Questions and Answers
What is the classification of a bank overdraft?
In which scenario can a bank overdraft be offset against another bank account?
What does a compensating balance typically represent?
If an entity maintains a compensating balance agreement with a bank, what is true about the deposit?
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What is the net cash balance if Cash in Bank - First Bank is overdrawn by P10,000 and Cash in Bank - Second Bank has a debit balance of P100,000?
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How are investments with a term of three months or less classified?
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What is the correct measurement of cash in foreign currency?
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Where should 'cash and cash equivalents' be displayed in financial statements?
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How are deposits in foreign countries treated when there are no foreign exchange restrictions?
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If a cash fund is set aside for current operations, how is it classified?
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Study Notes
Money Market Instruments and Cash Management
- Cash management involves controlling and utilizing cash effectively for operations.
- Excess cash can be invested in time deposits, money market instruments, or treasury bills for interest income.
Classifications of Excess Cash Investments
- Instruments with terms of three months or less are classified as cash equivalents, reported under "cash and cash equivalents."
- Instruments with terms over three months to one year are categorized as short-term financial assets and presented as current assets.
- Investments with terms exceeding one year are classified as noncurrent or long-term investments.
Cash Measurement and Financial Statement Presentation
- Cash is measured at face value, while foreign currency cash is measured at the current exchange rate.
- "Cash and cash equivalents" must be the first item listed among current assets in financial statements, with detailed components disclosed in the notes.
Foreign Currency Transactions
- Cash in foreign currency is converted to local currency using the current exchange rate.
- Deposits abroad without foreign exchange restrictions are considered as cash.
Cash Funds Classification
- Cash set aside for current operations is classified as a current asset and included in cash and cash equivalents.
- Cash set aside for noncurrent purposes is classified as a long-term investment.
Bank Overdrafts
- A bank overdraft occurs when checks exceed deposits and is classified as a current liability.
- Overdrafts should not be offset against other bank accounts with debit balances, maintaining distinct current asset and liability classifications.
Compensating Balances
- A compensating balance is a minimum deposit required for a borrowing arrangement (e.g., a percentage of the loan amount).
- If the deposit is not legally restricted, it is included as cash.
Types of Bank Deposits
- Demand Deposit: Non-interest-bearing, accessible for withdrawal at any time.
- Saving Deposit: Interest-bearing, with withdrawals requiring a passbook.
- Time Deposit: Interest-bearing, involves a fixed-term agreement represented by a certificate of deposit.
Cash Book and Bank Statement Overview
- The cash book reflects the company's asset, with debits indicating increases and credits showing decreases.
- The bank statement represents a liability, showing amounts owed to the bank.
Bank Reconciliation Process
- Bank reconciliation involves comparing the depositor's cash records with the bank statement at month-end.
- Reconciling items include credit memos (unrecorded deposits) and debit memos (unrecorded withdrawals).
Adjusted Balance Method for Bank Reconciliation
- Adjusted book balance is calculated by adding credit memos and subtracting debit memos from the book balance.
- Bank balance adjustments involve adding deposits in transit and subtracting outstanding checks.
Errors and Corrections in Reconciliation
- Reconciling items may arise from errors such as understatements of cash receipts or checks, or incorrect deposits and charges.
Proof of Cash
- A proof of cash provides expanded reconciliation, including analyses of receipts and disbursements to identify discrepancies.
- Three methods exist: adjusted balance method, book to bank method, and bank to book method.
Two-Date Bank Reconciliation
- Two-date reconciliation considers balances and transactions from two specific dates, focusing on deposits in transit and outstanding checks.
- Omitted information might complicate calculations related to account balances and transactions for accurate reporting.
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Description
This quiz explores the concept of investing excess cash in various financial instruments such as time deposits, money market instruments, and treasury bills. Understanding the control and proper use of cash is crucial for effective cash management in any business. Test your knowledge on the classifications and benefits of these investments.
