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MGT120H5 (67)
Chapter 5

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Department
Management
Course
MGT120H5
Professor
Catherine Seguin
Semester
Winter

Description
Chapter 5 - short term investments and receivables *short term investments are the next most liquid current assets after cash. Short term investments • These are also called marketable securities or temporary investments. They're investments that a company plans to hold for one year or less. • These investments allow the company to invest excess cash for a short period of time and earn a return until the cash is needed. • The account for this is placed right after cash, before the receivables Trading investments • The purpose of owning a financial asset held for trading investment is to hold it for a short time and then sell it for more than its cost. • Trading investments can be shares or bonds in another company. • Let's say Loblaws buys bonds from another company, TransCanada, for $100,000, they will then receive dividends. If the company's fair value (market price) of the shares increases, Loblaws will have a gain; and a loss if it decreases. • TO RECORD THE PURCHASE OF AN INVESTMENT: DR, SHORT TERM INVESTMENTS. CR, CASH. • And btw, if the company receives a dividend, then the entry is: DR, CASH. CR, DIVIDEND REVENUE. Unrealized gains and losses • READ FROM TEXTBOOK, 239 • Let's say the fiscal year for Loblaws ended, they have to make financial statements now. Assume that the shares increased and Loblaws investment has a fair value (current market price) of $102,000. • Fair value is the amount the owner can receive when selling the investment. • In this case, Loblaw has an unrealized gain on the investment. o Gain because the fair value ($102,000) is greater than Loblaw's investment cost. A gain has the same effect on OE as a revenue. o Unrealized gain because Loblaw hasn't sold the investment. • Trading investments are reported on the BALANCE SHEET at their fair value beacuse that's the amount the investor can receive by selling the investment. • So, Loblaws will have to make an adjustment to bring it to its fair value. So you: DR, SHORT TERM INVESTMENTS, $2000. CR, UNREALIZED GAIN ON INVESTMENTS, $2000. • If it had been a loss. Like the shares decreased in value to $95,000. This has the same effect on OE as an expense. So you: DR, UNREALIZED LOSS ON INVESTMENTS, 5000. CR, SHORT TERM INVESTMENTS, 5000. Reporting on the balance sheet and the income statement • THE BALANCE SHEET: short-term investments are current assets. They appear right after cash before receivables. Are always recorded at fair value • THE INCOME STATEMENT: investments earn interest revenue and dividend revenue. Investments also create gains and losses. For short-term investments, these items are reported on the income statement as other revenue, gains, and losses. • EXAMPLE IS ON PAGE 240. Realized gains and losses • A realized gain or loss usually occurs only when the investors sells an investment. The gain or loss is different from the unrealized gain that we reported for Loblaw. • REALIZED GAIN  sale price greater than investment carrying amount • Realized loss  sale price less than investment carrying amount. • Suppose Loblaws sells the TransCanada shares for $98,000. So they need to make the journal entry: Cash 98000 Loss on sale of investments 98000 Short-term investments 102000 • BTWWW!!!! Short-term investments consist primarily of government treasury bills, government-sponsored debt securities, corporate commercial paper and bank term deposits. Short-term investments designated as held-for-trading financial assets approximate the fair value of these instruments. Accounts and notes receivables Types of Receivables • Receivables are monetary claims against others. They are acquired mainly by selling goods and services (accounts receivables) and by lending money (notes receivables). • Trade receivables and accounts receivables are the same thing • The accounts receivables account in the general ledger serves as a control account that summarizes the total amount receivables from all customers. • IN THE GENERAL LEDGER, all the AR accounts are combined under one heading. IN THE SUBSIDIARY LEDGER, the AR accounts are separated by the customers. • Notes receivables are more formal contracts than accounts receivables. The borrowers sign a written promise to pay the creditor a definite sum of money. There is also interest. Notes receivables and promissory notes are the same thing. There is also a collateral if the borrower can't pay. • Businesses that sell on credit receive most of their cash payment on account by mail. This is where the separation of cash-handling and cash- accounting duties. • How do we manage the risk of not collecting AR's? We sell them. • If you extend credit to customers  benefit: increase in sales. Cost: risk of not collecting • Extended credit only to creditworthy customers  then you need to run a credit check on prospective customers Accounting for uncollectible receivables • Companies rarely collect all of their AR. So companies must account for their uncollectible accounts; which is the difference between the amount paid and owed. • The benefit of receivables is that customers who can't pay cash immediately can buy on credit, so company profits rise as sales increase • The cost of receivables is that the company will be unable to collect fr
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