Internal Control of Cash, Cash Flow Statement and Other Issues
Cash includes cash on hand and cash equivalents, such as highly liquid investments (money-market accounts, treasury bills) and borrowings used as part of an entities cash management process. Cash is difficult to control because anyone can spend cash; it is easily misappropriated. Internal controls, the procedures and processes for managing cash, is therefore necessary and usually involves separate duties so that the same person is not responsible for receiving and recording cash. Collusion however may still be an issue.
In addition to the balance sheet and income statement, reporting entities are now required to prepare a cash flow statement. The purpose is to provide information about cash receipts and cash payments for an accounting period. Transfers between cash equivalents and cash on hand need not be reported. Money coming in is referred to as cash inflows and money going out as cash outflows. The difference is the net cash flow.
The following format is recommended in the Accounting Standard. Negative amounts can be shown in brackets
|Transaction||This Year $Ks||This Year $Ks||Last Year $Ks|
|Cash flow from operating activities||Total OA|
|Cash flow from investing activities||Total IA||yIA|
|Detail Cash flow from investing activities||yIAD|
|Cash flow from financing activities|
|Detail flow from financing activities (Dividends)||xFA1||xFA1|
|Detail flow from financing activities (Share Capital)||xFA2||xFA1|
|Detail flow from financing activities (Repayment of loan)||xFA3|
Cash flow from operating activies refers to cash receipts from customers, payments to suppliers and employess, interest received and paid, dividends received. It is not the same as profit which depends on accrual accounting. To reconcile the net profit figure with the operating cash flows adjustments are made. This includes adding non-cash expenses (depreciation, amortisation) back to profit).
An increase in the debtors over the period must be subtracted from the sales to arrive at the cash received. A decrease in debtors of the period must be added to arrive at cash received. An increase in the debtors must be subracted from the profit to arive an the net cash flow from operating activity. A decrease in debtors must be added to profit to arrive at the net cash flow. An increase in creditors must be subtracted from the purchases to arrive at the cash paid and a decrease in the creditors over this period must be added to purchases to arrive at the cash paid. An increase in the creditors in the period must be added to the profit to arrive at the net cash flow and a crecease in creditors over the period must be subtracted from the profit to arrive at the net cash flow.
Charges for depreciation and amortisation of non-current assets charged to the income statement for the period must be added back to the operating profit to arrive at the net cash flow. An increase in inventory held over the period must be subtracted from the profit to arrive at the net cash flow. A decrease in inventory must be added to the profit to arrive at net cash flow.
There are two types of cash flow from investing activities; the first relates to non-current assets like property, plant & equipment and the second to shares in other companies. Both involve cash outflows for the purchase and cash inflow from sales. Cash inflows from financing activities include share issues, new loans and debtures. Cash outflows involves payments, shares redeemed and dividends paid.
Consolidated financial statements are prepared for an economic entity that is a group of entities with a parent and subsidaries. Consolidated statements must be made if there is a parent entity which controls subsidaries, directly or indirectly through other subsidaries. Control is defined as the power to govern the financial and operating policies. It is necessary to eliminate investment, subsidiary accounts and transactions between members of a group, otherwise reported performance would be inaccurate. The investment in subsidiary must be eliminated else a group would include in the consolidated balance sheet an asset as an investment in itself.
Deferred tax assets and deferred tax liabilities arise because of temporary differences between the tax value and the carrying value (for accounting purposes) of assets and liabilities, and tax losses e.g., a company which uses cash accounting for tax purposes rather than accrual.
The Goods and Services tax involves recording the the GST amounts paid and received in separate accounts. Amounts paid are an asset and amounts recorded are a liability. At the end of each rporting period the difference is paid to the ATO when the liability is greater than the asset. A receivable is recognised if the asset is greater than the liability.