Cash and Cash Equivalents

Question 1

Define “monetary assets”.

Answer 1

An asset with fixed nominal value.

Question 2

Define “compensating balance”.

Answer 2

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.

Question 3

List the items that are not included in cash.

Answer 3

?COD;
?Legally restricted compensating balances;
?Restricted cash funds;
?Post-dated checks received;
?Checks written but not sent;
?Advances to employees;
?Postage stamps.

Question 4

Describe bank overdraft rules.

Answer 4

Overdrafts can be offset against cash in the same bank, but if the bank has insufficient cash at the same bank, it is reported as a current liability.

Question 5

List the items included in cash.

Answer 5

Coin and currency, petty cash, cash in bank, and negotiable instruments such as ordinary checks, cashier’s checks, certified checks, and money orders.

Question 6

Define “cash equivalents”.

Answer 6

Treasury obligations (bills, notes, and bonds), commercial paper (very short-term corporate notes), and money market funds.

Question 7

What does separation of duties accomplish?

Answer 7

Makes it more difficult for employees to perpetrate fraud and gain access to the firm’s cash.

Question 8

What effect do overdrafts have in International Financial Reporting Standards (IFRS)?

Answer 8

They can be subtracted from cash, rather than classified as a liability.

Question 9

Bank overdrafts must be shown as a liability under IFRS.

Answer 9

FALSE

Question 10

Cash equivalents are included in the cash account.

Answer 10

FALSE

Question 11

The cash account typically includes all cash owned by the firm.

Answer 11

FALSE

Question 12

A firm maintains a sinking fund for the payment of a bond issue. That sinking fund can be withdrawn as cash at any time. Management intends to use the fund to retire debt in the next year. Therefore, the sinking fund should be included in the cash account.

Answer 12

FALSE

Question 13

U.S. currency is included in cash equivalents.

Answer 13

FALSE

Question 14

A CD with an original maturity of 180 days is 60 days from maturity. The CD would be included as a cash equivalent.

Answer 14

FALSE

Question 15

The balance sheet date is December 31, 20x8. A check is received from a customer on account before the balance sheet date. The check is dated January 4, 20x9. This check is included in the cash account at December 31, 20x8.

Answer 15

FALSE

Question 16

The effective rate of interest on a 1-year, 5%, $5,000 loan requiring a $300 compensating balance to be maintained is 5.3%.

Answer 16

TRUE

Question 17

Compensating cash balance for a loan is not included in the cash account.

Answer 17

TRUE

Question 18

List the three types of bank reconciliations.

Answer 18

?Bank to Book;
?Book to Bank;
?Bank and Book to True.

Question 19

List the adjustments made to a bank balance to arrive at book income.

Answer 19

?Deposits in Transit;
?Cash on Hand (deposited cash receipts, not petty cash);
?Outstanding Checks.
?Bank Errors.

Question 20

List the adjustments made to book balance to arrive at the bank balance.

Answer 20

?Interest Earned;
?Note Collected;
?Service Charges;
?NSF Checks;
?Errors in company's records.

Question 21

What is a deposit in transit?

Answer 21

Deposits made by a company that have not cleared the bank as of the bank statement date.

Question 22

What are outstanding checks?

Answer 22

Checks written and mailed by the company which have not cleared the bank by the bank statement date.

Question 23

What does cash on hand reflect?

Answer 23

Petty cash on hand and undeposited cash receipts.

Question 24

What does an NSF check represent?

Answer 24

“Non-sufficient funds” checks received from customers.

Question 25

All adjustments are made to the bank balance to arrive at the balance per bank.

Answer 25

FALSE

Question 26

A firm wrote a check to a supplier in the amount of $117. The correct amount was $171, the amount recorded by the firm. The supplier accepted the check on the condition that the remainder of the bill would be sent within 30 days. The check cleared in October. The book balance should be increased $54 on the October bank reconciliation.

Answer 26

TRUE

Question 27

Cash on hand is a reconciling adjustment to the bank balance because the bank balance cannot reflect cash on hand.

Answer 27

TRUE

Question 28

A note is collected by the bank as part of its services to the depositor. The note is interest bearing and requires the interest to be paid at maturity. The adjusting entry to be recorded when the reconciliation is prepared includes Cr. Notes receivable only.

Answer 28

FALSE

Question 29

At mid-month, the bank notifies KJ Inc. that a customer check deposited by KJ at the beginning of the month is an NSF check. KJ duly records the adjustment upon receiving the announcement. Therefore, the end-of-month reconciliation need not have an adjustment for the NSF check.

Answer 29

TRUE

Question 30

Cash on hand at the beginning of the month is subtracted from the bank balance of the previous month in the bank to true balance column of the comprehensive bank reconciliation for the current month.

Answer 30

FALSE

Question 31

The bank charged the account of TZ Company with a check written on the account of ZT Inc. The bank to true balance reconciliation of TZ Company will reflect an additional item.

Answer 31

TRUE

Question 32

Deposit in transit is a reconciling adjustment in the bank to true balance reconciliation.

Answer 32

TRUE