Accounts Receivable and Cash Balance Essay

Submitted By kco26
Words: 1596
Pages: 7
Open Document
Chapter 18
Short-Term
Finance and
Planning

McGraw­Hill/Irwin

Copyright © 2010 by The McGraw­Hill Companies, Inc. All rights reserved.

Key Concepts and Skills
• Understand the components of the cash cycle and why it is important
• Understand the pros and cons of the various short-term financing policies
• Be able to prepare a cash budget
• Understand the various options for short-term financing

18-2

Chapter Outline
• Tracing Cash and Net Working Capital
• The Operating Cycle and the Cash Cycle
• Some Aspects of Short-Term Financial
Policy
• The Cash Budget
• Short-Term Borrowing
• A Short-Term Financial Plan

18-3

Sources and Uses of Cash
• Balance sheet identity (rearranged)
– NWC + fixed assets = long-term debt + equity
– NWC = cash + other CA – CL
– Cash = long-term debt + equity + CL – CA other than cash – fixed assets

• Sources
– Increasing long-term debt, equity, or current liabilities
– Decreasing current assets other than cash, or fixed assets • Uses
– Decreasing long-term debt, equity, or current liabilities
– Increasing current assets other than cash, or fixed assets 18-4

The Operating Cycle
• Operating cycle – time between purchasing the inventory and collecting the cash from sale of the inventory
• Inventory period – time required to purchase and sell the inventory
• Accounts receivable period – time required to collect on credit sales
• Operating cycle = inventory period + accounts receivable period

18-5

Cash Cycle
• Cash cycle
– Amount of time we finance our inventory
– Difference between when we receive cash from the sale and when we have to pay for the inventory • Accounts payable period – time between purchase of inventory and payment for the inventory • Cash cycle = Operating cycle – accounts payable period

18-6

Figure 18.1

18-7

Example Information
• Inventory:
– Beginning = 200,000
– Ending = 300,000

• Accounts Receivable:
– Beginning = 160,000
– Ending = 200,000

• Accounts Payable:
– Beginning = 75,000
– Ending = 100,000

• Net sales = 1,150,000
• Cost of Goods sold = 820,000

18-8

Example – Operating Cycle
• Inventory period
– Average inventory = (200,000+300,000)/2 = 250,000
– Inventory turnover = 820,000 / 250,000 = 3.28 times
– Inventory period = 365 / 3.28 = 111 days

• Receivables period
– Average receivables = (160,000+200,000)/2 = 180,000
– Receivables turnover = 1,150,000 / 180,000 = 6.39 times
– Receivables period = 365 / 6.39 = 57 days

• Operating cycle = 111 + 57 = 168 days

18-9

Example – Cash Cycle
• Payables Period
– Average payables = (75,000+100,000)/2 = 87,500
– Payables turnover = 820,000 / 87,500 = 9.37 times
– Payables period = 365 / 9.37 = 39 days

• Cash Cycle = 168 – 39 = 129 days
• We have to finance our inventory for 129 days
• If we want to reduce our financing needs, we need to look carefully at our receivables and inventory periods – they both seem extensive. A comparison to industry averages would help solidify this assertion.

18-10

Short-Term Financial Policy
• Size of investments in current assets
– Flexible (conservative) policy – maintain a high ratio of current assets to sales
– Restrictive (aggressive) policy – maintain a low ratio of current assets to sales

• Financing of current assets
– Flexible (conservative) policy – less shortterm debt and more long-term debt
– Restrictive (aggressive) policy – more shortterm debt and less long-term debt

18-11

Carrying vs. Shortage
Costs
• Managing short-term assets involves a trade-off between carrying costs and shortage costs
– Carrying costs – increase with increased levels of current assets, the costs to store and finance the assets
– Shortage costs – decrease with increased levels of current assets
• Trading or order costs
• Costs related to safety reserves, i.e., lost sales and customers, and production stoppages
18-12

Temporary vs. Permanent
Assets
• Temporary current assets
– Sales or required inventory build-up may be seasonal
– Additional current assets are needed during the “peak”
Show More

Related Documents: Accounts Receivable and Cash Balance Essay

Accounting Principle - Answers Problem set B Chapter 9 Essay

3. 4. 5. Accounts Receivable ................................... Sales Revenue ...................................... 2,600,000 Sales Returns and Allowances ................... Accounts Receivable ........................... 45,000 Cash .............................................................. Accounts Receivable ........................... 2,250,000 Allowance for Doubtful Accounts ............... Accounts Receivable ........................... 10,000 Accounts Receivable ..........…

Words 935 - Pages 4

Notes On Intermediate Financial Accounting

CHAPTER 6 CASH AND RECEIVABLES ACCT3110, Intermediate Financial Accounting I ANNOUNCEMENTS • • Exam #3, see schedule. Monitor CNOW quiz dates. 2 CASH AND CASH EQUIVALENTS Included in Cash: Coins and currency Checking accounts Savings accounts Negotiable checks Bank drafts Excluded from Cash: Sinking funds (L-T Inv.) Certificates of deposit (S-T Inv.) Bank overdrafts (current liab.) Postdated checks (receivable) Travel advances (prepaid exp.) Cash equivalents: short-term, highly liquid investments…

Words 1808 - Pages 8

Short-Term Investments and Receivables Essay

Short-Term Investments and Receivables Short Exercises (5 min.) S 5-1 1. A trading investment is always a current asset because the investor intends to sell the trading investment in the very near future — days, weeks, or only a few months. A current asset is to be sold within one year or within the company’s operating cycle if longer than a year. 2. Trading investments are reported at their current market value. (10 min.) S 5-2 |BALANCE SHEET…

Words 5177 - Pages 21

Questions On Accounting

Real Answers Income statement For month ended October 31 Revenues Receivable $ 14,000 Expenses Rent expense 3,550 Salaries expense 7,000 Telephone expense 760 Miscellaneous expenses 580 Total expenses 11,890 Net income $ 2,110 Prob. 1-4A: Amity Company Balance Sheet December 31, 2013 Assets 90,000 Liabilities 44,000 Equity 46,000 Total assets $ 90,000 Total liabilities and equity $ 90,000 Exercise 2-9: Cash (a) 100,750 (b) 1,250 (d)…

Words 1087 - Pages 5

acc225 H Paris Wk 2 Essay

JOURNAL Date Aug Account Titles and Explanation 1 Cash Equipment H. Paris, Capital Investment by owner P. R. Debit Credit 7,500 32,500 40,000 Prepaid Insurance Cash Purchase Insurance Policy for cash 5 Office Supplies Cash Purchase office supplies for cash 3,000 3,000 1,400 1,400 20 Cash Fees Earned Cash received for services 2,650 2,650 31 Utilities Expense Cash Utilities paid 875 875 TOTAL 47,925 47,925 Name: Cash 101 H. Paris…

Words 384 - Pages 2

Essay on Account Notes

Equity is equal to common stock plus retained earnings Know that Retained Earnings = Expenses and Dividends subtracted from Revenues When you increase cash it is a debit and when you decrease cash it is a credit Increases in Liabilities are entered as credits and Decreases in Liabilities are entered as debits The normal balance is the side which is becoming increased Retained earnings are net income that is retained in the business. It represents the portion of stockholders' equity…

Words 2582 - Pages 11

Importance Of Ratio Analysis

statement. Financial ratio analysis uses formulas to gain insight into the company and its operations. For the balance sheet, using financial ratios can show you a better idea of the company's financial condition along with its operational efficiency. It is important to note that some ratios will need information from more than one financial statement, such as from the balance sheet, cash flow statement and the income statement. • Current Ratio we consider the current ratio which reflects a company's…

Words 395 - Pages 2

Acct 550 Week 4 Assignment Essay

84314 = PV $54,901.98 = PV Cash purchase price $650,000.00 PV of rental income – 54,901.98 Net present value $595,098.02 Answer: I would lease Building C since the present value of its net cost is the smallest. E7-2 1. Cash balance of $925,000. Only the checking account balance should be reported as cash. The certificates of deposit of $1,400,000 should be reported as a temporary investment, the cash advance to subsidiary of $980,000 should be reported as a receivable, and the utility deposit of…

Words 404 - Pages 2

ACCT 555 Week 6

Khalia Brewer ACCT 555 Week 6 Homework 14-21 A. (2)- Occurrence B. (1)- Accuracy C. (3)- Monthly statements are sent to customers and any discrepancies are resolved by someone independent of cash handling and accounting. D. (4)- existing cash receipts are recorded. 14-22 A.(4)- Receiving reports are prepared for all materials received and such reports are accounted for on a timely basis. B.(3)- Employees involved in the credit-granting function are separated from the sales function C.(1)-…

Words 2308 - Pages 10

Essay on Alcatel Accounting Case

A. What is an account receivable? What other names does it go by? Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services on credit. These receivables are generally expected to be collected within 30 to 60 days. They are typically the most significant type of claim held by a company. Accounts receivable and notes receivable resulting from sales are also known as trade receivables. Accounts receivable resulting from sales are referred to…

Words 975 - Pages 4