FAR SEC 5 Flashcards
What is the most liquid asset?
Cash.
Are securities held as investments the same as cash equivalents?
No, securities held as investments are reported in different classifications on the balance sheet.
What is the standard of value for transactions reported in the financial statements?
As the customary medium of exchange, CASH provides the standard of value (the unit of measurement) of the transactions that are reported in the financial statements.
How important is internal control of cash?
Cash is the most liquid of assets. Because of that liquidity and the ability to transfer it electronically, internal control of cash must be strong.
Is cash always a current asset?
No. Cash is classified as a current asset unless its use is restricted to such purposes as payments to sinking funds.
In this case, cash is reported as a noncurrent asset with an account title such as bond sinking fund.
What condition applies for cash to be reported as a noncurrent asset?
Cash is only reported as a noncurrent asset if its use is restricted to such purposes as payments to sinking funds.
How is cash reported when it is a noncurrent asset?
If cash is a noncurrent asset, the cash is reported as a noncurrent asset with an account title such as bond sinking fund.
Which four forms of cash or cash equivalents should be reported in the cash current asset account?
To be classified as current, cash must be readily available for use. The cash account on the balance sheet should consist of
1) Coin and currency on hand, including petty cash and change funds
2) Demand deposits (checking accounts)
3) Time deposits (savings accounts)
4) Near-cash assets
What are four attributes of near-cash assets?
Near-cash assets
1) They include many negotiable instruments, such as money orders, bank drafts, certified checks, cashiers’ checks, and personal checks.
2) They are usually in the process of being deposited (deposits in transit).
3) They must be depositable. They exclude unsigned and postdated checks.
4) Checks written to creditors but not mailed or delivered at the balance sheet date should be included in the payor’s cash account (not considered cash payments at year end).
Must restricted cash be set aside in special accounts? How should restricted cash be presented?
Restricted cash is not actually set aside in special accounts. However, it is designated for special uses and should be separately presented and disclosed in the notes.
Must restricted cash be set aside in special accounts?
Restricted cash is not actually set aside in special accounts.
How should restricted cash be presented?
Restricted cash is designated for special uses and should be separately presented and disclosed in the notes.
What are examples of restricted cash?
Examples are bond sinking funds, new building funds, and restricted compensating balances.
Is restricted cash always a noncurrent asset?
No. If cash is restricted to pay a current obligation, it is still a current asset. For an example, a bond sinking fund used to redeem noncurrent bond debt is noncurrent, but a fund to be used to redeem bonds currently redeemable is a current asset.
What factor determines if cash is current or noncurrent?
The nature of the use determines whether cash is current or noncurrent.
A bond sinking fund used to redeem noncurrent bond debt is noncurrent, but a fund to be used to redeem bonds currently redeemable is a current asset.
What are compensating balances?
As part of an agreement regarding either an existing loan or the provision of future credit, a borrower may keep an average or minimum amount on deposit with the lender. This compensating balance increases the effective rate of interest paid by the borrower.
-It also creates a disclosure issue because the full amount reported as cash might not be available to meet general obligations.
Why do compensating balances result in a disclosure?
Compensating balances create a disclosure issue because the full amount reported as cash might not be available to meet general obligations.
Do compensating balances require a disclosure?
Yes.
What are the three elements of the definition of cash equivalents?
Cash equivalents are
1) Readily convertible to known amounts of cash and
2) So near maturity that interest rate risk is insignificant.
3) Only investments with an original maturity to the holder of 3 months or less qualify.
What are three examples of cash equivalents?
Cash equivalents are short-term, highly liquid investments. Common examples are Treasury bills, money market funds, and commercial paper.
When would money market mutual funds, commercial paper, treasury bills, or certificates of deposit qualify as cash equivalents (current assets)?
If these are readily convertible to a known amount of cash and have an original maturity to the holder of 3 months or less, they would qualify as cash equivalents.
Can an asset be considered cash equivalent if its current time to maturity is less than 3 months but its original time to maturity was greater than 3 months?
No. However, the asset would become a current non-cash asset once its time to maturity is less than the greater of one year or the length of the operating cycle.
What is a nonsufficient funds (NSF) check?
Nonsufficient funds (NSF) checks and postdated checks should be treated as receivables. These are noncash assets.
How are advances for expenses to employees treated?
Advances for expenses to employees may be classified as receivables (if expected to be paid by employees) or as prepaid expenses. These are noncash assets.