Chapter 7 Short-term Financial Assets Managing Cash needs during seasonal cycles Figure 1 – page 342 Assignment 1-2 page report on a company’s business cycle ex: Home Depot. Include receivable turnover rate Average day’s sales uncollectible Credit Policies Credit policies
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Short-term Financial Assets
Net Credit Sales
Average Accounts Receivable
Indicates how quickly a company is collecting (i.e., turning over) its receivables
Average days’ sales uncollectible =
365 days/receivable turnover
Baker Corporation promises to pay High-Tec, Inc. $15,000 plus 12% annual interest on
December 31, 1998.
Date: January 1, 1998
Signed:_________Discounting Notes Receivable
Factoring plus 12% annual interest on
Factoring involves selling accounts receivable to a factoring company at a certain percentage of face value. The company receives cash right away from the factoring company.
The factoring company typically bears the default risk, bears the cost of financing the account and bears any collection costs.
Securitization of Accounts Receivable plus 12% annual interest on
Securitization of accounts receivable refers to selling a portfolio of accounts receivable in the financial markets.
Each investor effectively buys a proportional share in the accounts receivable portfolio.
Assets that arise from cash transactions
Short-term Investments 97,000
Accrued interest at year-end
Accrued interest 750
Interest Income 750
Short-term Investments 97,750
Interest Income 2,250
Principal plus 12% annual interest on
DateInterest-Bearing Promissory Note
Baker Corporation promises to pay High-Tec, Inc. $15,000 plus 12% annual interest on March 13, 2005.
Date: December 13, 2004
In exchange for $9,000 applied toward my purchase today, I promise to pay $9,900 in six months.
Date: November 1, 2004
J.E. PrivettNon-Interest-Bearing Promissory Note
Effective interest rate on note = 20%
$9,000 x 6
Discount transferred to interest revenue over life of note promise to pay $9,900 in six months.Balance Sheet Presentation of Discounted Notes
Notes receivable $ 9,900 $ 9,900
Less: Discount on
notes receivable ( 600) - 0 -
$ 9,300 $ 9,900