Chp.8.2 - current assets Flashcards
define liquidity
the ease/speed at which assets can be converted into cash
what’s the most liquid asset and why?
cash = most liquid asset since it cam be immediately be used for a variety of purposes
define current assets
assets that are expected to be used or received within 1 year
are long-term assets liquid?
long-term assets are relatively illiquid as they cannot be converted to cash quickly and easily and are expected to be used for longer than 1 year
define cash equivalents
represent short-erm investment that are highly liquid (typically mature in 90 days or less), are readily convertible to known amounts of cash and are subject to an insignificant risk of change in value
what are some examples of cash equivalents
- treasury bills
- money market funds:
- commercial paper
define treasury bills
short-term bonds issued by the government
define money market funds
a type of high liquid, short-term mutual fund (that does not invest in equities)
define commercial paper
a type of short-term debt issued by corporations
how is cash stored?
in multiple accounts
define short-term investments
investments that typically mature or are sold within a period of 3-12 months
what types of investment do short-term investments include?
cash equivalents + government bonds, corporate bonds, certificates of deposit - as long their maturity doesn’t extend beyond 1 year
define government bonds
a type of debt issued by the government that typically carries the least risk when compared to other bonds
define corporate bonds
a type of debt issued by corporations to raise money
define certificates of deposit
similar to a savings account provided by the banks but with a fixed time to maturity and often a fixed rate of interest
what’s the main benefit of short-term investments
allows the company to invest excess cash and earn income through the interest that these investments pay
what’s the journal entry to purchase short-term investments
DR. Short-term Investments
CR. Cash
to purchase short-term investments
why does a company book the full amount of interest earned when the investment matures
the interest gained from the investment is very small, so it’s impractical for the company to book a journal entry for every month that interest is earned
what’s the journal entry to book the full amount of interest earned when the investment matures
DR. Cash
CR. Short-term investments
CR. Interest income
to book maturing short-term investment and corresponding interest income
where are short-term investments listed on the balance sheet?
between the cash and AR line
define a notes receivable
represents a written promise to receive a specified amount of money from another party at a future date, typically greater than 90 days and with interest
define the creditor, in terms of notes receivables
the issuer or lender of the note, who sets the rate of interest and the terms of its payment
define maturity date, in terms of notes receivables
the due date of payment for the principal amount (amount loaned)
accounts receivables vs notes receivables
AR - informal, interest-free, typically no longer than 30 days
notes receivables - more legal formal contract, with an interest rate, and receipt of the principal amount plus interest
book a journal entry for a notes receivables on women’s blouses
DR. notes receivables
CR. Women’s Blouses revenue
to record a sale of women’s blouses in exchange for a note receivable from fashion fiends
book a journal entry on the interest income for a month on an outstanding note receivable
DR. Interest receivable
CR. Interest income
to record the interest income for a month on an outstanding note receivable
book a journal entry of the receipt of interest on a note receivable
DR. Cash
CR. Interest receivable
CR. interest income
book the journal entry for a receipt of a note receivable
DR. Cash
CR. Notes receivables
CR. Interest receivable
CR. Interest income
to record the receipt of a note receivable
where are prepaid expenses listed and why?
usually listed last in the current assets section as they tend to be the least liquid of all current assets
define net working capital
difference between a company’s current assets and current liabilities
what’s the purpose of net working capital
to measure a company’s liquidity and indicates the company’s operating efficiency and short-term financial health
what’s the presentation rule for current assets? why?
order of current assets is sorted by liquidity, this satisfies the comparability characteristic of accounting info
