1. Chapter 7: Cash and Receivables
Intermediate Accounting, 10th Edition
Kieso, Weygandt, and Warfield
Chapter 7: Cash and Receivables
Prepared by
Krishnan Ranganathan, Angelo State University,
San Angelo, Texas

2. Part 1: Cash and Cash Equivalents
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

3. Cash and Cash Equivalents: Issues
Definition of “cash” : various items that comprise cash.
Management and control of cash : the importance of internal control of cash
Reporting of cash in the balance sheet
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

4. Items comprising “Cash”
Cash must be readily available and be free of restrictions
Cash consists of coins, currency and available funds
Deposits (CDs) and short term paper are classified as temporary investments
Post dated checks, travel advances and stamps on hand are not classified as cash
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

5. Management and control of cash
Since cash is the most liquid asset, internal control of cash is imperative.
Controls must prevent unauthorized use of cash
Management must have necessary information for proper use of cash
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

6. Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)
Reporting of Cash
The reporting of cash depends upon whether it is:
restricted cash
a bank overdraft or
a cash equivalent 1 2 3
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7. Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)
Restricted Cash
Compensating balances:
are amounts maintained by a corporation with a bank in support of existing borrowing arrangements
give bank use of the restricted balance
are identified as current assets separate from cash, if they relate to short-term loans.
are identified as non-current assets separate from cash, if they relate to long-term loans. 1 2 3 4
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

8. Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)
Bank Overdrafts
Overdrafts represent checks written in excess of cash account.
Overdrafts may be offset against available cash in another account in the same bank.
Otherwise, such offsetting is not allowed.
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

9. Part 2: Accounts Receivable
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10. Accounts Receivable - Issues
Types of accounts receivable : current and non-current : trade and non-trade
Recognition of accounts receivable in the financial statements - cash discounts / interest
Valuation of accounts receivable : estimated bad debts and net realizable value
Disposition of receivable - transfers / sale
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

11. Accounts Receivable: Recognition
Trade or quantity discounts are not recorded in books of account.
Cash (sales) discounts are inducements to customers for prompt payment of amounts billed.
Cash discounts are recorded in books as reductions of sales revenue.
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12. Accounts Receivable: Recording Cash Discounts
There are two methods: Gross and Net
Gross method records discounts when taken by customers.
Net method records discounts not taken by customers.
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

13. Accounts Receivable: Recording Cash Discounts
GROSS method
NET method
Record revenue at gross amount of sales
When customer takes the discount, record cash discounts
Cash discounts reduce gross sales revenue
Record revenue at gross amount of sales less cash discount
When customer forfeits discount, record discounts not taken.
Report discounts forfeited as other revenue
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14. Valuation of Accounts Receivable
Short term receivables are reported at their net realizable value (NRV)
The NRV is the net amount expected to be collected
The NRV is gross accounts receivable less estimated uncollectible accounts.
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

15. Estimating uncollectible receivables
Methods
Direct Write-Off
Allowance
Not based on the matching Based on the matching
principle principle 1
Accounts are written off Estimated bad debts are
when determined uncollectible matched against revenue 2
Appropriate only if Must be followed if
amounts are not material amounts are material 3
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

16. Estimating uncollectible accounts: the Allowance method
The estimate of uncollectible accounts may be based on:
either sales (or net sales) or
accounts receivable balance end of year
These approaches are referred to as Income statement and Balance sheet approaches
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17. The Allowance method (Sales method - first year)
Indcom company reports the following balances for the year 2000 (first year):
Net sales: $50,000
Accounts Rec (Dec 31,2000): $4,600
The company estimates bad debts at 2% of net sales.
Determine estimated uncollectible accounts expense for 2000.
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18. The Allowance method (Sales method - first year)
Est. uncollectible accounts (bad debts) expense:
$50,000 * 2% = $1,000 1 2
To record bad debts expense:
Estimated bad debts expense Dr. $1,000
Allowance for Uncollectible
accounts $1,000
2000: $1,000 closed
Bad debts expense
$1,000
Allowance
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19. The Allowance method (Sales approach - second year)
Indcom company reports the following balances for the year 2001 (second year):
Net sales: $70,000
Accounts Rec (Dec 31,2001): $5,700
The company estimates bad debts at 2% of net sales.
Determine estimated uncollectible accounts expense for 2001.
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

20. The Allowance method (Sales approach - second year)
Est. uncollectible accounts (bad debts) expense:
$70,000 * 2% = $1,400 1 2
To record bad debts expense:
Estimated bad debts expense Dr. $1,400
Allowance for Uncollectible
accounts $1,400
2001: $1,400 closed
Bad debts expense
2000:$1,000
2001:$1,400
Allowance
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

21. The Allowance method (Acct Rec approach - first year)
Indcom company reports the following balances for the year 2000 (first year):
Net sales: $50,000
Accounts Rec (Dec 31,2000): $4,600
The company estimates bad debts at 10% of accounts receivable.
Determine estimated uncollectible accounts expense for 2000.
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

22. The Allowance method (Acct Rec approach - first year)
Est. uncollectible accounts (bad debts) expense:
$4,600 * 10% = $460 1 2
To record bad debts expense:
Estimated bad debts expense Dr. $460
Allowance for Uncollectible
accounts $460
2000: $ closed
$ 460
Bad debts expense
Allowance
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

23. The Allowance method (Acct Rec approach - second year)
Indcom company reports the following balances for the year 2001 (second year):
Net sales: $70,000
Accounts Rec (Dec 31,2001): $5,700
The company estimates bad debts at 10% of accounts receivable.
Determine estimated uncollectible accounts expense for 2001.
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

24. The Allowance method (Acct Rec approach - second year)
Est. uncollectible accounts (bad debts) expense:
$5,700 * 10% = $ 570 (required)
less: existing allowance = ($ 460)
Bad debts expense (2001) = $110 1 2
To record bad debts expense:
Estimated bad debts expense Dr. $110
Allowance for Uncollectible
accounts $110
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

25. The Allowance method (Acct Rec approach - second year)
2001: $ closed
Bad debts expense
$ 460
$ 110
$ 570
Allowance
Required
ending
allowance
Adjusting entry:
Bad Debts expense Dr $110
Allowance account $ 110
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

26. Balance Sheet Representation
Short term accounts receivable are shown at their net realizable value as follows:
Accounts Receivable (gross) : $ XXX less: Allowance : ($ XX) Net Realizable Value : $ XX
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

27. Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)
Part 3:
Notes Receivable
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

28. Notes Receivable: Issues
Recognition of Notes Receivable
issues at face value and issues not at face value
issues for cash / non-cash considerations
Valuation issues
Disposition of notes receivable 1 2
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

29. Recognition of Notes Receivable
Short term N/R
Long term N/R
Record at face value
less Allowance
Record at present value
of cash expected to
be collected
Issues at par
Issues not at par
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30. Recognition of Notes Receivable
Notes receivable are issued at face value when the stated rate of interest is the same as the effective (market) rate.
When the rates are unequal, a discount on the note results.
The discount is amortized to interest revenue by the effective interest method.
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

31. Recognition of Notes Receivable
Issues NOT at face value
Non interest bearing
Interest bearing
1. Determine discount on
notes receivable at
implicit rate of interest
2. The discount is
amortized to interest
revenue by the
effective interest
method
1. Determine discount on
notes receivable at
the effective rate of
interest.
2. The discount is
amortized to interest
revenue by the
effective interest
method
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

32. Discount on notes receivable: Example
Assume Debrief company issues a notes receivable (FV= $10,000) on
Stated Rate, 10%; Effective Rate, 12%
The discount is $480.
Assume that the discount to be amortized for 2000 is $ 142.
Show necessary journal entries.
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

33. Discount on notes receivable Example
: Notes Receivable Dr. 10, Discount (N/R) $ Cash $ 9,520
December 31, 2000: Discount (N/R) Dr. $ Cash Dr. $ 1, Interest Revenue $1,142
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34. Disposition of Accounts and Notes Receivable
Part 4:
Disposition of Accounts
and
Notes Receivable
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

35. Disposition of Accounts and Notes Receivable
The holder of accounts or notes receivable may transfer them for cash.
The transfer may be:
secured borrowing or
a sale of receivables
Holder retains ownership of receivables in a secured borrowing transaction.
Holder transfers ownership of receivables in a sale (retaining risks of collection)
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36. Transfer of Receivables: borrowing vs. sale treatment
Conditions
1. Are transferred assets isolated
from transferor? and
2. Does transferee have right to
pledge or sell assets? and
3. Has transferor divested itself of
control through repurchase
agreement?
Yes
Sale No
Borrowing
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37. Accounting for Transfers of Receivables
Secured Borrowing
Sale
Without Recourse
With Recourse
Continuing involvement by
seller
No continuing
involvement by
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

38. Secured Borrowing (highlights)
Transferor records a finance charge.
Transferor collects accounts receivable.
Transferor records sales returns and sales discounts.
Transferor absorbs bad debts expense.
Transferor records interest expense on notes payable.
Transferor pays on the note periodically from collections.
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)

39. Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)
Sale of Receivables
Transferor transfers ownership of receivables to factor.
Factor records the (transferred) accounts as assets in its books.
Transferor records any amount retained by transferee as “due from factor”
Transferor records loss on sale of receivables
Transferor records any component liability (when appropriate)
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40. Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)
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Intermediate Accounting, 10th Edition, Ch. 7 (Kieso et al.)