1. Cash, Short-term Investments And Accounts Receivable
Chapter 4
Cash, Short-term Investments And Accounts Receivable
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2. Chapter 4: 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.
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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
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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?
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5. Bank Reconciliations Deposits in Transit Outstanding Checks
Deposits Unknown to Firm
Bank Fees
NSF Checks
Errors (on the part of the Bank or Firm)
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6. Graphic Organizer 4.1 Categorizing items for the bank reconciliation
         
Graphic Organizer 4.1
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
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7. EXHIBIT 4.2
Bank Reconciliation
Book Balance Bank Balance
As stated, 6/ $6,450 As stated, 6/1 $4,343
Add: Interest earned 33 Add: Deposit in transit 3,000
Error - Lali
Deduct: Printing charge (20) Deduct: Outstanding checks (1,580)
NSF check - Dow (360)
Error - A/P amount(90)
Correct balance, 6/ Correct balance, 6/30
$6,013 $6,013
Note: Remember to make the appropriate journal entries for any adjustment to the book balance.
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8. Sales Discounts Sales Returns and Allowances
Accounts Receivable
Sales Discounts
Sales Returns and Allowances
What are Contra revenue accounts?
How and why are they used?
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9. Uncollectable Accounts
CREDIT TERMS
Uncollectable Accounts
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10. 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
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11. Direct Write-Off NOT GAAP Sept. 18 Uncollectible Accounts Expense 300
Accounts Receivable - D. Duck 300
To write off account receivable.
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12. Allowance Method Dec 31 Uncollectible Accounts Expense 27,000
Allowance for Uncollectible Accounts 27,000
To record an estimate for bad debts
related to 2002 credit sales.
Feb. 18 Allowance for Uncollectible Accounts 2,300
Accounts Receivable – Kent Pai 2,300
To write off an accounts receivable.
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13. Reinstating Accounts Receivable
May 15 Accounts Receivable – Kent Pai 920
Allowance for Uncollectible Accounts 920
To write on an previous write off.
May 15 Cash
Accounts Receivable – Kent Pai 920
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14. 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
Credit Cards Receivable 6,000
To record Visa deposit and related
service charge.
What are the costs and benefits of accepting credit cards?
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15. 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.
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16. 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
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17. Alternative Method for A/R Turnover
One Day’s Sales = Sales ÷ 360 days
A/R turnover = Average A/R ÷ One Day’s Sales
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18. Turnover Example
EXHIBIT 4.5
Accounts Receivable Turnover Ratio and Age of Receivables
Net credit sales for $704,250
Accounts receivable, 1/1/02 $ 82,000
Accounts receivable, 12/31/02 $ 74,500
Average Accounts Receivable = ($82,000 + $74,500) ¸ 2 = $78,250
A/R Turnover Ratio = $704,250 ¸ $78,250 = 9
Age of Receivables = 360 days ¸ 9 = 40 days
If normal credit terms are 2/10, n/30, the company is not doing a very good job of collecting its accounts receivable (in the 30 days expected). On average, the accounts are 10 days overdue.
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