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According to the documents: 1) Cash is critical for companies to meet financial obligations and survive economic downturns. Net working capital, accounts receivable, and trade credit also impact a company's ability to obtain financing and manage risk. 2) Controlling cash requires strict internal controls due to its universal appeal and value. Companies use petty cash funds to pay small, frequent expenses and replenish these funds periodically. 3) Working capital investments are reversible and can generate spontaneous cash sources. Recognizing and measuring cash, accounts receivable, and trade creditors follows accounting principles around expectation of benefit and asset valuation.

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133 views2 pages

RRL

According to the documents: 1) Cash is critical for companies to meet financial obligations and survive economic downturns. Net working capital, accounts receivable, and trade credit also impact a company's ability to obtain financing and manage risk. 2) Controlling cash requires strict internal controls due to its universal appeal and value. Companies use petty cash funds to pay small, frequent expenses and replenish these funds periodically. 3) Working capital investments are reversible and can generate spontaneous cash sources. Recognizing and measuring cash, accounts receivable, and trade creditors follows accounting principles around expectation of benefit and asset valuation.

Uploaded by

JOHN AXIL ALEJO
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Contemporary Financial Management Fundamentals 13th Edition (Moyer, McGuigan, And Rao, 2014)

All other things being equal, the more net working capital a firm has, the more likely it will be able to
meet current financial obligations. Because net working capital is one measure of risk, a company’s net
working capital position affects its ability to obtain debt financing. Overall working capital policy
considers both a firm’s level of working capital investment and its financing. In practice, the firm has to
determine the joint impact of these two decisions upon its profitability and risk.

Cash is the medium of exchange that permits management to carry on the various functions of the
business organization. In fact, the survival of a company can depend on the availability of cash to meet
financial obligations on time. These cash balances give the firm a cushion to handle economic
downturns and the ability to make investments in other firms and assets when the price is attractive.

Accounts receivable consist of the credit a business grants its customers when selling goods or services.
They take the form of either trade credit, which the company extends to other companies, or consumer
credit, which the company extends to its ultimate customers. The effectiveness of company’s credit
policies can have a significant impact on it total performance. When a company decides to extend credit
to customers, its making an investment decision-namely, an investment in accounts receivable, a
current asset

Whenever a business receives merchandise ordered from a supplier and then is permitted to wait a
specified period of time before having to pay, it is receiving trade credit. In the aggregate, trade credit is
the most important source of short term financing for business firms.

Analysis for Financial Management 9th Edition (Higgins, 2009)

Working capital investments have two unique features. One is that such investments are reversible in
the sense that at the end of the project’s life, the liquidation of working capital generates cash inflows
approximately as large as the original outflows. The second unique feature is that many investment
requiring working capital increases also generate spontaneous source of cash in the form of sources of
cash to the company that arise in the natural course of business and have no explicit cost.

Fundamental Financial and Managerial Accounting Concepts (Edmonds et al., 2007)


Controlling cash, more than any other asset, requires strict adherence to internal control procedures.
Cash has universal appeal. A relatively small suitcase filled with high-denomination currency can
represent significant value.

Although businesses use checks for most disbursements, they often pay for small items such as postage,
delivery charges, taxi fares, employees’ supper money, and so on with currency. They frequently
establish a petty cash fund to maintain effective control over these small cash disbursements. Petty cash
funds are usually maintained on an imprest basis, which means that the money disbursed is periodically
replenished. The fund is created by drawing a check on the regular checking account, cashing it, and
giving the currency to the petty cash custodian. The custodian normally keeps the currency under lock
and key. The amount of petty cash fund depends on what it is used for, how often it is used, and how
often it is replenished.

Financial and Management Accounting 5th Edition (Weetman, 2010)

Recognizing cash is no problem either in the expectation of benefit or in the measurement of the asset.
The amount is known either by counting cash in hand or by looking at a statement from the bank which
is holding the business bank account. The expectation of benefit lies in making use of the cash in future
to buy fixed assets or contribute to the working capital cycle so that the business earns a profit. In the
meantime, cash which is surplus to immediate requirements should be deposited in such a way that it is
earning interest. When a company has substantial cash balances there should be indications in the
income statement that investment income has been earned, to provide a benefit to the business.

Trade receivables meet the recognition conditions because there is an expectation of benefit when the
customer pays. The profit on the sale of the goods is known because the customer has taken the goods
or services and agreed the price. Trade receivables are therefore measured at the selling price pf the
goods and the profit is recognized in the income statement. There is a risk that the customer will not
pay, but the view taken is that the risk of non-payment should be seen quite separately from the risk of
not making a profit on a sale. The risk of non-payment is dealt with by reducing the reported value of
the asset using an estimate for doubtful debts.

Measurement of trade creditor is relatively straightforward because the company will know how much
it owes to short term creditors. If it forgets the creditors, they will soon issue a reminder. Recording
requires some care because omission of any credit transaction will mean there is understatement of a
liability. In particular, the company as to take some care at the end of the year over what are called cut-
off procedures.

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