12-1
CHAPTER 12
CASH AND MARKETABLE
SECURITIES
12-2
What is Cash?
Coins
 Currency
 Money orders received from customers
 Checks
 Money deposited in banks

12-3
Compensating balance
In order to ensure a company’s credit-granting
arrangement, a company is forced to keep a
minimum amount in the bank account. The
minimum is called compensating balance.
12-4
Application of Cash
Suppliers
Account
receivable
Convert
Inventory
Property
Can’t
pay
Rents
Employees
12-5
Cash and profit
Cash
Profit
12-6
Cash inflow & outflow
in
customers
in
lenders
salaries
suppliers
out
out
out
in
investors
creditors
12-7
Positive and negative cash flow
A positive cash flow
Inflow of cash
>
outflow of cash
<
outflow of cash
A negative cash flow
Inflow of cash
12-8
Components of cash flow
Operating cash flow
Internal operations
Cash
flow
Investing cash flow
Internal non-operating activities
Financing cash flow
To and from external sources
Marketable securities
(Short-term investment)



Marketable securities are government securities,
bonds, or other securities which are invested by a
company to avoid the excess cash lie idle .
They are liquid assets in that they can easily and
quickly be converted into cash.
Marketable securities held as a temporary
investment are classified as current assets.
12-9
Marketable securities
(Short-term investment)
As short-term investment, marketable securities
should :
1. have definite market
value and be exchanged on
the security market publicly;
2. as surplus funds, have
liquidity and profitability.
12-10
Classification of marketable
securities
 Credit
securities
 Equity securities
 Mixed securities
12-11
Classification of marketable
securities
12-12
Credit securities indicate the credit that is owned
by the investors, namely, the claim to the principal
and interest on maturity date.
Equity securities show the equity that the owner
owns, namely, the claim to the increment of capital.
Mixed securities have all the characteristics that
Credit and equity securities have. The examples of
mixed securities are preferred stocks and transferable
debenture.
Pricing Methods of Marketable
Securities
12-13
Value of securities investment at the beginning of
accounting period
If marketable securities are purchased with cash,
the investment cost includes purchase price, taxes, and
commission charges.
The investment cost doesn't
consist of the cash dividend
declared but not collected and
the uncollected mature security
interest.
Pricing Methods of Marketable
Securities
12-14
If marketable securities are invested by the investors,
the cost is the price determined by the individual
investing parties.
If the securities are the non-cash assets paid by the
debtors ,
the investment cost includes the
book value of the assets and taxes
excluding the cash dividend
declared but not collected.
Pricing Methods of Marketable
Securities
12-15
Value of securities at the end of accounting period
Method 1
Marketable Securities are first recorded at cost.
The cost of marketable securities includes purchase
price, broker’s fee, and other reasonable charge
incurred during the purchase of securities.
Pricing Methods of Marketable
Securities
Method 2
To use the marketable value
as the price and record the
investment income as the
result of change of the
marketable value.
12-16
Pricing Methods of Marketable
Securities
Method 3
To use the smaller one of
the cost and the marketable
price as the investment
cost of securities to meet
the prudence principle.
12-17
12-18
Entry of marketable securities
Now, let’s
look at an
example
for
George Ross
Photocopy
Company
12-19
Entry of marketable securities
George Ross Photocopy Company
U.S. Treasury bills , $10,000.
The commission charge is $200.
Mature in three months at $15,000
12-20
Entry of marketable securities
The entries
June 1 Dr. Marketable Securities
Cr. Cash
$ 10,200
$10,200
12-21
Entry of marketable securities
Suppose the securities purchased by George include
cash dividend declared but not collected $400.
The entries
June 1 Dr. Marketable Securities
Interest Receivable
Cr. Cash
$10,200
400
$10,600
12-22
Entry of marketable securities
Income on marketable securities
(short-term investments)
Recorded
Received
Dividends and interest on
stocks and bonds held
as short-term investments
Recorded
Dividend
income
When is collected
Interest income
12-23
Entry of marketable securities
The entries
September 1 Dr. Cash
$15,000
Cr. Interest Income
Marketable Securities
$3,000
12,000
12-24
WE ARE SAILING
RIGHT ALONG!!