Cash and Receivables

Chapter7

An electronic presentation by Norman Sunderman Angelo State University

An electronic presentation by Norman Sunderman Angelo State University

COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

Intermediate AccountingIntermediate Accounting 10th edition 10th edition

Nikolai Bazley JonesNikolai Bazley Jones

2

Cash is the resource on hand to meet planned

expenditures and emergency situations.

Cash

3

Cash

Cash

• Coins and currency• Checking accounts• Savings accounts• Negotiable checks• Bank drafts

Included in Cash Excluded from Cash

• Certificates of deposit• Bank overdrafts• Postdated checks• Travel advances• Postage stamps

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Cash equivalents are short-term, highly liquid investments that are

readily convertible into known amounts of cash and near their

maturity (90 days) when purchased.

Cash Equivalents

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Cash Management

The person opening the mail or the sales person using the cash register should count the receipts immediately.

All cash receipts are recorded daily in the accounting records.

All receipts are deposited daily in the company’s bank account.

Control Over ReceiptsControl Over Receipts

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Make all payments by check (except petty cash items) so that a record exists for every company expenditure.

Authorize and sign all checks only after an expenditure is verified and approved.

Periodically reconcile the cash balance in the bank statements with the company’s accounting records.

Control Over PaymentsControl Over Payments

Cash Management

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Receivables

Trade ReceivablesTrade Receivables

Revenue Recognition

and Valuation• Normal circumstances

• Right of return

• Valuation

• Cash discounts• Sales returns and allowances

• Uncollectible accounts• Financing arrangements

Recording and Reporting Accounts

Receivable• Interest-bearing

• Non-interest-bearing

• Discounted

Recording and Reporting Notes

Receivable

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1. The sales price is fixed or determinable at the date of sale.

2. The buyer has paid or will pay the seller, and the obligation is not contingent upon the resale of the product.

3. The buyer’s obligation to the seller would not be changed by theft or damage to the product.

Each of the following criteria must be satisfied when the right of return exists in order to recognize

revenue at the time of sale.

Each of the following criteria must be satisfied when the right of return exists in order to recognize

revenue at the time of sale.

ContinuedContinuedContinuedContinued

Receivables

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4. The buyer has an economic substance apart from the seller.

5. The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.

6. The seller can reasonably estimate the amount of future returns.

Right of ReturnRight of Return

Receivables

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Accounts Receivable

Prenumbered sales invoices.

Separation of the sales function from the cash collection responsibilities.

Internal Control Procedures for Accounts Receivable

Internal Control Procedures for Accounts Receivable

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Sales Discounts

Increase salesEncourage prompt

paymentIncrease likelihood

of collection

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2% discount if payment is made within 10 days, otherwise the total amount is due within 30 days (net of returns and

allowances)

2% discount if payment is made within 10 days, otherwise the total amount is due within 30 days (net of returns and

allowances)

2/10, n/30

Calculation of Sales Discounts

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Loss Contingencies1. Information available

prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements.

2. The amount of the loss can be reasonably estimated.

1. Information available prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements.

2. The amount of the loss can be reasonably estimated.

FASB Statement No. 5 requires that estimated

losses from loss contingencies be

accrued against income and...

FASB Statement No. 5 requires that estimated

losses from loss contingencies be

accrued against income and...

… recorded as reductions in assets or as liabilities when both of these conditions are

met.

… recorded as reductions in assets or as liabilities when both of these conditions are

met.

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Estimated Bad Debts Method

Bad debts can be estimated based on sales or on accounts

receivable.

Bad debts can be estimated based on sales or on accounts

receivable.

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1. Relationship to sales (income statement approach): Percentage of sales Percentage of net credit sales

2. Relationship to accounts receivable (balance sheet approach): Percentage of outstanding accounts

receivable Aging of accounts receivable

Estimated Bad Debts Method

16

Percentage of SalesPercentage of Sales

If a company’s net credit sales during the year were $525,000 and bad debts historically amount to 2% of

net credit sales, what is the required adjusting entry?

If a company’s net credit sales during the year were $525,000 and bad debts historically amount to 2% of

net credit sales, what is the required adjusting entry?

Bad Debt Expense 10,500Allowance for Doubtful Accounts 10,500

Estimated Bad Debts Method

$525,000 x 0.02$525,000 x 0.02$525,000 x 0.02$525,000 x 0.02

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Percentage of Outstanding Accounts Receivable

Percentage of Outstanding Accounts Receivable

If a company has determined that there has been a 4% relationship between actual bad debts and

the year-end account receivable balance($475,000), what would be the required

adjusting entry?

If a company has determined that there has been a 4% relationship between actual bad debts and

the year-end account receivable balance($475,000), what would be the required

adjusting entry?Allowance for Doubtful Accounts

4,500 (current balance)

$475,000 x 0.04 = $19,000$475,000 x 0.04 = $19,000$475,000 x 0.04 = $19,000$475,000 x 0.04 = $19,000

Estimated Bad Debts Method

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Percentage of Outstanding Accounts Receivable

Percentage of Outstanding Accounts Receivable

Allowance for Doubtful Accounts

4,500 (current balance)

19,000 (required balance)

14,500 (required adjustment)

If a company has determined that there has been a 4% relationship between actual bad debts and

the year-end account receivable balance($475,000), what would be the required

adjusting entry?

If a company has determined that there has been a 4% relationship between actual bad debts and

the year-end account receivable balance($475,000), what would be the required

adjusting entry?

Estimated Bad Debts Method

14,500 (required adjustment)

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Percentage of Outstanding Accounts Receivable

Percentage of Outstanding Accounts Receivable

If a company has determined that there has been a 4% relationship between actual bad debts and

the year-end account receivable balance($475,000), what would be the required

adjusting entry?

If a company has determined that there has been a 4% relationship between actual bad debts and

the year-end account receivable balance($475,000), what would be the required

adjusting entry?

Bad Debt Expense 14,500Allowance for Doubtful Accounts14,500

Estimated Bad Debts Method

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Aging of Accounts Receivable1. Gather the unpaid invoices in each customer’s

account.

2. Classify the invoice amounts according to the length of time the invoice has been outstanding.

3. Multiply the total amount in each age group by the applicable estimated uncollectible percentage.

4. Make a journal entry to bring the balance in Allowance for Doubtful Accounts to the amount calculated in Step 3.

Examine Example 7-2 carefully.Examine Example 7-2 carefully.Examine Example 7-2 carefully.Examine Example 7-2 carefully.

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Writing Off Uncollectibles

Allowance for Doubtful Accounts

8,750

Accounts Receivable

175,000

A customer’s account totaling $1,000 is determined to be uncollectible.

A customer’s account totaling $1,000 is determined to be uncollectible.

Allowance for Doubtful Accounts 1,000Accounts Receivable 1,000

Net realizable value = $166,250

1,000

1,000

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Collection of an Account Previously Written Off

Later, a payment for $300 is received from the account that was written off in

the previous slide.

Later, a payment for $300 is received from the account that was written off in

the previous slide.

Accounts Receivable 300Allowance for Doubtful Accounts 300

Cash 300Accounts Receivable 300

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Accounts Receivable Financing Agreements

PledgingAssigningFactoring

PledgingAssigningFactoring

There are three basic forms of financing

agreements to obtain cash from accounts receivable.

There are three basic forms of financing

agreements to obtain cash from accounts receivable.

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When a company pledges its accounts receivable, it is using

these accounts as collateral for a loan, and the servicing activities

remain its responsibility.

When a company pledges its accounts receivable, it is using

these accounts as collateral for a loan, and the servicing activities

remain its responsibility.

Pledging

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When a company assigns its accounts receivable to a

financial institution, it enters into a lending agreement with the institution to receive cash on specific customer accounts.

When a company assigns its accounts receivable to a

financial institution, it enters into a lending agreement with the institution to receive cash on specific customer accounts.

Assignment of Accounts Receivable

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When a company factors its accounts receivable, it sells individual accounts to a financial institution

(called a factor).

When a company factors its accounts receivable, it sells individual accounts to a financial institution

(called a factor).

Factoring

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Credit Card SalesMany retail companies accept national credit

cards, such as VISA, MasterCard, American Express and Diners’ Club.

The retailer either deposits the slips at the bank or receives an electronic transfer of funds from the credit card company.

The retailer is assessed a charge by the credit card company.

This charge is accounted for as an operating expense.

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Credit Card Sales

Assume that Kern Company sold $1,500 of merchandise on credit, which was billed to a

national credit card company. If the collection fee is 5%, Kern Company makes

the following journal entry:

Cash 1,425Credit Card Expense 75

Sales 1,500

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A note receivable is an unconditional written

agreement to collect a certain sum of money on a specific date.

A note receivable is an unconditional written

agreement to collect a certain sum of money on a specific date.

Notes Receivable

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Notes receivable generally have two attributes that are not

found in accounts receivable.

Notes receivable generally have two attributes that are not

found in accounts receivable.

Notes Receivable

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1. They are negotiable instruments, which means that they are legally and readily transferable among parities and may be used to satisfy debts by the holders of these instruments.

2. They usually involve interest, requiring the separation of the receivables into its principal and interest components.

Notes Receivable

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Interest-BearingInterest-Bearing

Received a $5,000, 60-day, 12% note on October 1, 2007.

Notes Receivable 5,000Sales5,000

Received maturity value on December 1, 2007.

Cash 5,100Notes Receivable5,000Interest Revenue100

Notes Receivable

$5,000 x 0.12 $5,000 x 0.12

x 60/360x 60/360

$5,000 x 0.12 $5,000 x 0.12

x 60/360x 60/360

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Non-Interest-BearingNon-Interest-Bearing

Received a $5,100, 60-day, non-interest-bearing note on October 1, 2007.Notes Receivable 5,100

Interest Revenue 100Sales 5,000

Received maturity value on December 1, 2007.

Cash 5,100Notes Receivable 5,100

Notes Receivable

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On August 31, 2007, the Kasper Corporation discounts a

customer’s note at its bank at a 14% discount rate. The note was

received from the customer on August 1, is for 90 days, has a face

value of $5,000, and carries an interest rate of 12%.

On August 31, 2007, the Kasper Corporation discounts a

customer’s note at its bank at a 14% discount rate. The note was

received from the customer on August 1, is for 90 days, has a face

value of $5,000, and carries an interest rate of 12%.

Notes Receivable Discounted

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1. Face value of note $5,000.00

2. Interest to maturity($5,000 x 0.12 x 90/360) 150.00

3. Maturity value of note $5,150.00

4. Discount ($5,150 x 0.14 x 60/360) (120.17)

5. Proceeds $5,029.83

6. Accrued interest revenue: $50

7. Book value of note ($5,000 + $50) (5,050.00)

8. Loss from discounting of note $ 20.17

Notes Receivable Discounted

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October 30, 2007Notes Receivable Discounted 5,000.00

Notes Receivable 5,000.00

Cash 5029.83Loss from Discounting of Note 20.17

Notes Receivable Discounted 5,000.00Interest Receivable 50.00

August 31, 2007Interest Receivable 50.00

Interest Revenue 50.00

Notes Receivable Discounted

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Assume instead that on November 2, 2007, the bank notified Kasper that the note had not been paid and also charged Kasper a $10 fee.

Assume instead that on November 2, 2007, the bank notified Kasper that the note had not been paid and also charged Kasper a $10 fee.

Notes Receivable Dishonored 5,160Notes Receivable Discounted 5,000

Notes Receivable 5,000Cash 5,160

Notes Receivable Discounted

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Appendix: Petty Cash

First: An employee is appointed petty

cash custodian.

First: An employee is appointed petty

cash custodian.

Petty Cash 500Cash 500

Petty Cash 500Cash 500

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Second: Petty cash vouchers are printed,

prenumbered, and given to the custodian of the fund.

Second: Petty cash vouchers are printed,

prenumbered, and given to the custodian of the fund.

At all times the total of the cash in the fund plus

the amounts of expenditure vouchers

should be equal to $500 (in this case).

At all times the total of the cash in the fund plus

the amounts of expenditure vouchers

should be equal to $500 (in this case).

Appendix: Petty Cash

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Third: When the amount of cash in the petty cash

fund becomes low and/or at the end of accounting

period,...

Third: When the amount of cash in the petty cash

fund becomes low and/or at the end of accounting

period,...

Assume that a count at the end of the month

shows $67.54 remaining in the petty cash fund.

Assume that a count at the end of the month

shows $67.54 remaining in the petty cash fund.

…the vouchers are sorted into expense categories and

the remaining cash is counted.

…the vouchers are sorted into expense categories and

the remaining cash is counted.

Appendix: Petty Cash

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The sorting of vouchers indicated the following costs were incurred during the month:

Office supplies $ 34.16Postage 178.00Transportation 132.14Miscellaneous 83.76Total expenses $428.06

The sorting of vouchers indicated the following costs were incurred during the month:

Office supplies $ 34.16Postage 178.00Transportation 132.14Miscellaneous 83.76Total expenses $428.06

The fund is short $4.40 ($71.94 - $67.54).The fund is short $4.40 ($71.94 - $67.54).

Appendix: Petty Cash

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The company records the actual expenses and the amount needed to replenish the fund.

Office Supplies Expense 34.16Postage Expense 178.00Transportation Expense 132.14Miscellaneous Expense 83.76Cash Short and Over 4.40

Cash 432.46

The company records the actual expenses and the amount needed to replenish the fund.

Office Supplies Expense 34.16Postage Expense 178.00Transportation Expense 132.14Miscellaneous Expense 83.76Cash Short and Over 4.40

Cash 432.46

Appendix: Petty Cash

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Appendix: Bank Reconciliation

Outstanding checksDeposits in transitCharges made by the

bankDeposits made

directly by the bankErrors

Causes of the difference between

the cash balance and the company’s

bank statement balance.

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Cash balance

from bank statement

$7,218

Cash balance

from company records $6,925

Appendix: Bank Reconciliation

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Cash balance from bank statement $7,218 Add: Receipts recorded on the company’s

records but not reported on the bankstatement. 629

$7,847

Deposits in transit and cash received but not yet deposited

totaled $629.

Deposits in transit and cash received but not yet deposited

totaled $629.

Cash balance from bank statement $7,218

Appendix: Bank Reconciliation

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Outstanding checks totaled $516.

Outstanding checks totaled $516.

Appendix: Bank Reconciliation

Cash balance from bank statement $7,218 Add: Receipts recorded on the company’s

records but not reported on the bankstatement. 629

$7,847 Deduct: Outstanding checks (516)Adjusted Cash Balance $7,331

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Notes receivable totaling $700 and interest totaling $15 were

collected by the bank.

Notes receivable totaling $700 and interest totaling $15 were

collected by the bank.

Cash balance from company records $6,925 Add: Notes receivable ($700) and interest

($15) collected by bank 715 $7,640

Appendix: Bank Reconciliation

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Cash balance from company records $6,925 Add: Notes receivable ($700) and interest

($15) collected by bank 715 $7,640

Deduct: Bank service charge (9)

Appendix: Bank Reconciliation

Bank service charge, $9.Bank service charge, $9.

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Cash balance from company records $6,925 Add: Interest earned on the funds on

deposit. 715 $7,640

Deduct: Bank service charge (9)NSF checks (300)

Adjusted Cash Balance $7,331

Customers’ checks were returned for lack of funds (NSF check),

$300.

Customers’ checks were returned for lack of funds (NSF check),

$300.

Appendix: Bank Reconciliation

50

Adjusted cash balance

per bank statement

$7,331

Adjusted cash balance per

company records $7,331

Appendix: Bank Reconciliation

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Journal Entries

Cash 715Notes Receivable (note collected) 700Interest Revenue (interest collected) 15

Miscellaneous Expense (bank service charge) 9Accounts Receivable (NSF check) 300

Cash 309

Appendix: Bank Reconciliation

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Chapter7

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