Question

Listed below are various items:

Coins & Currency on hand $6,200

Cashiers’ Checks $3,900

Postdated Checks $495

Commercial Paper with a 60-day maturity $3,300

Certificates of Deposit with a 120-day maturity $13,500

Overdraft in checking account at different bank from regular bank ($303)

Compensating Balance-Restricted Cash $18,000

Bond Sinking Fund $25,000

U.S. Treasury Bills with 30-day maturity $12,910

Postage Stamps $279

Petty Cash $551

Compute the cash and cash equivalents balance for this company.

Answer 1

Cash and cash equivalents of a corporation are the most liquid current assets which can either be ideal cash, usable bank balance or the short term maturity assets (upto 90 days) that can be immediately converted into a certainly known amount of cash. In the given problem, each item has been tested for the same parameter to be classified correctly:

1. Coins & Currency on hand $6,200 – This is simple cash in hand with no conditions.

2. Cashiers’ Checks $3,900 – Cashier’s check is also known as bank draft and is guaranteed for payment by bank. They are issued by bank after debiting account of person asking for the same. Hence, cash conversion of the same is certain. Thus, this is classified as cash and cash equivalent.

3. Postdated Checks $495 – Post dated check is issued for a date that falls after the current date. Post dated check cannot be banked until the date of check arrives. Hence, this cannot be considered as cash equivalent and should be considered as account receivable.

4. Commercial Paper with a 60-day maturity $3,300 – Commercial papers are short term maturity notes issued by corporations. Maturity is usually upto 270 days. These are considered as cash equivalent as given maturity period is less than 90 days i.e. 60 days.

5. Certificates of Deposit with a 120-day maturity $13,500 – Certificates of deposit are issued to a person who is depositing money at a bank for specific period of time. As maturity is more than 90 days, same cannot be considered as cash equivalent.

6. Overdraft in checking account at different bank from regular bank ($303) – Overdraft in bank account is amount payable in books of business. As overdraft account bank is different from regular checking account bank, overdraft should be classified as current liability and not be made part of cash and cash equivalent. If account were in same bank and looking at amount of overdraft (which looks insignificant), same could have been made part of cash and cash equivalent.

7. Compensating Balance-Restricted Cash $18,000 – Restricted cash is not freely available for business use and is held for some specific purpose. Hence, it is separate from cash and cash equivalent and hence, will not make part of it.

8. Bond Sinking Fund $25,000 – This is part of cash which will be used to pay off long term bond maturity liability. Hence, this cash cannot be used for regular business purpose. Hence, this cannot be classified as cash and cash equivalent and to be reported as a part of long term asset.

9. U.S. Treasury Bills with 30-day maturity $12,910 – As these are government backed securities with short maturity, this needs to classified under cash and cash equivalent.

10. Postage Stamps $279 – Postage stamps are part of expenses and thus, should be reported as prepaid expenses. Hence, not to be reported under cash and cash equivalent.

11. Petty Cash $551 – Petty cash is cash maintained separately for petty expenses of business. This is reported as cash and cash equivalent.

Hence, cash and cash equivalents balance of company will be:

Particular	Amount
Coins & Currency on hand	$6,200
Cashiers’ Checks	$3,900
Commercial Paper with a 60-day maturity	$3,300
U.S. Treasury Bills with 30-day maturity	$12,910
Petty Cash	$551
Total balance to be reported as cash and cash equivalent	$26,861

(Final Answer)