Chapter 7 Cash and Cash Equivalents

Question 1

Cash

Answer 1

Money and ANY OTHER NEGOTIABLE INSTRUMENT that is PAYABLE IN MONEY and ACCEPTABLE BY THE BANK for deposit and immediate credit

Question 2

T/F: Postdated checks received cannot be considered as cash yet because these checks are unacceptable by the bank for deposit and immediate credit or outright encashment

Answer 2

TRUE

Question 3

T/F: Cash needn’t be readily available in the payment of current obligations and not be subject to any restrictions, contractual or otherwise

Answer 3

FALSE

Question 4

Cash:

Answer 4

Cash on HAND, Cash in BANK, Cash FUND set aside for CURRENT PURPOSES

Question 5

Cash Equivalents:

Answer 5

SHORT-TERM, HIGHLY LIQUID investments READILY CONVERTIBLE into cash and near maturity that they present insignificant risk of changes in value because of changes in interest rates. MUST BE ACQUIRED AT MOST 3 MONTHS BEFORE MATURITY DATE

Question 6

T/F: Equity securities may qualify as cash equivalents.

Answer 6

True: Preference shares with specified redemption date and acquired at most 3 months before redemption can qualify as cash equivalents

Question 7

T/F: Cash is measured at face value

Answer 7

TRUE

Question 8

Cash in foreign currency is measured at the ______

Answer 8

Current Exchange Rate

Question 9

If a bank/financial institution holding the funds of an entity is in bankruptcy or financial difficulty, cash should be written down to _____ if the amount recoverable is estimated to be _____

Answer 9

Estimated Realizable Value; lower than the face value

Question 10

Deposits in foreign bank which are subject to foreign exchange restriction, if MATERIAL, should be classified separately among ____ and ____

Answer 10

Noncurrent Assets; the restriction clearly indicated

Question 11

Cash Fund set aside for use in current operations/payment for current obligations

Answer 11

(TIPDPeT) Travel Fund, Interest Fund, Payroll Fund, Dividend Fund, Petty Cash Fund, Tax Fund

Question 12

Examples of cash fund set aside for noncurrent purpose or payment of noncurrent obligation (long-term investment)

Answer 12

(RFacCSIP) Redemption Fund, Fund for Acquisition or Construction of ppe, Contingent Fund, Sinking Fund, Insurance Fund, Preference Share

Question 13

T/F: A sinking fund whose related liability is current is still classified as noncurrent

Answer 13

False. It’s current.

Question 14

Bank overdrafts are caused by ____

Answer 14

Issuance of Checks in excess of the deposits

Question 15

A bank overdraft is classified as a ____ except if it is ______

Answer 15

Current Liability; in the same bank and immaterial “Cash, net of bank overdraft” or “Bank overdraft, net of other bank account”

Question 16

T/F: If the deposit is not legally restricted because of an informal compensating balance agreement, the compensating balance is part of cash if the related loan is short-term

Answer 16

TRUE

Question 17

Unreleased/Undelivered Check

Answer 17

A check merely DRAWN AND RECORDED but NOT GIVEN to the payee before the end of the reporting period

Question 18

T/F: Even if at the end of the period, the company has unreleased/undelivered checks, no adjusting entries are necessary

Answer 18

FALSE. An adjusting entry is required to restore the cash balance and set up the liab: Dr Cash Cr. A/P or appropriate account

Question 19

Postdate Check Delivered

Answer 19

Check drawn, recorded, and already given to the payee BUT IT BEARS A DATE SUBSEQUENT TO THE REPORTING PERIOD

Question 20

Stale Check

Answer 20

Check not encashed by the payee within 6 months from the time of issuance

Question 21

Entry for stale checks

Answer 21

Immaterial: Dr. Cash Cr. Misc Income; Material: Dr. Cash Cr. A/P or Appropriate Account

Question 22

Window dressing

Answer 22

OPENING the books of Accounts BEYOND THE CLOSE OF THE ACCOUNTING PERIOD for the purpose of SHOWING a BETTER financial position and performance. A DELIBERATE MISSTATEMENT of the ALEIE (Assets, Liabilities, Equity, Income, and Expense)

Question 23

Window dressing is usually accomplished by:

Answer 23

Recording as of the last day of the reporting period (1) COLLECTIONS and (2) PAYMENTS OF ACCOUNTS MADE SUBSEQUENT to the close of the period

Question 24

Lapping

Answer 24

Best explained by example: The collections from Customer 1 is stolen/misappropriated. Then, the subsequent collection from Customer 2 is recorded as a collection on Customer 1’s account.

Question 25

Kiting

Answer 25

Possible when an entity maintains current accounts in difference banks. Occurs when a check is DRAWN AGAINST BANK a and then DEPOSITING THE SAME CHECK IN BANK b to COVER for the SHORTAGE in Bank b. No entry is made for both drawing and depositing of the check.

Question 26

How is Kiting possible?

Answer 26

Because when the check is drawn against Bank a at the end of the month, that bank statement for such month does not yet show the check drawn because the said check is yet to be cleared or presented for payment to Bank a. Hence, the Cash in Bank a at the end of the month is not affected. On the other hand, when the check is deposited in Bank b at the end of the month, the bank statement for such month will already show the deposit thereby increasing the Cash in Bank b, hence covering the cash shortage therein.

Question 27

Lapping can be prevented by:

Answer 27

Separating the custody (treasurer) and recording of cash (cash custodian)

Question 28

Entries for Cash Shortage:

Answer 28

Dr. Cash short or over Cr. Cash

Question 29

Entries for Cash Overage:

Answer 29

Dr. Cash Cr. Cash short or over

Question 30

Is the cash short or over account a temporary account? If yes, does it have any subsequent entries?

Answer 30

Yes and yes. For SHORTAGE, the entries are: (1) If the cashier/cash custodian is held responsible: Dr. Due from cashier Cr. Cash short or over (2) if it cause cannot be determined: Dr. Loss from cash shortage if material. If not material, Miscellaneous Expense Cr. Cash short or over. If OVERAGE (1) If the cash is properly found to be the money of the cashier: Dr. Cash short or over Cr. Payable to cashier (2) Else, Dr. Cash short or over Cr. Miscellaneous Income

Question 31

Imprest System requires that ___

Answer 31

All cash receipts should be deposited intact and all cash disbursements should be made by means of check.

Question 32

T/F: The Fluctuating fund system is the one usually followed in handling petty cash transactions.

Answer 32

False. The imprest fund system is the one usually followed in handling petty cash transactions.