Chapter 7 331

Chapter 7 331 - Lecture Notes for Chapter 7 (ACCT 331) Cash...

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Lecture Notes for Chapter 7 (ACCT 331) Cash and Receivables Cash and cash equivalents Cash: Currency, unrestricted bank deposits, checking account balances, bank drafts, money orders. Cash equivalents : Cash or other highly liquid assets. Usually investments with a maturity period of 3 months or less. Includes treasury bills, commercial paper, money market funds. Cash management and Control Cash Management: Only cash needed for day to day use, should be at hand. Rest should be invested. Internal control of Cash: Systems and procedures that safeguard cash and account for it properly. Separation of duties: Individuals who handle the cash should not account for it. Daily recording of all cash receipts. Daily deposit of cash receipts. Making disbursement through checks whenever possible. Issuing and signing checks only after expenditures are authorized. Periodically reconciling bank statements with accounting records. Keeping multiple copies of transactions. Restricted Cash Cash that is held separate for a particular use such as (1) for a particular project, (2) to cover certain debt payments (sinking fund), and (3) minimum balances required by a bank for loans taken (compensating balances). Such cash is usually reported as “investments and funds” or “other assets.” 1
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Interest effects of compensating balances With compensating balances, the effective interest rate is usually higher than the rate specified on the loan. Ex: My Bank lends $1,500,000 to Me Company, with a provision requiring a 10% compensating balance. The line of credit carries an 8% interest rate. . What is the effective interest rate on this loan? Petty cash/Imprest System [Appendix] System set up to make frequent small cash payments. Steps Involved: The cash custodian appointed withdraws a lump sum amount of cash. Journal entry recorded. Numbered cash vouchers given to the custodian. Custodian makes payments and completes vouchers. No journal entries are recorded. When the fund is low the vouchers are exchanged and the petty cash fund is replenished. A journal entry for the expenses is recorded. Example Suppose a petty cash account set up for $400 on 1/1/2005. During January, the following disbursements occurred: $50 spent on deliveries, $200 spent on travel, $60 spent on postage and $80 was spent on meals. What if there is a discrepancy in the amount of cash in hand and the amount left in the petty cash account? 2
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Receivables: Company’s claims to future collection of cash, other assets or services. Trade Receivables/Accounts Receivable : Receivables arising from the sale of goods and services. These are informal (non-written) contracts. Accounts receivables are classified as current assets. While in general receivables should be recorded at the present value of expected cash
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Chapter 7 331 - Lecture Notes for Chapter 7 (ACCT 331) Cash...

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