Chapter 7
Cash, Investments,
and Receivables
1
Financial Accounting 4e by Porter and Norton
PepsiCo Inc.
Consolidated Balance Sheet (partial)
ASSETS (in millions)
Dec. 29
2001
Current Assets:
Cash and cash equivalents
$ 683
Short-term investments, at cost
966
1,649
Accounts & notes receivable
2,142
Inventories
1,310
Prepaid expenses & other assets
752
Total Current Assets
$5,853
Dec. 30
2000 .
$1,038
467
1,505
2,129
1,192
791
$5,617
2
PepsiCo Inc.
Consolidated Balance Sheet (partial)
ASSETS (in millions)
Current Assets:
Cash and cash equivalents
Short-term investments, at cost
Accounts and notes receivable
Inventories
Prepaid expenses & other assets
Total Current Assets
Highly
Liquid
FEDERAL RESERVE NOTE
T
THE
HEUNIT
UNITE
ED
DST
STAT
ATE
ES
SOF
OFAME
AMERICA
RICA
T HI S
F OR
AL L
NOT E
DE B T S ,
I S
L E GAL
P UBL I C
T E NDE R
AND
P R I VAT E
12
L7 0 7 4 4 6 2 9 F
W ASHI NGTON,
D. C.
12
A
H 293
L7 0 7 4 4 6 2 9 F
12
S E RI E S
12
1985
ONE
ONEDOLLAR
DOLLAR
Less
Liquid
3
PepsiCo Inc.
Consolidated Balance Sheet (partial)
ASSETS (in millions)
Current Assets:
Cash and equivalents
Key to
classification
as cash: readily
available to
pay debts
4
Cash

Coin & currency

Checking, savings & money
market accounts

Undeposited, cashier, and
certified checks
5
FEDERAL RESERVE NOTE
THE
THE UNITED
UNITED STATES
STATES OF
OF AMERICA
AMERICA
THI S NOTE I S LEGAL TENDER
FOR ALL DEBTS, PUBLI C AND PRI VATE
L70744629F
12
WA
SH
IN
G
TO
N
, D
.C.
12
A
H 293
Cash Equivalents
L70744629F
12
1
2
3
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
2111 2212 23 13 2414
2818 2919 30 20 3121
25
26
27
4
25



5
26
6
27
7
28
1
2
3
8
9
10
1
2
3
15
4
16
5
17
6
7
8
9
10
22
11
23
12
24
13
14
15
16
17
29
18
30
19
31
20
21
22
23
24
25
26
27
28
29
30
31
12
1985
ONE
ONE DOLLAR
DOLLAR

4
SERI ES

Readily
convertible to cash
Original maturity
to investor of 3
months or less
Commercial paper
U.S. Treasury bills
Certain money market funds
6
Cash Management


Necessary to ensure
company has neither too
little nor too much
cash on hand
Tools:
 Cash Flows Statement
 Bank Reconciliations
 Petty Cash Funds
7
Bank Statements
Cash balance, beginning of period
 Deposits
 Customer notes
and interest
collected by bank
 Interest earned
+
 Canceled checks
 NSF checks
 Service charges
= Cash balance, end of period
8
Bank Reconciliation - Step 1
Trace deposits on bank statement to books.
Identify deposits in transit. Add to bank
balance.
Deposits in Transit:
Late period deposits
not yet reflected on
bank statement
9
Example of Reconciliation
Bank Statement Adjustments: Deposits
Balance per statement, June 30
Add: Deposit in transit
$ 3,308.59
642.30
10
Bank Reconciliation - Step 2
Trace checks cleared by bank to books.
Identify outstanding checks. Subtract from
bank balance.
Outstanding checks:
Checks written but
not yet presented to
bank
11
Example of Reconciliation
Bank Statement Adjustments:
Checks Outstanding
Balance per statement, June 30
$3,308.59
Add: Deposit in transit
642.30
Deduct: Outstanding checks:
Check No. 496
$ 79.89
Check No. 501
213.20
Check No. 502
424.75
(717.84)
Adjusted balance, June 30
$3,233.05
12
Bank Reconciliation - Step 3
List all other additions (credit memoranda)
shown on the bank statement. Add to
book balance.
Credit memoranda:
Interest earned,
customer notes collected
13
Example of Reconciliation
Cash Account Adjustments:
Credit Memoranda
Balance per books, June 30
$ 2,895.82
Add:
Note collected
$500.00
Interest on note
50.00
Interest earned
15.45
Recording error, #498
54.00 619.45
14
Bank Reconciliation - Step 4
List all other subtractions (debit memoranda)
shown on the bank statement. Subtract from
book balance.
Debit memoranda:
NSF checks, service
charges, etc.
15
Example of Reconciliation
Cash Account Adjustments:
Debit Memoranda
Balance per books, June 30
Add: Note collected
Interest on note
Interest earned
Recording error, #498
Deduct: NSF check
Collection fee – note
Service charge
Adjusted balance, June 30
$ 2,895.82
$500.00
50.00
15.45
54.00
$245.72
16.50
20.00
619.45
(282.22)
$ 3,233.05
16
Bank Reconciliation - Step 5
Identify errors made by the bank or
the company in recording
transactions during the period.
17
Bank Reconciliation - Step 6
Use the information collected in Steps 1 - 5 to
prepare the bank reconciliation.
Bank Reconciliation
Balance per bank
:
Adjusted balance
$$$
Balance per books
:
Adjusted balance
$$$
$$$
$$$
Adjusted
balances
for book
and bank
must
agree
18
Example of Reconciliation
Bank Statement Adjustments
Balance per statement, June 30
:
Adjusted balance, June 30
$ 3,308.59
$ 3,233.05
Cash Account Adjustments
Balance per books, June 30
:
Adjusted balance, June 30
$ 2,895.82
$ 3,233.05
19
Bank Reconciliation
Adjusting Entries
Bank Reconciliation
Balance per bank
:
Adjusted balance
$$$
Balance per books
:
Adjusted balance
$$$
$$$
$$$
Book
adjustments
are the basis
for
adjusting
entries
20
Bank Reconciliation
Adjusting Entries
Dr.
Cr.
Accounts Receivable
245.72
Collection Fee Expense
16.50
Rent Expense - Lockbox
20.00
Cash
337.23
Notes Receivable
500.00
Interest revenue
65.45
Supplies
54.00
To record bank reconciliation adjustments.
21
Petty Cash
RECEIPT
Dr. Cr.
FEDERAL RESERVE NOTE
T
THE
HEUNIT
UNITE
ED
DST
STAT
ATE
ES
SOF
OFAME
AMERICA
RICA
T HI S
F OR
RECEIPT
AL L
NOT E
DE BT S ,
I S
L E GAL
P UBL I C
T E NDE R
AND P RI VAT E
12
L7 0 7 4 4 6 2 9 F
WASHI NGTON,
D. C.
12
A
H 293
L7 0 7 4 4 6 2 9 F
12
S E RI E S
12
1985
ONE
ONEDOLLAR
DOLLAR
RECEIPT
RECEIPT
22
Petty Cash Transactions for Keese Corporation:
Original Fund Balance
Petty Cash Expenditures:
U.S. Post Office
Overnight Delivery Service
Office Supply Express
Coin & currency per count
$200.00
55.00
69.50
45.30
26.50
Prepare the journal entry to record the
petty cash fund replenishment
23
Accounting for Petty Cash
Journal Entry to Replenish Fund:
Postage Expense
Delivery Expense
Office Expense
Cash Over and Short*
Cash
55.00
69.50
45.30
3.70
173.50
* $200.00 - ($55.00 + 69.50 + 45.30 + 26.50) =
$200.00 - $196.30 = $3.70 short
24
Investment in CD
Example:
Invest $100,000 in a 120-day CD.
Principal plus interest @ 6% due
upon investment maturity.
Purchase of investment:
Short-Term
Investments – CD
Cash
Dr.
Cr.
100,000
100,000
25
Investment in CD
Year-end adjusting entry :
Interest Receivable
Interest Revenue
Dr.
1,500
Cr.
1,500
Interest = Principal x Rate x Time
$1,500 = $100,000 x 6% x 90/360
October –
29 days
November – 30 days
December – 31 days
90 days
26
Investment in CD
Upon investment maturity:
Dr.
Cash
102,000
Short-Term Investments - CD
Interest Receivable
Interest Revenue*
Cr.
100,000
1,500
500
Interest earned in January:
$100,000 x 6% x 30/360 = $500
27
Reasons Companies Invest in
Other Companies

Short-term cash excesses

Long-term investing for
future cash needs

Exert influence over
investee

Obtain control of investee
28
Accounting for Common-Stock
Investments
Fair
Value
Method
0%
Equity
Method
20%
No significant
influence
Our
Focus
Consolidated
F/S
50%
Significant
influence
100%
Control
29
Investments Without Significant
Influence

Held-to-Maturity
Securities

Trading Securities

Available-for-Sale
Securities
Use fair value
method to
account for these
investments
30
Held-to-Maturity Securities
Bonds of other companies
 Intent and ability to hold until maturity

$100,000 9% Bond
Due 2019
31
Held-to-Maturity Securities
Example:
On 1/1/04, Homer buys:
 $100,000; 10% bonds @ face value.
 Bonds mature December 31, 2013
 Interest payable semiannually
. Record the purchase of the bonds and
receipt of the first interest payment
32
Recording Bond Purchase
Dr.
100,000
Cr.
Investment in Bonds
Cash
100,000
To record the purchase of Simpson bonds.
$100,000 10% Bond
Due 2014
33
Recording Receipt of
Interest Payment
Dr.
Cr.
Cash ($100,000 x 10% x 1/2) 5,000
Interest Income
5,000
To record interest income on Simpson bonds.
34
Recording Bond Sale
Dr.
99,000
1,000
Cash
Loss on Sale of Bonds
Investment in Bonds
To record sale of Simpson bonds.
Cr.
100,000
35
Trading Securities

Stocks
Bonds
Purchased to generate profit from
short-term appreciation

Intent to sell in
near term
(classified as
current assets)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
36
Trading Securities
Stocks

At end of each period, security
is “marked to market”

Unrealized gain or loss
recognized on income
statement
Bonds
Income
Statement
37
Trading Securities
Example:
Dexter Corp. holds the following trading
securities at 12/31/04:
Cost
Market
Menlo preferred stock $25,000 $27,500
Canby common stock
40,000 39,000
Record the unrealized gain or loss at 12/31/04.
38
Recording Unrealized Gain or Loss
on Trading Securities
Dr.
Investment in Menlo
Preferred Stock
2,500
Investment in Canby
Common Stock
Unrealized Gain Trading Securities*
To adjust trading securities to fair value.
* income statement account
Cr.
1,000
1,500
39
Available-for-Sale Securities

Securities not classified as heldto-maturity or trading

Can be classified as
short-term or longterm, depending on
expected date of
disposition
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Stocks
Bonds
40
Available-for-Sale Securities
Stocks
Bonds

Also “marked to market” at
end of accounting period

Unrealized gain or loss
accumulated in stockholders’
equity account
Balance
Sheet
41
Available-for-Sale Securities
Example:
Lenox Corp. holds the following AFS
securities at 12/31/04:
Cost
Market
Adair preferred stock
$15,000 $16,000
Casey common stock
35,000 32,500
Record the unrealized gain or loss at 12/31/04.
42
Recording Unrealized Gain or Loss
on AFS Securities
Dr.
Cr.
Unrealized Gain/Loss – AFS
Securities*
1,500
Investment in Adair Preferred
Stock
1,000
Investment in Casey
Common Stock
2,500
To adjust available-for-sale (AFS)
securities to fair value.
* part of Stockholders’ Equity
43
Accounting for Investments
Without Significant Influence
Recognize
Categories
as income
Held-to-maturity interest
Trading
interest, div.
Avail.-for-Sale
interest, div.
Report
on BS at
cost
fair value
fair value
Report FV
changes on
N/A
Income stmt.
Balance sheet
44
Credit Sales
Slows inflow of cash
 Risk of uncollectible
accounts

Retail Customer
Receivables
Trade Credit
Sales Invoice
Terms: 2/10,
net 30
45
Menkhaus Corporation Sample
Accounts Receivable Subsidiary Ledger
In 000s
ABC Distributors
HIJ Distributors
:
:
XYZ Distributors
Gross Accounts
Receivable
Total Due
$ 25
336
:
:
108
$ 1,105
46
Winnebago Industries, Inc.
Consolidated Balance Sheet (partial)
2001
2000
Receivables, less allowance
for doubtful accounts ($244
and $1,168, respectively)
$20,183 $32,045
Net
Realizable
Value
47
Accounting for Bad Debts:
Direct Write-off Method
Period of Sale
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Future Period charged
with expense of bad
debt write-off
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Journal entry to record write-off in
period determined to be uncollectible:
Bad Debt Expense
XXX
Accounts Receivable – Dexter
XXX
48
Accounting for Bad Debts:
Allowance Method
Estimated bad debt
expense (and allowance
account) recorded in
same period
Period of Sale
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
49
Balance Sheet Presentation Allowance Method
Roberts Corp.
Partial Balance Sheet
Current assets:
Accounts receivable
$ 250,000
Less: allowance for
doubtful accounts
( 6,000)
Net accounts receivable $ 244,000
50
Accounting for Bad Debts:
Allowance Method
Journal entry to record estimated bad debt
expense in period of sale:
Bad Debts Expense
XXX
Allowance for Doubtful Accts
XXX
I estimate...
51
Accounting for Bad Debts:
Allowance Method
Journal entry to record bad debt write-off in
period determined uncollectible:
Allowance for Doubtful Accts
Accounts Receivable – Z Co.
XXX
XXX
Bankrupt
52
Approaches to Allowance Method
% of Net Credit Sales
Income
Statement
Approach
% of Accounts Receivable
» Aging Method
Balance
Sheet
Approach
53
Percentage of Net Credit Sales
Method
Example:
Assume prior years’ net credit sales and bad debt
expense is as follows:
Year
1999
2000
2001
2002
2003
Net credit sales
$1,250,000
1,340,000
1,200,000
1,650,000
2,120,000
$7,560,000
Bad debts
$ 26,400
29,350
23,100
32,150
42,700
$153,700
54
Percentage of Net Credit
Sales Method
Example:
Develop bad debt percentage:
$153,700
$7,560,000
= 0.02033
use 2%
55
Percentage of Net Credit
Sales Method
Example:
2004 Net credit sales
Bad debt percentage
Bad debts expense
$2,340,000 (given)
2%
46,800
Journal entry:
Bad Debts Expense
46,800
Allowance for Doubtful Accts 46,800
56
Aging Method
Category Amount
Current
$ 85,600
Past due:
1-30 days
31,200
31-60 days 24,500
61-90 days 18,000
90+ days
9,200
Totals
$168,500
Est. Percent Est. Amount
Uncollectible Uncollectible
1%
$ 856
4%
10%
30%
50%
1,248
2,450
5,400
4,600
$14,554
57
Aging Method
Assume Allowance account has a
beginning credit balance of $1,230:
Allowance for Doubtful Accts
Desired ending
balance from
aging schedule
$1,230
13,324
Required
adjustment
$14,554
58
Aging Method Example
Bad Debts Expense
Allowance for Doubtful
Accounts
From Taccount
analysis
Dr.
13,324
Cr.
13,324
To record estimated
bad debts.
59
Comparison of Methods
% of Net Sales
Allowance Account
XX
Computes bad debt
expense (of which
the credit is
recorded here)
Aging
Allowance Account
XX
Computes ending
balance in the
allowance account
60
Accounts Receivable Turnover
Net Credit Sales
Average Accounts Receivable
Indicates how quickly a
company is collecting (i.e.,
turning over) its receivables
61
Accounts Receivable Turnover

Too fast
credit policies too
stringent; may be
losing sales

Too slow
credit department
not operating effectively;
dissatisfied customers 62
Interest-Bearing Promissory Note
Principal
Baker Corporation promises to pay
HighTec, Inc. $15,000 plus 12% annual
interest on March 13, 2005.
Interest
Date: December 13, 2004
Baker Corporation
Signed:_________
Maturity
Date
63
Non-Interest-Bearing
Promissory Note
In exchange for $9,000 applied toward
my purchase today, I promise to pay
$9,900 in six months.
Effective interest
Date: November 1, 2004 rate on note = 20%
$900
12
J.E. Privett
Signed:_________
$9,000 x 6
64
Balance Sheet Presentation
of Discounted Notes
Notes receivable
Less: Discount on
notes receivable
Discount transferred
to interest revenue
over life of note
12/31/04
$ 9,900
4/30/05
$ 9,900
( 600)
$ 9,300
- 0 $ 9,900
Upon
Maturity
65
Accelerating Cash Inflow
From Sales
Sales Discounts
 Credit Card Sales
 Discounting Notes Receivable

FEDERAL RESERVE NOTE
THE
THEUNITED
UNITEDSTATES
STATES OF
OF AMERICA
AMERICA
TH
IS N
O
TE IS LEG
A
L TEN
D
ER
FO
RA
LL D
EBTS, PU
BLIC A
N
DPRIV
A
TE
L70744629F
12
WASHINGTON, D.C.
12
A
H293
L70744629F
12
SERIES
12
1985
ONE
ONE DOLLAR
DOLLAR
66
Credit Card Sales
 Competitive
necessity
 Credit card company:
»
»
Charges fee
Assumes risk of nonpayment
67
Discounting Notes Receivable
Sell note prior to maturity date for cash
 Receive less than face value (i.e.,
discounted amount)
 Can be sold with or without recourse

Baker Corporation promises to pay
HighTec, Inc. $15,000 plus 12% annual
interest on December 31, 1998.
FEDERAL RESERVE NOTE
THE
THEUNITED
UNITEDSTATES
STATES OF
OF AMERICA
AMERICA
FEDERAL RESERVE NOTE
TH
IS N
O
TE IS LEG
A
L TEN
D
ER
THE
THEUNITED
UNITEDSTATES
STATES OF
OFLAMERICA
AMERICA
70744629F
FO
RA
LL D
EBTS, PU
BLIC A
N
DPRIV
A
TE
FEDERAL RESERVE NOTE
TH
IS N
O
TE IS LEG
A
L TEN
D
ER
12
12
WASHINGTON, D.C.
THE
OF
THEUNITED
UNITEDSTATES
STATES
OFLAMERICA
AMERICA
70744629F
FO
RA
LL D
EBTS, PU
BLIC A
N
DPRIV
A
TE
FEDERAL RESERVE NOTE
A
TH
IS N
O
TE IS LEG
A
L TEN
D
ER
12
12
WASHINGTON, D.C.
THE
OF
THEUNITED
UNITEDSTATES
STATES
OFLAMERICA
AMERICA
H293
70744629F
FO
RA
LL D
EBTS, PU
BLIC A
N
DPRIV
A
TE
A
L70744629F
TH
IS N
O
TE IS LEG
A
L TEN
D
ER
12
Date: January 1, 1998
12
H293
12 L70744629F
WASHINGTON, D.C.
FO
RA
LL D
EBTS, PU
BLIC A
N
DPRIV
A
TE
12
SERIES
A
1985
L70744629F
12
12
ONE
DOLLAR
ONE
DOLLAR
A
WASHINGTON, D.C.
12
SERIES
12
H293
1985
L70744629F
ONE
ONE DOLLAR
DOLLAR
12
Baker Corporation
Signed:_________
H293
12
SERIES
1985
L70744629F
12
ONE
ONE DOLLAR
DOLLAR
SERIES
12
1985
ONE
ONE DOLLAR
DOLLAR
68
Liquid Assets and the Statement of Cash
Flows - Indirect Method
Operating Activities
Net income
Increase in accounts receivable
Decrease in accounts receivable
Increase in notes receivable
Decrease in notes receivable
xxxx
+
+
Investing Activities
Purchases of held-to-maturity and
available-for-sale securities
Sales/maturities of held-to-maturity and
available-for-sale securities
Financing Activities
-
+
69
End of Chapter 7
70