Cash

Question 0

What does Near-Cash assets consist of?

Answer 0

• Negotiable instruments, such as Money Orders, Bank Drafts, Certified Checks, Cashiers’ Checks, and Personal Checks
• In the process of being deposited
• Must be depositable. EXCLUDING unsigned and postdated checks
• Written checks that are not mailed or delivered at the Balance Sheet Date

Question 1

What does the Cash account on the balance sheet consists of?

Answer 1

1) Coin and currency on hand, including petty cash and change funds
2) Demand deposits (checking accounts)
3) Time deposits (savings accounts)
4) Near-Cash Assets

Question 2

Define Cash

Answer 2

Cash is money, the most liquid of assets. Internal control of cash must be strong

• The customary medium of exchange and the standard of value (unit of measurement)
• Cash is classified as a current asset unless its use is restricted

Question 3

How is restricted cash presented on the balance sheet?

Answer 3

Restricted cash is not in a separate account but should be separately presented and disclosed in the notes.

The nature of its use determines if it is current or non-current.

Question 4

Define compensating balances

Answer 4

As part of an agreement regarding either an existing loan or the provision of future credit, the borrower may keep an average or minimum amount on deposit with the lender.

Question 5

What are the 3 ways compensating balances are presented in the balance sheet/

Answer 5

1) If the balance relates to SHORT-TERM agreements and is LEGALLY restricted, it is SEPARATELY reported among the CASH and CASH EQUIVALENTS as CURRENT asset.
2) If the agreement is LONG-TERM the legally restricted balance is NONCURRENT. It should be treated as an INVESTMENT or OTHER ASSETS.
3) If the use is NOT restricted, FULL DISCLOSURE is required. Separate classification is NOT.

Question 6

Define Cash Equivalents

Answer 6

• Short-term, highly liquid investments
• Readily convertible to known amounts of cash, and
• So near maturity that interest rate risk is insignificant. (investments w/ original maturity of 3 mths or less qualify)

Question 7

List common examples of NonCash items and their presentation on the balance sheet.

Answer 7

• Nonsufficient funds (NSF) Checks and Posted Dated Checks should be classified as RECEIVABLES
• Advances to employees may be classified as Receivables or Prepaid expenses
• Overdrafts are CURRENT LIABILITIES unless the entity has sufficient funds in another account at the SAME BANK to cover it
• Noncash Short term investments should be classified as CURRENT or TEMPORARY investments, NOT cash.

Question 8

List some examples of Noncash Short-term investments that may qualify as cash equivalents.

Answer 8

• Treasury bills (short-term gov obligation)
• Money Market Funds ( if the fund has a usable checking feature it might be better classified as cash)
• Commercial Papers (negotiable instruments) short-term (no more than 270 days) corporate obligations
• Certificates of Deposit - formal debt instruments issued by bank and subject to withdrawal penalties.

Question 9

Define bank reconciliation and the common approach

Answer 9

A schedule comparing the cash balance per books with the balance per bank statement.

The common approach is to reconcile the bank balance to the book balance to reach the true Balance.

Question 10

List the items known to the Entity but NOT known to the Bank.
How should they be treated when reconciling?

Answer 10

Addition: Deposits in transit
Errors
Substract: Outstanding Checks
Errors

Question 11

List the items known to the Bank but NOT known to the Entity.
How should they be treated when reconciling?

Answer 11

Addition: Interest Income
Deposits Collected
Errors

Subtract: Service Charges
NSF Checks
Errors