Financial Assets Overview
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Questions and Answers

What is one primary reason for extending credit to customers?

  • To encourage purchases (correct)
  • To increase accounts payable
  • To limit customer transactions
  • To improve cash flow

What is a significant function of account receivable management?

  • To monitor and minimize outstanding debts (correct)
  • To authorize all payment transactions
  • To manage inventory levels
  • To consolidate all financial statements

Which of the following tasks should be separated to ensure proper internal control over receivables?

  • Custody of cash and customer credit analysis
  • Maintenance of accounts and managing inventory
  • Authorization of write-offs and preparing financial statements
  • Custody of cash and authorization of write-offs (correct)

What is a potential drawback of extending credit to customers?

<p>It ties up resources in accounts receivable (C)</p> Signup and view all the answers

Which function can potentially lead to a conflict of interest if not separated properly in receivable management?

<p>Custody of cash receipts (C)</p> Signup and view all the answers

What should be done with cash not needed for business purposes?

<p>Distribute to stockholders (A)</p> Signup and view all the answers

Which of the following is a primary objective of internal control over cash?

<p>To prevent fraud and theft (A)</p> Signup and view all the answers

How can a company effectively manage its cash balances?

<p>By preparing cash budgets or forecasts (B)</p> Signup and view all the answers

What is the benefit of separating cash handling from accounting records?

<p>To ensure accountability and reduce errors (B)</p> Signup and view all the answers

Why is it important to maintain adequate but not excessive cash balances?

<p>To ensure funds are available for growth opportunities (B)</p> Signup and view all the answers

Which aspect of cash management involves anticipating the need for borrowing?

<p>Cash forecasting (B)</p> Signup and view all the answers

Which of the following is NOT a component of efficient cash management?

<p>Maintaining excess cash reserves (A)</p> Signup and view all the answers

What is the role of cash budgets in cash management?

<p>To plan for future cash receipts and payments (D)</p> Signup and view all the answers

What is considered a principal source of daily cash receipts for a well-managed company?

<p>Collection of accounts receivable (A)</p> Signup and view all the answers

Why might a business aim to maintain low cash balances?

<p>To pay bills efficiently (D)</p> Signup and view all the answers

How can a business generate revenue from cash that is not needed in the immediate future?

<p>By investing in highly liquid, short-term securities (A)</p> Signup and view all the answers

What does the term 'financial assets' encompass?

<p>Assets easily convertible into cash (B)</p> Signup and view all the answers

What can a business do if it needs more cash than it currently has?

<p>Convert some investments back into cash (A)</p> Signup and view all the answers

What is the general recommendation for cash levels in a business?

<p>As little cash as necessary (B)</p> Signup and view all the answers

Why is it advantageous for a company to deposit daily cash receipts promptly?

<p>To improve cash flow management (B)</p> Signup and view all the answers

Which option correctly illustrates a disadvantage of keeping cash in hand rather than investing it?

<p>Cash can lose value from inflation (D)</p> Signup and view all the answers

What does cash management primarily involve?

<p>Planning, controlling, and accounting for cash transactions (B)</p> Signup and view all the answers

What can restricted cash be classified as?

<p>Listed as an investment (D)</p> Signup and view all the answers

What happens when a line of credit is used?

<p>A liability is incurred (B)</p> Signup and view all the answers

Why is efficient cash management essential for businesses?

<p>It is important for survival and success of organizations (B)</p> Signup and view all the answers

Which of the following is NOT a goal of cash management?

<p>Increasing the number of transactions (D)</p> Signup and view all the answers

What is the role of restricted cash in financial reporting?

<p>It is not available for current liabilities and listed as an investment (C)</p> Signup and view all the answers

What should be avoided in cash management to optimize cash utilization?

<p>Holding large amounts of idle cash (B)</p> Signup and view all the answers

What is a key characteristic of cash that is reported as restricted?

<p>It is not accessible for current liabilities (B)</p> Signup and view all the answers

What is a significant characteristic of the direct write-off method?

<p>It makes no effort to match revenue with uncollectible expense. (D)</p> Signup and view all the answers

Which method is required for calculating taxable income according to tax regulations?

<p>Direct write-off method (D)</p> Signup and view all the answers

What is a primary benefit of using the allowance methods over the direct write-off method?

<p>They help in better matching of expenses with revenues. (D)</p> Signup and view all the answers

In an accounting journal entry for the direct write-off method, which account is typically credited?

<p>Accounts Receivable (B)</p> Signup and view all the answers

Which of the following is NOT a characteristic of Generally Accepted Accounting Principles (GAAP) regarding uncollectible accounts?

<p>They require the direct write-off method in all cases. (B)</p> Signup and view all the answers

What is the typical impact of employing the allowance method on a company's financial statements?

<p>It provides a more accurate picture of expected losses in accounts receivable. (D)</p> Signup and view all the answers

Why might a company prefer the allowance method over the direct write-off method during financial reporting?

<p>It provides a clearer correlation between revenue recognition and expense. (D)</p> Signup and view all the answers

Which entry would you record when writing off an uncollectible account under the direct write-off method?

<p>Debit Uncollectible Accounts Expense, Credit Accounts Receivable (B)</p> Signup and view all the answers

What does the accounts receivable turnover ratio indicate?

<p>How effective management is in collecting outstanding debts (B)</p> Signup and view all the answers

Which metric is used to evaluate the efficiency of accounts receivable management?

<p>Accounts receivable turnover ratio (C)</p> Signup and view all the answers

To minimize amounts in accounts receivable, which strategy might be employed?

<p>Offering discounts for early payment (B)</p> Signup and view all the answers

What constitutes the calculation of the accounts receivable turnover ratio?

<p>Net sales divided by average accounts receivable (C)</p> Signup and view all the answers

Which approach does NOT help in minimizing accounts receivable?

<p>Increasing customer credit limits (C)</p> Signup and view all the answers

What would a higher accounts receivable turnover ratio suggest?

<p>Better performance in collecting debts (D)</p> Signup and view all the answers

Which of the following is likely to result in increased amounts in accounts receivable?

<p>Increased sales via credit sales (A)</p> Signup and view all the answers

What effect does a low accounts receivable turnover ratio typically indicate?

<p>Increased risk of bad debts (D)</p> Signup and view all the answers

Flashcards

Using Excess Cash

Employing cash not currently needed for immediate business operations to finance growth, expansion, or debt repayment.

Internal Control over Cash

A process to prevent fraud and theft of cash resources by meticulously managing cash transactions and maintaining appropriate cash balances.

Separate Handling of Cash

Separating the responsibilities of handling cash from the task of maintaining accounting records.

Cash Budgets/Forecasts

Planned projections of cash receipts, payments, and balances to anticipate and efficiently manage cash flow.

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Financial Assets

Financial assets include cash and assets easily convertible into known cash amounts.

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Income

The revenue generated by a business after deducting expenses.

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Balance Sheet

A financial statement that shows a company's assets, liabilities, and equity at a specific point in time.

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Cash Management

Managing cash flow to ensure a business can meet its obligations.

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Direct Write-Off Method

A method for accounting for uncollectible accounts that does not attempt to match revenue with the expense of uncollectible accounts.

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Accounts Receivable

Amounts owed to a business by its customers.

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Income Tax

Taxes levied on income earned by individuals or corporations.

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Short-term securities

Highly liquid investments earning interest or dividends.

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Optimal Cash Balance

The minimum amount of cash a business needs for its daily operations and contingencies.

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GAAP

Generally Accepted Accounting Principles; standards for financial reporting.

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Allowance Methods

Accounting methods that aim to better match expenses with revenues for uncollectible accounts.

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Taxable Income

The income subject to taxation; calculated using specific methods.

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Uncollectible Accounts

Amounts owed to a business that are expected to be uncollectible.

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Accounts Receivable

Amounts owed to a business by its customers for goods or services sold on credit.

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Accounts Receivable Turnover Ratio

A ratio that measures how efficiently a company collects its receivables; Calculated by dividing Net Sales by Average Accounts Receivable.

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Accounts Receivable

Amounts owed to a business by its customers for goods or services.

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Credit Terms

Conditions for granting credit to customers; specifying payment deadlines.

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Separate Duties (Receivables)

Different people handle different aspects of accounts receivable maintenance to prevent fraud, ensuring accuracy and security.

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Internal Controls (Receivables)

Processes and procedures to safeguard receivables and prevent errors or fraud.

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Receivables Write-offs

Formal acknowledgement that a customer's debt is unlikely to be recovered.

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Cash Management

Planning, controlling, and accounting for cash transactions and balances within a business.

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Cash in Balance Sheet

Cash that is readily available for paying current liabilities and not considered an investment.

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Restricted Cash

Cash that is unavailable for current operations, often held as an investment.

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Line of Credit

An agreement where a bank promises to lend money in the future.

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Unused Line of Credit

A line of credit that's not being used, disclosed in notes.

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Accounting for Cash

Precisely recording cash transactions and balances.

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Preventing Theft and Fraud

Protecting cash from illegal activities within a business.

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Adequate Cash Availability

Ensuring enough cash on hand to meet short-term financial obligations.

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Avoid Unnecessary Idle Cash

Preventing excess cash from sitting unused and earning no returns.

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Study Notes

Financial Assets

  • Financial assets encompass cash and assets easily convertible to cash.
  • Essential for businesses to pay bills.
  • Businesses ideally hold the minimum necessary cash.
  • Daily cash receipts are crucial.
  • Accounts receivable are a significant source of daily cash.
  • Excess cash can be invested in short-term securities for higher returns.
  • Investments earn interest and dividends.
  • Accounts receivable are valued at their estimated collectible amount (net realizable value).

Cash

  • Cash includes coins, paper money, checks, money orders, and travelers' checks.
  • It's defined as any deposit banks readily accept.
  • Cash and cash equivalents are frequently combined on balance sheets.
  • Cash equivalents are short-term investments quickly convertible to cash.
  • Some cash is restricted and not available for current liabilities.
  • Lines of credit create a liability when utilized.
  • Businesses should accurately track and manage cash to avoid theft and fraud.
  • Management must assure sufficient cash availability and minimize idle cash balances.

Internal Controls for Cash

  • Segregate cash handling from record-keeping.
  • Prepare forecasts for cash receipts, payments, and balances.
  • Deposit cash receipts daily.
  • All payments should be made by check.
  • Checks must be properly validated before issuing.
  • Separate check-signing and expenditure approval.
  • Match bank statements promptly to records.

Bank Statements

  • Bank statements show beginning and ending balances.
  • They detail all transactions (deposits, checks paid, etc.) during the period.

Reconciling Bank Statements

  • Reconciling bank statements identifies differences between reported and actual cash balances.
  • Both balances are adjusted for unrecorded transactions and errors.
  • Reconciling also ensures journal entries are properly made.
  • Typical differences: outstanding checks, deposits in transit, errors in recording.

Normal Differences between Bank Records and Accounting Records

  • Deposits not yet recorded by the bank.
  • Checks written but not yet cleared by the bank.
  • Errors in the bank's records

Reconciling the Bank Statement Example

  • The example details how to reconcile bank balance with the business's records (e.g., Outstanding checks, deposits in transit, bank errors).
  • Example demonstrates the associated journal entries for the differing amounts.

Short-Term Investments

  • Marketable securities are current assets.
  • They're easily converted to cash.
  • Short-term investments include bonds and capital stock.
  • Marketable securities are valued at current market values.
  • Unrealized gains/losses on investments are recorded separately.
  • Investments are valued at cost, including brokerage fees.
  • Income is recognized from interest/dividends.

Sale of Investments

  • Gain/loss from investment sales appears on the income statement.
  • The journal entry for sold investments must include cost basis and sale proceeds.

Adjusting Marketable Securities to Market Value

  • Marketable securities are shown on the balance sheet at their current market values.
  • Differences between the balance sheet cost and market values create unrealized holding gains or losses.

Presentation of Marketable Securities in the Balance Sheet

  • The example shows how to list marketable securities on a balance sheet, including their cost and market values.
  • Unrealized gains/losses are recorded in equity.

Accounts Receivable

  • Accounts receivable represent credit sales.
  • Accounts receivable frequently comprise the largest asset for businesses relying on credit sales.
  • The net realizable value represents expected collections from customers.
  • A business will occasionally find accounts to be uncollectible.

Uncollectible Accounts

  • Companies selling on credit need to estimate uncollectible accounts.
  • This is a crucial factor as it affects reported earnings and liquidity.
  • Estimate uncollectible amount at the end of each period.
  • Use journal entries for these uncollectible accounts.
  • Contra-asset account or valuation account is needed for bookkeeping.

Writing Off an Uncollectible Account

  • An account is written off when deemed uncollectible.
  • The entry decreases receivables and the allowance for doubtful accounts.
  • A journal entry is needed to reflect this write-off.

Recovery of an Account Receivable

  • Subsequent cash collection requires reversal of the write-off entry.
  • Collection is properly recorded as a cash receipt.

Monthly Estimates of Credit Losses (Method 1)

  • Estimate uncollectible accounts at the end of each month.
  • Adjust Allowance for Doubtful Accounts to the estimate.

Estimating Credit Losses (Method 2 - Balance Sheet Approach)

  • Year-end receivables are categorized by age.
  • Each age group has a specific uncollectible percentage.
  • Separate allowances are calculated for each age group.
  • This approach emphasizes the realizable value of accounts receivable.

Estimating Credit Losses (Method 3 - Alternative or Percentage of Sales Approach)

  • Uncollectible accounts are estimated as a percentage of prior years' credit sales.

Direct Write-Off Method

  • The revenue/expense relationship for uncollectible accounts is not matched.
  • This method is more relevant for income taxes than financial reporting.

Internal Controls for Accounts Receivable

  • Segregate responsibilities for accounts receivable subsidiary ledger, cash receipts, and authorization of write-offs.

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Financial Assets Chapter 7 PDF

Description

This quiz covers the essential aspects of financial assets, including cash and its equivalents. It highlights the importance of daily cash management, accounts receivable, and investment strategies for businesses. Test your understanding of how financial assets are defined and utilized in a business context.

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