a.

Definition of Cash
Cash refers to the most liquid form of assets that can be easily converted into other forms of
assets or used to settle financial obligations. It is a medium of exchange that is widely accepted
and used in transactions. Cash can be in the form of physical currency, such as banknotes and
coins, or electronic funds held in bank accounts.
Cash is also known as money, in physical form. Cash, in a corporate setting, usually includes
bank accounts and marketable securities, such as government bonds and banker's acceptances.
Example of Cash
Let’s consider an example of John, who owns a small grocery store. John receives cash payments
from his customers in the form of banknotes and coins. He also maintains a bank account where
he deposits the cash received from the sales. The bank account serves as an electronic form of
cash that John can use to pay his suppliers, employees, or taxes.

b. What is the meaning of unrestricted cash?

Unrestricted cash refers to cash that is readily available to be spent for any purpose and
has not been pledged as collateral for a debt obligation or other purpose.

Often, to satisfy debt covenants, companies must maintain a certain level of cash on their
balance sheets in case the company defaults or goes into nonpayment of their credit
obligations.

The remaining cash that exceeds the covenant requirements is referred to as unrestricted
cash. Unrestricted cash is a part of an organization's liquid funds, meaning it's easily
accessible. Unrestricted cash is important since it shows how much cash a company has
to meet its short-term bills and credit obligations.

C. cash equivalents are highly liquid investments that can be quickly and easily converted into
cash. They have a very short maturity period, usually less than three months, and have virtually
no risk of changes in value. Cash equivalents are carried on a company’s balance sheet as current
assets, since they can be used to meet short-term financial obligations.

Examples of cash equivalents include:

Treasury bills (T-bills): Short-term debt obligations issued by the U.S. government with
maturities ranging from a few weeks to 52 weeks. T-bills are considered one of the safest
investments since they are backed by the full faith and credit of the U.S. government.
Money market funds: Mutual funds that invest in short-term, high-quality investments such as
commercial paper, treasury bills, and repurchase agreements. Money market funds aim to
maintain a stable net asset value (NAV) of $1 per share, making them a low-risk investment
option.
Commercial paper: Short-term, unsecured promissory notes issued by corporations with high
credit ratings. Commercial paper is typically used for financing accounts receivable, inventory,
or meeting short-term debt obligations.
Banker’s acceptances: A short-term credit instrument created when a bank guarantees payment
on behalf of its customer to another party. Banker’s acceptances are often used in international
trade finance and are considered safe due to the involvement of a reputable bank.
Short-term certificates of deposit (CDs): Time deposits with maturities ranging from a few
weeks to several months that are issued by banks and credit unions. CDs usually offer a slightly
higher interest rate compared to money market funds or savings accounts but may impose
penalties for early withdrawal.
Marketable securities: Publicly traded stocks or bonds that can be quickly sold on an exchange
for cash. While these securities may not always be highly liquid, they can serve as cash
equivalents if they have a short selling period and a reliable market for resale.

D Transactions Not Included as Cash and Cash Equivalents:

Cash and cash equivalents are highly liquid assets that can be readily converted into cash.
However, not all transactions involving cash or cash equivalents are included in this
category. Some transactions that are not considered as cash and cash equivalents include:

Restricted Cash: This refers to cash that is not freely available for use by the entity. It
may be set aside for a specific purpose, such as collateral for a loan or to comply with
regulatory requirements. Restricted cash is not considered as part of the company’s cash
and cash equivalents.

Post-Dated Checks: Post-dated checks are checks received by a company but cannot be
deposited until the date written on the check. Since they cannot be immediately converted
into cash, post-dated checks are not classified as cash and cash equivalents.

Bank Overdrafts: Bank overdrafts occur when a company withdraws more money from
its bank account than is available. While overdrafts may create a negative balance in the
bank account, they are not considered as cash and cash equivalents since they represent a
liability rather than an asset.

Marketable Securities: Investments in marketable securities, such as stocks and bonds,

are not classified as cash and cash equivalents even though they can be easily converted
into cash. These investments are typically categorized separately on the balance sheet.

Promissory Notes: Promissory notes represent a promise to pay a certain amount of

money at a future date. While they may have a certain level of liquidity, promissory notes
are not considered as part of an entity’s cash and cash equivalents.
Foreign Currency: Cash held in foreign currencies is not included in the calculation of
cash and cash equivalents unless it is highly liquid and readily convertible into the
reporting currency.

Money Market Funds: While money market funds are highly liquid investments that
closely resemble cash, they are typically classified separately from cash and cash
equivalents on the balance sheet.

e. The measurement of cash is typically done in terms of its quantity, rather than its
physical dimensions. Cash, in the form of physical currency, can be measured by
counting the number of bills and coins. In the financial world, cash is also measured by
its value, which is typically expressed in a specific currency, such as US dollars or euros.

When measuring the value of cash, there are several key factors to consider:

Face value: This is the value that is printed on the currency itself. For example, a US
dollar bill has a face value of one dollar.
Purchasing power: This refers to the amount of goods and services that can be bought
with a given amount of cash. For example, if the price of a gallon of gasoline is $3.00,
then a $10 bill has a purchasing power of approximately 3.33 gallons of gasoline
(assuming no other expenses).
Exchange rate: When measuring the value of cash in different currencies, it’s important
to consider exchange rates. For example, if one US dollar is equivalent to 0.85 euros,
then a $10 bill has a value of approximately 8.50 euros.
Inflation: Over time, the value of cash can decrease due to inflation. This means that the
same amount of cash will be able to buy fewer goods and services in the future than it can
today. For example, if the annual inflation rate is 2%, then a $10 bill will have the same
purchasing power as $9.80 one year from now.
In addition to these measurements, there are also various financial metrics that are used to
evaluate the performance of cash as an investment. These include:

Return on investment (ROI): This measures the gain or loss made on an investment,
expressed as a percentage of the investment’s cost. For example, if a $100 investment
yields a profit of $10, the ROI is 10%.
Interest rate: This is the cost of borrowing or lending money, expressed as a percentage of
the amount borrowed or lent. For example, if a bank offers an interest rate of 5% on
savings accounts, then a $100 deposit will earn $5 in interest over the course of a year.
Liquidity: This refers to how easily an asset can be converted into cash without affecting
its market price. Cash is generally considered to be the most liquid asset, since it can be
used to purchase goods and services immediately.
f. Cash and cash equivalents are typically presented in the financial statements under
the current assets section. Cash equivalents are short-term, highly liquid investments
that are easily convertible into known amounts of cash and which are subject to an
insignificant risk of changes in value. These investments usually have a maturity period
of three months or less from the date of purchase.

In the balance sheet, cash and cash equivalents are reported as a single line item. This
line item includes physical currency, coins, checks, money orders, and balances held in
checking or savings accounts. Cash equivalents such as Treasury bills, money market
funds, and commercial paper are also included in this category. The total amount of
cash and cash equivalents represents the company’s ability to meet its short-term
obligations and fund its day-to-day operations.

For example, let’s consider a fictional company XYZ Inc.’s balance sheet:

XYZ Inc. Balance Sheet As of December 31, 20XX

Current Assets: Cash and Cash Equivalents $100,000 Accounts Receivable $50,000
Inventory $75,000 Total Current Assets $225,000

By presenting cash and cash equivalents separately from other current assets,
stakeholders can easily assess the company’s liquidity position and its ability to meet
short-term financial obligations.

g. Compensating balance refers to the minimum balance that a borrower must maintain
in a bank account as part of a loan agreement. This requirement is often imposed by
lenders to offset the credit risk associated with the loan. The compensating balance is
typically calculated as a percentage of the loan amount and is held in a non-interest-
bearing account. By requiring borrowers to maintain a compensating balance, lenders
ensure that they have access to funds that can be used to cover any potential losses
resulting from the loan.

In essence, compensating balances serve as a form of collateral for the lender, providing
them with a level of security in case the borrower defaults on the loan. While
compensating balances tie up some of the borrower’s funds, they can also help secure
more favorable loan terms or interest rates.

Overall, compensating balances play a crucial role in lending agreements by mitigating

risk for lenders and providing them with additional security.
1. h. Undelivered Checks: Undelivered checks refer to checks that have been
issued but have not been received by the intended recipient. These checks may
be lost in the mail or held by the issuer for some reason. Undelivered checks can
cause inconvenience and financial uncertainty for both the issuer and the
recipient. It is important for issuers to track the delivery of checks to ensure they
reach the intended recipient in a timely manner.
2. Postdated Checks: Postdated checks are checks that bear a future date instead
of the current date when they are issued. The issuer specifies a future date on the
check, which indicates when the recipient can deposit or cash the check.
Postdating a check is a common practice used to delay payment until a specific
date in the future. However, recipients should be aware that banks may choose to
process postdated checks before the specified date, so it is essential to
communicate clearly with the bank and the payee.
3. Stale Checks: Stale checks are checks that are not deposited or cashed within a
certain period after their issuance. The validity of a check is typically limited to six
months or less, after which it may be considered stale. Banks may refuse to honor
stale checks, and recipients may need to request a new check from the issuer if
 they still wish to receive payment. It is important for both issuers and recipients
to keep track of check expiration dates to avoid issues with stale checks.

In summary, undelivered checks refer to checks that have not reached their intended
recipients, postdated checks bear future dates for payment, and stale checks are checks
that have not been cashed within a specified timeframe.

The imprest system of internal control is a method used by organizations to manage

and control their petty cash funds. In this system, a fixed amount of money is
established as an initial fund, known as the imprest fund. This fund is replenished
periodically to maintain the original amount, ensuring that there is always a consistent
amount of cash available for small, everyday expenses. The imprest system helps
prevent misuse of funds and provides a clear audit trail for tracking cash transactions.

The key features of the imprest system include:

1. Fixed Amount: A specific amount of money is set aside as the initial imprest
fund.
2. Replenishment: When the petty cash fund is running low, it is replenished to
bring it back to the original fixed amount.
3. Documentation: All transactions involving the petty cash fund are recorded and
supported by receipts or other documentation.
4. Accountability: A designated custodian is responsible for managing the petty
cash fund and ensuring that it is used appropriately.
5. Audit Trail: The imprest system creates a clear audit trail that can be used to
track how the petty cash funds are being used.

Overall, the imprest system provides a structured approach to managing petty cash
funds, promoting transparency, accountability, and control over cash expenditures
within an organization.

j. Petty cash funds are small amounts of cash kept on hand by a company for minor
expenses such as office supplies, postage, or other incidental costs. There are two main
methods of accounting for petty cash funds: the imprest system and the fixed system.

1. Imprest System: Under the imprest system, a fixed amount of money is

established as the petty cash fund. When the fund runs low, it is replenished to its
original amount. The process of replenishing the fund involves submitting
receipts for the expenses incurred from the petty cash fund. This method ensures
 that the petty cash fund remains constant and is only used for legitimate business
expenses.
2. Fixed System: In the fixed system, a specific amount of money is allocated for
petty cash, but there is no requirement to replenish it to its original amount.
Instead, when the petty cash fund is depleted, additional funds are added
without regard to the original amount. This method does not require detailed
record-keeping for each expense but may lead to a lack of accountability and
control over petty cash expenditures.

Purpose of Petty Cash Fund: The purpose of a petty cash fund is to provide a
convenient and efficient way for companies to handle small expenses without having to
write a check or use a credit card for every minor purchase. By having a designated
amount of cash readily available, employees can quickly access funds for small
purchases that do not justify the time and effort required for traditional payment
methods. The petty cash fund also helps in maintaining confidentiality for certain
transactions that may not be suitable for electronic records.

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Kenton, W. (2020, March 9). Cash: definition, different types, and history. Investopedia.

https://www.investopedia.com/terms/c/cash.asp

Kenton, W. (2021, July 21). Unrestricted Cash: What it is, How it Works, Example.

Investopedia. https://www.investopedia.com/terms/u/unrestricted-cash.asp
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https://corporatefinanceinstitute.com/resources/accounting/cash-equivalents/

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ENTERPRISES & CO., INC.