Quiz 7: Financial Assets


a) Cash equivalents include those securities which can be converted into cash very easily and have a maturity date of three months or less. Equity securities will not have maturity date. Hence, the securities included by OC in the cash equivalents are debt securities. b) The statement, the credit exposure is limited by the financial institution means; The company has diversified its credit risk to various companies. It has invested in various financial institutions that issue these short-term securities in small amounts to lower the risk of any one investment failing to perform. c) The term Restricted funds means that the amount has been specifically designated for meeting some specific cash requirement and fund is not available for normal operational cash requirements.

a. This practice violates the matching principle. The expense relating to uncollectible accounts is not recorded until long after the related sales revenue has been recognized. The distortion caused in the company's financial statements is magnified by the fact that sales (and the creation of uncollectible accounts receivable) fluctuate greatly from year to year. b. In most cases, charging petty cash expenditures to Miscellaneous Expense would not violate generally accepted accounting principles. The only principle at issue is that of adequate disclosure. However, petty cash expenditures usually are not sufficiently material in dollar amount for users of the financial statements to be concerned with the specific purpose of these outlays. c. This practice violates the realization principle. The company is recognizing all of the interest to be earned from its notes receivable as revenue at the date of sale. This revenue is actually earned over the life of the note, not at the date on which the customer borrows the money. d. By combining restricted cash (the $1 million earmarked for construction) with unrestricted cash, the company is violating the accounting principle of adequate disclosure. This restricted cash is not available for paying current liabilities. Therefore, this amount should be classified as a long-term investment, not as a current asset.

Cash needs can be met by collections on accounts receivable and by selling investments. Because most accounts receivable have payment due dates, businesses know when to expect payments from customers on their accounts. Businesses use this timetable for expected payments to help plan for future cash needs. When a business has excess cash on hand, it is typically invested. If the cash will be needed in the near future, then short-term investments are made. Some businesses have enough excess cash on hand to warrant overnight investing. Investing in short-term investments helps a business use its excess cash to earn a return until the cash is needed. Then the short-term investment is sold, and the cash is available for use.

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