Professional Documents
Culture Documents
McGraw-Hill/Irwin
How
How Much
Much Cash
Cash Should
Should aa Business
Business
Have?
Have?
McGraw-Hill/Irwin
Every
business
needs
enough
cash to pay
its bills!
How
How Much
Much Cash
Cash Should
Should aa Business
Business
Have?
Have?
Financial
Assets
Cash
Receivables
Short-term
Investments
McGraw-Hill/Irwin
The
The Valuation
Valuation of
of Financial
Financial Assets
Assets
Basis for Valuation in
Type of Financial Asset
the Balance Sheet
Cash (and cash equivalents) Face amount
Short-term investments
Current market value
(marketable securities)
Receivables
Net realizable value
Estimated
Estimated collectible
collectible amount
amount
McGraw-Hill/Irwin
Cash
Cash
Coins and
paper
money
Bank credit
card sales
McGraw-Hill/Irwin
Cash is
defined as
any deposit
banks will
accept.
Checks
Cash equivalents
Reporting
Reporting Cash
Cash in
in the
the Balance
Balance
Sheet
Sheet
Combined
with cash on
balance sheet
Liquid shortterm
investments
Cash
Equivalents
Matures
within 90 days
of acquisition
Stable
market
values
McGraw-Hill/Irwin
Using
Using Excess
Excess Cash
Cash Balances
Balances
Efficiently
Efficiently
Cash available for
long-term investment
may be used to finance
growth and expansion
of the business, or to
repay debt.
McGraw-Hill/Irwin
Bank
Bank Statements
Statements
Shows the beginning bank balance,
deposits made, checks paid, other
debits and credits in the month, and
the ending bank balance.
Bank
Statement
McGraw-Hill/Irwin
Reconciling
Reconciling the
the Bank
Bank Statement
Statement
Explains the difference between cash
reported on bank statement and cash
balance in depositors accounting
records.
Provides information for
reconciling journal entries.
McGraw-Hill/Irwin
Reconciling
Reconciling the
the Bank
Bank Statement
Statement
Balance per Bank
+ Deposits in Transit
+ Deposits by Bank
(credit memos)
- Outstanding Checks
- Service Charge
- NSF Checks
Bank Errors
Book Errors
= Adjusted Balance
= Adjusted Balance
McGraw-Hill/Irwin
Reconciling
Reconciling the
the Bank
Bank Statement
Statement
All reconciling
items on the
book side
require an
adjusting
entry to the
cash account.
McGraw-Hill/Irwin
Reconciling
Reconciling the
the Bank
Bank Statement
Statement
Example
Example
Prepare a July 31 bank reconciliation
statement and the resulting journal entries
for the Simmons Company. The July 31
bank statement indicated a cash balance of
$9,610, while the cash ledger account on
that date shows a balance of $7,430.
Additional information necessary for the
reconciliation is shown on the next page.
McGraw-Hill/Irwin
Outstanding
Outstanding checks
checks totaled
totaled $2,417.
$2,417.
A
A$500
$500 check
check mailed
mailed to
to the
the bank
bank for
for deposit
deposit had
had
not
not reached
reached the
the bank
bank at
at the
the statement
statement date.
date.
The
The bank
bank returned
returned aa customers
customers NSF
NSF check
check for
for
$225
$225 received
received as
as payment
payment of
of an
an account
account
receivable.
receivable.
The
The bank
bank statement
statement showed
showed $30
$30 interest
interest earned
earned
on
on the
the bank
bank balance
balance for
for the
the month
month of
of July.
July.
Check
Check 781
781 for
for supplies
supplies cleared
cleared the
the bank
bank for
for $268
$268
but
but was
was erroneously
erroneously recorded
recorded in
in our
our books
books as
as
$240.
$240.
A
A$486
$486 deposit
deposit by
by Acme
Acme Company
Company was
was
erroneously
erroneously credited
credited to
to our
our account
account by
by the
the bank.
bank.
McGraw-Hill/Irwin
Reconciling
the
Bank
Statement
Reconciling
Reconcilingthe
theBank
BankStatement
Statement
Reconciling
the
Bank
Statement
Example
Example
2,903
7,207
7,430
McGraw-Hill/Irwin
9,610
500
30
253
7,207
Reconciling
Reconciling the
the Bank
Bank Statement
Statement
Example
Example
GENERAL JOURNAL
Date
Jul 31 Cash
P
R Debit
Credit
30
Interest Revenue
31 Supplies Inventory
Accounts Receivable
Cash
McGraw-Hill/Irwin
30
28
225
253
Types
Types of
of Investments
Investments
Bond
Investments
Readily
Marketable
Marketable
Securities
are . . .
Capital
Stock
Investments
Current Assets
Almost As
Liquid As
Cash
McGraw-Hill/Irwin
McGraw-Hill/Irwin
Uncollectible
Uncollectible Accounts
Accounts
IfIf aa company
company makes
makes credit
credit
sales
sales to
to customers,
customers, some
some
accounts
accounts inevitably
inevitably will
will
turn
turn out
out to
to be
be
uncollectible.
uncollectible.
PAST DUE
McGraw-Hill/Irwin
The
The Allowance
Allowance for
for Doubtful
Doubtful
Accounts
Accounts
Accounts receivable
Less: Allowance for doubtful accounts
Net realizable value of accounts receivable
The net realizable value is the amount of
accounts receivable that the business
expects to collect.
McGraw-Hill/Irwin
Writing
Writing Off
Off an
an Uncollectible
Uncollectible
Account
Account Receivable
Receivable
When
When an
an account
account is
is determined
determined to
to be
be uncollectible,
uncollectible,
itit no
no longer
longer qualifies
qualifies as
as an
an asset
asset and
and should
should be
be
written
written off.
off.
McGraw-Hill/Irwin
Writing
Writing Off
Off an
an Uncollectible
Uncollectible
Account
Account Receivable
Receivable
Assume that on January 5, K-Max
determined that Jason Clark would not pay
the $500 he owes.
K-Max would make the following entry.
McGraw-Hill/Irwin
Recovery
Recovery of
of an
an Account
Account Receivable
Receivable
Previously
Previously Written
Written Off
Off
Subsequent
Subsequentcollections
collectionsrequire
requirethat
thatthe
theoriginal
original write-off
write-off
entry
entrybe
be reversed
reversed before
before the
thecash
cashcollection
collectionis
isrecorded.
recorded.
GENERAL JOURNAL
Date
P
R Debit
$$$$
McGraw-Hill/Irwin
Credit
$$$$
$$$$
$$$$