Audit and Assurance Practice Exam

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What does valuation of cash balances primarily focus on?

The physical presence of cash
The true economic value of the cash
The frequency of cash transactions
The forecasted cash flows

The correct answer is: The true economic value of the cash

Valuation of cash balances primarily focuses on the true economic value of the cash. This involves assessing how much the cash is worth in an economic context, which includes considering factors such as inflation, interest rates, and the opportunity costs of holding cash rather than investing it. Understanding the true economic value is crucial for stakeholders as it impacts financial reporting and decision-making. While the physical presence of cash is important for security and fraud prevention, it does not fully represent how cash will perform economically. The frequency of cash transactions is more about operational metrics than valuation. Additionally, while forecasted cash flows are important for budgeting and financial planning, they are projections about future inflows and outflows rather than assessments of the current value of existing cash balances. These aspects reinforce why focusing on the true economic value of cash holds significance in the context of valuation activities.