Textbook Notes (367,993)
Canada (161,547)
MGCR 211 (10)
Chapter 6

Chapter 6 Reading Notes.docx

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Management Core
MGCR 211
Erica Pimentel

Chapter 6 Reading Notes Purchasing power: cash derives its values from its ability to be exchange for goods and services in the future - cash meets the recognition criteria of an asset several possible cash valuation methods: - face value unit of measure assumption: specifies that the results of business activities should be measured in terms of a monetary unit (eg Canadian dollar) – valuing items in terms of purchasing power internal control system: how a company controls its cash (safeguarding, organization of a company’s assets through different policies and procedures) key elements - physical measures - clear assignment of responsibilities - separation of duties - independent of verification - proper documentation procedures - an effective record-keeping and reporting system bank reconciliation: ensures that any differences between the accounting records for cash and the bank records are identified and explained.  A company’s accounting records are based on accrual accounting – transactions are recorded as they occur  However, bank statement shows transactions when cash is received or paid out from the bank account.  There can be timing differences between the cash movements at the bank and the accounting records of a company.  A bank reconciliation is needed to reconcile the two. Compensating balances: minimum balances that must be maintained in the bank account to avoid significant service charges or to satisy restrictive loan covenants Major feature of cash management: minimize cash balance b/c there are no returns on current or chequing accounts.  > marketable securities: one way to convert cash into an earning asset - -- publically traded or otherwise easily converted into cash – debt securities and equity securities  probable value of short-term investments o periodic payments o value of the security when it is sold in the future valuation methods 1. historical costs: recording investments at their original acquisition costs – with this method, changes in an investment’s market value has no effect on the balance sheet or statement of earnings until the investment is actually sold  > when sold, realized gain or loss: the difference between the original cost and its final market value is recognized. 2. market values: changes in the market values of the investments would cause changes in the carrying values reported on the balance sheet and producing corresponding gains or losses on the statement of earnings. -- unrealized gains or losses: changes in market values while investments are held 3. lower of cost and market method: hybrid of the two – uses historical cost unless the market value is less than the cost, in which case the market value is used. Canadian Practice Short-term investments are recorded at their fair (market) value. This is the intention to value them at the amount of cash that could be received from selling them. More relevant information and reconizied that the market values of such investments are usually easily determinable, objective, and verifiable. -the one type of investment that is not carried at market value is instruments that have fixed cash payments and a maturity date – can be carried at cost if the company intends to hold the investment to maturity and if the company is financially capable of waiting that long to convert the investment to cash, 4 types of financial instruments 1. held for trading 2. available for sale 3. held to maturity 4. loans and receivables Initial Acquisition Subsidiary account: many investments Control account: short-term investments - holds the sum of all the subsidiary accounts. Accounts Receivable  amounts owed by customers from normal business transactions of selling goods and services on credit. Either a formal contractual agreement or by some other less formal documentation, such as a sales invoice.  the value of the cash that is to be received in the future is affected by uncertainties – and also whether customers will pay the cash as agreed. Defaults are called bad debts.  other uncertainties --- the customer might return the goods for credit, the customer might request a price adjustment if the goods are damaged in shipment, or the customer might pay less than what is listed on the invoice if a discount is allowed for prompt payment. Present value: the concept that a dollar today is worth more than a dollar in the future, b/c theoretically the company can invest that dollar to have more than a dollar in the future.  third method is to consider that the receivable might not be paid.  fourth
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