Cash & Rec - 1 CASH & RECEIVABLES

Cash & Rec - 2 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

Cash & Rec - 3 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 & Rec - 4 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 & Rec - 5 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

Cash & Rec - 6 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 & Rec - 7 CASH EQUIVALENTS  Short-term, highly liquid investments –Readily convertible to known amounts of cash –Near to maturity (little change in interest)  Examples –Treasury bills –Commercial paper –Money market funds

Cash & Rec - 8 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

Cash & Rec - 9 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 n Two sections of reconciliation: -- Reconcile bank statement balance to adjusted (correct) balance. -- Reconcile book balance to adjusted (correct) balance. n The adjusted balances above are equal. n All reconciling items in book balance section require adjusting entries.

BANK RECONCILIATION FORMAT Bank balanceBook balance Ending bank bal.$ xxEnding book balance $ xxAdditions: Cash on hand Collections by bank Deposits in transitDeductions: NSF Checks Deductions: Bank service chgs. Checks outstanding Correct cash balance$xxxCorrect cash balance $xxx

Cash & Rec - 12 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

Cash & Rec - 13 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”)

Cash & Rec - 15 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

Cash & Rec - 16 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”

Cash & Rec - 17 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

Cash & Rec - 18  Allowance method –Uncollectibles are probable –Amount can be reasonably estimated –Bad debt expense is recorded in same period as the underlying revenue MATCHING PRINCIPLE UNCOLLECTIBLE ACCOUNTS

Cash & Rec - 19 ALLOWANCE METHOD  Adjusting entry for estimate: Bad debts expense (Debit) Allowance for doubtful accounts (Credit) contra  Allowance for doubtful accounts is a contra account to Accounts receivable

Cash & Rec - 20 ALLOWANCE METHOD n As accounts become uncollectible, the following entry is made: Allowance for Doubtful Accounts (Debit) Accounts Receivable (Credit) n This entry has no net effect on Accounts receivable or total assets

Cash & Rec - 21 ALLOWANCE METHOD n 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

Cash & Rec - 22 ESTIMATING BAD DEBTS  Credit sales method –Income statement approach  Accounts receivable method –Balance sheet approach Composite rate Aging of Accounts receivable balances Past Due

Cash & Rec - 23 matching principle nMethod emphasizes the matching principle and is income statement considered an income statement approach n n An average percentage relationship between net credit sales actual bad debt losses and net credit sales is determined based on historical information. n Bad debts expense n Bad debts expense = Net credit sales x (historical %) ESTIMATING BAD DEBTS Credit Sales Method

Cash & Rec - 24 ESTIMATING BAD DEBTS Accounts Receivable Method n Uses the historical relationship between accounts receivable accounts receivable and bad debt losses n n The historical rate, or multiple rates, is applied to the net accounts receivable to determine the balance in the Allowance for Doubtful Accounts balance in the Allowance for Doubtful Accounts. n Bad Debt Expense n Bad Debt Expense is the amount of adjustment necessary to bring the Allowance account to its desired ending balance.

Cash & Rec - 25 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

Cash & Rec - 26 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)

Cash & Rec - 27 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