F3 - M1 - Cash and Cash Equivalents

Question 1

Cash

Answer 1

Currency or demand deposits

Question 2

Cash Equivalents

Answer 2

short-term, highly liquid investments can convert to cash and near maturity (90 days of less), insignificant risk of changes in value

Question 3

Examples of Cash and Equivalents

Answer 3

• Coin and currency on hand
• Checking accounts
• Savings accounts
• Money market funds
• Compensating balances, not legally restricted
• Negotiable paper
  o Checks, money orders, bank drafts
  o Commercial paper and treasury bills
  o Certificates of deposit

Question 4

Items Not Cash or Cash Equivalents

Answer 4

Time certificates
Legally restricted
o Restricted = Cash aside for a specific us; current or non-current

Question 5

Bank Reconciliations

Answer 5

“Simple” and “Reconciliation of Cash Receipts and Disbursements”; Goal to calculate true balance; Cash account is different than bank statement

Question 6

Components of Simple Reconciliation

Answer 6

“True Balance”, difference between cash balance reported by bank and cash balance per the depositor’s records.

Question 7

“difference” between cash balance reported by bank and cash balance per the depositor’s records.

Answer 7

• Deposits in Transit – “Bank add it LOC”; add to bank, funds from depositor to bank have not been recorded; depositors records will be higher than of bank
• Outstanding Checks - “Bank add it LOC”; checks written by depositor for payment and have not been presented to bank. Higher bank balance per depositor records
• Service charges – Deduct from books; deducted by bank; overstated until amount is subtracted
• Bank Collections – Add to books; bank make collections on depositors behalf of depositor
• Errors – made by either bank or depositors
• Non-sufficient Funds (NSF) – overstate the depositors book balance
• Interest Income – balance per books is understated until this amount is added

Question 8

Steps in a simple bank reconciliation

Answer 8

Reconcile BOTH book and bank balances to a common “true” balance. Procedures

• Book balance is adjusted; Appear on balance sheet under “cash and cash equivalents.”
• Adjusted book balance = TRUE BALANCE
• Bank balance per the bank statement is reconciled to the “true balance”