Accounting 1 Module 5 Short Answer
1. Cash equivalents are short term investments that are converted into cash. Examples include money market funds, U.S. Treasury bills, and high-grade commercial paper. These items are combined with cash for the purpose of a balance sheet because cash equivalents are so similar to cash that they are combined. The cash equivalents are very safe, have a market value, and mature in 90 days of the date of acquisition. If they do not meet these requirements, they are to be listed as Marketable Securities.
2. Cash balances in excess of requirements are viewed as relatively nonproductive because these balances either do not earn any return or earn a very low return. Excess cash may be utilized effectively by:
1. Paying of the creditors early and taking advantage of cash discounts
2. Investing cash in higher return securities taking care of matching the security with the need of cash.
3. If cash is available for a long time, then the long term debt should be repaid
4. If there is no use of cash, then it should be returned to the owners
3. Investments in marketable securities are shown separately from cash equivalents in the balance sheet because they do not fall in the guideline of being safe, having a stable market value, or maturing within 90 days of the date of acquisition. These items are shown separately primarily because they are less liquid than cash equivalents.
4. The account Unrealized Holding Gains (or Losses) on Investments represents the difference between the cost of marketable securities owned and their current market value. In basis, this is the amount of gain or loss that would be realized if the securities were sold today. The amount of unrealized gain or loss appears in the owners’ equity section of the balance sheet. An unrealized gain increases total owners’ equity, and an unrealized loss decreases owners’ equity.
5. I = P x R x T –or– Interest = Principal x Rate of Interest x Time
Principal – Amount of debt
Rate of Interest –
2. Cash balances in excess of requirements are viewed as relatively nonproductive because these balances either do not earn any return or earn a very low return. Excess cash may be utilized effectively by:
1. Paying of the creditors early and taking advantage of cash discounts
2. Investing cash in higher return securities taking care of matching the security with the need of cash.
3. If cash is available for a long time, then the long term debt should be repaid
4. If there is no use of cash, then it should be returned to the owners
3. Investments in marketable securities are shown separately from cash equivalents in the balance sheet because they do not fall in the guideline of being safe, having a stable market value, or maturing within 90 days of the date of acquisition. These items are shown separately primarily because they are less liquid than cash equivalents.
4. The account Unrealized Holding Gains (or Losses) on Investments represents the difference between the cost of marketable securities owned and their current market value. In basis, this is the amount of gain or loss that would be realized if the securities were sold today. The amount of unrealized gain or loss appears in the owners’ equity section of the balance sheet. An unrealized gain increases total owners’ equity, and an unrealized loss decreases owners’ equity.
5. I = P x R x T –or– Interest = Principal x Rate of Interest x Time
Principal – Amount of debt
Rate of Interest –