Principles of Accounting: Chapter Six

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Chapter Summary

Chapter 6 begins with definitions of cash and cash equivalents. This is not always as obvious as it would seem, and presentation of items and amounts in the Cash account on a company's balance sheet should follow fairly precise guidelines. The initial portion of the chapter also emphasizes the importance of proper cash management and provides insight into tools and opportunities for improved cash management.

A detailed discussion and illustration of the bank reconciliation is presented, along with appropriate accounting adjustments. Another illustration is used to demonstrate the correct methods for managing and accounting for a petty cash fund.

The chapter closes with an examination trading securities. Trading securities are usually short-term type investments that are made with object of generating profits. Oftentimes they are acquired with excess cash funds. Trading securities are measured on a balance sheet at fair value, and fluctuations in value are reported in income as they occur.

To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. You will find these exercises very helpful in providing models and guidelines for solving all of the problems at principlesofaccounting.com.

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Objectives: Chapter Six

The following learning objectives for this chapter map to the curriculum design for our online university-level courses. These courses are offered through Utah State University, and result in the awarding of up to 6 hours of highly transferrable college credit. To learn more, check out the classroom link.

The composition of cash and how cash is presented on the balance sheet.

Define cash.

Know which items are properly classified as cash, and which are not.

Understand the concepts of compensating balances and cash equivalents.

Cash management and controls for receipts and disbursements.

Why is cash management important?

What tools can be used to facilitate cash management.

Describe external and internal strategies that might be used employed to enhance cash flow.

What are features of a typical cash control system?

Be able to recite at least three typical control features related to both cash receipts and cash disbursements.

Reconciliation of bank accounts.

Why are bank reconciliations necessary?

What items are likely to be included on the company records, but not the bank records?

Be able to create and solve a complex problem requiring a bank reconciliation.

Which items on a bank reconciliation require an adjusting journal entry, and why?

What is a proof of cash?

The correct operation of a petty cash system.

What is the benefit of a petty cash system?

Be able to explain the operation of a petty cash system.

Be able to explain the enhancement to internal control that results from a petty cash system.

Know how to prepare entries to establish and reimburse a petty cash fund.

Understand the importance of measuring cash short and over.

Accounting for highly-liquid investments known as "trading securities."

Name several examples of trading securities, how they are initially recorded, and their position on the balance sheet.

Know the application of the fair value method as it relates to trading securities, and the rationale for its use.

Prepare journal entries for investments in trading securities, including cases involving increases and decreases in value.

Grasp the financial statement impact of changes in value of trading securities.

Know how to record dividends received.

Understand the meaning of the word "derivatives," and know that they are valued at fair value.

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