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Chapter 7

Management and Organizational Studies 3360A/B Chapter Notes - Chapter 7: Cash Cash, Market Liquidity, Current Asset

Management and Organizational Studies
Course Code
MOS 3360A/B
Stacey Hann

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Chapter 7 Cash and Receivables
How Do Companies Manage and Control Cash?
Generally, companies with surplus cash try to minimize “idle” cash by putting extra cash
resources into short-term deposits
For companies without cash surplus, management must still carefully manage its cash
resources to minimize any bank loans and other borrowings
What Types of Companies have Extensive Accounts Receivable?
As a general rule, manufacturers and wholesalers often have significant amount of
accounts receivable
Whereas retailers often have relatively low accounts receivable
What are the Types of Accounts Receivable?
For most companies, typical accounts receivable related categories include trade
receivables, loans receivable, and non-trade receivables
How do Companies Manage Accounts Receivable?
It is important for management to carefully consider how to manage and control its
accounts receivable balances
Accounts receivable is directly related to sales
If credit balances are too “tight” or restricted potential sales could be lost to competitors.
On the other hand, if the credit policy is too “loose” or flexible, an aggressive sales team
might enter into contracts with high-risk customers
Some companies offer discounts to encourage faster payment of outstanding balances
Should ensure to check on outstanding account receivables
Companies should monitor accounts receivable levels carefully to:
1. Minimize the stress on working capital and related bank debt
2. Encourage prompt payment from their customers
Financial assets is any asset that is:
1. Cash
2. A contractual right to receive cash or another financial asset from another party
3. A contractual right to exchange financial instruments with another party under
conditions that are potentially favourable to the entity
4. An equity instrument of another entity
What is Cash?
Cash the standard medium of exchange and the basis for measuring and accounting for
all other items
Most liquid asset
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Consists of coins, currency, and other available funds that are on deposit at a bank
Although a company’s bank may have a legal right to demand advance notice before it
allows a withdrawal from a savings account, banks rarely ask for this notice
o Savings accounts can be classified as cash
Reporting Cash
Restricted Cash
o Restricted cash cash that is segregated from “regular” cash for reporting
purposes because it needs to be set aside for a particular purpose
o Cash should not be classified as current assets if there are restrictions that prevent
it from being used
o Could be set aside for long term loans or plant expansion
o If restricted cash is material:
Classify as current assets if related to short term loans
Classify as non-current assets if set aside for investment or financing
Note disclosure is required
o Compensating balances that portion of any demand deposit maintained by a
company that constitutes support for existing borrowing arrangements of the
company with a lending institution
Cash Foreign Currencies
o Many companies have bank accounts in other countries especially if they have
recurring transactions in that countries currency
o The foreign currency is translated into Canadian dollars at the exchange rate on
the date of the statement of financial position
o If there are no restrictions, it can be recorded as a current asset
Bank Overdrafts
o Bank overdraft occurs when cheques are written for more than the amount in
the bank account
o Recorded as a current liability
o Should NOT be offset by the Cash account
Cash Equivalents
o Cash equivalents short term, highly liquid investments that are readily
converted into known amounts of cash and are subject to an insignificant risk of
change in value
o Very near cash, but are not in negotiable form
o Example: treasury bills, money-market funds, commercial paper
o Generally, only investments with maturities of three months or less
o Equity investments are excluded under ASPE but not IFRS
Definition and Type
Receivables are claims that a company has against customers and others, usually for
specific cash receipts in the future
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Loans and receivables financial assets that result from the delivery of cash or other
assets by a lender to a borrower in return for a promise to pay an amount on specified
dates or on demand, usually with interest
Trade receivables amounts owed by customers for goods and services rendered as part
of the normal course of business operations
Notes receivables written promises, entitling a company to receive a certain sum of
money on a specified future date
Loans receivables an agreement where one party advances cash or other assets in
exchange for a promise to be repaid later
Nontrade receivables written promises entitling a company to receive a certain sum of
money, arising from a variety of transactions that are not part of normal business
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
Recognize at fair value
o Not always the price they exchange at
o The exchange price is generally indicated on a business document usually
o Two factors can make measuring the fair value of short-term receivables more
complicated: (1) the availability of discounts and (2) the length of time between
the sale and the payment due date
Trade Discounts
o Used to avoid frequent changes in catalogues, to quote different prices for
different quantities purchased, or to hide the true invoice price from competitors
Cash Discounts/Sales Discounts
o Imposed to encourage fast payments
o Can be recognized using either net method or gross method
o Net method says sales to customers who pay within the discount period are
reported at the cash price. If customers pay after the discount period expires, the
company separately records these amounts in the Sales Discounts Forfeited
o Gross method says sales discounts are recognized in the accounts only when the
payment is received within the discount period
o If you use gross method, you must estimate how many discounts are expected to
be taken
Sales Returns and Allowances
o When measuring sales revenue and receivables for sales with a right of return:
IFRS Refund Liability is credited
ASPE Allowance accounts are normally used
Non-recognition of interest elements
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