Financial 3 - Cash and Cash Equivalents

Question 1

Cash Definition and Examples

Answer 1

• Use checkbook balance and include any checks outstanding (pending to be disbursed). This includes checks dated and recorded in the Current year, but not mailed until the following year
• Cash is actual unrestricted cash and cash equivalents are defined as short-term, liquid investments that are so near maturity (ORIGINAL maturity date was within 3 months of the purchase date) that the risk of changes in the value because of interest rate changes is insignificant

Examples of CASH: Checking account, Money Market account, Depository account, Petty Cash, Cash items on Hand and any cash equivalents based on the company’s policy of equivalents

Examples NOT included in CASH: Bond sinking fund (restricted), post-dated checks (dated after balance sheet date), CD with six months to maturity (key is 6 months to maturity; greater than 3 months is not included), Non-sufficient funds check returned (this amount should be deducted from the book balance)

Question 2

Treatment of Overdraft (Negative Book Balance)

Answer 2

*** Any negative book balance should be separately reported as a liability on the balance sheet to the specific bank. DO NOT combine with other bank balances with positive book balance

Question 3

Reconciling the Bank Balance

Answer 3

*** There are only 2 reconciling items for the balance per the bank STATEMENT (ignoring bank errors). They are Deposits in Transit and Outstanding Checks

• Any other reconciling items: service charges, NSF checks, credit memos, interest income, and errors made by the company are only reconciling items to the balance per the BOOKS or the GL balance.

*** Read questions for bank STATEMENT balance vs. bank BOOK balance