Cash and Cash Equivalents Classification Quiz
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Questions and Answers

What is the standard medium of exchange and the basis for measuring and accounting for all other items?

Cash

How do companies generally classify cash on their balance sheets?

As a current asset

What are some examples of negotiable instruments that are viewed as cash?

Money orders, certified checks, cashier’s checks, personal checks, bank drafts

What are some temporary investments that are often mistakenly classified as cash?

<p>Money market funds, money market savings certificates, certificates of deposit (CDs)</p> Signup and view all the answers

Why is internal control over cash imperative for companies?

<p>To safeguard and assure the accuracy of accounting records for cash</p> Signup and view all the answers

What are some examples of items that present classification problems when it comes to cash?

<p>Petty cash funds, change funds</p> Signup and view all the answers

What are some ways of internal control over cash receipts?

<p>Only designated personnel should handle cash receipts, daily cash counts should be made, and cash registers should be used.</p> Signup and view all the answers

Why is it important to use a voucher system for payments?

<p>A voucher system ensures that payments are properly ordered, received, and billed by the supplier.</p> Signup and view all the answers

What are the main types of bank accounts mentioned in the text?

<p>Saving account, demand account, and time account.</p> Signup and view all the answers

What distinguishes a saving account from a demand account?

<p>Saving accounts have withdrawal limits, while demand accounts allow unrestricted withdrawals.</p> Signup and view all the answers

Why should payments be made by cheque/check rather than cash?

<p>Payments by cheque/check provide a record and help ensure that transactions are authorized.</p> Signup and view all the answers

What role does a bank account play in internal cash controls?

<p>A bank account is a primary tool for controlling cash receipts and payments.</p> Signup and view all the answers

How should companies classify restricted deposits held as compensating balances against short-term borrowing arrangements in their financial statements?

<p>As part of 'Cash and cash equivalent items' in current assets</p> Signup and view all the answers

Where should companies classify restricted deposits held as compensating balances against long-term borrowing arrangements?

<p>As non-current assets in either the investments or other assets sections</p> Signup and view all the answers

How should companies report bank overdrafts in their financial statements?

<p>In the current liabilities section, adding them to the amount reported as accounts payable</p> Signup and view all the answers

Under what circumstances are bank overdrafts included as a component of cash?

<p>If such overdrafts are repayable on demand and are an integral part of a company’s cash management</p> Signup and view all the answers

When should companies disclose compensating balance arrangements without cash use restrictions?

<p>In the notes to the financial statements</p> Signup and view all the answers

What should companies do if they have bank overdrafts that are material?

<p>Disclose these items separately, either on the face of the statement of financial position or in the related notes</p> Signup and view all the answers

How do companies typically treat interest revenue related to accounts receivable?

<p>Companies ignore interest revenue related to accounts receivable because the amount of the discount is usually not material in relation to the net income for the period.</p> Signup and view all the answers

What is the classification criteria for receivables on the statement of financial position?

<p>Receivables intended to be collected within a year or the operating cycle, whichever is longer, are classified as current. All other receivables are classified as non-current.</p> Signup and view all the answers

How do companies value and report short-term receivables?

<p>Short-term receivables are valued and reported at cash realizable value, which is the net amount companies expect to receive in cash.</p> Signup and view all the answers

What is the purpose of recording credit losses as debits to Bad Debt Expense?

<p>Recording credit losses as debits to Bad Debt Expense represents the normal and necessary risk of doing business on a credit basis.</p> Signup and view all the answers

What are the two methods used in accounting for uncollectible accounts?

<p>The two methods used in accounting for uncollectible accounts are the direct write-off method and the allowance method.</p> Signup and view all the answers

How does the direct write-off method handle uncollectible accounts?

<p>Under the direct write-off method, when a company determines an account to be uncollectible, it charges the loss to Bad Debt Expense.</p> Signup and view all the answers

What is the journal entry to reverse the write-off of an account that was previously deemed uncollectible?

<p>Accounts Receivable debited, Allowance for Doubtful Accounts credited</p> Signup and view all the answers

How does a company record the collection of an account that was previously written off as uncollectible?

<p>Cash debited, Accounts Receivable credited</p> Signup and view all the answers

What is a note receivable supported by?

<p>A formal promissory note</p> Signup and view all the answers

Define a negotiable instrument in the context of notes receivable.

<p>A note that can be legally and readily sold or transferred to others</p> Signup and view all the answers

How does a company record the recovery of a bad debt?

<p>By reversing the write-off entry and then journalizing the collection</p> Signup and view all the answers

What entries are made when a company collects from a customer after writing off the account as uncollectible?

<p>Reversal of write-off entry, Collection entry in the usual manner</p> Signup and view all the answers

Flashcards

Cash

Standard medium of exchange and basis for accounting.

Current Asset

How companies typically classify cash on balance sheets.

Negotiable Instruments

Documents viewed as cash, like money orders or checks.

Temporary Investments

Investments often mistaken for cash, e.g., money market funds.

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Internal Control

Safeguards for cash, ensuring accuracy of accounting.

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Classification Problems

Items like petty cash that complicate cash classification.

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Cash Receipts Control

Measures like restricted personnel and cash counts for cash management.

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Voucher System

Ensures that payments are ordered, received, and billed properly.

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Types of Bank Accounts

Includes savings, demand, and time accounts.

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Savings vs. Demand Account

Savings have limits; demand allows unrestricted access.

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Cheque vs. Cash Payments

Cheques provide a transaction record and authorization.

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Bank Account Functions

Primary tool for managing cash receipts and payments.

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Restricted Deposits Classification

Deposits against short-term borrowing classified as current assets.

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Long-term Deposit Classification

Deposits against long-term borrowing classified as non-current assets.

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Bank Overdraft Reporting

Reported as current liabilities and added to accounts payable.

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Bank Overdraft and Cash

Included in cash if repayable on demand and part of cash mgmt.

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Disclosing Compensating Balances

To be disclosed in notes for balances without restrictions.

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Material Bank Overdrafts Disclosure

Reported separately on statements for material overdrafts.

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Interest Revenue Treatment

Ignored for accounts receivable; often immaterial to income.

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Receivables Classification

Classified as current if collectible within a year or operating cycle.

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Valuing Short-term Receivables

Reported at cash realizable value, net expected cash.

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Bad Debt Expense

Records credit losses as business risks with debits.

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Uncollectible Accounts Methods

Two methods: direct write-off & allowance method.

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Direct Write-off Method

Charges losses to Bad Debt Expense when uncollectible accounts identified.

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Reversing Write-off Journal Entry

Debits Accounts Receivable, credits Allowance for Doubtful Accounts.

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Collection of Previously Written Off Account

Cash debited, Accounts Receivable credited on recovery.

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Note Receivable Definition

Formal promissory note as a debt instrument.

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Negotiable Instrument Definition

Note legally sold or transferred to others.

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Recovery of Bad Debt

Reverses write-off and journals collection.

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Collecting After Write-off

Involves reversing write-off entry and collection entry.

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