review07 - CHAPTER 7 Cash and Receivables 0REVIEWING THE...

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CHAPTER 7 Cash and Receivables 0REVIEWING THE CHAPTER Objective 1: Identify and explain the management and ethical issues related to cash and receivables. 10. To maintain adequate liquidity, management must carefully monitor its cash and receivables. To accomplish this, it must address five key issues: managing cash needs, setting credit policies, evaluating the level of accounts receivable, financing receivables, and making ethical estimates of credit losses. 20. Cash consists of currency and coins on hand, checks and money orders from customers, and deposits in checking and savings accounts. Cash may also include a compensating balance, the minimum amount a bank requires a company to keep in its bank account as part of a credit-granting arrangement. 30. During the course of a year, most businesses experience periods of both strong and weak sales and variations in cash flow. To remain liquid throughout these seasonal cycles, a business must carefully plan for cash inflows, cash outflows, borrowing, and investing. Excess cash, for example, must be invested wisely, while providing for access when needed. On the other hand, periods of cash shortages must be anticipated so that short-term borrowing (or other means of obtaining funds) can be arranged in advance. 40. A company must use its assets to maximize income while maintaining liquidity. Short-term financial assets are assets that arise from cash transactions, the investment of cash, and the extension of credit. Examples are cash, accounts receivable, and notes receivable. 50. Accounts receivable are short-term financial assets of a wholesaler or retailer that represent payment due from credit customers. This type of credit is often called trade credit. Installment accounts receivable are receivables that will be collected in a series of payments; they usually are classified on the balance sheet as current assets. When loans or credit sales are made to a company’s employees, officers, or owners, they are shown separately on the balance sheet with a title like “receivables from employees” rather than “assets receivable.” Accounts Receivable should appear on the balance sheet as the sum of all accounts with debit balances. Customers’ accounts sometimes show credit balances because of overpayment; the sum of the credit balances should appear on the balance sheet as a current liability. 60. Companies that sell on credit do so to be competitive and to increase sales. To minimize the risk of incurring bad debts, they establish policies and procedures for checking the financial backgrounds of potential credit customers. The effectiveness of a company’s credit policies is commonly measured by the receivable turnover (net sales divided by average accounts receivable) and the days’ sales uncollected (365 divided by the receivable turnover).
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70. Companies sometimes cannot afford to wait until their receivables are collected. They can use the receivables to obtain cash by borrowing funds and pledging the accounts receivable
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This note was uploaded on 06/10/2009 for the course ACG 2021 taught by Professor Magoulis,b during the Spring '08 term at Pasco-Hernando Community College.

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review07 - CHAPTER 7 Cash and Receivables 0REVIEWING THE...

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