Chapter 7
Cash and Receivables
Intermediate Accounting 11th edition
Nikolai Bazley Jones
An electronic presentation
By Norman Sunderman
and Kenneth Buchanan
Angelo State University
COPYRIGHT © 2010 South-Western/Cengage Learning
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Show Me the Money!
Cash is the lifeblood for companies, and infusions
are coming more frequently from nontraditional
sources. According to a recent Federal Reserve
Payments Study, noncash payments grew by
4.6% over the previous three years and had a
total value of $75.8 trillion. Of these noncash
payments, more than two-thirds were made
electronically, with debit cards being the most
frequently used electronic payment type.
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Show Me the Money!
 Debit and credit cards are used most
frequently.
 The automated clearing house (ACH) is an
electronic network that provides for the
interbank clearing of electronic payments.
 ACH payments currently represent 91% of the
value of all electronic payments.
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Automated Clearing House (ACH)
ACH payments include:
 Direct deposit of payroll and social security
 Electronic payments of bills
– Mortgages
– Utility bills
– Insurance premiums
 The conversion of checks by businesses
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Electronic Banking
 Accounts receivable conversion (ARC)
– Paper checks received at the bank lockbox are
converted into automated clearing house debits and
then the check is destroyed.
– ARC payments are about one-third cheaper than
paper checks.
– Float time is cut in half.
 Check Clearing for the 21st Century Act
(Check 21)
– Gives legal status to substitute checks
– Allows merchants to scan and transmit checks to the
bank
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Cash
Cash is the resource on hand to
meet planned payments and
emergency situations.
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Cash
Cash
Included in Cash
•
•
•
•
•
Coins and currency
Checking accounts
Savings accounts
Negotiable checks
Bank drafts
Excluded from Cash
•
•
•
•
•
Certificates of deposit
Bank overdrafts
Postdated checks
Travel advances
Postage stamps
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Cash Equivalents
Cash equivalents are short-term, highly
liquid investments that are readily
convertible into known amounts of cash
and so near their maturity that there is
little risk of changes in value because of
changes in interest rates.
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Cash Management
Control Over Receipts
 The person opening the mail or
the salesperson using the cash
register should count the receipts
immediately.
 All cash receipts are recorded
daily in the accounting records.
 All receipts are deposited daily in
the company’s bank account.
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Cash Management
Control Over Payments
 Make all payments by check or electronic
payment (except petty cash items) so that a
record exists for every company expenditure.
 Authorize and sign all checks only after an
expenditure is verified and approved.
 Periodically reconcile the cash balance in the
bank statement with the company’s
accounting records.
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Receivables
Those receivables expected to be collected or
satisfied within one year or the current
operating cycle, whichever is longer, are
classified as current assets; the remainder are
classified as noncurrent.
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Receivables
Each of the following criteria must be satisfied
when the right of return exists in order to
recognize revenue at the time of sale.
1. The sales price is known at the date of sale.
2. The buyer has paid or will pay the seller, and
the obligation is not contingent upon the resale
of the product.
3. The buyer’s obligation to the seller would not
be changed by theft or damage to the product.
Continued
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Receivables
Each of the following criteria must be satisfied
when the right of return exists in order to
recognize revenue at the time of sale.
4. The buyer has an economic substance apart
from the seller.
5. The seller does not have significant obligations
to help the buyer sell the product.
6. The seller can reasonably estimate the amount
of future returns.
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Accounts Receivable
Internal Control Procedures for
Accounts Receivable
 Prenumbered sales invoices
 Separation of the sales
function from the cash
collection responsibilities
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Sales Discounts
 Increase sales
 Encourage prompt payment
 Increase likelihood of collection
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Calculation of Sales Discounts
2/10, n/30
A 2% discount may be subtracted from the
invoice price if payment is made within 10
days, otherwise the total amount is due within
30 days (net of returns and allowances).
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Sales Returns and Allowances
 When goods are sold that
are found to be defective, the
customer may retain the
goods and be allowed a
reduction in the purchase
price. This reduction is
called a sales allowance.
 When the customer returns
good to the seller, the
exchange is called a sales
return.
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Loss Contingencies
1. Information available
prior to the issuance of
the financial statements
indicates that it is
probable that an asset
has been impaired or a
liability has been
incurred at the date of
the financial statements.
2. The amount of the loss
can be reasonably
estimated.
…recorded
as reductions
GAAP requires
that in
assets
or aslosses
liabilities
estimated
fromwhen
loss
both
of these conditions
are
contingencies
be accrued
met. and…
against income
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Estimated Bad Debts Method
Bad debts can be
estimated based on
sales or on accounts
receivable.
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Estimated Bad Debts Method
1. Relationship to sales (income statement
approach):
Percentage of sales
Percentage of net credit sales
2. Relationship to accounts receivable (balance
sheet approach):
Percentage of outstanding accounts receivable
Aging of accounts receivable
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Aging of Accounts Receivable
1. Review the unpaid invoices in each customer’s
account.
2. Classify the invoice amounts according to the
length of time the invoice has been
outstanding.
3. Multiply the total amount in each age group by
the applicable estimated uncollectible
percentage.
4. Make a journal entry to bring the balance in
Allowance for Doubtful Accounts to the
amount calculated in Step 3.
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Ratio Analysis
Activity Ratios
Receivables turnover indicates how
many times receivables are “turned
over” or collected each period.
Net Credit Sales
Average Net Receivables
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Accounts Receivable Financing Agreements
There are three basic forms of
financing agreements to obtain
cash from accounts receivable.
1. Pledging
2. Assigning
3. Factoring
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Pledging
When a company pledges its accounts
receivable, it is using these accounts as collateral
for a loan, and the servicing activities remain its
responsibility.
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Assignment
When a company assigns its accounts receivable
to a financial institution, it enters into a lending
agreement with the institution to receive cash on
specific customer accounts.
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Factoring
When a company factors its accounts receivable,
it sells individual accounts to a financial
institution (called a factor).
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Credit Card Sales
 Many retail companies accept national credit cards,
such as VISA, MasterCard, American Express, and
Diner’s Club.
 The retailer either deposits the credit card receipts at
the bank or receives an electronic transfer of funds
from the credit card company.
 The retailer is assessed a service charge by the credit
card company.
 This charge is accounted for as an operating expense.
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Notes Receivable
A note receivable is an unconditional
written agreement to collect a certain
sum of money on a specific date.
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Notes Receivable
Notes receivable generally have two
attributes that are not found in
accounts receivable.
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Notes Receivable
1. They are negotiable instruments, which means
that they are legally transferable among
parities and may be used to satisfy debts by
the holders of these instruments.
2. They usually involve interest, requiring the
separation of the receivable into its principal
and interest components.
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IFRS vs. U.S. GAAP
 Same
–
–
–
–
Cash and cash equivalents
Sales discounts
Allowance for doubtful accounts
Pledging, assignment, and factoring
 Different
– IFRS category loans and receivables not defined
under GAAP
– IFRS allows receivables to be classified as
“available-for-sale”
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Appendix: Petty Cash
1. An employee is
appointed petty cash
custodian.
Petty Cash
Cash
500
500
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Appendix: Petty Cash
2. Petty cash vouchers are
printed, prenumbered, and
given to the custodian of the
fund.
At all times the total of
the cash in the fund plus
the amounts of
expenditure vouchers
should be equal to $500
(in this case).
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Appendix: Petty Cash
3.
When
the amount
of cash
in
…the
vouchers
are sorted
into
the pettycategories
cash fundand
becomes
expense
the
low at the cash
end of
remaining
is accounting
counted.
period,…
Assume that a count at
the end of the month
shows $67.54 remaining in
the petty cash fund.
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Appendix: Petty Cash
The sorting of vouchers indicates the following
costs were incurred during the month:
Office supplies
Postage
Transportation
Miscellaneous
Total expenses
$ 34.16
178.00
132.14
83.76
$428.06
The fund is short by $4.40 ($71.94 – $67.54).
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Appendix: Petty Cash
The company records the actual expenses and
the amount needed to replenish the fund.
Office Supplies Expense
Postage Expense
Transportation Expense
Miscellaneous Expense
Cash Short and Over
Cash
34.16
178.00
132.14
83.76
4.40
432.46
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Appendix: Bank Reconciliation
Procedures for Preparing a Bank Reconciliation
 Compare the deposits listed in the company’s
records with the deposits shown on the bank
statement.
 Compare the checks listed in the company’s
records with the checks shown on the bank
statement.
Continued
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Appendix: Bank Reconciliation
Procedures for Preparing a Bank Reconciliation
 Identify any deposits or charges made
directly by the bank that are not included in
the company’s records.
 Determine the effect of any errors.
 Complete the bank reconciliation.
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Appendix: Bank Reconciliation
Causes of the
difference between
the cash balance
and the company’s
bank statement
balance:
 Outstanding
checks
 Deposits in transit
 Charges made
directly by the
bank
 Deposits made
directly by the
bank
 Errors
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Chapter 7
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