Ch7 - Intermediate Accounting Chapter 7 Cash and...

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Unformatted text preview: Intermediate Accounting Chapter 7 Cash and Receivables Learning Objectives Learning 2 Identify items considered cash Indicate how to report cash and related items Define receivables and identify the different types of receivables Explain accounting issues related to recognition of accounts receivable Explain accounting issues related to recognition of notes receivable Explain accounting issues related to valuation of notes receivable Explain accounting issues related to disposition of accounts and notes receivable Describe how to report receivables What is Cash What Cash Most liquid asset Standard medium of exchange Basis for measuring and accounting for all items 3 Current asset Examples: coin, currency, petty cash, change funds, available funds on deposit at the bank, money orders, certified checks, cashier’s checks, personal checks, bank drafts, savings accounts and money market funds with check writing privileges. LO 1: Identify items considered cash Reporting Cash Reporting Cash Equivalents Short­term, highly liquid investments that are both (a) readily convertible to cash, and (b) so near their maturity that they present insignificant risk of changes in interest rates. Examples: Treasury bills, Commercial paper, and Money market funds without check writing privileges. 4 LO 2: Indicate how to report cash and related items. Reporting Cash Reporting Restricted Cash Companies segregate restricted cash from “regular” cash for reporting purposes. Examples, restricted for: (1) plant expansion, (2) retirement of long­term compensating balances. 5 LO 2: Indicate how to report cash and related items. debt, and (3) Reporting Cash Reporting Bank Overdrafts When a company writes a check for more than the amount in its cash account. • Generally reported as a current liability. • Offset against cash account only when available cash is present in another account in the same bank on which the overdraft occurred. 6 LO 2: Indicate how to report cash and related items. Receivables Receivables Claims held against customers and others for money, goods, or services. Oral promises of the purchaser to pay for goods and services sold. Accounts Receivable 7 Written promises to pay a sum of money on a specified future date. Notes Receivable LO 3: Define receivables and identify the different types of receivables. Receivables Receivables Nontrade Receivables 1. Advances to officers and employees. 2. Advances to subsidiaries. 3. Deposits to cover potential damages or losses. 4. Deposits as a guarantee of performance or payment. 5. Dividends and interest receivable. 6. Claims against: (a) Insurance companies for casualties sustained. (b) Defendants under suit. (c) Governmental bodies for tax refunds. (d) Common carriers for damaged or lost goods. (e) Creditors for returned, damaged, or lost goods. (f) Customers for returnable items (crates, containers, etc.) 8 LO 3: Define receivables and identify the different types of receivables. Recognition of Accounts Receivable Recognition Trade Discounts • Reductions from the list price • Not recognized in the accounting records • Customers are billed net of discounts 9 LO 4: Explain accounting issues related to recognition of accounts receivable. 10% Discount for new Retail Store Customers Balance Sheet – “Current Assets” Balance Cash Discounts • Inducements for prompt payment Invoice • Gross Method vs. Net Method Payment Payment terms are 2/10, n/30 2/10, 10 LO 4: Explain accounting issues related to recognition of accounts receivable. Recognition of Accounts Receivables Recognition On June 4, Bolton Company sold to Arquette Company merchandise having a sale price of $3,000 with terms of 2/10, n/60, f.o.b. shipping point. On June 13, the company received a check for the balance due from Arquette Company. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the gross method. June 4 Accounts receivable Sales June 13 Cash ($3,000 x 98%) Sales discounts Accounts receivable 11 3,000 3,000 2,940 60 3,000 LO 4: Explain accounting issues related to recognition of accounts receivable. Recognition of Accounts Receivables Recognition On June 4, Bolton Company sold to Arquette Company merchandise having a sale price of $3,000 with terms of 2/10, n/60, f.o.b. shipping point. On June 13, the company received a check for the balance due from Arquette Company. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the net method. June 4 Accounts receivable Sales June 13 Cash ($3,000 x 98%) Accounts receivable 12 2,940 2,940 2,940 2,940 LO 4: Explain accounting issues related to recognition of accounts receivable. Recognition of Accounts Receivables Recognition On June 4, Bolton Company sold to Arquette Company merchandise having a sale price of $3,000 with terms of 2/10, n/60, f.o.b. shipping point. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the net net method and Arquette did not remit payment until June 29 . method June 4 Accounts receivable Sales June 29 Cash 2,940 2,940 3,000 Accounts receivable Sales Discounts Forfeited 13 LO 4: Explain accounting issues related to recognition of accounts receivable. 2,940 60 Recognition of Accounts Receivables Recognition Nonrecognition of Interest Element A company should measure receivables in terms of their present value. The profession specifically excludes from present value considerations “receivables arising from transactions with customers in the normal course of business which are due in customary trade terms not exceeding approximately one year.” 14 LO 4: Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Accounting Journal entry for credit sale of $100? Accounts receivable Sales Accounts Receivable 100 100 Allowance for Doubtful Accounts Beg. 500 25 Beg. Sale 100 End. 600 15 LO 4: Explain accounting issues related to recognition of accounts receivable. 25 End. Accounting for Accounts Receivable Accounting Collected of $333 on account? Cash Accounts Receivable Accounts Receivable 333 Allowance for Doubtful Accounts Beg. 500 Sale 100 333 25 Beg. Coll. End. 267 16 333 LO 4: Explain accounting issues related to recognition of accounts receivable. 25 End. Accounting for Accounts Receivable Accounting Adjustment of $15 for estimated Bad­Debts? Bad debt expense Allowance for Doubtful Accounts 15 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 Sale 100 333 25 Beg. Coll. End. 267 17 15 LO 4: Explain accounting issues related to recognition of accounts receivable. 15 Est. 40 End. Accounting for Accounts Receivable Accounting Write­off of uncollectible accounts for $10? Allowance for Doubtful accounts 10 Accounts receivable 10 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. Sale 100 333 Coll. 10 W/O W/O 10 15 End. 257 30 End. 18 LO 4: Explain accounting issues related to recognition of accounts receivable. Est. Accounting for Accounts Receivable Accounting Assets Current Assets: Cash Accounts receivable, net of $30 allowance $ 13 227 Inventory 812 Prepaids 40 Total current assets 1,092 Fixed Assets: Office equipment 5,679 Furniture and fixtures 6,600 Less: Accumulated depreciation (3,735) Total fixed assets 8,544 Total Assets $ 9,636 19 LO 4: Explain accounting issues related to recognition of accounts receivable. Valuation of Accounts Receivable Valuation Reporting Receivable Classification Valuation (net realizable value) Uncollectible Accounts Receivable 20 Sales on account raise the possibility of accounts not being collected. LO 5: Explain accounting issues related to valuation of accounts receivable. Valuation of Accounts Receivable Valuation Uncollectible Accounts Receivable An uncollectible account receivable is a loss of revenue that requires, through proper entry in the accounts, 21 a decrease in the asset accounts receivable and a related decrease in income and stockholders’ equity. LO 5: Explain accounting issues related to valuation of accounts receivable. Valuation of Accounts Receivable Valuation Methods of Accounting for Uncollectible Accounts Direct Write-Off Allowance Method Theoretically undesirable: Losses are Estimated: • No matching No matching • Percentage­of­sales Percentage­of­sales • Receivable not stated at net Receivable not stated at net realizable value • Percentage­of­receivables Percentage­of­receivables • Not GAAP 22 • GAAP LO 5: Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Uncollectible Percentage­of­Sales Matching Sales Bad Debt Expense Percentage­of­Receivables Net Realizable Value Accounts Allowance for Receivable Doubtful Accounts 23 LO 5: Explain accounting issues related to valuation of accounts receivable. Income Income Statement Approach Approach Balance Balance Sheet Approach Approach Uncollectible Accounts Receivable Uncollectible Percentage-of-Sales Approach ­ matches costs with revenues because it relates the charge to the period in which a company records the sale. Appropriate if there is a fairly stable relationship between previous years’ credit sales and bad debts. 24 LO 5: Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Uncollectible Percentage –of-Sales Approach Illustration: Chad Shumway Corp. estimates from past experience that about 2 percent of credit sales become uncollectible. If Chad Shumway has credit sales of $400,000 in 2010, it records bad debt expense as follows. Bad Debt Expense Allowance for Doubtful Accounts 25 8,000 8,000 LO 5: Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Uncollectible Percentage-of-Receivables Approach not matching reports receivables at net realizable value. Companies may apply this method using one composite rate, or an aging schedule of accounts receivable. See text page 329 for example. 26 LO 5: Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Uncollectible Summary Percentage of Sales approach: Percentage approach: • Bad debt expense estimate is related to a nominal account (Sales), any balance in the allowance account is ignored. • Achieves a proper matching of cost and revenues. Percentage of Receivables approach: • Results in a more accurate valuation of receivables on the balance sheet. • Method may also be applied using an aging schedule. 27 LO 5: Explain accounting issues related to valuation of accounts receivable. Recognition of Notes Receivable Recognition Notes Receivable Supported by a formal promissory note. • A negotiable instrument • Maker signs in favor of a Payee • Interest­bearing (has a stated rate of interest) OR •Zero­interest­bearing (interest included in face amount) 28 LO 6: Explain accounting issues related to recognition of notes receivable. Recognition of Notes Receivable Recognition Generally originate from: • Customers who need to extend payment period of an outstanding receivable • High­risk or new customers • Loans to employees and subsidiaries • Sales of property, plant, and equipment • Lending transactions (the majority of notes) 29 LO 6: Explain accounting issues related to recognition of notes receivable. Recognition of Notes Receivable Recognition Short-Term Long-Term Record at Face Value, Record less allowance less Record at Present Value Record of cash expected to be collected collected Interest Rates Note Issued at Stated rate = Market rate Face Value Stated rate > Market rate Premium Stated rate < Market rate Discount 30 LO 6: Explain accounting issues related to recognition of notes receivable. Disposition of Accounts and Notes Receivable Disposition Owner may transfer accounts or notes receivables to another company for cash. Reasons include: • Sell receivables because money is tight • Billing / collection are time­consuming and costly Transfer accomplished by: 1. Secured borrowing 2. Sale of receivables 31 LO 8: Explain accounting issues related to disposition of accounts and notes receivable. Sales of Receivables Sales Factors are finance companies or banks that buy receivables from businesses for a fee. See Illustration 7­16 32 LO 8: Explain accounting issues related to disposition of accounts and notes receivable. Sales of Receivables Sales Sale Without Recourse • Purchaser assumes risk of collection • Transfer is outright sale of receivable • Seller records loss on sale • Seller use Due from Factor (receivable) account to cover discounts, returns, and allowances Sale With Recourse • Seller guarantees payment to purchaser 33 LO 8: Explain accounting issues related to disposition of accounts and notes receivable. Secured Borrowing versus Sale Secured The FASB concluded that a sale occurs only if the seller surrenders control of the receivables to the buyer. Three conditions must be met. See Illustration 7­21 34 LO 8: Explain accounting issues related to disposition of accounts and notes receivable. Presentation and Analysis Presentation General rule in classifying receivables are: 1. Segregate the different types of receivables that a company possesses, if material 2. Appropriately offset the valuation accounts against the proper receivable accounts 3. Determine that receivables classified in the current assets section will be converted into cash within the year or the operating cycle, whichever is longer 4. Disclose any loss contingencies that exist on the receivables 5. Disclose any receivables designated or pledged as collateral 6. Disclose all significant concentrations of credit risk arising from receivables 35 LO 9: Describe how to report and analyze receivables. Cash Controls Cash Management faces two problems in accounting for cash transactions: 1. establish proper controls to prevent any unauthorized transactions by officers or employees, and 2. provide information necessary to properly manage cash on hand and cash transactions. 36 LO 10: Explain common techniques employed to control cash. Cash Controls Cash The Imprest Petty Cash System To pay small amounts for miscellaneous expenses. (See text page 348 for additional details.) Steps: 1. Record $300 transfer of funds to petty cash: Petty Cash Cash 300 300 2. The petty cash custodian obtains signed receipts from each individual to whom he or she pays cash 37 LO 10: Explain common techniques employed to control cash. Cash Controls Cash The Imprest Petty Cash System (continued) Steps: (continued) 3. Custodian receives a company check to replenish the fund. – There was $127 in fund before it was replenished. Office Supplies Expense Expense 76 2 173 38 42 Postage 53 Entertainment Cash Over and Short Cash LO 10: Explain common techniques employed to control cash. Cash Controls Cash The Imprest Petty Cash System (continued) Steps: (continued) 4. If the company decides that the amount of cash in the petty cash fund is excessive by $50, it lowers the fund balance as follows. Cash Petty cash 39 50 50 LO 10: Explain common techniques employed to control cash. Cash Controls Cash Physical Protection of Cash Balances Company should Minimize the cash on hand Only have on hand petty cash and current day’s receipts Keep funds in a vault, safe, or locked cash drawer Transmit each day’s receipts to the bank as soon as practicable Periodically prove (reconcile) the balance shown in the general ledger 40 LO 10: Explain common techniques employed to control cash. Cash Controls Cash Reconciliation of Bank Balances Schedule explaining any differences between the bank’s and the company’s records of cash. Reconciling Items: 1. Deposits in transit 2. Outstanding checks 3. Bank charges and credits 4. Bank or Depositor errors 41 LO 10: Explain common techniques employed to control cash. ...
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