| Chapter 7 Financial Assets- those assets easily and directly convertible into known amounts of cash - cash, short-term investments (marketable securities), and receivables * Valuation: financial assets are shown at their current value * Current Values: - Cash--simply the face amount - Marketable Securities--may change daily, so they appear at their current market values - Accounts Receivable�appear at the estimated collectible amount (net realizable value) Cash- money on deposit in banks and any items that banks will accept for deposit - coins, paper money, checks, money orders, travelers� checks, credit cards Reporting Cash in the Balance Sheet * Cash is listed first b/c it is the most liquid asset * Cash Equivalents: some short-term investments - money market funds, U.S. Treasury bills, high-grade commercial paper (very short-term notes payable) - matures within 90 days - combined with Cash on the Balance Sheet * Marketable Securities: short-term investments that don�t qualify as cash equivalents * Restricted Cash: account must have a certain amount maintained in it - why would a bank have this? provide them security - purpose? increases the interest that the bank earns on your money - Must be disclosed in footnotes * Lines of Credit: the bank has agreed in advance to lend the company any amount of $ up to a specified limit - liability arises when the money is borrowed - unused portion of a line of credit is neither asset nor liability, represents an ability to borrow money quickly & easily - usually disclosed in notes accompanying fin stmts The Statement of Cash Flows �Cash� includes Cash Equivalents - Transfers between bank accounts & cash equivalents aren�t listed b/c they don�t change the amount of cash owned - Interest received from owning cash equivalents is included Cash Management- planning, controlling, and accounting for cash transactions and cash balances - the management of all financial resources * Basic objectives: - Provide accurate accounting for cash receipts, cash disbursements, and cash balances. - Prevent or minimize losses from theft or fraud - Anticipate the need for borrowing and assure the availability of adequate amounts of cash for conducting business operations. - Prevent unnecessarily large amounts of cash from sitting idle in bank accounts that produce no revenue. Using Excess Cash Balances Efficiently Cash equivalents only generate a modest rate of return. Cash that is available for long-term investment may be used to finance growth and expansion of the business, or to repay debt. If the cash is not needed for business purposes, it may be distributed to the company�s stockholders. Internal Control over Cash a means of preventing fraud and theft; will also aid in achieving accurate accounting for cash transactions, anticipating the need for borrowing, and the maintenance of adequate but not excessive cash balances. * Major Steps: - Separate the authorities: authorizing checks, signing checks, accounting dept, reconciling - For each department, prepare a cash budget - Prepare a control listing of cash receipts at the time and place $ is received cash sales: cash register tape checks received in mail: listing prepared by employee opening mail Cash Over and Short errors in making change inevitably will occur, causing a shortage or overage of cash * Accounting records must be Adjusted: - Extra Cash: Dr Cash, Cr Cash Over and Short - Missing Cash: Dr Cash Over and Short, Cr Cash Bank Reconciliation schedule explaining any differences between the balance shown in the bank statement and the balance shown in the depositor�s accounting records. * Not Showing on Bank Statements: - Outstanding Checks: issued and recorded by company, not yet cleared bank. - Deposits in Transit: cash receipts recorded by company, but too late to be on the bank�s monthly stmt * Not Showing on Company�s Books: - Service Charges: banks often charge a fee for handling small accounts - NSF Checks (non-sufficient funds): checks uncollectible, b/c customer did not have enough in their acct - Credits for Interest Earned - Miscellaneous bank charges and credits Exercise 7.1 Bank $ 3,400 Book $ 601 Outstanding Checks < 2,800> Interest + 4 Service Charge - 5 $ 600 $ 600 * Electronic Funds transfer not in either balance yet b/c it was as of Sept 30 Exercise 7.5 A Bank $ 15, 200 Book $ 17,500 Deposit 10,000 Service Fee < 25 > Outstanding Checks < 8,500 > NSF < 775 > $ 16,700 $ 16, 700 * NSF: Jane Jones didn�t have the funds in her account B Dr Accounts Receivable $ 800 Cr Cash $ 800 ** Chapter 7 Continued** |