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Canada (158,187)
Accounting (526)
ACC 110 (66)
Chapter 6

Chapter 6

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Ryerson University
ACC 110
Brad Mac Master

Chapter 6 - Cash, receivables and the time value of money Cash - 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 account 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 Receivables - 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 Accounting for Uncollectible Receivables - Customers don’t pay when they owe and this must be accounted - Addresses two effects: - Expense recorded to reflect cost amount not collected - Accounts receivable decreased by estimated uncollected amount so balance sheet reflects the amount that will be collected - Easiest way to account for uncollectible receivables and bad debts is “write off” receivable when customer don’t pay - Direct writeoff method: amount owing from a customer is removed from the list of receivable and an expense recorded when management decides it won’t be collected Dr. bad debt expense (expense +, owner’s equity -) xxx Cr. Receivables (assets -) xxx Allowance for uncollectible accou
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