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CASH AND MARKETABLE SECURITIES

CHAPTER 12. CASH AND MARKETABLE SECURITIES. What is Cash?. Coins Currency Money orders received from customers Checks Money deposited in banks. Compensating balance.

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CASH AND MARKETABLE SECURITIES

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  1. CHAPTER 12 CASH AND MARKETABLE SECURITIES

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

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

  5. Cash and profit Profit Cash

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

  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. Components of cash flow Operating cash flow Cash flow Internal operations Investing cash flow Internal non-operating activities Financing cash flow To and from externalsources

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

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

  11. Classification of marketable securities • Credit securities • Equity securities • Mixed securities

  12. Classification of marketable securities Credit securities indicate the credit that is owned by the investors, namely, the claim to the principal and interest on maturity date. 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. 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. 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. Pricing Methods of Marketable Securities Value of securities at the end of accounting period Method 1 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.

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

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

  18. Entry of marketable securities Now, let’s look at an example forGeorge Ross Photocopy Company

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

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

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

  24. WE ARE SAILING RIGHT ALONG!!

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