2.1 Cash + Cash Equiv, Bank Reconciliation Flashcards
What is a Current Asset?
An asset expected to be used up or converted into cash within one year or one operating cycle, whichever is longer.
Examples: Cash, trading securities, Demand deposits, cash equivalents, accounts receivable, inventory, pre-paids
What is a Current Liability?
An obligation
- expected to be settled within one year or one operating cycle, whichever is longer; OR
- which will require the use of current assets.
What is a Cash Equivalent?
A security
- easily converted into cash
- fixed maturity amount
- an original maturity of < 90 days
Examples:
- US Treasury obligations (bills, notes, bonds)
- commercial paper
- money market accounts,
Are postdated checks or non-sufficient funds included in cash?
No; they are treated as receivables
Do compensating or restricted balances require disclosure in the notes to the financial statements?
Yes
What items are included in cash?
The components of cash include
- coin and currency,
- petty cash,
- cash in bank, and
- negotiable instruments such as
- ordinary checks,
- cashier’s checks,
- certified checks, and
- money orders.
also some types of
- deposits: held as compensating balance but not legally resticted
- checks written but not mailed (added back to balance)
- certificates of deposit: w/ original maturities < 3m
How is a bank overdraft accounted for?
GAAP: Treated as a current Liability
IFRS: subtract it from cash
What is a compensating balance?
This is a minimum balance that must be maintained by the firm in relation to a borrowing
- increases the effective rate of interest on the borrowing
- reduces the risk to the lender
classification
- if related to a short-term loan = current A but NOT part of unrestricted cash balance
- if related to a long-term loan = non-current A
What is a separation of duties?
Separation of Duties, in effect,
- forces employees to collude if they attempt to fraudulently remove any of the company’s cash resources.
- At a minimum, the duties related to cash that should be separated are:
- custody of cash
- recording of cash
- reconciliation of bank accounts.
What is not included in CASH
overdraft of bank account
- when checks cashed > balance in account
- offset against other cash accounts w/ SAME bank, but not w/ cash in other banks_: current liablity_
excluded:
- certificates of deposit (orig maturities > 3m),
- legal restricted compensating balances,
- restricted cash funds (such as a bond sinking fund),
- postdated checks rec’d from customers (A/Rec),
- advances to EE (a receivable),
- postage stamps (prepaid exp, L)
monetary asset
- an A w/ fixed nominal (stated) value doesn’t change w/ inflation
- cash is most monetary of all assets, b/c no uncertainty to stated/nominal value at present or future
- purchasing power of cash declines w/ inflation
Bank Reconciliation
Benefits
- periodic comparison bank account vs cash balance
- ID errors in firm/bank records
- Establish correct end balance
- Provide info for adj entries
- Reduce cash theft by EE
Bank Reconciliation
3 formats (general)
-
Bank to book: start w/ balance per bank,
- adj to get balance per book
-
Book to bank: start w/ balance per book,
- adj to get bank
-
Bank and book to true balance: both bank and book are separately* adj to *true cash balance (on B/S).
- adjustments are changes not recorded in bank or book at end of period
Bank Reconcilation
Adjustments to Bank Balance
- Deposit in transit: made by company but NOT cleared bank. Common bank policy to hold deposits after 2pm and post next business day
- Cash on hand: reflects petty cash and undeposited cash receipts (not deposited yet)
- Outstanding checks: written and mailed by company but not cleared by bank
- Errors made by bank: addition or subtraction mistake to balance
Bank Reconcilation
Adjustments to Book Balance
- Interest earned: added to account by bank but not yet by company
- Note collected: bank deducted, but not on book yet
- Service charges: bank recorded by not on book yet
- NSF (nonsufficient funds) checks: rec’d from customers, when bank determines is NSF will reduce company’s checking balance, company records NSF check when see statement
- Errors in firm’s records: ex: pmt $96 recorded as $69 or $11,000 vs $1,100
