1. 12-1 CASH AND MARKETABLE SECURITIES CHAPTER 12

2. 12-2 What is Cash? Coins l Currency l Money orders received from customers l Checks l Money deposited in banks

3. 12-3 Compensating balance In order to ensure a company’s credit-granting arrangement, a company is forced to keep a minimum amount in the bank account. The minimum is called compensating balance.

4. 12-4 Application of Cash Account receivable Inventory Property Suppliers Employees Rents Convert Can’t pay

5. 12-5 Cash and profit Cash Profit

6. 12-6 Cash inflow & outflow customers lenders investors salaries suppliers creditors out in out in

7. 12-7 Positive and negative cash flow A positive cash flow Inflow of cash > outflow of cash A negative cash flow Inflow of cash < outflow of cash

8. 12-8 Components of cash flow Cash flow Operating cash flow Internal operations Investing cash flow Internal non-operating activities Financing cash flow To and from external sources

9. 12-9 l Marketable securities are government securities, bonds, or other securities which are invested by a company to avoid the excess cash lie idle. l They are liquid assets in that they can easily and quickly be converted into cash. l Marketable securities held as a temporary investment are classified as current assets. Marketable securities (Short-term investment)

10. 12-10 Marketable securities (Short-term investment) 1. have definite market value and be exchanged on the security market publicly; As short-term investment, marketable securities should : 2. as surplus funds, have liquidity and profitability.

11. 12-11 Classification of marketable securities l Credit securities l Equity securities l Mixed securities

12. 12-12 Credit securities indicate the credit that is owned by the investors, namely, the claim to the principal and interest on maturity date. Classification of marketable securities Equity securities show the equity that the owner owns, namely, the claim to the increment of capital. Mixed securities have all the characteristics that Credit and equity securities have. The examples of mixed securities are preferred stocks and transferable debenture.

13. 12-13 Pricing Methods of Marketable Securities Value of securities investment at the beginning of accounting period If marketable securities are purchased with cash, the investment cost includes purchase price, taxes, and commission charges. The investment cost doesn't consist of the cash dividend declared but not collected and the uncollected mature security interest.

14. 12-14 Pricing Methods of Marketable Securities If marketable securities are invested by the investors, the cost is the price determined by the individual investing parties. If the securities are the non-cash assets paid by the debtors, the investment cost includes the book value of the assets and taxes excluding the cash dividend declared but not collected.

15. 12-15 Pricing Methods of Marketable Securities Value of securities at the end of accounting period Marketable Securities are first recorded at cost. The cost of marketable securities includes purchase price, broker’s fee, and other reasonable charge incurred during the purchase of securities. Method 1

16. 12-16 Pricing Methods of Marketable Securities To use the marketable value as the price and record the investment income as the result of change of the marketable value. Method 2

17. 12-17 Pricing Methods of Marketable Securities To use the smaller one of the cost and the marketable price as the investment cost of securities to meet the prudence principle. Method 3

18. 12-18 Entry of marketable securities Now, let’s look at an example for George Ross Photocopy Company

19. 12-19 Entry of marketable securities George Ross Photocopy Company U.S. Treasury bills, $10,000. The commission charge is $200. Mature in three months at $15,000

20. 12-20 Entry of marketable securities June 1 Dr. Marketable Securities $ 10,200 Cr. Cash $10,200 The entries

21. 12-21 Entry of marketable securities Suppose the securities purchased by George include cash dividend declared but not collected $400. The entries June 1 Dr. Marketable Securities $10,200 Interest Receivable 400 Cr. Cash $10,600

22. 12-22 Entry of marketable securities Interest income Income on marketable securities (short-term investments) Recorded Received Dividends and interest on stocks and bonds held as short-term investments Recorded Dividend income When is collected

23. 12-23 Entry of marketable securities The entries September 1 Dr. Cash $15,000 Cr. Interest Income $3,000 Marketable Securities 12,000

24. 12-24 WE ARE SAILING RIGHT ALONG!!