Textbook Notes (368,281)
Canada (161,763)
MGAC01H3 (34)
Daga (20)
Chapter 7

Chapter 7 Notes

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Department
Financial Accounting
Course
MGAC01H3
Professor
Daga
Semester
Winter

Description
Chapter 7 Cash and Receivables Notes financial asset is any asset that is: (i) cash; (ii) a contractual right to receive cash or another financial asset from another party; (iii) a contractual right to exchange financial instruments with another party under conditions that are potentially favourable to the entity; or (iv) an equity instrument of another entity Cash What is Cash? cash is the most liquid asset and is the standard medium of exchange and the basis for measuring and accounting for all other items it meets the definition of a financial asset, and is generally classified as a current asset Reporting Cash Restricted Cash the restricted cash is separately disclosed and reported in the Current Assets section or is classified separated in the Long-Term Assets section, depending on the date of availability or of the expected disbursement in general, it should not be classified in current assets if there are restrictions that prevent it from being used for current purposes, unless the restricted cash offsets a current liability; cash that is classified as in the long-term section has often been set aside for investment or financing purposes, such as for a plant expansion, long-term debt retirement, or as collateral for a loan some lending institutions require customers who borrow money from them to keep minimum cash balances in their chequing or savings accounts, which are called compensating balances and are defined as the portion of any demand deposit (or any time deposit or certificate of deposit) that a corporation keeps as support for its existing or maturing obligations with a lending institution Cash in Foreign Currencies the foreign currency is translated into Canadian dollars at the exchange rate on the balance sheet date and, in situations where there is no restriction on the transfer of those funds to the Canadian company, it is included as cash in current assets if there are restrictions on the flow of capital out of a country, the cash is reported as restricted the classification of the cash as current or noncurrent is based on the circumstances and, in extreme cases, restrictions may be so severe that the foreign balances do not even qualify for recognition as assets Bank Overdrafts bank overdrafts occur when cheques are written for more than the amount in the cash account overdrafts are reported in the Current Liabilities section, and companies often do this by adding the amount to accounts payable if the overdraft amount is material, it should be disclosed separately either on the face of the balance sheet or in the related notes Cash Equivalents cash equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value generally, only investments with original maturities of 3 months or less qualify under the definition in some circumstances, bank overdrafts may be deducted when the amount of cash and cash equivalents is being determined if overdrafts are part of the firms cash management activities, if they are repayable on demand, and if the bank balance fluctuates often between a positive and negative balance, the overdrafts may be considered part of cash and cash equivalents Receivables on a classified balance sheet, receivables are either current (short-term) or noncurrent (long-term) loans and receivables result from one party delivering cash (or other assets) to a borrower in exchange for a promise to repay the amount on a specified date or dates, or on demand, along with interest to compensate for the TVM and the risk of non-payment trade receivables are amounts owed by customers to whom the company has sold goods or services as part of its normal business operations; that is, they are amounts that result from operating transactions notes receivable are written promises to pay a certain amount of money on a specified future date loans receivable are created when one party advances cash or other assets to a borrower and receives a promise to be repaid later nontrade receivables are created by a variety of transactions and can be written promises either to pay cash or to deliver other assets Recognition and Measurement of Accounts Receivable the general accounting standards for the recognition and initial measurement of accounts receivable are as follows: o recognize an account receivable when the entity becomes a party to the contractual provisions of the financial instrument o measure the receivable initially at its fair value o after initial recognition, measure receivables at amortized cost recognizing receivables initially at their fair value is not as straightforward as it seems because fair value may not be the same as the exchange price (the amount due from the customer or borrower) that the parties agree on two factors can make measuring the fair value of short-term receivables more complicated: (1) the availability of discounts (trade and cash discounts) and (2) the length of time between the sale and the payment due date (the interest element) Impairment of Accounts Receivable Estimating Uncollectible Trade Accounts Receivable the single most important indicator used to identify impaired accounts receivable is the age of the accounts; that is, how long the amounts owed have been outstanding, especially beyond their due dates other factors that are taken into account include the companys past loss experience and current economic conditions accounts are analyzed by grouping those with similar credit risk characteristicsperhaps by geographic location or type of industry
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