CHAPTER 7
Cash and Receivables
Overview
We begin our study of assets by looking at cash and receivables—the two assets typically listed
first in a balance sheet. Internal control and classification on the balance sheet are key issues we
address in consideration of cash. For receivables, the key issues are valuation and the related income
statement effects of transactions involving accounts receivable and notes receivable.
Learning Objectives
1. Define what is meant by internal control and describe some key elements of an internal control
system for cash receipts and disbursements.
2. Explain the possible restrictions on cash and their implications for classification on the balance
sheet.
3. Distinguish between the gross and net methods of accounting for cash discounts.
4. Describe the accounting treatment for merchandise returns.
5. Describe the accounting treatment of anticipated uncollectible accounts receivable.
6. Describe the two approaches to estimating bad debts.
7. Describe the accounting treatment of short-term notes receivable.
8. Differentiate between the use of receivables in financing arrangements accounted for as a
secured borrowing and those accounted for as a sale.
9. Describe the variables that influence a company’s investment in receivables and calculate the
key ratios used by analysts to monitor that investment.
10. Discuss the primary differences between U.S. GAAP and IFRS with respect to cash and
receivables.
Lecture Outline
Part A: Cash and Cash Equivalents
I.
What Is Included? (T7-1)
A. Cash includes currency and coins, balances in checking accounts, and items acceptable in
these accounts, such as checks and money orders received from customers.
B. Cash equivalents include such items as money market funds, treasury bills, and
commercial paper.
C. Companies typically classify investments with maturity dates of three months or less when
purchased as cash equivalents. The company's policy must be described in a disclosure
note.
II. Internal Control of Cash (T7-2)
A. Internal control refers to a company's plan to (a) encourage adherence to company policies
and procedures, (b) promote operational efficiency, (c) minimize errors and theft, and (d)
enhance the reliability and accuracy of accounting data.
B. Section 404 of the Sarbanes-Oxley Act requires a company to document and assess its
internal controls. The company’s auditors must provide an opinion on management’s
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assessment. The Public Company Accounting Oversight Board’s Auditing Standard No. 2
further requires the auditor to express its own opinion on whether the company has
maintained effective internal control over financial reporting.
C. A critical aspect of an internal control system is the separation of duties.
D. In the cash receipt process, the employee who opens the mail should not also deposit the
checks nor be involved in recordkeeping.
E. In the cash disbursement process, responsibilities for check signing, check writing, check
mailing, cash disbursement documentation, and recordkeeping should be separated
whenever possible.
III. Restricted Cash and Compensating Balances
A. Only cash available for current operations or to pay current liabilities should be classified
as a current asset.
B. Restrictions on cash can be informal, arising from management intent or might be
contractually imposed.
1. Cash that is restricted and not available for current use usually is reported as
investments and funds or other assets.
2. An example of a contractual restriction on cash is a lender-imposed compensating
balance requirement.
C. IFRS (T7-3): U.S. GAAP and IFRS are similar with respect to accounting for cash and
cash equivalents. One difference relates to bank overdrafts. U.S. GAAP requires that
overdrafts typically be treated as liabilities. IFRS allows bank overdrafts to be offset
against other cash accounts.
Part B: Current Receivables
I.
Initial Valuation of Accounts Receivable
A. Receivables resulting from the sale of goods or services on account are called accounts
receivable.
B. Accounts receivable are current assets because, by definition, they will be converted to
cash within the normal operating cycle.
C. The typical account receivable is valued at the amount expected to be received, called the
net realizable value.
D. A trade discount reduces the actual price to a customer and is recognized indirectly by
recording the sale at the net of discount price.
E. Cash discounts reduce the amount to be paid if remittance is made within a specified short
period of time. (T7-4)
1. Using the gross method, we record the receivable and sales revenue at the gross, before
discount price. Discounts taken are recorded as sales discounts (reductions to gross
sales revenue).
2. Using the net method, we record the receivable and sales revenue at the net of discount
price. Discounts not taken are recorded as interest revenue.
3. The effect on the financial statements of the difference between the two methods
usually is not material.
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II. Subsequent Valuation of Accounts Receivable
A. Possible returns and customer nonpayment could cause subsequent accounts receivable to
be less than initial valuation.
B. If sales returns are material, they should be estimated and recorded in the same period as
the related sale. (T7-5)
C. If bad debts are material, the allowance method should be used. The method estimates
future bad debts and matches that expense with the related sales revenue.
1. There are two approaches to estimating bad debts, the income statement approach and
the balance sheet approach. (T7-6)
a. With the income statement approach, bad debt expense is a percentage of the
period's net credit sales. The amount recorded ignores any prior balance in the
allowance account.
b. With the balance sheet approach, the net realizable value of receivables is
determined, often using an aging schedule. Bad debt expense is equal to the
required adjustment to the allowance account to bring net receivables to realizable
value.
2. With either approach, accounts receivable is reduced to net realizable value indirectly
by an adjusting entry in which bad debt expense is debited and an allowance account is
credited.
3. Actual bad debt write-offs reduce both accounts receivable and the allowance account.
(T7-7)
4. When previously written-off accounts are collected, the receivable and the allowance
are reinstated and the cash collection is recorded as usual.
D. Direct write-off method
1. This is a method not generally permitted by GAAP.
2. Bad debt expense is simply the actual bad debt write-offs during the period.
III. Measuring and Reporting Accounts Receivable—A Summary
A. Summary of U. S. GAAP (T7-8)
B. International Financial Reporting Standards (T7-9)
IV. Notes Receivable
A. Notes receivable are formal credit arrangements between a creditor (lender) and a debtor
(borrower).
B. The typical note receivable requires the payment of a specified face amount, also called
principal, at a specified maturity date, along with interest at a specified percentage of the
face amount. (T7-10)
C. Sometimes a receivable assumes the form of a so-called noninterest-bearing note.
1. Noninterest-bearing notes actually do bear interest, but the interest is deducted at the
onset (or discounted) from the face amount to determine the cash proceeds made
available to the borrower. (T7-11)
2. When interest is discounted from the face amount of a note, the effective interest rate
is higher than the stated discount rate.
D. Similar to accounts receivable, if a company anticipates bad debts on short-term notes
receivable, it uses an allowance account to reduce the receivable to net realizable value.
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V. Financing with Receivables
A. Financial institutions have developed a wide variety of methods that allow companies to
use their receivables to obtain immediate cash.
B. These methods can be described as either:
1. A secured borrowing.
2. A sale of receivables.
C. Assignment and pledging are examples of arrangements treated as a secured borrowing.
1. An assignment involves the pledging of specific accounts receivable as collateral for
a loan. (T7-12)
2. The pledging of accounts receivable involves the assigning of accounts receivable in
general rather than specific receivables. No specific accounting treatment is needed
other than the disclosure of the pledging arrangement.
D. Two popular arrangements used for the sale of accounts receivable are factoring and
securitization. Recent changes in U.S. GAAP have made it more difficult for
securitizations to achieve sales treatment (QSPEs have been eliminated, and SPEs are
more likely to be required to be consolidated).
E. The sale of accounts receivable can be made without recourse or with recourse.
1. The buyer assumes the risk of uncollectibility when accounts receivable are sold
without recourse, and the transfer is accounted for as a sale. The typical factoring
arrangement is made without recourse. (T7-13)
2. The seller retains the risk of uncollectibility when accounts receivable are sold with
recourse. If certain criteria are met, factoring with recourse is accounted for as a sale;
otherwise, its accounted for as a borrowing. (T7-14)
F. The transfer of a note receivable to a financial institution is called discounting. (T7-15)
G Choosing sales versus secured borrowing:
1. In general, transferors want sale treatment (T7-16)
2. A full transfer can be treated as a sale when it meets three conditions (T7-17)
3. Partial transfers only can be treated as a sale if qualify as a participating interest.
H. Financing with Receivables – A Summary (T7-18)
I. IFRS: Similar treatment of sales and secured borrowings, but a different decision process
for determining which approach to use. (T7-19)
Decision Makers’ Perspective
A. A company's investment in receivables is influenced by several variables, including the
level of sales, the nature of the product or service sold, and credit and collection policies.
B. Management's choice of credit and collection policies often involves trade-offs.
Management must evaluate the costs and benefits of any change in credit and collection
policies.
C. The ability to use receivables as a method of financing also offers management
alternatives.
D. Investors and creditors can gain insights by monitoring a company's investment in
receivables. (T7-20)
1. The receivables turnover ratio is calculated by dividing net sales by the average
accounts receivable.
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2. The average collection period is calculated by dividing 365 days by the receivables
turnover ratio.
E. Bad debt expense is one of a variety of discretionary accruals that provide management
with the opportunity to manipulate income.
Appendix 7-A: Cash Controls
A. One of the most important tools used in the control of cash is the bank reconciliation.
B. Differences between the book and bank balances for cash occur due to (1) differences in
the timing of recognition of certain transactions, and (2) errors. (T7-21)
C. Step one in a bank reconciliation adjusts the bank balance to the corrected cash balance. In
addition to bank errors, adjustments include:
1. Checks outstanding.
2. Deposits outstanding.
D. Step two adjusts the book balance to the corrected cash balance.
1. In addition to company errors, these adjustments typically include service charges,
charges for NSF checks, and collections made by the bank on the company's behalf.
2. Each of these adjustments requires a journal entry to correct the book balance. (T7-22)
E. Companies often keep a small amount of cash on hand to pay for low cost items such as
postage, office supplies, delivery charges, and entertainment expenses. A petty cash fund
provides an efficient way to handle these payments.
F. The petty cash fund always should have a combination of cash and receipts that together
equal the amount of the fund.
G. The fund is established by writing a check to the custodian, and the appropriate expense
accounts are debited when the petty cash fund is reimbursed. (T7-23)
Appendix 7-B: Accounting for Impairment of a Receivable and a Troubled Debt
Restructuring
A. If a creditor’s investment in a receivable becomes impaired, the receivable is remeasured
based on the discounted present value of currently expected cash flows at the loan’s
original effective rate (regardless of the extent to which expected cash receipts have been
reduced).
B. When the terms of a debt agreement are changed as a result of financial difficulties
experienced by the debtor (borrower), the new arrangement is referred to as a troubled debt
restructuring.
1. When the receivable is continued, but with modified terms, the difference between the
receivable’s carrying amount and the discounted present value of the cash flows after
the restructuring is reported as a loss. (T7-24)
2. When the receivable is settled outright at the time of the restructuring the creditor
simply records a loss for the difference between the carrying amount of the receivable
and the fair value of the asset(s) or equity securities received. (T7-25)
C. IFRS: Accounting for impairments are handled similarly under U.S. GAAP and IFRS, but
differ somewhat in level of analysis and the specifics of impairment indicators. Both U.S.
GAAP and IFRS allow reversals of impairments under some circumstances. (T7-26)
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PowerPoint Slides
A PowerPoint presentation of the chapter is available at the textbook website.
Teaching Transparency Masters
The following can be reproduced on transparency film as they appear here, or
you can use the disk version of this manual and first modify them to suit your
particular needs or preferences.
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CASH AND CASH EQUIVALENTS


Cash includes:
 Bank drafts
 Cashier’s checks
 Money orders
Cash equivalents include liquid investments that have a
maturity date of three months or less from the date of
purchase, such as:
 Money market funds
 U.S. Treasury bills
 Commercial paper
T7-1
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INTERNAL CONTROL OF CASH

The focus is on controls intended to improve the accuracy and
reliability of accounting information and to safeguard the
company’s assets.

Separation of duties is a key aspect of an internal control
system.

Individuals that have physical responsibility for assets
should not also have access to accounting records.

Periodic reconciliation of book balances and bank
balances to the correct balance is one of the most
important tools used in the control of cash.

A petty cash system is employed by many business
enterprises.
T7-2
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International Financial Reporting Standards
Cash and Cash Equivalents.
In general, cash and cash equivalents are treated
similarly under IFRS and U.S. GAAP. One difference relates to bank overdrafts,
which occur when withdrawals from a bank account exceed the available balance.
U.S. GAAP requires that overdrafts typically be treated as liabilities. In contrast, IAS
No. 7 allows bank overdrafts to be offset against other cash accounts when overdrafts
are payable on demand and fluctuate between positive and negative amounts as part
of the normal cash management program that a company uses to minimize their cash
balance.
For example, imagine LaDonia Company has two cash accounts with the following
balances as of December 31, 2013:
National Bank:
Central Bank:
$300,000
(15,000)
Under U.S. GAAP, LaDonia’s 12/31/11 balance sheet would report a cash asset
$300,000 and an overdraft current liability of $15,000. Under IFRS, LaDonia would
report a cash asset of $285,000.
T7-3
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CASH DISCOUNTS
The Hawthorne Manufacturing Company offers credit customers
a 2% cash discount if the sales price is paid within 10 days. Any
amounts not paid within 10 days are due in 30 days. These
repayment terms are stated as 2/10,n/30. On October 5, 2013,
Hawthorne sold merchandise at a price of $20,000. The customer
paid $13,720 ($14,000 less the 2% cash discount) on October 14
and the remaining balance of $6,000 on November 4.
The appropriate journal entries to record the sale and cash
collection, comparing the gross and net methods are as follows:
Gross Method
Net Method
October 5, 2013
Accounts receivable
Sales revenue
20,000
20,000
Accounts receivable
Sales revenue
October 14, 2013
Cash
Sales discounts
Accounts receivable
13,720
280
14,000
Cash
13,720
Accounts receivable
13,720
November 4, 2013
Cash
Accounts receivable
6,000
6,000
19,600
19,600
Cash
Accounts receivable
Interest revenue
6,000
5,880
120
Illustration 7-3
T7-4
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SALES RETURNS

If material, sales returns should be anticipated by subtracting an allowance for
estimated returns from accounts receivable.
During 2013, its first year of operations, the Hawthorne Manufacturing Company sold merchandise
on account for $2,000,000. This merchandise cost $1,200,000 (60% of the selling price). Industry
experience indicates that 10% of all sales will be returned. Customers returned $130,000 in sales
during 2013, prior to making payment.
The entries to record sales and merchandise returned during the year, assuming that a perpetual
inventory system is used, are as follows:
Sales
Accounts receivable ..................................................
Sales revenue .........................................................
Cost of goods sold (60% x $2,000,000) .......................
Inventory ................................................................
Returns
Sales returns (actual return) .........................................
Accounts receivable ...............................................
Inventory ....................................................................
Cost of goods sold (60% x $130,000) ......................
2,000,000
2,000,000
1,200,000
1,200,000
130,000
130,000
78,000
78,000
At the end of 2013, the company would anticipate the remaining estimated returns using the
following adjusting entries:
Adjusting entries
Sales returns [(10% x $2,000,000) - 130,000] ..............
Allowance for sales returns ....................................
Inventory—estimated returns .....................................
Cost of goods sold (60% x $70,000) .......................
70,000
70,000
42,000
42,000
Assuming that the estimates of future returns are correct, the following (summary) journal entry
would be recorded in 2014:
Allowance for sales returns ........................................
Accounts receivable ..............................................
70,000
70,000
Illustration 7-4
T7-5
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UNCOLLECTIBLE ACCOUNTS RECEIVABLE

The allowance method attempts to estimate future bad debts
and match them with the related sales revenue.
The Hawthorne Manufacturing Company sells its products offering 30 days credit
to its customers. During 2013, its first year of operations, the following events
occurred:
Sales on credit
Cash collections from credit customers
Accounts receivable, end of year
$1,200,000
895,000
$ 305,000
There were no specific accounts determined to be uncollectible in 2013. The
company anticipates that 2% of all credit sales will ultimately become uncollectible.
Illustration 7-7
Income Statement Approach
Bad debt expense (2% x $1,200,000)............ 24,000
Allowance for uncollectible accounts ...
24,000
Allowance for uncollectible accounts is a contra account (valuation account) to
accounts receivable. In the 2013 balance sheet in the current asset section, accounts
receivable would be reported net of the allowance, as follows:
Accounts receivable
Less: Allowance for uncollectible accounts
Net accounts receivable
$305,000
(24,000)
$281,000
T7-6
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Balance Sheet Approach
Assume an aging of accounts receivable revealed a required allowance of
$25,500, and the allowance account prior to the adjusting entry was a credit
balance of $4,000:
Bad debt expense (25,500 - 4,000) ............... 21,500
Allowance for uncollectible accounts ...
21,500
This entry adjusts the allowance account to the required amount.
Accounts receivable
Less: Allowance for uncollectible accounts
Net accounts receivable
$305,000
(25,500)
$279,500
Allowance
Beg. bal.
4,000
Adj. entry
21,500
____
Bal.
25,500
T7-6 (continued)
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WHEN ACCOUNTS ARE DEEMED UNCOLLECTIBLE

The actual write-off of a receivable using the allowance
method is recorded as a debit to the allowance account and a
credit to accounts receivable.
Assume that actual bad debts in 2014 were $25,000. These bad debts
would be recorded (in a summary journal entry) as follows:
Allowance for uncollectible accounts.....
Accounts receivable ...........................
25,000
25,000
Net realizable value is not directly affected by the write-offs.
Accounts receivable
Less: Allowance for uncollectible accounts
Net accounts receivable
$280,000
(500)
$279,500
When Previously Written-off Accounts Are Collected
Assume a $1,200 account that was previously written off is collected.
The following journal entries record the event:
Accounts receivable ................................
Allowance for uncollectible accounts
1,200
Cash .........................................................
Accounts receivable ...........................
1,200
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1,200
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T7-7
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Measuring and Reporting Accounts Receivable
Recognition
Depends on the earnings process; for most credit
sales, revenue and the related receivables are
recognized at the point of delivery.
Initial valuation
Initially recorded at the exchange price agreed upon
by the buyer and seller.
Subsequent valuation
Initial valuation reduced to net realizable value by:
1. Allowance for sales returns
2. Allowance for uncollectible accounts:
- The income statement approach
- The balance sheet approach
Classification
Almost always classified as a current asset.
Illustration 7-8
T7-8
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INTERNATIONAL FINANCIAL REPORTING STANDARDS
 Until recently, IAS No. 39 was the standard that specified appropriate
accounting for accounts and notes receivables, under the category of Loans and
Receivables. However, IFRS No. 9, issued November 12, 2009, will be
required after January 1, 2015, and earlier adoption is allowed, so in the time
period between 2010 and 2014 either standard could be in effect for a particular
company that reports under IFRS.
 Still, both of the IFRS standards are very similar to U.S. GAAP.
 IFRS and U.S. GAAP allow a “fair value option” for accounting for receivables
(although the IFRS standards restrict the circumstances in which that option is
allowed).
 IAS No. 39 permits accounting for receivables as “available for sale”
investments if that approach is elected upon initial recognition of the
receivable. IFRS No. 9 does not allow that option for receivables, and U.S.
GAAP only allows “available for sale” accounting for investments in securities
(so we discuss that approach further in chapter 12).
 U.S. GAAP requires more disaggregation of accounts and notes receivable in
the balance sheet or notes. For example, companies need to separately disclose
accounts receivable from customers, from related parties, and from others.
IFRS does not have that requirement.
T7-9
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INTEREST-BEARING NOTES RECEIVABLE
The Stridewell Wholesale Shoe Company manufactures athletic shoes that it sells to
retailers. On May 1, 2013, the company sold shoes to Harmon Sporting Goods. Stridewell
agreed to accept a $700,000, 6-month, 12% note in payment for the shoes. Interest is
payable at maturity. Stridewell would account for the note as follows:
To record the sale of goods in exchange for a note receivable.
May 1, 2013
Notes receivable................................................................ 700,000
Sales revenue ................................................................
700,000
To record the collection of the note at maturity.
November 1, 2013
Cash ($700,000 + 42,000) .................................................. 742,000
Interest revenue ($700,000 x 12% x 6/12) ...................
Notes receivable ...........................................................
42,000
700,000
Illustration 7-9
If the sale in the above illustration occurs on August 1, 2013, and the company's
fiscal year-end is December 31, a year-end adjusting entry accrues interest earned.
December 31, 2013
Interest receivable .................................................................
Interest revenue ($700,000 x 12% x 5/12)........................
35,000
35,000
The February 1 collection is then recorded as follows:
February 1, 2014
Cash [$700,000 + ($700,000 x 12% x 6/12)] ......................... 742,000
Interest revenue ($700,000 x 12% x 1/12)........................
Interest receivable (accrued at December 31) ..................
Note receivable ................................................................
7,000
35,000
700,000
T7-10
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NONINTEREST-BEARING NOTES
The preceding note could be packaged as a $700,000 noninterest-bearing note, with
a 12% discount rate.
May 1, 2013
Note receivable (face amount) ...........................................
Discount on note receivable ($700,000 x 12% x 6/12).....
Sales revenue (difference) .............................................
November 1, 2013
Discount on note receivable ..........................................
Interest revenue .........................................................
Cash ...............................................................................
Note receivable (face amount).......................................
700,000
42,000
658,000
42,000
42,000
700,000
700,000
If the sale occurs on August 1, the December 31, 2013, adjusting entry and the
entry to record the cash collection on February 1, 2014, are recorded as follows:
December 31, 2013
Discount on note receivable ..........................................
Interest revenue ($700,000 x 12% x 5/12) .......................
35,000
February 1, 2014
Discount on note receivable ..........................................
Interest revenue ($700,000 x 12% x 1/12) .......................
7,000
Cash ...............................................................................
Note receivable (face amount).......................................
35,000
7,000
700,000
700,000
T7-11
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ASSIGNMENT OF ACCOUNTS RECEIVABLE

An assignment involves the pledging of specific receivables
as collateral for a debt.
At the end of November 2013, Santa Teresa Glass Company had outstanding
accounts receivable of $750,000. On December 1, 2013, the company borrowed
$500,000 from Finance Affiliates and signed a promissory note. Interest at 12% is
payable monthly. The company assigned $620,000 of its receivables as collateral
for the loan. Finance Affiliates charges a finance fee equal to 1.5% of the accounts
receivable assigned.
Santa Teresa Glass records the borrowing as follows:
Cash (difference)....................................................
Finance charge expense* (1.5% x $620,000) .........
Liability—financing arrangement ................
490,700
9,300
500,000
Santa Teresa will continue to collect the receivables, record any discounts, sales
returns, and bad debt write-offs, but will remit the cash to Finance Affiliates, usually
on a monthly basis. When $400,000 of the receivables assigned are collected in
December, Santa Teresa Glass records the following entries:
Cash .....................................................................
Accounts receivable .......................................
400,000
Interest expense ($500,000 x 12% x 1/12) ...............
Liability—financing arrangement .....................
Cash ................................................................
5,000
400,000
400,000
405,000
* In theory, this fee should be allocated over the entire period of the loan rather than recorded as
expense in the initial period. However, amounts usually are small and the loan period usually is
short. For expediency, then, we expense the entire fee immediately
Illustration 7-13
T7-12
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ASSIGNMENT OF ACCOUNTS RECEIVABLE
(continued)
In Santa Teresa’s December 31, 2013, balance sheet, the receivables and
note payable would be reported together as follows:
Current assets:
Accounts receivable assigned ($620,000 – 400,000)
Less: Liability—financing arrangement ($500,000 – 400,000)
Equity in accounts receivable pledged
$220,000
(100,000)
$120,000
Illustration 7-5
T7-12 (continued)
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ACCOUNTS RECEIVABLE FACTORED WITHOUT RECOURSE

The buyer assumes the risk of uncollectibility when accounts
receivable are factored without recourse. The seller accounts
for the transaction as a sale.
In December 2013, the Santa Teresa Glass Company factored accounts
receivable that had a book value of $600,000 to Factor Bank. The transfer
was made without recourse. Under this arrangement, Santa Teresa
transfers the $600,000 of receivables to Factor, and Factor immediately
remits to Santa Teresa cash equal to 90% of the factored amount (90% x
$600,000 = $540,000). Factor retains the remaining 10% to cover its
factoring fee (equal to 4% of the total factored amount; 4% x $600,000 =
$24,000) and do provide a cushion against potential sales returns or
uncollectible accounts. After Factor has collected cash equal to the
amount advanced to Santa Teresa plus their factoring fee, Factor remits
the excess to Santa Teresa. Santa Teresa Glass records the transfer as
follows:
Cash (90% x $600,000) ....................................
540,000
Loss on sale of receivables (to balance) ..........
34,000
Receivable from factor
(beneficial interest = $50,000 – 24,000 fee) .........
26,000
Accounts receivable (balance sold) ............
600,000
Illustration 7-16
T7-13
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Intermediate Accounting, 7/e
ACCOUNTS RECEIVABLE FACTORED WITH RECOURSE —
SALE CONDITIONS MET


If certain conditions are met, factoring with recourse is
accounted for as a sale of the receivables; otherwise, it is
accounted for as a borrowing.
If accounted for as a sale, the only difference in accounting
treatment is that for receivables factored with recourse, the
transferee records the estimated fair value of the recourse
obligation as a liability. This obligation increases the loss on
sale of receivables.
In Illustration 7-16, assuming that the fair value of the recourse
obligation is estimated to be $5,000, the transfer is accounted for as
follows:
Cash (90% x $600,000) ....................................................
540,000
Loss on sale of receivables (to balance) .........................
39,000
Receivable from factor (beneficial interest = $50,000 – 24,000 fee) 26,000
Recourse liability ..................................................
5,000
Accounts receivable (balance sold) ............................
600,000
Illustration 7-17
T7-14
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7-23
DISCOUNTING A NOTE RECEIVABLE

The transfer of a note receivable to a financial institution is
called discounting. Similar to accounts receivable, if certain
conditions are met, the transfer is accounted for as a sale;
otherwise as a borrowing.
On December 31, 2013, the Stridewell Wholesale Shoe Company sold
land in exchange for a nine-month, 10% note. The note requires the
payment of $200,000 plus interest on September 30, 2014. The
company’s fiscal year-end is December 31. The 10% rate properly
reflects the time value of money for this type of note. On March 31, 2014,
Stridewell discounted the note at the Bank of the East. The Bank’s
discount rate is 12%.
Because the note has been outstanding for three months before being
discounted at the bank, Stridewell first records the interest that has
accrued prior to being discounted:
March 31, 2014
Interest receivable ...........................................
Interest revenue ($200,000 x 10% x 3/12) .....
5,000
5,000
Next, the value of the note if held to maturity is calculated. Then the
discount for the time remaining to maturity is deducted to determine the
cash proceeds from discounting the note:
$200,000
15,000
215,000
(12,900)
$202,100
Face amount
Interest to maturity ($200,000 x 10% x 9/12)
Maturity value
Discount ($215,000 x 12% x 6/12)
Cash proceeds
Illustration 7-18
© The McGraw-Hill Companies, Inc. 2013
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Intermediate Accounting, 7/e
T7-15
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© The McGraw-Hill Companies, Inc. 2013
7-25
DISCOUNTING A NOTE RECEIVABLE
(continued)
Discounted Note Treated as a Sale
Cash (proceeds determined above).........................
202,100
Loss on sale of note receivable (difference) .......
2,900
Note receivable (face amount) .........................
200,000
Interest receivable (accrued interest determined above)
5,000
Illustration 7-19
T7-15 (continued)
© The McGraw-Hill Companies, Inc. 2013
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Intermediate Accounting, 7/e
Do Transferors Typically Prefer Sales or
Secured-Borrowing Treatment? Sales!
Does the
Accounting
Approach:
Derecognize A/R,
reducing assets?
Recognize liability
for cash received?
Where is cash
received shown in
the statement of
cash flows?
Recognize gain on
transfer?
Transfer of
Receivables
Accounted for as a:
Why Sales Approach is
Preferred by the
Secured
Transferor:
Sale
Borrowing
Yes
No
Sale approach produces
lower total assets and
higher return on assets
(ROA)
No
Yes
Sale approach produces
lower liabilities and less
leverage (debt/equity)
May be in Always in Sale approach can produce
operating financing higher cash flow from
or
section operations at time of
financing
transfer
sections
More
Less likely Sale approach can produce
likely
higher income at time of
transfer.
Illustration 7-20
T7-16
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© The McGraw-Hill Companies, Inc. 2013
7-27
When Can a Transfer be Treated as a Sale?

Key – the transferor must have surrendered control of the
receivables, which occurs if and only if:
A.The transferred assets have been isolated from the
transferor—beyond the reach of the transferor and its
creditors.
B. Each transferee has the right to pledge or exchange the
assets it received.
C. The transferor does not maintain effective control over
the transferred assets.
If all of these conditions are met, the transferor accounts for the
transfer as a sale. If any of the above conditions are not met, the
transferor treats the transaction as a secured borrowing.
Note: Beware of partial transfers! Those must qualify as
“participating interests” in addition to meeting the three basic
criteria.
T7-17
© The McGraw-Hill Companies, Inc. 2013
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FINANCING WITH RECEIVABLES – A SUMMARY
Financing with Receivables

Is the arrangement a transfer of
specific receivables or simply a
pledging of receivables in
general as collateral for a loan?
Transfer

Pledging

Does the transfer meet the three
conditions for treatment as a sale?
Yes 
Record as a Sale:
1. Remove receivables
2. Record proceeds
3. Recognize gain or loss

No 
Record as a secured borrowing:
1. Record liability
2. Recognize interest expense
Disclose arrangement in debt
note
Illustration 7-22
T 7-18
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© The McGraw-Hill Companies, Inc. 2013
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INTERNATIONAL FINANCIAL REPORTING STANDARDS
Transfers of Receivables.
The international and U.S. guidance often lead to
similar accounting. Both seek to determine whether an arrangement should be treated
as a secured borrowing or a sale, and, having concluded which approach is
appropriate, both account for the approaches in a similar fashion. Also, the recent
change in U.S. GAAP that eliminated the concept of QSPEs is a step towards
convergence with IFRS, and is likely to reduce the proportion of U.S. securitizations
that qualify for sale accounting.
Where IFRS and U.S. GAAP most differ is in the conceptual basis for their choice
of accounting approaches and in the decision process they require to determine which
approach to use. Under IFRS:
1. If the company transfers substantially all of the risks and rewards of
ownership, the transfer is treated as a sale.
2. If the company retains substantially all of the risks and rewards of
ownership, the transfer is treated as a secured borrowing.
3. If neither conditions 1 or 2 hold, the company accounts for the transaction
as a sale if it has transferred control, and as a secured borrowing if it has
retained control.
Whether risks and rewards have been transferred is evaluated by comparing how
variability in the amounts and timing of the cash flows of the transferred asset affect
the company before and after the transfer.
T 7-19
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DECISION MAKERS’ PERSPECTIVE

A company's investment in receivables is influenced by
several variables, including the level of sales, the nature of
the product or service sold, and credit and collection policies.

Management must evaluate the costs and benefits of any
change in credit and collection policies.

The ability to use receivables as a method of financing also
offers management alternatives. Earnings management may
result.

Investors, creditors, and financial analysts can gain important
insights by monitoring a company's investment in receivables.

The two ratios designed to monitor receivables are:

the receivables turnover ratio, and

the average collection period.
Receivables turnover ratio
Average collection period
=
=
Net sales
Average accounts receivable (net)
365
Receivables turnover ratio
T7-20
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BANK RECONCILIATION —
RECONCILING ITEMS
Step 1: Adjustments to Bank Balance:
1. Add deposits outstanding. These represent cash received by the company and
debited to cash that have not been deposited in the bank by the bank statement
cutoff date and cash receipts deposited in the bank near the end of the period
that are not recorded by the bank until after the cut-off date.
2. Deduct checks outstanding. These represent checks written and recorded by the
company as credits to cash that have not yet been processed by the bank before
the cutoff date.
3. Bank errors. These will either be increases or decreases depending on the
nature of the error.
Step 2: Adjustments to Book Balance:
1. Add collections made by the bank on the company’s behalf and other increases
in cash that the company is unaware of until the bank statement is received.
2. Deduct service and other charges made by the bank that the company is
unaware of until the bank statement is received.
3. Deduct NSF (nonsufficient funds) checks. These are checks previously
deposited for which the payors do not have sufficient funds in their accounts to
cover the amount of the checks. The checks are returned to the company whose
responsibility it is to seek payment from payors.
4. Company errors. These will either be increases or decreases depending on the
nature of the error.
Illustration 7–A1
T7-21
© The McGraw-Hill Companies, Inc. 2013
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Intermediate Accounting, 7/e
BANK RECONCILIATION
The Hawthorne Manufacturing Company maintains a general checking
account at the First Pacific Bank. First Pacific provides a bank statement
and canceled checks once a month. The cutoff date is the last day of the
month. The bank statement for the month of May is summarized as
follows:
Balance, May 1, 2013
$32,120
Deposits
Checks processed
Service charges
NSF checks
Note payment collected by bank
(includes $120 interest)
Balance, May 31, 2013
82,140
(78,433)
(80)
(2,187)
1,120
$34,680
The company’s general ledger cash account has a balance of $35,276 at
the end of May. A review of the company records and the bank statement
reveals the following:
1. Cash receipts not yet deposited totaled $2,965.
2. A deposit of $1,020 was made on May 31 that was not credited to
the company’s account until June.
3. All checks written in April have been processed by the bank.
Checks written in May that had not been processed by the bank
total $5,536.
4. A check written for $1,790 was incorrectly recorded by the
company as a $790 disbursement. The check was for payment
to a supplier of raw materials.
Illustration 7A-2
T7-22
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BANK RECONCILIATION
(continued)
Step 1:
Bank Balance to Corrected Balance
Balance per bank statement
Add: Deposits outstanding
Deduct: Checks outstanding
Corrected cash balance
Step 2:
$34,680
3,985 *
(5,536)
$33,129
Book Balance to Corrected Balance
Balance per books
Add: Note collected by bank
Deduct:
Service charges
NSF checks
Error—understatement of check
Corrected cash balance
$35,276
1,120
(80)
(2,187)
(1,000)
$33,129
* $2,965 + 1,020 = $3,985
Cash.........................................................................
Notes receivable ................................................
Interest revenue .................................................
1,120
Miscellaneous expense (bank service charges) ...........
Accounts receivable (NSF checks) ............................
Accounts payable (error in check to supplier) ..............
Cash ...................................................................
80
2,187
1,000
1,000
120
3,267
After these entries are posted, the general ledger cash account will equal the
corrected balance of $33,129.
T7-22 (continued)
© The McGraw-Hill Companies, Inc. 2013
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Intermediate Accounting, 7/e
PETTY CASH
On May 1, 2013, the Hawthorne Manufacturing Company established a
$200 petty cash fund. John Ringo is designated as the petty cash
custodian. The fund will be replenished at the end of each month. On
May 1, 2013, a check is written for $200 made out to John Ringo, petty
cash custodian. During the month of May, John paid bills totaling $160
summarized as follows:
Postage
Office supplies
Delivery charges
Entertainment
Total
$ 40
35
55
30
$160
Illustration 7A-3
When the petty cash fund is established
May 1, 2013
Petty Cash .........................................................
Cash (checking account) ..................................
200
200
When the petty cash fund is reimbursed
May 31, 2013
Postage expense ...............................................
Office supplies expense ...................................
Delivery expense ..............................................
Entertainment expense .....................................
Cash (checking account) ..................................
40
35
55
30
160
T7-23
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RECEIVABLE IMPAIRED BY
TROUBLED DEBT RESTRUCTURING – TERMS MODIFIED
Brillard Properties owes First Prudent Bank $30 million, under a 10% note with 2
years remaining to maturity. Due to financial difficulties of the developer, the
previous year's interest ($3 million) was not paid. First Prudent Bank agrees to:
(1) forgive the interest accrued from last year,
(2) reduce the remaining two interest payments to $2 million each,
(3) reduce the principal to $25 million
ANALYSIS
Previous Value:
Accrued interest
(10% x $30,000,000)
Principal
Carrying amount of the receivable
New Value:
Interest
$2 million x 1.73554 * =
Principal $25 million x 0.82645 ** =
Present value of the receivable
Loss:
$ 3,000,000
30,000,000
$33,000,000
$ 3,471,080
20,661,250
(24,132,330)
$ 8,867,670
* present value of an ordinary annuity of $1: n=2, i=10%
**present value of $1: n=2, i=10%
JOURNAL ENTRY
Loss on troubled debt restructuring (to balance) . 8,867,670
Accrued interest receivable (10% x $30,000,000) ........
Note receivable ($30,000,000 - $24,132,330) .............
3,000,000
5,867,670
After restructuring, the lender still records interest annually at the 10% effective
rate.
Illustration 12-B1
T7-24
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Intermediate Accounting, 7/e
Debt Settled at the Time of a Restructuring
First Prudent Bank is owed $30 million by Brillard Properties under a 10% note
with 2 years remaining to maturity. Due to financial difficulties of the developer,
the previous year's interest ($3 million) was not received. The bank agrees to settle
the receivable (and accrued interest receivable) in exchange for property having a
fair market value of $20 million.
..................................................................... ($ in millions)
Land (fair market value) ................................... ............... 20
Loss on troubled debt restructuring ................. ............... 13
Accrued interest receivable (10% x $30 million) ...........
Note receivable (balance) ............................ ...................
3
30
For most active lenders, a troubled debt restructuring unfortunately is not both
unusual and infrequent; so usually the loss is not reported as an extraordinary loss.
Illustration 7-B2
T7-25
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INTERNATIONAL FINANCIAL REPORTING STANDARDS
Impairments.
IFRS and U.S. GAAP generally have similar treatments of
impairments of accounts and notes receivable. In particular, both allow reversals of
impairments if circumstances change to indicate that the amount of the impairment
has decreased. Reversals increase the carrying amount of the receivable and increase
income (for example, by reducing bad debt expense and the allowance for
uncollectible accounts in the period of reversal). The amount of reversal is limited to
the amount of the original impairment.
Here are a couple of differences:
 Level of analysis:
O Under U.S. GAAP we examine impairment of individual receivables. If
impairment isn’t indicated, we group the receivables with other receivables of
similar risk characteristics when estimating bad debts for the group.
O Under IFRS we first consider whether individually-significant receivables are
impaired. If impairment isn’t indicated, the individually-significant receivables
are grouped with other receivables of similar risk characteristics to test
impairment.
 Impairment indicators:
o U.S. GAAP provides an illustrative list of information we might consider when
evaluating receivables for impairment, and requires measurement of potential
impairment if impairment (a) is viewed as probable and (b) can be estimated
reliably.
o IFRS provides an illustrative list of “loss events” and requires measurement of
an impairment if there is objective evidence that a loss event has occurred that
has an impact on the future cash flows to be collected and that can be
estimated reliably. Requiring the occurrence of a loss event may result in
recognizing a loss later under IFRS than U.S. GAAP.
T7-26
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Suggestions for Class Activities
1.
Real World Scenario
The following is an excerpt from a December 18, 2000, article on TheStreet.com entitled “Cisco
Triples Bad-Account Provision as Cash Crunch Deepens.” The article discusses an increase in bad
debts for Cisco Systems, Inc, the world’s largest networking products company.
Cisco’s deadbeat account column has more than tripled in the span of a year,
adding to evidence that some of its network equipment customers are
collapsing under the weight of a cash crunch.
For the fiscal first quarter ended Oct. 28 [2000], Cisco moved $275 million
from operating cash to cover potential nonpayments from failed customers,
according to the company’s quarterly regulatory filing. The company told
analysts on its earnings conference call last month that it was taking
insignificant provisions to cover doubtful accounts. It wasn’t until this week,
when Cisco filed its financial reports, tat there as a dollar figure clearly
associated with those potential losses. In the year –ago period, Cisco’s
provision was $75 million.
Suggestions:
There are a number of issues that could be discussed with the class. For example, the articles
states “Cisco moved $275 million from operating cash to cover potential nonpayments from failed
customers …” What is wrong with the terminology used in that sentence? You could have the class
access the 10Q for the period ended October 28, 2000 using the EDGAR database and have them
locate the $275 million provision, then, using information from the balance sheet, have them
determine the amount of receivables actually written off during the quarter. You could also have the
class access the most recent financial statements of Cisco and have them investigate the relationship
between receivables and the allowance and then compare the relationship with a competitor such as
Juniper Networks.
Points to note:
Of course, no “cash” was moved to cover potential nonpayments from failed customers. The
correct terminology is that the company increased the allowance for uncollectible accounts to cover
the increase in bad debts.
The $275 million provision can be located on the statement of cash flows as an adjustment to net
income. The allowance for uncollectible accounts (allowance for doubtful accounts) increased
during the quarter from $43 to 57 million, indicating actual write offs during the quarter of $261
million.
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2. Research Activity
In June of 2007, Frozen Food Express Industries reported that its auditors found material weaknesses
in its internal financial controls. The PCAOB’s Auditing Standard No. 2 requires that the auditor
form an opinion on the effectiveness of controls. If any deficiencies exist, they should be reporting
in writing to management and the audit committee. The existence of a material weakness requires
the issuance of an adverse opinion. There are three types of possible deficiencies.
Suggestions:
Have the class research Auditing Standard No. 2 (www.pcaobus.org), list and describe the three
types of deficiencies. This activity could be used for classroom discussion or as a writing
assignment.
Points to note:
The three types of deficiencies are:
1. A control deficiency exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis.
2. A significant deficiency is a control deficiency, or combination of control deficiencies, that
adversely affects the company’s ability to initiate, authorize, record, process, or report external
financial date reliably in accordance with generally accepted accounting principles such that
there is more than a remote likelihood that a misstatement of the company’s annual or interim
financial statements that is more than inconsequential will not be prevented or detected.
3. A material weakness is a significant deficiency, or combination or significant deficiencies that
results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented.
3.
Dell Analysis
Have students, individually or in groups, go to the most recent Dell annual report using EDGAR at:
www.sec.gov. Ask them to:
1. Compare the allowance for uncollectibles with the amount reported in the 2011 report located
in the annual report included with all new copies of the text. Has there been any change in the
relationship between the allowance and gross receivables? If so, how might this be
interpreted?
2. Compute the current year's average collection period and compare it to 2011. Interpret your
results in light of your findings in requirement 1 above.
3. Use EDGAR to locate the most recent annual report information for HP, Dell’s competitors.
Using the most recent annual report information for both companies, compare the relationship
between gross receivables the allowance for uncollectibles, the receivables turnover ratio, and
the average collection period.
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4.
Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis and judgment skills.
Communication Skills. In addition to Communication Case 7-2, Integrating Case 7-8 can be
adapted to ask students to write a memo from a junior accountant to a controller explaining the
appropriate accounting treatment. Real World Case 7-4, Ethics Case 7-5 and Judgment Case 76 do well as group assignments. Both of these cases also create good class discussions. Real
World Cases 7-4 and 7-7 are suitable for a student presentation.
Research Skills. In their careers, our graduates will be required to locate and extract relevant
information from available resource material to determine the correct accounting practice,
perhaps identifying the appropriate authoritative literature to support a decision. Research Case
7-11 provides an excellent opportunity to help students develop this skill. In addition, Real
World Case 7-7 can be adapted to require students to research the authoritative literature on
accounting for bad debts.
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret data to provide options for making
business and investment decisions. In addition to Analysis Cases 7-9, 7-12, and 7-13;
Exercises 7-24, and 7-25; and Real World Case 7-7 also provide opportunities to develop and
sharpen analytical skills.
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that require
students to critically analyze issues to apply concepts learned to business situations in order to
evaluate options for decision-making and provide an appropriate conclusion. In addition to
Judgment Cases 7-1, 7-3, and 7-6, Research Cases 7-4 and 7-11 also requires students to
exercise judgment.
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© The McGraw-Hill Companies, Inc. 2013
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5.
Ethical Dilemma
The chapter contains the following ethical dilemma:
ETHICAL DILEMMA
The management of the Auto Parts Division of the Santana Corporation receives a bonus if the
division's income achieves a specific target. For 2013 the target will be achieved by a wide margin.
Mary Beth Williams, the controller of the division, has been asked by Philip Stanton, the head of
the division's management team, to try to reduce this year's income and "bank" some of the profits
for future years. Mary Beth suggests that the division's bad debt expense as a percentage of net
credit sales for 2013 be increased from 3% to 5%. She believes that 3% is the more accurate
estimate but knows that both the corporation's internal auditors as well as the external auditors
allow some flexibility when estimates are involved. Does Mary Beth's proposal present an ethical
dilemma?
You may wish to discuss this in class. If so, discussion should include these elements.
Step 1—The Facts:
Managers of the Auto Parts Division receive bonuses for attaining division target net income. The
2013 target net income has been achieved. The head of the management team asks Mary Beth
Williams, division controller, to defer some of this year's income to future years in order to provide
bonuses in later reporting periods. The controller, although believing the 3% is a reasonable
estimate, suggests increasing the bad debt percentage of net credit sales to 5% as a way to defer the
income to future periods. By changing the bad debt percentage, the controller makes both net
receivables and net income less reliable and possibly misleading to users of the financial statements.
Step 2—The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether the controller's obligation to the management team to
provide for future profit and the ensuing bonuses is greater than her obligation to provide
information that is not misleading to users of the financial statements.
Stakeholders include Mary Beth Williams, controller, Philip Stanton, head of the management
team, other division managers, the top management of Santana Corporation, internal and external
auditors, current and future creditors, and current and future investors.
Step 3—Values:
Values include competence, honesty, integrity, objectivity, loyalty to the company, loyalty to the
management team, and responsibility to users of financial statements.
© The McGraw-Hill Companies, Inc. 2013
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Intermediate Accounting, 7/e
Step 4—Alternatives:
1. Follow the suggestion of Philip Stanton to defer some 2013 income to future years.
2. Refuse to defer profit to the future and record the 2013 bad debt expense at the best estimate
of 3% of net credit sales.
3. Report Stanton's request to a higher level of management, the audit committee, or the auditors.
4. Resign from the company and seek employment elsewhere.
Step 5—Evaluation of Alternatives in Terms of Values:
1.
Alternative 1 illustrates loyalty to the management team.
2,3. Alternatives 2 and 3 illustrate loyalty to the company as a whole and also incorporate the
values of competence, honesty, integrity, objectivity, and responsibility to users of the
financial statements.
4.
Alternative 4 supports the values of honesty and integrity, but does not reflect competence,
objectivity, or responsibility to financial statement users and the company as a whole.
Step 6—Consequences:
Alternative 1
Positive consequences: The controller would please the management team who would probably
receive bonuses in future years.
Negative consequences: Users of the financial statements, including corporate top management,
would be misinformed. The increased bad debt expense would reduce operating income and place
the division in a less favorable financial position for 2013. Net accounts receivable would be lower.
The controller may lose her self-respect, the respect of co-workers, and possibly her job if the
manipulation of 2013 income is detected by corporate top management.
Alternative 2
Positive consequences: Users of financial statements would receive a more relevant and reliable
estimate of net income for 2013 and future years. Net income and bonuses in future years would be
fairly stated. The controller would maintain her integrity, may receive praise for being honest, and
may keep her job.
Negative consequences: The controller may incur the disfavor of division management and may
lose the trust of other managers. Bonuses in future years may be lower or nonexistent.
Alternative 3
Positive consequences: The controller maintains her integrity. Users may receive a more relevant
and reliable estimate of reported income if upper management levels or the audit committee compel
fair presentation of the bad debt expense in the financial statements.
Negative consequences: The controller may incur the disfavor of division management and the
trust of other employees, resulting in a loss of future promotions or her job. Whistle blowers often
are not rewarded.
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© The McGraw-Hill Companies, Inc. 2013
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Alternative 4
Positive consequences: The controller maintains her integrity and avoids conflict with division
management.
Negative consequences: The controller has no job and may have difficulty getting references for a
new job. Users of financial statements, including corporate management, still do not receive
relevant and reliable information regarding bad debt expense and bonuses. Bonuses in future years
may not be correctly calculated.
Step 7—Decision:
Student(s) must decide their course of action.
© The McGraw-Hill Companies, Inc. 2013
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Intermediate Accounting, 7/e
Assignment Chart
Questions
7-1
7-2
7-3
7-4
7-5
7-6
7-7
7-8
7-9
7-10
Learning
Objective(s)
—
1
1
2
2, 10
3
3
4
5
6
7-11
7-12
7-13
7-14
7-15
7-16
6, 10
8
8
8, 10
8
9
7-17
7-18
7-19
7-20
7A
7A
7B
7B, 10
Brief
Exercises
7-1
7-2
7-3
7-4
7-5
7-6
7-7
7-8
7-9
7-10
7-11
7-12
7-13
7-14
Instructors Resource Manual
Learning
Objective(s)
1
2, 10
2
3
3
4
5, 10
5,6
5,6
5,6
5,6
7
8
8
Est. time
(min.)
Cash equivalents
5
Internal control procedures
5
Internal controls and Sarbanes-Oxley
5
Compensating balance
5
IFRS; Bank overdrafts
5
Trade versus cash discounts
5
Cash discounts; gross versus net methods
5
Sales returns
5
Accounting treatment for uncollectible accounts 5
Income statement versus balance sheet
5
approaches of accounting for bad debts
IFRS; Disclosure
5
Assigning of accounts receivable
5
Factoring with and without recourse
5
IFRS; Transfer of receivables
5
Discounting a note receivable
5
Monitoring a company’s investment in
5
receivables
Bank reconciliation [based on Appendix 7A]
5
Petty cash [based on Appendix 7A]
5
Debt impairment (based on Appendix 7B)
5
IFRS; Debt impairment (based on Appendix 7B) 5
Topic
Est. time
(min.)
10
10
5
10
10
10
10
Topic
Internal control
IFRS; Bank overdrafts
Cash and cash equivalents
Cash discounts; gross method
Cash discounts; net method
Sales returns
IFRS; Disclosure
Uncollectible accounts; income statement
approach
Uncollectible accounts; balance sheet approach
Uncollectible accounts; solving for unknowns
Uncollectible accounts; solving for unknowns
Note receivable
Factoring of accounts receivable
Factoring of accounts receivable
10
10
10
10
10
10
10
© The McGraw-Hill Companies, Inc. 2013
7-45
7-15
7-16
7-17
Exercises
7-1
7-2
7-3
7-4
7-5
7-6
7-7
7-8
7-9
7-10
7-11
7-12
7-13
7-14
7-15
7-16
7-17
7-18
7-19
7-20
7-21
7-22
7-23
7-24
7-25
7-26
7-27
7-28
8, 10
8
9
IFRS; Factoring an accounts receivable
Discounting a note
Receivables turnover
10
10
5
Learning
Est. time
Objective(s)
Topic
(min.)
2
Cash and cash equivalents; restricted cash
15
2
Cash and cash equivalents
10
Cash equivalents, uncollectible accounts, notes,
2,6,7
15
codification
IFRS; Overdrafts
2,10
10
Trade
and
cash
discounts;
the
gross
method
and
3
15
the net method compared
3
Cash discounts; the gross method
10
3
Cash discounts; the net method
10
4
Sales returns
15
5
Disclosure, codification
15
Uncollectible
accounts;
allowance
method
vs.
5,6
15
direct write-off method
Uncollectible accounts; allowance method;
5,6
20
balance sheet approach
Uncollectible accounts; allowance method and
6
15
direct write-off method compared; solving for
unknowns
Uncollecitble accounts; allowance method;
5,6
10
solving for unknowns; General Mills
7
Note receivable
10
7
Noninterest-bearing note receivable
15
Interest-bearing
note
receivable;
solving
for
7
20
unknown rate
8
Assigning of specific accounts receivable
10
8
Factoring of accounts receivable without recourse 10
8
Factoring of accounts receivable with recourse
15
8, 10
IFRS; Factoring of accounts receivable with
15
recourse
8
Discounting a note receivable
20
1,2,3,4,5,6, Concepts; terminology
15
7,8
3,5,6,7,8 Receivables; transaction analysis
25
9
Ratio analysis; Microsoft
10
9
Ratio analysis; solve for unknowns
15
7A
Petty cash [based on Appendix 7A]
10
7A
Petty cash [based on Appendix 7A]
10
7A
Bank reconciliation [based on Appendix 7A]
15
© The McGraw-Hill Companies, Inc. 2013
7-46
Intermediate Accounting, 7/e
7-29
7A
7-30
7-31
7B
7B
CPA/CMA
Exam Questions
CPA-1
CPA-2
CPA-3
CPA-4
CPA-5
CPA-6
CPA-7
CPA-8
CPA-9
CPA-10
CMA-1
CMA-2
CMA-3
Problems
7-1




7-2
7-3
7-4
7-5
7-6
7-7
7-8
7-9
7-10
7-11
Instructors Resource Manual
Bank reconciliation and adjusting entries [based
on Appendix 7A]
Troubled debt restructuring
Troubled debt restructuring
20
15
15
Learning
Est. time
Objective(s)
Topic
(min.)
5
Uncollectible accounts; allowance method,
income statement approach
3
5,6
Changes in accounts receivable
3
5
Uncollectible accounts; allowance method
3
4,5
Changes in accounts receivable
3
8
Factoring of accounts receivable without recourse 3
5,6
Uncollectible accounts; allowance method,
balance sheet approach
3
5,6
Uncollectible accounts; allowance method
3
2,10
Cash overdrafts under IFRS
3
5,7,10
Accounts receivable classification under IFRS
3
7B,10
Accounting for impairments under IFRS
3
5,6
Uncollectible accounts; allowance method
3
5
Uncollectible accounts; allowance method,
balance sheet approach
3
5
Uncollectible accounts; allowance method,
balance sheet approach
3
Learning
Est. time
Objective(s)
Topic
(min.)
Uncollectible
accounts;
allowance
method;
5,6
30
income statement and balance sheet approach
5
Uncollectible accounts; Amdahl
25
5
Bad debts; Cirrus Logic
25
5,6
Uncollectible accounts
40
4,5
Receivables; bad debts and returns; Symantec
40
7
Notes receivable; solving for unknowns
20
8
Factoring versus assigning of accounts receivable 25
Factoring of accounts receivable; with and
8
15
without recourse
2,5,8,10
IFRS; Cash and Accounts Receivable
25
3,4,7,8
Miscellaneous receivable transactions
30
8
Discounting a note receivable
45
© The McGraw-Hill Companies, Inc. 2013
7-47

7-12
5,6,7,8,9

7-13
7A
7-14
7-15
7A
7B
Accounts and notes receivable; discounting a
note; receivables turnover ratio
Bank reconciliation and adjusting entries;
determining cash and cash equivalents
Bank reconciliation and adjusting entries
Troubled debt restructuring
40
25
45
 Star Problems
Analysis Case 7-13
2,5
Est. time
Topic
(min.)
Accounts and notes receivable
15
Uncollectible accounts
40
Accounts receivable
20
Sales returns
60
Uncollectible accounts
20
Internal control
30
Receivables; bad debts; Avon Products
60
Change in estimate of bad debts
15
Financing with receivables
15
IFRS; Financing with receivables
20
Financing with receivables, codification
45
Compare receivables management using ratios;
60
Del Monte Foods and Smithfield Foods
Reporting cash and receivables; Dell
20
Air France-KLM Case
10
IFRS; Accounts receivable; Air France-KLM
Cases
Judgment Case 7-1
Communication Case 7-2
Judgment Case 7-3
Judgment Case 7-4
Ethics Case 7-5
Judgment Case 7-6
Real World Case 7-7
Integrating Case 7-8
Analysis Case 7-9
Real World Case 7-10
Research Case 7-11
Analysis Case 7-12
Learning
Objective(s)
5,6,8
5
3,7,8
4
5
1
5
5
8
5,8,10
8
9
© The McGraw-Hill Companies, Inc. 2013
7-48
20
Intermediate Accounting, 7/e