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
• 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
• 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
• 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:
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
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
• 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-
• 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