1. 1 Chapter 7 Cash, Investments, and Receivables Financial Accounting 4e by Porter and Norton

2. 2 PepsiCo Inc. Consolidated Balance Sheet (partial) ASSETS (in millions) Dec. 29 Dec. 30 2001 2000. Current Assets: Cash and cash equivalents $ 683 $1,038 Short-term investments, at cost 966 467 1,649 1,505 Accounts & notes receivable 2,142 2,129 Inventories 1,310 1,192 Prepaid expenses & other assets 752 791 Total Current Assets $5,853 $5,617 higher lower

3. 3 PepsiCo Inc. Consolidated Balance Sheet (partial) ASSETS (in millions) Current Assets: Cash and cash equivalents Short-term investments, at cost Accounts and notes receivable Inventories Prepaid expenses & other assets Total Current Assets Less Liquid Highly Liquid

4. 4 PepsiCo Inc. Consolidated Balance Sheet (partial) ASSETS (in millions) Current Assets: Cash and equivalents Key to classification as cash: readily available to pay debts

5. 5 Cash l Coin & currency l Checking, savings & money market accounts l Undeposited, cashier, and certified checks Pay to the order of: ABC Co.

6. 6 Cash Equivalents l Commercial paper l U.S. Treasury bills l Certain money market funds 123 45678910 11121314151617 18192021222324 25262829303127 123 45678910 11121314151617 18192021222324 25262829303127 123 45678910 11121314151617 18192021222324 25262829303127  Readily convertible to cash  Original maturity to investor of 3 months or less

7. 7 Cash Management l Necessary to ensure company has neither too little nor too much cash on hand l Tools: Õ Cash Flows Statement Õ Bank Reconciliations Õ Petty Cash Funds

8. 8 Cash balance, beginning of period + = Cash balance, end of period Bank Statements  Deposits  Customer notes and interest collected by bank  Interest earned  Canceled checks  NSF checks  Service charges

9. 9 Bank Reconciliation - Step 1 Deposits in Transit: Late period deposits not yet reflected on bank statement Trace deposits on bank statement to books. Identify deposits in transit. Add to bank balance.

10. Example of Reconciliation Balance per statement, June 30$ 3,308.59 Add: Deposit in transit 642.30 Bank Statement Adjustments: Deposits 10

11. 11 Bank Reconciliation - Step 2 Outstanding checks: Checks written but not yet presented to bank Trace checks cleared by bank to books. Identify outstanding checks. Subtract from bank balance. Pay to the order of: XYZ Co. ABC Co.

12. Example of Reconciliation Bank Statement Adjustments: Checks Outstanding Balance per statement, June 30 $3,308.59 Add: Deposit in transit 642.30 Deduct: Outstanding checks: Check No. 496$ 79.89 Check No. 501 213.20 Check No. 502 424.75 (717.84) Adjusted balance, June 30 $3,233.05 12

13. 13 Bank Reconciliation - Step 3 Credit memoranda: Interest earned, customer notes collected List all other additions (credit memoranda) shown on the bank statement. Add to book balance.

14. Example of Reconciliation Cash Account Adjustments: Credit Memoranda Balance per books, June 30 $ 2,895.82 Add: Note collected $500.00 Interest on note 50.00 Interest earned 15.45 Recording error, #498 54.00 619.45 14

15. 15 List all other subtractions (debit memoranda) shown on the bank statement. Subtract from book balance. Bank Reconciliation - Step 4 Debit memoranda: NSF checks, service charges, etc. Date Non-Sufficient Funds

16. Example of Reconciliation Cash Account Adjustments: Debit Memoranda Balance per books, June 30 $ 2,895.82 Add: Note collected $500.00 Interest on note 50.00 Interest earned 15.45 Recording error, #498 54.00 619.45 Deduct: NSF check $245.72 Collection fee – note 16.50 Service charge 20.00 (282.22) Adjusted balance, June 30 $ 3,233.05 16

17. 17 Bank Reconciliation - Step 5 Identify errors made by the bank or the company in recording transactions during the period.

18. 18 Bank Reconciliation - Step 6 Use the information collected in Steps 1 - 5 to prepare the bank reconciliation. Bank Reconciliation Balance per bank$$$ : Adjusted balance$$$ Balance per books$$$ : Adjusted balance$$$ Adjusted balances for book and bank must agree

19. Example of Reconciliation Balance per statement, June 30 $ 3,308.59 : Adjusted balance, June 30 $ 3,233.05 Bank Statement Adjustments Balance per books, June 30 $ 2,895.82 : Adjusted balance, June 30 $ 3,233.05 Cash Account Adjustments 19

20. 20 Bank Reconciliation Adjusting Entries Bank Reconciliation Balance per bank$$$ : Adjusted balance$$$ Balance per books$$$ : Adjusted balance$$$ Book adjustments are the basis for adjusting entries

21. 21 Bank Reconciliation Adjusting Entries Dr.Cr. Accounts Receivable245.72 Collection Fee Expense 16.50 Rent Expense - Lockbox 20.00 Cash337.23 Notes Receivable500.00 Interest revenue 65.45 Supplies 54.00 To record bank reconciliation adjustments.

22. 22 Petty Cash RECEIPT Paycheck for Date Dept. of Treasurer Jane Doe Dr. Cr. RECEIPT

23. 23 Prepare the journal entry to record the petty cash fund replenishment Petty Cash Transactions for Keese Corporation: Original Fund Balance$200.00 Petty Cash Expenditures: U.S. Post Office 55.00 Overnight Delivery Service 69.50 Office Supply Express 45.30 Coin & currency per count 26.50

24. 24 Accounting for Petty Cash * $200.00 - ($55.00 + 69.50 + 45.30 + 26.50) = $200.00 - $196.30 = $3.70 short Journal Entry to Replenish Fund: Postage Expense55.00 Delivery Expense69.50 Office Expense45.30 Cash Over and Short* 3.70 Cash 173.50

25. Investment in CD Purchase of investment:Dr. Cr. Short-Term Investments – CD 100,000 Cash 100,000 Invest $100,000 in a 120-day CD. Principal plus interest @ 6% due upon investment maturity. Example: 25

26. Year-end adjusting entry : Dr.Cr. Interest Receivable 1,500 Interest Revenue 1,500 Investment in CD Interest = Principal x Rate x Time $1,500 = $100,000 x 6% x 90/360 26 October – 29 days November – 30 days December – 31 days 90 days

27. Upon investment maturity: Dr. Cr. Cash102,000 Short-Term Investments - CD 100,000 Interest Receivable 1,500 Interest Revenue* 500 Investment in CD 27 Interest earned in January: $100,000 x 6% x 30/360 = $500

28. 28 Reasons Companies Invest in Other Companies l Short-term cash excesses l Long-term investing for future cash needs l Exert influence over investee l Obtain control of investee

29. 29 Accounting for Common-Stock Investments No significant influence 0%20% Fair Value Method Significant influence 50% Equity Method Control 100% Consolidated F/S Our Focus

30. 30 Investments Without Significant Influence l Held-to-Maturity Securities l Trading Securities l Available-for-Sale Securities Use fair value method to account for these investments

31. 31 Held-to-Maturity Securities l Bonds of other companies l Intent and ability to hold until maturity $100,000 9% Bond Due 2019

32. 32 Held-to-Maturity Securities On 1/1/04, Homer buys: l $100,000; 10% bonds @ face value. l Bonds mature December 31, 2013 l Interest payable semiannually. Example: Record the purchase of the bonds and receipt of the first interest payment

33. 33 Recording Bond Purchase Dr. Cr. Investment in Bonds 100,000 Cash100,000 To record the purchase of Simpson bonds. $100,000 10% Bond Due 2014

34. 34 Recording Receipt of Interest Payment Dr. Cr. Cash ($100,000 x 10% x 1/2) 5,000 Interest Income 5,000 To record interest income on Simpson bonds. Interest for Investor Borrower

35. 35 Recording Bond Sale Dr. Cr. Cash 99,000 Loss on Sale of Bonds 1,000 Investment in Bonds 100,000 To record sale of Simpson bonds. Interest for Investor Borrower

36. 36 Trading Securities l Purchased to generate profit from short-term appreciation Stocks Bonds 123 45678910 11121314151617 18192021222324 25262829303127 l Intent to sell in near term (classified as current assets)

37. 37 Trading Securities Income Statement l Unrealized gain or loss recognized on income statement l At end of each period, security is “marked to market” Stocks Bonds

38. 38 Trading Securities Dexter Corp. holds the following trading securities at 12/31/04: Cost Market Menlo preferred stock$25,000$27,500 Canby common stock 40,000 39,000 Example: Record the unrealized gain or loss at 12/31/04.

39. 39 Recording Unrealized Gain or Loss on Trading Securities Dr. Cr. Investment in Menlo Preferred Stock2,500 Investment in Canby Common Stock 1,000 Unrealized Gain - Trading Securities* 1,500 To adjust trading securities to fair value. * income statement account

40. 40 Available-for-Sale Securities l Securities not classified as held- to-maturity or trading Stocks Bonds l Can be classified as short-term or long- term, depending on expected date of disposition

41. 41 Available-for-Sale Securities Balance Sheet l Unrealized gain or loss accumulated in stockholders’ equity account l Also “marked to market” at end of accounting period Stocks Bonds

42. 42 Available-for-Sale Securities Lenox Corp. holds the following AFS securities at 12/31/04: CostMarket Adair preferred stock$15,000$16,000 Casey common stock 35,000 32,500 Example: Record the unrealized gain or loss at 12/31/04.

43. 43 Recording Unrealized Gain or Loss on AFS Securities Dr. Cr. Unrealized Gain/Loss – AFS Securities*1,500 Investment in Adair Preferred Stock1,000 Investment in Casey Common Stock 2,500 To adjust available-for-sale (AFS) securities to fair value. * part of Stockholders’ Equity

44. 44 Accounting for Investments Without Significant Influence RecognizeReportReport FV Categories as incomeon BS atchanges on Held-to-maturityinterestcostN/A Tradinginterest, div.fair valueIncome stmt. Avail.-for-Saleinterest, div.fair valueBalance sheet

45. 45 Credit Sales l Slows inflow of cash l Risk of uncollectible accounts Trade Credit Retail Customer Receivables Terms: 2/10, net 30 Sales Invoice

46. 46 Menkhaus Corporation Sample Accounts Receivable Subsidiary Ledger Total Due ABC Distributors$ 25 HIJ Distributors 336 : XYZ Distributors 108 $ 1,105 Gross Accounts Receivable In 000s

47. 47 Winnebago Industries, Inc. Consolidated Balance Sheet (partial) 2001 2000 Receivables, less allowance for doubtful accounts ($244 and $1,168, respectively) $20,183 $32,045 Net Realizable Value Estimated Uncollectible Accounts

48. 48 Accounting for Bad Debts: Direct Write-off Method Journal entry to record write-off in period determined to be uncollectible: Bad Debt ExpenseXXX Accounts Receivable – DexterXXX Period of Sale Future Period charged with expense of bad debt write-off 123 45678910 11121314151617 18192021222324 25262829303127

49. 49 Accounting for Bad Debts: Allowance Method Period of Sale Estimated bad debt expense (and allowance account) recorded in same period 123 45678910 11121314151617 18192021222324 25262829303127

50. 50 Roberts Corp. Partial Balance Sheet Current assets: Accounts receivable $ 250,000 Less: allowance for doubtful accounts ( 6,000) Net accounts receivable $ 244,000 Balance Sheet Presentation - Allowance Method

51. 51 Accounting for Bad Debts: Allowance Method Journal entry to record estimated bad debt expense in period of sale: Bad Debts ExpenseXXX Allowance for Doubtful Accts XXX I estimate...

52. 52 Accounting for Bad Debts: Allowance Method Journal entry to record bad debt write-off in period determined uncollectible: Allowance for Doubtful Accts XXX Accounts Receivable – Z Co. XXX Bankrupt

53. 53 Approaches to Allowance Method % of Net Credit Sales % of Accounts Receivable »Aging Method Income Statement Approach Balance Sheet Approach

54. 54 Example: Percentage of Net Credit Sales Method Assume prior years’ net credit sales and bad debt expense is as follows: YearNet credit salesBad debts 1999$1,250,000$ 26,400 2000 1,340,000 29,350 2001 1,200,000 23,100 2002 1,650,000 32,150 2003 2,120,000 42,700 $7,560,000$153,700

55. 55 Example: Percentage of Net Credit Sales Method Develop bad debt percentage: $153,700 $7,560,000 use 2% = 0.02033

56. 56 Percentage of Net Credit Sales Method 2004 Net credit sales $2,340,000 (given) Bad debt percentage 2% Bad debts expense 46,800 Example: Journal entry: Bad Debts Expense46,800 Allowance for Doubtful Accts 46,800

57. Aging Method 57 Est. Percent Est. Amount Category Amount Uncollectible Uncollectible Current $ 85,600 1%$ 856 Past due: 1-30 days 31,200 4% 1,248 31-60 days 24,50010% 2,450 61-90 days 18,00030% 5,400 90+ days 9,20050% 4,600 Totals $168,500$14,554

58. 58 Aging Method Allowance for Doubtful Accts $1,230 Assume Allowance account has a beginning credit balance of $1,230: Required adjustment 13,324 $14,554 Desired ending balance from aging schedule

59. 59 From T- account analysis Aging Method Example Dr. Cr. Bad Debts Expense 13,324 Allowance for Doubtful Accounts 13,324 To record estimated bad debts.

60. 60 Comparison of Methods % of Net Sales Allowance Account XX Computes bad debt expense (of which the credit is recorded here) Aging Allowance Account XX Computes ending balance in the allowance account

61. 61 Accounts Receivable Turnover Net Credit Sales Average Accounts Receivable Indicates how quickly a company is collecting (i.e., turning over) its receivables

62. 62 Accounts Receivable Turnover l Too fast credit policies too stringent; may be losing sales l Too slow credit department not operating effectively; dissatisfied customers

63. 63 Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on March 13, 2005. Date: December 13, 2004 Signed:_________ Interest-Bearing Promissory Note Baker Corporation Maturity Date Principal Interest

64. 64 In exchange for $9,000 applied toward my purchase today, I promise to pay $9,900 in six months. Date: November 1, 2004 Signed:_________ J.E. Privett Non-Interest-Bearing Promissory Note Effective interest rate on note = 20% $900 12 $9,000 x 6

65. 65 12/31/044/30/05 Notes receivable$ 9,900$ 9,900 Less: Discount on notes receivable ( 600) - 0 - $ 9,300$ 9,900 Balance Sheet Presentation of Discounted Notes Discount transferred to interest revenue over life of note Upon Maturity

66. 66 Accelerating Cash Inflow From Sales l Sales Discounts l Credit Card Sales l Discounting Notes Receivable

67. 67 Credit Card Sales l Competitive necessity l Credit card company: » Charges fee » Assumes risk of nonpayment

68. 68 Discounting Notes Receivable l Sell note prior to maturity date for cash l Receive less than face value (i.e., discounted amount) l Can be sold with or without recourse Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on December 31, 1998. Date: January 1, 1998 Signed:_________ Baker Corporation

69. Operating Activities Net incomexxxx Increase in accounts receivable - Decrease in accounts receivable + Increase in notes receivable - Decrease in notes receivable + Investing Activities Purchases of held-to-maturity and available-for-sale securities - Sales/maturities of held-to-maturity and available-for-sale securities + Financing Activities Liquid Assets and the Statement of Cash Flows - Indirect Method 69

70. 70 End of Chapter 7