1. C 7 Cash and Receivables hapter Intermediate Accounting 11th edition
Nikolai Bazley Jones
An electronic presentation
By Norman Sunderman
and Kenneth Buchanan
Angelo State University
COPYRIGHT © 2010 South-Western/Cengage Learning

2. Objectives Identify items of cash (and cash equivalents).
Understand the importance of cash management.
Discuss revenue recognition when the right of return exists.
Understand the credit policies and internal control related to accounts receivable.
Explain the gross and net methods to account for cash discounts. 2 2 2 4

3. Objectives Estimate and record bad debts using a percentage of sales.
Estimate and record bad debts using an aging analysis.
Explain pledging, assignment, and factoring of accounts receivable.
Account for short-term notes receivable.
Understand a petty cash fund (Appendix).
Prepare a bank reconciliation (Appendix).

4. 4
Show Me the Money!
Cash is the lifeblood for companies, and infusions are coming more frequently from nontraditional sources. According to a recent Federal Reserve Payments Study, noncash payments grew by 4.6% over the previous three years and had a total value of $75.8 trillion. Of these noncash payments, more than two-thirds were made electronically, with debit cards being the most frequently used electronic payment type.

5. Show Me the Money! Debit and credit cards are used most frequently.5
Show Me the Money!
Debit and credit cards are used most frequently.
The automated clearing house (ACH) is an electronic network that provides for the interbank clearing of electronic payments.
ACH payments currently represent 91% of the value of all electronic payments.

6. Automated Clearing House (ACH)6
Automated Clearing House (ACH)
ACH payments include:
Direct deposit of payroll and social security
Electronic payments of bills
Mortgages
Utility bills
Insurance premiums
The conversion of checks by businesses

7. Number and Value of Noncash Payments

8. Electronic Banking Accounts receivable conversion (ARC)8
Electronic Banking
Accounts receivable conversion (ARC)
Paper checks received at the bank lockbox are converted into automated clearing house debits and then the check is destroyed.
ARC payments are about one-third cheaper than paper checks.
Float time is cut in half.
Check Clearing for the 21st Century Act (Check 21)
Gives legal status to substitute checks
Allows merchants to scan and transmit checks to the bank

9. Cash
Cash is the resource on hand to meet planned payments and emergency situations.

10. 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

11. Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and so near their maturity that there is little risk of changes in value because of changes in interest rates.

12. Cash Management Control Over Receipts
The person opening the mail or the salesperson using the cash register should count the receipts immediately.
All cash receipts are recorded daily in the accounting records.
All receipts are deposited daily in the company’s bank account.

13. Cash Management Control Over Payments
Make all payments by check or electronic payment (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 statement with the company’s accounting records.

14. 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.

15. Receivables

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

17. Receivables
Each of the following criteria must be satisfied when the right of return exists in order to recognize revenue at the time of sale.
The buyer has an economic substance apart from the seller.
The seller does not have significant obligations to help the buyer sell the product.
The seller can reasonably estimate the amount of future returns.

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

19. Sales Discounts Increase sales Encourage prompt payment
Increase likelihood of collection

20. Calculation of Sales Discounts
A 2% discount may be subtracted from the invoice price if payment is made within 10 days, otherwise the total amount is due within 30 days (net of returns and allowances).

21. Alternative Methods of Accounting for Sales Discounts
Sold $8,000 of merchandise to various customers on December 4, 2010, with terms of 2/10, n/EOM:
Gross Price Method
Net Price Method
Accounts Receivable 8,000
Sales 8,000
Accounts Receivable 7,840
Sales 7,840
$8,000 – ($8,000 × 0.02)

22. Sales Discounts Alternative Methods of Accounting for Sales Discounts
On December 13, received payment on goods originally billed at $5,500:
Gross Price Method
Net Price Method
Cash 5,390
Sales Disc. Taken 110
Accounts Receivable 5,500
Cash 5,390
Accounts Receivable 5,390
$5,500 – ($5,500 × 0.02)

23. Alternative Methods of Accounting for Sales Discounts
Received payment on goods billed at $1,500 on December 30 (after the discount period):
Gross Price Method
Net Price Method
Cash 1,500
Accounts Receivable 1,470
Sales Discounts Not
Taken 30
Cash 1,500
Accounts Receivable 1,500
$1,500 – ($1,500 × 0.02)
Reported in “Other Items” on the income statement

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

25. Sales Returns and Allowances25
Sales Returns and Allowances
When goods are sold that are found to be defective, the customer may retain the goods and be allowed a reduction in the purchase price. This reduction is called a sales allowance.
When the customer returns good to the seller, the exchange is called a sales return.

26. Loss Contingencies
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.
The amount of the loss can be reasonably estimated.
…recorded as reductions in assets or as liabilities when both of these conditions are met.
GAAP requires that estimated losses from loss contingencies be accrued against income and…

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

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

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

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

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

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

33. Aging of Accounts Receivable
Review the unpaid invoices in each customer’s account.
Classify the invoice amounts according to the length of time the invoice has been outstanding.
Multiply the total amount in each age group by the applicable estimated uncollectible percentage.
Make a journal entry to bring the balance in Allowance for Doubtful Accounts to the amount calculated in Step 3.

34. Aging of Accounts Receivable34
Aging of Accounts Receivable

35. Aging of Accounts Receivable
Age
Under 60 days $ 53,500
60–120 days 34,500
121–240 days 3,600
241–360 days 15,700
Over 1 year ,500
$121,800
× 2
× 8
× 15
× 30
× 50 %
= $ 1,070
= ,760 =
= ,710
= ,250
$16,330
Estimated
Percentage
Uncollectible
Estimated Amounts Uncollectible

36. Aging of Accounts Receivable
If the firm has a current $1,350 debit balance, the required adjusting entry would be:
Allowance for Doubtful Accounts
1,350 (current balance)
17,680 (required adjustment)
16,330 (required ending balance)

37. 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

38. Writing Off Uncollectibles
Accounts Receivable
175,000
1,000
Allowance for Doubtful Accounts
8,750
Net realizable value = $166,250
Allowance for Doubtful Accounts 1,000
Accounts Receivable 1,000
A customer’s account totaling $1,000 is determined to be uncollectible.

39. Net Realizable Value Write-off Before Write-off After Write-off39
Net Realizable Value
Write-off
Before
Write-off
After
Write-off
Accounts receivable
Less: Allowance for
doubtful accounts
Net realizable value
$175,000
(8,750)
$166,250
$(1,000)
1,000
$174,000
(7,750)
$166,250

40. Collection of an Account Previously Written Off
Later, a payment for $300 is received from the account that was written off in the previous slide.
Accounts Receivable 300
Allowance for Doubtful Accounts 300
Cash 300
Accounts Receivable 300

41. Average Net Receivables41
Ratio Analysis
Activity Ratios
Receivables turnover indicates how many times receivables are “turned over” or collected each period.
Net Credit Sales
Average Net Receivables

42. Ratio Analysis Activity Ratios42
Ratio Analysis
Activity Ratios
Receivables turnover indicates how many times receivables are “turned over” or collected each period.
$35,510
($5,032 + $4,707) 2
365
7.29
= 7.29 times or 50.1 days

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

44. Accounts Receivable Financing Agreements44
Accounts Receivable Financing Agreements

45. Financing with Accounts Receivable

46. 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.

47. Assignment
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.

48. Assignment
On December 1, 2010, the Trussel Company assigns $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.
Cash 47,500
Assignment Service Charge Expense 500
Notes Payable 48,000
($60,000 × 0.80) – $500
$60,000 × 0.80
Accounts Receivable Assigned 60,000
Accounts Receivable 60,000

49. Assignment
On December 31, 2010, Trussel collects $10,000 on assigned accounts. This amount along with the 12% interest for 1 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 × 0.12 × 1/12

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

51. Factoring
Farber 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.
Cash 60,000
Receivables from Factor 8,000
Factoring Expense 12,000
Accounts Receivable 80,000
($80,000 × .90) – $12,000
$80,000 × 0.10
$80,000 × 0.15

52. Credit Card Sales
Many retail companies accept national credit cards, such as VISA, MasterCard, American Express, and Diner’s Club.
The retailer either deposits the credit card receipts at the bank or receives an electronic transfer of funds from the credit card company.
The retailer is assessed a service charge by the credit card company.
This charge is accounted for as an operating expense.

53. Credit Card Sales
Assume that Kerns Shoes sold $1,500 of merchandise on credit, which was billed to a national credit card company. If the collection fee is 5%, Kerns makes the following journal entry:
Cash 1,425
Credit Card Expense 75
Sales 1,500

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

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

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

57. Notes Receivable Interest-Bearing
Received a $5,000, 60-day, 12% note on October 1, 2010:
Notes Receivable 5,000
Sales 5,000
Received maturity value on December 1, 2010:
Cash 5,100
Notes Receivable 5,000
Interest Revenue 100
$5,000 × 0.12 × 60/360

58. Non-Interest-Bearing
Notes Receivable
Non-Interest-Bearing
Received a $5,100, 60-day, non-interest-bearing note on October 1, 2010:
Notes Receivable 5,100
Interest Revenue 100
Sales 5,000
Received maturity value on December 1, 2010:
Cash 5,100
Notes Receivable 5,100

59. Notes Receivable Discounted
On August 31, 2010, 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%.

60. Notes Receivable Discounted
Face value of note $ 5,000.00
Interest to maturity ($5,000 × 0.12 × 90/360)
Maturity value of note $ 5,150.00
Discount ($5,150 × 0.14 × 60/360) (120.17)
Proceeds $ 5,029.83
Accrued interest revenue: $50 ($5,000 × 0.12 × 30/360)
Book value of note ($5,000 + $50) (5,050.00)
Loss from discounting of note $

61. Notes Receivable Discounted
August 31, 2010
Cash
Loss from Discounting of Note 20.17
Notes Receivable Discounted 5,000.00
Interest Revenue
October 30, 2010
Notes Receivable Discounted 5,000.00
Notes Receivable 5,000.00

62. Notes Receivable Discounted
Assume instead that on November 2, 2010, 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

63. IFRS vs. U.S. GAAP Same Different Cash and cash equivalents63
IFRS vs. U.S. GAAP
Same
Cash and cash equivalents
Sales discounts
Allowance for doubtful accounts
Pledging, assignment, and factoring
Different
IFRS category loans and receivables not defined under GAAP
IFRS allows receivables to be classified as “available-for-sale”

64. Appendix: Petty Cash An employee is appointed petty cash custodian.

65. Appendix: Petty Cash
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).

66. Appendix: Petty Cash
…the vouchers are sorted into expense categories and the remaining cash is counted.
When the amount of cash in the petty cash fund becomes low 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.

67. The fund is short by $4.40 ($71.94 – $67.54).
Appendix: Petty Cash
The sorting of vouchers indicates the following costs were incurred during the month:
Office supplies $
Postage
Transportation
Miscellaneous
Total expenses $428.06
The fund is short by $4.40 ($71.94 – $67.54).

68. Appendix: 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

69. Appendix: Bank Reconciliation69
Appendix: Bank Reconciliation
Procedures for Preparing a Bank Reconciliation
Compare the deposits listed in the company’s records with the deposits shown on the bank statement.
Compare the checks listed in the company’s records with the checks shown on the bank statement.
Continued

70. Appendix: Bank Reconciliation70
Appendix: Bank Reconciliation
Procedures for Preparing a Bank Reconciliation
Identify any deposits or charges made directly by the bank that are not included in the company’s records.
Determine the effect of any errors.
Complete the bank reconciliation.

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

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

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

74. Appendix: Bank Reconciliation
Outstanding checks total $516.
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

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

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

77. Appendix: Bank Reconciliation
Customers’ checks were returned for lack of funds (NSF check), $300
Cash balance from company records $6,925
Add: Interest earned on the funds on
deposit
$7,640
Deduct: Bank service charge (9)
NSF checks (300)
Adjusted Cash Balance $7,331

78. Appendix: Bank Reconciliation
Adjusted cash balance per bank statement: $7,331
Adjusted cash balance per company records:
$7,331

79. Appendix: 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

80. C 7
hapter
The End
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