Intermediate Accounting
Thomas H. Beechy
Schulich School of
Business,
York University
Joan E. D. Conrod
Faculty of Management
Dalhousie University
Powerpoint slides by:
Michael L. Hockenstein  Commerce Department • Vanier College
Copyright © 2003 McGraw-Hill Ryerson Limited, Canada
Current Monetary Balances
Chapter 8
8-2
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Introduction


This chapter develops the accounting principles for the
recognition, measurement, and reporting of the
primary category of liquid resources: cash, accounts
receivable, and notes receivable, and the primary
short-term claims to cash, the various types of
payables
These financial statement elements are all financial
instruments that represent cash or claims to cash
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Definition of Monetary Items
 The CICA Handbook defines monetary items as

follows:
Monetary financial assets and financial liabilities
(also referred to as monetary financial
instruments) are financial assets and financial
liabilities to be received or paid in fixed or
determinable amounts of money. [CICA 3860.03]
There are two key aspects of this definition:
 the asset or obligation must be settled by means of cash
 the amount of asset, claim, or obligation must be fixed
(or determinable) by the nature of the transaction that
gave rise to the balance
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Characteristics of Cash and Cash
Equivalents
 The cash account includes only those items

immediately available to pay obligations
Cash includes:
 balances on deposit with financial institutions
 coins and currency
 petty cash
 negotiable instruments accepted by financial
institutions for immediate deposit and withdrawal,
e.g., cashier's cheques, certified cheques, and
money orders
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Characteristics of Cash and Cash
Equivalents (cont.)
 Cash equivalents:
items that can readily be
converted to cash
treasury bills (widely known as T-bills)
guaranteed investment certificates (GICs)
commercial paper (short-term notes
receivable from other companies)
money market funds
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Characteristics of Cash and Cash
Equivalents (cont.)
 An overdraft:
a negative bank account balance
 Reported as a separate current liability on the
balance sheet, regardless of its inclusion in “cash”
on the cash flow statement
 A compensating balance:
a minimum balance
that must be maintained in a depositor's account as
support for funds borrowed by the depositor
 Should not be included in the current cash account
because they are not currently available for use
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Internal Controls for Cash
 The risk of theft is directly related to

the ability of individuals to access
the accounting system and obtain
custody of cash
Firms address this problem through
an internal control system,
designed to protect all assets and
the integrity of the information
system
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Internal Controls for Cash (cont.)
 There are two internal control
issues for cash:
ensuring that cash is not stolen
making sure that cash is wisely
managed to maximize returns
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Internal Control
 Policies and procedures
designed to
protect assets
ensure compliance with
laws and company policies
provide accurate
accounting records
evaluate performance
8-10
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Reconciliation of Bank and Book
Cash Balances
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

Compare all deposits made in the bank account with
those in the books---if there are differences, determine
why
Compare all cheques and charges that went through
the bank account to the cash disbursements journal
Make journal entries for all adjustments to the book
balance, and inform the bank of any errors made by
the bank, so they can be corrected before the end of
next month
8-11
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Exhibit 8-2
8-12
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Bank Reconciliation - Entries
GENERAL JOURNAL
Date
7/31
Description
Page 13
PR
Debit
1100
Cash
Accounts Receivable
Interest Revenue
7/31
Accounts Receivable, J Fox
1000
100
330
Cash
7/31
7/31
330
Miscellaneous Expense
Cash
190
Cash
180
190
Accounts Payable
180
8-13
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Credit
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
Accounting for Receivables
 Accounts receivable:

amounts owed by
customers for goods and services sold in the
firm's normal course of business
Receivables may be current or non-current,
depending on the expected collection date
8-14
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Accounting for Receivables (cont.)
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


Notes receivable are also accounts receivables but
are usually supported by formal promissory notes
Non-trade receivables arise from many other sources,
such as tax refunds, contracts, investments, finance
receivables, instalment notes, sale of assets, and
advances to employees
The main accounting issues pertaining to receivables
are recognition and measurement
Both are affected by collectability
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Recognition and Measurement of
Accounts Receivable
 Recognized when there has been an


agreement with a customer
Valued at the original exchange price between
the firm and the outside party
Credit balances (from prepayments or
overpayments) are reclassified and reported
as liabilities
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Recognition and Measurement of
Accounts Receivable (cont.)
 The receivables are meant to be an
approximation of the cash that will be collected
 Net realizable value adjusts for things like:
cash discounts
sales returns
allowances for uncollectable accounts
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Accounts Receivable
 Cash Discounts are used to:
increase sales
encourage early payment by customers
increase the likelihood of collections of
accounts receivable
8-18
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Cash Discounts
2/10, n/30
Percentage
Discount
# of Days
Discount is
Available
Otherwise,
Net (or All)
is Due
Net Amount is
Due in this #
of Days
8-19
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Sales Returns and Allowances
 Sales returns occur when merchandise is
returned by the customer
 Sales allowances occur when a company
gives a price reduction to a customer who is
not completely satisfied with purchased
merchandise but does not actually return it
8-20
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Sales Returns and Allowances (cont.)
 Sales returns and allowances are significant


amounts in some industries, including
retailing and book publishing
If returns are material and inestimable, sales
revenue cannot be recorded until after the
uncertainty is resolved
Sales Returns and Allowances is a contra
account---it reduces Sales Revenue
8-21
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Allowance for Doubtful Accounts
 If uncollectable receivables are probable and
can be estimated, an estimate should be
made and recorded in the period in which the
revenue was produced
 The write-down is made to an allowance
account called allowance for doubtful
accounts
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Allowance for Doubtful Accounts (cont.)
 When we estimate the amount of our
uncollectable receivables, we make the
following adjusting entry:
Bad Debt Expense (Debit)
Allowance for Doubtful Accounts (Credit)
 The Allowance for Doubtful Accounts is a
contra account to Accounts Receivable
8-23
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Allowance for Doubtful Accounts (cont.)
 As accounts become uncollectable, the
following entry is made:
Allowance for Doubtful Accounts (Debit)
Accounts Receivable (Credit)
 The balance in the Allowance account
reduces Accounts Receivable on the
Balance Sheet
8-24
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
Allowance for Doubtful Accounts (cont.)
 If an account previously written off in a
subsequent period proves to be collectable
in the current period, the following entries
are made:
Accounts Receivable (Debit)
Allowance for Doubtful Accounts (Credit)
Cash (Debit)
Accounts Receivable (Credit)
8-25
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Disclosure of Accounts Receivable
 Section 3020 of the CICA Handbook

recommends that accounts receivable be
segregated between
 ordinary trade accounts
 amounts owing by related parties
 other unusual items of substantial amount
Amounts and maturity dates of instalment
receivables should be disclosed
8-26
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
Disclosure of Accounts Receivable
(cont.)
 Accounts receivable are financial instruments,
and information on terms and conditions,
credit risk, and fair values should be disclosed
 In some cases, concentration of credit risk in
certain geographic locations or with certain
customers might be appropriate
8-27
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Calculation of Allowance for Doubtful
Accounts
 Aging method (TO a calculated method)
 Credit sales method (BY a calculated method)
Past Due
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Aging Method
 Uses the historical relationship between
accounts receivable and bad debt losses
 The historical rate, or multiple rates, is
applied to the net accounts receivable to
determine the balance in the Allowance for
Doubtful Accounts
 Bad Debt Expense is the amount of
adjustment necessary to bring the Allowance
account to its desired ending balance
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Credit Sales Method
 Emphasizes the matching principle and is
considered an income statement approach
 An average percentage relationship between
actual bad debt losses and net credit sales is
determined based on historical information
 The percentage is applied to current period net
credit sales to determine bad debts expense
8-30
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Speeding Up Cash Flow From Receivables
 Credit Card Operations
 Loans Secured By Accounts Receivable
 Sale Of Accounts Receivable
8-31
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Credit Card Operations
 At one point in time, many retail stores offered
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
credit to customers
Now, most retailers prefer to get their money
up front, and let the customers owe the credit
card company
Retailers are charged a fee, a percentage of
the total sale, for the privilege, but prefer this
charge because they avoid bad debts
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Transfer of Accounts Receivable
 A transfer of accounts receivable can be


recorded as a sale or a borrowing
A sale: the accounts receivable come off the
books of the selling company, and a financing fe
is recognized
A borrowing: the accounts receivable are left
on the books of the selling company, and the
amount received from the finance company is
recorded as a loan until the customer actually
pays
8-33
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Notes Receivable and Payable
 A note receivable:


a written promise to pay a
specified amount at a specified future date (or a
series of amounts over a series of payment dates)
Notes receivable are a current asset if the term is a
year or an operating cycle, if longer; notes payable
are a current liability and are the mirror image of
receivables
Notes payable are also called short-term
commercial paper, issued by large companies with
excellent credit ratings, and bought by other
companies as temporary investments
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Current Liabilities
 Current (short-term liabilities): amounts

payable within one year from the date of the
balance sheet or within the normal operating
cycle, where this is longer than a year
Common monetary current liabilities are:
accounts payable
short-term notes payable
cash dividends payable
advances and returnable deposits
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Current Liabilities
monetary accrued liabilities
estimated monetary liabilities, including:
- taxes (sales, property, and payroll)
- conditional payments (income taxes and
bonuses)
- compensated-absence liabilities
current loans payable
current portion of long-term liabilities
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Current Liabilities (cont.)
 May also include some non-monetary
items, such as:
 non-monetary accrued liabilities, e.g., frequent
flyer reward plans
 unearned revenues, which are liabilities to
provide goods and/or services in the future as
the result of cash already received, e.g.,
magazine subscriptions
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Loans as Current Liabilities
 Loans may be long-term liabilities, or current

liabilities
Loans are current liabilities if:
loans due on demand
loans due within the next year
long-term debt in violation of covenants and
thus able to be called by the lender at any time
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Disclosure of Monetary Current Liabilities
 Current liabilities are financial instruments that

must satisfy disclosure requirements for terms
and conditions, interest rate risk, and fair value
Disclosure is most likely required for loans and
notes payable, as the circumstances
surrounding accounts payable renders
disclosure trivial
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Foreign Currency Receivables and
Payables
 Monetary items that are denominated in a
foreign currency always arise from some
transaction, e.g.,

 sales to a foreign customer
 purchases from a foreign supplier
 investments in foreign currency (financial
instruments)
When the transaction occurs, it is recorded at
the exchange rate in effect at the date of the
transaction
8-40
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