Textbook Notes (368,775)
Canada (162,159)
Management (865)
MGT120H5 (67)
Chapter 5

Chapter 5.docx

5 Pages
Unlock Document

Catherine Seguin

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
More Less

Related notes for MGT120H5

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.