Chapter 7 – Cash Chapter 7 – Cash Coins, Currency, Petty Cash Funds, Change Funds, Checking Accounts, Savings Accounts and other Negotiable Instruments:

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Presentation transcript:

Chapter 7 – Cash Chapter 7 – Cash Coins, Currency, Petty Cash Funds, Change Funds, Checking Accounts, Savings Accounts and other Negotiable Instruments: (Money Orders, Certified Checks, Cashier’s Checks, Bank Drafts) … is readily available for the payment of current obligations & … is free from any contractual restrictions that limit its use in satisfying debts

The Cash Account Debit to Increase Cash receipts Cash salesCash sales Collect on A/RCollect on A/R Sale of assetsSale of assets borrowingsborrowings owner investmentsowner investments Credit to Decrease Cash disbursements Pay expensesPay expenses Pay on A/PPay on A/P Pay other liabilitiesPay other liabilities Purchase assetsPurchase assets Owner withdrawalsOwner withdrawals

Cash Equivalents Are readily convertible to known cash amounts & are so near their maturity that they carry insignificant risk of changes in interest rates Original Maturities < 3 month qualify treasury billstreasury bills commercial papercommercial paper money market fundsmoney market funds Short-term Certificates of Deposit (CD’s)Short-term Certificates of Deposit (CD’s)

Restricted Cash Short-term (should be separately stated as cash equivalent, if material) Long-term (noncurrent asset in “Investment” or “Other Asset” section of the Balance Sheet) Compensating Balances Payroll Funds Dividend Funds Bond Sinking Funds

Bank Overdrafts Report in current liabilities section of the Balance SheetReport in current liabilities section of the Balance Sheet Separately state (on face of b/S or in notes) if materialSeparately state (on face of b/S or in notes) if material Exception: Offset (against other cash accounts) only if there is cash available in another account in the same bankException: Offset (against other cash accounts) only if there is cash available in another account in the same bank

Chapter 7 -- Receivables Trade Receivables Nontrade Receivables: Advances to officers & employees Advances to subsidiaries Deposits to cover potential damages or losses Deposits as a guarantee of performance or payment Dividends and interest receivable Claims against insurance companies for casualties sustained Claims against defendants in a lawsuit Claims against the government for tax refunds Claims against common carriers for damaged or lost goods Claims against creditors for returned, damaged, or lost goods Claims against customers for returnable items (containers) … are claims held against customers and other for money, goods, or services

Long Term Notes Receivable Record at the present value of the expected future cash collectionsRecord at the present value of the expected future cash collections Amortize the resulting discount or premium using the effective interest method (that is, recognize interest revenue at the effective interest rate (which may be different that the contract rate)Amortize the resulting discount or premium using the effective interest method (that is, recognize interest revenue at the effective interest rate (which may be different that the contract rate)

Assume that all three notes are issued today in equal quantities & that each carries identical risk. How much extra will you pay in order to earn the highest possible interest? And, how much discount will you demand in order to settle for the lowest possible interest? Note A pays 10% Note B pays 12% Note C pays 14% 10 year, $1,000 Notes offered to raise cash (annual interest)

Note Investment Journal Entries: Gross Method Acquisition: Dr Notes ReceivableFaceValue Dr Premium on NotesReceivableDif Cr Discount on NotesReceivableDif Cr CashAmntPd Interest Date: Dr CashAmntRec’d Dr Discount on NotesReceivable Dif Cr Premium on NotesReceivable Dif Cr Interest RevenueEffRate Note: 2 JE’s can replace this compound JE

(A) Record the Investment in Notes A, B & C. (B) Record each interest payment & amortize the discount or premium (assume interest is paid at year-end) using the Effective Interest Method Note A pays 10% Note B pays 12% Note C pays 14%

Note Issuance Journal Entries Issuance:Dr CashAmntRec’d Dr Note DiscountDif Cr Note PremiumDif Cr Note PayableFaceValue Interest Date: Dr Interest ExpenseEffInt Dr Note PremiumDif Dr Note PremiumDif Cr Note DiscountDif Cr Interest Payable (Cash)Contract Note: 2 JE’s can replace this compound JE Slide included for completeness only -- not for test purposes