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Chapter 7: Problem 9

What types of items are included in cash? What are the two important characteristics of an item of cash?

Short Answer

Expert verified
Cash includes currency, bank deposits, and undeposited checks. Its characteristics are liquidity and stability.

Step by step solution

01

Identify Cash Items

The first step is to understand what typically constitutes cash in a business. Cash items include currency (coins and notes), bank deposits (checking or savings accounts), and undeposited checks.
02

Understand the Characteristics of Cash

Next, we need to examine the characteristics of cash. The two important characteristics are: liquidity and stability. Liquidity means that cash can be easily converted into any other form of currency or used for transactions without loss of value, while stability suggests cash maintains its value over time and doesn't rapidly fluctuate.
03

Review the Scope of Cash

Cash not only includes physical currency but also other forms that can be immediately accessed or used for paying obligations. This principle ensures cash is readily available for immediate needs.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Liquidity
Liquidity refers to how quickly an asset can be converted into a usable form of wealth. In the world of financial accounting, cash is the most liquid asset there is. This means it can be easily used to settle debts or make transactions without losing any value.
For instance, if a company needs to pay a supplier, having liquid assets like cash ensures they can promptly do so.
Other assets, like inventory or equipment, are less liquid because they might require time and effort to convert into cash.
  • Cash can be instantly accessed and used.
  • There are no delays or complications when converting cash.
The liquidity of cash makes it crucial for businesses to meet short-term obligations and emergencies. When considering liquidity, companies often assess how much of their current assets are in cash form.
Stability
Stability in financial terms means the ability of an asset to maintain its value over time. For cash, stability is a critical characteristic because it ensures the purchasing power remains consistent without unexpected fluctuations.
A stable monetary system supports economic confidence, allowing businesses to plan and operate without fear of sudden losses in value.
  • Stable cash preserves purchasing power.
  • This enables predictable financial planning and decision-making.
The perception of stability in cash helps foster trust among consumers and businesses alike, forming a reliable basis for settling transactions and saving.
Cash Items
Cash items encompass various forms of money that a business can use to quickly meet its financial obligations. These include physical currency, bank account balances, and undeposited checks.
Each of these elements contributes differently to a company's cash on hand:
  • Currency includes coins and banknotes kept within the business or a cash register.
  • Bank deposits refer to funds held in checking or savings accounts.
  • Undeposited checks are checks received but not yet deposited at a bank.
Together, these items form the basic foundation of cash that enables the smooth operation of day-to-day business activities. Understanding what constitutes cash items helps ensure a business maintains sufficient liquidity and stability to thrive.

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Most popular questions from this chapter

Bank Reconciliation Components Identify the requested amount in each of the following situations: a. Mary Ann Company 's August 31 bank reconciliation shows deposits in transit of \(2,250. The general ledger Cash in Bank account shows total cash receipts during September of \)86,050. The September bank statement shows total cash deposits of \(87,000 (and no credit memos). What amount of deposits in transit should appear in the September 30 bank reconciliation? b. Ginger Corporation 's March 31 bank reconciliation shows deposits in transit of \)1,400. The general ledger Cash in Bank account shows total cash receipts during April of \(64,600. The April bank statement shows total cash deposits of \)63,100 (including \(700 from the collection of a note; the note collection has not yet been recorded by Ginger). What amount of deposits in transit should appear in the April 30 bank reconciliation? c. Skipper Company 's October 31 bank reconciliation shows outstanding checks of \)2,400. The general ledger Cash in Bank account shows total cash disbursements (all by check) during November of \(69,300. The November bank statement shows \)67,200 of checks clearing the bank. What amount of outstanding checks should appear in the November 30 bank reconciliation?

External versus Internal Audit Explain why parties outside the company, such as bankers and stockholders, prefer an independent appraisal of the company's financial results rather than relying on the work of internal auditors.

Internal Controls for Cash Received from Retail Sales Dunn Company operates a retail depart- L04 ment store. Most customers pay cash for their purchases. Edwards has asked you to help it design procedures for processing cash received from customers for cash sales. Briefly describe the procedures that should be used in each of the following departments: a. Retail sales departments b. Retail sales supervisor c. Treasurer's department d. Controller's department

Internal Control Each of the following lettered paragraphs briefly describes an independent situa- L02, 4 tion involving some aspect of internal control. Required Answer the questions at the end of each paragraph or numbered section. a. Robert Flynn is the office manager of Oakwood Company, a small wholesaling company. Flynn opens all incoming mail, makes bank deposits, and maintains both the general ledger and the accounts receivable subsidiary ledger. An assistant records transactions in the credit sales journal and the cash receipts journal. The assistant also prepares a monthly statement for each customer and mails the statements to the customers. These statements list the beginning balance, credit sales, cash receipts, adjustments, and ending balance for the month. 1\. If Flynn stole Customer A's \(200 check (payment in full) and made no effort to conceal his embezzlement in the ledgers, how would the misappropriation be discovered? 2\. What routine accounting procedure would disclose Flynn's \)200 embezzlement in part (1), even if Flynn destroyed Customer A's subsidiary ledger account? 3\. What circumstances might disclose Flynn's theft if he posted a payment to Customer A's account in the accounts receivable subsidiary ledger and set up a $200 account for a fictitious customer? 4\. In part (3), why might Flynn be anxious to open the mail himself each morning? 5\. In part (3), why might Flynn want to have the authority to write off accounts considered uncollectible? b. A bagel shop uses a cash register that produces a printed receipt for each sale. The register also prints each transaction on a paper tape that is locked inside the cash register. Only the supervisor has access to the cash-register tape. A prominently displayed sign promises a free bagel to any customer who is not given a cash-register receipt with his or her purchase. How is this procedure an internal control device for the bagel shop? c. Jason Philber, a swindler, sent several businesses invoices requesting payment for office supplies that had never been ordered or delivered to the businesses. A 5 percent discount was offered for prompt payment. What internal control procedures should prevent this swindle from being successful? d. The cashier for Downtown Cafeteria is located at the end of the food line. After customers have selected their food items, the cashier rings up the prices of the food and the customer pays the bill. The customer line frequently stalls while the person paying searches for the correct amount of cash. To speed things up, the cashier often collects money from the next customer or two who have the correct change without ringing up their food on the register. After the first customer finally pays, the cashier rings up the amounts for the customers who have already paid. What is the internal control weakness in this procedure? How might the internal control over the collection of cash from the cafeteria customers be strengthened?

Internal Control Walt Company encountered the following situations: a. Jenny Farrell, head of the receiving department, created a fictitious company named Speedy Forms and used it to send invoices to Walt Company for business documents that Walt never ordered or received. Farrell prepared receiving reports that stated that the business documents had been received, Walt's controller compared the receiving reports to the invoices and paid each one, b. Walt Company lost one day's cash receipts. An employee took the receipts to the bank after the bank's closing hours to deposit them in the night depository slot. A creative thief had placed a sign on the slot saying it was out of order and all deposits should be placed in a metal canister placed next to the building. Walt's employee placed the deposit in the canister and left. Employees from two other companies did the same thing. Later that night, the thief returned and stole the deposits from the canister. (This is an actual case.) c. Walt Company does not prenumber the sales invoices used for over-the- counter sales. A cashier pocketed cash receipts and destroyed all copies of the related sales invoices. Required For each situation, describe any violations of good internal control procedures and identify the steps that you would take to prevent each situation.
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