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What is one primary reason for extending credit to customers?
What is one primary reason for extending credit to customers?
What is a significant function of account receivable management?
What is a significant function of account receivable management?
Which of the following tasks should be separated to ensure proper internal control over receivables?
Which of the following tasks should be separated to ensure proper internal control over receivables?
What is a potential drawback of extending credit to customers?
What is a potential drawback of extending credit to customers?
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Which function can potentially lead to a conflict of interest if not separated properly in receivable management?
Which function can potentially lead to a conflict of interest if not separated properly in receivable management?
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What should be done with cash not needed for business purposes?
What should be done with cash not needed for business purposes?
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Which of the following is a primary objective of internal control over cash?
Which of the following is a primary objective of internal control over cash?
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How can a company effectively manage its cash balances?
How can a company effectively manage its cash balances?
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What is the benefit of separating cash handling from accounting records?
What is the benefit of separating cash handling from accounting records?
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Why is it important to maintain adequate but not excessive cash balances?
Why is it important to maintain adequate but not excessive cash balances?
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Which aspect of cash management involves anticipating the need for borrowing?
Which aspect of cash management involves anticipating the need for borrowing?
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Which of the following is NOT a component of efficient cash management?
Which of the following is NOT a component of efficient cash management?
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What is the role of cash budgets in cash management?
What is the role of cash budgets in cash management?
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What is considered a principal source of daily cash receipts for a well-managed company?
What is considered a principal source of daily cash receipts for a well-managed company?
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Why might a business aim to maintain low cash balances?
Why might a business aim to maintain low cash balances?
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How can a business generate revenue from cash that is not needed in the immediate future?
How can a business generate revenue from cash that is not needed in the immediate future?
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What does the term 'financial assets' encompass?
What does the term 'financial assets' encompass?
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What can a business do if it needs more cash than it currently has?
What can a business do if it needs more cash than it currently has?
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What is the general recommendation for cash levels in a business?
What is the general recommendation for cash levels in a business?
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Why is it advantageous for a company to deposit daily cash receipts promptly?
Why is it advantageous for a company to deposit daily cash receipts promptly?
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Which option correctly illustrates a disadvantage of keeping cash in hand rather than investing it?
Which option correctly illustrates a disadvantage of keeping cash in hand rather than investing it?
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What does cash management primarily involve?
What does cash management primarily involve?
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What can restricted cash be classified as?
What can restricted cash be classified as?
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What happens when a line of credit is used?
What happens when a line of credit is used?
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Why is efficient cash management essential for businesses?
Why is efficient cash management essential for businesses?
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Which of the following is NOT a goal of cash management?
Which of the following is NOT a goal of cash management?
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What is the role of restricted cash in financial reporting?
What is the role of restricted cash in financial reporting?
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What should be avoided in cash management to optimize cash utilization?
What should be avoided in cash management to optimize cash utilization?
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What is a key characteristic of cash that is reported as restricted?
What is a key characteristic of cash that is reported as restricted?
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What is a significant characteristic of the direct write-off method?
What is a significant characteristic of the direct write-off method?
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Which method is required for calculating taxable income according to tax regulations?
Which method is required for calculating taxable income according to tax regulations?
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What is a primary benefit of using the allowance methods over the direct write-off method?
What is a primary benefit of using the allowance methods over the direct write-off method?
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In an accounting journal entry for the direct write-off method, which account is typically credited?
In an accounting journal entry for the direct write-off method, which account is typically credited?
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Which of the following is NOT a characteristic of Generally Accepted Accounting Principles (GAAP) regarding uncollectible accounts?
Which of the following is NOT a characteristic of Generally Accepted Accounting Principles (GAAP) regarding uncollectible accounts?
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What is the typical impact of employing the allowance method on a company's financial statements?
What is the typical impact of employing the allowance method on a company's financial statements?
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Why might a company prefer the allowance method over the direct write-off method during financial reporting?
Why might a company prefer the allowance method over the direct write-off method during financial reporting?
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Which entry would you record when writing off an uncollectible account under the direct write-off method?
Which entry would you record when writing off an uncollectible account under the direct write-off method?
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What does the accounts receivable turnover ratio indicate?
What does the accounts receivable turnover ratio indicate?
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Which metric is used to evaluate the efficiency of accounts receivable management?
Which metric is used to evaluate the efficiency of accounts receivable management?
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To minimize amounts in accounts receivable, which strategy might be employed?
To minimize amounts in accounts receivable, which strategy might be employed?
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What constitutes the calculation of the accounts receivable turnover ratio?
What constitutes the calculation of the accounts receivable turnover ratio?
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Which approach does NOT help in minimizing accounts receivable?
Which approach does NOT help in minimizing accounts receivable?
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What would a higher accounts receivable turnover ratio suggest?
What would a higher accounts receivable turnover ratio suggest?
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Which of the following is likely to result in increased amounts in accounts receivable?
Which of the following is likely to result in increased amounts in accounts receivable?
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What effect does a low accounts receivable turnover ratio typically indicate?
What effect does a low accounts receivable turnover ratio typically indicate?
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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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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.
