Acc011_03_CashAndReceivables

Acc011_03_CashAndRec - Cash Receivables Cash Includes cash on hand cash in bank Most companies report cash and cash equivalents Cash equivalents

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Cash & Receivables
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Cash • Includes cash on hand, cash in bank • Most companies report cash and cash equivalents .
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Cash equivalents • Short-term highly liquid investments that are readily convertible into cash and so near their maturity that there is little risk of change in value due to change's in interest rates - per SFAS #95 - their maturity should be three months or less.
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• To be reported on balance sheet as 'cash' it must be readily available, free from any contractual restrictions that limit its use- examples of restrictions include sinking funds and compensating balances
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Sinking Funds • Sometimes set up when a company borrows money. According to the bond or loan contract the borrower has to deposit money into a fund at periodic intervals to ensure that when the liability matures there will be enough
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Compensating balances • Occurs when bank requires a portion of any amount loaned to a company to remain on deposit in the bank.
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Example: Bank offers the following terms on a loan A) $8,000 at 12% per year, or B) $10,000 at 10% per year with a compensating balance of 20% of loan principal • Which is a better deal for the borrower?
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• Compensating balances are payments for services rendered. By requiring a compensating balance, the bank can achieve an effective interest rate on a loan that is higher than the stated rate. Important if there is a ceiling or usury rate.
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Balance Sheet Classification • Legally restricted deposits must be stated separated on the balance sheet. They should be classified as short or long-term depending on the reason they are restricted.
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• Example: Compensating balance held against a short-term loan is classified as a current asset, while a compensating balance held against a long-term loan is classified as a noncurrent asset.
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Cash Management • It is not good to have too much, nor too little cash on hand. If a company has too little cash on hand it may experience liquidity problems, which can be costly. If it has too much cash on hand it suffers an opportunity loss, for cash is a non productive asset.
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Receivables • Claims that arise from the sale of goods, performance of services, etc.
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Classifications Current (expected to be collected within one year or the current operating cycle, whichever is longer) vs NonCurrent Trade (arising in the course of business) vs NonTrade Accounts (oral promise to pay) vs Notes (written
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Valuation • In general the amount recognized as a receivable is the price agreed upon by the parties to the transaction. In specific cases this does not hold.
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consider 1) The length of time between sale and payment 2) The availability of a discount. There are two types of discounts – Trade - sale at less than list price. Record at invoice price. – Cash (Sales) - to induce prompt
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This note was uploaded on 05/19/2008 for the course ACCT 3511 taught by Professor Balsam during the Spring '07 term at Temple.

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Acc011_03_CashAndRec - Cash Receivables Cash Includes cash on hand cash in bank Most companies report cash and cash equivalents Cash equivalents

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