CPA Exam: FAR · Select Balance Sheet Accounts
CPA Exam: FAR: Cash, Receivables, and Investments Concepts
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Overview
This chapter covers the most liquid assets: cash, money owed by customers, and investments in other companies' debt and stock. Cash includes currency and bank balances available for use, while cash equivalents are short-term, highly liquid investments with original maturities of three months or less. A bank reconciliation brings the bank's balance and the company's book balance to the same correct figure.
Receivables are reported at the amount expected to be collected. Under the current expected credit loss model, a company estimates losses over the whole life of the receivable from the start and records them in an allowance account, rather than waiting until a loss is probable. Writing off a specific bad account reduces both the receivable and the allowance, so it does not change the net amount.
Debt securities are classified as trading, available-for-sale, or held-to-maturity. Trading securities are at fair value with changes in net income, available-for-sale are at fair value with changes in other comprehensive income, and held-to-maturity are at amortized cost. Equity securities are generally measured at fair value with changes in net income, but an investor with significant influence, usually presumed at 20 to 50 percent ownership, uses the equity method.
Key concepts
Cash equivalents
Short-term, highly liquid investments that are readily convertible to known amounts of cash and have an original maturity of three months or less when bought, such as Treasury bills and money market funds.
Memory tipOriginal maturity counts from the purchase date, not from the balance sheet date.
Source: FASB ASC 305 · as of 2026
Bank reconciliation
Bank side adjusts for deposits in transit and outstanding checks. Book side adjusts for items the company has not yet recorded, such as bank fees, interest earned, NSF checks, and collections by the bank.
Memory tipOnly book-side adjustments need journal entries.
Expected credit losses (CECL)
For receivables and other financial assets at amortized cost, the company records an allowance for lifetime expected credit losses using past events, current conditions, and reasonable forecasts.
Memory tipWrite-offs reduce the receivable and the allowance; net receivable stays the same.
Source: FASB ASC 326 · as of 2026
Debt security categories
Trading: fair value, changes to net income. Available-for-sale: fair value, unrealized changes to OCI. Held-to-maturity: amortized cost, for securities the company has the intent and ability to hold to maturity.
Memory tipInterest income on all three uses the effective interest method for any premium or discount.
Source: FASB ASC 320 · as of 2026
Equity securities
Generally measured at fair value with changes in net income. An equity security without a readily determinable fair value may use the measurement alternative: cost less impairment, adjusted for observable price changes.
Memory tipThere is no available-for-sale category for equity securities.
Source: FASB ASC 321 · as of 2026
Equity method
Used when the investor has significant influence, presumed at 20 to 50 percent of voting stock. The investment rises by the investor's share of the investee's income and falls by dividends received.
Memory tipDividends from an equity-method investee reduce the investment; they are not income.
Source: FASB ASC 323 · as of 2026
Often tested
- Cash equivalents have an original maturity of three months or less.
- Outstanding checks and deposits in transit are bank-side items with no journal entry.
- CECL records lifetime expected losses at the start, not when a loss becomes probable.
- AFS debt: fair value with unrealized changes in OCI; HTM: amortized cost.
- Equity securities generally go to fair value through net income.
- Equity method: share of income increases the investment, dividends decrease it.
Easy to confuse: Trading vs. available-for-sale debt securities
| Item | Trading | Available-for-sale |
|---|---|---|
| Balance sheet amount | Fair value | Fair value |
| Unrealized gain or loss | Net income | Other comprehensive income |
| When sold | Gain or loss in net income | Amount in OCI is reclassified to net income |
3 sample questions
Verified practice questions from this unit.
Question 1. Which item should a company include in cash and cash equivalents on its balance sheet?
- ① A U.S. Treasury bill bought 2 months before it matures
- ② A 1-year certificate of deposit bought on the day it was issued
- ③ A customer's postdated check
- ④ Postage stamps on hand
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Answer: ① A U.S. Treasury bill bought 2 months before it matures
Key point: Cash equivalents: original maturity of 3 months or less
Cash equivalents are very liquid investments that will turn into a known amount of cash soon. The rule of thumb is that the original maturity, counted from the day the company buys it, is 3 months or less. A Treasury bill bought 2 months before maturity meets this test.
Wrong choices
- A 1-year certificate of deposit bought on the day it was issued: Its original maturity to the company is more than 3 months, so it is a short-term investment, not a cash equivalent.
- A customer's postdated check: A postdated check cannot be cashed yet, so it is a receivable.
- Postage stamps on hand: Stamps are a prepaid expense (supplies), not cash.
Question 2. The bank statement shows a balance of $20,000 on June 30. Deposits in transit are $3,000 and outstanding checks are $4,500. The bank also charged a $50 service fee that the company has not yet recorded. What is the correct cash balance on June 30?
- ① $18,450
- ② $21,500
- ③ $18,500
- ④ $27,500
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Answer: ③ $18,500
Key point: Bank side: + deposits in transit, − outstanding checks
Start from the bank balance and fix items the bank does not know about yet.
- Bank balance: $20,000
- Add deposits in transit: +$3,000
- Subtract outstanding checks: −$4,500
- Correct cash = $18,500
Check: the service fee is already in the bank balance, so it only affects the book side.
Wrong choices
- $18,450: The $50 service fee is already deducted in the bank balance. It is a book-side adjustment, so it is not subtracted again from the bank balance.
- $21,500: This adds the outstanding checks and subtracts the deposits in transit, which is backwards.
- $27,500: Outstanding checks must be subtracted, not added.
Question 3. A company's cash account (book balance) shows $15,000. The bank statement shows: a customer's $600 check returned for insufficient funds (NSF), a $2,000 note receivable the bank collected for the company, and a $40 service charge. None of these has been recorded by the company. What is the correct cash balance?
- ① $16,960
- ② $16,360
- ③ $14,360
- ④ $17,640
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Answer: ② $16,360
Key point: Book side: add bank collections, subtract NSF and fees
Items the bank already recorded but the company has not are adjusted on the book side.
- Book balance: $15,000
- Add note collected by bank: +$2,000
- Subtract NSF check: −$600
- Subtract service charge: −$40
- Correct cash = $16,360
Check: $15,000 + $2,000 − $640 = $16,360.
Wrong choices
- $16,960: This forgets to subtract the $600 NSF check, which the company can no longer count as cash.
- $14,360: The note collected by the bank increases cash; it should be added, not subtracted.
- $17,640: The NSF check and service charge reduce cash; they should be subtracted.