SU # 5: Cash and Investments

Question 1

5.4 Equity Method:
Applying the EM @ acquisition date:

What is a private company?

Answer 1

any entity that is not:

• a public business entity
• a not-for-profit entity, or
• an employee benefit plan

Question 2

5.1 Cash:

What are cash equivalents?

Answer 2

• category of assets so close to conversion to cash that they are classified with cash on the balance sheet

Question 3

5.1 Cash:
Readily Available:

What should the cash account on the balance sheet consist of (4)?

Answer 3

• Coin and currency on hand, including petty cash and change funds
• Demand deposits (checking accounts)
• Time deposits (savings accounts)
• Near-cash assets

Question 4

5.1 Cash
Readily Available:

Provide examples of near-cash assets

Answer 4

• many negotiable instruments, such as money orders, bank drafts, certified checks, cashiers’ checks, and personal checks.
• in the process of being deposited (deposits in transit).
• must be depositable. They exclude unsigned and postdated checks.
• 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).

Question 5

5.1 Cash
Compensating Balances:

What is a compensating balance?

Answer 5

• 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

Question 6

5.1 Cash
Non-cash Items:

Identify the 4 non-cash short-term investments

Answer 6

• money market funds
• commercial paper (a.k.a negotiable instruments)
• treasury bills
• certificates of deposit

Question 7

5.1 Cash
Non-cash Items:

What are money market funds?

Answer 7

• mutual funds that have portfolios of commercial paper and Treasury bills

Question 8

5.1 Cash
Non-Cash Items:

What are negotiable instruments a.k.a commercial paper?

Answer 8

• consists of short-term (no more than 270 days) corporate obligations

Question 9

5.1 Cash
Non-Cash Items:

What are treasury bills?

Answer 9

short-term, guaranteed U.S. government obligations.

Question 10

5.1 Cash
Non-Cash Items:

What are certificates of deposit?

Answer 10

formal debt instruments issued by a bank or other financial institution and are subject to penalties for withdrawal before maturity

Question 11

5.6 Investments In Bonds
Definition and Classification:

Define an indenture

Answer 11

• document in which all the terms are stated for bonds

Question 12

5.6 Investments In Bonds
Amortizing a Premium or Discount:

Define effective rate

Answer 12

• the interest rate prevailing in the market at the time of the initial purchase
• also called the yield