Saturday, May 30, 2009
Short term Investment
Short Term Investment
Companies with large amounts of liquid resources often hold most of these resources in the form of marketable securities rather than cash.
Marketable securities consist primarily of investments in bonds and in the capital stock of publicly owned corporations. These marketable securities are trade daily on organized securities exchanges, such as the
Mark to Market:
Accounting principles are not carved in stone. Rather, they evolve and change as the accounting profession seeks to increase the usefulness of accounting information. A 1993 change in the way companies account for short term investments provides an excellent case in point.
Short term investments once appeared in the balance sheet at the lower of their cost or current market value. This valuation method reflected the cost principle, tempered by conservatism. But in 1993, the FASB changed the rules.
Marketable securities are classified as one of three types: (1) available for sale securities (2) trading securities (3) held-to-maturity securities. These classifications are based in large part on management’s intent regarding the length of time the securities will be held. Most corporations classify their marketable securities as available for sale. In view of this fact, the remainder of our discussion focuses exclusively on this particular classification.
To achieve the objective of presenting marketable securities classified as available for sale at current market value, the balance sheet valuation of these investments is adjusted to market value at the balance sheet date. Hence, this valuation principle often is called mark to market. When the value of marketable securities is adjusted to current market value, an offsetting entry is made to an account entitled Unrealized Holding Gain on Investments. This account appears as a special stockholders’ equity account in the balance sheet.
Unrealized holding gains and losses are not subject to income taxes. Income taxes are levied on gains and losses only when the investments are sold. Nonetheless, unrealized gains and losses are shown in the balance sheet net of the expected future income tax effects. These expected future tax effects are included in the company’s tax liability rather than in the amount shown as unrealized holding gain or loss. Such “deferred tax adjustments” are beyond the scope of our introductory discussion and are addressed in later accounting courses.
Our Assessment of Mark to Market:
The authors of this text commend the FASB on this recent change in accounting principles. Reporting short term investments at market value substantially enhances the usefulness of the balance sheet in evaluating the solvency of a business.
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Friday, May 29, 2009
Cash
Cash
Accountant defined cash as money on deposit in bank sand any items that bank will accept for deposit. These items include not only coins and paper money, but also checks, money orders, and traveler’s checks. Bank also accepts drafts signed by customer using bank credit cards, such as visa and master card. Thus sales to customers using bank cards are cash sales, the enterprise that makes the sale.
A cash subsidiary ledger includes separate accounts corresponding to each bank account and each supply of cash on hand within the organization.
Reporting Cash in the balance sheet:
Cash is listed first in the balance sheet because it is most liquid of all current assets. For the purposes of balance sheet presentation, the balance of the cash controlling account is combined with that of the controlling account for cash equivalents.
Cash Equivalents:
Some short term investments are so liquid that they are termed cash equivalents. Examples include money market funds. U.S, treasury bills. These assets are considered so similar to cash that they are combined with the amount of cash in the balance sheet. Therefore, the first asset listed in the balance sheet often is called Cash and Cash Equivalents.
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 marked for the acquisition of plant assets. Bank accounts in foreign countries are restricted by laws that prohibited transferring the money to another country. Cash that is not available in for paying current liabilities should not be viewed as a current asset. Therefore, restricted cash should be listed just below the current asset sections of the balance sheet in the section entitled “Investments and Funds”.
Cash Management:
The term cash management refers to planning, controlling, and accounting for cash transactions and cash balances. Because cash moves so readily between banks accounts and other financial assets, cash managements really means the management of all financial resources. The basic objectives of cash management are as follows:
· Provide accurate accounting for cash receipts, cash disbursements, and cash balances. Many of the total transactions of a business involve the receipt or disbursement of cash.
· Prevent or minimize losses from theft or fraud. Cash is more susceptible to theft than any other asset and, therefore, requires physical protection.
· Anticipate the need for borrowing and assure the availability of adequate amounts of cash for conducting business operations. Every business organization must have sufficient cash to meet its financial obligations as they come due.
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Tuesday, May 26, 2009
Merchandising Activities
MERCHANDISING COMPANIES
In the preceding chapters we examined organizations that render services to their customers. Merchandising companies earn most of their revenue by selling goods. Goods that are purchased fro purpose of resale to customers are called inventory. The success of most merchandising companies depends on their ability to acquire, distribute, and sell inventory quickly.
The Operating Cycle of a Merchandising Company:
The series of transactions through which a business generates its revenue and its cash receipts from customers are called operating cycle. The operating cycle of a merchandising company consists of the following basic transactions: (1) purchase of merchandise (2) sales of merchandise (3) collection of the accounts receivable from customers. As the word cycle suggests, this sequence of transactions repeats continuously. Some of the cash collected from the customers is used to purchase more merchandise. And the cycle begins a new. This continuous sequence of merchandising transactions is illustrated below.
Comparing Merchandising Activities with Manufacturing Activities:
Most merchandising companies purchase their inventories from other business organization is ready to sell condition. Companies that manufacture their inventories. Such as General Motors, IBM is called manufacturers. Rather than merchandisers. The operating cycle of a merchandising company.
Retailers and Wholesalers:
Merchandising companies including both retailers and wholesalers. A retailer is a business that sells merchandise directly to the public. Retailers may be small or large; they vary in size from giant department stores chains; such as sears and Wal-Mart to small neighborhood businesses, such as gas stations and convenience stores. In fact, more businesses engage in retail sales than in any other type of business activity.
The other major type of merchandising company is the wholesaler. Wholesalers buy large quantities of merchandise from several different manufacturers and then resell this merchandise to many different retailers.
Income Statement of a Merchandising Company:
Selling merchandise introduces a mew and major cost of doing business; the cost to the merchandising company of the goods that it resells to its customers. This cost is term the cost of goods sold. In essence, the cost of goods sold is an expense; however, this item is of such importance to the merchandising company that it is shown separately fro other expenses in the income statement. The difference between revenue from sale of cost of goods sold is called gross profit.
Gross profit is a useful means of measuring the profitability of sales transactions, but it does not represent the overall profitability of the business. A merchandising company has many expenses other than the cost of goods sold. Examples include salaries, rent, advertising and depreciation. The company earns a net income only if its gross profit exceeds the sum of its other expenses.
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Saturday, May 23, 2009
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