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Student Notes Chap 7 - CHAPTER 7 Cash and Receivables...

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CHAPTER 7 Cash and Receivables CHAPTER REVIEW *Note: All asterisked (*) items relate to material contained in the Appendix to the chapter. 1. (S.O. 1) Chapter 7 presents a detailed discussion of two of the primary liquid assets of a company, cash and receivables. Cash is the most liquid asset held by a company and possesses unique problems in its management and control. Receivables are composed of both accounts and notes receivables. Chapter coverage of accounts receivable places emphasis on trade receivables. In covering notes receivables, the chapter includes both short-term and long-term notes. Nature of Cash 2. Cash consists of coin, currency, bank deposits, and negotiable instruments such as money orders, checks, and bank drafts. Cash that has been designated for some specific use, other than for payment of currently maturing obligations, is segregated from the general cash account. This amount may be classified as a current asset if it will be disbursed within one year or the operating cycle, whichever is longer. Otherwise, the amount should be shown as a noncurrent asset. Reporting Cash 3. (S.O. 2) Cash equivalents are short-term, highly liquid investments that are both (a) readily convertible to known amounts of cash and (b) so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. If an asset is not cash and is short-term in nature, it should be reported as as a temporary investment. 4. It is common practice for a corporation to have an agreement with a bank concerning credit and borrowing arrangements. When such an agreement exists, the bank usually requires the company to maintain a minimum cash balance on deposit. This minimum balance is known as a compensating balance. Compensating balances that result in legally restricted deposits must be separately classified in the balance sheet. The nature of the borrowing arrangement determines whether the compensating balance is classified as a current asset or a noncurrent asset. 5. Bank overdrafts occur when a company writes a check for more than the amount in the cash account. Bank overdrafts should be accounted for as accounts payable or, if material, separately disclosed on the balance sheet or in the related notes.
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Accounts Receivable 6. (S.O. 3) Receivables are claims held against customers and others for money, goods, or services. Receivables may generally be classified as trade or nontrade. Trade receivables (accounts receivable and notes receivable) are the most significant receivables an enterprise possesses. Accounts receivable are oral promises of the purchaser to pay for goods and services sold. Notes receivable are written promises to pay a certain sum of money on a specified future date. Nontrade receivables arise from a variety of transactions and can be written promises either to pay or to deliver. Nontrade receivables are generally classified and reported as separate items in the balance sheet.
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