Chapter 7 Class Notes

Chapter 7 Class Notes - Chapter 7 CASH AND RECEIVABLES What...

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Chapter 7 CASH AND RECEIVABLES What is Cash? A company’s most liquid asset It is a standard medium of exchange It is the basis for measuring and accounting for all transactions Almost always classified as a current asset (unless specifically pledged on a non- current liability); ‘restricted cash ’ must be segregated from regular cash for reporting purposes ‘Bank overdrafts ’ are when a company writes a check for an amount that exceeds the cash balance in its checking account; bank overdrafts should be treated as a current liability and are typically added to the balance of ‘accounts payable’ What qualifies as cash: coin, currency, available funds on deposit at the bank, money orders, certified checks, cashier’s checks, personal checks, bank drafts and money in savings accounts Some negotiable instruments provide small investors with an opportunity to earn interest. These items are more appropriately classified as temporary investments than as cash. Examples include money market funds, money market savings certificates, certificates of deposit (CDs), and similar types of deposits and “short term paper.’ Cash & Cash Equivalents This is a very popular account classification. ‘Cash equivalents’ are short-term, highly liquid investments that are both (a) readily convertible to known amount of cash, and (b) so near their maturity (three months or less when purchased) that they present insignificant risk of changes in interest rates. Summary Illustration Illustration 7-2 on Page 322 summarizes the classification of cash-related items. 1
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Receivables Receivables are claims held against customers and others for money, goods, or services. For financial statement purposes, companies classify receivables as either current (short- term) or noncurrent (long-term). Companies expect to collect short term receivables within a year or during the current operating cycle, whichever is longer. All other receivables are classified as noncurrent. Receivables are further classified in the balance sheet as either trade or non-trade receivables. Customers often owe a company amounts for goods bought or services rendered. A company may sub-classify these trade receivables into accounts receivable and notes receivable. Accounts receivable are oral promises of the purchaser to pay for goods and services sold. They represent “open accounts” resulting from short-term extensions of credit and are normally collected within 30 to 60 days. Notes receivable are written promises to pay a certain sum of money on a specified future date. They may arise from sales, financing, or other transactions. Notes receivable may be short-term or long-term. Examples of non-trade receivables are:
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This note was uploaded on 12/09/2011 for the course ACC 371 taught by Professor Proscott during the Spring '11 term at S. Alabama.

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Chapter 7 Class Notes - Chapter 7 CASH AND RECEIVABLES What...

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