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CASH AND MARKETABLE SECURITIES

CHAPTER 12CHAPTER 12

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What is Cash? What is Cash?

Coins Currency Money orders received from customers Checks Money deposited in banks

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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.

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Application of CashApplication of Cash

Account receivable

Inventory

Property

Suppliers

Employees

RentsConvertCan’t pay

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Cash and profitCash and profit

Cash Profit

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Cash inflow & outflowCash inflow & outflow

customers

lenders

investors

salaries

suppliers

creditors

outin

out

out

in

in

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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

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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

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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)

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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.

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Classification of marketable Classification of marketable securitiessecurities

Credit securities Equity securities Mixed securities

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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.

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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.

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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.

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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

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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

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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

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Entry of marketable securitiesEntry of marketable securities

Now, let’s look at an example

for George Ross

Photocopy Company

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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

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Entry of marketable securitiesEntry of marketable securities

June 1 Dr. Marketable Securities $ 10,200

Cr. Cash $10,200

The entries

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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

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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

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Entry of marketable securitiesEntry of marketable securities

The entries

September 1 Dr. Cash $15,000

Cr. Interest Income $3,000

Marketable Securities 12,000

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WE ARE SAILING RIGHT ALONG!!