Financial Accounting: An Integrated Statements Approach, 2nd Edition

Replenishing the petty cash fund restores it to its original amount of $500. You

should note that there is no entry in Petty Cash when the fund is replenished. Petty

Cash is debited only when the fund is initially set up or when the amount of the fund

is increased at a later time. Petty Cash is credited if it is being decreased.

In addition, businesses often use other cash funds to meet special needs, such as travel

expenses for salespersons. For example, each salesperson might be given $200 for travel-

related expenses. Periodically, the salesperson submits a detailed expense report and the

travel funds are replenished. Also, as we discussed earlier in this chapter, retail businesses

use change funds for making change for customers. Finally, most businesses use a pay-

roll bank account to pay employees. Such cash funds are called special-purpose funds.

A special-purpose cash fund is initially established by first estimating the amount

of cash needed for payments from the fund during a period, such as a week or a

month. After necessary approvals, a check is written and cashed for this amount. The

money obtained from cashing the check is then given to an employee, called the cus-

todian, who is authorized to disburse monies from the fund. For control purposes, the

company may place restrictions on the maximum amount and the types of payments

that can be made from the fund.

FINANCIAL STATEMENT REPORTING OF CASH

Cash is the most liquid asset, and therefore it is listed as the first asset in the Current

Assets section of the balance sheet. Most companies present only a single cash amount

on the balance sheet by combining all their bank and cash fund accounts.

A company may have cash in excess of its operating needs. In such cases, the com-

pany normally invests in highly liquid investments in order to earn interest. These in-

vestments are called cash equivalents.^8 Examples of cash equivalents include U.S.

Treasury Bills, notes issued by major corporations (referred to as commercial paper),

and money market funds. Companies that have invested excess cash in cash equiva-

lents usually report Cash and cash equivalentsas one amount on the balance sheet.

To illustrate, Microsoft Corp.disclosed the details of its cash and cash equivalents

in the notes to its financial statements as follows:

June 30, June 30,

(in millions) 2004 2005

Cash and cash equivalents:

Cash $ 1,812 $1,911

Money market mutual funds 3,595 817

Commercial paper 4,109 1,570

Certificates of deposit 330 453

U.S. government and agency securities 4,083 —

Corporate notes and bonds 98 80

Municipal securities 277 20

$14,304 $4,851

326 Chapter 7 Sarbanes-Oxley, Internal Control, and Cash

SCF BS IS

OT AcTSET Ec

Q.If the petty cash ac-

count has a balance of

$200, the cash in the fund

totals $20, and the petty

cash receipts total $180 at

the end of a period, what

account is credited and

what is the amount of the

credit in the entry to re-

plenish the fund?

A.Cash is credited for

$180.

Describe and illustrate the

reporting of cash and cash

equivalents in the financial

statements.

7

International Perspective

In the United Kingdom, the

statement of cash flows is

prepared using a narrower

definition of “cash” than

in the United States.

Specifically, the United

Kingdom does not include

cash equivalents, such as

certificates of deposit, in

its definition of cash as

does the United States.

Aug. 31 Office Supplies 402

Store Supplies 35

Miscellaneous Administrative Expense 30

Cash 467

8 To be classified a cash equivalent, according to FASB Statement 95, the investment is expected to be con-

verted to cash within 90 days.