ACCT 327 Chp 7 notes

ACCT 327 Chp 7 notes - Accounting 327 Chapter 7 Notes: Cash...

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Accounting 327 Chapter 7 Notes: Cash and Receivables What is cash? o Cash : is the most liquid of assets, the standard medium of exchange and the basis for measuring and accounting for all other items. o Cash consists of coin, currency, and available funds on deposit at the bank o Negotiable items such as money orders, certified checks, cashier’s checks, personal checks, and bank drafts are also viewed as cash o Certain items present classification problems : Companies treat postdated checks and IOUs as receivables. Companies treat travel advances as receivables if collected from employees or deducted from their salaries. Otherwise, companies classify the travel advance as a prepaid expense. Postage stamps on hand are classified as part of office supplies inventory or as a prepaid expense. Petty cash funds and change funds are classified as cash because they are used to meet current operating expenses and liquidate current liabilities Reporting Cash o Issues relate to the reporting of: (1) cash equivalents, (2) restricted cash, and (3) bank overdrafts o Cash Equivalents : short term, highly liquid investments that are both (1) readily convertible to known amounts of cash, and (2) so near their maturity that they present insignificant risk of changes in interest rates Usually maturities of 3 months or less
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EX: treasury bills, commercial paper, and money market funds It appears likely that the FASB will eliminate the cash-equivalent classification from financial statement presentations all together. Companies will now report only cash o Restricted Cash : Petty cash, payroll, and dividend funds are examples of cash set aside for a particular purpose. In most situations, these fund balances are not material. Companies classify restricted cash either in the current assets or in the long term assets section, depending on the date of disbursement. It is classified as current if the maturity date is one year or less Compensatory Balances : whenever we borrow money from a bank, part of the agreement may be to keep a minimum balance in the account. They do this because the bank uses it to loan to other people. Thus, they earn more money, the more money you keep in the bank. Money that is kept in the bank could be reinvested, or some of the debt could be paid off Similar to a bond sinking fund o Bank Overdrafts : occur when a company writes a check for more than the amount in its cash account. Companies should report overdrafts in the current liabilities section, adding them to the amount reported as accounts payable. Bank overdrafts are generally not offset against the cash account. A major exception is when available cash is present in another account in the same bank on which the overdraft occurred. Offsetting is required in this case. Receivables
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This note was uploaded on 11/04/2009 for the course ACCT 327 taught by Professor Knight during the Spring '08 term at Texas A&M.

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ACCT 327 Chp 7 notes - Accounting 327 Chapter 7 Notes: Cash...

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