07.01 Cash & Cash Equivalents

Question 1

What is a cash equivalent?

Answer 1

A cash equivalent is a financial instrument (investment) that meets the following criteria: 1. It is easily convertible into a known amount of cash (highly liquid) 2. It has an original maturity of three months or less from the date of purchase.

Question 2

What are examples of cash equivalents?

Answer 2

Coin and currency on hand (petty cash); money market accounts; unmailed checks; savings accounts; CDs with an original maturity of three months or less; negotiable paper (bank checks, traveler’s checks, money orders)

Question 3

What items are excluded from unrestricted cash?

Answer 3

Compensating balances; postdated or NSF checks (receivables); restricted cash; postage stamps (supplies - prepaid expense)

Question 4

How is cash presented if there is more than one account in the same bank?

Answer 4

If there is more than one account in the same bank, the accounts are netted together. If the net balance is positive, it is listed as cash. If the net balance is negative, it is listed as a current liability. Cash accounts in different banks cannot be netted.

Question 5

What is restricted cash?

Answer 5

Current - cash that is restricted for use on a current asset/liability within one year; segregated from cash because it is not available for use in current operations.
Noncurrent - cash that is restricted for use on a noncurrent asset/liability (e.g. bond sinking funds) is considered noncurrent. It is presented in either other assets or investments.

Question 6

What are bank reconciliations used for?

Answer 6

Bank reconciliations are used to explain differences between cash balances per bank and per book to arrive at a corrected balance between the two.

Question 7

What can cause a difference between bank and book cash balances?

Answer 7

Deposits in transit, outstanding checks, errors, bank service charges, or returned checks (i.e. NSF)