BCO114

Accounting I
Prof. Mayra Mas
Unit

4B FINANCIAL ASSETS
Chapter 7 of Textbook
 The Valuation of Financial Assets

Basis for Valuation in

Type of Financial Assets the Balance Sheet
Cash (and cash equivalents) Face amount
Short-term investments Current market value
(marketable securities)
Receivables Net realizable value

Estimated collectible amount

How Much Cash Should a Business
Have?

Financial
Assets

Cash Receivables
Short-term
Investments
 Cash

Coins and
paper money
Cash is Checks
defined as
any deposit
Bank credit banks will
Money orders
card sales
accept.
Reporting Cash in the Balance Sheet

Combined with
cash on balance
sheet

Liquid short- Matures within

Cash
term 90 days of
Equivalents
investments acquisition

Stable market
values
 Bank Statements

Shows the beginning bank balance,

deposits made, checks paid, other debits
and credits in the month, and the ending
bank balance.

Bank
Statement
 Reconciling the Bank Statement

Explains the difference between cash

reported on bank statement and cash
balance in depositor’s accounting records.

Provides information for

reconciling journal entries.
 Short-Term Investments

Bond Capital Stock

Investments Investments
Marketable
Securities are
Readily
Marketable
... Current Assets

Almost As
Liquid As
Cash
Accounting for Marketable Securities
Most short-term investments in marketable securities are
classified as available for sale and appear on the balance sheet
at their current market value.
Treatment of Unrealized
Classification Management's Intent Holding Gains and Losses
Available-for- Held for short-term Reported in stockholders'
sale securities resale (often 6 to 18 equity section of the
months) balance sheet
Trading Held for immediate Reported in "other" revenue
securities resale (often within (expense) section of the
hours or days) income statement
Held-to-maturity Debt securities Not reported. Securities are
securities intended to be held reported on balance sheet
until they mature at amortized cost.
 Purchase of Marketable Securities
Foster Corporation purchases as a short-term
investment 4,000 shares of The Coca-Cola
Company on December 1. Foster paid $43.98 per
share, plus a brokerage commission of $80.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Marketable Securities 176,000
Cash 176,000

Total Cost: (4,000 × $43.98) + $80 = $176,000

Cost per Share: $176,000 ÷ 4,000 = $44.00
 Recognition of Investment Revenue
On December 15, Foster Corporation receives a $0.30
per share dividend on its 4,000 shares of Coca-
Cola.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Cash 1,200
Dividend Revenue 1,200

4,000 × $0.30 = $1,200

 Sales of Investments
On December 18, Foster Corporation sells 500 shares
of its Coca-Cola stock for $46.04 per share, less a
$20 brokerage commission.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Cash 23,000
Marketable Securities 22,000
Gain on Sale of Investment 1,000
Sales Proceeds: (500 × $46.04) - $20 = $23,000
Cost Basis: 500 × $44 = $22,000
Gain on Sale: $23,000 - $22,000 = $1,000
 Adjusting Marketable
Securities to Market Value
On December 31, Foster Corporation’s remaining
shares of Coca-Cola capital stock have a current
market value of $42,000. Prior to any adjustment,
the company’s Marketable Securities account has a
balance of $44,000 (1,000 × $44 per share).

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Unrealized Holding Loss on Investments 2,000
Marketable Securities 2,000
Unrealized Loss: $42,000 - $44,000 = ($2,000)
 Accounts Receivable

If a company makes credit

sales to customers, some
accounts inevitably will
turn out to be uncollectible.

PAST DUE
 Reflecting Uncollectible Accounts in the
Financial Statements
At the end of each period, record an
estimate of the uncollectible
accounts based on past experience.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Uncollectible Accounts Expense $$$$
Allowance for Doubtful Accounts $$$$

Selling expense Contra-asset account

 The Allowance for Doubtful Accounts

Accounts receivable
Less: Allowance for doubtful accounts
Net realizable value of accounts receivable

The net realizable value is the amount of accounts

receivable that the business expects to collect.
 Writing Off an Uncollectible Account
Receivable
When an account is determined to be
uncollectible, it no longer qualifies as an
asset and should be written off.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Allowance for Doubtful Accounts $$$$
Accounts Receivable (X Customer) $$$$
End of UNIT 4B