ACC 110 Chapter Notes - Chapter 6: Money Market Fund, Bank Reconciliation, Cash Cash

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1 Dec 2011
Chapter 6 - Cash, receivables and the time value of money
- Cash = short-term
- Most liquid asset
- Vital to financial health
- Includes near cash items,(Treasury bills, Guaranteed investment
certificates (GICs), Money market funds)
-Deflation: a period when on average, prices, in the economy are falling -
-Inflation: a period when, on average, prices in the economy are rising –
reduces the purchasing power of cash.
Objectives of Cash Management:
- Too much cash = useless
- -> could be used for other stuff
- Effective cash management is an important stewardship responsibility and
key function of management
- having adequate cash resources available to support business operations
- safeguarding this critical asset / resource (segregation of duties, regular
bank reconciliation, and security procedure)
-Internal control: ensure an entity achieves its objectives
Cash is an unproductive asset
- Chequing accounts pay no interest
- invest into (safe) productive uses
Segregation of duties: ensuring that people who handle an asset are not also
responsible for record keeping for that asset
Bank reconciliation : difference between an entity’s accounting records and its bank
The time Value of Money
- Better to get money now
- -> investment, spend/enjoy , inflation, later= likelihood of not getting paid
- Concept that people prefer to receive money sooner rather than later is
known as the time value of money
-Future value (FV) of cash flow is the amount of money you will receive
in the future by investing today
-Present value (PV) of cash flows is the value today of money that will be
received in the future
- Amounts owing to an entity
- Usually result from selling goods and services to customers on credit
- Usually current assets (within one year) , can be non-current also
- Bad debts, returns, discounts = reduce net income and A/R
-NRV (Net realizable Value) = Cash flow prediction/liquidity analysis
--> non-payment (hand debts)
--> Early payment discount
--> Refunds
- Essentially loans to customers
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