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Cash and Receivables C hapter 7 An electronic presentation by Norman Sunderman Angelo State University An electronic presentation by Norman Sunderman Angelo.

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Presentation on theme: "Cash and Receivables C hapter 7 An electronic presentation by Norman Sunderman Angelo State University An electronic presentation by Norman Sunderman Angelo."— Presentation transcript:

1 Cash and Receivables C hapter 7 An electronic presentation by Norman Sunderman Angelo State University An electronic presentation by Norman Sunderman Angelo State University COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Intermediate Accounting 10th edition Nikolai Bazley Jones

2 2 Cash is the resource on hand to meet planned expenditures and emergency situations. Cash

3 3 Coins and currency Checking accounts Savings accounts Negotiable checks Bank drafts Included in CashExcluded from Cash Certificates of deposit Bank overdrafts Postdated checks Travel advances Postage stamps

4 4 Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and near their maturity (90 days) when purchased. Cash Equivalents

5 5 Cash Management  The person opening the mail or the sales person 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. Control Over Receipts

6 6  Make all payments by check (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 statements with the company’s accounting records. Control Over Payments Cash Management

7 7 Receivables Trade Receivables Revenue Recognition and Valuation Normal circumstances Right of return Valuation Cash discounts Sales returns and allowances Uncollectible accounts Financing arrangements Recording and Reporting Accounts Receivable Interest- bearing Non-interest- bearing Discounted Recording and Reporting Notes Receivable

8 8 1. The sales price is fixed or determinable at the date of sale. 2. The buyer has paid or will pay the seller, and the obligation is not contingent upon the resale of the product. 3. The buyer’s obligation to the seller would not be changed by theft or damage to the product. Each of the following criteria must be satisfied when the right of return exists in order to recognize revenue at the time of sale. ContinuedContinued Receivables

9 9 4. The buyer has an economic substance apart from the seller. 5. The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer. 6. The seller can reasonably estimate the amount of future returns. Right of Return Receivables

10 10 Accounts Receivable  Prenumbered sales invoices.  Separation of the sales function from the cash collection responsibilities. Internal Control Procedures for Accounts Receivable

11 11 Sales Discounts  Increase sales  Encourage prompt payment  Increase likelihood of collection

12 12 2% discount if payment is made within 10 days, otherwise the total amount is due within 30 days (net of returns and allowances) 2/10, n/30 Calculation of Sales Discounts

13 13 Loss Contingencies 1. 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. 2. The amount of the loss can be reasonably estimated. 1. 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. 2. The amount of the loss can be reasonably estimated. FASB Statement No. 5 requires that estimated losses from loss contingencies be accrued against income and... … recorded as reductions in assets or as liabilities when both of these conditions are met.

14 14 Estimated Bad Debts Method Bad debts can be estimated based on sales or on accounts receivable.

15 15 1.Relationship to sales (income statement approach): Percentage of sales Percentage of net credit sales 2.Relationship to accounts receivable (balance sheet approach): Percentage of outstanding accounts receivable Aging of accounts receivable Estimated Bad Debts Method

16 16 Percentage of Sales If a company’s net credit sales during the year were $525,000 and bad debts historically amount to 2% of net credit sales, what is the required adjusting entry? Bad Debt Expense10,500 Allowance for Doubtful Accounts10,500 Estimated Bad Debts Method $525,000 x 0.02

17 17 Percentage of Outstanding Accounts Receivable If a company has determined that there has been a 4% relationship between actual bad debts and the year-end account receivable balance($475,000), what would be the required adjusting entry? Allowance for Doubtful Accounts 4,500 (current balance) $475,000 x 0.04 = $19,000 Estimated Bad Debts Method

18 18 Percentage of Outstanding Accounts Receivable Allowance for Doubtful Accounts 4,500 (current balance) 19,000 (required balance) 14,500 (required adjustment) If a company has determined that there has been a 4% relationship between actual bad debts and the year-end account receivable balance($475,000), what would be the required adjusting entry? Estimated Bad Debts Method 14,500 (required adjustment)

19 19 Percentage of Outstanding Accounts Receivable If a company has determined that there has been a 4% relationship between actual bad debts and the year-end account receivable balance($475,000), what would be the required adjusting entry? Bad Debt Expense14,500 Allowance for Doubtful Accounts14,500 Estimated Bad Debts Method

20 20 Aging of Accounts Receivable 1. Gather the unpaid invoices in each customer’s account. 2. Classify the invoice amounts according to the length of time the invoice has been outstanding. 3. Multiply the total amount in each age group by the applicable estimated uncollectible percentage. 4. Make a journal entry to bring the balance in Allowance for Doubtful Accounts to the amount calculated in Step 3. Examine Example 7-2 carefully.

21 21 Writing Off Uncollectibles Allowance for Doubtful Accounts 8,750 Accounts Receivable 175,000 A customer’s account totaling $1,000 is determined to be uncollectible. Allowance for Doubtful Accounts1,000 Accounts Receivable1,000 Net realizable value = $166,250 1,000

22 22 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 Receivable300 Allowance for Doubtful Accounts300 Cash300 Accounts Receivable300

23 23 Accounts Receivable Financing Agreements  Pledging  Assigning  Factoring  Pledging  Assigning  Factoring There are three basic forms of financing agreements to obtain cash from accounts receivable.

24 24 When a company pledges its accounts receivable, it is using these accounts as collateral for a loan, and the servicing activities remain its responsibility. Pledging

25 25 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. Assignment of Accounts Receivable

26 26 When a company factors its accounts receivable, it sells individual accounts to a financial institution (called a factor). Factoring

27 27 Credit Card Sales  Many retail companies accept national credit cards, such as VISA, MasterCard, American Express and Diners’ Club.  The retailer either deposits the slips at the bank or receives an electronic transfer of funds from the credit card company.  The retailer is assessed a charge by the credit card company.  This charge is accounted for as an operating expense.

28 28 Credit Card Sales Assume that Kern Company sold $1,500 of merchandise on credit, which was billed to a national credit card company. If the collection fee is 5%, Kern Company makes the following journal entry: Cash1,425 Credit Card Expense75 Sales1,500

29 29 A note receivable is an unconditional written agreement to collect a certain sum of money on a specific date. Notes Receivable

30 30 Notes receivable generally have two attributes that are not found in accounts receivable. Notes Receivable

31 31 1. They are negotiable instruments, which means that they are legally and readily transferable among parities and may be used to satisfy debts by the holders of these instruments. 2. They usually involve interest, requiring the separation of the receivables into its principal and interest components. Notes Receivable

32 32 Interest-Bearing Received a $5,000, 60-day, 12% note on October 1, 2007. Notes Receivable5,000 Sales5,000 Received maturity value on December 1, 2007. Cash5,100 Notes Receivable5,000 Interest Revenue100 Notes Receivable $5,000 x 0.12 x 60/360 $5,000 x 0.12 x 60/360

33 33 Non-Interest-Bearing Received a $5,100, 60-day, non-interest-bearing note on October 1, 2007. Notes Receivable5,100 Interest Revenue100 Sales5,000 Received maturity value on December 1, 2007. Cash5,100 Notes Receivable5,100 Notes Receivable

34 34 On August 31, 2007, 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%. Notes Receivable Discounted

35 35 1. Face value of note$5,000.00 2. Interest to maturity ($5,000 x 0.12 x 90/360) 150.00 3. Maturity value of note$5,150.00 4. Discount ($5,150 x 0.14 x 60/360) (120.17) 5. Proceeds$5,029.83 6. Accrued interest revenue: $50 7. Book value of note ($5,000 + $50)(5,050.00) 8. Loss from discounting of note$ 20.17 Notes Receivable Discounted

36 36 October 30, 2007 Notes Receivable Discounted5,000.00 Notes Receivable5,000.00 Cash5029.83 Loss from Discounting of Note20.17 Notes Receivable Discounted5,000.00 Interest Receivable50.00 August 31, 2007 Interest Receivable50.00 Interest Revenue50.00 Notes Receivable Discounted

37 37 Assume instead that on November 2, 2007, the bank notified Kasper that the note had not been paid and also charged Kasper a $10 fee. Notes Receivable Dishonored5,160 Notes Receivable Discounted5,000 Notes Receivable5,000 Cash5,160 Notes Receivable Discounted

38 38 Appendix: Petty Cash First: An employee is appointed petty cash custodian. Petty Cash500 Cash500 Petty Cash500 Cash500

39 39 Second: 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). Appendix: Petty Cash

40 40 Third: When the amount of cash in the petty cash fund becomes low and/or 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. …the vouchers are sorted into expense categories and the remaining cash is counted. Appendix: Petty Cash

41 41 The sorting of vouchers indicated the following costs were incurred during the month: Office supplies$ 34.16 Postage178.00 Transportation132.14 Miscellaneous 83.76 Total expenses$428.06 The sorting of vouchers indicated the following costs were incurred during the month: Office supplies$ 34.16 Postage178.00 Transportation132.14 Miscellaneous 83.76 Total expenses$428.06 The fund is short $4.40 ($71.94 - $67.54). Appendix: Petty Cash

42 42 The company records the actual expenses and the amount needed to replenish the fund. Office Supplies Expense34.16 Postage Expense178.00 Transportation Expense132.14 Miscellaneous Expense83.76 Cash Short and Over4.40 Cash432.46 The company records the actual expenses and the amount needed to replenish the fund. Office Supplies Expense34.16 Postage Expense178.00 Transportation Expense132.14 Miscellaneous Expense83.76 Cash Short and Over4.40 Cash432.46 Appendix: Petty Cash

43 43 Appendix: Bank Reconciliation  Outstanding checks  Deposits in transit  Charges made by the bank  Deposits made directly by the bank  Errors Causes of the difference between the cash balance and the company’s bank statement balance.

44 44 Cash balance from bank statement $7,218 Cash balance from company records $6,925 Appendix: Bank Reconciliation

45 45 Cash balance from bank statement$7,218 Add: Receipts recorded on the company’s records but not reported on the bank statement. 629 $7,847 Deposits in transit and cash received but not yet deposited totaled $629. Cash balance from bank statement$7,218 Appendix: Bank Reconciliation

46 46 Outstanding checks totaled $516. Appendix: Bank Reconciliation Cash balance from bank statement$7,218 Add: Receipts recorded on the company’s records but not reported on the bank statement. 629 $7,847 Deduct:Outstanding checks (516) Adjusted Cash Balance$7,331

47 47 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 bank 715 $7,640 Appendix: Bank Reconciliation

48 48 Cash balance from company records$6,925 Add: Notes receivable ($700) and interest ($15) collected by bank 715 $7,640 Deduct:Bank service charge(9) Appendix: Bank Reconciliation Bank service charge, $9.

49 49 Cash balance from company records$6,925 Add: Interest earned on the funds on deposit. 715 $7,640 Deduct:Bank service charge(9) NSF checks(300) Adjusted Cash Balance$7,331 Customers’ checks were returned for lack of funds (NSF check), $300. Appendix: Bank Reconciliation

50 50 Adjusted cash balance per bank statement $7,331 Adjusted cash balance per company records $7,331 Appendix: Bank Reconciliation

51 51 Journal Entries Cash715 Notes Receivable (note collected)700 Interest Revenue (interest collected)15 Miscellaneous Expense (bank service charge)9 Accounts Receivable (NSF check)300 Cash309 Appendix: Bank Reconciliation

52 52 C hapter 7 Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.


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