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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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chapter 7

Chapter 7

Short-term Financial Assets

managing cash needs during seasonal cycles
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
  • Credit policies
    • Increase sales
    • Be competitive
  • Credit department policies
    • Control procedures
      • Approval of customers
        • Check references
liquidity 3 key issues
Liquidity – 3 Key Issues
  • Plan for cash inflows, outflows, borrowing, and investing
  • Minimize the risk of bad debts due to sales on credit by establishing policies and procedures for checking credit
  • Ratios - check for effectiveness of policies
    • Receivable turnover ratio: net sales/average net receivable
    • Average days’ sales uncollectible: 365/rec turnover
accounts receivable turnover
Accounts Receivable Turnover

Net Credit Sales

Average Accounts Receivable

Indicates how quickly a company is collecting (i.e., turning over) its receivables

average day s sales uncollectible
Average day’s sales uncollectible
  • A measure that shows on average how long it takes to collect accounts receivable
  • Figure 2 – pg. 7 and Figure 3 – pg. 8

Average days’ sales uncollectible =

365 days/receivable turnover

discounting accounts receivables
Discounting Accounts Receivables
  • Two popular arrangements used for the discounting or sale of accounts receivable are factoring and securitization. The sale of accounts receivable can be made without recourse or with recourse.
  • 1. The buyer assumes the risk of uncollectibility when accounts receivable are sold without recourse, and the transfer is accounted for as a sale. The typical factoring arrangement is made without recourse.
  • 2. The seller retains the risk of uncollectibility when accounts receivable are sold with recourse. If certain criteria are met, factoring with recourse is accounted for as a sale; otherwise, its accounted for as a borrowing.
discounting notes receivable
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
  • Sell note prior to maturity date for cash
  • Receive less than face value (i.e., discounted amount)
  • Can be sold with or without recourse
slide9
Factoring

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.

slide10
Securitization of Accounts Receivable

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.

short term financial assets
Short-term financial assets

Assets that arise from cash transactions

  • Cash transactions
  • Investment of cash
  • Extension of credit
electronic funds transfer eft
Electronic Funds Transfer (EFT)
  • Transfers of funds between banks through electronic communication
    • ATM’s
    • Banking by telephone
    • Debit cards
    • Direct deposit for payroll checks
    • Direct deposit for Accounts Payable payments
short term investments held to maturity
Short-term investments Held to Maturity
  • Marketable securities – ex: purchased $97,000 U.S. Treasury bills

Short-term Investments 97,000

Cash 97,000

Accrued interest at year-end

Accrued interest 750

Interest Income 750

      • Journal entry to book at maturity

Cash 100,000

Short-term Investments 97,750

Interest Income 2,250

trading securities
Trading Securities
  • Securities consist of both debt and equity securities that will be held for a short-time
  • Valued on the balance sheet at their fair value (market value)
interest bearing promissory note
Principal

Interest

Maturity

Date

Interest-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

Signed:_________

Baker Corporation

non interest bearing promissory note
In exchange for $9,000 applied toward my purchase today, I promise to pay $9,900 in six months.

Date: November 1, 2004

Signed:_________

J.E. Privett

Non-Interest-Bearing Promissory Note

Effective interest rate on note = 20%

$900 12

$9,000 x 6

balance sheet presentation of discounted notes
Discount transferred to interest revenue over life of noteBalance Sheet Presentation of Discounted Notes

12/31/044/30/05

Notes receivable $ 9,900 $ 9,900

Less: Discount on

notes receivable ( 600) - 0 -

$ 9,300 $ 9,900

Upon

Maturity

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