1. An electronic presentation Pepperdine University6
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Cash and Receivables
An electronic presentation
by Douglas Cloud
Pepperdine University 1 1 1 1

2. Objectives 1. Understand the importance of cash management.
2. Prepare a bank reconciliation.
3. Discuss revenue recognition when the right of return exists.
4. Understand the credit policies relates to accounts receivable.
5. Explain the gross and net methods to account for cash discounts.
Continued 2 2 2 4

3. Objectives
6. Estimate and record bad debts using a percentage of sales.
7. Estimate and record bad debts using an aging analysis.
8. Explain pledging, assignment, and factoring of accounts receivable.
9. Account for short-term notes receivable.
10. Prepare a proof of cash (Appendix)

4. Cash
Cash is the resources on hand to meet planned expenditures and emergency situations.

5. Cash Cash Included in Cash Excluded from Cash Coins and currency
Checking accounts
Savings accounts
Negotiable checks
Bank drafts
Certificates of deposit
Bank overdrafts
Postdated checks
Travel advances
Postage stamps

6. Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and near their maturity.

7. Cash Management Control Over Receipts
Immediately count the receipts (by the person opening the mail or the sales person using the cash register).
Record daily all cash receipts in the accounting records.
Deposit daily all receipts in the company’s bank account.

8. Cash Management Control Over Payments
Make all payments by check (except petty cash items) so that a record exists for every company expenditure.
Authorize and sign all checks only after an expenditure is verified and approved.
Periodically reconcile the cash balance in the bank statements with the company’s accounting records.

9. Petty Cash
A journal entry is made to record the establishment of the fund.
First: An employee is appointed petty cash custodian.
Petty Cash 500
Cash 500

10. Petty Cash
Second: Petty cash vouchers are printed, prenumbered, and given to the custodian of the fund.
At all times the total of the cash in the fund plus the amounts of expenditure vouchers should be equal to $500 (in this case).

11. Petty Cash
…the vouchers are sorted into expense categories and the remaining cash is counted.
Third: When the amount of cash in the petty cash fund becomes low and/or at the end of accounting period,...
Assume that a count at the end of the month shows $67.54 remaining in the petty cash fund.

12. Petty Cash
The sorting of vouchers indicated the following costs were incurred during the month:
Office supplies $
Postage
Transportation
Miscellaneous
Total expenses $428.06
The fund’s expected balance is $71.94 ($ $428.06). There is a shortage of $4.40 ($ $67.54).

13. Petty Cash
The company records the actual expenses and the amount needed to replenish the fund.
Office Supplies Expense 34.16
Postage Expense
Transportation Expense
Miscellaneous Expense 83.76
Cash Short and Over 4.40
Cash

14. Bank Reconciliation
Causes of the difference between the cash balance and the company’s bank statement balance.
Outstanding checks
Deposits in transit
Charges made by the bank
Deposits made directly by the bank
Errors

15. Bank Reconciliation Cash balance from company records $6,925
Cash balance from bank statement $7,218

16. Bank Reconciliation
Cash balance from bank statement $7,218
Add: Receipts recorded on the company’s
records but not reported on the bank
statement
$7,847
Cash balance from bank statement $7,218
Deposits in transit and cash received but not yet deposited totaled $629.

17. Outstanding checks totaled $516.
Bank Reconciliation
Cash balance from bank statement $7,218
Add: Receipts recorded on the company’s
records but not reported on the bank
statement
$7,847
Cash balance from bank statement $7,218
Add: Receipts recorded on the company’s
records but not reported on the bank
statement
$7,847
Deduct: Outstanding checks (516 )
Outstanding checks totaled $516.

18. Bank Reconciliation Cash balance from bank statement $7,218
Add: Receipts recorded on the company’s
records but not reported on the bank
statement
$7,847
Deduct: Outstanding checks (516 )
Adjusted Cash Balance $7,331

19. Bank Reconciliation
Cash balance from company records $6,925
Add: Notes receivable ($700) and interest
($15) collected by bank
$7,640
Cash balance from company records $6,925
Add: Notes receivable ($700) and interest
($15) collected by bank 715
Cash balance from company records $6,925
Notes receivable totaling $700 and interest totaling $15 were collected by the bank.

20. Bank Reconciliation Bank service charge, $9.
Cash balance from company records $6,925
Add: Notes receivable ($700) and interest
($15) collected by bank
$7,640
Bank service charge, $9.

21. Bank Reconciliation Bank service charge, $9.
Cash balance from company records $6,925
Add: Notes receivable ($700) and interest
($15) collected by bank
$7,640
Deduct: Bank service charge (9 )
Bank service charge, $9.

22. Customers’ checks were returned for lack of funds (NSF check), $300.
Bank Reconciliation
Cash balance from company records $6,925
Add: Notes receivable ($700) and interest
($15) collected by bank
$7,640
Deduct: Bank service charge (9 )
Customers’ checks were returned for lack of funds (NSF check), $300.

23. Customers’ checks were returned for lack of funds (NSF check), $300.
Bank Reconciliation
Cash balance from company records $6,925
Add: Notes receivable ($700) and interest
($15) collected by bank
$7,640
Deduct: Bank service charge (9 )
NSF checks (300 )
Customers’ checks were returned for lack of funds (NSF check), $300.

24. Bank Reconciliation Cash balance from company records $6,925
Add: Notes receivable ($700) and interest
($15) collected by bank
$7,640
Deduct: Bank service charge (9 )
NSF checks (300 )
Adjusted Cash Balance $7,331

25. Bank Reconciliation Adjusted cash balance per company records
Adjusted cash balance per bank statement $7,331
Adjusted cash balance per company records
$7,331

26. Bank Reconciliation Journal Entries Cash 715
Notes Receivable (note collected) 700
Interest Revenue (interest collected) 15
Miscellaneous Expense (bank
service charge) 9
Accounts Receivable (NSF check) 300
Cash 309

27. Receivables
Those receivables expected to be collected or satisfied within one year or the current operating cycle, whichever is longer, are classified as current assets; the remainder are classified as noncurrent.

28. Receivables Trade Receivables Normal circumstances Right of return
Revenue Recognition and Valuation
Recording and Reporting Notes Receivable
Recording and Reporting Accounts Receivable
Normal circumstances
Right of return
Valuation
Cash discounts
Sales returns and allowances
Uncollectible accounts
Financing arrangements
Interest-bearing
Non-interest-bearing
Discounted

29. Receivables Right of Return
1. The sales price is fixed or determinable at the date of sale.
2. The buyer has paid or will pay the seller, and the obligation is not contingent upon the resale of the product.
3. The buyer’s obligation to the seller would not be changed by theft or damage to the product.
Each of the following criteria must be satisfied when the right of return exists in order to recognize revenue at the time of sale.
Continued

30. Receivables Right of Return
4. The buyer has an economic substance apart from the seller.
5. The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.
6. The seller can reasonably estimate the amount of future returns.

31. Internal Control Procedures for Accounts Receivable
Prenumbered sales invoices.
Separation of the sales function from the cash collection responsibilities.

32. Alternative Methods of Accounting for Sales Discounts
Gross Price Method
Net Price Method
Sold $8,000 of merchandise to various customers on December 4, 2004 with terms of 2/10, n/EOM
Accounts Receivable 8,000
Sales 8,000
Accounts Receivable 7,840
Sales 7,840
$8,000 - ($8,000 x 0.02)

33. Sales Discounts Alternative Methods of Accounting for Sales Discounts
Gross Price Method
Net Price Method
On December 13 received payment on goods originally billed at $5,500.
Cash 5,390
Sales Disc. Taken 110
Accts. Receivable 5,500
Cash 5,390
Accts. Receivable 5,390
$5,500 - ($5,500 x 0.02)

34. Sales Discounts Alternative Methods of Accounting for Sales Discounts
Gross Price Method
Net Price Method
Received payment on goods billed at $1,500 on December 30 (after the discount period).
Cash 1,500
Accts. Receivable 1,500
Cash 1,500
Accts. Receivable 1,470
Sales Discounts
Not Taken 30
$1,500 - ($1,500 x 0.02)
Classified as” Other Items” on the income statement

35. Sales Discounts Alternative Methods of Accounting for Sales Discounts
Gross Price Method
Net Price Method
Year-end adjustment at the end of the period.
No entry required
Accounts Receivable 20
Sales Discounts
Not Taken 20

36. Loss Contingencies
FASB Statement No. 5 requires that estimated losses from loss contingencies be accrued against income and...
… recorded as reductions in assets or as liabilities when both of these conditions are met.
1. Information available prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements.
2. The amount of the loss can be reasonably estimated.

37. Estimated Bad Debts Method
Bad debts can be estimated based on sales or on accounts receivable.

38. Estimated Bad Debts Method
1. Relationship to sales (income statement approach):
a. Percentage of sales
b. Percentage of net credit sales
2. Relationship to accounts receivable (balance sheet approach):
a. Percentage of outstanding accounts receivable
b. Aging of accounts receivable

39. Estimated Bad Debts Method
Percentage of Sales
If a company’s net credit sales during the year were $525,000 and bad debts historically amount to 2% of net credit sales, what is the required adjusting entry?
Bad Debt Expense 10,500
Allowance for Doubtful Accounts 10,500
$525,000 x 0.02

40. Estimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
If a company has determined that there has been a 4% relationship between actual bad debts and the year-end account receivable balance ($475,000), what would be the required adjusting entry?
Allowance for Doubtful Accounts
4,500 (current balance)
$475,000 x 0.04 = $19,000

41. Estimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
If a company has determined that there has been a 4% relationship between actual bad debts and the year-end account receivable balance ($475,000), what would be the required adjusting entry?
Allowance for Doubtful Accounts
4,500 (current balance)
19,000 (required balance)
14,500 (required adjustment)

42. Estimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
If a company has determined that there has been a 4% relationship between actual bad debts and the year-end account receivable balance ($475,000), what would be the required adjusting entry?
Bad Debt Expense 14,500
Allowance for Doubtful Accounts 14,500

43. Aging of Accounts Receivable
1. Gather the unpaid invoices in each customer’s account.
2. Classify the invoice amounts according to the length of time the invoice has been outstanding.
3. Multiply the total amount in each age group by the applicable estimated uncollectible percentage.
4. Make a journal entry to bring the balance in Allowance for Doubtful Accounts to the amount calculated in Step 3.
Examine Exhibit 6-3 carefully.

44. Aging of Accounts Receivable
Age
Under 60 days $ 53,500
days 34,500
days 3,600
days 15,700
Over 1 year ,500
$121,800
x 2%
x 8%
x 15%
x 30%
x 50%
= $ 1,070
= ,760 =
= ,710
= ,250
$16,330
Estimated Percentage Uncollectible
Estimated Amounts Uncollectible

45. Aging of Accounts Receivable
If the firm has a current $1,350 debit balance, the required adjusting entry would be--
Bad Debt Expense 17,680
Allowance for Doubtful Accounts 17,680
$16,330 + $1,350

46. Writing Off Uncollectibles
Accounts Receivable
175,000
850
Allowance for Doubtful Accounts
8,750
Net realizable value = $166,250
Net realizable value = $166,250
Allowance for Doubtful Accounts 850
Accounts Receivable 850
A customer’s account totaling $850 is determined to be uncollectible.

47. Collection of an Account Previously Written Off
Later, a payment for $850 is received from the account that was written off in the previous slide.
Accounts Receivable 850
Allowance for Doubtful Accounts 850
Cash 850
Accounts Receivable 850

48. Accounts Receivable Financing Agreements
There are three basic forms of financing agreements to obtain cash from accounts receivable.
Pledging
Assigning
Factoring

49. Accounts Receivable Financing Agreements
Retain Risks and Benefits of Ownership
Pledge
(Collateral for Loans)
Transfer Some Risks and Benefits of Ownership
Assign
(Specific Receivables with Recourse)
Transfer Risks and Benefits of Ownership
Factor
(Sale without Recourse)

50. Factoring
The FASB addressed these issues when it concluded in FASB Statement No. 140 that a transferor records the transfer of financial assets to the transferee as a sale when all of the following conditions are met:
1. The transferred assets have been isolated from the transferor.
2. The transferee obtains the right to exchange the transferred assets.
3. The transferor does not maintain effective control over the transferred assets through an agreement that entitles and obligates the transferor to repurchase the transferred assets before their maturity.

51. Pledging
When a company pledges its accounts receivable, it is using these accounts as collateral for a loan, and the servicing activities remain its responsibility.

52. Assignment of Accounts Receivable
When a company assigns its accounts receivable to a financial institution, it enters into a lending agreement with the institution to receive cash on specific customer accounts.

53. Assignment of Accounts Receivable
On December 1, 2004 the Trussel Company assigned $60,000 of its accounts to a finance company. The finance company advances 80% of the accounts receivable assigned less a service charge of $500. It also charges an annual interest of 12% on any outstanding loan balance.
($60,000 x 0.80) - $500
Cash 47,500
Assignment Service Charge Expense 500
Notes Payable 48,000
$60,000 x 0.80
Accounts Receivable Assigned 60,000
Accounts Receivable 60,000

54. Assignment of Accounts Receivable
On December 31, 2004 Trussel collects $10,000 on assigned accounts. This amount along with the 12% interest for one month is paid to the finance company.
Cash 10,000
Accounts Receivable Assigned 10,000
Notes Payable 10,000
Interest Expense 480
Cash 10,480
$48,000 x 0.12 x 1/12

55. Factoring of Accounts Receivable
When a company factors its accounts receivable, it sells individual accounts to a financial institution (called a factor).

56. Factoring
Factor Corporation sells $80,000 of accounts receivable to a factor, receives 90% of the value of the factored accounts, and is charged a 15% commission based on the gross amount of factored accounts receivable.
($80,000 x .90) - $12,000
Cash 60,000
Receivables from Factor 8,000
Factoring Expense 12,000
Accounts Receivable 80,000
$80,000 x 0.10
$80,000 x 0.15

57. Notes Receivable
A note receivable is an unconditional written agreement to collect a certain sum of money on a specific date.

58. Notes Receivable
Notes receivable generally have two attributes that are not found in accounts receivable.

59. Notes Receivable
1. They are negotiable instruments, which means that they are legally and readily transferable among parities and may be used to satisfy debts by the holders of these instruments.
2. They usually involve interest, requiring the separation of the receivables into its principal and interest components.

60. Notes Receivable Interest-Bearing
Received a $5,000, 60-day, 12% note on October 1, 2004.
Notes Receivable 5,000
Sales 5,000
$5,000 x 0.12 x 60/360
Received maturity value on December 1, 2004.
Cash 5,100
Notes Receivable 5,000
Interest Revenue 100

61. Non-Interest-Bearing
Notes Receivable
Non-Interest-Bearing
Received a $5,100, 60-day, non-interest-bearing note on October 1, 2004.
Notes Receivable 5,100
Interest Revenue 100
Sales 5,000
Received maturity value on December 1, 2004.
Cash 5,100
Notes Receivable 5,100

62. Notes Receivable Discounted
On August 1, 2004, the Kasper Corporation discounts a customer’s note at its bank at a 14% discount rate. The note was received from the customer on August 1, is for 90 days, has a face value of $5,000, and carries an interest rate of 12%.

63. Notes Receivable Discounted
1. Face value of note $5,000.00
2. Interest to maturity ($5,000 x 0.12 x 90/360)
3. Maturity value of note $5,150.00
4. Discount ($5,150 x 0.14 x 60/360) ( )
5. Proceeds $5,029.83
6. Accrued interest revenue: $50
7. Book value of note ($5,000 + $50) (5, )
8. Loss from discounting of note $ (20.17 )

64. Notes Receivable Discounted
August 31, 2004
Interest Receivable 50.00
Interest Revenue
Cash
Loss from Discounting of Note 20.17
Notes Receivable Discounted 5,000.00
Interest Receivable
October 30, 2004
Notes Receivable Discounted 5,000.00
Notes Receivable 5,000.00

65. Notes Receivable Discounted
Assume instead that on November 3, 2004 the bank notified Kasper that the note had not been paid and also charged Kasper a $10 fee.
Notes Receivable Dishonored 5,160
Notes Receivable Discounted 5,000
Notes Receivable 5,000
Cash 5,160

66. Appendix: Proof of Cash
1. The reconciliation of the bank balance and book balance for the previous month.
2. The reconciliation of the receipts recorded by the bank for the current month with the receipts recorded on the books.
3. The reconciliation of the payments recorded by the bank for the current month with the payments recorded on the books.
4. The reconciliation of the bank balance and book balance for the current month.
The proof of cash provides four separate reconciliations.

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