1. 1 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

2. Short-Term Investments and Receivables Chapter 5 2 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

3. Account for short-term investments 3 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

4. Short-Term Investments Also called marketable securities Easily convertible into cash ▫Next most liquid asset after cash Expected to be held one year or less 4 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

5. Short-Term Investment Categories 5 Trading securities Covered in this section Available- for-sale securities Covered in Chapter 8 Held-to- maturity securities Covered in Chapter 8 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

6. Trading Securities Held for a short time and then sold ▫If market price of investment increases, a gain results ▫If market price of investment decreases, a loss results Can be debt or equity securities of another company Earn interest or dividend revenue 6 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

7. Accounting for Trading Securities Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 7 JOURNAL DateAccounts and explanationDebitCredit Investment in ABC stock Cash Purchased investment Cash Dividend Revenue Received cash dividend

8. Unrealized Gains and Losses Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 8 If market value has increased If market value has decreased Trading securities are reported on the balance sheet at current market value

9. Adjusting Trading Securities to Market JOURNAL DateAccounts and explanationDebitCredit Investment in ABC stock Unrealized gain on investments Adjusted investment to market value JOURNAL DateAccounts and explanationDebitCredit Unrealized loss on investment Investment in ABC stock Adjusted investment to market value If market value increases over period If market value decreases over period 9 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

10. Balance Sheet & Income Statement Reporting 10 Balance SheetIncome Statement Current assets:Revenues $$$ Cash $$$ Expenses $$$ Short-term investments, at fair value $$$ Other revenue, gains and (losses): Accounts receivable $$$ Interest revenue $$$ Dividend revenue $$$ Unrealized gain on investments $$$ Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

11. Realized Gains and Losses Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 11 If sales price > carrying amount If sales price < carrying amount Only reported when investment is sold

12. Exercise 5-21A Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 12 1. Trading securities – company intends to hold a short period and then sell JOURNAL DateAccounts and explanationDebitCredit 12-15 Purchased investment 12-31 Adjusted investment to market value

13. Exercise 5-21A Eastern Company Balance Sheet December 31, 2012 Current assets: Short-term investments at fair value Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. Eastern Company Income Statement For the year ending December 31 Other income, revenue,(loss): Unrealized gain on investments 13

14. Apply GAAP for proper revenue recognition Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 14

15. Revenue Recognition Revenue recognized when earned ▫Seller has transferred good or service to customer ▫Price is fixed or determinable ▫Collection reasonably assured Amount is cash value of goods or services transferred Impacted by shipping terms and payment incentive 15 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

16. Shipping Terms FOB Shipping Point FOB Destination Ownership changes hands Revenue recognized ▫When goods leave seller’s shipping dock Ownership changes hands Revenue recognized ▫At point of delivery to customer 16 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

17. Sales Discounts Offered to customers to speed up cash flow 17 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 2/10, n/30 2% discount if paid within 10 day Full amount due in 30 days

18. Sales Returns & Allowances Right to return unsatisfactory or damage merchandise 18 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. JOURNAL DateAccounts and explanationDebitCredit Sales returns and allowances Accounts receivable Purchased investment

19. Net Revenue Gross revenue - Sales discounts - Sales returns and allowances = Net revenue 19 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

20. Account for and control for accounts receivable 20 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

21. Receivables Third most liquid asset Monetary claims against others Acquired mainly by: ▫selling goods and services (accounts receivable) ▫lending money (notes receivable) 21 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

22. Accounts Receivable Amounts collectible from customers Balance in general ledger ▫Control account: summarizes total amount due from all customers Subsidiary ledger ▫Separate account for each customer 22 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

23. 23 Accounts receivable $5,000 Customer A Customer B $2,000 $1,800 Customer C $1,200 General LedgerAccounts Receivable Subsidiary Ledger Total $5,000

24. Notes Receivable More formal than accounts receivable Written promise to pay a sum at the maturity date ▫Plus interest Also called promissory notes 24 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

25. Internal Control: Collections on Account Separate cash-handling and cash accounting duties ▫Bookkeeper should not handle cash  Should record amounts from remittance advices ▫Separate employee should open incoming mail and make deposit Another option: ▫Lockbox system 25 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

26. Risks of Selling on Credit IssuesPlan of action What are the benefits and costs of extending credit to customers? Benefit – increase in sales Cost – risk of not collecting Extend credit to only creditworthy customers Run a credit check on prospective customers Separate cash-handling and accounting duties to keep employees from stealing cash from customers Design internal control system to separate duties Pursue collection from customers to maximize cash flow Keep a close eye on customers. Send additional statements to slow-paying customers 26 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

27. Evaluate collectibility using the allowance method for uncollectible accounts 27 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

28. Uncollectible Receivables Benefit of selling on credit Cost of selling on credit Customers that do not have cash available can buy on credit Sales and profits increase Company cannot collect from some customers This cost is called “Uncollectible-account expense”, “Doubtful- account expense”, or “Bad debt expense ” 28 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

29. The Allowance Method Records collection losses based on company’s collection experience Estimates Uncollectible-Account Expense Also sets up Allowance for Uncollectible Accounts  Contra-account to Accounts Receivable  Shows amount of receivables expected not to be collected. 29 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

30. Net Realizable Value Balance Sheet Current assets: Accounts receivable$100,000 Less: Allowance for uncollectible accounts(5,000) Accounts receivable, net$95,000 30 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. Balance Sheet Current assets: Accounts receivable, less allowance of $5,000$95,000

31. Methods to Estimate Uncollectibles Percent-of- sales Aging-of- receivables 31 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

32. Percent-of-Sales Method Emphasizes matching concept 32 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. Revenue JOURNAL DateAccounts and explanationDebitCredit Uncollectible–Account Expense Allowance for Uncollectible Accounts Recorded expense for the year Estimated % uncollectible Uncollectible- Account Expense

33. Aging-of-Receivables Focuses on proper valuation of accounts receivable on the balance sheet Individual customer balances analyzed based on time outstanding ▫Aging schedule Allowance for Uncollectible Accounts adjusted to equal amount from aging schedule 33 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

34. 34 Age of Account Customer 1-30 days 31-60 days 61-90 days Over 90 days Total Balance Customer A$100$500$600 Customer B400 All others5,0001,5006004007,500 Totals$5,100$1,900$1,100$400$8,500 Est. percent uncollectible1%3%8%20% Allowance balance should be:$51$57$88$80$276 Allowance for Uncollectible Accounts $31 Balance before adjustment $276 $245 Adjustment needed Ending balance equals aging schedule

35. Aging-of-Receivables 35 JOURNAL DateAccounts and explanationDebitCredit Uncollectible-Account expense245 Allowance for Uncollectible Accounts245 Recorded expense for the year Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

36. Writing Off Uncollectible Accounts Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. JOURNAL DateAccounts and explanationDebitCredit Allowance for uncollectible accounts900 Accounts Receivable900 Write off uncollectible receivable Allowance for Uncollectible Accounts Accounts Receivable $50,000 $3,000 Bal. $900 $49,100 $2,100 36

37. Impact of Write-Off Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. Balance Sheet – Before Write Off Current assets: Accounts receivable$50,000 Less: Allowance for uncollectible accounts(3,000) Accounts receivable, net$47,000 Balance Sheet – After Write Off Current assets: Accounts receivable$49,100 Less: Allowance for uncollectible accounts(2,100) Accounts receivable, net$47,000 37

38. Comparing Allowance Methods Approaches Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. Percent-of-Sales Aging-of-Receivables Adjusts Allowance for Uncollectible Accounts BY TO The amount of UNCOLLECTIBLE ACCOUNTS EXPENSE The amount of UNCOLLECTIBLE ACCOUNTS EXPENSE The amount of UNCOLLECTIBLE ACCOUNTS RECEIVABLE The amount of UNCOLLECTIBLE ACCOUNTS RECEIVABLE 38

39. Exercise 5-25A Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. JOURNAL DateAccounts and explanationDebitCredit 39

40. Exercise 5-25A Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. JOURNAL DateAccounts and explanationDebitCredit Accounts receivable Allowance for Uncollectible Accounts $34,000 $3,000 Bal. Sales PaymentsBal. Write-offs Adj. 40

41. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. Balance Sheet Current assets: Accounts receivable Less: Allowance for uncollectible accounts Accounts receivable, net Exercise 5-25A 41

42. Direct Write-Off Method Waits until a specific account is uncollectible to record the expense Inferior to Allowance method ▫Receivables reported at full amount  Assets overstated on Balance Sheet ▫Poor matching of uncollectible-account expense against revenue Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. JOURNAL DateAccounts and explanationDebitCredit Uncollectible-Account Expense Accounts Receivable Write off customer account 42

43. Computing Cash Collections from Customers Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 43 Accounts Receivable Ending balance Sales on credit Write-offs of uncollectibles Collections from customers Beginning balance ?

44. Account for notes receivable 44 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

45. Notes Receivable Can be current or long-term assets Terms: 45 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. CreditorParty to whom money is owed; Lender DebtorParty that borrowed and owes money; Maker, borrower InterestCost of borrowing money; stated as annual percentage rate Maturity dateDate when debtor must pay note Maturity valueSum of principal and interest PrincipalAmount borrowed by debtor TermLength of time from when note was signed to when payment must be made

46. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 46 AmountDate For value received, I promise to pay to the order of Second National Bank Omaha, Nebraska Dollars On plus interest at the annual rate of 6 percent $3,000June 1, 2012 Three thousand and no/100s-------------------------------- March 1, 2011 Patricia Alexander PROMISSORY NOTE PrincipalDate Interest Starts Payee (Creditor) Principal Maturity Date Maker (Debtor)

47. Accounting for Notes Receivable Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 47 JOURNAL DateAccounts and explanationDebitCredit 2012 6-1Notes Receivable3,000 Cash3,000 12-31Interest Receivable105 Interest Revenue105 2011 3-1Cash3,135 Notes Receivable3,000 Interest Receivable105 Interest Revenue30

48. Interest Interest rates are usually expressed as an annual percent For time periods less than a year, a fraction is used ▫Months/12 Often interest is computed based on days ▫Denominator would be days/365 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 48

49. Show how to speed up cash flow from receivables 49 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

50. Rapid Cash Flow Allows companies to pay current liabilities faster and finance new projects Strategies to shorten credit cycle: ▫Sales discounts ▫Interest on older accounts ▫Effective credit and collection procedures ▫Emphasize credit and bank card sales 50 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

51. Credit card or Bankcard Sales Increases sales Retailer charged fee 51 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. JOURNAL DateAccounts and explanationDebitCredit Cash Credit Card Discount Expense Sales 2% of sale

52. Factoring Receivables Company sells receivables to a factor Factor pays discounted price Benefit to company ▫Immediate cash Disadvantage to company ▫Expense and loss of control Used by company with weak or insufficient credit history 52 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

53. Evaluate liquidity using two new ratios 53 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

54. Quick (or Acid-Test) Ratio Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 54 Cash + Short-term investments + Net current receivables Total current liabilities

55. Days’ Sales in Receivables Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 55 Average daily sales Net sales 365 Days’ sales in receivables Average receivables One day’s sales (Beginning net receivables + Ending net receivables)/2

56. Short Exercise 5-19 Acid-test ratio Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 56

57. Short Exercise 5-19 365 Days’ sales in receivables (Beginning net receivables + Ending net receivables)/2 = Days’ sales in receivable 57 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. Average daily sales

58. 58 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

59. 59