Chapter 7 Cash and Cash Equivalents Flashcards
Cash
Money and ANY OTHER NEGOTIABLE INSTRUMENT that is PAYABLE IN MONEY and ACCEPTABLE BY THE BANK for deposit and immediate credit
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
TRUE
T/F: Cash needn’t be readily available in the payment of current obligations and not be subject to any restrictions, contractual or otherwise
FALSE
Cash:
Cash on HAND, Cash in BANK, Cash FUND set aside for CURRENT PURPOSES
Cash Equivalents:
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
T/F: Equity securities may qualify as cash equivalents.
True: Preference shares with specified redemption date and acquired at most 3 months before redemption can qualify as cash equivalents
T/F: Cash is measured at face value
TRUE
Cash in foreign currency is measured at the ______
Current Exchange Rate
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 _____
Estimated Realizable Value; lower than the face value
Deposits in foreign bank which are subject to foreign exchange restriction, if MATERIAL, should be classified separately among ____ and ____
Noncurrent Assets; the restriction clearly indicated
Cash Fund set aside for use in current operations/payment for current obligations
(TIPDPeT) Travel Fund, Interest Fund, Payroll Fund, Dividend Fund, Petty Cash Fund, Tax Fund
Examples of cash fund set aside for noncurrent purpose or payment of noncurrent obligation (long-term investment)
(RFacCSIP) Redemption Fund, Fund for Acquisition or Construction of ppe, Contingent Fund, Sinking Fund, Insurance Fund, Preference Share
T/F: A sinking fund whose related liability is current is still classified as noncurrent
False. It’s current.
Bank overdrafts are caused by ____
Issuance of Checks in excess of the deposits
A bank overdraft is classified as a ____ except if it is ______
Current Liability; in the same bank and immaterial “Cash, net of bank overdraft” or “Bank overdraft, net of other bank account”
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
TRUE
Unreleased/Undelivered Check
A check merely DRAWN AND RECORDED but NOT GIVEN to the payee before the end of the reporting period
T/F: Even if at the end of the period, the company has unreleased/undelivered checks, no adjusting entries are necessary
FALSE. An adjusting entry is required to restore the cash balance and set up the liab: Dr Cash Cr. A/P or appropriate account
Postdate Check Delivered
Check drawn, recorded, and already given to the payee BUT IT BEARS A DATE SUBSEQUENT TO THE REPORTING PERIOD
Stale Check
Check not encashed by the payee within 6 months from the time of issuance
Entry for stale checks
Immaterial: Dr. Cash Cr. Misc Income; Material: Dr. Cash Cr. A/P or Appropriate Account
Window dressing
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)
Window dressing is usually accomplished by:
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
Lapping
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.
Kiting
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.
How is Kiting possible?
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.
Lapping can be prevented by:
Separating the custody (treasurer) and recording of cash (cash custodian)
Entries for Cash Shortage:
Dr. Cash short or over Cr. Cash
Entries for Cash Overage:
Dr. Cash Cr. Cash short or over
Is the cash short or over account a temporary account? If yes, does it have any subsequent entries?
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
Imprest System requires that ___
All cash receipts should be deposited intact and all cash disbursements should be made by means of check.
T/F: The Fluctuating fund system is the one usually followed in handling petty cash transactions.
False. The imprest fund system is the one usually followed in handling petty cash transactions.
