Qustions & Answers
How is petty cash reported on the financial statements?
Answer: The general ledger account Petty Cash is reported on the balance sheet as a current asset.
Often the balance in the Petty Cash account is combined with the balances in other cash accounts (such as checking accounts) and the total will be reported on the balance sheet as Cash.
The Petty Cash account should be replenished just prior to issuing the financial statements so that the amount of currency and coins on hand is equal to the balance in the Petty Cash account. This also ensures that the recent petty cash disbursements are recorded in their appropriate accounts—often expense accounts.
How does petty cash affect expenses?
Answer: Petty Cash is a current asset account; it is part of a company’s cash. A petty cash fund is established by cashing a check drawn on the company’s regular checking account and giving the currency and coins to the petty cash custodian. No expense is involved in this transaction since the company is simply creating the asset account Petty Cash by reducing another asset account.
An expense occurs when the company pays the postal carrier for the postage that is due on the incoming mail. Another expense occurs when the company sends an employee to pick up some needed supplies. If these expenses are paid with money in the petty cash fund, the currency and coins held by the petty cash custodian will decrease and in place of that money the custodian will have petty cash receipts or petty cash vouchers. The expenses will be recorded in the general ledger when the petty cash fund is replenished.
In order to get the expenses entered in the proper accounting period, it is necessary to replenish the petty cash fund at the end of each accounting period. (This is done in addition to replenishing the fund whenever the currency and coins are low.)
What does it mean to replenish the petty cash fund?
Answer: Replenishing the petty cash fund means the petty cash custodian requests and receives cash from the company’s regular checking account in order to have the cash on hand equal to the amount reported in the general ledger account, Petty Cash.
Let’s assume that Company X has a petty cash fund of $100 and Mary is the company’s employee responsible for handling the petty cash transactions. At all times Mary should have $100 in some combination of cash and petty cash vouchers (receipts). Let’s assume that Mary has $20.00 in cash and she has petty cash vouchers of $79.70. She knows that $20.00 is too little cash to have on hand. As a result she will request that a check be written from the company’s regular checking account in the amount of $80 ($100.00 that is reported in the Petty Cash account minus the $20.00 that is actually on hand.) The replenishment means the cash in the custodian’s possession will be returned to $100, even if the vouchers do not equal the amount needed ($80 in this example). The small difference will be expensed along with the amounts shown in the vouchers.
It is important to point out that the $80 check will be credited to Cash (the company’s checking account). No entry will be made to the Petty Cash account.
What is the difference between fixed assets and noncurrent assets?
Answer: Fixed assets are one of several categories of noncurrent assets. Fixed assets are usually reported on the balance sheet as property, plant and equipment.
In addition to property, plant and equipment, the other categories of noncurrent assets include long-term investments, intangible assets, deferred charges, and other noncurrent assets.
What is the advantage of using historical cost on the balance sheet for property, plant and equipment?
Answer: The main advantage of using historical cost on the balance sheet for property, plant and equipment is that historical cost can be verified. Generally, the cost at the time of purchase is documented with contracts, invoices, payments, transfer taxes, and so on.
The historical cost of plant and equipment (not land) is also used to determine the amount of depreciation expense reported on the income statement. The accumulated amount of depreciation is also reported as a deduction from the assets’ historical costs reported on the balance sheet. (In the case of impairment, some assets might be reported at less than the amounts based on historical cost.)
The use of historical cost is also a disadvantage to those users of the financial statements who want to know the current values.
Is it possible for owner’s equity to be a negative amount?
Answer: It is possible for owner’s equity to be a negative amount. The following illustrates how it might occur.
In 2005, a sole proprietorship was begun with the owner investing $100,000. During the years 2005 through 2008 the owner withdrew most of each year’s net income. As a result, the total owner’s equity at the end of 2008 was $110,000 (original investment of $100,000 plus $10,000 of net income not withdrawn). During 2009 the company’s expenses exceed revenues by $125,000 and there were no draws or additional investments by the owner. The owner’s equity at the end of 2009 would be a negative $15,000.
The negative amount of owner’s equity also means that the company’s balance sheet will report liability amounts greater than the amount of assets. The company could operate under those conditions if its assets are turning to cash before the liabilities need to be paid.
Why is an increase in inventory shown as a negative amount in the statement of cash flows?
Answer: An increase in inventory indicates that a company has purchased more goods than it has sold. Increasing inventory requires a cash outflow. Cash outflows have a negative effect on the company’s cash balance.
Negative amounts on the statement of cash flows can be interpreted to mean 1) a cash outflow, 2) that cash was used, or 3) that it was unfavorable for the company’s cash balance. In other words, you can think of negative amounts as having a negative effect on the company’s cash balance.
Hence, the amount of the increase in inventory is shown as a negative amount on the statement of cash flows. Had inventory decreased, the amount of the decrease in inventory would be shown as a positive amount on the statement of cash flows.
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