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Planning and Control of Cash Planning and Control of Cash and Short term Investmentsand Short term Investments

ACCT7320-Dr. Bailey-Fall 2012ACCT7320-Dr. Bailey-Fall 2012

Thanks for the contributions of Michelle Strickland and Michelle TungThanks for the contributions of Michelle Strickland and Michelle Tung

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AgendaAgenda

• Define Cash Define Cash • Describe Cash Control Describe Cash Control

ProceduresProcedures• Cash Budget Cash Budget

DevelopmentDevelopment• Identify Cash Flow Identify Cash Flow

RequirementsRequirements• Identify Methods used in Identify Methods used in

developing cash flowsdeveloping cash flows• Controller’s Controller’s

Responsibilities Responsibilities

• Define short Term Define short Term InvestmentsInvestments

• Criteria For Selecting Criteria For Selecting InvestmentInvestment

• Types of Money Market Types of Money Market InstrumentsInstruments

• Short-Term Investment Short-Term Investment ControlControl

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Controller’s ResponsibilityController’s Responsibility

• Develop cash forecastDevelop cash forecast• Review and enforce internal controlsReview and enforce internal controls• Reconcile bank accountsReconcile bank accounts• Prepare or review cash reportsPrepare or review cash reports• Review cash forecastReview cash forecast• Ensure proper safeguards to protect Ensure proper safeguards to protect

company assetscompany assets

Define Cash and Cash Define Cash and Cash EquivalentsEquivalents

““Cash equivalents are short-term, Cash equivalents are short-term, highly liquid investments that are highly liquid investments that are readily convertible to known readily convertible to known amounts of cash and which are amounts of cash and which are subject to an insignificant risk of subject to an insignificant risk of changes in value.”changes in value.”

(International Accounting (International Accounting Standards Board)Standards Board)

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Fraud: Cash ReceiptsFraud: Cash Receipts

Major Risk associated with Cash Receipts is the Major Risk associated with Cash Receipts is the misappropriation of funds. misappropriation of funds.

Common schemes:Common schemes:• LappingLapping• Overstating DiscountsOverstating Discounts• Writing Off AccountsWriting Off Accounts• Failure to Record All SalesFailure to Record All Sales

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Fraud: Cash Disbursement Fraud: Cash Disbursement Misappropriation schemes include:Misappropriation schemes include:• Preparing false vouchers or presenting vouchers Preparing false vouchers or presenting vouchers

twice for paymenttwice for payment• Changing check amountsChanging check amounts• Understating cash discountsUnderstating cash discounts• Cashing unclaimed payroll or dividend checksCashing unclaimed payroll or dividend checks• Forging checksForging checks

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Cash Control ProceduresCash Control ProceduresPrimacy of segregation of dutiesPrimacy of segregation of duties• Ensure employees take vacation at least Ensure employees take vacation at least

annually.annually.• Assign another employee to perform job duties Assign another employee to perform job duties

during absences and periodically.during absences and periodically.• Periodically and without warning reassign job Periodically and without warning reassign job

duties.duties.

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Cash Control ProceduresCash Control Procedures

• All disbursements by All disbursements by checkcheck

• All documents pre-All documents pre-numberednumbered

• Checks over $1000 (?) Checks over $1000 (?) should require two should require two signaturessignatures

• Disbursements have Disbursements have proper documentationproper documentation

• Vouchers should be Vouchers should be marked paid to prevent marked paid to prevent duplicate useduplicate use

• Petty cash vouchers Petty cash vouchers in ink or typewrittenin ink or typewritten

• Employees bondedEmployees bonded• Bank Reconciliations Bank Reconciliations

monthly [daily?]monthly [daily?]• Separate account Separate account

maintained for payrollmaintained for payroll• Restricted access to Restricted access to

checks and signature checks and signature stamps/platesstamps/plates

……against misappropriation of cash disbursementsagainst misappropriation of cash disbursements

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Bank ReconciliationBank Reconciliation

• The reconciling of the balance per bank The reconciling of the balance per bank statement with the balance per books.statement with the balance per books. The employee who performs the bank

reconciliation should not be involved either in the receipt or disbursement of cash.

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Cash ManagementCash Management

Speed up Cash ReceiptsSpeed up Cash Receipts• Lockbox- Cash receipts go directly to the bank.Lockbox- Cash receipts go directly to the bank.

• Customer receives report from bankCustomer receives report from bank

• Preauthorized Draft or wire transferPreauthorized Draft or wire transfer• Funds withdrawn directly from customer’s bank Funds withdrawn directly from customer’s bank

account.account.

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Lockbox ArrangementLockbox Arrangement

http://www.mellon.com/cashmanagement/http://www.mellon.com/cashmanagement/receivables/lockboxservices.html#retail receivables/lockboxservices.html#retail

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Cash Management of Cash Management of DisbursementsDisbursements

• Control of cash discounts (take them all)Control of cash discounts (take them all)• Pay when due, not early or latePay when due, not early or late• Use floatUse float

• Pay from distant banks?Pay from distant banks?

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Petty Cash FundsPetty Cash Funds

• Small and fixed fund (e.g., $100)Small and fixed fund (e.g., $100)• Cash + Receipts = constant $totalCash + Receipts = constant $total

• Uniform receipt and uniform procedureUniform receipt and uniform procedure• Proper approvalsProper approvals• Person handling cash receipts and Person handling cash receipts and

disbursements should not control petty disbursements should not control petty cashcash

• Immediate cancellation of all petty cash Immediate cancellation of all petty cash slips after paymentslips after payment

• Surprise cash countsSurprise cash counts

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Cash Budget Cash Budget • Produced to determine the cash requirements of Produced to determine the cash requirements of

an organization.an organization.• Lists the expected cash receipts, disbursements, Lists the expected cash receipts, disbursements,

and short-term financing needs. and short-term financing needs. • Draws information from the sales forecast Draws information from the sales forecast

budget and the capital budget.budget and the capital budget.• The cash budget will be used to plan growth and The cash budget will be used to plan growth and

identify seasonal trends.identify seasonal trends.

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Cash BudgetCash Budget

There are two methods used to develop There are two methods used to develop cash budgets:cash budgets:

• Direct estimate of cash receipts and Direct estimate of cash receipts and disbursementsdisbursements

• detailed forecast of each cost element or function detailed forecast of each cost element or function involving cash.involving cash.

• Adjusted net income methodAdjusted net income method• begins with net income, adjusts for all noncash begins with net income, adjusts for all noncash

transactions.transactions.

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Cash ReportsCash Reports

• Reports produced daily.Reports produced daily.• Summarizes cash requirements.Summarizes cash requirements.• Reports cash balances in major bank Reports cash balances in major bank

accounts.accounts.• Provided to chief executive officer and Provided to chief executive officer and

treasurer.treasurer.

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Evaluating cash flowsEvaluating cash flows

• Sufficiency ratiosSufficiency ratios• Directly measure the ability of a company to generate Directly measure the ability of a company to generate

enough cash flow to meet its, such as long-term debt enough cash flow to meet its, such as long-term debt repayment ratio and dividend payout ratio.repayment ratio and dividend payout ratio.

• Efficiency cash flow ratiosEfficiency cash flow ratios• Indicate how well a company generates cash from Indicate how well a company generates cash from

sales and from use of assetssales and from use of assets

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Evaluating Evaluating SufficiencySufficiency of Cash of Cash

• Cash flow adequacy Cash flow adequacy • = Cash from operations / (Long-term debt paid+ = Cash from operations / (Long-term debt paid+

Funds for assets purchased + Dividends paid)Funds for assets purchased + Dividends paid)

• Long-term debt repayment Long-term debt repayment • = Long-term debt payments / Cash from operations= Long-term debt payments / Cash from operations

• Dividend payout = Dividend payout = • Dividends / Cash from operationsDividends / Cash from operations

Is cash sufficient to cover needs?Is cash sufficient to cover needs?

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Evaluating Evaluating EfficiencyEfficiency of Cash Usage of Cash Usage

How well are we using Sales (or How well are we using Sales (or Assets) to generate cash?Assets) to generate cash?

• Cash flow-to-sales ratioCash flow-to-sales ratio• = Cash flow from operations / Sales= Cash flow from operations / Sales

• Cash flow return-on-assets Cash flow return-on-assets • = Cash flow from operations / Total assets (or total = Cash flow from operations / Total assets (or total

assets employed)assets employed)

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Investment of Short-Term FundsInvestment of Short-Term Funds

• SafetySafety• LiquidityLiquidity• StabilityStability

• MarketabilityMarketability• MaturityMaturity• YieldYield

Criteria For Selecting InvestmentCriteria For Selecting Investment

Temporary idle cash should be invested to Temporary idle cash should be invested to obtain maximum yield consistent with obtain maximum yield consistent with safety, liquidity and diversification.safety, liquidity and diversification.

Types of money-market instrumentsTypes of money-market instruments

• U.S. Treasury bill U.S. Treasury bill • Short-term notes issued by the U.S. government Short-term notes issued by the U.S. government

• NegotiableNegotiable Certificates of deposit Certificates of deposit • Issued by a federally chartered bank against deposited Issued by a federally chartered bank against deposited

funds that earn a specified return for a definite period of funds that earn a specified return for a definite period of time time

• Banker’s acceptances Banker’s acceptances • begins life as a written demand for the bank to pay a begins life as a written demand for the bank to pay a

given sum at a future date given sum at a future date

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Types of money-market instrumentsTypes of money-market instruments

• Federal agency issues - Some agencies issue Federal agency issues - Some agencies issue both short-term and long-term obligationsboth short-term and long-term obligations

• Fannie Mae and Sallie Mae Fannie Mae and Sallie Mae

• Commercial paper Commercial paper • Unsecured short-term promissory notes issued by Unsecured short-term promissory notes issued by

financial and nonfinancial corporations financial and nonfinancial corporations

• Short – term tax exemptsShort – term tax exempts• Issued by state and municipal governments Issued by state and municipal governments

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Shortchange ArtistsShortchange Artists

Shortchanging schemesShortchanging schemes Discussion of my article in Discussion of my article in Internal AuditingInternal Auditing

  Demonstrations of shortchanging techniquesDemonstrations of shortchanging techniques http://www.youtube.com/watch?v=JHgf5aOu9NE&feature=relatedhttp://www.youtube.com/watch?v=JHgf5aOu9NE&feature=related Brits: http://www.youtube.com/watch?v=grCE0LPGBbI&feature=relatedBrits: http://www.youtube.com/watch?v=grCE0LPGBbI&feature=related ttp://www.youtube.com/watch?v=SlhWhuYCnH4 (Straightforward demo, hands only)ttp://www.youtube.com/watch?v=SlhWhuYCnH4 (Straightforward demo, hands only) News story: http://www.youtube.com/watch?v=fFGmQxCwhD8&feature=relatedNews story: http://www.youtube.com/watch?v=fFGmQxCwhD8&feature=related

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Case/Class Discussion Case/Class Discussion

Cash ManagementCash Management• Have you had experiences with a cash Have you had experiences with a cash

management system in your job/past job?management system in your job/past job?• How secure are EFT, authorized drafts, wire How secure are EFT, authorized drafts, wire

transfers, etc. against fraud?transfers, etc. against fraud?