Cash Flashcards
The following is Gold Corp’s June 30, 2004 trial balance:
Cash overdraft $10,000
Accounts Receivable, net $35,000
Inventory 58,000
Prepaid Expenses 12,000
Land held for resale 100,000
Property, plant, &
equipment, net 95,000
Accounts Payable &
accrued expenses 32,000
Common Stock 25,000
Additional paid-in
capital 150,000
Retained Earnings 83,000
$300,000 $300,000
Additional Information:
1) Checks amounting to $30,000 were written to vendors and recorded on June 29, 2004, resulting in a cash overdraft of $10,000. The checks were mailed on July 9, 2004.
2) Land held for resale was sold for cash on July 15, 2004
3) Gold issued its financial statements on July 31, 2004.
In its June 30, 2004, balance sheet, what amount should Gold report as current assets?
A) $225,000
B) $205,000
C) $195,000
D) $125,000
Current assets are those assets expected to be consumed or realized in cash within one year of the balance sheet date. There is no overdraft because the checks were not sent as of the balance sheet date. Thus, the balance sheet should disclose $20,000 in cash ($30,000 − $10,000).
The land held for resale is a current asset because it is expected to be sold in the next year (and the corroboration of this expectation was known before the issuance of the financial statements).
Cash $20,000
Net Accounts Receivable 35,000
Inventory 58,000
Prepaid expenses 12,000
Land held for resale 100,000
Total current assets $225,000
Answer = A
On October 31, 2005, Dingo, Inc. had cash accounts at three different banks. One account balance is segregated solely for a November 15, 2005, payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance.
How should these accounts be reported in Dingo’s October 31, 2005, classified balance sheet?
A) The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability.
B) The segregated and regular accounts should be reported as current assets, and the overdraft should be reported as a current liability.
C) The segregated account should be reported as a noncurrent asset, and the regular account should be reported as a current asset net of the overdraft.
D) The segregated and regular accounts should be reported as current assets net of the overdraft.
The accounts are with different banks. Thus, the accounts cannot be offset against one another.
The overdraft is a liability because the bank honored a check or withdrawal causing the account to be negative. The firm owes the bank this amount.
The regular corporate account is part of the cash account, a current asset. The segregated account is a long-term investment. The cash in this asset is set aside for a specific purpose. There is no intent to use the cash for ordinary operating purposes.
Answer = A
The following information pertains to Grey Co. on December 31, 2003:
Checkbook balance $12,000
Bank statement balance 16,000
Check drawn on Grey’s account, 1,800
payable to a vendor, dated and
recorded 12/31/03, but not
mailed until 01/10/04
On Grey’s December 31, 2003 balance sheet, what amount should be reported as cash?
A) $12,000
B) $13,800
C) $14,200
D) $16,000
The correct cash balance is the balance per the checkbook ($12,000) plus the $1,800 check written to the vendor, for a total of $13,800.
This check reduced the balance in the checkbook but was not mailed. Thus, the amount remains in Grey’s cash balance at the end of the year. The bank statement balance is not the correct balance because information about transactions affecting cash near the end of the month, recorded by Grey, did not reach the bank by the cutoff date.
Answer = B
Cook Co. had the following balances on December 31, 2004:
Cash in checking account $350,000
Cash in money market account 250,000
U.S. Treasury bill, purchased 800,000
12/01/04, maturing 02/28/05
U.S. Treasury bond, purchased 500,000
03/01/04, maturing 02/28/05
Cook’s policy is to treat as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. What amount should Cook report as cash and cash equivalents in its December 31, 2004, balance sheet?
A) $600,000
B) $1,150,000
C) $1,400,000
D) $1,900,000
The first three items in the list are included in cash and cash equivalents. The total of these items is $1,400,000 ($350,000 + $250,000 + $800,000).
Money market accounts are included in cash equivalents because they maintain a $1 per share value, and are readily convertible to cash (there is no maturity date). The Treasury bill is a cash equivalent because it has an original maturity to the firm of three months or less (12/1/04, maturing 2/28/05).
The Treasury bond matures within two months from the balance sheet date but did not have an original maturity of less than three months. The original maturity is one year, far in excess of the three month limit and thus the bond is not a cash equivalent.
The reason for the three month rule is to minimize price fluctuations due to interest rate changes. A security with a fluctuating price is not “equivalent” to cash. One year is too long a time to expect interest rates to remain stable.
Answer = C
The following are held by Smite Co.:
Cash in checking account $20,000
Cash in bond sinking fund account 30,000
Post-dated check from customer 250
dated one month from balance
sheet date
Petty Cash 200
Commercial paper (matures in 7,000 2 months)
Certificate of deposit (matures 5,000
in 6 months)
What amount should be reported as cash and cash equivalents on Smite’s balance sheet?
A) $57,200
B) $32,200
C) $27,450
D) $27,200
The cash balance is $20,200: the sum of the checking account balance and the petty cash. Because it has a maturity of less than three months, the only cash equivalent is the $7,000 of commercial paper. The final sum of these two accounts is $27,200.
Answer = D
