1. Cash, Short-term Investments and Accounts Receivable
Chapter 4
Cash, Short-term Investments and Accounts Receivable
Chapter 4

2. Cash, Short-term Investments and Accounts Receivable
Chapter 4
Cash, Short-term Investments and Accounts Receivable
Chapter 4

3. Chapter 4 Learning 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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4. 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
Chapter 4

5. 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?
Chapter 4

6. Entry to Establish Petty Cash
Chapter 4

7. Entry to Replenish Petty Cash
Chapter 4

8. Review debit to the Cash account. credit to the Petty Cash account.
The entry to establish petty cash includes a:
debit to the Cash account.
credit to the Petty Cash account.
debit to the Petty Cash account.
debit to the Petty Cash Expense account.
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9. Review debit to the Cash account. credit to the Petty Cash account.
The entry to establish petty cash includes a:
debit to the Cash account.
credit to the Petty Cash account.
debit to the Petty Cash account.
debit to the Petty Cash Expense account.
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10. Problem Review
Prepare the entry on January 1 to establish a petty cash fund for $100.
Prepare the entry on January 31 to replenish petty cash assuming $19 was spent on postage, $55 on office supplies, and $20 on coffee and doughnuts.
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11. Problem Review Solution
Jan. 1
Petty Cash
100
Cash 31
Postage Expense 19
Office Supplies Expense 55
Miscellaneous Expense 20 94
Chapter 4

12. Bank Reconciliations Deposits in Transit Outstanding Checks
Deposits Unknown to Firm
Bank Fees
NSF Checks
Errors (on the part of the Bank or Firm)
Chapter 4

13. Categorizing items for the bank reconciliation Outstanding Checks
         
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
Chapter 4

14. Bank Reconciliation Illustrated
Chapter 4

15. Bank Reconciliation Journal Entries
Chapter 4

16. Review addition to the book balance. deduction from the bank balance.
A NSF check received from a customer is shown on bank reconciliation statement as a(n):
addition to the book balance.
deduction from the bank balance.
deduction from the book balance.
addition to the bank balance.
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17. Review addition to the book balance. deduction from the bank balance.
A NSF check received from a customer is shown on bank reconciliation statement as a(n):
addition to the book balance.
deduction from the bank balance.
deduction from the book balance.
addition to the bank balance.
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18. Review addition to the book balance. deduction from the bank balance.
Outstanding checks are shown on bank reconciliation statement as a(n):
addition to the book balance.
deduction from the bank balance.
deduction from the book balance.
addition to the bank balance.
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19. Review addition to the book balance. deduction from the bank balance.
Outstanding checks are shown on bank reconciliation statement as a(n):
addition to the book balance.
deduction from the bank balance.
deduction from the book balance.
addition to the bank balance.
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20. Review debit to Cash. credit to Accounts Payable.
The journal entry to record bank charges for printing checks includes a:
debit to Cash.
credit to Accounts Payable.
debit to Miscellaneous Expense.
credit to Miscellaneous Expense.
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21. Review debit to Cash. credit to Accounts Payable.
The journal entry to record bank charges for printing checks includes a:
debit to Cash.
credit to Accounts Payable.
debit to Miscellaneous Expense.
credit to Miscellaneous Expense.
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22. Short-Term Investments
Companies need to hold an adequate amount of cash to meet current obligations, but do not generally want to hold significantly more cash than will be needed.
Companies often make short-term investments of excess cash in the stocks and bonds of other companies.
These investments are referred to as available-for-sale securities.
Available-for-sale securities are shown on on the balance sheet at fair market value rather than cost.
Such an adjustment requires an end-of-period adjusting entry to record a gain or loss relative to the investment cost.
Chapter 4

23. Adjusting Entries for Available-for-Sale Securities
Assume Caliope Co. purchased $2,500 of stock in Orleans Corp. in November By Dec. 31, 2009, the stock was worth $2,200. Caliope Co. would prepare the following adjusting entry:
Chapter 4

24. Contra Revenue Accounts
Sales Discounts
Sales Returns and Allowances
What are contra revenue accounts?
How and why are they used?
Chapter 4

25. Sales Discounts Illustrated
Assume that Payne Company sells $400 of merchandise with credit
terms of 2/10, n/30 to Brenda Joyner on March 1. Payne Company
would record the following entry on March 1.
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26. Sales Discounts Illustrated continued
Assume that Brenda Joyner pays the amount due to Payne
Company on March 11. Payne Company would record the
following entry:
Chapter 4

27. Sales Discounts Illustrated continued
Assume now that Brenda Joyner pays the amount due to Payne
Company on March 31 instead of March 11. Payne Company
would record the following entry:
Chapter 4

28. Sales Returns and Allowances Illustrated
Assume now that on March 4 Brenda Joyner wants to return
$100 of merchandise purchased from Payne Company on
March 1. Payne Company records the following journal entry
on March 4.
Mar. 4
Sales Returns and Allowances
400
Accounts Receivable-B. Joyner
Chapter 4

29. Income Statement Presentation of Contra Revenue Accounts
Sales Returns and Allowances and Sales Discounts are both subtracted from Sales to obtain Net Sales on the income statement.
Following is an example of an income statement with contra revenue accounts.
Chapter 4

30. Review
The amount paid to the seller within the discount period on a $1,500 sale on account, with credit terms of 2/10, n/30, and a credit for a return of $300 is:
$1,200.
$1,176.
$1,224.
$1,470.
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31. Review
The amount paid to the seller within the discount period on a $1,500 sale on account, with credit terms of 2/10, n/30, and a credit for a return of $300 is:
$1,200.
$1,176.
$1,224.
$1,470.
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32. Uncollectible Accounts
Two key activities are associated with a credit sale: making the sale and collecting the resulting receivable.
Whenever a business decides to extend credit to customers, there is the potential for bad debts.
When it becomes apparent that a receivable will not be collected, the business should eliminate, or write off, that receivable.
The two ways to account for bad debt write-offs are the direct write-off method and the allowance method.
Chapter 4

33. 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
Chapter 4

34. Direct Write-Off NOT GAAP Sept. 18 Uncollectible Accounts Expense 300
Accounts Receivable - D. Duck 300
To write off account receivable.
Chapter 4

35. Allowance Method Aug.10 Accounts Receivable-Kent Pai 2,300 2010
Sales ,300
To record a credit sale in 2010.
Dec 31 Uncollectible Accounts Expense 27,000
Allowance for Uncollectible Accounts 27,000
To record an estimate for bad debts related to 2010 credit sales.
2011
Feb. 18 Allowance for Uncollectible Accounts 2,300
Accounts Receivable – Kent Pai 2,300
To write off an accounts receivable in 2011 from a 2010 credit sale.
Chapter 4

36. Reinstating Accounts Receivable
May 15 Accounts Receivable – Saffron Cheng 920
Allowance for Uncollectible Accounts 920
To reinstate an account previously written off.
May 15 Cash 920
Accounts Receivable – Saffron Cheng 920
To collect a reinstated account previously written off.
Chapter 4

37. Review Uncollectible Accounts Expense. Accounts Receivable.
The entry to write off an account using the allowance method involves a debit to:
Uncollectible Accounts Expense.
Accounts Receivable.
Allowance for Uncollectible Accounts.
Sales Discounts.
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38. Review Uncollectible Accounts Expense. Accounts Receivable.
The entry to write off an account using the allowance method involves a debit to:
Uncollectible Accounts Expense.
Accounts Receivable.
Allowance for Uncollectible Accounts.
Sales Discounts.
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39. Review liability account. contra asset account.
The Allowance for Uncollectible Accounts is classified as a:
liability account.
contra asset account.
contra liability account.
stockholders’ equity account.
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40. Review liability account. contra asset account.
The Allowance for Uncollectible Accounts is classified as a:
liability account.
contra asset account.
contra liability account.
stockholders’ equity account.
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41. Problem Review
Prepare the entry on December 15, 2009, to record a sale on account for $5,000 to June DeLucas.
Prepare the entry on March 31, 2010, to write off the account in full for June DeLucas using the allowance method.
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42. Problem Review Solution
2009
Dec. 15
Accounts Receivable-J. DeLucas
5,000
Sales
2010
Mar. 31
Allowance for Uncollectible Accounts
Accounts. Receivable-J. DeLucas
Chapter 4

43. Credit Card Receivables
Feb. 20 Credit Cards Receivable ,000
Sales Revenue ,000
To record Visa sales.
Feb Cash ,850
Credit Card Expense
Credit Cards Receivable ,000
To record Visa deposit and related service charge.
What are the costs and benefits of accepting credit cards?
Chapter 4

44. 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.
Chapter 4

45. 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
Chapter 4

46. Alternative Method for A/R Turnover
One Day’s Sales = Sales ÷ 360 days
A/R turnover = Average A/R ÷ One Day’s Sales
Chapter 4

47. Turnover Example
Chapter 4

48. Problem Review
Compute the quick ratio for MamaMia Soup Company for Year 1 and Year 2 based on the following information.
Year 1
Year 2
Cash
$ 94
$ 63
Short-term investments 2 7
Accounts receivable (net)
578
646
Inventory
786
904
Property, plant & equipment (net)
2,401
2,265
Current liabilities
1,465
1,851
Long-term liabilities
1,338
1,343
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49. Problem Review Solution
Year 1
Quick ratio = Quick Assets/Current Liabilities
= ($ $578)/$1,465
= $674/$1,465
= .46
Year 2
= ($63 + $7 + $646)/$1,851
= $716/$1,851
= .39
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50. THE END!
Chapter 4
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