Acc200Day07 - Accy 200 Accy Day 7 Peter A. Silhan Agenda...

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Unformatted text preview: Accy 200 Accy Day 7 Peter A. Silhan Agenda Agenda Working Capital (CA-CL) Cash Management AR net of bad debt allowance AP Estimated Warranty Liability Unearned Revenue Textbook Coverage Textbook Assets = Claims CH5: Current Assets CH5 CA CL CH7: Liabilities LTL LTA CH6: Noncurrent Assets OE CH8: Equity CL LTL OE LTA CA Cash Management: Cash-to-Cash (C2C) Operating Cycle Operating AR: Late Cash inflow C2C Cycle AP: Late Cash outflow INV on Account days AR days II end Collect Cash cash start (pay AP) Purchase INV INV after payment days C2C = INV days – AP days + AR days difficult concept pas 2005 Cash Management Cash Invest excess cash with minimal risk. Assure Avoid the availability of adequate amounts of cash. unnecessarily large amounts of idle cash. theft and fraud. Prevent The Internal Control System The Internal control objectives are to ensure: 1. Effective and efficient operations. 2. Reliable financial reporting. 3. Compliance with applicable laws and regulations. Internal Control Over Cash Require Make daily deposits. all payments by check. reconcile bank statements. Promptly CA Cash Prepaid Expenses Short-term Securities Receivables Inventories Current assets (CA) include cash and those assets that are expected to be converted to cash or used up within one year, or an operating cycle, whichever is longer. Ch5: Current Assets Ch5: Cash & Equivalents Short term Marketable Securities Accounts receivable (AR) Notes Receivable (NR) Inventories (INV) Meeting 8 Prepaid Expenses Other Current Assets Cash Cash Coins and paper money Checking accounts Cash includes… Money orders Petty cash funds Undeposited receipts Cash Equivalents Commercial paper U.S. Treasury securities Cash Equivalents Bank certificates of deposit Money market mutual funds Microsoft’s Current Assets Microsoft’s P ERI OD ENDI NG Assets Current Assets Cash And Cash Equivalents Short Term Investments Net Receivables Inventory Other Current Assets Total Current Assets 30-Jun-05 30-Jun-04 30-Jun-03 marketable securities 4,851 ,000 32,900,000 8,881 ,000 491 ,000 1 4,000 ,61 48,737,000 1 5,982,000 44,61 0,000 7,987,000 421 ,000 1 ,566,000 70,566,000 6,438,000 42,61 0,000 7,702,000 640,000 1 ,583,000 58,973,000 Source: Yahoo! Finance (ticker symbol = MSFT) Short-Term Marketable Securities Securities Bond Investments Readily Marketable Marketable Securities are . . . Almost As Liquid As Cash Capital Stock Investments Current Assets E5.9 Notes Receivable (NR) & Interest Receivable (IR) E5.9 Cash Beg Interest Receivable na 232.88 232.88 Interest Received End na 232.88 Accrue Interest Interest Revenue 232.88 Cash Cash Interest Receivable 232.88 -232.88 Interest Revenue 232.88 232.88 Dr Interest Receivable Cr Interest Revenue Dr Cash Cr Interest Receivable 232.88 232.88 232.88 232.88 "earnings" account (i.e., to retained Cash 4500 Note Receivable 4,500 4500 collect principal; increase c ash c ollect principal; reduce NR Let’s turn our attention to AR (net accounts receivable and bad debt expense) important concepts Microsoft’s Current Assets Microsoft’s P ERI OD ENDI NG Assets Current Assets Cash And Cash Equivalents Short Term Investments Net Receivables Inventory Other Current Assets 4,851 ,000 32,900,000 8,881 ,000 491 ,000 1 4,000 ,61 48,737,000 1 5,982,000 44,61 0,000 7,987,000 421 ,000 1 ,566,000 70,566,000 6,438,000 42,61 0,000 7,702,000 640,000 1 ,583,000 58,973,000 30-Jun-05 30-Jun-04 30-Jun-03 AR (net) Total Current Assets Source: Yahoo! Finance (ticker symbol = MSFT) Bad Debts (Uncollectible Accounts) Bad If a company makes credit sales to customers, some accounts inevitably will turn out to be uncollectible. PAST DUE AR (net): Allowance for Bad Debts AR “contra­ account” Accounts receivable Less: Allowance for bad debts Net realizable value of accounts receivable The net realizable value is the amount of accounts receivable that the business expects to collect. AR (net): Accounts Receivable- net of bad debt allowance bad Cash dr AR­gross collections dr cr cr Bad Debt Allowance (contra asset) write­off dr cr accrue RE: sales important concepts Bad Debt Expense cr dr Bad Debts/Uncollectible Accounts Bad There are two ways to make this estimate: 1. Based on the collectibility of all credit sales for the period (percentage of sales method) 2. Based on an estimate of the accounts receivable to be collected (aging of receivables method). Writing Off an Uncollectible Account Receivable Account When an account is determined to be uncollectible, it no longer qualifies as an asset and should be written off. E5.5 AR: Bad Debt Allowance E5.5 Cash + AR(net) + INV + PPE = -21462 no net change 263 CL+ LTL+ PIC+ RE memorandum Beginning Balance -21462 (a) Accrue bad debt expens (b) W rite-off Bad Debt 263 (c) adjust BDA & bad debt e Ending Balance Cash + AR + INV + PPE = CL+ LTL+ PIC+ RE NOTE: "net" means reduced by (e.g., bad debt allowance contra-account) Writing Off an Uncollectible Account Writing Receivable: No Effect on Net Receivables or No Net retained earnings retained Before Write-Off $ 10,000 2,500 $ 7,500 After Write-Off $ 9,500 2,000 $ 7,500 Accounts receivable Less: Allow. for bad debts Net realizable value Notice that the $500 write-off did not change the net realizable value nor did it affect any income statement accounts. E5.13 Prepaid Insurance Cash Beg 3,000 advance payment Prepaid Insurance na 3,000 1,500 insurance expense End na Insurance Expense 1,500 (a) Dr Prepaid Isurance Cr Cr Cash Dr Insurance Expense Cr Prepaid Insurance rent 3,000 3000 1500 1500 (6 months) (b) P5.17 Comprehensive CA problem: Basic Horizontal Model Basic Notice no change in AR­net!!! Basic Horizontal Model Assets = Beginning Balance (a) Accrued Interest on NoteRec (IntRec) (b) Recorded Bad Debts estimated for period ( c) Wrote off overdue AR (d) Converted AR into NoteReceivable (e) Accrued Interest on NoteReceivable (f) Collected accrued Interest on NR (g) Recorded Sales (80% on account) (h) Recognized cost of goods sold Ending Balance na $15 ($700) $0 520 & -520 $48 48 & -48 800 & 3,200 ($3,200) na na Liabilities + na Equity na $15 ($700) $48 $4,000 ($3,200) na Textbook Coverage Textbook Assets = Claims CH5: Current Assets current liabilities CA CL CH7: Liabilities LTL LTA CH6: Noncurrent Assets OE CH8: Equity CL LTL OE LTA CA Nature of Liabilities Nature Liabilities are obligations that represent “probable future sacrifice of economic benefits.” The term accrued expenses is often used on the balance sheet to describe liabilities. Current liabilities are those liabilities that will be paid within one year of the current balance sheet date. Short-Term Debt Short-Term Matrix, Inc. borrows $25,000 from 1st National Bank to provide working capital. The following entry is recorded: Dr. Cr. Cash Short-term debt 25,000 25,000 This transaction has the following effect on Horizontal Model: Balance Sheet Assets + Cash = Liabilities + + Shortterm debt Owners' Equity Interest Expense Interest The $25,000 note bears interest at 9% per year. Interest is payable to the bank each December 31st. The following entry is recorded to accrue interest each month: Dr. Cr. Interest expense Interest payable 187.50 187.50 Accounts Payable (Terms of Payment) (Terms Amounts owed to suppliers for goods and services that have been provided on credit. Purchase Discounts 2/10, n/30 Percentage Discount . . . Discount . . . for this for number of days. days. Otherwise, Otherwise, Net (or All) is Due . . . . . . in this Number of Days. Days. Estimated Warranty Estimated Liability Liability recognize here for net income purposes Estimated Warranty Liability actual costs Cash, Supplies, etc. Cr Dr Cr accrued warranty expense RE (expense) Dr (Beg Liability + inflow = End Liability + outflow) E7.6(a) Estimated Warranty Liability E7.6(a) E7.8(a) Unearned Revenue: Early Cash Early E7.8(a) inflow (defer recognition of revenue until later) recognition later Cash 50,400 Unearned Revenue (current liability) na cash collected 8,400 na 50,400 recognize Revenue End Beg Ticket Revenue 8,400 Cash Cash 50,400 no effect Equals Equals Equals Unearned revenue 50,400 -8,400 Plus Plus Plus RE: Ticket Revenue 8,400 (a) Dr Cash Cr Unearned Revenue Dr Unearned Revenue Cr Revenue (from one event) 50,400 50400 8400 8400 Q&A Q&A ...
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This note was uploaded on 10/16/2010 for the course ACCY Accy 200 taught by Professor Xxx during the Spring '10 term at University of Illinois at Urbana–Champaign.

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