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Chapter 6: Problem 32

The Simmons Corporation had the following investments at December 31 1\. 1000 shares of Hollings, Inc., purchased early in the year at 40 dollars per share and held as available-for-sale and with a year-end fair market value of \(\$ 38 dollars per share 2. \$ 25,000 in U.S. three-month Treasury Bills 3\. \$ 15,000 commercial deposit with a maturity date of April 30 of the next year 4.\$ 25,000 in postage stamps 5\. \$ 1,600 petty cash fund \)6 . \$ 3,000$ IOU from the president of simmons Corporation 7\. \$ 12,000. money market account a. Describe where each item would be classified on the balance sheet. b. At what amount should cash, cash equivalents, and short-term investments be reported?

Short Answer

Expert verified
On the balance sheet: Hollings shares are Short-term investments, U.S. Treasury Bills, commercial deposit and money market account are Cash equivalents, postage stamps are Prepaid expenses, petty cash is Cash, IOU from president is Receivable. For reporting, cash is \$1,600, cash equivalents are \$52,000, and short-term investments are \$38,000.

Step by step solution

01

Classifying Items

1. 1000 shares of Hollings, Inc. are classified as short-term investments. This is due to them being available-for-sale shares.\n 2. The \$25,000 in US Treasury Bills are cash equivalents as they are short-term, highly liquid investments.\n 3. The \$15,000 commercial deposit with a maturity date of April 30 of the next year is considered a cash equivalent as it matures within three months.\n 4. The \$25,000 in postage stamps are a prepayment and typically classified in Prepaid Expenses under Current Assets.\n 5. The \$1,600 petty cash fund is considered cash as it's readily available for use.\n 6. The \$3,000 IOU from the president of Simmons Corporation is considered a Receivable as it's an amount owed to the corporation that's expected to be paid.\n 7. The \$12,000 money market account is considered a cash equivalent as it's an investment that's easily converted to cash.
02

Valuing Items for reporting

1. 1000 shares of Hollings, Inc. should be reported at year-end fair market value which is \$38 per share, giving a total of \$38,000.\n 2. The \$25,000 in U.S. three-month Treasury Bills is reported at face value.\n 3. The \$15,000 commercial deposit is reported at its face value as it will mature the next year.\n 4. The \$25,000 in postage stamps is reported at cost.\n 5. The \$1,600 petty cash fund is reported at face value.\n 6. The \$3,000 IOU from the president of Simmons Corporation is reported at face value as it represents an obligation to the corporation.\n 7. The \$12,000 money market account is reported at its market value.
03

Reporting cash, cash equivalents, and short-term investments

Cash is \$1,600 (from the petty cash fund). Cash equivalents include U.S. Treasury bills (\$25,000), the commercial deposit (\$15,000) and the money market account (\$12,000), totaling to \$52,000. Short-term investments amount to \$38,000 from the 1000 shares of Hollings.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Short-term Investments
Short-term investments refer to financial assets that a company holds for a relatively brief period, usually less than a year. These investments are primarily characterized by their liquidity and their potential to be quickly converted into cash.
One common type is stocks or bonds that are available-for-sale, meaning they can be sold whenever suitable market conditions arise.
Such investments are typically securities that can be easily liquidated or sold without affecting their market value.
This is crucial for businesses that need to quickly access funds to seize market opportunities or meet sudden financial needs.
  • Examples: Stocks, bonds, or mutual funds with short holding periods.
  • Purpose: To earn returns over a short horizon while maintaining liquidity.
  • Balance Sheet Classification: Recorded under current assets.
These are reflected at their market value at the end of each reporting period, providing an accurate and current picture of the company's financial position.
Cash Equivalents
Cash equivalents are highly liquid investments that are easily converted into cash within a short timeframe, typically 90 days or less. These are crucial for maintaining liquidity, allowing companies to meet their short-term obligations.
Common examples include Treasury bills, money market funds, and commercial paper. These investments are made to preserve capital and provide flexibility.
Key characteristics include:
  • High Liquidity: Can be quickly converted to cash.
  • Short Maturity: Typically matures in three months or less.
  • Low Risk: Minimal risk of value fluctuation.
In financial reporting, cash and cash equivalents are often consolidated on the balance sheet, providing clear insight into a company's liquid assets.
Current Assets
Current assets are company assets that are expected to be converted into cash or used up within one year. They play a pivotal role in assessing a company鈥檚 short-term financial health and liquidity.
These include cash, cash equivalents, accounts receivable, inventory, and other assets that are readily available. Having a robust amount of current assets allows a company to meet its incoming liabilities and sustain operations effectively.
Key features include:
  • Quick Convertibility: Can be turned into cash quickly.
  • Measurement: Typically valued at market or cost, whichever is lower.
  • Role in Liquidity: Essential for covering short-term liabilities.
Listing current assets in the balance sheet helps stakeholders assess the company's capacity to manage its financial obligations and operational activities.
Financial Reporting
Financial reporting is the process of disclosing financial data and performance of a company to its stakeholders. This practice ensures transparency and provides insightful information for decision-making.
It includes financial statements such as the balance sheet, income statement, and cash flow statement. These documents are essential for evaluating a company's financial position, performance, and changes over time.
Key aspects of financial reporting include:
  • Compliance: Adhering to accounting standards (like GAAP or IFRS) is essential.
  • Accuracy: Ensures that financial information represents the company's true financial condition.
  • Transparency: Builds trust among investors, creditors, and other stakeholders.
Through effective financial reporting, a company can communicate its financial health and operational efficiency, paving the way for strategic planning and informed investment decisions.

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Most popular questions from this chapter

Firm A has an accounts receivable balance of 126,000 dollars and a balance in its allowance for uncollectible accounts of 29,000 dollars. Contrast this situation with Firm B, which has corresponding balances of \(\$ 963,000\) and \(\$ 865,000\). Which firm is riskier? Why? Which firm do you think is doing a better job of managing its accounts receivable? Why?

Locate the latest available set of financial statements for Oncogene Science, Inc. from the 10 -K on file in the EDGAR archives.a. In what types of short- term securities does Oncogene invest? (The information needed to answer this question can be found in the Notes to the Financial Statements.) b. According to SFAS No. \(115,\) what alternatives are available to Oncogene for reporting its investments in short-term securities? c. Does Oncogene classify its short-term investments as trading securities, available-for-sale securities, or held-to-maturity securities? d. Describe how Oncogene's investments are reflected on the income statement, balance sheet, statement of shareholders' equity, and statement of cash flows.

Under what circumstances could a firm's cash balance be negative? Why?

Becca's Finance and Collection Company has had a lot of trouble collecting its receivables recently. Discuss how each of the following circumstances might be reflected in the Allowance for Uncollectible Accounts:1. Dagwood Bumpstead has an "open" account that is always overdue. Dagwood makes regular payments of 500 dollars each month, but the balance in his account is always about \(\$ 4,000 dollars 2. Blondie purchased a car using 4,000 dollars borrowed from Becca's. Blondie has not made any payments for six months, and her overdue balance exceeds 1,200 dolars 3\. Sad Sack has just borrowed 4,000 dollars from Becca's, has excellent credit references, and after borrowing the money has sent Becca's a change-of- address notification showing a new address in Brazil.4. Blondie paid her overdue balance. 5\. Dagwood's son purchased a car using 4,000 dollars borrowed from Becca's. He has no credit references, other than the family connections and circumstances discussed earlier. Becca's is unable to get Dagwood to cosign the note! 6\. Blondie's daughter purchased a new sound system for her house and car, using \)\$ 4,000$ borrowed from Becca's. She has an excellent credit history, but after purchasing the sound system, it failed; she informed Becca's that because the seller provided no warranty, she was not going to make any payments on the defective sound system.

Shard Crockery Co. recognized the following events related to customer accounts receivable during \(2000 .\) At the start of the year, the firm reported gross accounts receivable of 22,000,000 dollars and an allowance for uncollectible accounts of \(\$ 2,000,000 dollars .1. Sales on credit totaled 60,000,000 dollars for the year. 2\. The company factored 18,000,000 dollars of its receivables to a financial institution and paid a fee of 700,000 dollars . 3\. Uncollectible customer accounts totaling 3,200,000 dollars were written off during the year. 4\. Based on an aging of its remaining accounts receivable at year-end, the company estimates that \)10 \%$ of its remaining receivables will ultimately be uncollectible. a. Determine the balance of accounts receivable (net of allowance) to be reported in Shard Crockery's balance sheet at the end of 2000 . b. Determine the effects of each of the events described above on the company's accounts receivable (net), total assets, revenues, and expenses. c. How would the factoring of accounts receivable during the year affect your calculation or interpretation of the company's accounts receivable collection period (if at all)? Discuss.
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