Question 4 Abacus Bhd has entered into the following transactions after the year end and wish to know how to deal with them in a cash flow statement, as they are unsure of the meaning of the definition of cash and cash equivalents. Abacus Bhd had decided after the year end to deposit the funds with the bank in two term deposit accounts as follows: RM3 million into a 12-month term account, earning 5% interest. The cash can be withdrawn by giving 14 days’ notice but Angel will incur a penalty, being the loss of all interest earned. RM7 million into a 12-month term account earning 3% interest. The cash can be withdrawn by giving 21 days’ Interest will be paid for the period of the deposit but if money is withdrawn, the interest will be at the rate of 2%, which is equivalent to the bank’s stated rate for short-term deposits. Abacus Bhd is confident that it will not need to withdraw the cash from the higher-rate deposit within the term, but wants to keep easy access to the remaining RM7 million to cover any working capital shortfalls which might arise. Required: Advise Abacus Bhd on whether any of the above transactions should be treated as cash equivalent. Support your answer with reasons.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter17: The Management Of Cash And Marketable Securities

Section: Chapter Questions

Problem 2P

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Question 4

Abacus Bhd has entered into the following transactions after the year end and wish to know how to deal with them in a cash flow statement, as they are unsure of the meaning of the definition of cash and cash equivalents.

Abacus Bhd had decided after the year end to deposit the funds with the bank in two term deposit accounts as follows:

RM3 million into a 12-month term account, earning 5% interest. The cash can be withdrawn by giving 14 days’ notice but Angel will incur a penalty, being the loss of all interest earned.

RM7 million into a 12-month term account earning 3% interest. The cash can be withdrawn by giving 21 days’ Interest will be paid for the period of the deposit but if money is withdrawn, the interest will be at the rate of 2%, which is equivalent to the bank’s stated rate for short-term deposits.

Abacus Bhd is confident that it will not need to withdraw the cash from the higher-rate deposit within the term, but wants to keep easy access to the remaining RM7 million to cover any working capital shortfalls which might arise.

Required:

Advise Abacus Bhd on whether any of the above transactions should be treated as cash equivalent. Support your answer with reasons.

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