Textbook Notes (280,000)
CA (170,000)
UTSC (20,000)
MGA (400)
Daga (20)
Chapter 7

MGAC01H3 Chapter Notes - Chapter 7: Current Asset, Market Liquidity, Financial Instrument


Department
Financial Accounting
Course Code
MGAC01H3
Professor
Daga
Chapter
7

This preview shows page 1. to view the full 4 pages of the document.
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 firm’s 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:
orecognize an account receivable when the entity becomes a party to the contractual provisions of the financial instrument
omeasure the receivable initially at its fair value
oafter 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 company’s past loss experience and current economic conditions
accounts are analyzed by grouping those with similar credit risk characteristics—perhaps by geographic location or type of industry
You're Reading a Preview

Unlock to view full version