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Unformatted text preview: 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 to differ from the balance recorded by the bank •...
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This note was uploaded on 09/12/2011 for the course MGCR 211 taught by Professor La rocca during the Fall '08 term at McGill.
- Fall '08
- LA ROCCA