Chapter06 UML 2007

Chapter06 UML 2007 - Ch 6 Cash and Cash Equivalents 1...

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Unformatted text preview: Ch. 6: Cash and Cash Equivalents 1 Chapter 6 Cash and Cash Equivalents In this chapter you will see how cash affects businesses, how it is controlled, how it is accounted for, and why its proper accounting is important to the quality of information reported in financial statements. You will also learn what companies do with cash for which they do not anticipate immediate needs. What are cash and cash equivalents? Cash Cash is a resource (asset). As you would expect from your personal experiences, cash includes currency (one-dollar bills, five-dollar bills, fifty- dollar bills, etc.) and coins (pennies, nickels, quarters, etc.). From a business standpoint, cash includes currency, coins, and deposits in bank checking accounts and savings accounts. The key element of cash is that it is readily available for the company to use. It need not be in a drawer or safe in the manager's office, but the company must have quick and easy access to it. For example, a company's cash in a bank checking account can be quickly used by the company's manager simply writing a check. For companies who conduct business in different countries, cash may be in the form of many different currencies, such as dollars (United States), pesos (Mexico), or yen (Japan). For financial statement purposes, even though a company uses many different currencies to conduct its business throughout the world, the cash reported on its balance sheet is stated in terms of one currency. Cash is reported in terms of dollars for companies reporting in the United States but it is reported in terms of yen for companies reporting in Japan. Cash equivalents Cash equivalents are low risk investments that can be converted into known amounts of cash within 90 days. A low risk investment is one in which there is little chance the investment will be lost. Companies have found some of the safest investments are securities of the United States government. On the other hand, investing in a medical research company being started by a friend who knows nothing about medical research would be an example of a high risk investment. Two common forms of cash equivalents which will be briefly discussed later in this chapter are certificates of deposit and treasury bills. The major reason companies have cash equivalents is such investments earn higher rates of interest than bank checking or savings accounts. Companies take cash they will not need for the next 90 days and invest it in cash equivalents in order to earn higher interest than would be earned if the cash was left in a bank checking or savings account. In terms of the accounting equation, cash and cash equivalents are resources and are reported as assets as shown below. As you proceed through the following chapters in this text, additional assets, liabilities and stockholders' equity accounts will be added to the accounting equation....
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This note was uploaded on 10/09/2011 for the course ACCT 60.201 taught by Professor Monty during the Spring '11 term at UMass Lowell.

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Chapter06 UML 2007 - Ch 6 Cash and Cash Equivalents 1...

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