Cash Management and Equivalents Analysis
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Ynah GarciaCash Management and Equivalents Analysis
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Ynah GarciaCommon questions
Powered by AIA cash equivalent is an investment with a maturity of three months or less from the date of purchase and is readily convertible to a known amount of cash, with negligible risk of changes in value. A 3-year treasury note, even though maturing in the next year, does not qualify as a cash equivalent because its maturity period exceeds the three-month threshold required for classification as a cash equivalent .
Macao Imperial should report cash and cash equivalents of $460,000. The cash in the checking account ($35,000) and the money market account ($75,000) qualify as cash or near-cash equivalents. In addition, the Treasury bill purchased on November 1, 2022, and maturing on January 31, 2023, is included because it matures within three months of the balance sheet date, adding $350,000 to the total cash equivalents. Thus, the total for cash and cash equivalents is $460,000 .
To qualify as a cash equivalent, an investment must have a maturity period of three months or less from the date of acquisition. This qualifier ensures the investment is highly liquid, meaning it can readily be converted into a known amount of cash with minimal risk of fluctuation in value. The short maturity period underscores its status as non-sensitive to market interest rate changes, ensuring it remains a stable and secure component of cash management in financial reporting .
In a scenario where a petty cash fund should contain P250 but contains P150 in cash and P95 in disbursement receipts, a cash short situation occurs because the total (P245) is less than the expected cash fund amount (P250). The discrepancy, a shortage of P5, should be recorded under a Cash Short and Over account when replenishment occurs. Conversely, an overage is recorded when the fund's total exceeds the anticipated amount, indicating surplus cash or accounting errors .
Diego Bantay Company should classify the Citibank account as an asset with a balance of $3,000,000 and the HSBC overdraft as a liability, decreasing total cash equivalents. The money market placement at JP Morgan $2,000,000 is included but the time deposit at Duetche Bank is set aside for a specific future purpose, excluding it from cash equivalents. After adjusting for the overdraft and excluded time deposit, the reported cash and cash equivalents stand at $3,060,000. This involves recognizing accessible balances and disregarding those restricted or intended for future non-current liabilities .
Paragas Corporation should report $6,400 as cash on the balance sheet. The checkbook balance starts at $8,000. The check dated January 2, 2022, for $2,000, and the check stamped NSF for $500 reduce this, as they were not properly cleared. Additionally, the undeposited check for $950 dated May 1, 2021, should be subtracted. The unmailed vendor check dated December 31, 2021, amounting to $1,000, and the check dated January 3, 2022, for the supplier, $850, should be excluded because they weren't affecting cash by the balance sheet date. This reconciliation process leads to a conclusion of $6,400 .
To reimburse and simultaneously increase Bojay Company's petty cash fund to P10,000, record the expenses and the increase. Entry: Debit Postage (P600), Travel (P750), Donations (P1,000) for reimbursement, and increase Petty Cash (P7,500), then credit Cash (P9,850) representing the total amount needed for reimbursement and the increase in the petty cash fund. This entry reflects the necessity to cover the used funds and to establish the new fixed fund amount going forward .
The petty cash system employs an imprest system, which is specific to managing small amounts of cash for incidental expenses. This system ensures that petty cash expenses are regularly replenished back to the original fixed amount, maintaining control over the cash flow. It assigns responsibility to a custodian, ensuring separation of duties and reducing the risk of discrepancies or misuse of funds. Proper documentation and authorization ensure that all disbursements are appropriate and accounted for, enhancing the internal control mechanism .
Mursi Company should report cash and cash equivalents of $190,000. This includes the BDO Checking account #101 with a balance of $175,000 and subtracts the deficit in BDO Checking account #201 of $10,000. The 90-day certificate of deposit ($50,000) and the money market account ($25,000) are included as cash equivalents, totaling $190,000. The 190-day certificate is excluded as it exceeds the 90-day period for classification as a cash equivalent .
Cash denominated in foreign currency should be translated into Philippine pesos using the closing exchange rate as of the balance sheet date. This translation is crucial for accurately reflecting the current financial position under Philippine accounting standards. It accounts for fluctuations in exchange rates and ensures that the cash balance is representative of its true value in the context of the local economy. Failure to adjust for the exchange rate could result in misstated assets and liabilities on the financial reports .