Accountants' Handbook Volume One: Financial Accounting and General Topics, Eleventh Edition

Chapter 18. CASH, TRANSFERS OF FINANCIAL ASSETS, LOANS, AND INVESTMENTS

Luis E. Cabrera, CPA

American Institute of Certified Public Accountants

18.1 INTRODUCTION TO CASH

(a) NATURE AND IMPORTANCE OF CASH.

Cash is both the beginning and the end of the operating cycle (cash–inventory–sales–receivables–cash) in the typical business enterprise, and almost all transactions affect cash either directly or indirectly. Cash transactions are probably the most frequently recurring type entered into by a business because (except for barter transactions) every sale leads to a cash receipt and every expense to a cash disbursement. It is recognized as the most liquid of the assets, and thus has prominence for users who are focusing on issues of liquidity.

Cash derives its primary importance from its dual role as a medium of exchange and a unit of measure. As a medium of exchange, it has a part in the majority of transactions entered into by an enterprise. Assets are acquired and realized, and liabilities are incurred and liquidated, in terms of cash. Thus, cash is generally the most active asset possessed by a company. As a unit of measure, it sets the terms on which all properties and claims against the enterprise are stated in its financial statements. Price-change reporting, which addresses disclosures for fluctuations in value as general and specific price levels rise and fall, is discussed in Chapter 17.

(b) CASH ACCOUNTING AND CONTROL.

The major challenge in accounting for cash is maintaining adequate ...