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Unformatted text preview: CHAPTER 7 CASH AND RECEIVABLES Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 7-1 Cash and Receivables Cash and Receivables Cash What is cash? Reporting cash Summary of cashrelated items Chapter 7-2 Receivables Recognition of accounts Recognition receivable receivable Valuation of accounts Valuation receivable receivable Recognition of notes Recognition receivable receivable Valuation of notes Valuation receivable receivable Disposition of accounts Disposition and notes receivable and Presentation and Presentation analysis analysis What is Cash? What is Cash? Cash Most liquid asset Standard medium of exchange Basis for measuring and accounting for all items Current asset Examples: coin, currency, available funds on deposit at the bank, money orders, certified checks, cashier’s checks, personal checks, bank drafts and savings accounts. Chapter 7-3 LO 1 Identify items considered cash. Reporting Cash Reporting Cash 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. Chapter 7-4 LO 2 Indicate how to report cash and related items. Reporting Cash Reporting Cash 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. Chapter 7-5 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. Written promises to pay a sum of money on a specified future date. Accounts Accounts Accounts Accounts Receivable Receivable Receivable Receivable Notes Notes Notes Notes Receivable Receivable Receivable Receivable Chapter 7-6 LO 3 Define receivables and identify the different types of receivables. Receivables Receivables Nontrade Receivables 1. 2. 3. 4. 5. 6. Advances to officers and employees. Advances to subsidiaries. Deposits to cover potential damages or losses. Deposits as a guarantee of performance or payment. Dividends and interest receivable. Claims against: a) b) c) d) e) f) Chapter 7-7 Insurance companies for casualties sustained. Defendants under suit. Governmental bodies for tax refunds. Common carriers for damaged or lost goods. Creditors for returned, damaged, or lost goods. Customers for returnable items (crates, containers, etc.). LO 3 Define receivables and identify the different types of receivables. Recognition of Accounts Receivables Recognition of Accounts Receivables Cash Discounts Cash Discounts Inducements for prompt payment Inducements for prompt payment Gross Method vs. Net Gross Method vs. Net Method Method Chapter 7-8 Payment terms are 2/10, n/30 LO 4 Explain accounting issues related to recognition of accounts receivable. Recognition of Accounts Receivables Recognition of Accounts Receivables Cash Discounts (Sales Discounts) Illustration 7-4 Chapter 7-9 LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Accounting for Accounts Receivable Assets Current Assets: Cash Accounts receivable Less: Allowance for doubtful accounts Inventory Prepaids Total current assets Fixed Assets: Office equipment Furniture & fixtures Less: Accumulated depreciation Total fixed assets Total Assets Chapter 7-10 $ 500 (25) 346 475 812 40 1,673 $ 5,679 6,600 (3,735) 8,544 10,217 LO 4 Explain accounting issues related to recognition of accounts receivable. Accounting for Accounts Receivable Accounting for Accounts Receivable Assets Current Assets: Cash Accounts receivable, net of $25 allowance I nventory P repaids Total current assets Fixed Assets: Office equipment Furniture & fixtures Less: Accumulated depreciation Total fixed assets Total Assets Chapter 7-11 $ $ 346 475 812 40 1,673 5,679 6,600 (3,735) 8,544 10,217 LO 4 Explain accounting issues related to recognition of accounts receivable. Valuation of Accounts Receivable Valuation of Accounts Receivable Uncollectible Accounts Receivable An uncollectible account receivable is a loss of revenue that requires, through proper entry in the accounts, a decrease in the asset accounts receivable and a related decrease in income and stockholders’ equity. Chapter 7-12 LO 5 Explain accounting issues related to valuation of accounts receivable. Valuation of Accounts Receivable Valuation of Accounts Receivable Methods of Accounting for Uncollectible Accounts Direct Write-Off Theoretically undesirable: No matching Receivable not stated at net realizable value Not GAAP Chapter 7-13 Allowance Method Losses are Estimated: Percentage­of­sales Percentage­of­receivables GAAP LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Uncollectible Accounts Receivable Income Income Statement Statement Approach Approach Balance Balance Sheet Sheet Approach Approach Chapter 7-14 LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Uncollectible Accounts Receivable 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. Chapter 7-15 LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Uncollectible Accounts Receivable 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. Chapter 7-16 LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Uncollectible Accounts Receivable Summary Percentage of Sales 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. Chapter 7-17 LO 5 Explain accounting issues related to valuation of accounts receivable. Uncollectible Accounts Receivable Uncollectible Accounts Receivable Exercise 7-7 and Problem 7-2 are examples of both methods Chapter 7-18 LO 5 Explain accounting issues related to valuation of accounts receivable. Recognition of Notes Receivable Recognition of Notes Receivable 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) Chapter 7-19 LO 6 Explain accounting issues related to recognition of notes receivable. Recognition of Notes Receivable Recognition of Notes Receivable 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) Chapter 7-20 LO 6 Explain accounting issues related to recognition of notes receivable. Recognition of Notes Receivable Recognition of Notes Receivable Short-Term Long-Term Record at Face Value, less allowance Record at Present Value of cash expected to be collected Interest Rates Stated rate = Market rate Face Value Stated rate > Market rate Premium Stated rate < Market rate Chapter 7-21 Note Issued at Discount LO 6 Explain accounting issues related to recognition of notes receivable. Note Receivable Example – zero interest Note Receivable Example – zero interest On July 1, 2010, Smith Tools, Inc. sold land having a fair market value of $900,000 in exchange for a 4­year zero­interest­bearing promissory note in the face amount of $1,416,167. The land is carried on Smith Tool’s books at a cost of $590,000. What is the interest rate on the note? Make the journal entry for the transaction. The interest rate is 11.91142% 7/1/2010 Note Receivable Chapter 7-22 $1,416,167 Discount on Note Receivable Land Gain on Sale of Land 516,167 310,000 590,000 Note Receivable Example -- continued Note Receivable Example continued At the end of each accounting period the Discount on Note Receivable is amortized at discounted interest rate. Note that the Carrying amount of the Note Receivable increases as the Discount on Note Receivable is amortized and Interest Revenue is recognized. Date Discount on Note Receivable Interest Revenue (carrying amt x interest rate) XXXXX XXXXX 12/31/10 Discount on Note Receivable Interest Revenue 53,601 12/31/11 Discount on Note Receivable Interest Revenue 113,587 12/31/12 Discount on Note Receivable Interest Revenue 127,117 Chapter 7-23 53,601 113,587 127,117 Note Receivable Example – mkt interest Note Receivable Example – mkt interest On July 1, 2010 Happy Face, Inc. sold imported shaving soap and accepted a promissory note in the face amount of $400,000. The interest rate on the note is 3% and the note has an eight year term. The interest is payable annually. The market rate of interest is 12%. Make the journal entry for the note on July 1. PV of $400,000 at 12% in eight years = 400,000 x .40388 = 161,552 PV of $12,000 per year at 12% for eight years = 12,000 x 4.96764 = 59,612 PV of Note = 161,552 + 59,612 = 221,164 Face amount of Note – PV of Note = Discount on Note 400,000 – 221,164 = 178,836 7/1/10 Chapter 7-24 Note Receivable Discount on Note Receivable Sales Revenue – Shaving Soap 400,000 178,836 221,164 Note Receivable Example -- continued Note Receivable Example continued Note Receivable Discount on Note Receivable Before Amort Cash Rec'd Interest - 3% 7/1/10 400,000 400,000 178,836 6,000 12/31/11 400,000 171,566 12/31/12 400,000 12/31/13 Discount on Note Receivable After Amort 178,836 12/31/10 Amortization of Discount Carrying Amt of Note Rec 178,836 221,164 7,270 171,566 228,434 12,000 15,412 156,154 243,846 156,154 12,000 17,262 138,893 261,107 400,000 138,893 12,000 19,333 119,560 280,440 12/31/14 400,000 119,560 12,000 21,653 97,907 302,093 12/31/15 400,000 97,907 12,000 24,251 73,656 326,344 12/31/16 400,000 73,656 12,000 27,161 46,494 353,506 12/31/17 400,000 46,494 12,000 30,421 16,074 383,926 6/30/18 400,000 16,074 6,000 16,074 0 400,000 At the end of each accounting period the Discount on Note Receivable is amortized at discounted interest rate. Note that the Carrying amount of the Note Receivable increases as the Discount on Note Receivable is amortized and Interest Revenue is recognized. Date Discount on Note Receivable Interest Revenue (carrying amt x interest rate) 12/31/15 Cash Discount on Note Receivable Interest Revenue Chapter 7-25 XXXXX XXXXX 12,000 24,251 36,251 Valuation of Notes Receivable Valuation of Notes Receivable Short-Term reported at Net Realizable Value (same as accounting for accounts receivable). Long-Term ­ FASB requires companies disclose not only their cost but also their fair value in the notes to the financial statements. Chapter 7-26 Fair Value Option. Companies have the option to use fair value as the basis of measurement in the financial statements. LO 7 Explain accounting issues related to valuation of notes receivable. Valuation of Notes Receivable Valuation of Notes Receivable Illustration (recording fair value option): Assume that Escobar Company has notes receivable that have a fair value of $810,000 and a carrying amount of $620,000. Escobar decides on December 31, 2010, to use the fair value option for these receivables. This is the first valuation of these recently acquired receivables. At December 31, 2010, Escobar makes an adjusting entry to record the increase in value of Notes Receivable and to record the unrealized holding gain, as follows. Notes Receivable Unrealized Holding Gain or Loss—Income Chapter 7-27 190,000 190,000 LO 7 Explain accounting issues related to valuation of notes receivable. Disposition of Accounts and Notes Receivable Disposition of Accounts and Notes Receivable Owner may transfer accounts or notes receivables to another company for cash. Reasons: Competition. Sell receivables because money is tight. Billing / collection are time­consuming and costly. Transfer accomplished by: 1. Secured borrowing 2. Sale of receivables Chapter 7-28 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Sales of Receivables Sales of Receivables Factors are finance companies or banks that buy receivables from businesses for a fee. Illustration 7-16 Chapter 7-29 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Sales of Receivables Sales of Receivables 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 Financial components approach used to record transfer Chapter 7-30 LO 8 Explain accounting issues related to disposition LO of accounts and notes receivable. of Presentation and Analysis Presentation and Analysis Analysis of Receivables Illustration 7-23 This Ratio used to: Assess the liquidity of the receivables. Measure the number of times, on average, a company collects receivables during the period. Chapter 7-31 LO 9 Describe how to report and analyze receivables. The accounting and reporting related to cash is essentially the same under both iGAAP and U.S. GAAP. The basic accounting and reporting issues related to recognition and measurement of receivables are essentially the same between iGAAP and U.S. GAAP. Although iGAAP implies that receivables with different characteristics should be reported separately, there is no standard that mandates this segregation. Chapter 7-32 The FASB, the IASB have adopted a piecemeal approach in which disclosure of fair value information in the notes is the first step. The second step is the fair value option. iGAAP and U.S. GAAP standards on the fair value option are similar but not identical. iGAAP and U.S. GAAP differ in the criteria used to derecognize a receivable. Chapter 7-33 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. Chapter 7-34 LO 10 Explain common techniques employed to control cash. Using Bank Accounts To obtain desired control objectives, a company can vary the number and location of banks and the types of accounts. General checking account Collection float. Lockbox accounts Imprest bank accounts Chapter 7-35 LO 10 Explain common techniques employed to control cash. ...
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This note was uploaded on 03/02/2012 for the course AICS 3115 taught by Professor Lynnalmond during the Spring '11 term at Virginia Tech.

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