Chapter 7
Cash and Receivables
Intermediate Accounting 10th edition
Nikolai Bazley Jones
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.
2
Cash
Cash is the resource on
hand to meet planned
expenditures and
emergency situations.
3
Cash
Cash
Included in Cash
Excluded from Cash
• Coins and currency
• Checking accounts
• Savings accounts
• Negotiable checks
• Bank drafts
• Certificates of deposit
• Bank overdrafts
• Postdated checks
• Travel advances
• Postage stamps
4
Cash Equivalents
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.
5
Cash Management
Control Over Receipts
 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.
6
Cash Management
Control Over Payments
 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.
7
Receivables
Trade Receivables
Revenue
Recognition
and Valuation
• Normal
circumstances
• Right of
return
• Valuation
Recording and
Reporting Accounts
Receivable
• Cash discounts
• Sales returns and
allowances
• Uncollectible accounts
• Financing
arrangements
Recording and
Reporting Notes
Receivable
• Interestbearing
• Non-interestbearing
• Discounted
8
Receivables
Each of the following criteria must be satisfied when
the right of return exists in order to recognize
revenue at the time of sale.
1.
2.
3.
The sales price is fixed or determinable at the
date of sale.
The buyer has paid or will pay the seller, and the
obligation is not contingent upon the resale of
the product.
The buyer’s obligation to the seller would not be
changed by theft or damage to the product.
Continued
9
Receivables
Right of Return
4.
5.
6.
The buyer has an economic substance apart
from the seller.
The seller does not have significant
obligations for future performance to directly
bring about resale of the product by the
buyer.
The seller can reasonably estimate the
amount of future returns.
10
Accounts Receivable
Internal Control Procedures for
Accounts Receivable
Prenumbered sales
invoices.
Separation of the sales
function from the cash
collection responsibilities.
11
Sales Discounts
Increase sales
Encourage prompt
payment
Increase likelihood
of collection
12
Calculation of Sales Discounts
2/10, n/30
2% discount if payment is made within
10 days, otherwise the total amount is
due within 30 days (net of returns and
allowances)
13
Loss Contingencies
1.
2.
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.
The amount of the loss
can be reasonably
estimated.
FASB Statement No. 5
… recorded as
requires that estimated
reductions in assets or
losses from loss
as liabilities when both
contingencies be
of these conditions are
accrued against income
met.
and...
14
Estimated Bad Debts Method
Bad debts can be
estimated based on
sales or on accounts
receivable.
15
Estimated Bad Debts Method
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
16
Estimated Bad Debts Method
Percentage 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?
Bad Debt Expense
10,500
Allowance for Doubtful Accounts
10,500
$525,000 x 0.02
17
Estimated Bad Debts Method
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?
Allowance for Doubtful Accounts
4,500 (current balance)
$475,000 x 0.04 = $19,000
18
Estimated Bad Debts Method
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
14,500 (required adjustment)
balance($475,000), what would be the required
adjusting entry?
Allowance for Doubtful Accounts
4,500 (current balance)
14,500 (required adjustment)
19,000 (required balance)
19
Estimated Bad Debts Method
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?
Bad Debt Expense
14,500
Allowance for Doubtful Accounts
14,500
20
Aging of Accounts Receivable
1. 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.
21
Writing Off Uncollectibles
Accounts Receivable
175,000
1,000
Allowance for Doubtful Accounts
1,000
8,750
Net realizable value = $166,250
Allowance for Doubtful Accounts 1,000
Accounts Receivable
1,000
A customer’s account totaling $1,000 is
determined to be uncollectible.
22
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.
Accounts Receivable
300
Allowance for Doubtful Accounts
300
Cash
Accounts Receivable
300
300
23
Accounts Receivable
Financing Agreements
There are three basic
forms of financing
agreements to obtain cash
from accounts receivable.
Pledging
Assigning
Factoring
24
Pledging
When a company pledges its
accounts receivable, it is using
these accounts as collateral for a
loan, and the servicing activities
remain its responsibility.
25
Assignment of
Accounts Receivable
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.
26
Factoring
When a company factors
its accounts receivable, it
sells individual accounts
to a financial institution
(called a factor).
27
Credit Card Sales
Many 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.
28
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
1,425
Credit Card Expense
75
Sales
1,500
29
Notes Receivable
A note receivable is an
unconditional written agreement
to collect a certain sum of money
on a specific date.
30
Notes Receivable
Notes receivable generally have
two attributes that are not found
in accounts receivable.
31
Notes Receivable
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.
1.
32
Notes Receivable
Interest-Bearing
Received a $5,000, 60-day, 12% note on October 1, 2007.
Notes Receivable
Sales
5,000
5,000
Received maturity value on December 1, 2007.
Cash
Notes Receivable
Interest Revenue
5,100
$5,000 x 0.12
x 60/360
5,000
100
33
Notes Receivable
Non-Interest-Bearing
Received a $5,100, 60-day, non-interest-bearing note
on October 1, 2007.
Notes Receivable
5,100
Interest Revenue
100
Sales
5,000
Received maturity value on December 1, 2007.
Cash
Notes Receivable
5,100
5,100
34
Notes Receivable Discounted
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%.
35
Notes Receivable Discounted
1.
2.
3.
4.
5.
6.
7.
8.
Face value of note
$5,000.00
Interest to maturity
($5,000 x 0.12 x 90/360)
150.00
Maturity value of note
$5,150.00
Discount ($5,150 x 0.14 x 60/360)
(120.17)
Proceeds
$5,029.83
Accrued interest revenue: $50
Book value of note ($5,000 + $50) (5,050.00)
Loss from discounting of note
$ 20.17
36
Notes Receivable Discounted
August 31, 2007
Interest Receivable
Interest Revenue
Cash
Loss from Discounting of Note
Notes Receivable Discounted
Interest Receivable
October 30, 2007
Notes Receivable Discounted
Notes Receivable
50.00
50.00
5029.83
20.17
5,000.00
50.00
5,000.00
5,000.00
37
Notes Receivable Discounted
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
Notes Receivable Discounted
Notes Receivable
Cash
5,160
5,000
5,000
5,160
38
Appendix: Petty Cash
First: An employee
is appointed petty
cash custodian.
Petty Cash
Cash
500
500
39
Appendix: Petty Cash
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).
40
Appendix: Petty Cash
…the vouchers
sortedof
Third:
When theare
amount
into
categories
and
cashexpense
in the petty
cash fund
the remaining
cashatisthe
becomes
low and/or
counted. period,...
end of accounting
Assume that a count at
the end of the month
shows $67.54 remaining in
the petty cash fund.
41
Appendix: Petty Cash
The sorting of vouchers indicated the following
costs were incurred during the month:
Office supplies
Postage
Transportation
Miscellaneous
Total expenses
$ 34.16
178.00
132.14
83.76
$428.06
The fund is short $4.40 ($71.94 - $67.54).
42
Appendix: Petty Cash
The company records the actual expenses and
the amount needed to replenish the fund.
Office Supplies Expense
Postage Expense
Transportation Expense
Miscellaneous Expense
Cash Short and Over
Cash
34.16
178.00
132.14
83.76
4.40
432.46
43
Appendix: Bank Reconciliation
Causes of the
difference between
the cash balance
and the company’s
bank statement
balance.
Outstanding checks
Deposits in transit
Charges made by the
bank
Deposits made
directly by the bank
Errors
44
Appendix: Bank Reconciliation
Cash
balance
from bank
statement
$7,218
Cash
balance
from
company
records
$6,925
45
Appendix: Bank Reconciliation
Deposits in transit and cash
received but not yet deposited
totaled $629.
Cash balance from bank statement
$7,218
Add: Receipts recorded on the company’s
records but not reported on the bank
statement.
629
$7,847
46
Appendix: Bank Reconciliation
Outstanding checks
totaled $516.
Cash balance from bank statement
$7,218
Add: Receipts recorded on the company’s
records but not reported on the bank
statement.
629
$7,847
Deduct: Outstanding checks
(516)
Adjusted Cash Balance
$7,331
47
Appendix: Bank Reconciliation
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
48
Appendix: Bank Reconciliation
Bank service charge, $9.
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)
49
Appendix: Bank Reconciliation
Customers’ checks were returned
for lack of funds (NSF check), $300.
Cash balance from company records
Add: Interest earned on the funds on
deposit.
Deduct: Bank service charge
NSF checks
Adjusted Cash Balance
$6,925
715
$7,640
(9)
(300)
$7,331
50
Appendix: Bank Reconciliation
Adjusted
cash balance
per bank
statement
$7,331
Adjusted cash
balance per
company
records
$7,331
51
Appendix: Bank Reconciliation
Journal Entries
Cash
715
Notes Receivable (note collected)
Interest Revenue (interest collected)
700
15
Miscellaneous Expense (bank
service charge)
9
Accounts Receivable (NSF check) 300
Cash
309
52
Chapter 7
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