepancies between the company’s cash ledger account and the bank statement.
Reasons for Differences in Cash Balances
Timing Differences:
Unrecorded Transactions: Some cash transactions are recorded by the company but not yet on the bank statement.
Bank-Recorded Transactions: Some transactions are on the bank statement but not yet recorded by the company.
Potential Causes:
Recording Errors: Discrepancies may result from errors in transaction recording by either the company or the bank.
Outstanding Cheques
Definition: Cheques written and recorded in the company’s ledger but not yet cleared by the bank.
Identification: Compare cancelled cheques on the bank statement with the company’s cheque records (e.g., cheque stubs or journal).
Deposits in Transit
Definition: Deposits sent to the bank and recorded in the company’s ledger but not yet recorded by the bank.
Occurrence: Often happens when deposits are made shortly before the close of the bank statement period.
Identification: Compare deposits listed on the bank statement with copies of deposit slips retained by the company.
NSF Cheques
Definition: “Bad” or “bounced” cheques that were deposited but need to be deducted from the company’s cash account and recorded as accounts receivable.
Bank Service Charges
Definition: Expenses for bank services listed on the bank statement but not recorded on the company’s books.
Interest
Interest paid by the bank to the company on its bank balance.
Impact: Can cause differences between the bank and book balances.
Errors
Cause: Mistakes made by both the bank and the company, especially in high-volume cash transactions.
Bank Reconciliation Process
Steps:
Identify Outstanding Cheques: Un-cleared cheques recorded by the company.
Identify Deposits in Transit: Deposits made by the company but not yet recorded by the bank.
Identify Bank Charges and Credits: Bank deductions or additions not yet recorded by the company.
Determine Impact of Errors: Identify and rectify discrepancies, e.g., transposition errors.
Purpose: To reconcile the ending bank balance with the ending book balance of cash.
Importance of Bank Reconciliation
Accuracy Check: Ensures accuracy of both bank balance and company’s cash records.
Correct Cash Balance: Computes the correct cash balance, including cash on hand if any, reported on the statement of financial position.
Identification of Unrecorded Transactions: Highlights any transactions or changes necessary for the company’s cash accounts to show the correct balance.
Journal Entries: Transactions identified in the bank reconciliation require corresponding journal entries in the company’s records.
