s for Today: l Discuss cash denominated in various currencies l Discuss financial reporting of temporary investments l Discuss accounts receivable

Cash includes... n petty cash on hand n cash in the bank n Government of Canada T-Bills n commercial paper

Cash Denominated in Various Currencies n What do financial statement users want to know? how much cash is flowing through the company? will the cash maintain its purchasing power until it is used? what is the current value of cash in relation to other assets?

Reporting Foreign Currencies n "Unit of measure" assumption n When reporting currencies in the financial statements, assume the company does business only in one currency n Use the currency that is most meaningful to the financial statement users

Reporting Foreign Currencies n Foreign Currency Translation one currency is adopted for financial statement reporting foreign currencies are translated into the reporting currency gains or losses from increases or decreases in the value of the foreign currency are reported on the income statement in Canada (in the US, reported in equity on the B/S, not in I/S)

Reporting Foreign Currencies n Foreign Currency Translation DateFC AmountExchange RateReporting Currency Amount B.o.Y.1,0001:11:1 E.o.Y.1,0001:1.1 Illustration

Reporting Foreign Currencies n Foreign Currency Translation DateFC AmountExchange RateReporting Currency Amount B.o.Y.1,0001:11:1 E.o.Y.1,0001:1.11,100 one currency is adopted for financial statement reporting foreign currencies are translated into the reporting currency gains or losses from increases or decreases in the value of the foreign currency are reported on the income statement in Canada (in the US, reported in equity on the B/S, not in I/S)

Reporting Foreign Currencies n Foreign Currency Translation DateFC AmountExchange RateReporting Currency Amount B.o.Y.1,0001:11:1 E.o.Y.1,0001:1.11,100 Difference0 100 one currency is adopted for financial statement reporting foreign currencies are translated into the reporting currency gains or losses from increases or decreases in the value of the foreign currency are reported on the income statement in Canada (in the US, reported in equity on the B/S, not in I/S) Dr. Cash 100 Cr. Foreign Exch Gain 100

Bank Reconciliation – ensuring that the bank’s records match the company’s records Class Exercise: 6-9 page 355

n minor equity shares in other companies n debt instruments issued by governments (e.g.,Government of Canada Savings Bonds) n debt instruments issued by other businesses Temporary Investments can include... the key features are that (1) management must intend the investments to be temporary, AND (2) they must be marketable

Cash Inventory Accounts Receivable Temporary Investments buy sell Note that Temporary Investments often are not the core activity of a business …

Temporary Investments what is the current value of the investments? will the value change before the investments are sold? n What do financial statement users want to know? what are the risks of holding the investment(s)?

Temporary Investments (TI) n What do the financial statements tell users? what is the current value of the investments? will the value change before the investments are sold? what are the risks of holding the investment(s)? l TI initially reported on the B/S at original cost l losses in investment value are recorded l gains in investment value above original cost are not reported u application of conservatism ("lower of cost and market" rule) l market values are disclosed if substantially greater than cost l speculations about the future are not reported l described in the financial statement notes (if deemed significant)

Some details about TI accounting l TI initially reported on the B/S at original cost l losses in investment value are recorded l gains in investment value above original cost are not reported n How do you apply the LCM Rule to a portfolio? u application of conservatism ("lower of cost and market" rule) InvestmentCost A-B$ 1,000 Big Rock$ 600 Total$ 1,600 n the debits and credits...

Some details about TI accounting l TI initially reported on the B/S at original cost l losses in investment value are recorded l gains in investment value above original cost are not reported n How do you apply the LCM Rule to a portfolio? u application of conservatism ("lower of cost and market" rule) InvestmentCost A-B$ 1,000 Big Rock$ 600 Total$ 1,600 n the debits and credits... n record the initial investment... Dr. Temporary Investments $ 1,600 Cr. Cash $ 1,600

Some details about TI accounting l TI initially reported on the B/S at original cost l losses in investment value are recorded l gains in investment value above original cost are not reported n How do you apply the LCM Rule to a portfolio? u application of conservatism ("lower of cost and market" rule) InvestmentCost A-B$ 1,000 Big Rock$ 600 Total$ 1,600 n the debits and credits...

Some details about TI accounting l TI initially reported on the B/S at original cost l losses in investment value are recorded l gains in investment value above original cost are not reported n How do you apply the LCM Rule to a portfolio? u application of conservatism ("lower of cost and market" rule) InvestmentCostMarket A-B$ 1,000$ 300 Big Rock$ 600$ 800 Total$ 1,600$ 1,100 n the debits and credits...

Some details about TI accounting l TI initially reported on the B/S at original cost l losses in investment value are recorded l gains in investment value above original cost are not reported n How do you apply the LCM Rule to a portfolio? u application of conservatism ("lower of cost and market" rule) InvestmentCostMarketLCM-Portfolio A-B$ 1,000$ 300 Big Rock$ 600$ 800 Total$ 1,600$ 1,100 n the debits and credits... n record the write-down to LCM Dr. Unrealized loss on Temporary Investments (exp--I/S) $ 500 Cr. Valuation Allowance for Temp Invstmnts (xA--B/S) $ 500 the valuation allowance is a contra-asset account that allows asset values to be reduced without losing track of original cost just like "accumulated amortization"

More details about TI accounting n the debits and credits... n record the write-down to LCM Dr. Unrealized loss on Temporary Investments (exp--I/S) $ 500 Cr. Valuation Allowance for Temp Invstmnts (xA--B/S) $ 500 the valuation allowance is a contra-asset account that allows asset values to be reduced without losing track of original cost just like "accumulated amortization" BALANCE SHEET Current Assets Cash $ 25,549 Temporary Investments (cost) 1,600 Less: Valuation Allowance (500) Temporary Investments (LCM) 1,100 Accounts receivable 9,882 Etc. INCOME STATEMENT Sales Revenues $2000 Cost of Goods Sold (950) Gross Profit 1050 SG&A Expenses (150) Unrealized loss on TIs (500) Net income before tax 400 Etc.

Accounts Receivable (amounts owed to a company by its customers ) n What do financial statement users want to know? how much is owed to the company? what is the level of customer satisfaction? how much is the company likely to collect in cash? how long does the company wait to be paid? how many orders is the company likely to receive in the future?

Accounts Receivable how much is owed to the company? n What do the financial statements tell users? l reported as "gross accounts receivable" on the B/S Accounts receivable, gross Less: Allowance for uncollectibles Accounts receivable, net 35,556 25,999 (755) (400) 34,801 25,599 Mondetta Inc. Balance Sheet As at February 28

Accounts Receivable how much is the company likely to collect in cash? n What do the financial statements tell users? l reported as "net accounts receivable" on the B/S Ù after deducting an "allowance for doubtful accounts" how much is owed to the company? Accounts receivable, net Accounts receivable, gross Less: Allowance for uncollectibles 35,556 25,999 (755) (400) 34,801 25,599 Mondetta Inc. Balance Sheet As at February 28

Accounts Receivable how much is the company likely to collect in cash? n What do the financial statements tell users? l reported as "net accounts receivable" on the B/S Ù after deducting an "allowance for doubtful accounts" how much is owed to the company?

Accounts Receivable how much is owed to the company? how much is the company likely to collect in cash? n What do the financial statements tell users? how many orders is the company likely to receive in the future? l not required to be reported in the financial statements orders represent promises for future transactions ä too speculative (i.e., unreliable) to be recorded in the accounting records ä haven’t met revenue recognition criteria at the order stage of the earnings process some companies voluntarily report this information (in the notes)

Accounts Receivable n What do the financial statements tell users? what is the level of customer satisfaction?

Accounts Receivable n What do the financial statements tell users? what is the level of customer satisfaction? l Not directly reported in the financial statements l But trends can be inferred from the number of days to collect accounts receivable

Accounts Receivable n What do the financial statements tell users? what is the level of customer satisfaction? how long does the company wait to be paid? l calculate from sales and average accounts receivable numbers

Accounts Receivable n What do the financial statements tell users? how long does the company wait to be paid? l calculate from sales and average accounts receivable numbers l 1. Calculate the average sales per day in the period. l 2. Calculate the average receivables outstanding in the period. l 3. From 1 & 2, calculate number of days sales in receivables.

Accounts Receivable n What do the financial statements tell users? how long does the company wait to be paid? l calculate from sales and average accounts receivable numbers l using BCE as an example

Accounts Receivable n What do the financial statements tell users? how long does the company wait to be paid? l calculate from sales and average accounts receivable numbers Calculate the average sales per day in the period. l using BCE as an example... Calculate the average receivables outstanding in the period. l From 1 & 2, calculate number of days sales in receivables. $33,191,000,000 / 365 days = $90,934,246 / day ($9,027,000, ,072,000,000) / 2 = $8,049,500,000 $8,049,500,000 / $90,934,246 = 88.5 days in receivables l 88.5 days seems long (almost 3 months) l need to compare to prior years (89 in '97) and competitors (AT&T, MCI, etc.) Analysis

Accounts Receivable n What do the financial statements tell users? how long does the company wait to be paid? l if the number of days sales in receivables is big or increasing... è suggests possible problems with collecting from customers

Accounts Receivable n What do the financial statements tell users? how long does the company wait to be paid? l if the number of days sales in receivables is big or increasing... è suggests possible problems with collecting from customers – why aren't customers paying sooner? – what do they think of the company's product? are they disappointed? – are they waiting to see what competitors are coming out with? – is the sales force extending payment schedules just to boost sales? – are they being soft on credit to make up for prices that are too high? è should lead you to ask questions such as:

The Debits and Credits of Receivables Goals of Accounting for Receivables – track what is owed by each customer – report the amount that is likely to be collected – match the cost of extending credit to the revenues earned

l a listing of all customer balances is maintained l the total of this listing is reported as gross A/R CustomerTotal Balance 0-30 Days Days Days >90 Days Pizza Nitza$2,000$4,00-- $1,600 ……………… Zed’s Heads$3,300$2,200$1,100-- TOTAL$35,556$14,699$12,276$1,449$7,132 The Debits and Credits of Receivables Goals of Accounting for Receivables – track what is owed by each customer – report the amount that is likely to be collected – match the cost of extending credit to the revenues earned

l each time the financial statements are prepared, management makes an estimate of the amount of receivables that are not likely to be collected l this amount is recorded in the "allowance for doubtful accounts" (which is deducted from gross A/R) Beginning Ending Allowance for Doubtful Accounts (xA) Estimated Uncollectible This Period Accounts Written Off This Period Accounts receivable, net Accounts receivable, gross Less: Allowance for uncollectibles 35,556 25,999 (755) (400) 34,801 25,599 Mondetta Inc. Balance Sheet As at February 28 The Debits and Credits of Receivables Goals of Accounting for Receivables – track what is owed by each customer – report the amount that is likely to be collected – match the cost of extending credit to the revenues earned

l an expense called "bad debt expense" is recorded at the same time the "allowance for doubtful accounts" is adjusted... Dr. Bad Debt Expense (I/S) Cr. Allowance for Doubtful Accounts (B/S) Net Income Sales Revenue Less: Cost of Goods Sold Bad Debt Expense etc. 65,986 75, Mondetta Inc. Income Statement For the year ended February 28 35,335 25, Goals of Accounting for Receivables – track what is owed by each customer – report the amount that is likely to be collected – match the cost of extending credit to the revenues earned The Debits and Credits of Receivables

l an expense called "bad debt expense" is recorded at the same time the "allowance for doubtful accounts" is adjusted... Dr. Bad Debt Expense (I/S) Cr. Allowance for Doubtful Accounts (B/S) l this single entry achieves the objective of matching the cost of extending credit to the period in which the credit sales are recorded l it also enables A/R to be reported at net realizable value Goals of Accounting for Receivables – track what is owed by each customer – report the amount that is likely to be collected – match the cost of extending credit to the revenues earned The Debits and Credits of Receivables

n the only time the A/R balance is reduced is when cash is collected or a known uncollectible balance is written-off Dr. Allowance for Doubtful Accounts $ YY Cr. Accounts Receivable $ YY n the only time a Bad Debt Expense is recorded is when the amount of uncollectibles is estimated and recorded The Debits and Credits of Receivables Dr. Cash $ XXX Cr. Accounts Receivable $ XXX Dr. Bad Debt Expense $ ZZ Cr. Allowance for Doubtful Accounts $ ZZ