Select Financial Statement Accounts Flashcards
30-40%
Define “monetary assets.”
An asset with fixed nominal value
Define “compensating balance.”
A minimum balance that must be maintained by the firm in relation to a borrowing. It is classified as current or noncurrent based on the related loan classification.
List the items that are not included in cash.
- COD
- Legally restricted compensating balances
- Restricted cash funds
- Postdated checks received
- Checks written but not sent
- Advances to employees
- Postage stamps
Describe bank overdraft rules.
Overdrafts can be offset against cash in the same bank, but if the bank has insufficient cash at the same bank, the overdrafts are reported as a current liability.
List the items included in cash.
- Coin and currency
- Petty cash
- Cash in bank
- Negotiable instruments, such as ordinary checks, cashier’s checks, certified checks, and money orders
Define “cash equivalents.”
- Treasury obligations (bills, notes, and bonds)
- Commercial paper (very short-term corporate notes)
- Money market funds
What does separation of duties accomplish?
Separation of duties makes it more difficult for employees to perpetrate fraud and gain access to the firm’s cash.
What effect do overdrafts have in International Financial Reporting Standards (IFRS)?
They can be subtracted from cash rather than classified as a liability.
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. Determine the annual effective interest rate.
- The $700 is not included in the cash account but is rather reported in restricted cash, a current asset.
- The annual effective interest rate is 6.45% [($10,000 x (.06)/$9,300]. The net loan is only $9,300 ($10,000 – $700).
Main difference between US GAAP and IFRS pertaining to Cash?
The main difference between U.S. GAAP and IFRS is that bank overdrafts can be subtracted from cash, rather than classified as liabilities.
List the three types of bank reconciliations
- Bank to book
- Book to bank
- Bank and book to true
List the adjustments made to a bank balance to arrive at book income.
- Deposits in transit
- Cash on hand (deposited cash receipts, not petty cash)
- Outstanding checks
- Bank errors
List the adjustments made to book balance to arrive at the bank balance.
- Interest earned
- Note collected
- Service charges
- Nonsufficient funds (NSF) checks
- Errors in company’s records
What is a deposit in transit?
Deposits made by a company that have not cleared the bank as of the bank statement date
What are outstanding checks?
Checks written and mailed by the company that have not cleared the bank by the bank statement date
