Cash, Short-term Investments and Accounts Receivable Chapter 4 Cash, Short-term Investments and Accounts Receivable Chapter 4

Cash, Short-term Investments and Accounts Receivable Chapter 4 Cash, Short-term Investments and Accounts Receivable Chapter 4

Chapter 4 Learning Objectives Account for the major types of transactions involving cash, short-term investments, and accounts receivable. Prepare a bank reconciliation and related entries. Estimate and record bad debts for accounts receivable. Use ratios and other analysis techniques to make decisions about cash, short-term investments, and accounts receivable. Chapter 4 Chapter 4 3

Cash and Cash Equivalents To qualify as a cash equivalent, an item must be readily convertible into a specific amount of cash and have very little risk of a change in value from the time it is acquired to the time it is changed back into cash. To qualify as a cash equivalent, an item must be readily convertible into a specific amount of cash and have very little risk of a change in value from the time it is acquired to the time it is changed back into cash Chapter 4

Petty Cash Most organizations keep a limited amount of petty cash on hand (in a petty cash box, for example) to pay for small items. What issues are of concern when a petty cash fund is in use? Chapter 4

Entry to Establish Petty Cash Chapter 4

Entry to Replenish Petty Cash Chapter 4

Review debit to the Cash account. credit to the Petty Cash account. The entry to establish petty cash includes a: debit to the Cash account. credit to the Petty Cash account. debit to the Petty Cash account. debit to the Petty Cash Expense account. Chapter 4 Chapter 4 8

Review debit to the Cash account. credit to the Petty Cash account. The entry to establish petty cash includes a: debit to the Cash account. credit to the Petty Cash account. debit to the Petty Cash account. debit to the Petty Cash Expense account. Chapter 4 Chapter 4 9

Problem Review Prepare the entry on January 1 to establish a petty cash fund for $100. Prepare the entry on January 31 to replenish petty cash assuming $19 was spent on postage, $55 on office supplies, and $20 on coffee and doughnuts. Chapter 4 Chapter 4 10

Problem Review Solution Jan. 1 Petty Cash 100 Cash 31 Postage Expense 19 Office Supplies Expense 55 Miscellaneous Expense 20 94 Chapter 4

Bank Reconciliations Deposits in Transit Outstanding Checks Deposits Unknown to Firm Bank Fees NSF Checks Errors (on the part of the Bank or Firm) Chapter 4

Categorizing items for the bank reconciliation Outstanding Checks           Categorizing items for the bank reconciliation   Found on Bank Stmt (Adjust Cash Ledger) Found on Cash Ledger (Adjust Bank Balance) Increase Interest Earned Direct Deposits Company errors Deposits in Transit Bank Errors Decrease Service Charges NSF Charges Drafts Outstanding Checks Chapter 4

Bank Reconciliation Illustrated Chapter 4

Bank Reconciliation Journal Entries Chapter 4

Review addition to the book balance. deduction from the bank balance. A NSF check received from a customer is shown on bank reconciliation statement as a(n): addition to the book balance. deduction from the bank balance. deduction from the book balance. addition to the bank balance. Chapter 4 Chapter 4 16

Review addition to the book balance. deduction from the bank balance. A NSF check received from a customer is shown on bank reconciliation statement as a(n): addition to the book balance. deduction from the bank balance. deduction from the book balance. addition to the bank balance. Chapter 4 Chapter 4 17

Review addition to the book balance. deduction from the bank balance. Outstanding checks are shown on bank reconciliation statement as a(n): addition to the book balance. deduction from the bank balance. deduction from the book balance. addition to the bank balance. Chapter 4 Chapter 4 18

Review addition to the book balance. deduction from the bank balance. Outstanding checks are shown on bank reconciliation statement as a(n): addition to the book balance. deduction from the bank balance. deduction from the book balance. addition to the bank balance. Chapter 4 Chapter 4 19

Review debit to Cash. credit to Accounts Payable. The journal entry to record bank charges for printing checks includes a: debit to Cash. credit to Accounts Payable. debit to Miscellaneous Expense. credit to Miscellaneous Expense. Chapter 4 Chapter 4 20

Review debit to Cash. credit to Accounts Payable. The journal entry to record bank charges for printing checks includes a: debit to Cash. credit to Accounts Payable. debit to Miscellaneous Expense. credit to Miscellaneous Expense. Chapter 4 Chapter 4 21

Short-Term Investments Companies need to hold an adequate amount of cash to meet current obligations, but do not generally want to hold significantly more cash than will be needed. Companies often make short-term investments of excess cash in the stocks and bonds of other companies. These investments are referred to as available-for-sale securities. Available-for-sale securities are shown on on the balance sheet at fair market value rather than cost. Such an adjustment requires an end-of-period adjusting entry to record a gain or loss relative to the investment cost. Chapter 4

Adjusting Entries for Available-for-Sale Securities Assume Caliope Co. purchased $2,500 of stock in Orleans Corp. in November 2009. By Dec. 31, 2009, the stock was worth $2,200. Caliope Co. would prepare the following adjusting entry: Chapter 4

Contra Revenue Accounts Sales Discounts Sales Returns and Allowances What are contra revenue accounts? How and why are they used? Chapter 4

Sales Discounts Illustrated Assume that Payne Company sells $400 of merchandise with credit terms of 2/10, n/30 to Brenda Joyner on March 1. Payne Company would record the following entry on March 1. Chapter 4

Sales Discounts Illustrated continued Assume that Brenda Joyner pays the amount due to Payne Company on March 11. Payne Company would record the following entry: Chapter 4

Sales Discounts Illustrated continued Assume now that Brenda Joyner pays the amount due to Payne Company on March 31 instead of March 11. Payne Company would record the following entry: Chapter 4

Sales Returns and Allowances Illustrated Assume now that on March 4 Brenda Joyner wants to return $100 of merchandise purchased from Payne Company on March 1. Payne Company records the following journal entry on March 4. Mar. 4 Sales Returns and Allowances 400 Accounts Receivable-B. Joyner Chapter 4

Income Statement Presentation of Contra Revenue Accounts Sales Returns and Allowances and Sales Discounts are both subtracted from Sales to obtain Net Sales on the income statement. Following is an example of an income statement with contra revenue accounts. Chapter 4

Review The amount paid to the seller within the discount period on a $1,500 sale on account, with credit terms of 2/10, n/30, and a credit for a return of $300 is: $1,200. $1,176. $1,224. $1,470. Chapter 4 Chapter 4 30

Review The amount paid to the seller within the discount period on a $1,500 sale on account, with credit terms of 2/10, n/30, and a credit for a return of $300 is: $1,200. $1,176. $1,224. $1,470. Chapter 4 Chapter 4 31

Uncollectible Accounts Two key activities are associated with a credit sale: making the sale and collecting the resulting receivable. Whenever a business decides to extend credit to customers, there is the potential for bad debts. When it becomes apparent that a receivable will not be collected, the business should eliminate, or write off, that receivable. The two ways to account for bad debt write-offs are the direct write-off method and the allowance method. Chapter 4

Recording Bad Debts Direct Write-Off Allowance Method Easy Not GAAP Violates Matching Accurate Allowance Method Not so Easy GAAP Matches Expense/Revenue Requires Estimation Chapter 4

Direct Write-Off NOT GAAP Sept. 18 Uncollectible Accounts Expense 300 Accounts Receivable - D. Duck 300 To write off account receivable. Chapter 4

Allowance Method Aug.10 Accounts Receivable-Kent Pai 2,300 2010 Sales 2,300 To record a credit sale in 2010. Dec 31 Uncollectible Accounts Expense 27,000 Allowance for Uncollectible Accounts 27,000 To record an estimate for bad debts related to 2010 credit sales. 2011 Feb. 18 Allowance for Uncollectible Accounts 2,300 Accounts Receivable – Kent Pai 2,300 To write off an accounts receivable in 2011 from a 2010 credit sale. Chapter 4

Reinstating Accounts Receivable May 15 Accounts Receivable – Saffron Cheng 920 Allowance for Uncollectible Accounts 920 To reinstate an account previously written off.   May 15 Cash 920 Accounts Receivable – Saffron Cheng 920 To collect a reinstated account previously written off. Chapter 4

Review Uncollectible Accounts Expense. Accounts Receivable. The entry to write off an account using the allowance method involves a debit to: Uncollectible Accounts Expense. Accounts Receivable. Allowance for Uncollectible Accounts. Sales Discounts. Chapter 4 Chapter 4 37

Review Uncollectible Accounts Expense. Accounts Receivable. The entry to write off an account using the allowance method involves a debit to: Uncollectible Accounts Expense. Accounts Receivable. Allowance for Uncollectible Accounts. Sales Discounts. Chapter 4 Chapter 4 38

Review liability account. contra asset account. The Allowance for Uncollectible Accounts is classified as a: liability account. contra asset account. contra liability account. stockholders’ equity account. Chapter 4 Chapter 4 39

Review liability account. contra asset account. The Allowance for Uncollectible Accounts is classified as a: liability account. contra asset account. contra liability account. stockholders’ equity account. Chapter 4 Chapter 4 40

Problem Review Prepare the entry on December 15, 2009, to record a sale on account for $5,000 to June DeLucas. Prepare the entry on March 31, 2010, to write off the account in full for June DeLucas using the allowance method. Chapter 4 Chapter 4 41

Problem Review Solution 2009 Dec. 15 Accounts Receivable-J. DeLucas 5,000 Sales 2010 Mar. 31 Allowance for Uncollectible Accounts Accounts. Receivable-J. DeLucas Chapter 4

Credit Card Receivables   Feb. 20 Credit Cards Receivable 6,000 Sales Revenue 6,000 To record Visa sales. Feb. 22 Cash 5,850 Credit Card Expense 150 Credit Cards Receivable 6,000 To record Visa deposit and related service charge. What are the costs and benefits of accepting credit cards? Chapter 4

Financial Ratios Financial ratios are measures that express the relationship or interrelationships between, or among, two or more financial statement items. Liquidity refers to an entity's ability to finance its day-to-day operations and to pay its liabilities as they mature. Quick assets generally include cash and cash equivalents, short-term investments, and the net amount of current notes and accounts receivable. Chapter 4

Relevant Financial Ratios Quick ratio = Quick Assets ÷ Current Liabilities A/R turnover ratio = Net credit sales ÷ Average A/R Age of receivables = 360 days ÷ A/R turnover ratio Chapter 4

Alternative Method for A/R Turnover One Day’s Sales = Sales ÷ 360 days A/R turnover = Average A/R ÷ One Day’s Sales Chapter 4

Turnover Example Chapter 4

Problem Review Compute the quick ratio for MamaMia Soup Company for Year 1 and Year 2 based on the following information. Year 1 Year 2 Cash $ 94 $ 63 Short-term investments 2 7 Accounts receivable (net) 578 646 Inventory 786 904 Property, plant & equipment (net) 2,401 2,265 Current liabilities 1,465 1,851 Long-term liabilities 1,338 1,343 Chapter 4 Chapter 4 48

Problem Review Solution Year 1 Quick ratio = Quick Assets/Current Liabilities = ($94 + 42 + $578)/$1,465 = $674/$1,465 = .46 Year 2 = ($63 + $7 + $646)/$1,851 = $716/$1,851 = .39 Chapter 4 Chapter 4 49

THE END! Chapter 4 Chapter 4 50