ADVANCE FINANCIAL ACCOUNTING

LECTURE 01
 Chapter

7
Financial Assets
 Financial Assets

Financial Assets are cash and other assets

that convert directly into known amount
of cash.
The three basic categories are cash,
marketable securities and receivable.
How Much Cash Should a Business
Have?
The Valuation of Financial Assets
Basis for Valuation in
Type of Financial Assets the Balance Sheet
Cash (and cash equivalents) Face amount
Short-term investments Current market value
(marketable securities)
Receivables Net realizable value

Estimated collectible amount

 Cash
Coins and
Checks
paper money
Cash is defined
as any deposit
Bank credit
banks will
Money orders
card sales accept.
Travelers’ checks
Reporting Cash in the Balance Sheet
Cash
Equivalents

Restricted
Cash

Lines of
Credit
Cash Equivalents
Some short-term investments are so liquid that they are termed as
cash equivalents.
E.g Money market funds, U.S Treasury bills,
Characteristics:
To qualify as cash equivalents an investment:
 must be safe
Very stable market value
Mature with in 90 days
Restricted Cash
Some banks accounts are restricted as to their use, so they
are not available to meet the normal operating needs of the
company. For example a bank account may contain cash
specifically earmarked for the repayment of noncurrent
liability such as bonds payable. Restricted cash should be
presented in the balance sheet as part of the section
entitled “ Investments and Funds”.
Lines of Credit
Many businesses arrange lines of credit with their banks. A
line of credit means that the bank ha agreed in advance to
lend the company any amount of money up to a specified
limit. The company can borrow this money at any time
simply by drawing checks on a special bank account. A
liablity to the bank arises as soon as money is borrowed __
that is as soon as a portion of the credit line is used.
Cash Management
Accurately account for cash.
Prevent theft and fraud.
Assure the availability of adequate amounts of cash.
Prevent unnecessarily large amounts of idle cash.
Internal Control Over Cash
•Segregate authorization, custody and recording of cash.
•Prepare a cash budget (or forecast).
•Prepare a control listing of cash receipts.
•Require daily deposits.
•Make all payments by check.
•Require that every expenditure be verified before payment.
•Promptly reconcile bank statements.
Cash Over and Short
On May 5, XBAR, Inc.’s cash drawer
was counted and found to be $15 short.
GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
May 5 Cash Over and Short 15
Cash 15

Cash Over and Short is debited for

shortages and credited for overages.
Bank Statement/ Pass Book
Bank Statement or Pass Book is merely copy of
customer’s account in the book of a bank.
The bank either send periodical statement of account
or gives a pass book to it’s customer in which all
deposits and withdrawals made by the customer
during particular period is recorded.
atement or Pass Book is merely copy of customer’s
account in the book of a bank.
Reconciling the Bank Statement
Explains the difference between cash
reported on bank statement and cash
balance in depositor’s accounting
records.

Provides information for

reconciling journal entries.
Differences between Banks Records
and Accounting Records
Outstanding Checks:
Checks issued and recorded by the company but not yet presented to the bank for payment.
Deposit in transit:
Cash receipts recorded by the depositor that reached the bank too late to be included in the
bank statement for the the current month
 Service Charges:
Bank often charge a fee for handling small accounts. The amount of this charges usually depends
on both the average balance of the account and the numbers of checks paid during the month.
Differences between Banks Records
and Accounting Records
Charges for depositing NSF checks:
NSF stand for “ Not Sufficient Funds” When checks from the customers are deposited, the bank generally gives the
depositor immediate credit. On occasion, one of the checks may prove to be uncollectable, because the customer
who wrote the check did not have sufficient funds in his or her account. In such cases, the bank will reduce the
depositor’s account by the amount of this uncollectable item and return the checks to the depositor marked as
“NSF”.
Credits for Interest earned:
The checking accounts of unincorporated businesses often earn interest. At month end, this interest is credited to
the depositor’s account and reported in the bank statement.
 Miscellaneous bank charges and credits:
Bank charges for services- such as printing checks, handling collection of notes receivable, and processing NSF
checks. The bank deducts these charges from the depositor’s account and notifies the depositor’s by including a
debit memorandum in the monthly bank statement. If the bank collects a note receivable on behalf of the
depositor, it credits the depositor’s account and issues a credit memorandum.
Reconciling the Bank Statement
Balance per Bank Balance per Depositor

+ Deposits by Bank
+ Deposits in Transit
(credit memos)

- Service Charge
- Outstanding Checks
- NSF Checks

± Bank Adjustments ± Book Adjustments

= Adjusted Balance = Adjusted Balance

Reconciling the Bank Statement
• The July 31 bank statement for Simmons Company indicated a cash balance of $9,610
• The cash ledger account on that date shows a balance of $7,430.
• Outstanding checks totaled $2,417.
• A $500 check mailed to the bank for deposit had not reached the bank at the statement
date.
• The bank returned a customer’s NSF check for $225 received as payment of an account
receivable.
• The bank statement showed $30 interest earned on the bank balance for the month of
July.
• Check 781 for supplies cleared the bank for $268 but was erroneously recorded in our
books as $240.
• A $486 deposit by Acme Company was erroneously credited to our account by the bank.
Reconciling the Bank Statement
Ba la nce pe r ba nk sta te me nt, July 31 $ 9,610
Additions:
De posit in tra nsit 500
De ductions:
Ba nk e rror $ 486
Outsta nding che cks 2,417 2,903
Adjuste d ca sh ba la nce $ 7,207

Ba la nce pe r de positor's re cords, July 31 $ 7,430

Additions:
Inte re st 30
De ductions:
Re cording e rror $ 28
NSF che ck 225 253
Adjuste d ca sh ba la nce $ 7,207
Reconciling the Bank Statement
GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Jul 31 Cash 30
Interest Revenue 30

31 Supplies Inventory 28
Accounts Receivable 225
Cash 253