Chapter 7 – Financial assets. The learning objectives for this chapter include: Define financial assets and explain their valuation in the balance sheet, describe the objectives of cash management, explain means of achieving internal control over cash transactions, prepare a bank reconciliation and explain its purpose,. | FINANCIAL ASSETS Chapter 7 2 How Much Cash Should a Business Have? $ Every business needs enough cash to pay its bills! How Much Cash Should a Business Have? Cash Short-term Investments Receivables Financial Assets How Much Cash Should a Business Have? Accounts receivable Marketable securities (short-term investments) Cash (and cash equivalents) Collections from customers Cash payments “Excess” cash is invested temporarily. Investments are sold as cash is needed. The Valuation of Financial Assets Estimated collectible amount 4 Cash Coins and paper money Checks Money orders Travelers’ checks Bank credit card sales Cash is defined as any deposit banks will accept. 4 Combined with cash on balance sheet Reporting Cash in the Balance Sheet Liquid short-term investments Stable market values Matures within 90 days of acquisition Cash Equivalents 4 Not available for paying current liabilities Reporting Cash in the Balance Sheet Not a current asset Listed as an investment “Restricted” Cash 4 Bank agrees in advance to lend money. Reporting Cash in the Balance Sheet Liability is incurred when line of credit is used. Unused line of credit is disclosed in notes. Lines of Credit 4 The Statement of Cash Flows Summarizes cash transactions for an accounting period. Statement of Cash Flows Includes cash and cash equivalents. 4 Cash Management Accurately account for cash. Prevent theft and fraud. Assure the availability of adequate amounts of cash. Avoid unnecessarily large amounts of idle cash. 4 Using Excess Cash Balances Efficiently Cash available for long-term investment may be used to finance growth and expansion of the business, or to repay debt. Cash not needed for business purposes should be distributed to the company’s stockholders. 4 Internal Control Over Cash Segregate authorization, custody and recording of cash. Prepare a cash budget. Prepare a control listing of cash receipts. Require daily deposits. Make all payments by check. Verify every expenditure before payment. . | FINANCIAL ASSETS Chapter 7 2 How Much Cash Should a Business Have? $ Every business needs enough cash to pay its bills! How Much Cash Should a Business Have? Cash Short-term Investments Receivables Financial Assets How Much Cash Should a Business Have? Accounts receivable Marketable securities (short-term investments) Cash (and cash equivalents) Collections from customers Cash payments “Excess” cash is invested temporarily. Investments are sold as cash is needed. The Valuation of Financial Assets Estimated collectible amount 4 Cash Coins and paper money Checks Money orders Travelers’ checks Bank credit card sales Cash is defined as any deposit banks will accept. 4 Combined with cash on balance sheet Reporting Cash in the Balance Sheet Liquid short-term investments Stable market values Matures within 90 days of acquisition Cash Equivalents 4 Not available for paying current liabilities Reporting Cash in the Balance Sheet Not a current asset Listed as an investment “Restricted” Cash 4 .
