Chapter 6

Question 1

Cash

Answer 1

includes those items that are acceptable to a bank for deposit and are free from restrictions (i.e., available for use in satisfying current debts).

coins, currency, funds on deposit with a bank, checks, and money orders.

NOT postdated checks, certificates of deposit, IOUs, stamps, and travel advances

Question 2

compensating balances

Answer 2

An amount that must be left on deposit and cannot be withdrawn

should be disclosed

reported separately from cash

Question 3

Sinking funds

Answer 3

Monies that must be set aside to satisfy debts

restricted foreign currency holdings that can be easily converted/transferred

Question 4

Sinking funds

Answer 4

Monies that must be set aside to satisfy debts

restricted foreign currency holdings that can be easily converted/transferred

reported in long term investments

Question 5

cash and cash equivalents

Answer 5

Short-term interest-earning financial instruments that are deemed to be highly secure and will convert back into cash within 90 days

Question 6

cash budget

Answer 6

major component of the cash planning system

represents the overall plan that depicts cash informs and outflows for stated period of time

Question 7

External strategies to improve cash flow

Answer 7

Issue additional shares of stock

Borrow additional funds

Question 8

Internal strategies to improve cash flow

Answer 8

Accelerate cash collections

postponement of cash outflows

cash control:
control features - authorized people, separate duties

control of receipts- compare to register at end of day.

control of receipts by mail - list what comes in then pass on to person for deposit

Question 9

Internal strategies to improve cash flow

Answer 9

Accelerate cash collections

postponement of cash outflows

cash control:
control features - authorized people, separate duties

control of receipts- compare to register at end of day.

control of receipts by mail - list what comes in then pass on to person for deposit

bank reconciliation

Question 10

bank reconciliation

Answer 10

cash control procedure

every bank statement should be promptly reconciled by a person not otherwise involved in the cash receipts and disbursements functions

helps identify errors and adjustments for cash account

Question 11

bank reconciliation

Answer 11

cash control procedure

every bank statement should be promptly reconciled by a person not otherwise involved in the cash receipts and disbursements functions

helps identify errors and adjustments for cash account

compares the amount of cash shown on the monthly bank statement with amount of cash in general ledger

These will differ often

Question 12

bank statement

Answer 12

the document received from a bank which summarizes deposits and other credits, and checks and other debits

Question 13

Outstanding checks

Answer 13

Checks written that have not cleared the bank

Question 14

Reasons that bank statement does not reconcile

Answer 14

outstanding checks

deposits in transit

NSF Checks

bank service charges

notes receivable

Question 15

Reasons that bank statement does not reconcile

Answer 15

outstanding checks

deposits in transit

NSF Checks

bank service charges

notes receivable

interest earnings

Question 16

notes receivable

Answer 16

more formal accounts receivable

Question 17

Steps to reconcile bank statement

Answer 17

reconcile bank statement to correct cash balance

Reconcile ledger to correct cash balance- adjustments

Add adjustment to ledger

Question 18

Proof of cash

Answer 18

total checks per bank statement and
total disbursements per company record
total receipts on company accounts

problem will show when total on bank statement
exceed totals per company records for receipts/disbursements

Question 19

Proof of cash

Answer 19

total checks per bank statement and
total disbursements per company record
total receipts on company accounts

problem will show when total on bank statement
exceed totals per company records for receipts/disbursements

recommended for high volume and money

Question 20

kiting

Answer 20

one opens numerous bank accounts at various locations and then proceeds to write checks on one account and deposit them to another. In turn, checks are written on that account, and deposited to yet another bank

Question 21

Petty cash

Answer 21

imprest cash

fund for making small payments that are impractical to pay by check

postage due, reimburse for small office purchases

Question 22

Petty Cash System

Answer 22

establish fund by making check to petty cash, cashing it, place it in petty cash box

designated petty cash custodian

policies for appropriate expenditures

disbursements require receipt to show amount/ nature

receipts + remaining cash = balance of fund ( cash originally placed)

Question 23

Replenish Petty Cash

Answer 23

check for cash to bring up to original level

receipts are moved and formally recorded as expense
as a debit to the type of expense
credit to cash

Question 24

Petty cash short and over

Answer 24

Income statement type account

debit: shortages
Credit : overage

Question 25

trading securities

Answer 25

current asset on balance sheet

investment acquired with intent of generating profits by reselling in the near future

Question 26

trading securities

Answer 26

current asset on balance sheet

investment acquired with intent of generating profits by reselling in the near future

recorded at cost -incl. brokerage fees

reported at fair value- price that would be paid for sale

Question 27

Unrealized loss on investments

Answer 27

if you are still holding onto investment and don’t know for sure if it will end in loss

Question 28

Unrealized loss/gain on investments

Answer 28

if you are still holding onto investment and don’t know for sure if it will end in loss/gain

Question 29

Valuation Adjustment account

Answer 29

an alternative to directly adjusting the Trading Securities account

maintain a separate Valuation Adjustment account that is added to or subtracted from the Trading Securities account

same results

reason for using the alternative approach is to provide additional information that may be needed for more complex accounting and tax purposes

Question 30

derivatives

Answer 30

Investments accounted for a fair value that generally derive their value from some other item; examples include commodity futures, options, and so forth

futures, interest rate swap agreements, options related agreements