Fin Stmt Accts - Cash & Cash Equivalents

Question 1

What is Cash? What is not Cash?

• 1. Cash is a m___ a___.
     * a monetary asset is an asset with fixed nominal (stated) value. The nominal value of a monetary asset does not change with i___. A $100 bill is always worth exactly $100. However, the p___ p___ of cash declines with inflation. The amount of real goods and services a fixed amount of cash can buy decreases as the general price level increases. The effect is the opposite during times of d___.
• 2. Cash must be ___, meaning available to meet current operating expenses and obligations as they arise.
• 3. Cash include the following:
     * 1. c___ and c___.
     * 2. p___.
     * 3. cash in b___.
     * 4. unrestricted c___ b___.
     
     • NOTE - restricted compensating balances are either restricted cash under current assets other than cash (for ST liabilities) or under non-current assets (for LT liabilities).
       * 5. n___ such as ordinary checks, cashier’s checks, certified checks, and money orders.
• 4. Cash exclude the following:
     * 1. CD, that is, ___.
     * 2. restricted c___ b___.
     
     • 1. restricted compensating balance is a ___ that must be maintained by the company to borrow money. Such a balance increases ___ on the borrowing and reduces ___.
     • 2. If the balance is related to a ST liability, the restricted compensating balance is recorded as a ___, but is not considered as unrestricted cash balance.
     • 3. If the compensating balance is related to a LT liability, the restricted compensating balance is recorded as a ___.
     • 4. Example: A firm borrows $10,000 for one year at 6% but must maintain a $700 compensating balance in an account with the lender financial institution. (1) How to record the $700 restricted compensating balance? (2) What is the effective interest rate? effective interest % = total interest payment / net loan.
     • NOTE - unrestricted compensating balances are cash.
       * 3. restricted c___ f___.
     • e.g., bond sinking fund.
       * 4. p___ d___ checks.
       * 5. a___ to employees.
       * 6. p___ stamps.

Answer 1

What is Cash? What is not Cash?

• 1. monetary asset
     * inflation; purchasing power; deflation.
• 2. unrestricted.
• 3.
  
  • 1. coin and currency.
  • 2. petty cash.
  • 3. cash in bank.
  • 4. unrestricted compensating balances.
  • 5. negotiable instruments.
• 4.
  
  • 1. certificates of deposit.
  • 2. restricted compensating balances.
       * 1. minimum balance; effective rate of interest; risk to the lender.
       * 2. current asset.
       * 3. non-current asset.
       * 4. (1) The $700 is not included in the cash account but is rather reported in restricted cash, a current asset. (2) The annual effective interest rate is 6.45% = 10,000 x 6% / 9,300. The net loan is 9,300 = 10,000 - 700.
  • 3. restricted cash funds.
  • 4. posted dated checks.
  • 5. advances to employees.
  • 6. postage stamps.

Question 2

What is Cash Equivalent?

• 1. Are Cash Equivalents included in Cash?
• 2. Cash equivalents include the following:
     * 1. U.S. Treasury obligations: b___, n___, b___.
     * 2. commercial paper: very short-term c___ n___.
     * 3. m___ m___ f___.

Answer 2

What is Cash Equivalent?

• 1. NO. Cash equivalents are not cash even if they are so near cash and are often combined with cash for financial statement reporting.
• 2.
  
  • 1. bills, notes, bonds.
  • 2. corporate notes.
  • 3. money market funds.

Question 3

Cash Articulation

• 1. if the company uses the term cash on the SCF, the term used on the Balance Sheet will be ___.
• 2. if the company uses the term cash and cash equivalents on the SCF, the term used on the Balance Sheet will be ___.

Answer 3

Cash Articulation

• 1. cash.
• 2. cash and cash equivalents.

Question 4

Overdraft of Bank Account

• 1. What is bank overdraft?
• 2. How to record bank overdrafts under US GAAP?
     * 1. when there’s only one cash account with the same bank?
     * 2. when there’re two or more cash accounts with the same bank?
• 3. How to record bank overdrafts under IFRS?

Answer 4

Overdraft of Bank Account

• 1. Bank overdraft occurs when checks honored by the bank exceed the balance in the company’s account.
• 2. under US GAAP
     * 1. overdrafts are recorded as current liabilities.
     * 2. overdrafts can also be offset against other cash accounts with the same bank.
     
     • NOTE - overdrafts cannot be offest against cash accounts with other banks.
• 3. under IFRS - bank overdrafts can be subtracted from cash, rather than classified as current liabilities.

Question 5

Two Main Internal Control Measures to Protect Cash

• 1. Separation of Duties
     * 1. c___ of cash.
     * 2. r___ of cash.
     * 3. r___ of bank accounts.
     * The reason for this minimum separation is to prevent an employee from pilfering cash and concealing the action by altering the records.
• 2. Bank Reconciliations
     * 1. Bank reconciliations are necessary because cash transactions that occur near the end of a month or an accounting year may be recorded by the company but have not been recorded by the ___. Likewise, there may be some cash transactions that have been recorded by the financial institution but have not been recorded by the ___.
     * 2. In most cases, any errors detected in a bank reconciliation are the result of h___ mistakes on the part of the company’s employees or on the part of the bank’s employees.

Answer 5

Two Main Internal Control Measures to Protect Cash

• 1.
  
  • 1. custody of cash.
  • 2. recording of cash.
  • 3. reconciliation of bank accounts.
  • none.
• 2.
  
  • 1. financial institution; company.
  • 2. honest.

Question 6

Cash - CPAexcel Flashcards

• 1. Describe bank overdraft rules.
• 2. What does separation of duties accomplish?
• 3. List the items included in cash.
• 4. List the items that are not included in cash.
• 5. What effect do bank overdrafts have in IFRS?
• 6. Define “compensating balance”.
• 7. Define “cash equivalents” and give examples.
• 8. Define “monetary assets”.

Answer 6

Cash - CPAexcel Flashcards

• 1. Overdrafts can be offset against cash in the same bank, but if the company has insufficient cash at the same bank, it is reported as a current liability.
• 2. Makes it more difficult for employees to perpetrate fraud and gain access to the firm’s cash.
• 3.
  
  • 1. coin and currency
  • 2. petty cash
  • 3. cash in bank
  • 4. negotiable instruments such as ordinary checks, cashier’s checks, certified checks, and money orders.
• 4.
  
  • 1. cash on delivery
  • 2. legally restricted compensating balances
  • 3. restricted cash funds
  • 4. post dated checks received (recorded as receivables)
  • 5. checks written before the balance sheet date but not sent as of the balance sheet date
  • 6. advances to employees (cash payment or loan made by the employer for the business expenses that are anticipated to be incurred by the employee on behalf of the employer; recorded as receivables)
  • 7. postage stamps
• 5. They can be subtracted from cash, rather than classified as a liability.
• 6. A minimum balance that must be maintained by the firm in relation to a borrowing. Classified as current or non-current based on related loan classification.
• 7. Highly liquid assets that can be converted into a fixed amount of cash and have original maturity value of 3 months or less. Examples:
     * 1. treasury obligations (bills, notes, and bonds).
     * 2. commercial paper (very short-term corporate notes).
     * 3. money market funds.
• 8. An asset with fixed nominal (stated) value.