Cash and Cash Equivalents Flashcards
Trans Co. had the following balances at December 31, 20X1:
Cash in checking account $ 35,000
Cash in money market account 75,000
U.S. Treasury bill,
purchased 11/01/20X1, maturing 01/31/20X2 350,000
U.S. Treasury bill,
purchased 12/01/20X1, maturing 03/31/20X2 400,000
Trans’ policy is to treat as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. What amount should Trans report as cash and cash equivalents in its December 31, 20X1, balance sheet?
C. $460,000
FASB ASC 210-10-20 defines cash equivalents as highly liquid investments with original maturities of less than or equal to three months. The U.S. Treasury bill, purchased December 1, 20X1, maturing March 31, 20X2, has an original maturity of greater than three months, and is therefore not a cash equivalent.
Hilltop Co.’s monthly bank statement shows a balance of $54,200. Reconciliation of the statement with company books reveals the following information:
- Bank service charge: $10
- Insufficient funds check: $650
- Checks outstanding: $1,500
- Deposits in transit: $350
- Check deposited by Hilltop and cleared by the bank for $125, but improperly recorded by Hilltop as $152
What is the net cash balance after the reconciliation?
We have no way of finding the unadjusted ending month balance per books in the cash account, but we can find the corrected ending cash balance from the information given by starting with the ending bank balance.
The ending bank balance is $54,200 and when we add the deposits in transit and subtract outstanding checks from this balance, we should have the corrected ending balance.
Thus, starting with $54,200 and adding the $350 deposit in transit, and then subtracting the $1,500 checks outstanding, we get $53,050.
The other items would be adjustments to unadjusted ending cash balance, which we do not have, the check error being the company’s error, not the bank’s error.
On March 15, 20X1, Ashe Corp. adopted a plan to accumulate $1,000,000 by September 1, 20X5. Ashe plans to make four equal deposits to a fund that will earn interest at 10% compounded annually. Ashe made the first deposit on September 1, 20X1. Future value and future amount factors are as follows:
- Future value of 1 at 10% for 4 periods 1.4641
- Future amount of ordinary annuity of 1 at 10% for 4 periods 4.6410
- Future amount of annuity in advance of 1 at 10% for 4 periods 5.1100
Ashe should make four annual deposits (rounded) of:
A. $250,000.
B. $215,500.
C. $195,700.
D. $146,000.
5.1100z = $1,000,000
z = $1,000,000 / 5.1100
z = $195,695 (rounded to $195,700)
Where:
z is the amount of deposit
Future value is $1,000,000
Periods of future value is 4
Future value of annuity in advance of 1 at 10% for 4 periods is 5.1100
Inch Co. had the following balances at December 31, 20X2:
- Cash in checking account $ 35,000
- Cash in money market account 75,000
- U.S. Treasury bill, purchased 12/1/X2, maturing 2/28/X3 200,000
- U.S. Treasury bill, purchased 12/1/X1, maturing 5/31/X3 150,000
Inch’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 Inch report as cash and cash equivalents in its December 31, 20X2, balance sheet?
A. $110,000
B. $235,000
C. $310,000
D. $460,000
C. $310,000
The $150,000 Treasury bill had a maturity of 18 months when purchased and should be classified as an investment.
Which of the following ratios is useful in assessing the liquidity position of a company?
A. Both defensive-interval ratio and return on stockholders’ equity
B. Defensive-interval ratio only
C. Return on stockholders’ equity only
D. Neither defensive-interval ratio nor return on stockholders’ equity
B. Defensive-interval ratio only
The defensive-interval ratio is a measure of time the company can survive (continue to pay operating expenses in cash) using only the quick assets (cash, marketable securities, and net accounts receivable). Thus, it is computed by dividing total quick assets by average daily cash expenditures.
The following are held by Smite Co.:
Cash in checking account $20,000
Cash in bond sinking fund account 30,000
Postdated check from customer dated
1 month from balance sheet date 250
Petty cash 200
Commercial paper (matures in 2 months) 7,000
Certificate of deposit (matures in 6 months) 5,000
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
D. $27,200
Cash includes cash in the checking account and the petty cash. Cash equivalents are short-term, highly liquid investments. They must be convertible to known amounts of cash and generally have maturities when purchased of not more than three months. The commercial paper qualifies as a cash equivalent because it is highly liquid and matures within three months of the balance sheet date. The sinking fund would be restricted cash, and the postdated check is still a receivable.
Smith Co. has a checking account at Small Bank and an interest-bearing savings account at Big Bank. On December 31 of the current year, the bank reconciliations for Smith are as follows:
Bank balance $150,000
Deposit in transit 5,000
Book balance 155,000
Bank balance $1,500
Outstanding checks (8,500)
Book balance (7,000)
What amount should be classified as cash on Smith’s balance sheet at December 31?
A. $148,000
B. $151,000
C. $155,000
D. $156,000
C. $155,000
The balance in the account at Big Bank of $155,000 would be the only amount included in cash. The negative balance in Small Bank would be classified as a current liability.
The following information pertains to Grey Co. on December 31, 20X1:
Checkbook balance $12,000
Bank statement balance 16,000
Check drawn on Grey’s account, payable
to a vendor, dated and recorded
December 31, 20X1, but not mailed
until January 10, 20X2 1,800
On Grey’s December 31, 20X1, balance sheet, what amount should be reported as cash?
A. $12,000
B. $13,800
C. $14,200
D. $16,000
B. $13,800
Since the check was held for several days in January, the $1,800 amount should be added back to cash and accounts payable as of December 31, 20X1. Thus:
Checkbook balance (December 31, 20X1) $ 12,000
Amount of check + 1,800
——–
Cash reported on December 31, 20X1 $ 13,800
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At June 30, Almond Co.’s cash balance was $10,012 before adjustments, while its ending bank statement balance was $10,772. Check number 101 was issued June 2 in the amount of $95, but was erroneously recorded in Almond’s general ledger balance as $59. The check was correctly listed in the bank statement at $95. The bank statement also included a credit memo for interest earned in the amount of $35, and a debit memo for monthly service charges in the amount of $50. What was Almond’s adjusted cash balance at June 30?
A. $9,598
B. $9,961
C. $10,048
D. $10,462
B. $9,961
Given the information in the question, the company’s cash balance should be adjusted to determine the adjusted cash balance. It is computed as follows:
Balance per books, June 30 $10,012
Add: Interest revenue 35
——–
Deduct:
Service charges (50)
Correction of check (36)
——–
Adjusted cash balance $ 9,961
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The following information pertains to Park Co. on December 31, 20X1:
Bank statement balance $10,000
Checkbook balance 14,000
Deposit in transit 5,000
Outstanding checks 1,000
In Park’s December 31, 20X1, balance sheet, cash should be reported as:
A. $9,000.
B. $10,000.
C. $14,000.
D. $15,000.
C. $14,000
Since none of the information provided is an amount that is included in the bank statement balance but not included in the checkbook balance, the December 31, 20X1, checkbook balance of $14,000 is the balance sheet cash amount.
This amount is confirmed by the reconciliation of the bank statement balance:
Statement balance $10,000
Deposit in transit 5,000
Outstanding checks (1,000)
——–
Cash balance (12/31, 20X1) $14,000
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