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Account For Cash And Cash Equivalents - CPA Far

  1. Which of the following items should be classified as restricted cash and presented separately from cash and cash equivalents on the balance sheet?
    Answer: Cash held in escrow required by a loan covenant that restricts its use. Restricted cash is cash that is not available for general use due to legal, contractual, or regulatory restrictions. Cash held in escrow under a loan covenant that prohibits its use for general operations must be classified as restricted and presented separately on the balance sheet. Answer A is correct. A money market account used for daily operating disbursements (B) is unrestricted and qualifies as cash. Petty cash funds at various locations (C) are unrestricted operating cash included in the cash balance. Checks written but not yet mailed (D) remain in the cash balance because the payee has not received them and the company still controls the funds.
  2. A company's general ledger shows a cash balance of $42,500. The bank statement shows a balance of $39,800. Outstanding checks total $4,500, deposits in transit total $7,100, and the bank charged a $100 service fee not yet recorded by the company. What is the adjusted (reconciled) cash balance?
    Answer: $42,400 Bank balance: $39,800 + deposits in transit $7,100 - outstanding checks $4,500 = $42,400. Book balance: $42,500 - bank service fee $100 = $42,400. Both sides reconcile to $42,400. Answer C is correct. Answer A ($41,700) uses the incorrect outstanding check figure of $5,200. Answer B results from an arithmetic error in the reconciliation. Answer D is the unadjusted bank balance.
  3. A company's December 31 bank statement shows a balance of $25,000. The company's general ledger shows a cash balance of $27,500. The reconciliation reveals: outstanding checks of $3,800, deposits in transit of $6,200, and a bank service charge of $100 not yet recorded by the company. What is the correct adjusted cash balance?
    Answer: $27,400 Bank side: $25,000 + deposits in transit $6,200 - outstanding checks $3,800 = $27,400. Book side: $27,500 - bank service charge $100 = $27,400. Both sides reconcile to $27,400. Answer C is correct. Answer A ($25,400) uses the original deposit in transit of $4,200 rather than $6,200. Answer B is the unadjusted bank balance. Answer D results from an arithmetic error in the reconciliation.
  4. A bank statement shows a balance of $18,600. The following reconciling items are identified: deposits in transit of $4,200, outstanding checks of $6,500, and a bank error in which the bank incorrectly charged the company's account $800 for another customer's check. What is the adjusted bank balance?
    Answer: $17,100 Adjusted bank balance = $18,600 + deposits in transit $4,200 - outstanding checks $6,500 + bank error correction $800 = $17,100. The bank error understated the company's balance, so it is added back. Answer C is correct. Answer A omits the bank error correction ($18,600 + $4,200 - $6,500 = $16,300). Answer B subtracts the bank error rather than adding it ($18,600 + $4,200 - $6,500 - $800 = $15,500). Answer D uses the unadjusted bank balance.
  5. Under U.S. GAAP, which of the following items qualifies as a cash equivalent?
    Answer: A 60-day Treasury bill purchased when it had 55 days remaining to maturity. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. A Treasury bill with 55 days remaining to maturity at the time of purchase qualifies. Answer A is correct. A 6-month CD (B) has an original maturity exceeding three months and does not qualify. A money market fund with a redemption restriction (C) lacks the required liquidity. Equity securities (D) are subject to market price risk and do not qualify as cash equivalents.
  6. A company holds the following items. Which should be included in the cash and cash equivalents balance reported on the balance sheet?
    Answer: A commercial paper investment purchased with 45 days remaining to maturity. Commercial paper with 45 days remaining to maturity at purchase qualifies as a cash equivalent (original maturity of three months or less, highly liquid). Answer A is correct. A 180-day CD (B) has an original maturity exceeding three months. Postdated checks (C) are not yet negotiable and cannot be deposited until the date on the check - they are receivables, not cash. Compensating balances (D) required by a loan agreement are restricted and must be disclosed separately, not included in unrestricted cash.
  7. A company maintains a checking account and a savings account at the same bank. The checking account has a balance of $15,000 and the savings account has a balance of $8,000. Under what circumstances would the company be required to report both balances together as a single cash figure?
    Answer: When both accounts are unrestricted and available for general use, they may be combined and reported as cash. Cash includes all demand deposits and unrestricted balances immediately available for use. When both a checking and savings account are unrestricted and available for general use, they may be combined and reported as cash on the balance sheet. Answer A is correct. Answer B imposes a separation requirement that does not exist under GAAP. Answer C and D create conditions (interest-bearing, same branch) that have no basis in the definition of cash under ASC 305.
  8. A company discovers during a bank reconciliation that the bank erroneously credited $1,500 to the company's account that belongs to another customer. How should this item be treated on the bank reconciliation?
    Answer: Deducted from the bank balance, and the company should notify the bank of the error. A bank error that incorrectly credited the company's account overstates the bank balance. On the bank reconciliation, the $1,500 erroneous credit is deducted from the bank balance to arrive at the correct adjusted balance. The company should also notify the bank to correct the error. Answer D is correct. Answer A adjusts the book balance, which is incorrect - the company did not actually receive these funds and its books are unaffected. Answer B adds to the bank balance rather than deducting, which would further overstate it. Answer C assumes the bank will automatically correct the error without any reconciliation treatment, which does not satisfy the requirement to present an adjusted balance.
  9. Under ASC 230, how should a change in restricted cash be presented on the statement of cash flows?
    Answer: Included in the beginning and ending totals of cash, cash equivalents, and restricted cash on the statement of cash flows; the net change in the combined balance reconciles to the balance sheet without separately classifying changes in restricted cash as operating, investing, or financing activities. Under ASU 2016-18 (ASC 230), restricted cash is included in the beginning and ending cash totals presented on the statement of cash flows. The statement reconciles the change in the combined balance of cash, cash equivalents, and restricted cash, and companies provide a reconciliation of these totals to the balance sheet. Changes in restricted cash are therefore embedded in the overall net change and are not separately classified as operating, investing, or financing activities. Answer A is correct. Answers B and C incorrectly mandate a single activity classification for all changes in restricted cash, which misapplies the standard. Answer D incorrectly excludes restricted cash from the statement of cash flows entirely.
  10. For purposes of the statement of cash flows, which of the following correctly describes the treatment of bank overdrafts?
    Answer: Bank overdrafts at the same bank where positive balances exist are netted against cash; overdrafts at a different bank are classified as current liabilities. Under ASC 230, if a bank overdraft occurs at the same institution where the company maintains other positive cash balances, it is offset against those balances for cash flow purposes. If the overdraft is at a different bank, it represents a current liability and is not netted against cash. Answer D is correct. Answer A incorrectly classifies overdrafts as investing activities. Answer B reverses the treatment - netting applies when overdrafts and positive balances are at the same bank. Answer C requires balance sheet recognition, not merely disclosure.
  11. A bank reconciliation reveals that a customer's $3,000 check was returned NSF (non-sufficient funds) and the bank charged a $25 NSF fee. Both items appear on the bank statement but have not been recorded by the company. What journal entry should the company record?
    Answer: Debit Accounts Receivable $3,025; Credit Cash $3,025. When a customer's check is returned NSF, the company must reverse the original cash receipt and reinstate the receivable. The NSF fee charged by the bank also reduces the company's cash. Total reduction to cash = $3,000 + $25 = $3,025, reinstated as accounts receivable. Answer B is correct. Answer A omits the NSF fee. Answer C debits bad debt expense prematurely - the amount is still owed by the customer and should be a receivable. Answer D records only the fee, omitting the NSF check reversal.
  12. A company discovers that a check for $1,800 written to a supplier was recorded correctly in the cash disbursements journal but was never presented to the bank for payment. After two years, the check is considered stale and unlikely to be cashed. How should this be recorded?
    Answer: Debit Cash $1,800 and credit Miscellaneous Income (or Accounts Payable, pending escheatment review) $1,800. When an outstanding check becomes stale and is unlikely to be presented, the company restores the cash balance. The credit depends on circumstances: if the obligation has lapsed (no escheatment requirement), it may be recognized as income. If subject to state unclaimed property laws, the credit is to a liability pending remittance. The debit is always to Cash. Answer C is correct. Answer A credits Accounts Payable, implying the obligation to the vendor still exists. Answer B leaves a stale check on the reconciliation indefinitely, which is improper. Answer D debits Accounts Payable against Bad Debt Expense, which is not appropriate for a cash disbursement reversal.
  13. A company records a $900 journal entry debiting Cash and crediting a customer's Accounts Receivable. The bank statement reflects a deposit of $900. Which of the following items would NOT appear on the bank reconciliation as a reconciling item?
    Answer: The $900 deposit, since it is recorded on both the books and the bank statement. Reconciling items are transactions recorded on one side (book or bank) but not yet on the other. The $900 deposit has been recorded by both the company and the bank - it is not a reconciling item. Answer B is correct. Outstanding checks (A) appear on the books but not the bank statement. Deposits in transit (C) appear on the books but not the bank. Bank service charges (D) appear on the bank statement but not yet on the books.
  14. A company's petty cash fund has an imprest balance of $500. At month-end, the fund contains $87 in cash and $418 in receipts. What journal entry should be recorded to replenish the fund?
    Answer: Debit Various Expenses $418; Credit Cash Over and Short $5; Credit Cash $413. The fund should contain $500 total. Cash on hand is $87 and receipts are $418, totaling $505. The fund is over by $5 ($505 - $500). To replenish, the check written = $500 - $87 = $413. Expenses per receipts = $418. The $5 discrepancy represents a fund overage: more was documented in receipts than cash was disbursed, so Cash Over and Short is credited (a gain). Entry: Debit Expenses $418, Credit Cash Over and Short $5, Credit Cash $413. Answer B is correct. Answer A debits Petty Cash rather than expenses, which would increase the fund balance. Answer C omits the overage and uses the wrong expense amount. Answer D re-establishes the full $500 rather than replenishing only the amount spent.
  15. During a bank reconciliation, a company discovers that it recorded a $540 check as $450 in its cash disbursements journal. The check was for a utility bill. What adjustment is required to the book balance?
    Answer: Deduct $90 from the book balance. The company recorded the check as $450 but the correct amount is $540. The book balance is overstated by $90 ($540 - $450). The adjustment is to deduct $90 from the book balance (Debit Utility Expense $90, Credit Cash $90). Answer D is correct. Answer A adds rather than deducts. Answer B deducts the full check amount rather than the correction amount. Answer C is incorrect - book errors require book adjustments, not reliance on the bank statement.
  16. Which of the following would appear as an addition to the bank balance side of a bank reconciliation?
    Answer: Deposits in transit. Deposits in transit are cash receipts recorded on the company's books but not yet reflected on the bank statement. They are added to the bank balance to arrive at the adjusted balance. Answer D is correct. Notes collected by the bank (A) and interest credited (B) have already been recorded by the bank - they appear as additions to the book balance, not the bank balance. Outstanding checks (C) are subtracted from the bank balance, not added.
  17. A compensating balance requirement is in place as part of a short-term borrowing arrangement. Which of the following is the correct disclosure treatment?
    Answer: The compensating balance is disclosed in the notes to the financial statements, and if legally restricted, is excluded from cash and cash equivalents. Compensating balances required by lending agreements must be disclosed in the notes. If the balance is legally restricted (i.e., the company cannot use it), it must be excluded from cash and cash equivalents and presented separately. If not legally restricted, it may remain in cash but should still be disclosed. Answer C is correct. Answer A nets against borrowings, violating the prohibition on offsetting. Answer B includes it in cash without disclosure, which is insufficient. Answer D always reclassifying as long-term is incorrect - classification depends on the term of the restriction.
  18. A company has cash on hand of $5,000, a checking account balance of $48,000, a savings account balance of $12,000, a 2-month Treasury bill of $20,000, and a 6-month certificate of deposit of $15,000. What total amount should be reported as cash and cash equivalents?
    Answer: $85,000 Cash and cash equivalents include: cash on hand $5,000 + checking $48,000 + savings $12,000 + 2-month T-bill $20,000 = $85,000. The 2-month Treasury bill qualifies as a cash equivalent (original maturity of 3 months or less). The 6-month CD does not qualify (original maturity exceeds 3 months). Answer D is correct. Answer A omits the T-bill and savings. Answer B omits the T-bill. Answer C omits the savings account.
  19. Which of the following items is correctly excluded from cash and cash equivalents on the balance sheet?
    Answer: A U.S. Treasury bill purchased when it had 95 days remaining to maturity. Cash equivalents require an original maturity of three months or less at the time of purchase. A Treasury bill with 95 days remaining to maturity at the time of purchase does not qualify - the investor's remaining term exceeds three months. Answer B is correctly excluded. Demand deposits (A), coins and currency (C), and unrestricted next-day money market funds (D) all qualify as cash or cash equivalents and should be included.
  20. Which of the following best describes the purpose of an imprest petty cash system?
    Answer: To maintain a fixed fund balance by replenishing it to its established amount after documenting all expenditures. An imprest petty cash system maintains a fixed fund at an established amount. When funds are disbursed, receipts are collected. The fund is periodically replenished to its original balance by exchanging receipts for a check, which records the expenses. Answer C is correct. Answer A is incorrect - bank reconciliations are still required for the main cash account. Answer B is the opposite of the imprest system's control purpose. Answer D describes a credit facility, not a petty cash system.

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