Accounting Module 4 Financial Assets Includes cash short term investments and receivables In the balance sheet they are shown at their current value the amount of cash they represent Cash Shown at face value in balance sheet Short term investments Appear in the balance sheet at their current fair market value Accounts receivable Appear in the balance sheet at the estimated collectible amount net realizable value Appears in the balance sheet immediately after cash and short term investments Relatively liquid asset that is converted into cash within a period of 30 to 60 Marketable securities Short term investments Cash days bank cards Reporting Cash in the Balance Sheet account for cash equivalents Cash Equivalents Cash Management commercial paper Money on deposit in banks paper money checks money orders and traveler s checks sales using Cash is listed first in the balance sheet because it is the most liquid It is combined with the control Very short term investments that are so liquid that they are considered equivalent to cash Examples include money market funds U S Treasury bills certificates of deposit and Refers to planning controlling and accounting for cash transactions and cash balances Objectives Provide accurate accounting for cash receipts cash disbursements and cash balances Prevent or minimize losses from theft or fraud Anticipate the need for borrowing and assure the availability of adequate amounts of cash Prevent unnecessarily large amounts of cash from sitting idle in bank accounts that for conducting business operations produce no revenue Reflecting Uncollectible Accounts in the Financial Statements An account receivable that has been determined to be uncollectible is no longer an asset The loss of this asset represents an expense termed Uncollectible Accounts Expense Writing off an uncollectible Accounts Receivable Credit Account Receivable and debit to Allowance for Doubtful Accounts If the amounts written off as uncollectible turn out to be less than the estimated amount the Allowance for Doubtful Accounts will continue to show a credit balance If the amounts written off as uncollectible are greater than the estimated amount the Allowance for Doubtful Accounts will acquire a temporary debit balance which will be eliminated by the adjustment at the end of the period Allowance for Doubtful Accounts A valuation account or contra asset account relating to accounts receivable and showing the portion of the receivables estimated to be uncollectible Is credited with the amount of accounts receivable that is estimated to be uncollectible Aging the Accounts Receivable Method The process of classifying accounts receivable by age groups Most common method for estimating the probable amount of uncollectible accounts Finding the Adjusting entry amount Multiply Age group total amount with percentages of each age group to find credit balance after adjustment Credit balance after credit balance before credit adjustment required Maker The party that issues a note i e signs the note is referred to as this Accounts Receivable Turnover Rate Tells us how many times the company s average investment in receivables was converted into Net sales Average accounts receivable Average of days account receivable remain outstanding before they are collected cash during the year Computed by 365 Turnover rate Interest Charge for the use of money Major steps in achieving internal control over cash transactions and cash balances Separate the function of handling cash from the maintenance of accounting records Employees who handle cash should not have access to the accounting records and accounting personnel with access to cash records should not handle cash Prepare cash budgets or forecasts of planned cash receipts cash payments and cash balances scheduled month by month for the coming year Prepare a control listing of cash receipts at the time and place the money is received Require that all cash receipts be deposited daily in the bank Make all payments by check The only exception should be for small payments to be made in cash from what is often referred to as a petty cash fund Module 4 Questions Cash that will not be needed in the immediate future is often invested in highly short term securities Liquid Current Financial assets are shown in the balance sheet at their values Which items are typically included as part of a company s cash balance money orders bank deposits checks travelers checks Cash Transactions Balances Which asset is viewed as the most liquid on the balance sheet Cash management refers to planning controlling and accounting for cash and cash A principal source of a company s daily receipts is the collection of accounts receivable Cash budgets should be prepared on a Monthly basis Cash is carried in the balance sheet at its face amount Accounts receivable are typically listed in the balance sheet immediately after cash and short term investments in marketable securities True or false Transactions where a customer uses a bank credit card e g Visa MasterCard are considered cash sales True Increase 188 000 Srinivasan Inc sells 600 000 worth of goods on account in March and estimates that 2 of these credit sales will ultimately prove to be uncollectible The cost of the items sold was 400 000 As a result total assets will increase decrease by in March 600000 x 02 1200 600000 1200 588 000 588 000 400 000 188 000 Cash is reported in which location in the balance sheet The first item listed among current assets True or false The Allowance for Doubtful Accounts has a normal credit balance True The objectives of cash management include preventing or minimizing losses due to theft or fraud anticipating borrowing needs and ensuring that adequate amounts of cash are providing accurate accounting for cash receipts cash disbursements and cash available balances Check Higher 30 60 Days On July 10 Yang Inc concludes that a 24 000 receivable due from Jones Inc is uncollectible Yang will credit to write off the receivable Accounts Receivable Except for very small payments all payments should be made by If the amounts written off as uncollectible are greater than the estimated amount then the prior period s net income is higher lower than it would have been if the estimation process were more accurate Accounts receivable are typically collected within how many days of the sale on account At June 30 Lopez Inc determines that approximately 1 5 of its 400 000 accounts receivable balance will