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Chapter 7 Short Answer Questions Essay

3. Cash equivalents are described as the balance of the Cash control amount combined with the control account for purposes of balance sheet presentation. These liquid short-term investments, such as U.S. Treasury bills and money market funds, qualify because the are considered very safe, have a very stable market, and mature within 90 days of the acquisition date. Because these items are so similar to cah, they are combined with it on the balance sheet.

6. Two items that are often encountered in reconciling a bank statement that may caus cash per the bank statement to be larger than the balance of cash shown in the depositor’s accounting records include credits for interest earned and credit for collecting a note receivable on behalf of the depositor. These would be noted in the reconciliation as credit memoranda.

7. Investments in marketable securities are shown separately from cash in the balance sheet for several reasons. First, they are not as stable; the securities are readily marketable and can be purchased or sold quickly at the given market price. They are almost as liquid as cash, and are listed directly below Cash in the assets on the balance sheet. Investments in even the highest-quality stocks or businesses do not meet the criteria of stability, safe, and maturity within 90 days of acquisition.

13. There are several advantages for retailers who only make credit cakes to customers who use nationally recognized customers. Some cards, such a Visa and MasterCard, are issued by banks and the funds received by customers who use these cards can be drafted directly into a company’s bank account. These sales can be counted for as cash sales. This allows for one-stop shop accounting. Non-bank cards do not have this feature and generally carry higher service fees (3.5 to 5%, as opposed to 1.25 to 3.5% for bank-issued cards.)

15. The formula for computing interest on a note receivable is : Interest = Principal*Rate of Interest*Time (I=PRT). The Principal is the amount of money borrowed. The Rate of Interest is the interest rate percentage expressed as a decimal. The time is expressed in terms of years, normally with interest. If the time is less than a year, T is expressed as the fraction of the year.


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