CHAPTER 7 REVIEW - CHAPTERREVIEW 1. (S.O. 1)Chapter 7...

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CHAPTER REVIEW 1. (S.O. 1) Chapter 7 presents a detailed discussion of two of the primary liquid assets of a business enterprise, cash and receivables. Cash is the most liquid asset held by a business enterprise and possesses unique problems in its management and control. Receivables are composed of both accounts and notes receivables. Chapter coverage of accounts receivable places emphasis on trade receivables. In covering notes receivables, the chapter includes both short-term and long-term notes. Nature of Cash 2. Cash consists of coin, currency, bank deposits, and negotiable instruments such as money orders, checks, and bank drafts. Cash that has been designated for some specific use, other than for payment of currently maturing obligations, is segregated from the general cash account. This amount may be classified as a current asset if it will be disbursed within one year or the operating cycle, whichever is longer. Otherwise, the amount should be shown as a noncurrent asset. Management of Cash 3. Two problems associated with accounting for cash transactions for management: (1) Proper controls must be established to ensure that no unauthorized transactions are entered into by officers or employees; (2) Information necessary to the proper management of cash on hand and cash transactions must be provided. *Note: All asterisked (*) items relate to material contained in the Appendix to the chapter. Restricted Cash 4. (S.O. 2) It is common practice for an enterprise to have an agreement with a bank concerning credit and borrowing arrangements. When such an agreement exists, the bank usually requires the enterprise to maintain a minimum cash balance on deposit. This minimum balance is known as a compensating balance. Compensating balances that result in legally restricted deposits must be separately classified in the balance sheet. The nature of the borrowing arrangement determines whether the compensating balance is classified as a current asset or a noncurrent asset. 5. Bank overdrafts occur when a check is written for more than the amount in the cash account. Bank overdrafts should be accounted for as accounts payable or, if material, separately disclosed. Cash equivalents are short-
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term, highly liquid investments that are both (a) readily convertible to known amounts of cash and (b) so near their maturity that they present insignificant risk of changes in interest rates. Accounts Receivable 6. (S.O. 3) Receivables are defined as claims held against customers and others for money, goods, or services. Receivables may generally be classified as trade or nontrade. Trade receivables (accounts receivable and notes receivable) are the most significant receivables an enterprise possesses. Accounts receivable are oral promises of the purchaser to pay for goods and services sold. Notes receivable are written promises to pay a certain sum of money on a specified future date. Nontrade receivables arise from a variety of transactions and can be written promises either to pay or to
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This note was uploaded on 09/30/2008 for the course ACCY 206 taught by Professor Madlinger during the Spring '08 term at Northern Illinois University.

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CHAPTER 7 REVIEW - CHAPTERREVIEW 1. (S.O. 1)Chapter 7...

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