A New Accountant At Netzloff Inc. Is Trying To Identify Whic

A New Accountant At Netzloff Inc Is Trying To Identify Which Of the A

A new accountant at Netzloff Inc. is trying to identify which of the amounts shown below should be reported as the current asset “Cash and cash equivalents” in the year-end balance sheet, as of April 30, 2012.

1. $58 of currency and coin in a locked box used for incidental cash transactions.

2. A $13,590 U.S. Treasury bill, due May 31, 2012.

3. $327 of April-dated checks that Netzloff has received from customers but not yet deposited.

4. An $85 check received from a customer in payment of its April account, but postdated to May 1.

5. $3,510 in the company’s checking account.

6. $5,800 in its savings account.

7. $74 of prepaid postage in its postage meter.

8. A $34 IOU from the company receptionist.

Paper For Above instruction

The task of accurately reporting cash and cash equivalents on the balance sheet is fundamental for presenting a clear picture of a company's liquidity. Cash and cash equivalents (CCE) are highly liquid assets, easily convertible to known amounts of cash, usually within three months. Distinguishing which items qualify as cash or cash equivalents involves understanding their nature, availability, and the company's intent regarding their use in operations.

Items such as physical currency and coins held in a locked box are clearly classified as cash because they are immediately available for use in transactions. Similarly, balances in checking and savings accounts are considered cash because they are readily accessible and can be used for payments without restrictions.

Cash equivalents are short-term, highly liquid investments that are close to their maturity date, typically within three months from the date of acquisition. For instance, the U.S. Treasury bill due May 31, 2012, with a maturity date shortly after the balance sheet date (April 30, 2012), qualifies as a cash equivalent. This is because, at the balance sheet date, it is very close to maturity, highly liquid, and readily convertible to cash.

Checks received but not yet deposited, such as the $327 of April-dated checks, are considered cash because they are funds available for immediate use once deposited. However, the postdated check for May 1, the next day after the balance sheet date, should not be included in cash and cash equivalents as of April 30, 2012, because it is not yet available for use.

Prepaid expenses, such as the $74 of postage prepaid in the meter, do not qualify as cash or cash equivalents. They are classified as current assets but under a different category—prepaid expenses or supplies—since they are not liquid assets.

The $85 postdated check and the IOU from the receptionist are not included in cash or cash equivalents. The postdated check cannot be cashed or deposited until May 1, and the IOU is not a cash asset but a receivable or informal IOU, which is non-liquid and not readily convertible to cash.

In conclusion, only the physical cash, checking and savings account balances, and the Treasury bill due shortly after the balance sheet date should be reported as cash and cash equivalents on Netzloff Inc.'s balance sheet. Correct classification ensures accurate financial reporting and reflects the company's liquidity position reliably.

References

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