Chapter 2 - Cash and Cash Equivalents & Balance Sheet

Question 1

Balance Sheet (Statement of Financial Position)

Answer 1

Reports the effect of transactionsat a point in time. Consists of assets, liabilities, and stockholders’ equity.

Question 2

Current Assets

Answer 2

Assets that will be used up or converted into cash within one year or the operating cycle, which is longer;

Ex) Cash, temporary trading securities, A/R,N/R, inventories and prepaid expenses

Question 3

Current Liabilities

Answer 3

liabilities that will be settled within one year or the operating cycle, whichever is longer;

Ex) A/P, accrued expenses, dividends payable, incomes taxes payable, current portion of L/T debt

Question 4

Cash (ASC 305)

Answer 4

the most liquid asset of an enterprise

Question 5

Cash Equivalent

Answer 5

Security that is easily converted into cash with an original maturity of 90 days or less;

CE is a financial instrument that has both: easily convertible into a known amount of cash (highly liquid), and original maturity of 3 months or less from the date of purchase.

Since it is so close to maturity, this presents very little risk of change in value, due to changes in interest rates:e.g. Treasury bills, comercial paper & market funds)

Question 6

Examples of Cash Equivalents

Answer 6

Coin and currency on hand (petty cash), money market accounts, unmailed checks, savings accounts,

CDs with an original maturity of 3 months or less,

Negotiable paper (banks checks, travlers checks, money orders)

Question 7

Items exluded from cash

Answer 7

Compensating balances, postdated checks or NSF, Overdrafted protection, Restricted cash, Postage stamps

Question 8

Compensating balances

Answer 8

Legally restricted deposits that are either a current asset or a non-current asset, but not considered part of cash. If funds are NOT legally restricted, present them along with cash

Question 9

Postdated checks or NSF (Non-sufficient Funds)

Answer 9

recievables

Question 10

Overdrafted protection

Answer 10

If in same bank, net them; if positive then show it as casf; if negative, shot it as a current liability;;If in a different banks, show the positive as an asset, and the negative as a current liability

Question 11

Restricted Cash - Current

Answer 11

Restricted for a current asset or liability (segragated from cash)

Question 12

Restricted Cash - Non-Current

Answer 12

Restricted for a noncurrent asset or liability (either other assets or investments)

Question 13

Postage stamps

Answer 13

supplies (prepaid expenses)

Question 14

Bank Reconciliation

Answer 14

Used to reconcile differences between cash balances per bank and per book to arrive at a corrected balance between the two. Several factos can cause a differential between bankand book cash balances such as deposits in transit, outstanding checks, erros or bank service charges.

Question 15

Balance on bank statement

Answer 15

Deposits in transit
- Outstanding checks
+ Errors made by bank
= Corrected balance

Question 16

Checkbook balance

Answer 16

Amounts collected by bank
- Unrecorded bank charges
+ Errors made in recording transactions
= Corrected balance

Question 17

Gross Profit

Answer 17

Sales
- Cost of Sales
= Gross Profit

Question 18

Operating Income

Answer 18

Gross Profit 
- Selling expenses 
- General & Admin exp. 
- Deprciation Exp. 
= Operating Income

Question 19

Multiple Step (ON-TIDE-N-OC)

Answer 19

Operating Income
+ Non-operating [Other income and Expense]
- Provision for Income Tax
+ Discontinued component unit [FASB, ASC 205]
- Extraodinary Loss
= Net Income
+ [(Other Comprehensive Income (OCI) (DENT) (net of tax)]
= Comprehensive Income