Home / Part 3 / Chapter 8 / C2

Control of Cash

🎯 Learning Objectives

  • Understand why cash requires special internal controls
  • Identify cash and cash equivalents for financial reporting
  • Explain procedures for controlling cash receipts
  • Describe procedures for controlling cash disbursements
  • Apply bank reconciliation as a cash control tool
  • Understand the importance of petty cash controls

📚 Background & Principles

Cash is the most liquid asset and the most susceptible to theft and misappropriation. Effective cash controls protect assets, ensure accurate financial reporting, and promote operational efficiency. These controls cover both cash receipts (money coming in) and cash disbursements (money going out).

Core Principle: Cash controls follow the principle of segregation of duties—different people should handle cash receipt, cash recording, and bank deposits. This prevents any single person from both stealing cash and hiding the theft in records.
💡 Key Insight: Think of cash liquidity like physical states of water. Cash is liquid water (instantly spendable), cash equivalents are ice cubes (melt in 90 days), and inventory is a glacier (slow to convert).

🔑 Key Concepts

Cash Equivalents

Short-term, highly liquid investments within 3 months of maturity (T-bills, money market funds).

Cash Receipt Controls

Procedures for over-the-counter and mail receipts to ensure all cash is recorded and deposited.

Cash Disbursement Controls

Procedures for authorizing and recording payments to prevent unauthorized disbursements.

Zero-Base Cash

Keeping minimum cash on hand by depositing all receipts promptly and paying by check.

Electronic Funds Transfer (EFT)

Electronic movement of money between accounts, providing audit trails and reducing handling.

Bank Reconciliation

Monthly comparison of bank statements to company records to verify cash balances.

🔍 Deep Dive

Explore cash control at different levels of depth:

🟢 Foundational Level

Understanding cash liquidity.

Liquidity Analogy

Liquid Water vs. Ice vs. Glacier

Cash (Liquid Water)

You can pour it instantly. Spend NOW.

Cash Equivalents (Ice)

Basically water, but need to melt first. Investments maturing in < 90 days.

Inventory (Glacier)

Frozen assets. Must sell (melt) before spending.

Cash Equivalents Criteria

Cash Equivalents

Short-term, highly liquid investments within 3 months of maturity

Examples: T-bills, Money Market Funds, Commercial Paper

🟡 Standard Level

Understanding receipt and disbursement controls.

Cash Receipt Controls

Over-the-Counter

  • ✅ Customer receives receipt
  • ✅ Register records transaction
  • ✅ Manager compares tape to cash
  • ✅ Daily deposit required

By Mail

  • ✅ Two people open mail
  • ✅ List of checks prepared
  • ✅ Copy to cashier & accountant
  • ✅ Immediate deposit

🔴 Advanced Level

Understanding cash management and fraud prevention.

Cash Management Strategies

Strategy Description
Zero-Base Cash Deposit all receipts, pay by check/EFT
Electronic Payments Use EFT for vendor payments and payroll
Controlled Disbursement Timing bank withdrawals to optimize cash

🧪 Liquidity Lab: Sort the Assets

Drag the items below into the correct container based on their liquidity. Remember: Ice melts in 90 days!

Score: 0 / 6
💧

Cash

Liquid (Instant)

🧊

Equivalents

Melts < 3 Mos.

🗻

Non-Cash

Frozen (> 3 Mos.)

🚫 Common Misconceptions & Professional Tips

❌ Misconception 1: "Any short-term investment is a cash equivalent."

✅ Reality: Only investments within 3 months of maturity qualify as cash equivalents.
❌ Misconception 2: "Bank reconciliation is just for finding errors."

✅ Reality: It's also a critical fraud detection tool and provides external verification.
💡 Professional Tip #1: Reconcile bank statements monthly.
💡 Professional Tip #2: Have someone other than the cash custodian perform bank reconciliation.
💡 Professional Tip #3: Deposit all cash receipts daily.

🧠 Memory Aids & Quick Reference

⚡ Quick Recall: Cash Equivalents

Must be:

• Readily convertible to known cash amount

• Within 3 months of maturity

Examples: T-bills, Money Market Funds

📖 Glossary

Cash Equivalents

Short-term, highly liquid investments within 3 months of maturity.

Bank Reconciliation

Comparing bank statements to company records to verify cash balances.

Segregation of Duties

Separating functions so no single person controls all aspects of cash.

Zero-Base Cash

Keeping minimum cash by depositing everything and paying by check.

🎯 Knowledge Check: Control of Cash

Test your understanding of cash control:

Question 1: Which is a cash equivalent?


Question 2: Who should perform bank reconciliation?


Question 3: Cash receipts by mail should be handled by: