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1
Practical Issues in Cash and Receivable
InstructorAdnan Shoaib
PART II: Corporate Accounting Concepts and Issues
Lecture 08
2
1. Identify items considered cash.
2. Indicate how to report cash and related items.
3. Define receivables and identify the different types of receivables.
4. Explain accounting issues related to recognition of accounts receivable.
5. Explain accounting issues related to valuation of accounts receivable.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
3
What is cash?
Reporting cash
Summary of cash-related items
CashSpecial Issues
Recognition of notes receivable
Valuation of notes receivable
Cash and ReceivablesCash and ReceivablesCash and ReceivablesCash and Receivables
Accounts Receivable
Notes Receivable
Recognition of accounts receivable
Valuation of accounts receivable
Fair value option
Disposition of accounts and notes receivable
Presentation and analysis
4
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.
What is Cash?What is Cash?What is Cash?What is Cash?
LO 1 Identify items considered cash.
Cash
5
Short-term, highly liquid investments that are both
Reporting CashReporting CashReporting CashReporting Cash
LO 2 Indicate how to report cash and related items.
Cash Equivalents
(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.
6
Companies segregate restricted cash from “regular” cash.
Examples, restricted for:
(1) plant expansion, (2) retirement of long-term debt,
and (3) compensating balances.
Reporting CashReporting CashReporting CashReporting Cash
LO 2
Restricted Cash
Illustration 7-1
7
Company writes a check for more than the amount in its cash account.
Reporting CashReporting CashReporting CashReporting Cash
LO 2 Indicate how to report cash and related items.
Bank Overdrafts
Generally reported as a current liability.
Offset against other cash accounts only when accounts
are with the same bank.
8
Summary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related Items
LO 2
Illustration 7-2
9
Internal ControlInternal ControlInternal ControlInternal Control
Encourages adherence to company policiesand procedures
Encourages adherence to company policiesand procedures
Promotes operational efficiency
Promotes operational efficiency
Minimizes errorsand theft
Minimizes errorsand theft
Enhances the reliability and accuracy of accounting dataEnhances the reliability and accuracy of accounting data
10
Internal Control ProceduresInternal Control ProceduresInternal Control ProceduresInternal Control Procedures
Cash ReceiptsCash Receipts
• Separate responsibilities for receiving cash, recording cash transactions, and reconciling cash balances.
• Match the amount of cash received with the amount of cash deposited.
• Close supervision of cash-handling and cash-recording activities.
Cash ReceiptsCash Receipts
• Separate responsibilities for receiving cash, recording cash transactions, and reconciling cash balances.
• Match the amount of cash received with the amount of cash deposited.
• Close supervision of cash-handling and cash-recording activities.
Cash DisbursementsCash Disbursements
• All disbursements, except petty cash, made by check.
• Separate responsibilities for cash disbursement documents, check authorization, check signing, and record keeping.
• Checks should be signed only by authorized individuals.
Cash DisbursementsCash Disbursements
• All disbursements, except petty cash, made by check.
• Separate responsibilities for cash disbursement documents, check authorization, check signing, and record keeping.
• Checks should be signed only by authorized individuals.
11
Compensating BalancesCompensating BalancesCompensating BalancesCompensating Balances
Compensating BalanceCompensating BalanceMinimum balance that must beMinimum balance that must bemaintained in a company’s bankmaintained in a company’s bankaccount as support for fundsaccount as support for fundsborrowed from the bank.borrowed from the bank.
Compensating BalanceCompensating BalanceMinimum balance that must beMinimum balance that must bemaintained in a company’s bankmaintained in a company’s bankaccount as support for fundsaccount as support for fundsborrowed from the bank.borrowed from the bank.
12
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 3 Define receivables and identify the different types of receivables.
Written promises to pay a sum of money on a
specified future date.
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 Accounts ReceivableReceivableAccounts Accounts
ReceivableReceivableNotes Notes
ReceivableReceivableNotes Notes
ReceivableReceivable
13
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: 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.).
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 3 Define receivables and identify the different types of receivables.
14
Nontrade Receivables
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 3 Define receivables and identify the different types of receivables.
Illustration 7-3
15
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
Reductions from the list
price
Not recognized in the
accounting records
Customers are billed net of
discounts
10 %
Discount for
new Retail
Store
Customers
Trade Discounts
16
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
Inducements for prompt
payment
Gross Method vs. Net
Method
Cash Discounts
Payment terms are 2/10, n/30
17
Cash DiscountsCash DiscountsCash DiscountsCash Discounts
Sales are recorded at the invoice
amounts.
Sales are recorded at the invoice
amounts.
Sales discounts are recorded as reduction of revenue if payment is
received within the discount period.
Sales discounts are recorded as reduction of revenue if payment is
received within the discount period.
Gross Method
Sales are recorded at the invoice amount less the discount.
Sales are recorded at the invoice amount less the discount.
Sales discounts forfeited are recorded
as interest revenue if payment is received after
the discount period.
Sales discounts forfeited are recorded
as interest revenue if payment is received after
the discount period.
Net Method
18
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
Cash Discounts (Sales Discounts)Illustration 7-4
19
Merchandise may be
returned by a customer to a supplier.
A special price reduction, called
an allowance, may be given as an incentive to
keep the merchandise.
Sales ReturnsSales ReturnsSales ReturnsSales Returns
To avoid misstating the financial statements, sales revenue and accounts receivable
should be reduced by the amount of returns in the period of sale if the amount of returns
is anticipated to be material.
20
Sales ReturnsSales ReturnsSales ReturnsSales Returns
During the first year of operations, Hawthorne sold $2,000,000 of merchandise that had cost them $1,200,000 (60%).
Industry experience indicates 10% return rate. During the year $130,000 was returned prior to customer payment. Record the returns and the end of the year adjustment. .
Actual ReturnsSales returns 130,000
Accounts receivable 130,000Inventory 78,000
Cost of goods sold (60%) 78,000Adjusting Entries
Sales returns 70,000Allowance for sales returns 70,000
Inventory-estimated returns 42,000Cost of goods sold (60%) 42,000
21
E7-5: On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10, n/60,
f.o.b. shipping point. On June 12, 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.
Sales
2,000
Accounts receivable 2,000June 3
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
Cash ($2,000 x 98%) 1,960
Sales discounts 40
Accounts receivable 2,000
June 12
22
E7-5: On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10, n/60,
f.o.b. shipping point. On June 12, 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.
Sales
1,960
Accounts receivable 1,960June 3
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
Cash ($2,000 x 98%) 1,960
Accounts receivable 1,960
June 12
23
E7-5: On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10, n/60,
f.o.b. shipping point. Prepare the journal entries on Bolton Company
books to record the sale assuming Bolton records sales using the net
method, and Arquette did not remit payment until July 29.
Sales
1,960
Accounts receivable 1,960June 3
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
Cash 2,000
Accounts receivable 1,960
Sales Discounts Forfeited 40
June 12
24
A company should measure receivables in terms of their present value.
Non-Recognition of Interest Element
LO 4 Explain accounting issues related to recognition of accounts receivable.
In practice, companies ignore interest revenue related to accounts receivable because, for current assets, the amount of the discount is not usually material in relation to the net income for the period.
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
25
How are these accounts presented on the Balance Sheet?How are these accounts presented on the Balance Sheet?
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 500 25 End.
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.
26 LO 4 Explain accounting issues related to recognition of accounts receivable.
Current Assets:
Cash 346$
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaids 40
Total current assets 1,673
Fixed Assets:
Office equipment 5,679
Furniture & fixtures 6,600
Less: Accumulated depreciation (3,735)
Total fixed assets 8,544 Total Assets 10,217$
Assets
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
27 LO 4 Explain accounting issues related to recognition of accounts receivable.
Current Assets:
Cash 346$
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaids 40
Total current assets 1,673
Fixed Assets:
Office equipment 5,679
Furniture & fixtures 6,600
Less: Accumulated depreciation (3,735)
Total fixed assets 8,544 Total Assets 10,217$
Assets
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
28
Journal entry for credit sale of $100?Journal entry for credit sale of $100?
Accounts receivableAccounts receivable 100100
SalesSales 100 100
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 500 25 End.
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
29
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 600 25 End.
Sale 100
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
Journal entry for credit sale of $100?Journal entry for credit sale of $100?
Accounts receivableAccounts receivable 100100
SalesSales 100 100
30
Collected of $333 on account?Collected of $333 on account?
CashCash 333333
Accounts receivableAccounts receivable 333333
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 600 25 End.
Sale 100
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
31
Collected of $333 on account?Collected of $333 on account?
CashCash 333333
Accounts receivableAccounts receivable 333333
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 25 End.
Sale 100 333 Coll.
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
32
Adjustment of $15 for estimated Bad-Debts?Adjustment of $15 for estimated Bad-Debts?
Bad debt expenseBad debt expense 1515
Allowance for Doubtful AccountsAllowance for Doubtful Accounts 1515
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 25 End.
Sale 100 333 Coll.
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
33
Adjustment of $15 for estimated Bad-Debts?Adjustment of $15 for estimated Bad-Debts?
Bad debt expenseBad debt expense 1515
Allowance for Doubtful AccountsAllowance for Doubtful Accounts 1515
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 40 End.
Sale 100 333 Coll.
15 Est.
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
34
Write-off of uncollectible accounts for $10?Write-off of uncollectible accounts for $10?
Allowance for Doubtful accountsAllowance for Doubtful accounts 1010
Accounts receivableAccounts receivable 1010
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 40 End.
Sale 100 333 Coll.
15 Est.
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
35
Write-off of uncollectible accounts for $10? Write-off of uncollectible accounts for $10?
Allowance for Doubtful accountsAllowance for Doubtful accounts 1010
Accounts receivableAccounts receivable 1010
Accounts ReceivableAllowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 257 30 End.
Sale 100 333 Coll.
15 Est. W/O 10 10 W/O
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
LO 4 Explain accounting issues related to recognition of accounts receivable.
36 LO 4 Explain accounting issues related to recognition of accounts receivable.
Current Assets:
Cash 13$
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaids 40
Total current assets 1,092
Fixed Assets:
Office equipment 5,679
Furniture & fixtures 6,600
Less: Accumulated depreciation (3,735)
Total fixed assets 8,544 Total Assets 9,636$
Assets
Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable
37 LO 5 Explain accounting issues related to valuation of accounts receivable.
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of 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.
Uncollectible Accounts Receivable
38 LO 5 Explain accounting issues related to valuation of accounts receivable.
Allowance MethodAllowance Method
Losses are Estimated:
Percentage-of-sales.
Percentage-of-receivables.
GAAP requires when material in amount.
Methods of Accounting for Uncollectible Accounts
Direct Write-OffDirect Write-Off
Theoretically deficient:
No matching.
Receivable not stated at cash realizable value.
Not GAAP when material in amount.
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
39 LO 5 Explain accounting issues related to valuation of accounts receivable.
Emphasis on the Income Statement
relationships
Emphasis on the Income Statement
relationships
Emphasis on the Balance
Sheet relationships
Emphasis on the Balance
Sheet relationships
Illustration 7-6
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
40 LO 5 Explain accounting issues related to valuation of accounts receivable.
Percentage-of-Sales Approach
Percentage based upon past experience and
anticipate credit policy.
Achieves proper matching of costs with revenues.
Existing balance in Allowance account not considered.
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
41 LO 5
Illustration: Gonzalez Company estimates from past experience
that about 1% of credit sales become uncollectible. If net credit
sales are $800,000 in 2012, it records bad debt expense as
follows.Bad Debt Expense 8,000
Allowance for Doubtful Accounts 8,000
Illustration 7-7
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
42 LO 5 Explain accounting issues related to valuation of accounts receivable.
Percentage-of-Receivables Approach
Not matching.
Reports receivables at realizable value.
Companies may apply this method using
one composite rate, or
an aging schedule using different rates.
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
43 LO 5 Explain accounting issues related to valuation of accounts receivable.
Bad Debt Expense 37,650
Allowance for Doubtful Accounts 37,650
What entry would Wilson
make assuming that no balanceexisted in the
allowance account?
Illustration 7-8Accounts Receivable Aging Schedule
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
44 LO 5 Explain accounting issues related to valuation of accounts receivable.
Bad Debt Expense ($37,650 – $800) 36,850
Allowance for Doubtful Accounts 36,850
What entry would Wilson
make assuming the allowance account had a credit balance of $800 before
adjustment?
Illustration 7-8Accounts Receivable Aging Schedule
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
45
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
LO 5 Explain accounting issues related to valuation of accounts receivable.
E7-7 (Recording Bad Debts): Sandel Company reports the following financial information before adjustments.
Instructions: Prepare the journal entry to record bad debt
expense assuming Sandel Company estimates bad debts at
(a) 1% of net sales and (b) 5% of accounts receivable.
46
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
LO 5LO 5
E7-7 (Recording Bad Debts): Sandel Company reports the following financial information before adjustments.
Instructions: Prepare the journal entry assuming Sandel
estimates bad debts at (a) 1% of net sales.
Bad Debt Expense 7,500
Allowance for Doubtful Accounts 7,500($800,000 – $50,000) x 1% = $7,500
LO 5
47
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
LO 5LO 5
E7-7 (Recording Bad Debts): Sandel Company reports the following financial information before adjustments.
Instructions: Prepare the journal entry assuming Sandel
estimates bad debts at (b) 5% of accounts receivable.
Bad Debt Expense 6,000
Allowance for Doubtful Accounts 6,000($160,000 x 5%) – $2,000) = $6,000
LO 5
48
Illustration: Assume that the financial vice president of Brown Furniture authorizes a write-off of the $1,000 balance owed by Randall Co. on March 1, 2012. The entry to record the write-off is:
Allowance for Doubtful Accounts 1,000
Accounts Receivable1,000
Assume that on July 1, Randall Co. pays the $1,000 amount that Brown had written off on March 1. These are the entries:
Accounts Receivable 1,000Allowance for Doubtful Accounts
1,000
Cash 1,000Accounts Receivable
1,000
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
LO 5