adeng pustikaningsih, m.si. dosen jurusan pendidikan akuntansi...
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Adeng Pustikaningsih, M.Si.
Dosen Jurusan Pendidikan Akuntansi
Fakultas Ekonomi
Universitas Negeri Yogyakarta
CP: 08 222 180 1695
Email : adengpustikaningsih@uny.ac.id
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8 Sarbanes-Oxley, Internal Control
and Cash
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1. Describe the Sarbanes-Oxley Act of
2002 and its impact on internal
controls and financial reporting.
2. Describe and illustrate the objectives
and elements of internal control.
3. Describe and illustrate the application
of internal controls to cash.
After studying this chapter, you should
be able to:
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4. Describe the nature of a bank account
and its use in controlling cash.
5. Describe and illustrate the use of a
bank reconciliation in controlling
cash.
6. Describe the accounting for special-
purpose cash funds.
After studying this chapter, you should
be able to:
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7. Describe and illustrate the reporting
of cash and cash equivalents in the
financial statements.
After studying this chapter, you should
be able to:
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Describe the Sarbanes-Oxley
Act of 2002 and its impact on
internal controls and
financial reporting.
Objective 1
8-1
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The Sarbanes-Oxley Act of 2002
(referred to simply as Sarbanes-
Oxley) applies only to companies
whose stock is traded on public
exchanges. Its purpose is to restore
public confidence and trust in the
financial statements of companies.
8-1
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Sarbanes-Oxley requires
companies to maintain
strong and effective
internal control.
8-1
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Internal control is broadly
defined as the procedures and
processes used by a company to
safeguard its assets, process
information accurately, and
ensure compliance with laws
and regulations.
8-1
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8-1 Effect of Sarbanes-Oxley Act
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As a company that listed on the New York Stock Exchange, Telkom is obliged to comply with all existing rules, including the Sarbanes Oxley Act (SOA). The SOA requires internal control over the financing reporting and
guarantee from Telkom’s management that all information in the financial report is accurate and can be
accounted for. To meet the SOA requirement, Telkom has conducted internal improvement through organizational transformation and the application of Good Corporate
Governance (GCG) policies. The internal control over the financing reporting has become the priority for improving
the system.
8-1
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Describe and illustrate the
objectives and elements of
internal control.
Objective 2
8-2
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1) assets are safeguarded and used for
business purposes,
2) business information is accurate, and
3) employees comply with laws and
regulations.
To provide reasonable assurance that:
8-2 Objectives of Internal Control
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Employee fraud is the
intentional act of
deceiving an employer
for personal gain.
8-2
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1) the control environment,
2) risk assessment,
3) control procedures,
4) monitoring, and
5) information and communication.
Management is responsible for designing and
applying five elements of internal control to
meet the three internal control objectives.
These elements are—
8-2 Five Elements of Internal Control
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8-2
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A business’s control
environment is the overall
attitude of management and
employees about the
importance of controls.
8-2 Control Environment
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8-2 Factors That Influence the Control
Environment
Management’s philosophy and
operating style
The business’s organizational
structure
Personnel policies
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8-2 Control Environment
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Example of control procedures for an all-
night convenience store:
Locate the cash register near the door, so that
it is fully visible from outside the store; have
two employees work late hours; employ a
security guard.
Deposit cash in the bank daily, before 5 p.m.
(Continued)
8-2
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Keep only small amounts of cash on hand
after 5 p.m. by depositing excess cash in a
store safe that can’t be opened by
employees on duty.
Install cameras and alarm systems.
8-2
(Concluded)
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8-2 Indicators of Internal
Control Problems
Warning Signs With Regard to People
1. Abrupt change in lifestyle.
2. Close social relationships with suppliers.
3. Refusing to take a vacation.
4. Frequent borrowing from other
employees.
5. Excessive use of alcohol or drugs.
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8-2 Indicators of Internal
Control Problems
Warning Signs from the
Accounting System
1. Missing documents or gaps in transaction
numbers.
2. An unusual increase in customer refunds.
3. Differences between daily cash receipts
and bank deposits.
4. Sudden increase in slow payments.
5. Backlog in recording transactions.
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8-2 -
Example Exercise 8-1
Identify each of the following as relating to (a)
the control environment, (b) risk assessment, or
(c) control procedures.
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1. Mandatory vacations
2. Personnel policies
3. Report of outside consultants on
future market changes
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Follow My Example 8-1
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8-2
For Practice: PE 8-1A, PE 8-1B
1. (c) control procedures
2. (a) the control environment
3. (b) risk assessment
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Describe and illustrate the
application of internal
controls to cash.
Objective 3
8-3
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One of the most important
controls to protect cash
received in over-the-counter
sales is a cash register.
8-3 Control of Cash Receipts
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A predetermined amount of
money that is given to each cash
register clerk in a cash drawer is
called a change fund.
8-3 Change Fund
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Mar 19 Cash 3 142 000
Cash Short and Over 8 000
To record cash sales and
actual cash on hand.
Sales 3 150 000
Cash sales for March 19 totaled Rp3,150,000
per the cash register tape. After removing the
change fund, only Rp3,142,000 was on hand.
8-3 Cash Short and Over
Note that the shortage was debited to Cash
Short and Over.
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8-3 Control of Cash Receipts
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Cash may be received from
customers through electronic
funds transfers. Customers may
authorize automatic electronic
transfers from their checking
accounts to pay monthly bills.
8-3 Electronic Funds Transfers
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A voucher system is a set of
procedures for authorizing and
recording liabilities and cash
payments. It may be either
manual or computerized.
Voucher System 8-3
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A voucher is any document
that serves as proof of
authority to pay cash or issue
an electronic funds transfer.
8-3
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Describe the nature of a bank
account and its use in
controlling cash.
Objective 4
8-4
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A major reason that
businesses use bank accounts
is for control purposes.
Use of Bank Accounts 8-4
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Bank accounts provide an
independent recording of cash
transactions that can be used as a
verification of the business’s
recording of transactions.
8-4
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A summary received from
the bank of all checking
account transaction is called
a bank statement.
8-4 Bank Statement
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8-4 Bank Statement
(Continued)
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8-4 Bank Statement
(Concluded) 37
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Typical credit or debit memorandum
entries found on the bank statement:
EC — Error correction to correct bank
error.
NSF — Not sufficient funds check.
SC — Service charge.
ACH — Automated Clearing House entry
for electronic funds transfer.
MS — Miscellaneous items.
8-4
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8-4 -
Example Exercise 8-2
The following items may appear on a bank statement:
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(1) NSF check
(2) EFT Deposit
(3) Service Charge
(4) Bank correction of an error from recording a
Rp400,000 check as Rp40,000.
Indicate whether the item would appear as a debit or credit
memorandum on the bank statement and whether the item
would increase or decrease the balance of depositor’s
account.
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Follow My Example 8-2
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8-4
For Practice: PE 8-2A, PE 8-2B
Appears on the
Bank Statement
as a Debit or
Credit
Memorandum
Increases or
Decreases the
Balance of the
Depositor’s
Bank Account Item No.
(1) Debit Memorandum Decreases
(2) Credit Memorandum Increases
(3) Debit Memorandum Decreases
(4) Debit Memorandum Decreases
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Beginning balance Rp 4,218,600
Additions:
Deposits Rp13,749,750
Miscellaneous 408,000 14,157,750
Deductions:
Checks Rp 14,698,570
NSF checks 300,000
Service charge 18,000 15,016,570
Ending balance Rp3,359,780
Bank Statement
Beginning balance Rp 4,227,600
Deposits 14,565,950
Checks 16,243,560
Ending balance Rp 2,549,990
Power Networking Records
Power Networking
should determine the
reason for difference in
these two amounts.
Power Networking’s Records
and Bank Statement
8-4
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Describe and illustrate the use
of a bank reconciliation in
controlling cash.
Objective 5
8-5
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A bank reconciliation is an analysis of
the items and amounts that cause the
cash balance reported in the bank
statement to differ from the balance of
the cash account in the ledger in order
to determine the adjusted cash balance.
8-5
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8-5
Bank’s records
Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Power Network prepares to reconcile
the monthly bank statement as of
July 31. The bank statement shows
an ending cash balance of
Rp3,359,780. The company’s Cash
account has a July 31 balance of
Rp2,549,990.
Company’s records
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8-5
Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816,200
Rp4,175,980
A deposit of Rp816,200 did not
appear on the bank statement.
Company’s records Bank’s records
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8-5
Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816.200
Rp4,175,980
The bank collected a note in the amount of
Rp400,000 and the related interest of Rp8,000 for
Power Networking
Add note and interest
collected by bank 408,000
Rp2,957,990
Company’s records Bank’s records
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8-5
Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816.200
Rp4,175,980
Add note and interest
collected by bank 408,000
Rp2,957,990
Three checks that were written during the period did not
appear on the bank statement: No. 812, Rp1,061,000;
No. 878, Rp435,390, No. 883, Rp48,600.
Deduct outstanding
checks:
No. 812 Rp1,061,000
No. 878 435,390
No. 883 48,600 1,544,990
Company’s records Bank’s records
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8-5
Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816,200
Rp4,175,980
Add note and interest
collected by bank 408,000
Rp2,957,990 Deduct outstanding
checks:
No. 812 Rp1,061,000
No. 878 435,390
No. 883 48,600 1,544,990
The bank returned a check for Rp300,000 from
customer (Thomas Tarigan) because of insufficient
funds (NSF).
Company’s records Bank’s records
Deduct check
NSF Rp300,000
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8-5
Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816,200
Rp4,175,980
Add note and interest
collected by bank 408,000
Rp2,957,990 Deduct outstanding
checks:
No. 812 Rp1,061,000
No. 878 435,390
No. 883 48,600 1,544,990
Bank service
charges 18,000
The bank service charges totaled Rp18,000.
Company’s records Bank’s records
Deduct check
NSF Rp300,000
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8-5
Beginning balance Rp3,359,780
Company’s records
Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816,200
Rp4,175,980
Add note and interest
collected by bank 408,000
Rp2,957,990 Deduct outstanding
checks:
No. 812 Rp1,061,000
No. 878 435,390
No. 883 48,600 1,544,990
Bank service
charges 18,000
Error recording
Check No. 879 9,000
327,000
Check No. 879 for Rp732,260 to CV Tunggal Jaya on
account, erroneously recorded in journal as Rp723,260.
Bank’s records
Deduct check
NSF Rp300,000
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8-5
Beginning balance Rp3,359,780 Beginning balance Rp2,549,990
Add deposit not
recorded by bank 816,200
Rp4,175,980
Add note and interest
collected by bank 408,000
Rp2,957,990 Deduct outstanding
checks:
No. 812 Rp1,061,000
No. 878 435,390
No. 883 48,600 1,544,990
Deduct check
NSF Rp300,000
Bank service
charges 18,000
Adjusted balance Rp2,630,990 Adjusted balance Rp2,630,990
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Company’s records Bank’s records
Error recording
Check No. 879 9,000 327,000
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Cash balance according to bank statement Rp3 359 780
Add deposit of July 31, not recorded by bank 816 200
Rp4 175 980
Deduct outstanding checks:
No.812 Rp1 061 000
No.878 435 390
N0.883 48 600 1 544 990
Adjusted balance 2 630 990
Cash balance according to Omega Perdana records Rp2 549 990
Add note and interest collected by bank 408 000
Rp2 957 990
Deduct:
Check returned because of insufficient fundsRp 300 000
Bank service charge 18 000
Error in recording Check No.879 9 000 327 000
Adjusted balance Rp2 630 990
CV Omega Perdana
Bank Reconci l iat ion
July 31, 2007
8-5
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Journal entries must be
prepared for those items that
affected the company’s
(depositor’s) side of the
reconciliation.
8-5
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8-5
Beginning balance Rp2,549,990
Add note and interest
collected by bank 408,000
Rp2,957,990
Deduct check
NSF Rp300,000
Bank service
charges 18,000
327,000
Error recording
Check No. 879 9,000
Company’s records
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8-5
July 31 Cash 408 000
Note collected by bank.
Notes Receivable 400 000
Interest Income 8 000
Entry to Record Plus Items
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Beginning balance Rp2,549,990
Add note and interest
collected by bank 408,000
Rp2,957,990
Deduct check
NSF Rp300,000
Bank service
charges 18,000
327,000
Error recording
Check No. 879 9,000
Company’s records
8-5
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8-5
July 31 Cash 408 000
Note collected by bank.
Notes Receivable 400 000
Interest Income 8 000
31 Accounts Receivable— Thomas Tarigan 300 000
Miscellaneous Expense 18 000
Accounts Payable— CV Tunggal Jaya 9 000
Cash 327 000
NSF check, bank service
charges, and error in
recording Check no. 879.
Entry to Record Minus Items
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8-5
Example Exercise 8-3
The following data were gathered to use in reconciling
the bank account of Depok Photo Studio
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Balance per bank Rp14,500,000
Balance per company records 13,875,000
Bank service charges 75,000
Deposit in transit 3,750,000
NSF check 800,000
Outstanding checks 5,250,000
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8-5
Example Exercise 8-3
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a. What is the adjusted balance on the bank
reconciliation?
b. Journalize any necessary entries for Depok
Photo Studio based upon the bank
reconciliation.
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Follow My Example 8-3
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8-5
For Practice: PE 8-3A, PE 8-3B
a. Rp13,000,000 as shown below.
Bank section of reconciliation: Rp14,500,000 –
Rp5,250,000 + Rp3,750,000 = Rp13,000,000
Company section of reconciliation: Rp13,875,000
– Rp75,000 – Rp800,000 = Rp13,000,000
b. Accounts Receivable 800,000
Miscellaneous Expense 75,000
Cash 875,000
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Describe the
accounting for special-
purpose cash funds.
Objective 6
8-6
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It is usually not practical for a
business to write checks to pay
small amounts. Thus, it is
desirable to control such
payments by using a special cash
fund, called a petty cash fund.
8-6
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On August 1, issued Check No. 511 for
Rp500,000 to established a petty cash fund.
Post.
Ref.
JOURNAL
Date Description Debit Credit
Page 9
Aug. 1 Petty Cash 500 000 2008
Cash 500 000
Established petty cash
fund issuing Check 511.
8-6
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At the end of August, the petty cash receipts indicated
expenditures for the following items: office supplies, Rp380,000,
postage (office supplies), Rp22,000; store supplies, Rp35,000,
and miscellaneous administrative items, Rp30,000.
Aug. 31 Office Supplies 402 000
Replenished petty cash fund.
Cash 467 000
Store Supplies 35 000
Miscellaneous Administrative Exp. 30 000
8-6
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Replenishing the petty cash fund
restores it to its original amount
of Rp500,000. Note that there is
no entry to Petty Cash when the
fund is replenished.
8-6
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Businesses often use special
cash funds to meet other needs,
such as payroll. Such funds are
called special-purpose funds.
8-6
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8-6
Example Exercise 8-4
Prepare journal entries for each of the following;
a) Issued check to establish a petty cash fund of
Rp500,000.
b) The amount of cash in the petty cash fund is
currently Rp120,000. Issued a check to replenish the
fund, based on the following summary of petty cash
receipts: office supplies, Rp300,000 and
miscellaneous administrative expense, Rp75,000.
Record any missing funds in the cash short and over
account. 67
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Follow My Example 8-4
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8-6
For Practice: PE 8-4A, PE 8-4B
a) Petty Cash 500,000
Cash 500,000
b) Office Supplies 300,000
Miscellaneous Admin. Expense 75,000
Cash Short and Over 5,000
Cash 380,000
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Describe and illustrate
the reporting of cash and
cash equivalents in the
financial statements.
Objective 7
8-7
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A company’s excess cash is
normally invested in highly liquid
investments. These investments
are called cash equivalents.
8-7
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Companies that have
invested excess cash in
cash equivalents usually
report cash and cash
equivalents as one amount
on the balance sheet.
8-7
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Banks may require depositors to
maintain minimum cash
balances in their bank accounts.
Such a balance is called a
compensating balance.
8-7
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A cash ratio that is especially useful for
companies, starting up or in financial
distress, is the ratio of cash to monthly
cash expenses. First, the monthly cash
expenses are determined.
8-7 Ratio of Cash to Monthly
Cash Expenses
Monthly Cash Expenses =
Negative Cash Flows
from Operations
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The ratio of cash to monthly
cash expenses can then be
computed as follows:
8-7 Ratio of Cash to Monthly
Cash Expenses
Ratio of Cash to Monthly
Cash Expenses
Cash and Cash Equivalent
as of Year-End
Monthly Cash Expenses =
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Northwest Airlines Corporation reported the following
data (in millions) at the end of 2005:
Negative cash flows from operations Rp(436,000)
Cash and cash equivalents, Dec. 31, 2005 1,284,000
8-7 Ratio of Cash to Monthly
Cash Expenses
= Rp36,300 per mo. Rp436,000
12
Monthly Cash
Expense =
Monthly cash expense is sometimes
referred to as cash burn.
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Rp1,284,000
Rp36,300 = Rp35,400
Interpretation: As of December 31, 2007,
Northwest would run out of cash in less than
three years months unless it changes it
operations, sells investments, or raises
additional funds.
8-7 Ratio of Cash to Monthly
Cash Expenses
Ratio of Cash to
Monthly Cash
Expenses =
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