introduction chapters
chapter 6
Cash and
Highly-Liquid Investments
goals discussion
goals
achievement
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in the blanks
multiple
choice
problems
check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Know which items are properly classified as cash, and which are not.
Why is cash management important?
Define cash planning and cash control.
Discuss ways in which cash flows can be accelerated or delayed.
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.
Why are bank reconciliations necessary?
What items are likely to be included on the company records, but not the bank records?
What items are likely to be included on the bank records, but not the company 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 the benefit of a petty cash system?
Be able to explain the operation of a petty cash system.
Prepare journal entries to establish and replenish a petty cash system, including situations involving cash shortages.
Be able to explain the enhancement to internal control that results from a petty cash system.
Name several examples of trading securities, how they are initially recorded, and where they are positioned on the balance sheet.
What method is used to account for trading securities?
Be totally familiar with the operation (journal entries and financial statement impact) of the fair value method for trading securities, including cases involving increases and decreases in value.
Know how to record dividends received.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| bank reconciliation | A control procedure to establish and verify the correct cash balance via identification of errors, irregularities, and adjustments |
| bank statement | The document received from a bank which summarizes deposits and other credits, and checks and other debits to a bank account |
| cash | Items acceptable to a bank for deposit and free from restrictions to satisfying current debts; includes coins, currency, bank deposits, etc. |
| cash budget | A major component of a cash planning system that depicts cash inflows and outflows for a stated period of time |
| cash equivalents | Short-term interest-earning financial instruments that are deemed to be highly secure and will convert back into cash within 90 days |
| compensating balance | An amount that must be left on deposit and cannot be withdrawn |
| deposit in transit | Receipts entered on company records but not yet posted by the bank |
| derivatives | Investments accounted for a fair value that generally derive their value from some other item; examples include commodity futures, options, and so forth |
| fair value accounting | Sometimes called "mark-to-market;" to record an investment at its fair value and recognize changes in value as it occurs |
| NSF check | Nonsufficient funds check; a customer check returned for lack of funds (a "hot check") |
| outstanding checks | Checks entered on company records but not yet cleared by the bank |
| petty cash | A fund established for making small payments that are impractical to pay by check; also known as imprest cash fund |
| proof of cash | A detailed bank reconciliation that verifies not only beginning and end balances, but also validates deposits and withdrawals during the month |
| trading securities | Investments acquired with the intent of generating profits by reselling the investment in the very near future; classified as current assets |