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7-1 7 CASH AND RECEIVABLES CHAPTER OBJECTIVES After careful study of this chapter, students will be able to: 1. Identify items of cash (and cash equivalents). 2. Understand the importance of cash management. 3. Discuss revenue recognition when the right of return exists. 4. Understand the credit policies related to accounts receivable. 5. Explain the gross and net methods to account for cash discounts. 6. Estimate and record bad debts using a percentage of sales. 7. Estimate and record bad debts using an aging analysis. 8. Explain pledging, assignment, and factoring of accounts receivable. 9. Account for short-term notes receivable. 10. Understand a petty cash fund (Appendix). 11. Prepare a bank reconciliation (Appendix).
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7-2 SYNOPSIS Cash 1. Investors, long-term creditors and short-term creditors are interested in the ability of a company to pay its operating expenses, dividends, and interest and to repay its current debts. The existence of cash and other liquid assets which may be quickly converted into cash by a company to pay current debts is important to these users of financial statements. 2. Any money on hand reported under the balance sheet caption "Cash" in the current asset section must be available to pay current obligations and not be subject to any contractual restrictions that prevent these monies from being used to pay current debts. Items properly included in the measurement of cash on hand are coins, currency, unrestricted funds on deposit with a bank, negotiable checks, and bank drafts. Items which should not be included are certificates of deposit, bank overdrafts, post-dated checks, travel advances, and postage stamps. 3. Some companies use the title Cash and Cash Equivalents on their balance sheet in place of Cash . This category includes cash as well as securities that are defined as "cash equivalents" because of their liquidity and low risk. Examples of cash equivalents are commercial paper, treasury bills, and money market funds. 4. The efficient management of cash is very important to every company. Proper cash management requires the investment of idle funds. However, it is necessary to determine the estimated timing of cash inflows and outflows to ensure the availability of cash to meet the company's needs prior to embarking on a short-term investment program. 5. Cash planning systems are those methods and procedures, such as cash budgets, that a company uses to ensure that it has adequate cash to meet maturing obligations and that any unused or excess cash is invested. Cash control systems are the methods and procedures that a company uses to safeguard its funds. 6. Internal control , which forms the basis for cash control systems, is the process (policies and procedures) a company uses so that its financial reports are reliable, its operations (including safeguarding its assets) are effective and efficient, and that it complies with applicable laws and regulations. Particular internal control procedures should be established only if the benefits of the procedures exceed their costs.
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