CASH

Cash, the most liquid of assets, is the standard medium of exchange and the basis for measuring and
accounting for all other items. Companies generally classify cash as a current asset.
Cash consists of
o coin,
o currency, and
o available funds on deposit at the bank.
Negotiable instruments such as
o money orders,
o certified checks,
o cashier’s checks,
o personal checks, and
o bank drafts

What about savings accounts? Banks do have the legal right to demand notice before
withdrawal. But, because banks rarely demand prior notice, savings accounts nevertheless are
considered cash

Because petty cash funds and change funds are used to meet current operating expenses and
liquidate current liabilities, companies include these funds in current assets as cash

Some negotiable instruments provide small investors with an opportunity to earn interest.
These items, more appropriately classified as temporary investments than as cash, include money
market funds, money market savings certificates, certificates of deposit (CDs), and similar types of
deposits and “short-term paper.”

Companies treat postdated checks and I.O.U.s as receivables. They also treat travel advances
as receivables if collected from employees or deducted from their salaries. Otherwise, companies
classify the travel advance as a prepaid expense. Postage stamps on hand are classified as part of office
supplies inventory or as a prepaid expense.

REPORTING CASH

1. Cash equivalents.
Cash Equivalents are short-term, highly liquid investments that are both
(a) readily convertible to known amounts of cash, and
(b) so near their maturity that they present insignificant risk of changes in value
because of changes in interest rates.
 Generally, only investments with original maturities of three months or less
qualify under these definition

o Examples of cash equivalents are

o Treasury bills,
o commercial paper - is a short-term note issued by corporations with good credit rating,
o money market - a variation of the mutual fund, the mix of Treasury bills and commercial
paper making up the fund’s portfolio determines the yield

If an asset is not cash and is short-term in nature, it should be reported as a temporary

investment

2. Restricted cash.
Petty cash, payroll, and dividend funds are examples of cash set aside for a particular purpose. In
most situations, these fund balances are not material. Therefore, companies do not segregate them
from cash in the financial statements

When material in amount, companies segregate restricted cash from “regular” cash for reporting
purposes
Companies classify restricted cash either in the current assets or in the long-term assets section,
depending on the date of availability or disbursement

Cash classified in the long-term section (non current) is frequently set aside for plant expansion,
retirement of long-term debt

The SEC defines these minimum balances, called compensating balances, as “that portion of any
demand deposit (or any time deposit or certificate of deposit) maintained by a corporation which
constitutes support for existing borrowing arrangements of the corporation with a lending institution.
Such arrangements would include both outstanding borrowings and the assurance of future credit
availability.”

the SEC recommends that companies state separately legally restricted deposits held as
compensating balances against short-term borrowing arrangements among the “Cash and cash
equivalent items” in current assets.

Companies should classify separately restricted deposits held as compensating balances against
long-term borrowing arrangements as noncurrent assets in either the investments or other assets
sections, using a caption such as “Cash on deposit maintained as compensating balance.

3. Bank overdrafts occur when a company writes a check for more than the amount in its cash
account. Companies should report bank overdrafts in the current liabilities section, adding them
to the amount reported as accounts payable.
STATEMENT OF CASH FLOWS

Operating activities include those transactions and events that enter into the calculation of net income.
Cash receipts from the sale of goods or services are the major cash infl ows for most businesses. Other
infl ows include cash receipts for interest revenue, dividend revenue, and similar items. Major outfl ows
of cash are for the purchase of inventory and for the payment of wages, taxes, interest, utilities, rent,
and similar expenses. As is explained later, the amount of cash provided by (or used in) operating
activities is a key fi gure and should be highlighted on the statement of cash fl ows.
Investing activities Transactions and events that involve the purchase and sale of securities (excluding
cash equivalents), property, plant, equipment, and other assets not generally held for resale, and the
making and collecting of loans. occur regularly and result in cash infl ows and outfl ows. Th ey are not
classifi ed under operating activities because they relate only indirectly to the entity’s central, ongoing
operations, which usually involve the sale of goods or services.

Financing Activities Financing activities include transactions and events whereby resources are obtained
from or paid to owners (equity fi nancing) and creditors (debt fi nancing). Dividend payments, for
example, fi t this defi nition. As noted, the receipt of dividends and interest and the payment of interest
are classifi ed under operating activities simply because they are reported as a part of income on the
income statement. Th e receipt or payment of the principal amount borrowed or repaid (but not the
interest) is considered a fi nancing activity.

EXERCISE :

1. Made sales on account, $13,500.

2. Collected payments on account, $14,000.
3. Purchased inventory on account, $7,900.
4. Recorded cost of goods sold, $8,000.
5. Paid accounts payable, $8,100.
6. Purchased property, plant, and equipment for cash, $1,700.
7. Sold property, plant, and equipment for cash, $500 (original cost, $1,200; accumulated depreciation,
$800)
8. Paid long-term debt, $200.
9. Issued stock at par value, $450.
10. Recorded depreciation expense, $500.
11. Paid interest on debt, $180.
12. Recorded interest owed (accrued) but not paid, $20.
13. Paid miscellaneous expenses (e.g., wages, supplies, etc.) for the period, $3,200.
14. Recorded tax expense for the period, $450.
15. Paid taxes during the period, $440.

1. Accounts Receivable 13,500

Sales 13,500
2. Cash 14,000
Accounts Receivable 14,000
3. Inventory 7,900
Accounts Payable 7,900
4. Cost of Goods Sold 8,000
Inventory 8,000
5. Accounts Payable 8,100
Cash 8,100
6. Property, Plant, and Equipment 1,700
Cash 1,700
7. Cash 500
Accumulated Depreciation 800
Property, Plant, and Equipment 1,200
Gain on Sale of Equipment 100
8. Long-Term Debt 200
Cash 200
9. Cash 450
Common Stock 450
10. Depreciation Expense 500
Accumulated Depreciation 500
11. Interest Expense 180
Cash 180
12. Interest Expense 20
Interest Payable 20
13. Miscellaneous Expenses 3,200
Cash 3,200
14. Tax Expense 450
Taxes Payable 450
15. Taxes Payable 440
Cash 440