Study Guide Exam 3 - Study Guide Exam 3 Chapter 7 Cash Cash...

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Unformatted text preview: Study Guide Exam 3 Chapter 7 Cash, Cash Equivalents, and Short Term Investments 1. Liquidity of an Asset: the amount of time necessary before the asset is converted into cash. 2. Liquidity of a Company: the ability of the company to pay their debts as they become due. 3. Primary Liquid Assets: as cash and cash equivalents, short term investments and receivables. 4. Cash a. Includes the fallowing i. Coin and currency on hand, including a petty cash fund ii. Checking and savings accounts at the bank iii. Money market funds that provide checking privileges iv. Un-deposited checks from customers v. Negotiable instrument such as money orders, certified checks, cashiers checks, personal checks and bank drafts. b. To be classified as cash, it must meet two conditions i. Be readily available for payment or current obligations ii. Be free from contractual restrictions that limit its use in paying debts 5. Cash Equivalents a. Short term investments that are readily convertible into know amounts of cash and have an original maturity of three months or less b. Cash equivalents include i. Money market funds that do not allow checking privileges ii. Commercial paper or “short-term paper” issued by corporations iii. Treasury bill (t-bills) issued by the federal government iv. Certificates of deposit (CDs) at a financial institution c. Two conditions must be met in order for the security to be classified as a “cash equivalent:” i. The security must be convertible into a know amount of cash. ii. The maturity date must be three months or less. d. If either or both of these conditions are not met, then the security would either be classified as a short-term or long-term investment, depending on the length of time until maturity. 6. Short Term Investment a. Commercial paper, treasury bills, and certificate of deposits with the maturity of more than three months are classified as short term investments, not as cash equivalents. If the maturity date is more than a year, then the security should be classified as a long-term investment. 7. Other rules regarding cash: a. Compensating balances – a minimum account balance required by the bank to be held in the company’s checking or savings account. Two main rules are: i. If the compensating balance is held against short-term borrowings, the amount should be stated separately among “cash and cash equivalents.” ii. If the balance is being held against long-term barrowings, the amount should be shown as a long-term asset under either the “long-term investments” or “other assets” categories.a long-term asset under either the “long-term investments” or “other assets” categories....
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This note was uploaded on 04/15/2008 for the course MGMT 460 taught by Professor Lynn during the Spring '08 term at Abilene Christian University.

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Study Guide Exam 3 - Study Guide Exam 3 Chapter 7 Cash Cash...

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