CASH & RECEIVABLES

Policies & procedures designed to: INTERNAL CONTROL Policies & procedures designed to: Protect assets Provide accurate records Ensure compliance with laws and policies Evaluate performance & assist in accomplishment of strategic objectives More than protection of assets More than coverage of financial reporting More than “compliance” NOTICE THE STRATEGIC IMPLICATIONS Internal control has ALWAYS been a part of the audit process In the past a “check-the-box” approach may have been used too frequently Emphasis on management’s reponsibility Top management can no longer “dodge” their responsibility for internal control or lack of knowledge about the financial statements and their contents

INTERNAL CONTROL OF CASH General Policies Separate physical custody and record keeping Account for all cash transactions (no netting) Maintain minimum cash balances on hand Conduct periodic test counts of cash Prepare appropriate bank reconciliations

CASH RECEIPTS Separate responsibility for handling and recording receipts Close supervision of handling of cash receipts Deposit ALL receipts in a bank account as frequently as possible (prefer DAILY)

CASH DISBURSEMENTS Separate responsibilities for disbursement documents, check preparation, check signing, mailing, and record keeping All disbursements (except minor) made by check Close control of petty cash funds Adequate source documents to support ALL disbursements

Deposits with financial institutions Negotiable instruments COMPOSITION OF CASH Coins and currency Including change funds Petty cash Deposits with financial institutions Negotiable instruments Cashier’s checks Certified checks Money orders

CASH EQUIVALENTS Short-term, highly liquid investments Examples Readily convertible to known amounts of cash Near to maturity (little change in interest) Examples Treasury bills Commercial paper Money market funds

PETTY CASH Imprest fund for small routine disbursements Examples Cab fares Postage (C.O.D., etc.) Office supplies Delivery charges Pizza for the office Balance in the fund = Cash on hand + receipts = Authorized amount of the fund

BANK RECONCILIATION Explains difference between cash reported on bank statement and balance reported on the accounting records Basis for adjusting accounting records Major control devise

BANK RECONCILIATION Two sections of reconciliation: -- Reconcile bank statement balance to adjusted (correct) balance. -- Reconcile book balance to adjusted (correct) balance. The adjusted balances above are equal. All reconciling items in book balance section require adjusting entries.

BANK RECONCILIATION FORMAT Bank balance Book balance Ending bank bal. $ xx Ending book balance $ xx Additions: Additions: Cash on hand Collections by bank Deposits in transit Deductions: NSF Checks Deductions: Bank service chgs. Checks outstanding Correct cash balance $xxx Correct cash balance $xxx

RECEIVABLES Claims held against customers or others for money or services Current Noncurrent Trade receivables – amounts owed by customers for services rendered as part of normal business operation Nontrade receivables – arise from other types of transactions

ACCOUNTS RECEIVABLE Discounts Trade discounts Granted to encourage a sale Reduction in final selling price Not recorded (part of negotiation) Cash discounts Inducement for prompt payment Interest rate offered is often significant Recording methods Gross – only discounts taken are recorded (contra revenue) Net – sale is recorded net of discount (discounts forfeited shown as “Other revenue”)

SALES RETURNS & ALLOWANCES Reduction in receivable (or refund) for items returned or damaged Contra revenue Methods of recording Estimated with an allowance established Recorded when actually granted

ACCOUNTS RECEIVABLE Valuation Net realizable value Amount expected to be received in cash Uncollectible accounts generally inevitable Issue is how to account for “bad debts”

UNCOLLECTIBLE ACCOUNTS Direct write-off method No material uncollectibles occur Amount of uncollectibles cannot be reliably estimated Bad debts expense recognized in period when it is determined the account cannot be collected

UNCOLLECTIBLE ACCOUNTS Allowance method Uncollectibles are probable Amount can be reasonably estimated Bad debt expense is recorded in same period as the underlying revenue MATCHING PRINCIPLE

Adjusting entry for estimate: Bad debts expense (Debit) ALLOWANCE METHOD Adjusting entry for estimate: Bad debts expense (Debit) Allowance for doubtful accounts (Credit) Allowance for doubtful accounts is a contra account to Accounts receivable

Accounts Receivable (Credit) ALLOWANCE METHOD As accounts become uncollectible, the following entry is made: Allowance for Doubtful Accounts (Debit) Accounts Receivable (Credit) This entry has no net effect on Accounts receivable or total assets

ALLOWANCE METHOD Accounts Receivable (Debit) If an account previously written off proves to be collectible, the following entries are made: Accounts Receivable (Debit) Allowance for Doubtful Accounts (Credit) Cash (Debit) Accounts Receivable (Credit) This approach provides detailed information (in the subsidiary ledger) of the recovery of this amount

Accounts receivable method ESTIMATING BAD DEBTS Credit sales method Income statement approach Accounts receivable method Balance sheet approach Composite rate Aging of Accounts receivable balances Past Due

ESTIMATING BAD DEBTS Credit Sales Method Method emphasizes the matching principle and is considered an income statement approach An average percentage relationship between actual bad debt losses and net credit sales is determined based on historical information. Bad debts expense = Net credit sales x (historical %)

ESTIMATING BAD DEBTS Accounts Receivable Method Uses the historical relationship between accounts receivable and bad debt losses The historical rate, or multiple rates, is applied to the net accounts receivable to determine the balance in the Allowance for Doubtful Accounts. Bad Debt Expense is the amount of adjustment necessary to bring the Allowance account to its desired ending balance.

NOTES RECEIVABLE Unconditional written promise … Made & signed by the maker (borrower)… To pay the bearer or stated payee … A definite amount of money … Plus a stated interest rate … The note does not have to include a stated interest rate. If none exists, an imputed rate is assumed On the maturity date … On demand, a specific date, or at the end of a stated period

NOTES RECEIVABLE Valuation Short-term Generally shown at face value (less allowances for uncollectibility) Long-term Reported at present value of cash expected to be collected Face value = NPV if market rate = stated rate Zero-interest notes Recorded at NPV (using effective rate)

SALE OF RECEIVABLES Factoring Acceleration of receipt of cash from receivables Common example is approach used by credit card companies (MasterCard or VISA) Sale without Recourse Purchaser assumes risk of uncollectibility Sale with Recourse Seller assumes risk of uncollectibility