Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Module 1: Cash & Accounts Receivable
Table of Contents
Module 1: Cash & Accounts Receivable ................................................................................... 1
Lesson 1-0: Module 1 Information .................................................................................................... 2
Lesson 1-0.1: Introduction to Cash & Accounts Receivable ................................................................................. 2
Lesson 1-1: Cash and Cash Equivalents, Internal Controls, and Cash Restriction/Discounts ............... 4
Lesson 1-1.1. Cash and Cash Equivalents, Internal Controls, and Cash Restriction/Discounts ............................ 4
Lesson 1-2: Receivables, Uncollectable Receivables and Bad Debt Expense Estimation Methods.... 15
Lesson 1-2.1: Receivables, Uncollectable Receivables and Bad Debt Expense Estimation Methods ................ 15
Lesson 1-3: Notes Receivable and Receivables Financing and Management ................................... 32
Lesson 1-3.1: Notes Receivable and Receivables Financing and Management ................................................. 32
Lesson 1-4: Bank Reconciliations .................................................................................................... 47
Lesson 1-4.1: Bank Reconciliations .................................................................................................................... 47
Lesson 1-5: USGAAP x IFRS ............................................................................................................. 51
Lesson 1-5.1: USGAAP x IFRS ............................................................................................................................. 51
Lesson 1-5.2: Wrap-Up to Cash & Accounts Receivable .................................................................................... 54
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Lesson 1-0: Module 1 Information
Lesson 1-0.1: Introduction to Cash & Accounts Receivable
Welcome to Accounting Analysis part 2, Module 1. As discussed previously, we will now
take a closer look at the assets as we start with cash and receivables, which are usually
true of the first items listed in the balance sheet based on listing them in order of
liquidity. Let's briefly review our learning objectives for this week's module. First of all,
we'll discuss the key concepts of cash related internal controls. In addition, we will also
discuss the various cash restrictions and discounts. Next, we want to discuss the topic
of uncollectible receivables and the methods of estimating bad debt expense.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
After that we will discuss our Notes Receivables and the various financing tools that can
aid us in financing with receivables, and ratio analysis for measuring our management
or receivables. We will discuss also bank reconciliations, which is a very common and a
strong internal control method. Finally, we'll close this module with differences between
IFRS and USGAAP.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Lesson 1-1: Cash and Cash Equivalents, Internal Controls, and Cash
Restriction/Discounts
Lesson 1-1.1. Cash and Cash Equivalents, Internal Controls, and Cash
Restriction/Discounts
In this lesson, we will discuss the key concepts of cash and cash equivalents and
related internal controls, as well as review of various cash restrictions and discount. As
we learned previously, the assets are listed in order of liquidity. Thus, cash and cash
equivalents are always listed first on the assets as it is the most liquid. Cash consists of
coins, currency, available funds on deposit at the bank, money orders, certified checks,
cashier's checks, personal checks, bank drafts, and savings accounts. Cash equivalents
are short-term, highly liquid investments that are readily convertible to know amounts of
cash. They present an insignificant at risk and their maturity is lower than three months
or 90 days.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Let's now discuss the various internal controls over cash. It's the most liquid item we
have on the balance sheet. We have to really be prepared to watch both our receipts
and disbursements. In receipts, we look at separation of duties. This is the key. Make
sure employees involved in the recording keeping do not also have physical access to
the assets. Next, we talk about cash disbursements. The payments should be made by
check, which should be signed by an authorized officer of the company, and all those
payments should be authorized. In other words, they should include the purchase order
or purchase order signed by an authorized manager. About the bank reconciliation at
the end of each column that month, the bank supplies each customer with a bank
statement. If neither the bank nor the customer made any errors, the balance of cash
reported by the bank to the customer equals that shown in the customer's owns records.
This is why it's very common that all the companies make its bank accounts
reconciliation. It's a kind of control.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Next, let's discuss the restricted cash or cash that is restricted in some manner and not
available for general use. Typically, it might be for a specific purpose, such as future
property plant equipment, or future planned expansion, for example. It also can be
contractually imposed, where sometimes the banks impose restrictions on their bank
loans. This restricted cash is then classified on the balance sheet in line with a related
debt instrument where they're current or non-current. In most cases, you'll find restricted
cash classified as non-current assets on the balance sheet because it's tied into
property, plant, equipment, and long-term debit.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Some people have overdrawn their bank accounts. Bank overdrafts occur when a
company writes a check for more than the amounts on its account. Companies should
report bank overdrafts in the current liabilities section, adding them to the amounts
reported as accounts payable. Bank overdrafts are generally not offset against the cash
account. EMIR exemption is when available cash is present in another account in the
same bank on which the overdraft occurred.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Before talking about trade and cash discounts, let's talk briefly about receivables.
Receivables are claims held against customers and other for money, goods, or
services. Companies classify receivables as either current or long-term assets.
Companies expect to collect current receivables within a year or during the current
operating cycle, whichever is longer. All other receivables are classified as long-term.
Receivables are further classified in the balance sheet as either trade or non-trade
receivables. Trade receivables are accounts receivable and notes receivable. Accounts
receivable are oral promises of the purchaser to pay for goods and services sold. They
represent opening accounts resulting from short-term extension of credit. A company
normally collects them within 30-60 days. Notes receivables are written promises to pay
a certain sum of money on a specified future date. They may arise from sales financing
or other transactions. Notes may be short-term or long-term and generally include an
interest component. Nontrade receivables arise from a variety of transactions outside
the normal course of business. Some examples of nontrade receivables are deposits
pay to cover potential, that matrices are losses or as a guarantee of a promise of
payment, dividends and interest receivables, etc. Because of the peculiar nature of
nontrade receivables, companies generally report known trade receivables as separate
items in the balance sheet.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Now, let's discuss trade and cash discount. A trade discount is a percent reduction from
the list price. It's not recognized it in the accounting records and the customers are billet
net of discounts. Next, we have a cash discount, which has a reduction in the amount to
be paid by a customer paying on credit if they pay within a specific time frame. For
example, the very common invoice terms of 2/10 net 30 indicates a 2% discount will be
off the price if paid within 10 days, or the full payment is required in 30 days. Because of
that, we can work with the gross and net method.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Let's discuss the two methods of recording cash discount. First, we have the gross
method. It recognizes the receivables, its gross amount, and if they discount happens, it
will be recognized as a decrease in sales revenue. The other method, the net method,
recognize the revenues and accounts receivable less the cash discount. Discounts not
used are sales discounts forfeited. They are created and added to sales revenue.
Let's work with an example now. Imagine that company ABC sells goods on account for
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
$10,000 to Gies College of Business on June 1, with terms 2/10, net 30. How should
ABC record this transaction? First, we work with the gross method. As the name says,
the revenue will be recognized at the gross amount of $10,000. Debit on accounts
receivable and credit on sales revenue at 10,000.
Using the net method, we can see that the revenue will be recognized at the net
amount, 10,000-0.02*10,000=9,800. It means like Gies will use the total discount for the
first 10 days.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
On June 10th, Gies paid $4,900 to ABC. 4,900 means 5,000-2% of 5,000. If working
with the gross method ABC, we make a debit on cash at 4,900, debit on sales discount
of 100, and a credit of 5,000. The discount is only recognized if the customer pays it in
the discount window.
For the net method that we only have to recognize a debit on cash had 4,900 and a
credit on accounts receivable add 4,900.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
On June 31, Gies pay the remaining balance of 5,000. So, on gross method, we have a
debit on cash at the amount of 5,000 and the credit on accounts receivable at the same
amount.
On the net method, there's two debit on cash at $5,000. Credit at accounts receivable at
4900, and the credit on sales discount forfeited at 100.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Lesson 1-2: Receivables, Uncollectable Receivables and Bad Debt
Expense Estimation Methods
Lesson 1-2.1: Receivables, Uncollectable Receivables and Bad Debt Expense
Estimation Methods
Hi everyone, in this class we'll discuss returns on collectible, receivables and bad debt
expense estimation methods.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Let's start with returns. Sales returns can happen anytime. The merchandisers return it
for a refund or for credit to be applied to other purchases as gift cards. The companies
can also give incentives for the customer to keep the merchandise called allowances.
When is the best time to recognize the possible sales returns or allowance? The best
one is in the time of the sale or in the end of the period because we can use the
matching principle. If we don't use the matching principle, the next year's net income will
be understated as the previous year will be overstated.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Fighting Illini sold 200,000 shirts for the 2024 season for $14 million. So, each shirt
sales price equals $70. The shirts cost 65% to Fighting Illini, so the total cost equals 9.1
million. Every year, Fighting Illini experiences 5% of returns regularly, which equals
700,000 from the total sale. At the end of the year, but half of the season Fighting Illini
experienced only 3% of sales return. How would we record these transactions?
For the sales in 2024, supposing that Fighting Illini received it by cash. It's a debit on
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
cash and a credit on sales revenue in the amount of 14 million. In another journal entry,
we must make a debit on cost of goods sold and a credit on inventory at 9.1 million.
As the company experienced at 3% of sales return, we have a debit on sales return and
a credit on cash at 420,000. If it was a save on account, so you debited accounts
receivable before and you would make a credit on accounts receivable instead of cash.
Because you received the inventory back, you make a debit on inventory and a credit
on cost of goods sold at 273,000.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
As the total return expected is 5%, but Fighting Illini received 3% back. So, 2% is
expected to happen in the next year. Remember, we are working with the matching
principle and the net income from 2025 cannot be punished because of that. So, 2% is
the estimated amount for sales return in 2025. We are going to make a debit on sales
return and a credit on refund liability in the amount of 280,000. As we expect to receive
some inventories back, we make a debit on inventory estimated returns and a credit on
cost of goods sold in an amount of 182,000.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Let's say that the returns occurred in 2025 so I will make a debit on refund liability and a
credit on cash for the remaining balance. I still have to make a debit on inventory and a
credit on inventory estimated returns in the amount of 182,000.
But imagine that instead of expecting 280,000 on returns, I expect only 200,000. So, I
have to make the adjustments to my provisions. I adapt refund liability and credit sales
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
returns at 80,000. And I will also adjust the inventories making a debit on inventory and
a credit on inventory estimated returns in the amount of 52,000.
In this lesson, we will now discuss the uncollectible of some of our receivables as well
as the two methods related to the estimation of bad debt expense. Very surprising to
some folks. Some customers will not pay their bills. They will default on their payments,
for example due to bankruptcy issues, possibly service or product issues. So again, this
concept called bad debt expense is the inherit cost of granting credit to customers. In
other words, this expense is simply a cost of doing business. But Generally Accepted
Accounting Principles or GAAP, we are required to estimate this expense per the
matching principle that we learned about in part one of the course. Thus, we now report
receivables at their net realizable value or NRV.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
For example, on the Microsoft 2022 10-K statement under their balance sheet, we see
receivables listed as such. It actually says that the current assets, the receivables, are
less the allowances of 633 and 751 million respectively. So, in other words, those net
amounts show under 2022 and 2021 are basically the net realizable value. In the next
slide, we will discuss the methods of accounting for uncollectible accounts and after that
I will tell you how we can find that numbers.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
We have two methods of accounting for uncollectible accounts. The first one, the direct
write-off method, is a method not allowed by GAAP because it's theoretically deficient. It
doesn't follow the matching principle and receivables won't be started at net realizable
value. We will make an example of it in a few seconds.
The second method is the allowance method. It's allowed by GAAP because the
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
receivables will be at net realizable value on the assets. We will accrue the bad debt
expense and create the allowance for uncollectible accounts in the assets.
Here is an example of the direct write-off method. Assume Gies College of Business will
not receive from company ABC an amount of 10,000 anymore. Gies didn't create any
allowance and we use the direct write-off method. So Gies makes a debit on bad debt
expense and a credit on accounts receivable at 10,000.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Now, let's make an example with the allowance method. Assume that Fighting Illini had
credit sales of 7 million in 2024. On December 31, its accounts receivable has an
amount of 250,000. The credit department estimates that 5% of these sales will be
uncollectible. Allowance for bad debt was zero at that time. So, we make a debit on bad
debt expense and a credit on allowance for uncollectible accounts at 12,500. This last
account is a contra asset account that decreases accounts receivable.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Look at the balance sheet after the last journal entry. Accounts receivable is on its
naturalizable value.
Assume now that Gies concludes that they will not receive 5,000 from a customer
anymore. So, we must make a debit on allowance for uncollectable accounts in an
amount of 5,000 and a credit on accounts receivable at the same amount. Look that the
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
net amount didn't change but accounts receivable and the allowance both decreased it
by the same amount.
Assume that the same customer that has been written off is reinstated, but just half of it.
So, we must make a debit on accounts receivable and a credit on allowance for
uncollectible accounts in the amount of 2.5K. Look that accounts receivable increased
and allowances for uncollectible accounts increased too, but the net realizable value
remains the same.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Let's say that at the end of the year Gies decided after recalculating the risk to decrease
the allowance for the following year. So, to decrease it, we make a debit on allowance
for a collectible account and a credit on bad debt expense, in this case, it decreased by
2,500. The net realizable value increased by the amount decreases at the allowances.
But how can we estimate the amount of allowance for the following year? Let's see it in
the next slide.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
To estimate the allowance, the company can use the percentage of receivables
approach and the current expected credit loss, also call it CECL. In the percentage of
receivables approach, the companies will use one composite rate or an aging schedule
using different rate through customers or customers clusters. This is the most used
approach by the company. It's easy and inexpensive because it doesn't need to
purchase programs and systems to calculate risk by risk of any customer. To use only
one composite rate, the company only need to see the past data. Or maybe simulate
some market risks and multiply it to the amount of receivables at a point in time or the
credit sales that happen in the year. Let me show you how to work with the aging
schedule method.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
For the aging schedule method, which is the percentage of receivables approach, we
need to prepare an aging schedule as of year-end. The headings you see on this slide
here are days outstanding. The accounts receivable dollar amount, the percent and
collectible based on past history and the total allowance per day is outstanding. In the
first category of 0 to 60 days or which was 500,000 worth of receivables that have a 5%
passed uncollectibility. The second category is 61 to 90 days which has 250,000 of
receivables at a 10% on uncollectibility. Lastly, our third and final category is 91 to 120
days, we have 100,000 of receivables there at a 30% uncollectibility. As you can see
here, it seems to make sense that the older receivables get, the greater the chance of
not collecting it. Please note that the total of all these receivables amounts on this aging
schedule add up to the 850,000 receivables balance on our balance sheet as you talked
about earlier. Have now completed the aging schedule by multiplying the dollar amount
times the percent of passed uncollectibility. When you multiply those free amounts out
and sum them up, the total allowance for doubtful accounts per the aging is $70,000.
Now, the only thing to do is to make the journal entry. If there is no balance in the
allowance, you debit bad debt expense and credit allowance in an amount of 70K.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
The second and last approach or I can say model. It's the current expected credit loss,
also called CECL. This model doesn't have a mandatory style but has to capture all the
risks from the clients measuring the future probability of default. So, it does not look only
into the past, but present and future. This is not new data or information because a lot of
financial institution have used this for a lot of years ago. I remember when I worked in a
bank, and I use it to make a model for the allowances with a Gaussian time series
model. So, this method is required starting 2020, but only mandatory for financial
institutions. For sure, other financial institutions already used models to calculate it. All
of us have a credit risk and it's monitored by them. So, it's easy to create any models
with this kind of information for each customer even big firms that can purchase this
information from banks. For small companies or maybe medium ones, I think they will
continue using the other approach because it's easier and not expensive to them.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Lesson 1-3: Notes Receivable and Receivables Financing and
Management
Lesson 1-3.1: Notes Receivable and Receivables Financing and Management
Hello everyone. In this class we talk about the notes receivable, how the companies can
capture some money with their receivables, and finally we can discuss some ratio
analysis.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Notes receivable, a formal credit arrangements between a lender and a borrower, and
we can classify them as current and non-current assets depending on their maturities.
Commonly, we should use simple interests for the current ones and for long-term ones,
we should use compound interest. It's very normal in other countries to use compound
interest on short or long-term notes.
For the short-term interest-bearing notes, we use simple interest. Remember that the
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
payment equals principal plus interest. This is how we will calculate the future value. We
must accrue all the interests. Let's make an example in the following slide.
Imagine that company, ABC sold computers to Gies College of Business. Gies agreed
to accept 200,000, four months, 6% note in payment for them. How should we record
this transaction? First, we must calculate the interests. Interests equals
200,000*4/12*0.06 so it equals $4,000. This total amount of interest will be accrued, and
you can see that at the end of the transaction.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
At the beginning of the transaction, there is a debit on notes receivable and a credit on
sales revenue in the amount of $200,000. Imagine that at the end of the transaction, we
have a debit on cash at $204,000, and the credit on notes receivable at 200,000, and
the credit on interest revenue at 4,000. I can accrue the entire interest in the end, but
you can accrue with per month, mainly, when you are in the middle of the timeline and
you must provide the balance sheet, and other financial statements.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Let's work with a noninterest-bearing note. For this kind of note, the face amount is fixed
to be paid in the future. Face amount equals future value. The interest is discounted
from the face amount and the discount will be a contra-asset accounts to notes
receivable.
Let's work with an example about noninterest-bearing note. Imagine that company ABC
sold computers to Gies College of Business. Gies agreed to accept a noninterest-
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
bearing note that costs $200,000 to be paid in four months. These products have a cash
sales price of $192,000. How should we record this transaction?
First, let's calculate the discount rate note and I'll use a simple rate, not a compounded
one. As I told you, maybe the country you are now uses a compounded one instead of a
simple one. The future value equals 200,000, the present value equals 192,000, n=4 so
the simple rate equals 13%, which means 2,000 per month.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Let's make the journal entries now. The first journal entry is a debit or note receivable at
200,000, a credit on discount on notes receivable at 8,000, and a credit on sales
revenue at 192,000. In the end of the process, mainly in the same year, we make a
debit on discount on notes receivable and a credit on interests revenue at 80,000. A
debit on cash at 100,000, and a credit on notes receivable are the same amount.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Again, if I'm accruing it monthly, so I can debit discount on notes receivable and credit
interest revenue per month until the end.
For subsequent valuation of the notes receivable, we can use an allowance accounts to
decrease it to its net realizable value, so we discount the risk of not collecting. If the
company has a good risk system, the company can use the CECL model, like the
accounts receivable.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
There are three methods we can use for financing here. One is secured borrowing,
where we pledge our receivables as collateral for a loan. There is no special accounting
treatment needed here though. It's just that we have to make sure we disclose this very
carefully and fully in our disclosure notes in our income statement. The remaining three
methods of financing are the sale of receivables, where it can be sold at a gain/loss
quite honestly, like any other asset with a very similar accounting treatment. Third, is a
very unusual term call it factoring of receivables, where the company sells its
receivables to a financial company that buys those receivables and then charges a fee
to do the billing and collection.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
On April 1, 2023, Gies College of Business borrowed $250,000 from a local bank and
signed a note. Interest at 12% is payable monthly. The company assigned $420,000 of
its receivable as collateral for the loan. The Champaign bank charges or finance fee of
1% of the accounts receivable assigned. How should we record the journal entries? As
the finance charge equals 1% of 420,000, so the journal entry would be a debit on cash
at 245,800 and a debit on finance charge experience at 4,200. The credit is on notes
payable at $250,000.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Assume 150,000 of the receivables assigned are collected in April. Now we make a
debit on cash in the amount of 150,000 and a credit on accounts receivable at the same
amount. Finally, I will make a debit on interest expense of 2,500, a debit on notes
payable at 150,000, and a credit on cash at 152,500.
If a financial institution makes an arrangement of sales without recourse, the buyer can't
ask the seller for more money if the receivables are uncollectible. When a company
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
sells accounts receivable with recourse, the seller retains all of the risks of bad debt to
compensate the seller for retaining their risk of bad debts. The buyer usually charges a
lower fee when receivables are sold with recourse.
Let's work first with a fun example without recourse. Gies sold 250,000 of accounts
receivable to a local financial institution, FI, on a without-recourse basis. Gies will
transfer the receivable records to the local FI. There is a finance charge of 2% of the
face amount of the accounts receivable and the FI retains an amount equals to 4% of
the accounts receivable because of risks. How should we record the journal entries?
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
For this example, the company received a net amount of 235,000 in cash. This net
amount because there is a receivable from the financial institution equals 10,000. This
10,000 is 4% times 250,000. There is also a debt on loss on sale of receivables at
5,000, which means 2% on the total amount of 250,000. In the end, a credit of 250,000
on accounts receivable.
Now let's work with the same example, but with recourse. In this one, Gies sold 250,000
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
of accounts receivable to a local financial institution, FI, on a with-recourse basis. Gies
will transfer the receivable records to the local FI. There is a finance charge of 2% of
their face amount of the accounts receivable. The recourse liability has a fair value of
$2,000.
I restart this example of credits and debits by the credit side so you can understand the
rest easier. I will credit the total amount of the accounts receivable of 250,000 and the
recourse liability of 2,000. Gies received only 235,000. That's a debt on cash. There is
still the receivable from the financial institution of 10,000, and by difference, I have a
debit on loss on sale of receivables at 7,000.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Now, let's take a look at ratio analysis for assessing how well we manage our
receivables. There are two common measures. One is the receivables turnover ratio,
which provides a monitor over receivables and its overall collectability. The higher the
ratio, the better. Example would be a ratio of 2.0 would indicate that this company is
twice as good at collecting and receivable as a different company have a ratio of one.
The calculation itself, as you see here, is net sales divided by our average net
receivables. And for this course, anytime I talk about an average in the denominator, it's
a two-point average beginning of year, end of year divided by two. Next, we can parlay
this into something, call it average collection period. It simply represents an
approximation of the number of days or average receivables balances outstanding. We
take 365 days, the number of days in a year excluding leap years and divide by that
receivables turnover ratio we just calculated. Please note that these ratios should be
compared to the industry average to see how we compare against our peers. As well as
we can actually reflect trends over a period of maybe 3, 5, 10 years.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Lesson 1-4: Bank Reconciliations
Lesson 1-4.1: Bank Reconciliations
In this lesson, we will discuss how companies use bank reconciliations as a powerful
internal control method over their cash. Bank reconciliations involve the following key
steps. First of all, we compare our book balance what's on our general ledger versus the
bank balance per the bank statement. We can reconcile these differences, which are
typically two items, timing differences, and we will discuss those as well as errors. And
they can happen on both sides, bank, or book sites.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
The following steps are required to complete bank reconciliation. First of all, we make
our adjustments to the bank balance, we add in deposits in transit. For example, if I
send a check on January 29th to my bank and it doesn't reach them until February 3rd
based on the January 31st statement, they wouldn't have gotten that by then. That
deposit in transit has to be added into their balance. Likewise, if I cut checks at the end
of a period, they probably won't pay those clear the system by the end of the calendar
month. So, we have to subtract those outstanding checks out, and then hopefully this
doesn't occur, but sometimes it does. We have to add or detect any bank errors that
may be occurring during the period.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Next, let's take a look at the book balance because we have to make similar
adjustments to our general ledger. If the bank is making some collections on our behalf,
maybe they have a repository that they are collecting our checks. We have to add those
bank collections into our book balance. Likewise, there is a very key item I want you to
take a look at on your next bank reconciliation. Take a look at the bank's service charge.
Believe it or not, the banks do tend to charge you for fees you may not be aware of.
Maybe you have fallen below a minimum balance. So that's something we have to
deduct out of our book balance as well. If you do have something current in our
sufficient funds check where you have cut a check, but there isn't not enough balance in
your account to cover that, you have to deduct those back out as well. And then lastly,
sometimes this happens, you make a posting error throughout the month, you have to
add or deduct any errors that you have made into your cash account.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
So, we have working on both sides now. After both those steps have been completed,
basically we have corrected the balances for both your bank and your book side. Those
two corrected balances must agree. The last step that you have to do is to prepare
some journal entries for any of those adjustments you made to your book balance or
general ledger.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
Lesson 1-5: USGAAP x IFRS
Lesson 1-5.1: USGAAP x IFRS
Hello everyone, let's learn a little bit about the differences between USGAAP and IFRS.
About cash and cash equivalents, USGAAP allows overdrafts should be treated as a
liability. But if you have some accounts in the same bank, that it's a net positive amount,
it's allowed to have this positive amount in the assets. In the all the hand, IFRS allows
overdrafts to be offset against other cash accounts. Even though they are from different
checking accounts from different banks.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
About accounts and notes receivable, USGAAP allows the fair value option for
accounting for them. We will discuss this topic better in the future, but it means that, you
can evaluate the receivables at their market price, making some adjustments to it in a
different account. Remember that USGAAP doesn't allow revaluations, so you cannot
change the historical cost but can make the adjustment in another account for some
investments. The USGAAP still requires more disaggregation of the receivables, in the
balance sheet or notes. And CCL model, is apparently more complete than the IFRS
model, and it involves more receivables in its measurement.
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
IFRS allows the fair value option but it's more restrictive. We will see this topic again
when discussing investment. This standard also does not require separated disclosure.
And the expected credit loss ECL model reports a twelve-month model unless credit
quality has deteriorated significantly. A little different from USGAAP.
About transferring the receivables, USGAAP aims at whether control of assets has
shifted from the transfer to the transferee. IFRS requires a different decision process,
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Accounting Analysis Ⅰ: Measurement and Disclosure of Assets
Professor Gerlando Lima
like if the company transfers all of the risks and rewards of ownership substantially, the
transfer is treated as a sale. If the company retains all of the risks and rewards of
ownership substantially, the transfer is treated as a secured borrowing. Otherwise, the
company accounts for the transactions as a sale if it has transferred control and as a
secured borrowing if it has retained control. As you can see in this topic and in many
other ones, IFRS is much more subjective than USGAAP.
Lesson 1-5.2: Wrap-Up to Cash & Accounts Receivable
Hello everyone. Now that you have concluded the materials for this module, let's do a
real quick wrap up or summary of what you have learned in this week's module. This
week's module initially discusses the topic of cash and its related internal controls as
well as various restrictions and discounts where we have talked about the gross versus
the net methods. Next, we discussed the receivables in general, the uncollectibility of
receivables and the two methods the GAAP allows us to estimate our bad debt
expense. Next, we discussed our notes receivable as well as the various financial tools
that can aid us in getting financing with receivables. And then finally, we look at the ratio
analysis for measuring the management of our receivables. After that we had that
significant internal control topic or bank reconciliations mentioned earlier. Finally, we
talked about some differences that we can find between USGAAP and IFRS in this
topic. I hope you enjoyed this week's module and see you next time when we discuss
the next item on our balance sheet inventories.
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