Current Ratio (Ch5 review)

What does it measure?

CA/CL

Measure of liquidity 

1. Cash 
2. Recievables
3. Short term investments - STI

1. Coin
2. Currency
3. Available funds on deposit in bank
4. money order
5. certified checks
6. cashier's check
7. Personal checks
8. Bank drafts
9. Savings account

To be considered cash equivalents, they must meet to requirements: **KNOW**

1. Readily convertible to cash.
2. So near their maturity that they present insignificant risk of changes in interest rates/value. 

• Treasury bills
• Commercial paper
• Money market funds

*Must be less than 3 months*

investments.

$1000 in = At least $1000 out

Bob buys a six month CD from the bank.

Is this a cash equivalent? 

1. CA
2. Cash
3. L/T investment

Offset against other cash accounts only when available cash is present in another account with the same bank in which the overdraft accured.

• Same bank
• Two accounts

1= $100

2= $25 overdraft

Cash = $75

1. Establish proper controls to prevent any auauthoiztion transaction by officers or employees
2. Provide information necessary to properly manage cash on hand and cash transaction. 

In determining ending accounts recievables, which accounts and/or balances would you need?

In determing "correct" A/R, possible fraud case. (E4)

• COGS (Purchases - Ending INV)
• Selling Price (COGS x % above P-price)
• (Less) Collections
• Ending ledger balance of A/R

Difference b/t amount on deposit per company records and the amount of cash collected per bank records. 

• Length of time b/t check and cleared
• Getting smaller and smaller (Debit cards)

limited purpose bank accounts

Ex. Petty cash, P/R account, Large Corp (Dividend account)

Petty cash  -  X

                  Cash   -  X

1. When currency is low
2. At the end of the period

Petty cash account itself doesn't not get touched unless increasing or decreasing the fund amount you need it to be. 

• Allowance for Doubtful Accounts
• Accounts Receivable

DR - A/R - 100

               CR - Sales - 100

DR - Cash - 333

        CR - A/R - 333

• Cash equivalents are less than 3 months.
• Temporary investments have a maturity of 3 - 12 months. 

• Cash equivalents
• Temporary

<3 Mo - Cash Eq

3-12 Mo - temp investment 

1. Advances to officers and employees
2. Advances to subsidiaries
3. Deposits to cover potential damages or losses
4. Deposits as guarantee of performance or payment
5. Dividends and interest receivables
6. Certain claims 

reductions from the list price to determine actual selling price. 

Example:

List price

(Less) Sale price

= Trade Discount

Gross method

Net Method

• 2 = % discount 
• 10 = days
• N = net sales price
• 30 = When full sales price is due

"2% discount if paid within 10 days, full sales price due in 30 days"

Sales of $10,000, terms 2/10, n/30

Record transaction under gross method.

 DR - A/R - 10000

                    CR - Sales Rev - 1000

Sales of $10,000, terms 2/10, n/30

Record transaction under net method.

DR - A/R - 9800

                      CR - Sales Rev - 9800

Payment on $4000 of sales received within discount period. (2/10, n/30)

Record transaction under gross method?

• Cash - 3920
• Sales Dis - 80
• A/R - 4000

Payment on $4000 of sales received within discount period. (2/10, n/30)

Record transaction under net method?

• Cash - 3920
• A/R - 3920

Payment on $6000 of sales received outside the discount period. (2/10, n/30)

Record transaction under gross method?

• Cash - 6000
• A/R - 6000

Payment on $6000 of sales received outside the discount period. (2/10, n/30)

Record transaction under net method?

• A/R - 120
• Sales discount fortified - 120
• Cash - 6000
• A/R - 6000

A/R

Credit

Credit Of $12,000

• DR - Bad debt Expense - 12000
• CR - ALL - 12000

A company's Allowance for Doubtful Accounts has a credit balance of $25,000. It learns that one of its accounts receivable amounting to $1,800 is worthless and needs to be written off.

Which account should be debited for $1,800 when writing off the account?

A company's Allowance for Doubtful Accounts has a credit balance of $25,000. It learns that one of its accounts receivable amounting to $1,800 is worthless and needs to be written off.

Which account should be credited for $1,800 when writing off the account?

Sorting a company's accounts receivable into classifications such as current, 1-30 days past due, and 31-60 days past due is known as the 

 of accounts receivables.

June 3, Sale, $2000 - 2/10, N/60.

June 12, recieved check. 

Make journal entries! (GROSS METHOD)

• June 3 - A/R - 2000
•                    Sales - 2000

• June 12 - Cash - 1960
• Sales Discount - 40
•                             A/R - 2000

June 3, Sale, $2000 - 2/10, N/60.

June 12, recieved check. 

Make journal entries! (NET METHOD)

• June 3, A/R - 1960
•                    Sales  - 1960
• June 12, Cash - 1960
•                           A/R  - 1960

discount

premium

•  Notes Receivable -  10000
• Discount on Notes Receivable ($10,000 2 $7,721.80)  - 2278.20
• Cash -                                                                             - 7721.8

At the date of issuance, a note is valued at the present value of the future principal and interest cash flows, discounted at the market rate of interest. Changes in the market rate of interest are ignored throughout the remainder of the life of the note. 

PV= FV+int

The maturity value of a $14,000 120 day note with an interest rate of 7.5% would be

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1. Percent of accounts receivables method.'
2. Percent of sales method.

• $320

Interest on the note = principal of the note $12,800 x the annual interest rate .06 (or 6%) x the time period expressed in years 150/360 = $320. 

The amount of the adjusting entry will be $60.

It rendered services in exchange for a 3%, 8-year promissory note having a face value of $400,000

(interest payable annually).

What will be under the "Cash Interest" column?

Jan, 1 2014 we loaned green co Cash. Receive a $30,000, 8% 3/yr note. Interest paid annually. Market rate is 12%.

• FV = 
• Cash interest = 
• What interest rate do you use for the PV chart?
• How many periods do you use for the PV chart?

• 30000
• 2400
• 12%
• 3