FAR coverage for cash classification, petty cash, reconciliations, proof of cash, controls, and disclosure.
This chapter begins the balance-sheet account work with cash, one of the most basic but still error-prone FAR topics. The key is to classify cash correctly, reconcile it properly, and understand the control and disclosure issues surrounding it.
Cash questions are easy to underestimate because the account name looks familiar. FAR often tests whether a compensating balance, restricted account, post-dated check, bank error, outstanding check, deposit in transit, or overdraft belongs in cash, disclosure, another asset, or a liability.
| Question clue | Accounting focus | Common FAR trap |
|---|---|---|
| Cash equivalent | Short-term, highly liquid investment with insignificant risk of value change. | Including equity securities or longer-term investments merely because they are liquid. |
| Restricted cash or compensating balance | Presentation and disclosure based on restriction and timing. | Treating all bank balances as unrestricted operating cash. |
| Bank reconciliation item | Determine whether the bank, books, or both require adjustment. | Adjusting the wrong side for deposits in transit, outstanding checks, service charges, or errors. |
| Cash overdraft | Liability classification unless offset rights and account facts support netting. | Netting overdrafts against unrelated positive balances automatically. |
| Step | What to verify | Reporting effect |
|---|---|---|
| Identify the account or instrument | Cash, cash equivalent, restricted cash, overdraft, or investment. | Classification determines statement presentation. |
| Check restrictions and availability | Legal restriction, compensating balance, designated use, or maturity. | Restrictions may require separate presentation or disclosure. |
| Reconcile book and bank records | Deposits in transit, outstanding checks, fees, interest, errors, and timing. | Reconciliation determines the corrected cash balance. |
| Evaluate controls | Authorization, custody, reconciliation, review, and segregation. | Control weakness affects reliability of the cash balance. |
| Determine disclosure | Restrictions, compensating balances, overdrafts, and policy details. | Some cash facts affect notes more than measurement. |
| Item | Adjust bank balance? | Adjust book balance? |
|---|---|---|
| Deposit in transit | Yes, add to bank balance. | No, if already recorded in the books. |
| Outstanding check | Yes, subtract from bank balance. | No, if already recorded in the books. |
| Bank service charge | No. | Yes, subtract from book balance. |
| Interest earned by bank | No. | Yes, add to book balance. |
| Bank error | Yes, correct the bank side. | No, unless the entity also recorded the error. |
| Book error | No. | Yes, correct the book side. |