Chapter_7_Lecture - LECTURE 7 A Cash and receivables...

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LECTURE 7 A. Cash and receivables represent two of the most liquid of assets. Liquidity is an indication of an enterprise's ability to meet its obligations as they come due. B. Cash. 1. Includes coin, currency, bank deposits including checking and savings accounts, and negotiable instruments such as money orders, cashiers' checks, personal checks, and bank drafts. 2. Postdated checks and I.O.U.s should be reported as receivables. Travel advances to employees should be reported as receivables or as prepaid expenses. Postage stamps on hand should be reported as office supplies or as prepaid expenses. Petty cash funds and change funds should be included in cash. 3. Bank overdrafts should be reported as current liabilities. They are not offset against the cash account unless there is available cash in another account at the same bank. 4. Restricted cash. a. Cash restricted for some special purpose (such as the retirement of bonds) is reported separately in either the current asset section or the noncurrent asset section of the balance sheet, depending on the date of availability or disbursement. b. The SEC recommends that legally restricted deposits held as compensating balances against borrowing arrangements be reported separately in either the current asset section or the noncurrent asset section, depending on whether the borrowing arrangement is short-term or long-term. 5. Cash equivalents. a. This category includes items 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 (generally 3 months or less). b. Money market funds, money market savings certificates, certificates of deposit, and similar types of deposits are nearly "equivalent to cash" in terms of liquidity. However, these securities usually contain restrictions or penalties on their conversion to cash. These items should be reported as temporary investments. c. Many companies now report these items in a current asset category called cash and cash equivalents, which includes cash plus these items. 6. Many control procedures exist for cash transactions. Two that are discussed in the Appendix are the imprest petty cash system and the preparation of bank reconciliations. 7-1
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C. Receivables: Claims held against customers and others for money, goods, or services. Classified as either trade or nontrade. 1. Accounts receivable are oral promises of the purchaser to pay for goods and services sold. 2. Notes receivable are written promises to pay a certain sum of money on a specified future date. D. Accounts Receivable— Recognition Issues. These involve the concepts of timing and measurement. Measurement is complicated by: 1. Trade Discounts. These reductions from the list price are not recognized in the accounting records, customers are billed net of trade discounts. 2.
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Chapter_7_Lecture - LECTURE 7 A Cash and receivables...

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