ACC 313 Exam 3

Knight, Creighton University

cash

the standard medium of exchange and the basis for measuring and accounting for all other items; most liquid asset

what items consist of cash?

• cash in checking accounts

• petty cash

• cash on hand

• personal checks

• business checks

• bank/bank-guaranteed checks

  • certified checks

  • cashier’s check

  • bank drafts

  • “official” checks

• money orders

• cash in a savings account

why are savings accounts considered cash?

banks do not have to give cash to customers from their savings accounts immediately upon request, but most almost always do

what items are excluded from cash?

• cash equivalents

• short-term investments

  • certificates of deposit

  • money market funds

  • commercial paper

  • treasury bills

• postage stamps

• IOUs

• check written to the company that has bounced

• postdated check

• travel advances

• cash in a sinking fund

• bank overdraft

• checks written by the company

• restricted cash

cash equivalents

highly liquid investments that are able to be turned into known amount of cash; have original maturities of 3 months (90 days) or less

how are cash equivalents reported?

on the balance sheet on the same line as “cash”

when can money in a money market fund be considered “cash”?

if a company is able to write checks on the account

what items consist of short-term investments?

• certificates of deposit

• money market funds

• commercial paper

• treasury bills

how are short-term investments reported?

on the balance sheet as either…

• “short-term investments” if they do not meet the criteria of a a cash equivalent

• “cash equivalent” if they meet the criteria of a cash equivalent

how are postage stamps reported?

on the balance sheet as “office supplies inventory”

how is an “IOU” reported?

on the balance sheet as a “receivable”

how is a postdated check reported?

on the balance sheet as a “receivable”

how is a check written to a company that has bounced reported?

on the balance sheet as a “receivable”

why is a postdated check reported as a receivable, not cash?

a company does not have access to the amount the check is written for until the date that is stated on the check

how are travel advances reported?

on the balance sheet as either…

• a “receivable” if the employee will repay the advance

• a “prepaid salary” if the advance will be deducted from a future payroll check

how is cash in a sinking fund reported?

on the balance sheet as a “sinking fund” in “long-term investments”

how is a bank overdraft reported?

on the balance sheet as a “liability”

when may a bank overdraft be reported as “cash”?

if a company has 2 accounts in one bank and 1 of the accounts has an overdraft, the 2 accounts may be netted and reported as “cash”

*this is as long as the positive balance is greater than the negative balance

how is restricted cash reported?

on the balance sheet as either…

• “restricted cash” in the “current asset” section if the restriction will be lifted within the next year or operating cycle, whichever is longer

• in the “other assets” section if restriction is for a long-term purpose

efficient internal controls over cash includes measures that will…

• prevent losses from theft and fraud

• provide accurate accounting of cash receipts, cash disbursements, and cash balances

• ensure that a sufficient amount of cash is kept on hand for emergencies

• prevent large amounts of idle cash

what are the types of bank accounts?

• general checking accounts

• savings accounts

• imprest bank account

• lockbox account

most cash transactions are cycled through what type of bank account?

general checking accounts

imprest bank account

a checking account that was created for a single, specific purpose; a specific amount of cash is deposited into it

what do most companies have an imprest bank account for?

• employee payroll checks

• dividend checks

lockbox account

used to make collections when there is heavy customer billing; accelerates availability and interest earned on cash

ex. PO boxes

electronic funds transfer

allow for funds to be transferred between parties or parts of a single party without the physical exchange of cash or checks

ex. automatic deposit for an employee of their payroll check

changes that have resulted from the widespread use of electronic cash transactions

• shorter delay between making a cash payment from a bank account and having the cash actually taken out of the account

• companies must have better internal controls over cash payments

• increasing need for people with great accounting and information system skills

• greater threat of consumer identity theft and corporate cybersecurity

entry to record a cash register transaction at the end of a period (usually a day):

Db. cash [amount currently in cash register - amount in cash register at beg. of period]

Cr. sales rev. [amount shown in cash register synonym

*balanced with cash over and short if necessary

cash over and short

used for both petty funds and cash register transactions

how is “cash over and short” reported?

on the income statement, netted together and reported as a gain/loss in “other income-other expense”

entry to record a customers’ use of a debit card:

Db. cash [amount of sale - charge to retailer for use of debit card]

Db. financing expense [amount the bank charges a retail establishment]

Cr. sales rev. [for gross amount of sale]

entry to record a customer’s use of a credit card:

Db. cash [amount of sale - charge to retailer for use of credit card]

Cr. financing expense [amount of sale x percentage charged to retailer for the use of the credit card]

Cr. sales rev. [for gross amount of sale]

which is usually greater, the bank fee to a retailer for accepting the use of a credit card or the use of a debit card?

the fee for the use of a credit card

what is restricted cash?

cash held by a company for a specific purpose; not available for immediate general use

compensating balance

a minimum balance that must be maintained in a bank account; a type of restricted cash

what is a bank overdraft?

occurs when a company writes a check for more than what’s in its bank account

what is the lowest card-use-related fee?

the bank fee to a retailer for accepting the use of a debit card

what is a petty cash fund?

a fund created to make cash payments for small items

what type of person should be put in charge of a petty cash fund?

someone who is…

• honest

• meticulous and responsible

• a good recordkeeper

• always present to make payments

when is a petty cash fund replenished?

either…

• when the fund gets low

• at the end of an accounting period → want to get all accounts at end-of-year balances

entry to record the creation of a petty cash fund:

Db. petty cash fund [for amount of fund]

Cr. cash

how is a petty cash fund created?

a company writes a check to the person in charge of the fund, who cashes in exchange for a mix of change

entry to record the use of a petty cash fund:

no entry

entry to record the replenishment of a petty cash fund:

Db. various expenses

Cr. cash

Db./Cr. cash over and short [plug]

how is a petty cash fund replenished?

• the non-cash contents of the fund are recorded (like receipts, checks, IOUs)

• cash is increased in the fund from what is physically in it to what should be in the fund

how is a replenishment entry for a petty cash fund balanced?

using “cash over and short”

how is “cash over and short” reported?

on the income statement as “other income-other expense”

when is “cash over and short” reported as a loss, and when is it reported as a gain?

loss → account has an ending Db. balance

gain → account has an ending Cr. balance

entry to record the increase of a petty cash fund:

Db. petty cash fund

Cr. cash

entry to record the decrease of a petty cash fund:

Db. cash

Cr. petty cash fund

what is a cash reconciliation?

an internal schedule prepared to ensure that the bank has not made any errors in a company’s checking account and bring “cash” to its correct general ledger balance

a cash reconciliation is a ________ schedule

point-in-time

what is the format of a cash reconciliation?

• a heading

• 2 columns → one that works from “balance per books” to “correct company cash balance”; another that works from “balance per bank” to “correct company cash balance”

what is the purpose of the “balance per bank” side in a cash reconciliation?

to discover if the bank made any errors in the company account, as a check figure for “balance per books”, and to confirm that deposits-in-transit and outstanding checks reported are not fictitious

what items must be considered in preparing a cash reconciliation?

• items known and recorded correctly by the bank or company, but not by the latter

• items not known and/or not recorded correctly by both the company and the bank

where are cash reconciliation items recorded correctly by the bank, but not by the company shown?

on the “balance per books” side of the reconciliation

ex. “company monthly bank charge”

where are cash reconciliation items recorded correctly by the company, but not by the bank shown?

on the “balance per bank” side of the reconciliation

ex. “deposits-in-transit”

where are cash reconciliation items known and recorded correctly by both the company and the bank shown?

nowhere 

where are cash reconciliation items not known and/or not recorded correctly by both the company and the bank shown?

both the “balance per books” and “balance per bank” sides of the reconciliation

steps in completing a cash reconciliation problem

1. read carefully

2. see what was done with an item by both the bank and company

3. see what should have been done with the item by both the bank and company

4. make necessary correction/adjustment

what is done with a cash reconciliation, once prepared?

a transaction entry is made for all items shown on the “balance per books” side to get “cash” to its correct balance

deposits in transit

end-of-month deposits recorded on the company’s books in one month are recorded by the bank in the following month

outstanding checks

checks written by the company are recorded when written but may not be recorded by the bank until the following month

bank charges

chargers recorded by the bank against a company’s balance, which the company may not be aware of until receipt of the bank statement

bank credits

collections or deposits by the bank for the benefit of the company that may be unknown to the company until receipt of the bank statement

receivables

claims held against customers and others for money, goods, or services

how are receivables classified?

• short-term or long-term

• trade or non-trade

short-term receivables

expected to be collected within 1 year or current operating cycle, whichever is longer

trade receivables

assets owed from customers for goods bought or services rendered

non-trade receivables

assets owed to an entity that arise from transactions outside the normal course of business

accounts receivable

oral promises of a purchaser to pay for goods and services received; arise from short-term extensions of credit; collected w/in 30-60 days

notes receivable

written promises of a purchaser to pay a certain sum of money on a specified future date; can be short or long-term; usually include interest

all trade receivables are called…

“accounts receivable”

*all others are non-trade receivables

how are short-term receivables reported?

on the balance sheet under “current assets”

what short-term receivables should not be shown as a “current asset”?

• loans to related-party individuals or companies

  • (officers or board members, relatives of owners, subsidiaries, parent companies)

• short-term receivables that are restricted for payment of a long-term liability

  • “restricted receivables”

how are related-party receivables and restricted receivables reported?

on the balance sheet under “other assets”

installment receivables

receivables that are due in more than 1 year

how are installment receivables reported?

• installment sales are a major portion of business → under “current assets”

  • (this is bc the firm’s operating cycle is greater than 1 year)

• installment sales are not a major portion of business → under “long-term investments”

how are receivables with a credit balance reported?

on the balance sheet as a liability (bc this indicates an overpayment by a customer)

trade discount

an arbitrary reduction in the sales price of an item

how are trade discounts handled in accounting?

they are disregarded

sales discounts

reductions in amount owed that are offered to customers to induce prompt payment

computation for the annual interest rate being paid if a sales discount is not taken

[(% discount / (1 - % discount)] x [365 / (day gross amount must be paid - day discount period ends)]

sales discounts are usually accounted for using the _____ method

gross

entry to record the sale of goods to a customer (on account)

Db. A/R

Cr. sales rev.

entry to record collection of a customer’s payment within the discount period:

Db. cash

Db. sales discounts

Cr. A/R

entry to record collection of a customer’s payment after the discount period:

Db. cash

Cr. A/R

gross method

A/R and its related revenue is recognized at the invoice price; sales discounts are a separate account

sales returns and allowances are accounting for when…

they occur

entry to record returns and allowances":

Db. sales returns & allowances

Cr. cash or A/R

if a company maintains a perpetual inventory system, what entries have to be made for returns and allowances?

Db. sales returns & allowances

Cr. cash or A/R

Db. inventory

Cr. COGS

what are financial statement disclosures pertain to accounts receivable?

companies should…

• segregate different receivable types

• ensure contra accounts are offset against the proper receivable accounts

• ensure that receivables classified as current will actually be converted to cash within one year/operating cycle

• disclose any existing loss contingencies

• disclose any receivables pledged as collateral

• disclose all significant credit risks arising from receivables

accounts receivable turnover

equation: net sales / average A/R

measured in: times

measures: operating efficiency

days in accounts receivable

equation: 365 days / accounts receivable turnover

measured in: days

measures: operating efficiency

any receivable being collected at a later date has…

imputed interest

*this is included in the face amount of the payment, as long as there’s no stated interest rate

how is imputed interest handled for receivables due in one year or less?

imputed interest is overlooked → no “interest income” is recorded

direct write-off method

theoretically unacceptable because expenses are not matched to revenues → violation of matching principle

can only be used for immaterial amounts and tax purposes

entry to record end-of-period adjustment under direct write-off method:

no entry

entry to record write-off of accounts receivable - direct write-off method

Db. bad debt expense

Cr. A/R

entry to record the recovery of a specific receivable previously written-off as uncollectible under the direct write-off method:

Db. A/R

Cr. bad debt expense

Db. cash

Cr. A/R