ACC 106 CASH AND CASH EQUIVALENTS

Question 1

Define cash.

Answer 1

Cash includes money or its equivalent that are readily available for unrestricted use. Money is the standard medium for exchange and the basis for accounting measurements. Other negotiable instruments that can be used to settle obligations and are readily available for unrestricted use may also form part of cash.

Question 2

List down the cash inclusions and its examples.

Answer 2

Cash includes:
1. Cash on hand - undeposited collections awaiting deposit and other current funds held as of the reporting period.
2. cash in bank - deposited collections that are readily available for immediate withdrawal and unrestricted use.

examples of cash:
1. coins and currencies
2. demand deposits
3. checks
4. bank drafts
5. money orders
6. cash fund set aside for current operations

Question 3

Demand deposits included in cash.

Answer 3

1. checking accounts
2. current accounts
3. savings accounts

Question 4

Checks included in cash.

Answer 4

1. cashier’s checks
2. personal checks
3. manager’s checks
4. traveller’s checks
5. certified checks received from customer or external parties

Question 5

Define bank drafts.

Answer 5

Bank drafts are guarantees by the bank to the demand by the party to whom the draft was directed.

Question 6

Define money orders.

Answer 6

Money orders are similar to bank drafts but are drawn from post offices or other financial institutions.

Question 7

List the types of cash funds set aside for current operations.

Answer 7

1. petty cash fund
2. revolving fund - similar to PCF but is used for limited or specific purpose set by management
3. change fund
4. dividend fund
5. tax fund - set aside to be used in paying taxes
6. travel fund
7. interest fund
8. other types of imprest bank account used in current operations

Question 8

List the examples of items NOT included in cash.

Answer 8

1. postdated checks - checks dated at a future date. (receivables)
2. IOUs or advances to employees (receivables)
3. Cash funds not available for use in current operations.
4. Postage stamps (unused postage stamps are treated as prepaid supplies – asset)

Question 9

Why do postdated checks received by an entity not form part of cash?

Answer 9

Postdated checks are checks dated at a future date. Postdated checks received by an entity do not qualify as cash because they are not presently available for immediate use and will only be available for use at a future date. Treatment to this is by reverting these checks to receivables at the end of the reporting period.

Question 10

Define line of credit and explain why unused credit line do no form part of cash.

Answer 10

line of credit is the present amount of loan that a bank or a credit union has extended to a borrower.

unused credit line is the excess amount from the amount of line credit and the actual amount borrowed. unused credit line is only disclosed in the notes because you have not yet received it in cash.

Question 11

Discuss why unreleased checks drawn and postdated checks drawn are part of cash.

Answer 11

Checks drawn from an entity is used for settling their accounts payable. Now when the checks drawn are either (1) unreleased or undelivered to the payee, or (2) postdated checks drawn, no payment has been actually made. Therefore, adjustments are needed at the end of the period, and the treatment to these checks drawn (payables) is reverting them back to cash and payables, that’s why unreleased/undelivered/postdated checks drawn are included in cash.

Question 12

What are stale checks and why is it included in cash?

Answer 12

Stale checks are checks delivered to the payees but are not encashed for a relatively long period of time, normally 6 months and more (though the period of time before a check becomes stale is a matter of company policy). Thus stale checks are reverted back to cash.

Question 13

Define cash equivalents.

Answer 13

cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash, and are subject to significant risk of changes in value. PAS 7.6

only debt instruments that are acquired within 3 months or less can qualify as cash equivalents.

Question 14

List down the examples of cash equivalents.

Answer 14

A. Treasury bills, notes, bonds acquired 3 months before maturity date
1. treasury bills - short term obligation issued by the government at a discount. normally has maturity of 90 days to less than a year.
2. treasury notes and Treasury bonds are long term obligations issued also by the government. treasury notes have a maturity of 1 year to less than 10 years. maturity bonds have maturity date of 10 years or more.

B. money market instrument or commercial paper acquired 3 months before maturity date
1. money market investments are investments in portfolios of short term securities
2. commercial paper is normally less than 270 days and is traded in money markets and thus highly liquid.

C. 3-month time deposit

Question 15

1) explain why checks and bank drafts can not qualify as cash equivalents.

2) distinguish redeemable preference share from equity shares and why the latter do not form part of cash equivalent.

Answer 15

1. Checks and bank drafts can not qualify as cash equivalent because these are not short term investments but rather, if available for unrestricted and immediate use, included as cash.
2. Redeemable preference shares that are acquired 3 months or less before their specified redemption date can qualify as cash equivalents because it is a debt instrument. Equity securities on the other hand are shares of stocks that do not have a maturity date.