2 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.

3  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.

4  Direct deposit of payroll and social security  Electronic payments of bills –Mortgages –Utility bills –Insurance premiums  The conversion of checks by businesses ACH payments include:

5  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 21 st Century Act (Check 21) –Gives legal status to substitute checks –Allows merchants to scan and transmit checks to the bank

6 Cash is the resource on hand to meet planned payments and emergency situations.

Excluded from Cash 7 Cash Coins and currency Checking accounts Savings accounts Negotiable checks Bank drafts Included in Cash Certificates of deposit Bank overdrafts Postdated checks Travel advances Postage stamps

8 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.

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. 9 Control Over Receipts

10  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. Control Over Payments

11 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.

12

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. 13 Each of the following criteria must be satisfied when the right of return exists in order to recognize revenue at the time of sale. ContinuedContinued

14 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. Each of the following criteria must be satisfied when the right of return exists in order to recognize revenue at the time of sale.

Prenumbered sales invoices Separation of the sales function from the cash collection responsibilities 15 Internal Control Procedures for Accounts Receivable

Increase sales Encourage prompt payment Increase likelihood of collection 16

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). 17 2/10, n/30

18 Alternative Methods of Accounting for Sales Discounts Gross Price Method Net Price Method Sold $8,000 of merchandise to various customers on December 4, 2010, with terms of 2/10, n/EOM: Accounts Receivable 8,000 Sales8,000 Accounts Receivable 7,840 Sales7,840 $8,000 – ($8,000 × 0.02)

19 Alternative Methods of Accounting for Sales Discounts Gross Price Method Net Price Method On December 13, received payment on goods originally billed at $5,500: Cash 5,390 Sales Disc. Taken110 Accounts Receivable5,500 Cash5,390 Accounts Receivable5,390 $5,500 – ($5,500 × 0.02)

20 Alternative Methods of Accounting for Sales Discounts Received payment on goods billed at $1,500 on December 30 (after the discount period): Cash 1,500 Accounts Receivable1,500 Cash1,500 Accounts Receivable1,470 Sales Discounts Not Taken30 $1,500 – ($1,500 × 0.02) Reported in “Other Items” on the income statement Gross Price Method Net Price Method

21 Alternative Methods of Accounting for Sales Discounts Gross Price Method Net Price Method No entry requiredAccounts Receivable20 Sales Discounts Not Taken20 Year-end adjustment at the end of the period.

22 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.

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. 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. 23 GAAP requires that estimated losses from loss contingencies be accrued against income and… …recorded as reductions in assets or as liabilities when both of these conditions are met.

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. 24

Assume that Kerns Shoes sold $1,500 of merchandise on credit, which was billed to a national credit card company. If the collection fee is 5%, Kerns makes the following journal entry: 25 Cash1,425 Credit Card Expense75 Sales1,500

26 A note receivable is an unconditional written agreement to collect a certain sum of money on a specific date.

27 Notes receivable generally have two attributes that are not found in accounts 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. 28

29 Interest-Bearing Received a $5,000, 60-day, 12% note on October 1, 2010: Notes Receivable5,000 Sales5,000 Received maturity value on December 1, 2010: Cash5,100 Notes Receivable5,000 Interest Revenue100 $5,000 × 0.12 × 60/360

30 Non-Interest-Bearing Received a $5,100, 60-day, non-interest-bearing note on October 1, 2010: Notes Receivable5,100 Interest Revenue100 Sales5,000 Received maturity value on December 1, 2010: Cash5,100 Notes Receivable5,100

31 On August 31, 2010, the Kasper Corporation discounts a customer’s note at its bank at a 14% discount rate. The note was received from the customer on August 1, is for 90 days, has a face value of $5,000, and carries an interest rate of 12%.

1. Face value of note$ 5, Interest to maturity ($5,000 × 0.12 × 90/360) Maturity value of note$ 5, Discount ($5,150 × 0.14 × 60/360) (120.17) 5. Proceeds$ 5, Accrued interest revenue: $50 ($5,000 × 0.12 × 30/360) 7. Book value of note ($5,000 + $50) (5,050.00) 8. Loss from discounting of note$

33 October 30, 2010 Notes Receivable Discounted5, Notes Receivable5, Cash Loss from Discounting of Note20.17 Notes Receivable Discounted5, Interest Revenue50.00 August 31, 2010

34 Assume instead that on November 2, 2010, the bank notified Kasper that the note had not been paid and also charged Kasper a $10 fee. Notes Receivable Dishonored5,160 Notes Receivable Discounted5,000 Notes Receivable5,000 Cash5,160

35 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”

What is included in cash and cash equivalents and be able to correctly calculate Internal controls over cash and appropriate cash planning What types of items are included in non-trade versus trade receivables How are receivable valued? Revenue recognition versus deferral Sales/cash discounts & appropriate treatment Receivables bad debt allowance 36