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(6) Cash, Short-Term Investments..

(6) Cash, Short-Term Investments.. - Chapter 6 Cash...

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Chapter 6 – Cash, Short-Term Investments, and Accounts and Notes Receivables Cash, short-term investments, accounts receivable, and notes receivable represent the most liquid of a company’s assets Sufficient cash must be available at all times to pay for purchases and other obligations as they come due Monetary Assets: Value is fixed in current monetary terms Purchasing Power: Value is derived from the ability to be exchanged for goods and services in the future (affected by inflation and deflation) Cash flowing in and out of a company is a clear signal that a transaction has taken place Unit of Measure Assumption: Results of business activities should be measured in terms of a monetary unit (e.g. the Canadian dollar) Requires that Canadian currency must be measured at face value Foreign Currency Translation Loss: Keeps track of losses when you switch currencies Individuals who hold currencies in countries with high inflation rates lose more purchasing power than those in countries with low inflation rates Note: Control of cash is a key part of a company’s internal control system Key Elements of an Effective Internal Control System: 1) Physical Measures – Aimed at protecting the assets from theft, diversion, damage, or destruction 2) Clear Assignment of Responsibilities 3) Separation of Duties – Can’t have one person doing all the activities with regards to purchasing power 4) Independent Verification – When one person is responsible for verifying the work of another to see if they are behaving badly 5) Proper Documentation Procedures – Documents provide evidence that a transaction has occurred (“Audit Trail”) 6) An Effective Record-Keeping and Reporting System Bank Reconciliation: Ensures that any differences between the accounting records for cash and the bank records are identified and explained (Internal control) Identify items that are causing the cash balance recorded by the company
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