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FINANCIAL ASSETS
Chapter
7
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How Much Cash Should a BusinessHave?
How Much Cash Should a BusinessHave?
$
Everybusiness
needsenough
cash to pay
its bills!
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How Much Cash Should a BusinessHave?
How Much Cash Should a BusinessHave?
Cash
Short-term
Investments
Receivables
Financial
Assets
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How Much Cash Should a BusinessHave?
How Much Cash Should a BusinessHave?
Accounts
receivable
Maretablesecuritiesshort-term
investments"
Cash and cashe#uivalents"
Collectionsrom
customers Cashpayments
%E&cess'cash is
invested
temporarily(
Investmentsare sold as
cash is
needed(
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The Valuation of Financial Assets
The Valuation of Financial Assets
)ype o Financial Asset
*asis or +aluation in
the *alance Sheet
Cash !and cash e#uivalents" Face amount
Short-term investments!maretable securities"
Current maret value
Receivables ,et realiable value
Estimated collectible amount
Estimated collectible amount
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Cash
Cash
Coins andpapermoney
Checs
Money orders
)ravelers. checs
*an creditcard sales
Cashisdeined as
any depositbans /ill
accept(
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Combined/ith cash onbalance sheet
Reporting Cash in the BalanceSheet
Reporting Cash in the BalanceSheet
0i#uid short-term
investments
Stablemaretvalues
Matures/ithin 12 dayso ac#uisition
CashE#uivalents
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,ot availableor paying
currentliabilities
Reporting Cash in the BalanceSheet
Reporting Cash in the BalanceSheet
,ot a currentasset
0isted as aninvestment
%Restricted'Cash
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*an agrees inadvance to lend
money(
Reporting Cash in the BalanceSheet
Reporting Cash in the BalanceSheet
0iability isincurred /hen lineo credit is used(
3nused line ocredit is disclosed
in notes(
0ines oCredit
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The Stateent of Cash FlowsThe Stateent of Cash Flows
Summaries cash
transactions or anaccounting period(
Statement o Cash Flo/s
Includes cash and cash
e#uivalents(
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Cash ManageentCash Manageent
Accurately account for cash.
Prevent theft and fraud.
Assure the availability ofadequate amounts of cash.
Avoid unnecessarily large
amounts of idle cash.
Accurately account for cash.
Prevent theft and fraud.
Assure the availability ofadequate amounts of cash.
Avoid unnecessarily large
amounts of idle cash.
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!sing "#cess Cash Balances"fficientl$
!sing "#cess Cash Balances"fficientl$
Cash available orlong-term investment
may be used to inance
gro/th and e&pansiono the business4 or to
repay debt(
Cash not needed orbusiness purposes
should be distributedto the company.sstocholders(
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Internal Control Over Cash
Segregate authoriation4 custody and recording ocash(
5repare a cash budget(
5repare a control listing o cash receipts(
Re#uire daily deposits(
Mae all payments by chec(+eriy every e&penditure beore payment(
5romptly reconcile ban statements(
Internal Control Over Cash
Segregate authoriation4 custody and recording ocash(
5repare a cash budget(
5repare a control listing o cash receipts(
Re#uire daily deposits(
Mae all payments by chec(
+eriy every e&penditure beore payment(
5romptly reconcile ban statements(
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Cash %ver and ShortCash %ver and Short
Cash 6ver and Short is debited or shortagesand credited or overages(
Cash 6ver and Short is debited or shortagesand credited or overages(
6n May 74 8*AR4 Inc(.s cash dra/er /ascounted and ound to be $92 over(
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Ban& StateentsBan& Stateents
Sho/s the beginning ban balance4deposits made4 checs paid4 other
debits and credits in the month4 andthe ending ban balance(
*an
Statement
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Reconciling the Ban& StateentReconciling the Ban& Stateent
E&plains the dierence bet/een cashreported on ban statement and cash
balance in depositor.s accountingrecords(
5rovides inormation orreconciling :ournal entries(
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Reconciling the Ban& StateentReconciling the Ban& Stateent
*alance per *an
; Ad:usted *alance
*alance per
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Reconciling the Ban& StateentReconciling the Ban& Stateent
All reconcilingitems on the
boo sidere#uireanad:usting
entry to thecash account(
*alance per
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Reconciling the Ban& Stateent"#aple
Reconciling the Ban& Stateent"#aple
Prepare a July 31 ban reconciliationstatement and the resulting !ournal entriesfor the "immons Company. #he July 31
ban statement indicated a cash balance of$%&'1(& )hile the cash ledger account on
that date sho)s a balance of $*&+3(.
Additional information necessary for thereconciliation is sho)n on the ne,t page.
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Outstanding checs totaled $-&+1*.
A $(( chec mailed to the ban for deposit had
not reached the ban at the statement date. #he ban returned a customer/s 0" chec for
$-- received as payment of an accountreceivable.
#he ban statement sho)ed $3( interest earnedon the ban balance for the month of July.
Chec *21 for supplies cleared the ban for $-'2
but )as erroneously recorded in our boos as$-+(.
A $+2' deposit by Acme Company )aserroneously credited to our account by the ban.
Outstanding checs totaled $-&+1*.
A $(( chec mailed to the ban for deposit had
not reached the ban at the statement date. #he ban returned a customer/s 0" chec for
$-- received as payment of an accountreceivable.
#he ban statement sho)ed $3( interest earnedon the ban balance for the month of July.
Chec *21 for supplies cleared the ban for $-'2
but )as erroneously recorded in our boos as$-+(.
A $+2' deposit by Acme Company )aserroneously credited to our account by the ban.
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Reconciling the Ban& Stateent"#aple
Reconciling the Ban& Stateent"#aple
Reconciling the Ban& Stateent"#aple
Reconciling the Ban& Stateent"#aple
*alance per ban statement4 ?uly @9 1492$AdditionsB
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Reconciling the Ban& Stateent"#aple
Reconciling the Ban& Stateent"#aple
HE,ERA0 ?63R,A0
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3sed or minore&penditures(
'ett$ Cash Funds'ett$ Cash Funds
as onecustodian(
Replenishedperiodically(
5etty CashFunds
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Short(Ter )nvestentsShort(Ter )nvestents
*ondInvestments
CapitalStoc
Investments
Current Assets
Almost As0i#uid As
Cash
ReadilyMaretable
MaretableSecurities
are ( ( (
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Mar&(to(Mar&et* A +ew 'rincipleof Asset Valuation
Mar&(to(Mar&et* A +ew 'rincipleof Asset Valuation
Short-term investments in maretable securitiesappear on the balance sheet at their current maret
value as o the balance sheet date(
Classiication ManagementGs Intent)reatment o 3nrealied
olding Hains and 0osses
Available or
sale securities
eld or short-term
resale !oten to 9D
months"
Reported in stocholdersG
e#uity section o the
balance sheet
)rading
securities
eld or immediate
resale !oten /ithin
hours or days"
Reported in JotherJ revenue
!e&pense" section o the
income statement
eld to maturity
securities
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0et.s turn ourattention to accounts
receivable(
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!ncollecti,le Accounts!ncollecti,le Accounts
If a company maes
credit sales tocustomers& someaccounts inevitably )ill
turn out to be
uncollectible.
If a company maes
credit sales tocustomers& someaccounts inevitably )ill
turn out to be
uncollectible. 5AS)
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Reflecting !ncollecti,le Accountsin the Financial Stateents
Reflecting !ncollecti,le Accountsin the Financial Stateents
At the end of each period& recordan estimate of the uncollectible
accounts.
At the end of each period& recordan estimateof the uncollectible
accounts.
Contra-asset accountContra-asset account
Selling e&penseSelling e&pense
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The Allowance for -ou,tfulAccounts
The Allowance for -ou,tfulAccounts
Accounts receivable
0essB Allo/ance or doubtul accounts,et realiable value o accounts receivable
#he net realiable valueis the amount ofaccounts receivable that the business
e,pects to collect.
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.riting %ff an !ncollecti,leAccount Receiva,le
.riting %ff an !ncollecti,leAccount Receiva,le
4hen an account is determined to be uncollectible&it no longer qualifies as an asset and should be
)ritten off.
4hen an account is determined to be uncollectible&it no longer qualifies as an asset and should be
)ritten off.
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.riting %ff an !ncollecti,leAccount Receiva,le
.riting %ff an !ncollecti,leAccount Receiva,le
Assume that on January & 567a,determined that Jason Clar )ould not pay
the $(( he o)es.
567a, )ould mae the follo)ing entry.
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.riting %ff an !ncollecti,leAccount Receiva,le
.riting %ff an !ncollecti,leAccount Receiva,le
Assume that before this entry& the Accounts8eceivable balance )as $1(&((( and theAllo)ance for 9oubtful Accounts balance
)as $-&((.
:et/s see )hat effect the )rite6off had onthese accounts.
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.riting %ff an !ncollecti,leAccount Receiva,le
.riting %ff an !ncollecti,leAccount Receiva,le
*eore
Krite-6
Ater
Krite-6
Accounts receivable 924222$ 14722$0essB Allo/( or doubtul accts( E4722 E4222
,et realiable value 4722$ 4722$
,otice that the $722 /rite-o did notchange the netrealiable value nor did it aect any income
statement accounts(
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Recover$ of an Account Receiva,le'reviousl$ .ritten %ff
Recover$ of an Account Receiva,le'reviousl$ .ritten %ff
HE,ERA0 ?63R,A0
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Monthl$ "stiates of Credit /ossesMonthl$ "stiates of Credit /osses
At the end of each month&management should
estimate the probableamount of uncollectibleaccounts and ad!ust theAllo)ance for 9oubtful
Accounts to this ne)estimate.
At the end of each month&management shouldestimatethe probable
amount of uncollectibleaccounts and ad!ust theAllo)ance for 9oubtfulAccounts to this ne)
estimate.
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At $724222Allo/ance or $22 credit"
5ast e&perience suggests that 7L o receivablesare uncollectible(
Khat is Music0and.s 3ncollectible AccountsE&pense or 22@
At $724222Allo/ance or $22 credit"
5ast e&perience suggests that 7L o receivablesare uncollectible(
Khat is Music0and.s 3ncollectible AccountsE&pense or 22@
Monthl$ "stiates of Credit /osses"#aple
Monthl$ "stiates of Credit /osses"#aple
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0et.s loo atanother /ay
to estimatethe
uncollectibleaccounts!
0et.s loo atanother /ay
to estimatethe
uncollectibleaccounts!
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"stiating Credit /osses 0 The1Balance Sheet2 Approach
"stiating Credit /osses 0 The1Balance Sheet2 Approach
Near-end Accounts Receivable isbroen do/n into age
classiications(
Near-end Accounts Receivable isbroen do/n into age
classiications(
Each age grouping has adierent lielihood o being
uncollectible(
Each age grouping has adierent lielihood o being
uncollectible(
Compute a separate allo/ance oreach age grouping(
Compute a separate allo/ance oreach age grouping(
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"stiating Credit /osses 0 The1Balance Sheet2 Approach
"stiating Credit /osses 0 The1Balance Sheet2 Approach
At
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"stiating Credit /osses 0 The1Balance Sheet2 Approach
"stiating Credit /osses 0 The1Balance Sheet2 Approach
At
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"stiating Credit /osses 0 The1Balance Sheet2 Approach
"stiating Credit /osses 0 The1Balance Sheet2 Approach
At
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EastCo.s unad:usted balancein the allo/ance account is
$722(
5er the previous computation4the desired balance is $94@72(
EastCo.s unad:usted balancein the allo/ance account is
$722(
5er the previous computation4the desired balance is $94@72(
"stiating Credit /osses 0 The1Balance Sheet2 Approach
"stiating Credit /osses 0 The1Balance Sheet2 Approach
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Huess Khat!
)here isanother
alternative toestimate theuncollectible
accounts!
Huess Khat!
)here isanother
alternative toestimate the
uncollectibleaccounts!
A Al i A h
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An Alternative Approach to"stiating Credit /osses
An Alternative Approach to"stiating Credit /osses
3ncollectible accounts.percentage is based on actualuncollectible accounts rom
prior years. credit sales(
Focus is on determining the amount to
record on the income statement as3ncollectible Accounts E&pense(
A Al i A h
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An Alternative Approach to"stiating Credit /osses
An Alternative Approach to"stiating Credit /osses
,et Credit Sales
L Estimated 3ncollectibleAmount o ?ournal Entry
,et Credit Sales
L Estimated 3ncollectibleAmount o ?ournal Entry
A Al i A h
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An Alternative Approach to"stiating Credit /osses
An Alternative Approach to"stiating Credit /osses
In -((3& ;astCo had credit sales of $'(&(((.
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An Alternative Approach to"stiating Credit /osses
An Alternative Approach to"stiating Credit /osses
! ll ti,l A t
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!ncollecti,le AccountsSuar$
!ncollecti,le AccountsSuar$
L o ReceivablesL o Receivables
Emphasis onRealiable +alue
Emphasis on
Realiable +alue
Accts(Rec( All( or
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-irect .rite(%ff Method-irect .rite(%ff Method
)his method maes no attempt tomatch revenue /ith the e&pense o
uncollectible accounts(
) T R l ti d
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)ncoe Ta# Regulations andFinancial Reporting
)ncoe Ta# Regulations andFinancial Reporting
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)nternal Controls for Receiva,le)nternal Controls for Receiva,le
Separate the ollo/ing dutiesB
7aintenance of the accounts receivablesubsidiary ledger.
Custody of cash receipts.
Authoriation of accounts receivable )rite6offs.
7aintenance of the accounts receivable
subsidiary ledger.
Custody of cash receipts.
Authoriation of accounts receivable )rite6offs.
f A
M t f A t
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Manageent of AccountsReceiva,le
Manageent of AccountsReceiva,le
Credit )erms
MinimieAccounts
Receivable
E&tending credit encouragescustomers to buy rom us ( ( (
( ( ( but it ties up resourcesin accounts receivable(
. Mi i i A i
. t Mi i i A t i
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.a$s to Minii3e Aounts inAccounts Receiva,le
.a$s to Minii3e Aounts inAccounts Receiva,le
Selling
AccountsReceivable
Credit
CardSales
" l i h 4 li f A
" l ti th 4 lit f A t
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"valuating the 4ualit$ of AccountsReceiva,le
"valuating the 4ualit$ of AccountsReceiva,le
Accounts 8eceivable #urnover 8atio
#his ratio provides useful information for
evaluating ho) efficient management hasbeen in granting credit to produce revenue.
Accounts 8eceivable #urnover 8atio
#his ratio provides useful information for
evaluating ho) efficient management hasbeen in granting credit to produce revenue.
,et SalesAverage Accounts Receivable
" l i h 4 li f A
" l ti th 4 lit f A t
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"valuating the 4ualit$ of AccountsReceiva,le
"valuating the 4ualit$ of AccountsReceiva,le
Avg. 0umber of 9ays to Collect AB8
#his ratio helps !udge the liquidity of acompany/s accounts receivable.
Avg. 0umber of 9ays to Collect AB8
#his ratio helps !udge the liquidity of a
company/s accounts receivable.
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"nd of Chapter 7"nd of Chapter 7
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