CPA Exam (FAR F3) questions and answers
Cash and Cash Equivalents - AnswerCah incl currency and demand deposits w/ banks/fin institutions.
Also incl deposits sim to demand deposits (can be added to/withdrawn from at any time w/o
penalty).
Cash equivalents broaden definition of cash to incl ST, highly liquid investmts both readily
convertible to cash and so near their maturity when acq'd by entity (*OG maturity of <= 90 days
from date of purch*) that they present insig risk of changes in value. Fixed inc. Exs of cash/cash
equivalents:
-coin/currency on hand (incl petty cash)
-checking accts
-savings accts
-money mkt (MM) funds
-deposits held as compensating bals against borrowing arrangemts w/ a lending institution that are
*NOT* legally restricted
-negotiable paper, incl
(a) bank checks, money orders, traveler's checks, bank drafts, and cashier's checks
(b) commercial paper and treasury bills
(c) CDs (w/ OG maturities of <= 90 days)
Items that aren't cash/cash equivalents:
-time certificates of deposit (if OG maturity >90 days)
-legally restricted deposits held as compensating bals against borrowing arrangemts w/ a lending
institution
Restricted or Unrestricted Cash and Cash Equivalents - AnswerCash can be unrestricted or restricted.
Restricted cash has been set aside for a specific use/purpose (purch PP&E, etc.). Unrestricted cash is
used for all current ops. Nature, amt, and timing of restrictions S/B disclosed in footnotes.
-if the restriction is assoc w/ a current A/L, classify as current asset, but sep from unrestricted cash.
-if assoc w/ non-current A/L, classify as a non-current asset, but sep from either investmts or other
assets section.
Exs of restrictions:
-if any portion of cash/cash equivalents is contractually restricted b/c of financing arrangemts w/
credit institution (compensating bal), that portion S/B sep reported as "restricted cash" on B/S.
,-if any portion of cash/cash equivalents is restricted by mgmt, S/B reported as restricted cash and as
a current/LT asset (depending on anticipated date of disbursemt).
-some industries (like pub utilities) report the amt of cash/cash equivalents as last asset on B/S bc
they report assets in an inverse order of liquidity.
Book ex of items incl in cash bal: S corp's cash ledger bal on 12/31/7 was 160k (unadjusted bal). Had
these items in its safe:
-5k check payable, dated 1/2/8, not incl in dec checkbook bal.
-3.5k check payable, deposited 12/22 and incl in 12/31 checkbook bal, was returned NSF and
redeposited in january.
-25k check dated/recorded 12/31 not mailed until 1/15/8.
Cash that S/B on 12/31/7 B/S:
Unadj bal of 160k
+ check payable to supplier of 25k
- NSF check of 3,500
=adjusted bal of 181,500.
Bank Reconciliations - Answer2 gen forms of bank recs. One called simple rec, one called
reconciliation of cash receipts and disbursemts.
Goal of a simple rec is to calc "true bal." Diffs btw cash bal per bank and per depositor's records are
explained w/ prep of bank rec. Factors that bring abt the diff:
1. Deposits in transit: *add to bank*. Funds sent by depositor to bank that haven't been recorded by
bank and deposits made after bank's cutoff date won't be incl in bank's stmt, so bal per books will be
higher than bank.
2. Outstanding checks: *deduct from bank*. Checks written for pmt by depositor that haven't been
presented to the bank will result in a higher bank bal than book bal. *LOC*, *L*ess *O*utstanding
*C*hecks.
Mostly these top 2 affect the bank, so remember bank; add it *LOC*. All others (except maybe
errors) adj books.
,3. Service charges: *deduct from books*. These are deducted by bank, and depositor won't deduct
this amt from its records until it's made aware of the charge, usually in next mo. Bal per books is
ostated until this amt is substracted.
4. Bank collections : *add to books*. Bank may made collections on depositor's behalf, incr
depositor's bank bal. If depositor isn't aware collection was cr to its bal, bal per books will be
understated.
5. Errors: those made by either bank or depositor can cause diffs.
6. Non-sufficient funds (NSF): *deduct from books*. Bank may have charged depositor's acct for
dishonored check and the check may not have been redeposited until next mo. Would ostate book
bal as of B/S date.
7. Interest income: *add to books*. Usually depositor doesn't keep track of avg daily cash bals, so
will add this amt to its records when made aware of this rev. Bal per books is understated until this
amt is added.
Steps in a Simple Bank Reconciliation - AnswerWhile other methods can be used, most common proc
is to reconcile both book/bank bals to a common "true" bal. That bal should appear on B/S under
"cash and cash equivalents." Procs:
1. Book bal is adj to reflect any corrections reported by bank (ex: NSF checks, notes collected by
bank and cr to the acct, monthly service charges, and other bank charges (like check printing)).
2. After these adjs are made, adj book bal = true bal.
3. The bank bal per the bank stmt is reconciled to the true bal.
Book ex of simple bank rec:
- B co has 12,650 book bal and bank bal of 10,050, 10 bank service charge, and 90 NSF check. Depsits
in transit are 3k and outstanding checks are 500. To get Y3 adj cash bal:
Book bal
- bank service charge
, - NSF check
=adj cash bal, true bal. Check figure!
Bank bal
+ deposits in transit
- oustanding checks (*LOC*)
=adj cash bal, true bal. Should match above check figure.
Do book side of bank rec w/ incoming (+) 1st, then all exps in chronological order.
Reconciliation of Cash Receipts and Disbursements - AnswerCalled 4-column rec or proof of cash.
Serves as proof of proper recording of cash trans. Additional info is req'd in prepping this. Bank rec
info for present and prior mo must be obtained.
Object of the 4-column approach is to rec any diffs btw amt depositor has recorded as cash receipts
and amt the bank has recorded as deposits. Likewise, this approach determines any diffs btw amts
depositor has recorded as cash disbursemts and amts bank has recorded as checks paid.
Book ex: Same info as ex on last card. Rec of CR/CD for 12/3.
4 columns- nov bal, dec receipts, dec pmts, dec bal.
Bal per depositor's books
+ note collected by bank
- bank service charge
- NSF check (in receipts column)
+ error in recording check
= adj bals.
Bal per bank records
+ deposits in transit (if addition in last mo, subtract from receipts column in current mo)
- outstanding checks (add back those subtracted in prior mo in the pmts column)
- NSF check from receipts column
Cash and Cash Equivalents - AnswerCah incl currency and demand deposits w/ banks/fin institutions.
Also incl deposits sim to demand deposits (can be added to/withdrawn from at any time w/o
penalty).
Cash equivalents broaden definition of cash to incl ST, highly liquid investmts both readily
convertible to cash and so near their maturity when acq'd by entity (*OG maturity of <= 90 days
from date of purch*) that they present insig risk of changes in value. Fixed inc. Exs of cash/cash
equivalents:
-coin/currency on hand (incl petty cash)
-checking accts
-savings accts
-money mkt (MM) funds
-deposits held as compensating bals against borrowing arrangemts w/ a lending institution that are
*NOT* legally restricted
-negotiable paper, incl
(a) bank checks, money orders, traveler's checks, bank drafts, and cashier's checks
(b) commercial paper and treasury bills
(c) CDs (w/ OG maturities of <= 90 days)
Items that aren't cash/cash equivalents:
-time certificates of deposit (if OG maturity >90 days)
-legally restricted deposits held as compensating bals against borrowing arrangemts w/ a lending
institution
Restricted or Unrestricted Cash and Cash Equivalents - AnswerCash can be unrestricted or restricted.
Restricted cash has been set aside for a specific use/purpose (purch PP&E, etc.). Unrestricted cash is
used for all current ops. Nature, amt, and timing of restrictions S/B disclosed in footnotes.
-if the restriction is assoc w/ a current A/L, classify as current asset, but sep from unrestricted cash.
-if assoc w/ non-current A/L, classify as a non-current asset, but sep from either investmts or other
assets section.
Exs of restrictions:
-if any portion of cash/cash equivalents is contractually restricted b/c of financing arrangemts w/
credit institution (compensating bal), that portion S/B sep reported as "restricted cash" on B/S.
,-if any portion of cash/cash equivalents is restricted by mgmt, S/B reported as restricted cash and as
a current/LT asset (depending on anticipated date of disbursemt).
-some industries (like pub utilities) report the amt of cash/cash equivalents as last asset on B/S bc
they report assets in an inverse order of liquidity.
Book ex of items incl in cash bal: S corp's cash ledger bal on 12/31/7 was 160k (unadjusted bal). Had
these items in its safe:
-5k check payable, dated 1/2/8, not incl in dec checkbook bal.
-3.5k check payable, deposited 12/22 and incl in 12/31 checkbook bal, was returned NSF and
redeposited in january.
-25k check dated/recorded 12/31 not mailed until 1/15/8.
Cash that S/B on 12/31/7 B/S:
Unadj bal of 160k
+ check payable to supplier of 25k
- NSF check of 3,500
=adjusted bal of 181,500.
Bank Reconciliations - Answer2 gen forms of bank recs. One called simple rec, one called
reconciliation of cash receipts and disbursemts.
Goal of a simple rec is to calc "true bal." Diffs btw cash bal per bank and per depositor's records are
explained w/ prep of bank rec. Factors that bring abt the diff:
1. Deposits in transit: *add to bank*. Funds sent by depositor to bank that haven't been recorded by
bank and deposits made after bank's cutoff date won't be incl in bank's stmt, so bal per books will be
higher than bank.
2. Outstanding checks: *deduct from bank*. Checks written for pmt by depositor that haven't been
presented to the bank will result in a higher bank bal than book bal. *LOC*, *L*ess *O*utstanding
*C*hecks.
Mostly these top 2 affect the bank, so remember bank; add it *LOC*. All others (except maybe
errors) adj books.
,3. Service charges: *deduct from books*. These are deducted by bank, and depositor won't deduct
this amt from its records until it's made aware of the charge, usually in next mo. Bal per books is
ostated until this amt is substracted.
4. Bank collections : *add to books*. Bank may made collections on depositor's behalf, incr
depositor's bank bal. If depositor isn't aware collection was cr to its bal, bal per books will be
understated.
5. Errors: those made by either bank or depositor can cause diffs.
6. Non-sufficient funds (NSF): *deduct from books*. Bank may have charged depositor's acct for
dishonored check and the check may not have been redeposited until next mo. Would ostate book
bal as of B/S date.
7. Interest income: *add to books*. Usually depositor doesn't keep track of avg daily cash bals, so
will add this amt to its records when made aware of this rev. Bal per books is understated until this
amt is added.
Steps in a Simple Bank Reconciliation - AnswerWhile other methods can be used, most common proc
is to reconcile both book/bank bals to a common "true" bal. That bal should appear on B/S under
"cash and cash equivalents." Procs:
1. Book bal is adj to reflect any corrections reported by bank (ex: NSF checks, notes collected by
bank and cr to the acct, monthly service charges, and other bank charges (like check printing)).
2. After these adjs are made, adj book bal = true bal.
3. The bank bal per the bank stmt is reconciled to the true bal.
Book ex of simple bank rec:
- B co has 12,650 book bal and bank bal of 10,050, 10 bank service charge, and 90 NSF check. Depsits
in transit are 3k and outstanding checks are 500. To get Y3 adj cash bal:
Book bal
- bank service charge
, - NSF check
=adj cash bal, true bal. Check figure!
Bank bal
+ deposits in transit
- oustanding checks (*LOC*)
=adj cash bal, true bal. Should match above check figure.
Do book side of bank rec w/ incoming (+) 1st, then all exps in chronological order.
Reconciliation of Cash Receipts and Disbursements - AnswerCalled 4-column rec or proof of cash.
Serves as proof of proper recording of cash trans. Additional info is req'd in prepping this. Bank rec
info for present and prior mo must be obtained.
Object of the 4-column approach is to rec any diffs btw amt depositor has recorded as cash receipts
and amt the bank has recorded as deposits. Likewise, this approach determines any diffs btw amts
depositor has recorded as cash disbursemts and amts bank has recorded as checks paid.
Book ex: Same info as ex on last card. Rec of CR/CD for 12/3.
4 columns- nov bal, dec receipts, dec pmts, dec bal.
Bal per depositor's books
+ note collected by bank
- bank service charge
- NSF check (in receipts column)
+ error in recording check
= adj bals.
Bal per bank records
+ deposits in transit (if addition in last mo, subtract from receipts column in current mo)
- outstanding checks (add back those subtracted in prior mo in the pmts column)
- NSF check from receipts column
