Financial Assets

What are financial assets?

Financial assets are a companys most liquid (or cashlike) resources. The ability of a company to
service its debt, purchase inventory, pay taxes and cover payroll obligations spins around the
availability of these highly liquid assets.

Financial assets include Cash, and those assets that can be converted to cash in a reasonably short
period of time - one year at most, but less time in many cases. We will study the following financial
assets:

Cash
Cash Equivalents
Short Term Investments
Accounts Receivable

Valuation of financial assets.

Financial assets are valued as of balance sheet date, when financial statements are prepared. They
are valued at the equivalent of their current Cash value - what they would be worth if we could
convert them to cash now. In the case of Cash, it is already at it's current value. Short Term
Investments are reported at their current market value. Accounts Receivables are adjusted for
possible bad debts.

How much cash should a business have?

Most business people would say as little as necessary. In a well managed company, daily cash
receipts are deposited promptly in the bank. Often, a principal source of these daily receipts is the
collection of accounts receivable. If the daily receipts exceed the routine daily outlays, the company
can meet its obligations while maintaining relatively low balances in the bank accounts.
Cash that will not be needed in the immediate future often is invested in highly liquid, short-term
securities. These investments are more productive than cash because they earn revenues in forms of
interest and dividends.

Cash and Cash Equivalents.

Cash is just as the word suggests. It includes cash money including paper and coins, cheques and
money orders to be deposited, money deposited in bank accounts that can be accessed quickly. The
term liquid refers to Cash, and the ease or difficulty of converting an asset into Cash.

Some short term investments are so liquid that they are termed as cash equivalents. To qualify as a
cash equivalent, an investment must be very safe, has a very stable market value, and mature within
90 days o f the date of acquisition.

Cash Equivalents are highly liquid short term investments that can be turned into Cash very quickly.
When corporations need to borrow money for a very short time, they often sell these short term
investments. These come due within a few months at most, and pay a higher interest rate than other
investments.
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Restricted Cash

Cash that can be used only for the purpose intended.

Some bank accounts are restricted as to their use, so they are not available to meet the normal
operating needs of the company. For example, a bank account may contain cash specifically assigned
for the repayment of a non-current liability. Restricted cash should be presented in the balance
sheet as part of the section entitled Investments and Restricted Funds.

Line of credit

In business a line of credit or credit line is an arrangement/commitment by a bank or other creditor

with a customer. The agreement specifies an amount that the customer can borrow or use in the
future, assuming that the customers financial condition is maintained.
For example, a company may arrange with its bank to borrow money as needed but never owe the
bank in excess of $500,000. The agreement might specify that interest will be calculated by
multiplying the prime rate times the loan balance.
In the U.S. many individuals have a home equity line of credit that allows them to borrow up to the
amount of the line.

Cash Management.

The term Cash management refers to planning, controlling and accounting for cash transactions
and cash balances. The basic objectives of cash management are as follows,

a) Provide accurate accounting for cash receipts, cash disbursements, and cash balances.
b) Prevent or minimize losses from theft or fraud.
c) Anticipate the need for borrowing and assure the availability of adequate amounts of cash
for conducting business operations.
d) Prevent unnecessarily large amounts of cash from sitting idle in bank accounts that produce
no revenue.

Internal Controls over cash.

Internal control over cash is sometimes regarded merely as a means of preventing fraud and theft. A
good system of internal control, however, will also aid in achieving the other of efficient cash
management including accurate accounting for cash transactions, anticipating the need for
borrowing, and the maintenance of adequate but not excessive cash balance.

The major steps in achieving internal control over cash transactions and cash balances include the
following,

a) Separate the function of handling cash from the maintenance of accounting records.
Employees who handle cash should not have the access to the accounting records, and
accounting personnel should not have access to cash.
b) For each department within the organization, prepare a cash budget (or forecast) of planned
cash receipts, cash payments, and cash balances.
c) Require that all cash receipts be deposited daily in the banks.
d) Make all payments by cheques. The only exception should be for small payments to be made
in cash from a petty cash fund.
e) Require that the validity and amount of every expenditure be verified before a cheque is
issued in payment. Separate the function of approving expenditures from the function of
signing the cheques.
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 f) Promptly reconcile the bank statements with the accounting records.

Cash over and short.

In handling over-the-counter cash receipts, a few errors in making change inevitable will occur.
These errors may cause a cash shortage or overage at the end of the day when the cash is counted
and compared with the reading on the cash register.

For example, assume that total cash sales recorded on the point-of-sale terminals during the day
amount to $4,500. However, the cash receipts in the drawers total only $4,487.30. the following
entry would be made to adjust the accounting records for this $12.7 shortage in the cash receipts;

Cash over and short 12.7

Cash 12.7

The account entitled cash over and short is debited for the shortages and credited with the
overages. If the account has a debit balance, it appears in the income statement as a miscellaneous
expense, if it has a credit balance; it is shown as miscellaneous revenue.

CASH BOOK

Cash book is a book of original entry in which transactions relating only to cash receipts and
payments are recorded in detail. When cash is received it is entered on the debit or left hand side.
Similarly, when cash is paid out the same is recorded on the credit or right hand side of the cash
book.

The cash book, though it serves the purpose of a cash book of original entry viz., cash journal really it
represents the cash account of the ledger separately bound for the sake of convenience. It is more a
ledger than a journal. It is journal as cash transactions are chronologically recorded in it. It is a ledger
as it contains a classified record of all cash transactions. The balances of the cash book are recorded
in the trial balance and the balance sheet.