12-1 cash and marketable securities chapter 12. 12-2 what is cash? coins l currency l money orders...
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12-1
CASH AND MARKETABLE SECURITIES
CHAPTER 12CHAPTER 12
12-2
What is Cash? What is Cash?
Coins Currency Money orders received from customers Checks Money deposited in banks
12-3
Compensating balanceCompensating balance
In order to ensure a company’s credit-granting arrangement, a company is forced to keep a minimum amount in the bank account. The minimum is called compensating balance.
12-4
Application of CashApplication of Cash
Account receivable
Inventory
Property
Suppliers
Employees
RentsConvertCan’t pay
12-5
Cash and profitCash and profit
Cash Profit
12-6
Cash inflow & outflowCash inflow & outflow
customers
lenders
investors
salaries
suppliers
creditors
outin
out
out
in
in
12-7
Positive and negative cash flowPositive and negative cash flow
A positive cash flowInflow of cash > outflow of
cash
A negative cash flowInflow of cash < outflow of cash
12-8
Components of cash flowComponents of cash flow
Cash flow
Operating cash flowInternal operations
Investing cash flowInternal non-operating activities
Financing cash flow
To and from external sources
12-9
Marketable securities are government securities, bonds, or other securities which are invested by a company to avoid the excess cash lie idle .
They are liquid assets in that they can easily and quickly be converted into cash.
Marketable securities held as a temporary investment are classified as current assets.
Marketable securitiesMarketable securities(Short-term investment)(Short-term investment)
12-10
Marketable securitiesMarketable securities(Short-term investment)(Short-term investment)
1. have definite market value and be exchanged on the security market publicly;
As short-term investment, marketable securities
should :
2. as surplus funds, have
liquidity and profitability.
12-11
Classification of marketable Classification of marketable securitiessecurities
Credit securities Equity securities Mixed securities
12-12
Credit securities indicate the credit that is owned by the investors, namely, the claim to the principal and interest on maturity date.
Classification of marketable Classification of marketable securitiessecurities
Equity securities show the equity that the owner owns, namely, the claim to the increment of capital.
Mixed securities have all the characteristics that Credit and equity securities have. The examples of mixed securities are preferred stocks and transferable debenture.
12-13
Pricing Methods of Marketable Pricing Methods of Marketable Securities Securities
Value of securities investment at the beginning of accounting period
If marketable securities are purchased with cash,
the investment cost includes purchase price, taxes, and commission charges.
The investment cost doesn't consist of the cash dividend declared but not collected and the uncollected mature security interest.
12-14
Pricing Methods of Marketable Pricing Methods of Marketable Securities Securities
If marketable securities are invested by the investors,
the cost is the price determined by the individual investing parties.
If the securities are the non-cash assets paid by the debtors ,
the investment cost includes the book value of the assets and taxes excluding the cash dividend declared but not collected.
12-15
Pricing Methods of Marketable Pricing Methods of Marketable Securities Securities
Value of securities at the end of accounting period
Marketable Securities are first recorded at cost.
The cost of marketable securities includes purchase price, broker’s fee, and other reasonable charge incurred during the purchase of securities.
Method 1
12-16
Pricing Methods of Marketable Pricing Methods of Marketable Securities Securities
To use the marketable value as the price and record the investment income as the result of change of the marketable value.
Method 2
12-17
Pricing Methods of Marketable Pricing Methods of Marketable Securities Securities
To use the smaller one of the cost and the marketable price as the investment cost of securities to meet the prudence principle.
Method 3
12-18
Entry of marketable securitiesEntry of marketable securities
Now, let’s look at an example
for George Ross
Photocopy Company
12-19
Entry of marketable securitiesEntry of marketable securities
George Ross Photocopy Company
U.S. Treasury bills , $10,000.
The commission charge is $200.
Mature in three months at $15,000
12-20
Entry of marketable securitiesEntry of marketable securities
June 1 Dr. Marketable Securities $ 10,200
Cr. Cash $10,200
The entries
12-21
Entry of marketable securitiesEntry of marketable securities
Suppose the securities purchased by George include cash dividend declared but not collected $400.
The entries
June 1 Dr. Marketable Securities $10,200
Interest Receivable 400
Cr. Cash $10,600
12-22
Entry of marketable securitiesEntry of marketable securities
Interest income
Income on marketable securities (short-term investments)
RecordedReceived
Dividends and interest on stocks and bonds held
as short-term investments
Recorded Dividend income
When is collected
12-23
Entry of marketable securitiesEntry of marketable securities
The entries
September 1 Dr. Cash $15,000
Cr. Interest Income $3,000
Marketable Securities 12,000
12-24
WE ARE SAILING RIGHT ALONG!!
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