CHAPTER 7 CASH AND FINANCIAL ASSETS

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CHAPTER 7

CASH AND

FINANCIAL ASSETS

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2

Financial Assets

Objective 1

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Financial Assets

 Financial assets are cash ( 현금 ) and contractual righ ts ( 계약상권리 ) to receive cash from another entities.

 Financial assets ( 금융자산 ) include cash, equity instr uments ( 지분상품 ) of another firm, contractual right s ( 계약상권리 ) to receive cash from another firm, an d other assets with similar nature.

 Financial assets include another firm’s stocks ( 주

식 ), bonds ( 사채 ) and accounts receivable ( 매출채

권 ) as well as cash.

(4)

Financial Assets

 Financial assets held for trading purposes ( 단기투자 목적 )

- Measured at fair value(

공정가치로 측정

).

- Changes in fair value are included in profit (

손익반영

)

 Financial assets held to receive cash flows throughou t the duration ( 만기에 걸친 현금흐름수취 목적 )

- Measured at amortized cost (

상각후원가로 측정

).

- Subject to impairment accounting (

손상차손회계 대상

).

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5

Cash

Objective 2

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What is Cash?

 Currency ( 통화 ), coins ( 주화 ), demand deposits ( 요구불예금 , checking account), petty cash ( 소액현 금 ), and money orders ( 우편환 )…….sure

 But also undeposited checks (but not post dated)

 IOU’s are not cash, but receivables.

 Cash includes cash in bank (but sometimes restricte d) like demand deposits.

 Important! Cash = sum of (cash on hand) + (cash in

bank)

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7

Control of Cash

Objective 3

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Cash Management

Cash is the firm’s most vulnera- ble asset

• Requires a system of Internal Con- trols

• Segregation of duties ( 업무분장 ) is

essential

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Control of Cash…some exampl es

 Separate custody of assets from recording.

 Use point-of-sale system for documentation.

 Cash receipts should be deposited with the bank each day.

 Use bank reconciliation system.

 Cash payments are made only by authorized individual.

 All payments made by checks or credit cards.

 Spoiled checks should be voided.

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11

Bank Reconciliation ( 은행계정조정 )

Objective 4

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A bank reconciliation is an analysis of the items and

amounts that cause the cash balance reported in the bank statement to differ from the

balance of the cash account in the ledger in order to deter-

mine the adjusted cash bal-

ance.

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The bank balance is adjusted for items reflected on the company’s books that are not on the bank statement. They include several types of items.

Outstanding checks (미인출수표 )

These are checks that have been issued by the company but have not as yet cleared the bank.

Therefore, these have not been recorded as with- drawals by the bank yet. The total of the outstanding checks is deducted from the bank balance.

Deposits in transit (은행미기록예금 )

This refers to cash received and recorded as cash receipts by the company, but has not been

recorded by the bank as a deposit yet. Such deposits are added to the bank balance.

Errors

in recording checks (수표기장오류 )

Mistakes, such as transaction errors, can be made in recording checks. For example, an overstate- ment of the company’s payment should be added to the company balance.

Bank errors

in charging or crediting the company’s account (은행의 기타오류 )

If a company’s account is charged in error for another company’s cleared check, the bank balance is understated. Then, the amount of the mis-

charged check should be added to the bank balance. If a deposit made by the company is incor- rectly added to the account of another company, the amount should be added to the bank balance.

Table 7-1

Reconciling items for the bank

statement

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The book balance(cash account) is adjusted for items shown on the bank statement that are not reflected on the company’s books.

Collections (추심액 )

Notes receivable and interest on them are sometimes collected by the bank for the company, which the

company has not recorded yet. Also, electronic trans- fers of money to the company’s account may not have been recorded by the company yet. The collections must be added to the book balance.

NSF(not sufficient funds) checks

(부도수표 )

NSF checks refer to checks that have been returned to the company because of insufficient funds in the customer’s checking account. In this case, the company’s bank issues a debit memorandum for the dishonored amount and hence the book balance is re- duced.

Bank charges (은행수수료 )

Bank service fees reduce the company’s cash balance.

These amounts are not known until the bank statement is received. Examples include the monthly service charge, cost per check, check printing costs, and dishonored check fees.

Interest earned (이자수익 )

Interest income credited by the bank on the checking account increases the company’s cash balance.

Errors on the books

(회사장부상 오류 ) Various types of mistakes can be made on the books.

Table 7-2

Reconciling items for the

books

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Bank reconciliation

Balance per bank statement - outstanding checks

+ deposits in transit + - bank errors.

= Adjusted Cash Balance Balance per book

+ collection of receivables by the bank + interest earned

+ - recording errors - NSF checks returned - bank service charges = Adjusted Cash Balance

Notes:

1. Adjustments in top section do no require journal entries.

2. Amounts in bottom section require journal entries.

3. Adjusted balance should be final cash balance

(16)

Bank Reconciliation

Wisteria Corporation provides the following data in connection with the preparation of its bank reconciliation at June 30, 20×1:

balance per bank $4,889; balance per books $4,400; outstanding checks $700; depo sits in

transit $300; collection of notes receivable $200 and interest $16; collection fee on notes

receivable $12; NSF checks $100; and monthly service charge $15.

Example 7-1

Bank Reconciliation for Wieseria Corporation June 30, 20×1

Balance per bank $4,889 Balance per books $4,400

Add: Deposits in transit 300 Add: Collection of notes & interest 216

$5,189 $4,616

Less: Outstanding checks 700 Less: NSF checks Collection fee Service charge

$100 12 15

127

Adjusted bank balance $4,489 Adjusted book balance $4,489

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Bank Reconciliation

The following journal entries are required at June 30, 20×1 ：

After the journal entries have been posted, the books are up to date. For example, the cas h balance per books will now agree with the bank balance, namely $4,489. The cash “T” acc ount is shown below for clarification.

Example 7-1

June 30 Cash 216

Notes receivable 200

Interest income 16

Accounts receivable 100

Cash 100

Bank service charge 27

Cash 27

Cash

6/30 Balance before adjustment 4,400 NSF checks 100

Notes receivable and interest collected

216 Service charges 27

4,616 127

6/30 Balance after adjustment 4,489

(18)

18

Cash Short and Over ( 현금과부족 )

Objective 5

(19)

Cash Shortage and Overage

The cash shortage or overage is revealed when the cash count at the end of the day does not agree with the cash register record.

Assuming that the count is $600 and the cash register (

금전등록기

) reading shows $620, the appropriate journal entry is

：

Cash 600

Cash Short and Over 20

Sales 620

Cash short and over (

현금과부족

) is an income

statement account that is grouped with miscel-

laneous expenses (

기타비용

) or miscellaneous

revenues (

기타수익

), respectively.

(20)

20

Petty Cash ( 소액현금 )

Objective 6

(21)

It is usually not practical for a business to write checks or use

credit cards to pay small amounts.

Thus, it is desirable to control such payments by using a special cash fund, called a petty cash fund.

Petty Cash ( 소액현 금 )

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Petty Cash

Petty Cash Book

Date Explanation Voucher# Receipts Payments Postage Taxi Sundry

Jan. 1 Initiate fund $100

3 Taxi fare 1 $15 $15

16 Stamps 2 20 $20

29 Coffee 3 5 $5

$100 40 $20 $15 $5

Balance 60

$100

Feb. 1 Balance $60

Replenishment 40

Example 7-2

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Journal entry for replenishment

Postage expense 20 Taxi expense 15

Miscellaneous expense 5

Cash 40

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IMPORTANT!

The only time Petty Cash is deb- ited is when the fund is initially established or when the fund is increased. The only time Petty

Cash is credited is when the fund

is being decreased.

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25

Financial Assets ( 금융자산 )

Objective 7

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3 Types of Financial Assets

1)

Amortized cost financial assets(

상각후원가측정금융자산

): 　 Only debt securities(

채무증권

) that meet the business model test(

사업모형검증

) an d the cash flow characteristics test(

현금흐름특성검증

) are eligible for thi s classification. Equity securities(

지분증권

) are not included in this categ ory since they do not have maturities.

2)

FVPL(fair value through profit and loss) financial assets (

당기손익

-

공 정가치측정금융자산

): 　 Securities bought and held primarily for sale in the near term to generate income on short-term price differences. Both equ ity securities and debt securities can be held for this purpose.

3)

FVOCI(fair value through other comprehensive income) financial assets

(

기타포괄손익

-

공정가치측정금융자산

): 　 Financial assets other than t

hose classified as amortized cost or FVPL.

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FVPL Securities

Example 7-3

On May 1, 20X1, Carnation Inc. purchased 5,000 ordinary shares of Begonia Company for $17 per share plus 2% brokerage commission. The journal entry is:

FVPL Securities 86,700*

Cash 86,700

• (5,000 shares x $17) + 2% x (5,000 shares x $17) = $86,700

On August 5, 20X1, Carnation received cash dividends of $2 per share. The journal entry is:

Cash 10,000**

Dividend Income 10,000

** (5,000 shares×$2) ＝ $10,000

On December 31, 20X1, the share price of Begonia was $20 per share. The journal entry to recognize holding gains and losses is:

FVPL Securities 13,300***

Holding gain – Profit and Loss 13,300

*** (5,000 shares x $20) - $86,700 = $13,300

(28)

Investments in debt securities

Example 7-4

Lemur Inc. purchased several investments in debt securities during 20x1. The following information pe rtains to these securities. The fluctuations in their fair values are not considered permanent.

Required:

1. What amount would Lemur report for the total of its investments in debt securities at 12/31/20x1?

2. What total unrealized holding gain would Lemur report in its 20x2 income statement relative to its in vestments in debt securities?

3. What would be the balance in Lemur’s accumulated other comprehensive income with respect to the se investments in its 12/31/20x2 statement of financial position(ignore taxes)?

Classifications 12/31/20x1 12/31/20x2 12/31/20x1 12/31/20x2 Amortized cost:

ABC Bonds

Fair value Fair value Amortized cost Amortized cost

$375,000 $400,000 $367,000 $360,000

FVPL:

DEF Bonds

Fair value Fair value Cost

$139,000 $175,000 $138,000

FVOCI:

GHI Bonds

Fair value Fair value Cost

$130,000 $150,000 $140,000

(29)

Investments in debt securities

Example 7-4

Solutions:

1. At amortized cost securities are carried at amortized cost whereas FVPL and FVOCI securities are carried at fair values. Hence, the carrying amount of the investments in debt securities at

12/31/20x1 is: $367,000 (amortized cost for ABC bonds) +

$139,000 (fair value for DEF bonds) + $130,000 (fair value for GHI bonds) = $636,000

2. Change in fair values during the period for the FVPL securities only is included in the current period net income. Hence, the

amount of holing gains and losses included in 20x2 net income is:

$175,000 (12/31/20x2 fair value) - $139,000 (12/31/20x1 fair value) = $36,000

3. AOCI(accumulated other comprehensive income) on the FVOCI securities is measured as the difference between year-end fair value and the cost. Hence, the AOCI on the FVOCI securities at 12/31/20x2 is: $150,000(fair value at 12/31/20x2) - $140,000 (cost) = $10,000

(30)

Accounting Terminologies in Chapter 7

accounts receivable

외상매출금

adjusted bank balance

수정후은행잔액

adjusted book balance

수정후장부잔액

amortized costs

상각후원가

available for sale securities

매도가능증권

bank charges

은행수수료

bank reconciliation

은행계정조정

bank statement

은행명세서

bonds

사채

brokerage commission

중개수수료

capital gains

자본이득

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Accounting Terminologies in Chapter 7

cash equivalents

현금성자산

cash register

금전등록기

cash short and over

현금과부족

checking account

당좌계정

collections

추심액

contractual rights

계약상권리

currency

통화

current assets

유동자산

debt securities

채무증권

demand deposits

요구불예금

deposits in transit

은행미기록예금

(32)

diversification

분산투자

dividend revenue

배당수익

equity securities

지분증권

financial assets

금융자산

government bonds

정부채권

held-to-maturity securities

만기보유증권

holding gains and losses

보유손익

impairment loss

손상차손

imprest fund

정액전도금

interest earned

이자수익

interest revenue

이자수익

(33)

internal control

내부통제

market value

시장가치

marketable securities

시장성유가증권

memorandum entry

비망기록

meney order

우편환

NSF checks

부도수표

outstanding checks

미인출수표

petty cash

소액현금

petty cash voucher

소액현금증서

post dated checks

선일자수표

prepaid expense

선급비용

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purchase price

매입가격

return

수익률

savings account

예금계정

segregation of duties

업무분장

short-term investments

단기투자

stock dividends

주식배당

stock splits

주식분할

stocks

주식

trading purpose

매매목적

trading securities

단기매매증권

unrealized holding gains and losses

미실현보유손익

(35)

Chapter 7

 The end