Short-Term Liquid Assets

1. Short-Term Liquid Assets Chapter 7

2. Liquidity • Managing Cash • Setting credit policies • Average days’ sales uncollected • Receivable turnover • Financing receivables • Contingent liability – factoring with recourse

3. Cash • Coins and currency on hand • Checks and money orders from customers • Deposit in checking accounts • A compensating balance

4. Cash equivalents • Investments that have a term of 90 days or less • Time deposits, certificate of deposits, treasury notes

5. imprest • An advance of money or loan • A petty cash fund is an advance of money • The fund is to be reimbursed based on the documented expenditures • So a petty cash fund is an imprest system

6. Short-Term Investments • Investments that have a maturity of more than 90 days but are intended to be held only until cash is needed for the current operations • A.k.a. marketable securities

7. Long-term investments • Intended to be held for more than one year • Reported in the an investment section of the balance sheet

8. Securities • Held-to-maturity securities • Trading securities – short term • Available-for-sale securities

9. Held-to-maturity • Recorded at cost • Valued on B/S at cost adjusted for the effects of interest

10. Trading Securities • Classified as current assets • Valued at fair value, which is usually the same as market value • An increase or decrease in the total trading portfolio is included in the net income in the accounting period in which the increase or decrease occurs.

11. Available-for-sale Security • Accounted for in exactly the same way as trading securities • BUT the unrealized gain or loss is not reported on the income statement, but is reported as a special item in the stockholders’ equity section of the balance sheet

12. Accounts Receivable • Uncollectible accounts or bad debts • Expense of selling on credit • GAAP do not use the direct charge-off method

13. The Allowance Method • Matching Rule • Losses from uncollectible accounts be estimated • The estimated losses become an expense in the fiscal year in which sales (revenues) are made

14. Estimating Uncollectible Accounts expense • Two methods • Percentage of Net sales method • Accounts receivable aging method • Two key questions: • What is the amount of uncollectible accounts expense? • What is the ending balance of Allowance for uncollectible accounts

15. Percentage of Net Sales Method • Use historical records or industrial experience to estimate • Will use Excel to show the procedure and computations • Loss rate times Net sales = expense • Beginning balance + expense = ending balance

16. Accounts receivable aging method • Classify the age (due date) of the accounts receivable • The further past due an account is, the greater the possibility the account will not be paid • Summation of loss of each different due date will be the ending balance

17. Aging method • The uncollectible accounts expense will be the difference between the beginning balance and the ending balance • The problem is to recognize that normal allowance balance should be credit; if it is debit, then it adds to the expense more

18. Bank Reconciliation • Two different balances: • Balance per bank statement • Balance per book • Each one needs to add some and subtract some

19. Balance per bank statement • Add • Deposit in transit • Subtract • Outstanding checks

20. Balance per book • Add • Credit memos like note receivable collected • Interest income • Subtract • Debit memos like overstatement of deposit • Service charge