Cash and Temporary Investments

Cash is that current asset which is available for payment of current liabilities and the regular operating expenses of the business. It includes deposits with banks as well as petty cash funds, currency and coins, personal checks, bank drafts, money orders and cashiers' checks. The term excludes such items as postage on hand, IOU's, postdated checks, sinking funds in the hands of a bond trustee, etc.

Cash Budgets

A cash budget is a statement of estimated cash receipts, disbursements, and balances for a given time period. This time period is determined by operating patterns and industrial peculiarities. Cash budgets may be (1) long-term policy budgets covering several years or (2) short-term operating budgets covering a year or less. The basic distinction between the two lies in the fact that the short-term budget is used in planning for borrowings or the investment of temporary idle funds whereas the long-term forecast can be used in planning for capital expenditures, dividend policy, etc.

Forecasting Cash Receipts, Disbursements, and Balances

The main source of cash for any business is the revenue from the sale of its goods and/or services. There are also some miscellaneous cash sources, such as interest, dividends, commissions, etc. When forecasting cash receipts, it must be remembered that a lag between sales and cash collection usually results from conducting business on credit. Collection patterns based on past experience therefore provide the basis for approximating the flow of cash into the enterprise.

The sales pattern is also useful in forecasting cash disbursements.

Expenditures for raw materials, supplies, salaries and wages, etc. are largely controlled by expected sales. At the same time, payments for other items may follow a consistent pattern each month and not be dependent on sales volume (e.g., salaries for key management personnel, rental payments, etc.), Still other expenditures may depend on a combination of contractual arrangements and sales volume.

Generally, cash forecasts are prepared on a monthly basis for several months at a time. The projected balance is compared to the amount established as necessary to finance regular operations; this sometimes appears within the budget as the cash balance desired. When the relationship between projected receipts and disbursements results in the availability of a significant amount of excess (free) cash, such funds are usually invested. Conversely, if a cash deficiency exists, plans will be made to obtain the necessary funds from either existing excess cash or short-term loans.

Investment of Idle Cash

Idle cash is defined as those funds which will not be needed in the immediate future for the daily operations of the business. Such funds are invested in marketable securities (generally short-term notes or bonds) to generate additional income. Marketable securities are those which have relatively stable prices and are salable on a day-to-day basis.

Transactions Involving Marketable Securities

Marketable securities are recorded at cost upon acquisition. Cost includes the actual purchase price plus brokers' fees, transfer taxes, and any other costs incidental to acquisition.

Marketable Securities and the Financial Statements

By definition, marketable securities represent highly liquid assets. As such, their financial statement presentation is of special interest to creditors and other analysts concerned with a firm's debt-paying ability. In the current asset section of the balance sheet, these temporary investments may be listed in one of two ways:

(1) At cost, with a parenthetical notation showing current market value, or

(2) At lower-of-cost-or-market, Which requires the establishment of a separate valuation account for reduction of the asset. This method is not allowed for income tax purposes. The position of the American Institute of Certified Public Accountants, with respect to marketable securities, is that

" ... where market value is less than cost by a substantial amount and it is evident that the decline in market value is not due to a mere temporary condition, the amount to be included as a current asset should not exceed the market value ... . It is important that the amounts at which current assets are stated be supplemented by information which reveals for temporary investments, their market value at the balance-sheet date.... (Accounting Research and Terminology Bulletins, Final Edition)."

Petty Cash

Imprested cash is the term used for a petty cash fund of fixed amount from which the firm makes payments for small bills that are most conveniently paid in cash. The size of the fund should be sufficient to meet the normal needs of the business for two to three weeks. As disbursements are made, vouchers are prepared and placed in the fund. Thus, at any one time, the total of these vouchers plus the remaining cash should equal the total size of the original fund. The fund is restored periodically to its original amount by a company check drawn to Petty Cash.

Reconciliation of Bank Balances

The cash balance on a company's books seldom agrees with the balance on its monthly bank statement. Differences between these two amounts result from one or more of the following:

(1) Cash received at the end of the month which is not deposited in the bank until the following month (deposit in transit),

(2) Checks issued by the company which have not cleared the bank (outstanding checks),

(3) Bank charges for services rendered during the past month

(4) Notes receivable collected by the bank

(5) Recording and handling errors made by either the bank or the company.

The process of reconciling these two amounts requires a review of all cash transactions for the period on the company's books and on the bank statement. Many differences involve time lags which are self-correcting over time. However, errors on the company's books must be corrected, and the bank must be advised if there are errors in its records. This is the essence of the reconciliation.