1. 1 Planning and Control of Cash and Short term Investments ACCT7320-Dr. Bailey-Fall 2012 Thanks for the contributions of Michelle Strickland and Michelle Tung

2. 2 Agenda Define Cash Define Cash Describe Cash Control Procedures Describe Cash Control Procedures Cash Budget Development Cash Budget Development Identify Cash Flow Requirements Identify Cash Flow Requirements Identify Methods used in developing cash flows Identify Methods used in developing cash flows Controller’s Responsibilities Controller’s Responsibilities Define short Term Investments Define short Term Investments Criteria For Selecting Investment Criteria For Selecting Investment Types of Money Market Instruments Types of Money Market Instruments Short-Term Investment Control Short-Term Investment Control

3. 3 Controller’s Responsibility Develop cash forecast Develop cash forecast Review and enforce internal controls Review and enforce internal controls Reconcile bank accounts Reconcile bank accounts Prepare or review cash reports Prepare or review cash reports Review cash forecast Review cash forecast Ensure proper safeguards to protect company assets Ensure proper safeguards to protect company assets

4. Define Cash and Cash Equivalents “Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.” (International Accounting Standards Board)

5. 5 Fraud: Cash Receipts Major Risk associated with Cash Receipts is the misappropriation of funds. Common schemes: Lapping Lapping Overstating Discounts Overstating Discounts Writing Off Accounts Writing Off Accounts Failure to Record All Sales Failure to Record All Sales

6. 6 Fraud: Cash Disbursement Misappropriation schemes include: Preparing false vouchers or presenting vouchers twice for payment Preparing false vouchers or presenting vouchers twice for payment Changing check amounts Changing check amounts Understating cash discounts Understating cash discounts Cashing unclaimed payroll or dividend checks Cashing unclaimed payroll or dividend checks Forging checks Forging checks

7. 7 Cash Control Procedures Primacy of segregation of duties Ensure employees take vacation at least annually. Ensure employees take vacation at least annually. Assign another employee to perform job duties during absences and periodically. Assign another employee to perform job duties during absences and periodically. Periodically and without warning reassign job duties. Periodically and without warning reassign job duties.

8. 8 Cash Control Procedures All disbursements by check All disbursements by check All documents pre- numbered All documents pre- numbered Checks over $1000 (?) should require two signatures Checks over $1000 (?) should require two signatures Disbursements have proper documentation Disbursements have proper documentation Vouchers should be marked paid to prevent duplicate use Vouchers should be marked paid to prevent duplicate use Petty cash vouchers in ink or typewritten Petty cash vouchers in ink or typewritten Employees bonded Employees bonded Bank Reconciliations monthly [daily?] Bank Reconciliations monthly [daily?] Separate account maintained for payroll Separate account maintained for payroll Restricted access to checks and signature stamps/plates Restricted access to checks and signature stamps/plates …against misappropriation of cash disbursements

9. 9 Bank Reconciliation The reconciling of the balance per bank statement with the balance per books. The reconciling of the balance per bank 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.

10. 10 Cash Management Speed up Cash Receipts Lockbox- Cash receipts go directly to the bank. Lockbox- Cash receipts go directly to the bank. Customer receives report from bank Customer receives report from bank Preauthorized Draft or wire transfer Preauthorized Draft or wire transfer Funds withdrawn directly from customer’s bank account. Funds withdrawn directly from customer’s bank account.

11. 11 Lockbox Arrangement http://www.mellon.com/cashmanagement/re ceivables/lockboxservices.html#retail http://www.mellon.com/cashmanagement/re ceivables/lockboxservices.html#retail

12. 12 Cash Management of Disbursements Control of cash discounts (take them all) Control of cash discounts (take them all) Pay when due, not early or late Pay when due, not early or late Use float Use float Pay from distant banks? Pay from distant banks?

13. 13 Petty Cash Funds Small and fixed fund (e.g., $100) Small and fixed fund (e.g., $100) Cash + Receipts = constant $total Cash + Receipts = constant $total Uniform receipt and uniform procedure Uniform receipt and uniform procedure Proper approvals Proper approvals Person handling cash receipts and disbursements should not control petty cash Person handling cash receipts and disbursements should not control petty cash Immediate cancellation of all petty cash slips after payment Immediate cancellation of all petty cash slips after payment Surprise cash counts Surprise cash counts

14. 14 Cash Budget Produced to determine the cash requirements of an organization. Produced to determine the cash requirements of an organization. Lists the expected cash receipts, disbursements, and short-term financing needs. Lists the expected cash receipts, disbursements, and short-term financing needs. Draws information from the sales forecast budget and the capital budget. Draws information from the sales forecast budget and the capital budget. The cash budget will be used to plan growth and identify seasonal trends. The cash budget will be used to plan growth and identify seasonal trends.

15. 15 Cash Budget There are two methods used to develop cash budgets: Direct estimate of cash receipts and disbursements Direct estimate of cash receipts and disbursements detailed forecast of each cost element or function involving cash. detailed forecast of each cost element or function involving cash. Adjusted net income method Adjusted net income method begins with net income, adjusts for all noncash transactions. begins with net income, adjusts for all noncash transactions.

16. 16 Cash Reports Reports produced daily. Reports produced daily. Summarizes cash requirements. Summarizes cash requirements. Reports cash balances in major bank accounts. Reports cash balances in major bank accounts. Provided to chief executive officer and treasurer. Provided to chief executive officer and treasurer.

17. 17 Evaluating cash flows Sufficiency ratios Sufficiency ratios Directly measure the ability of a company to generate enough cash flow to meet its, such as long-term debt repayment ratio and dividend payout ratio. Directly measure the ability of a company to generate enough cash flow to meet its, such as long-term debt repayment ratio and dividend payout ratio. Efficiency cash flow ratios Efficiency cash flow ratios Indicate how well a company generates cash from sales and from use of assets Indicate how well a company generates cash from sales and from use of assets

18. 18 Evaluating Sufficiency of Cash Cash flow adequacy Cash flow adequacy = Cash from operations / (Long-term debt paid+ Funds for assets purchased + Dividends paid) = Cash from operations / (Long-term debt 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?

19. 19 Evaluating Efficiency of Cash Usage How well are we using Sales (or Assets) to generate cash? Cash flow-to-sales ratio Cash 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 assets employed) = Cash flow from operations / Total assets (or total assets employed)

20. 20 Investment of Short-Term Funds Safety Safety Liquidity Liquidity Stability Stability Marketability Marketability Maturity Maturity Yield Yield Criteria For Selecting Investment Temporary idle cash should be invested to obtain maximum yield consistent with safety, liquidity and diversification.

21. Types 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 Negotiable Certificates of deposit Negotiable Certificates of deposit Issued by a federally chartered bank against deposited funds that earn a specified return for a definite period of time Issued by a federally chartered bank against deposited funds that earn a specified return for a definite period of time Banker’s acceptances Banker’s acceptances begins life as a written demand for the bank to pay a given sum at a future date begins life as a written demand for the bank to pay a given sum at a future date

22. 22 Types of money-market instruments Federal agency issues - Some agencies issue both short-term and long-term obligations Federal agency issues - Some agencies issue both 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 financial and nonfinancial corporations Unsecured short-term promissory notes issued by financial and nonfinancial corporations Short – term tax exempts Short – term tax exempts Issued by state and municipal governments Issued by state and municipal governments

23. 23 Shortchange Artists  Shortchanging schemes Discussion of my article in Internal Auditing Discussion of my article in Internal Auditingmy article in Internal Auditingmy article in Internal Auditing  Demonstrations of shortchanging techniques  http://www.youtube.com/watch?v=JHgf5aOu9NE&feature=related http://www.youtube.com/watch?v=JHgf5aOu9NE&feature=related  Brits: http://www.youtube.com/watch?v=grCE0LPGBbI&feature=related 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  News story: http://www.youtube.com/watch?v=fFGmQxCwhD8&feature=related http://www.youtube.com/watch?v=fFGmQxCwhD8&feature=related

24. 24 Case/Class Discussion Cash Management Have you had experiences with a cash management system in your job/past job? Have you had experiences with a cash management system in your job/past job? How secure are EFT, authorized drafts, wire transfers, etc. against fraud? How secure are EFT, authorized drafts, wire transfers, etc. against fraud?