Financial Assets Overview

Financial Assets

• Financial assets include cash and assets easily converted to cash
• Businesses need enough cash to pay bills
• Well-managed companies promptly deposit daily cash receipts
• Accounts receivable are a primary source of daily receipts
• Excess cash can be invested in short-term, liquid securities
• These investments generate interest and dividends
• The current value of cash is its face amount
• Marketable securities' values change daily
• Receivables are shown at the estimated collectible amount (net realizable value)

Cash

• Cash is defined as any deposit banks will accept
• This includes coins, paper money, checks, money orders, and travelers' checks
• Bank credit card sales are also considered cash
• Cash equivalents are short-term investments that are as liquid as cash
• Examples include money market funds, U.S. Treasury bills, and high-grade commercial papers

Reporting Cash in the Balance Sheet

• Cash and cash equivalents are combined on the balance sheet
• Investments that mature within 90 days of their purchase are considered cash equivalents
• Restricted cash is not available for paying current liabilities
• Lines of credit are disclosed in notes
• Companies need to accurately account for cash, prevent theft and fraud, and assure adequate cash availability
• Unnecessarily large amounts of idle cash should be avoided.

Internal Control Over Cash

• Separate handling cash duties from accounting and record keeping duties
• Prepare cash budgets of cash receipts, cash payments, and cash balances
• Deposit all cash receipts daily in the bank
• Make all cash payments by check
• Verify all expenditures before a payment check is issued
• Separate the functions of approving expenses from signing checks
• Reconcile bank statements with accounting records

Bank Statements

• Bank statements show beginning and ending balance, deposits, checks paid, and other debits and credits
• These are essential in reconciling the bank balance with the company's cash records

Reconciling Bank Statements

• Adjust bank statements and company records for any unrecorded transactions or errors
• Reconciling the bank statement helps create a company's adjusted balance
• Differences between bank records and accounting records are normal (outstanding checks, deposits in transit, service charges, NSF checks, bank errors, and book errors)
• Reconciling entries are needed for any adjustment items

Reconciling Bank Statement Example

• Outstanding checks totalled $2,417
• A $500 check mailed to the bank was not recorded yet
• Customer's NSF check for $225
• Bank statement showed $30 interest earned
• Check 781 was erroneously recorded in the books as $240
• Acme Company deposit of $486 was credit erroneously to the account

Short-Term Investments

• Marketable securities include bond investments, capital stock investments, and readily marketable investments
• Short-term investments are almost as liquid as cash

Mark-to-Market

• Short-term investments in marketable securities are shown on the balance sheet at current market value
• This is called fair value accounting
• Investments are frequently listed immediately after cash on the balance sheet
• Unrealized holding gain or loss on investments account is created to show adjustments
• The account appears as a stockholders' equity item

Accounting for Marketable Securities

• There are four basic events relating to investments in marketable securities: purchasing, receiving interest and dividends, and selling
• Investments recorded at cost, including brokerage commissions
• The example shows The Coca-Cola Company stock received dividend on December 15 and record this in journal entry

Recognition of Investment Revenue

• Entries to recognize interest and dividend revenue typically involve a debit to Cash and a credit to revenue accounts
• The example shows receipt of dividends from Coca-Cola Company

Sale of Investments

• Gains or losses on investment sales appear in the Other Income/Expense section
• The example shows the sale of 500 and 2,500 shares of Coca-Cola Company stock.

Adjusting Marketable Securities to Market Value

• Marketable securities are presented on the balance sheet at their current market value
• Unrealized holding gain or loss on investments account is adjusted
• Example shows Foster Corporation's adjustment on December 31

Presentation of Marketable Securities in the Balance Sheet Example

• Shows Foster Corporation's Balance Sheet Example

Accounts Receivable

• Companies often sell goods and services on credit
• Accounts receivable are the largest asset for many companies
• Some accounts will not be collected

Uncollectible Accounts

• Uncollectible accounts result from credit sales
• This is recorded as an estimate in the financial statements
• The Allowance for Doubtful Accounts is a contra-asset account

The Allowance for Doubtful Accounts

• This account is a contra-asset account or a valuation account
• The balance offsets Accounts Receivable to form a more helpful measure of a company's liquidity

Writing Off an Uncollectible Account

• When an account is uncollectible, it is no longer considered an asset
• Example illustrates how to write off an uncollectible account, and the effect on Accounts Receivable and the Allowance for Doubtful Accounts

Recovery of an Account Receivable

• Subsequent collection of a previously written-off account needs a reversal entry

Monthly Estimates of Credit Losses

• At the end of each month, management estimates and adjusts the probable amount of uncollectible accounts estimate of the Allowance for Doubtful Accounts

Monthly Estimates of Credit Losses Example

• Example of MusicLand's accounting records at December 31, 2003

Estimating Credit Losses — The "Balance Sheet" Approach

• Year-end receivables are broken down by age
• Different age groupings have different likelihoods of being uncollectible
• A separate allowance is computed for each age grouping
• Example shows EastCo, Inc. receivables at December 31, 2003

An Alternative Approach to Estimating Credit Losses

• The percentage of uncollectible accounts is based on the actual uncollectible accounts from previous years' credit sales
• The example shows EastCo credit sales of $60,000 in 2003, and 1% historically uncollectible

Direct Write-Off Method

• This method makes no attempt to match revenue with the expense of uncollectible accounts
• Company records the expenses when accounts are determined to be uncollectible

Income Tax Regulations and Financial Reporting

• Direct write-off methods are not permitted by GAAP
• Allowance methods better match expenses with revenues

Internal Controls for Receivable

• Separate the maintenance of the account receivable subsidiary ledger from the custody of cash receipts and the authorization of write-offs

Management of Accounts Receivable

• Extending credit encourages customers to buy from a company
• However, it ties up resources in accounts receivables

Ways to Minimize Amounts in Accounts Receivable

• Selling accounts receivables and credit card sales minimize amounts in accounts receivables

Evaluating the Quality of Accounts Receivable

• Accounts Receivable Turnover Ratio
• Average Number of Days to Collect A/R

This quiz covers the essentials of financial assets, including cash, receivables, and marketable securities. Understand the importance of liquidity in business operations and how cash equivalents are reported on balance sheets. Test your knowledge on the management and reporting of these financial components.