CASH, CASH
EQUIVALENTS, AND MARKETABLE SECURITIES
1. Nature of Cash. Cash is the first item presented in the
assets section of the balance sheet.
It is ready
money, the most liquid of assets. As
the customary medium of exchange, it also
provides the
standard of value (the unit of measurement) of the transactions that are
reported in the
financial statements.
a. According to SFAC
6, “Money (cash, including deposits in banks) is valuable because
of what it can
buy. It can be exchanged for
virtually any good or service or it can be
saved and
exchanged for them in the future. Money’s
‘command over resources’ --
its purchasing
power -- is the basis of its value and future economic benefits.”
b. For the sake of
simplicity, the changes in purchasing power over time are not
recognized in
standard financial statements; that is, nominal units of money provide
the measurement
scale.
c. Because cash is
the standard medium of exchange, its effective management is vital.
Economic entities
must plan to hold sufficient cash (have adequate liquidity) to
execute
transactions. The amount held should
be limited, however, because cash
usually does not
increase in value (appreciate) unless invested.
d. Current assets
are “reasonably expected to be realized in cash or sold or consumed
during the normal
operating cycle of the business” (ARB 43, Chapter 3A). Thus, cash
itself is
ordinarily a current asset.
1) However, even
though not actually set aside in special accounts, cash that is
“clearly to be
used in the near future for the liquidation of long-term debts,
payments to
sinking funds, or for other similar purposes should be excluded
from current
assets.”
Items of
Cash. To be classified as cash, an asset must be readily available
for use by the
business; its use
should not be restricted.
a. The cash account
on the balance sheet should consist of
1) Coin and currency
on hand, including petty cash and change funds
2) Demand deposits
(checking accounts)
3) Time deposits
(savings accounts)
a) Although
technically subject to a bank’s right to demand notice before
withdrawal,
savings accounts are treated as cash because the right is
seldom exercised.
4) Near-cash assets
such as undeposited checks
a) They are usually
in the process of being deposited and are called “deposits
in transit.”
b) They include many
negotiable instruments, such as money orders, bank
drafts, certified
checks, cashiers’ checks, and personal checks.
c) They must be
depositable and thus do not include unsigned or postdated
checks.
d) Checks written to
creditors but not mailed or delivered at the balance sheet
date should be
included in the payor’s cash account (not considered cash
payments at
year-end).
b. Companies have
either a general ledger cash control account with a subsidiary ledger
of accounts for
each bank account or a series of general ledger accounts to represent
the various cash
accounts.
1) On the balance
sheet, only one cash account is presented. It
reflects all
unrestricted
cash.
2) Each transfer of
cash from one account to another requires an entry.
3) At the end of
each period, a schedule of interaccount transfers should be
prepared and
reviewed to make certain all cash transfers are counted once and
only once.
Cash Equivalents. These are short-term, highly liquid
investments. According to SFAS 95,
a. They are readily
convertible into known amounts of cash.
b. They are so near
maturity that interest rate risk is insignificant.
c. Generally, only
investments with an original maturity to the holder of 3 months or less
qualify.
d. Common examples
are Treasury bills, money market funds, and commercial paper.
restricted and
thus not readily available for use by the entity, they should be classified as
short-term
investments, or temporary investments, not cash. However, in some cases,
they may qualify
as cash equivalents.
a. Certificates of
deposit are formal debt instruments issued by a bank or another
financial
institution and are subject to penalties for withdrawal before maturity.
b. Money market
funds are essentially mutual funds that have portfolios of commercial
paper and
T-bills.
1) However, a money
market fund with a usable checking feature might be better
classified as
cash.
2) Commercial paper
consists of short-term (no more than 270 days) corporate
obligations.
3) Treasury bills
are short-term guaranteed U.S. government obligations.
a) In contrast, an
obligation of a federal agency is guaranteed only by the
agency, not by
the U.S. government.
c. Money market
savings certificates are debt instruments with rates tied to the T-bill
rate.
5. Other Noncash Items
a. Nonsufficient
fund (NSF) checks, postdated checks, and IOUs should be treated as
receivables. Advances for expenses to employees may be
classified as receivables
(if expected to
be paid by employees) or as prepaid expenses.
1) Restricted cash
in foreign banks should be reported as a receivable (current or
noncurrent), but
unrestricted deposits in foreign banks are classified as cash.
b. Postage stamps
are accounted for as prepaid expenses or office supplies.
c. An overdraft is a
current liability unless the entity has sufficient funds in another
account in the
same bank to cover it.
1) If a company has
separate accounts in one bank, an overdraft will usually be
subject to a
right of offset: The funds in another
account may be legally
transferred by
the bank to cover the shortage.
a) This right does
not exist when the accounts are in different institutions.
Thus, the
overdraft must be reported as a liability, not netted against the
other cash
accounts.
Restricted Cash. Cash amounts designated for special uses
should be separately
presented.
a. Examples are bond
sinking funds and new building funds.
b. The nature of the
use will determine whether such an amount will be classified as
current or
noncurrent.
1) A bond sinking
fund to redeem noncurrent bond debt is noncurrent, but a fund to
be used to redeem
bonds currently redeemable is a current asset.
Compensating Balances. As part of an agreement regarding either
an existing loan or the
provision of
future credit, a borrower may keep an average or minimum amount on deposit
with the lender. This compensating balance not only
increases the effective rate of interest
paid by the
borrower but also creates a disclosure issue because the full amount reported
in the cash
account might not be available to meet general obligations. The SEC’s
recommended
solution depends on the duration of the lending arrangement and the nature
of the
restriction.
a. If the balance
relates to a short-term agreement and is legally restricted, it is
separately
reported among the cash and cash equivalent items as a current asset.
1) If the agreement
is long-term, the legally restricted balance is noncurrent and
should be
separately classified in either the investment or other asset section.
b. When the entity
has a compensating balance agreement but the use of the balance is
not restricted,
full footnote disclosure but not separate classification is required.
Petty Cash. In an imprest petty cash system, a specific amount of money, e.g., $100, is
set aside in the
care of a petty cash custodian to pay office expenses that are too small to
pay by check or
to record in the accounting system as they occur. The entry is to debit
petty cash and to
credit cash.
a. Periodically, the
fund is reimbursed for all expenditures based on expense receipts,
and journal
entries are made to reflect the transactions.
However, entries are made
to the petty cash
account only to establish the fund, to change its amount, or to adjust
the balance if it
has not been reimbursed at year-end.
b. The cash over and short account is a nominal account for errors in petty cash. It is
used when the
total of the expense receipts and the cash remaining does not equal
the amount that
should be in the petty cash fund, i.e., the imprest amount. The over
and short account
is treated on the income statement as a miscellaneous revenue or
expense.
Bank Reconciliations. A bank reconciliation is a schedule
comparing the entity’s cash
balance per books
with the balance shown on the bank statement (usually received
monthly). The most common approach is to reconcile
from the bank balance to the
unadjusted book
balance.
a. Because the two
balances usually vary, this schedule permits the entity to determine
whether the
difference is attributable to normal conditions, errors, or fraud. It also
serves as a basis
for accounting entries to adjust the entity’s books to reflect
unrecorded items.
b. Common reasons
for differences. The bank and the
entity inevitably record many
transactions at
different times, and both may make errors.
1) Outstanding
checks. The books may reflect checks
drawn by the entity that
have not yet
cleared the bank. These amounts
should be subtracted from the
bank balance to
arrive at the balance per books.
2) Deposits in
transit. A time lag may occur
between deposit of receipts and the
bank’s recording
of the transaction. Thus, receipts
placed in a night depository
on the last day
of the month would be reflected only in the next month’s bank
statement. These receipts should be added to the
bank balance to arrive at the
book balance.
3) Amounts added by
the bank. Interest income added to
an account may not be
included in the
book balance. Banks may act as
collection agents, for example,
for notes on
which the depositor is the payee. If
the depositor has not learned
of a collection,
it will not be reflected in the entity’s records.
a) These amounts are
subtracted from the bank balance to reconcile to the
unadjusted book
balance. They should be recorded on
the entity’s books,
after which they
are no longer reconciling items.
4) Amounts deducted
by the bank. These amounts generally
include service
charges and
customer checks returned for nonsufficient funds (NSF checks).
Service charges
cannot be recorded in the books until the bank statement is
received. Also, customer checks returned for
nonsufficient funds may have
been deducted by
the bank but still included in the book balance.
a) These amounts are
added to the bank balance to reconcile to the
unadjusted book
balance. Once the amounts are recorded
on the books,
they are no
longer reconciling items.
ليست هناك تعليقات:
إرسال تعليق