7.4 Reporting and Managing Cash Flashcards
where is cash reported
sofp (one point in time) and socf (during a period of time)
what do companies combine with cash in reporting cash?
cash equivalents (short term, highly liquid (easily sold) investments, (they can be sold really fast to meet short term cash needs)
what are the 2 qualities of cash equivalents
readily convertible into known cash amounts
and
so near to maturity that there is basically no risk of changes in value (usually <3mos)
how do companies use cash equivalents?
to generate a return (interent) on excess cash balances until cash is needed for operating purchases
ex of cash equivalents
government T bills, commericlal paper, bankers acceptance, money market funds, short term bank deposits
why do companies not want to have too much cash or too little cash?
too much is because cash does not generate revenue!!!!
too little cash because too litttle is not enough to cover operating expenses
Some companies may be in a cash deficit or overdraft position at year end. Bank overdrafts occur when the bank has pre-approved the company to be able to write cheques for amounts greater than the cash balance in the company’s bank account. These pre-approved amounts are called operating lines of credit or credit facilities. When used, they area short-term loan from the bank. Most companies have overdraft protection or operating lines of credit up to a certain amount with their banks. When they have been accessed, the Cash account (which is net of the line of credit) will show a credit balance in the general ledger that is reported as a current liability calledbank indebtedness. This is because the bank has the right to request funds from the company to cover the overdraft (line of credit) at any time. We will discuss operating lines of credit in more depth inChapter 10.
Some companies may be in a cash deficit or overdraft position at year end. Bank overdrafts occur when the bank has pre-approved the company to be able to write cheques for amounts greater than the cash balance in the company’s bank account. These pre-approved amounts are called operating lines of credit or credit facilities. When used, they area short-term loan from the bank. Most companies have overdraft protection or operating lines of credit up to a certain amount with their banks. When they have been accessed, the Cash account (which is net of the line of credit) will show a credit balance in the general ledger that is reported as a current liability calledbank indebtedness. This is because the bank has the right to request funds from the company to cover the overdraft (line of credit) at any time. We will discuss operating lines of credit in more depth inChapter 10.
think about this:
To understand cash management, consider the operating cycle of Martineau Designs. First, it purchases raw materials (fabric, buttons, thread, zippers, and the like). Let’s assume that it purchases these on credit provided by the supplier, so the company owes its supplier money. Next, employees manufacture the clothing. Now the company also owes its employees their salaries. Then, it sells the clothing to retailers, on credit. In spite of making the sale, the company will have no money to pay suppliers or employees until it collects money from its customers.
isnt that cool!!
companies will have no money to pay suppliers or employees until money has been collected from customers
word
6 principles of cash management
1) increase the speed of collection on receivables
2) keep inventory levels low
3) take advantage of credit periods
4) plan the timing of major expenditures
5) invest idle cash
6)prepare a cash budget
principle of cash management
1)increase the speed of collection on recieveables
the faster customers pay, the faster company can pay suppliers, employees
it is better to make customers pay faster! but need to think about if you make customers pay faster than they can be angry!!!
principle of cash management
2) keep inventory levels low
high inventory levels can be costly to keep, cash is tied up
inventory can also become obsolete/spoilage
principle of cash management
3) take advantage of credit periods
keep track of when bills are due- dont pay too fast or you cant use cash for the periods you are given, but dont pay too late or suppliers will be mad
ex: pay too fast w/n 10 days when u had 30, well then u could have used that cash for 20 days and u didnt
principle of cash management
4) plan timing of major expenses
big expenses need financing, and these big expesnses should be purchased when company normally has excess cash
->ex: in the offsesason when inventory is low!
principle of cash management
5) invest idle cash
no return is earned on idle cash, invest excess idle cash even if only over night!!!
INVESTMENTS like these should be liquid and risk free (with an active market )
