WEEK 8 -Cash management and control, Cash flow statements

Question 1

Cash

Answer 1

• Term used in accounting to identify money, duplicates of credit car and electronic funds transfer at POS, any other negotiable instrument (cheque or postal noted), that a bank will normal accept as a deposit into an account
  
  • Almost every transaction eventually results in an inflow or outflow of cash Proper use of cash is an important management function

Question 2

Environmental and Social Governance (ESG) and Impact of Cash Flows

Answer 2

• top line growth
• cost reductions
• reduced regulatory and legal interventions
• employee productivity
• investment and asset optimisation

Question 3

Cash Control Principles

Answer 3

1. Separation of responsibility for handling and custodianship of cash from maintaining records
2. Internal verification on a frequent basis: the band record of all cash transactiosn is a cross-check on the accuracy of internal cash records

Question 4

Internal Control of Cash Receipts

Answer 4

Clear Lines of Responsibility - Only designated people act as cashiers

Separation of record keeping and custodianship - people who handle cash do not bank cash or record receipts in the accounts

division of responsibility for related transactions - mail clerk records receipts through the post while another person supervises

mechanical and electronic devices - use of cash registers and EFTPOS equipment

Internal Control - One senior staff member records cash receipts daily; another compares total receipts with daily deposits

Physical Controls - use of safe on premises for temporary cash storage, and night safe for deposits

Other - prenumbered sales dockets and receipt forms if done manually, all receipts banked in tact each day

Question 5

Control of Cash Receipts

Answer 5

from cash sales and mail - principle of separation of custodianship and record keeping

cash short and over

Question 6

Control of cash payments

Answer 6

approving invoices for payment - employees designated to approve invoices for payment should have no responsibility for electronic transfers

signing cheques and approving electronic transfers - employees with this responsibility should have no invoice approval or accounting responsibilities

Question 7

Control of Cash Payments: Principles

Answer 7

• use of business bank account to enable all major payments to be made by cheque or electronic transfer
• use of petty cash fund to cover small incidental cash payments

Question 8

Internal Control of Cash Payments

Answer 8

Clear lines of responsibility - designated people authorise payments; onyl authorised people approve electronic transfers or sign cheques (although cheques are being phased out)

Separation of record keeping and custodianship - ppl who sign payment instruments are not involved with recording payments in accounting records

Divisions of responsibility for related transactions - person authorising payment does not make the electronic funds transfer or sign the cheques

mechanical and electronic devices - limited acces through passwords

internal control - reconcile payments with records kept by bank as shown on bank statement; rancom checks and balances on petty cash fund balance

phsycial controls - use of safe

Question 9

Reconciliation

Answer 9

• CAB balance at any date rarely agrees with balance shown on bank statement of the same date because

1. some items recorded in CJ in period covered are not recorded by bank on statement for the same period
2. some items originate in bank statement
3. errors have ben made by entity in CJ’s or by bank in entity’s account and bank statement

Question 10

Reconciliation Documents Required

Answer 10

Last bank reconciliation statement prepared

CRJ and CPJ covering period since last reconciliation

opening balance for CAB for period beginning with the preparation of last reconciliation statement

statement covering period since last reconciliation

Question 11

Bank Reconciliation Statment entry

Answer 11

Bank Reconciliation Statement
as at … 2025

Balance as per bank statement Cr (or DR)
+ ( or - ) outstanding deposits

     - ( or + ) unpresented chq's or outstanding EFTS

Balance as per CAB (Dr or Cr)

                         $xxx
                           xxx
                           -----
                           xxx
           $xxx
             xxx 
             xxx       xxx
             -----       -----
                         $xxx

Question 12

Cash Budgeting

Answer 12

• projection of expected future CR and CP, entity can meet commitments as they fall due and as aresult of paying on time, reputation and credit standing of entity is maintained
• minimises use of borrowed funds
• cash funds are not left lying idle and can generate income from interest and dividends

Question 12

Petty Cash Fund

Answer 12

• establised fund for round amount
• recorded as

Dr to Petty cash fund, and Cr to bank account

• making payments - recipient signs petty cash voucher or receipt prepared by petty cashier.
• reimbursing - transfer amount = to sum of vouchers in fund, and each voucher is stamped and PAID by cashier

Question 13

Principles of Cash Management

Answer 13

• reduce collection time for accounts payable
• postpone payments to acc payable
• keep inventory levels to a minimum
• invest surplus cash
• plan for capital expenditures

Question 14

Analysing Adequacy of Cash - 2 ratios

Answer 14

• short term cash flow adequacy ratio
• cash flow adequacy ratio

Question 15

Cash on Hand

Answer 15

• cash/demand deposits
• eg. notes, coins, demand deposits held at financial institutions
• conditions: none

Question 16

Cash Equivalents

Answer 16

• short term highly liquid investments
• bank bills, non-bank bills, deposits on short-term money market
• conditions; readily convertible to cash AND short-term investments (3m or less) AND insignificant risk of changes in value

Question 17

Cash flow from operating activities

Answer 17

• principal revenue-producing activities of the entity and other activities that are not investing or financing activities
• represents an entity’s cash flows

eg. Inflows
- for sale of goods or services
- from cash advances and loans made relating to entity’s main revenue-producing activities

eg. Outflows
- to suppliers for goods
- to employees for services
- to lenders for interest and other borrowing costs

Question 18

Cash flow from investing activities

Answer 18

• relating to acquisition and disposal of long-term assets and other investments that are not included in cash equivalents

eg. Inflows
- from sale of property, plant and equipment
- from repayment of advances and loans to other entities
- from interest received (or operating activity)
- from interest received

eg. Outflows
- purchase property, plant and equipment
- to purchase shares and debentures of other entities
- to lend money to other entities

Question 19

Cash flows from financing activities

Answer 19

• relating to change in size and compositiong of entity, adn borrowings of an antity give rise to CF from FA
• borrowing costs paid form financing activities are classified the same as dividends paid

eg. Inflows
- from issue of shares
- from issuing debentures, notes
- from borrowings
- from grants

eg. Outflows
- to shareholders for share buy-backs and redemption of preference shares
- to owners for dividends paid (or operating activity) or cash drawings
- to debenture holders for redemption of debt

Question 20

Accrual Basis Cost of Sales

Answer 20

(-) beginning inventory (+) ending inventory = accrual basis purchases

Question 21

Accrual basis purchases

Answer 21

(+) beginning acc payable (-) ending accounts payable = cash paid to suppliers for purchases

Question 22

Impact of GST

Answer 22

• rec and payables of GST made by entity are included as part of caluclations for CR from customers and payments made to suppliers

Question 23

Trade Accounts Receivables

Answer 23

• must consider bad debts (direct-write off), allowance for doubtful debts (expected credit loss) an ddiscount allowed

Question 24

Non-trade receivables and payables

Answer 24

• may not be included in calc of CF from OA
• treated as CFIA or CFIA

Question 25

Bills Receivable/Bills Payable

Answer 25

• classified into trade bills and commercial bills
• essentially another ACCREC/PAY, must enter into calculation for CFOA

Question 26

Short Term Investments

Answer 26

• can appear in CuA and CuL of SOFP
• not included in process of converting accrual basis expenses to cash basis expenses to arrive at CFOA

Question 27

Dividends

Answer 27

• for SOCF putposes, only cash payments for dividends are considered
• dividends declared are not considered
• usually reported in SOCF as FA, but may be shown as OA

Question 28

Income Tax

Answer 28

• companies required to pay income tax
• reported asincome tax (EXP) in SOFP
  L for tax as CuTAX Liability in SOFP

Question 29

Limitations of Statement of Cash Flows

Answer 29

• past cash flows reported
• non-cash transactions adn events
• disclosures in notes to the statement
• liquidity, sovlency
• management manipulation costs