Short-Term Liquid Assets

1
Short-Term Liquid Assets

• Chapter 7

2
Liquidity

• Managing Cash
• Setting credit policies
• Average days sales uncollected
• Receivable turnover
• Financing receivables
• Contingent liability factoring with recourse

3
Cash

• Coins and currency on hand
• Checks and money orders from customers
• Deposit in checking accounts
• A compensating balance

4
Cash equivalents

• Investments that have a term of 90 days or less
• Time deposits, certificate of deposits, treasury
  notes

5
imprest

• An advance of money or loan
• A petty cash fund is an advance of money
• The fund is to be reimbursed based on the
  documented expenditures
• So a petty cash fund is an imprest system

6
Short-Term Investments

• Investments that have a maturity of more than 90
  days but are intended to be held only until cash
  is needed for the current operations
• A.k.a. marketable securities

7
Long-term investments

• Intended to be held for more than one year
• Reported in the an investment section of the
  balance sheet

8
Securities

• Held-to-maturity securities
• Trading securities short term
• Available-for-sale securities

9
Held-to-maturity

• Recorded at cost
• Valued on B/S at cost adjusted for the effects of
  interest

10
Trading Securities

• Classified as current assets
• Valued at fair value, which is usually the same
  as market value
• An increase or decrease in the total trading
  portfolio is included in the net income in the
  accounting period in which the increase or
  decrease occurs.

11
Available-for-sale Security

• Accounted for in exactly the same way as trading
  securities
• BUT the unrealized gain or loss is not reported
  on the income statement, but is reported as a
  special item in the stockholders equity section
  of the balance sheet

12
Accounts Receivable

• Uncollectible accounts or bad debts
• Expense of selling on credit
• GAAP do not use the direct charge-off method

13
The Allowance Method

• Matching Rule
• Losses from uncollectible accounts be estimated
• The estimated losses become an expense in the
  fiscal year in which sales (revenues) are made

14
Estimating Uncollectible Accounts expense

• Two methods
• Percentage of Net sales method
• Accounts receivable aging method
• Two key questions
• What is the amount of uncollectible accounts
  expense?
• What is the ending balance of Allowance for
  uncollectible accounts

15
Percentage of Net Sales Method

• Use historical records or industrial experience
  to estimate
• Will use Excel to show the procedure and
  computations
• Loss rate times Net sales expense
• Beginning balance expense ending balance

16
Accounts receivable aging method

• Classify the age (due date) of the accounts
  receivable
• The further past due an account is, the greater
  the possibility the account will not be paid
• Summation of loss of each different due date will
  be the ending balance

17
Aging method

• The uncollectible accounts expense will be the
  difference between the beginning balance and the
  ending balance
• The problem is to recognize that normal allowance
  balance should be credit if it is debit, then it
  adds to the expense more

18
Bank Reconciliation

• Two different balances
• Balance per bank statement
• Balance per book
• Each one needs to add some and subtract some

19
Balance per bank statement

• Add
• Deposit in transit
• Subtract
• Outstanding checks

20
Balance per book

• Add
• Credit memos like note receivable collected
• Interest income
• Subtract
• Debit memos like overstatement of deposit
• Service charge