Chapter 7 Notes

Chapter 7 Notes - Chapter 7 Cash and Receivables Section 1...

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Unformatted text preview: Chapter 7: Cash and Receivables Section 1: Cash What is Cash?- Cash- standard medium of exchange and the basis for measuring and accounting for all other items- Cash is the most liquid of all assets- Generally, classified as a current asset- Consist of coin, currency, and available funds on deposit at the bank- Negotiable instruments such as money orders, certified checks, cashier’s checks, personal checks, and bank drafts are also viewed as cash- Savings accounts are considered cash- Some negotiable instruments provide small investors with an opportunity to earn interest o These items classified as temporary investments: Money market funds Money market saving certificates Certificates of deposit (CDs) Short-term paper o Money market funds that provide checking account privileges are usually classified as cash- Companies treat: o Postdated checks and I.O.U.s as receivables o Travel advances as receivables if collected from employees or deducted from their salaries, otherwise classified as a prepaid expense o Postage stamps on hand are classified as office supply inventories or prepaid expense o Petty c ash funds and change funds are used to meet current operating expenses and liquidate current liabilities, companies include these funds in current assets as cash Reporting Cash- A number of issues merit special attention, these issues relate to reporting of: o Cash Equivalents o Restricted Cash o Bank Overdrafts Cash Equivalents- Cash Equivalents- short-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- Generally, only investments with original maturities of three months or less qualify under these definitions- Examples of cash equivalents: o Treasury bills o Commercial paper o Money market funds- Some companies combine cash with temporary investments on the balance sheet o In these cases, they describe the amount of the temporary investments either parenthetically or in the notes- Most individuals think of cash equivalents as cash, unfortunately this is not always the case- Appears the FASB will eliminate the cash-equivalent classification from financial statement presentations altogether Restricted Cash- When material in amount, companies segregate restricted cash from “regular” cash for reporting purposes- Classify restricted cash either in the current assets or long-term assets- Cash classified in the long-term section is frequently set aside for plant expansion, retirement of long-term debt, or for entry fee deposits Page 2 of 21- Compensating Balances- portion of any demand deposit (or any time deposit or certificate of deposit) maintained by a corporation which constitutes support for existing borrowing arrangements of the corporation with a lending institution- To avoid misleading investors about the amount of cash available to meet recurring obligations, the SEC recommends that companies state separately legally restricted...
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This note was uploaded on 02/22/2011 for the course BUAD 362 taught by Professor Frazer during the Spring '10 term at Millersville.

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Chapter 7 Notes - Chapter 7 Cash and Receivables Section 1...

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