Chapter 6

Cash

Most liquid asset on the balance sheet, used to convert goods and services into another form.

Cash equivalents

Short-term highly liquid investments easily converted to cash with minimal risk.

Restricted cash

Cash that is set aside for a specific purpose, such as plant expansion or debt retirement.

Compensating balance

A minimum balance required to be maintained in a bank account, reported as cash and cash equivalents.

Bank overdraft

Checks written for more than the amount in the account, usually reported as current liabilities.

Receivables

Claims held against customers for goods or services, categorized as current or non-current.

Accounts receivable

Amounts not yet paid for goods or services provided to customers.

Notes receivable

Written agreements to pay an amount at a specified future date, often including interest.

Recognition of account receivable

Occurs from revenue arrangements with customers under the revenue recognition principle.

Transaction price

Expected consideration to be received from accounts receivable.

Variable consideration

Factors like discounts and returns that affect the total amount of accounts receivable.

Sales returns/allowances

Contra asset accounts that reduce accounts receivable balances.

Valuation of account receivable

Involves recording credit losses as bad debt expenses using direct write-off or allowance methods.

Allowance method

A GAAP-recommended method for estimating bad debt when amounts are material.

Estimating the allowance

Methods include percentage of receivables approach and aging schedule approach.

Disposition of account or note receivable

Transferring notes or accounts receivable for cash due to various operational needs.

Account receivable turnover

A measure of how many times during the year a company collects receivables.

Cash Controls

Procedures like lunch box system and imprest accounts used to manage cash.

Physical Protection of Cash

Strategies to protect cash, such as minimizing cash on hand and using secure storage.

Reconciliation of Bank Balance

A schedule explaining differences between bank balance and cash records.

Reasons for the difference

Include factors like deposits in transit, outstanding checks, and bank charges.

Days to Collect

365/ Turnover

Accounts Receivable Turnover Equation

Net Assets/ Average Net Accounts Receivable