1 Practical Issues in Cash and Receivable Instructor Adnan Shoaib PART II: Corporate Accounting...

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Practical Issues in Cash and Receivable

InstructorAdnan Shoaib

PART II: Corporate Accounting Concepts and Issues

Lecture 08

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1. Identify items considered cash.

2. Indicate how to report cash and related items.

3. Define receivables and identify the different types of receivables.

4. Explain accounting issues related to recognition of accounts receivable.

5. Explain accounting issues related to valuation of accounts receivable.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

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What is cash?

Reporting cash

Summary of cash-related items

CashSpecial Issues

Recognition of notes receivable

Valuation of notes receivable

Cash and ReceivablesCash and ReceivablesCash and ReceivablesCash and Receivables

Accounts Receivable

Notes Receivable

Recognition of accounts receivable

Valuation of accounts receivable

Fair value option

Disposition of accounts and notes receivable

Presentation and analysis

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Most liquid asset

Standard medium of exchange

Basis for measuring and accounting for all items

Current asset

Examples: coin, currency, available funds on deposit at

the bank, money orders, certified checks, cashier’s checks,

personal checks, bank drafts and savings accounts.

What is Cash?What is Cash?What is Cash?What is Cash?

LO 1 Identify items considered cash.

Cash

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Short-term, highly liquid investments that are both

Reporting CashReporting CashReporting CashReporting Cash

LO 2 Indicate how to report cash and related items.

Cash Equivalents

(a) readily convertible to cash, and

(b) so near their maturity that they present insignificant risk of changes in interest rates.

Examples: Treasury bills, Commercial paper, and Money market funds.

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Companies segregate restricted cash from “regular” cash.

Examples, restricted for:

(1) plant expansion, (2) retirement of long-term debt,

and (3) compensating balances.


LO 2

Restricted Cash

Illustration 7-1

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Company writes a check for more than the amount in its cash account.


LO 2 Indicate how to report cash and related items.

Bank Overdrafts

Generally reported as a current liability.

Offset against other cash accounts only when accounts

are with the same bank.

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Summary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related Items

LO 2

Illustration 7-2

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Internal ControlInternal ControlInternal ControlInternal Control

Encourages adherence to company policiesand procedures

Encourages adherence to company policiesand procedures

Promotes operational efficiency

Promotes operational efficiency

Minimizes errorsand theft

Minimizes errorsand theft

Enhances the reliability and accuracy of accounting dataEnhances the reliability and accuracy of accounting data

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Internal Control ProceduresInternal Control ProceduresInternal Control ProceduresInternal Control Procedures

Cash ReceiptsCash Receipts

• Separate responsibilities for receiving cash, recording cash transactions, and reconciling cash balances.

• Match the amount of cash received with the amount of cash deposited.

• Close supervision of cash-handling and cash-recording activities.

Cash ReceiptsCash Receipts

• Separate responsibilities for receiving cash, recording cash transactions, and reconciling cash balances.

• Match the amount of cash received with the amount of cash deposited.

• Close supervision of cash-handling and cash-recording activities.

Cash DisbursementsCash Disbursements

• All disbursements, except petty cash, made by check.

• Separate responsibilities for cash disbursement documents, check authorization, check signing, and record keeping.

• Checks should be signed only by authorized individuals.

Cash DisbursementsCash Disbursements

• All disbursements, except petty cash, made by check.

• Separate responsibilities for cash disbursement documents, check authorization, check signing, and record keeping.

• Checks should be signed only by authorized individuals.

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Compensating BalancesCompensating BalancesCompensating BalancesCompensating Balances

Compensating BalanceCompensating BalanceMinimum balance that must beMinimum balance that must bemaintained in a company’s bankmaintained in a company’s bankaccount as support for fundsaccount as support for fundsborrowed from the bank.borrowed from the bank.

Compensating BalanceCompensating BalanceMinimum balance that must beMinimum balance that must bemaintained in a company’s bankmaintained in a company’s bankaccount as support for fundsaccount as support for fundsborrowed from the bank.borrowed from the bank.

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Accounts ReceivableAccounts ReceivableAccounts ReceivableAccounts Receivable

LO 3 Define receivables and identify the different types of receivables.

Written promises to pay a sum of money on a

specified future date.

Receivables - Claims held against customers and others for money, goods, or services.

Oral promises of the purchaser to pay for goods

and services sold.

Accounts Accounts ReceivableReceivableAccounts Accounts

ReceivableReceivableNotes Notes

ReceivableReceivableNotes Notes

ReceivableReceivable

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Nontrade Receivables

1. Advances to officers and employees.

2. Advances to subsidiaries.

3. Deposits to cover potential damages or losses.

4. Deposits as a guarantee of performance or payment.

5. Dividends and interest receivable.

6. Claims against: Insurance companies for casualties sustained;

defendants under suit; governmental bodies for tax refunds; common carriers for damaged or lost goods; creditors for returned, damaged, or lost goods; customers for returnable items (crates, containers, etc.).



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Nontrade Receivables



Illustration 7-3

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Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables

LO 4 Explain accounting issues related to recognition of accounts receivable.

Reductions from the list

price

Not recognized in the

accounting records

Customers are billed net of

discounts

10 %

Discount for

new Retail

Store

Customers

Trade Discounts

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Inducements for prompt

payment

Gross Method vs. Net

Method

Cash Discounts

Payment terms are 2/10, n/30

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Cash DiscountsCash DiscountsCash DiscountsCash Discounts

Sales are recorded at the invoice

amounts.

Sales are recorded at the invoice

amounts.

Sales discounts are recorded as reduction of revenue if payment is

received within the discount period.

Sales discounts are recorded as reduction of revenue if payment is

received within the discount period.

Gross Method

Sales are recorded at the invoice amount less the discount.

Sales are recorded at the invoice amount less the discount.

Sales discounts forfeited are recorded

as interest revenue if payment is received after

the discount period.

Sales discounts forfeited are recorded

as interest revenue if payment is received after

the discount period.

Net Method

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Cash Discounts (Sales Discounts)Illustration 7-4

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Merchandise may be

returned by a customer to a supplier.

A special price reduction, called

an allowance, may be given as an incentive to

keep the merchandise.

Sales ReturnsSales ReturnsSales ReturnsSales Returns

To avoid misstating the financial statements, sales revenue and accounts receivable

should be reduced by the amount of returns in the period of sale if the amount of returns

is anticipated to be material.

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Sales ReturnsSales ReturnsSales ReturnsSales Returns

During the first year of operations, Hawthorne sold $2,000,000 of merchandise that had cost them $1,200,000 (60%).

Industry experience indicates 10% return rate. During the year $130,000 was returned prior to customer payment. Record the returns and the end of the year adjustment. .

Actual ReturnsSales returns 130,000

Accounts receivable 130,000Inventory 78,000

Cost of goods sold (60%) 78,000Adjusting Entries

Sales returns 70,000Allowance for sales returns 70,000

Inventory-estimated returns 42,000Cost of goods sold (60%) 42,000

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E7-5: On June 3, Bolton Company sold to Arquette Company

merchandise having a sale price of $2,000 with terms of 2/10, n/60,

f.o.b. shipping point. On June 12, the company received a check for

the balance due from Arquette Company. Prepare the journal entries

on Bolton Company books to record the sale assuming Bolton

records sales using the gross method.

Sales

2,000

Accounts receivable 2,000June 3



Cash ($2,000 x 98%) 1,960

Sales discounts 40

Accounts receivable 2,000

June 12

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f.o.b. shipping point. On June 12, the company received a check for

the balance due from Arquette Company. Prepare the journal entries

on Bolton Company books to record the sale assuming Bolton

records sales using the net method.

Sales

1,960




Cash ($2,000 x 98%) 1,960


June 12

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f.o.b. shipping point. Prepare the journal entries on Bolton Company

books to record the sale assuming Bolton records sales using the net

method, and Arquette did not remit payment until July 29.

Sales

1,960




Cash 2,000


Sales Discounts Forfeited 40

June 12

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A company should measure receivables in terms of their present value.

Non-Recognition of Interest Element


In practice, companies ignore interest revenue related to accounts receivable because, for current assets, the amount of the discount is not usually material in relation to the net income for the period.


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How are these accounts presented on the Balance Sheet?How are these accounts presented on the Balance Sheet?

Accounts ReceivableAllowance for

Doubtful Accounts

Beg. 500 25 Beg.

End. 500 25 End.



26 LO 4 Explain accounting issues related to recognition of accounts receivable.

Current Assets:

Cash 346$

Accounts receivable 500

Less: Allowance for doubtful accounts (25) 475

Inventory 812

Prepaids 40

Total current assets 1,673

Fixed Assets:

Office equipment 5,679

Furniture & fixtures 6,600

Less: Accumulated depreciation (3,735)

Total fixed assets 8,544 Total Assets 10,217$

Assets



Current Assets:

Cash 346$

Accounts receivable, net of $25 allowance 475

Inventory 812

Prepaids 40


Fixed Assets:





Assets


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Journal entry for credit sale of $100?Journal entry for credit sale of $100?

Accounts receivableAccounts receivable 100100

SalesSales 100 100


Doubtful Accounts

Beg. 500 25 Beg.

End. 500 25 End.



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Doubtful Accounts

Beg. 500 25 Beg.

End. 600 25 End.

Sale 100



Journal entry for credit sale of $100?Journal entry for credit sale of $100?


SalesSales 100 100

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Collected of $333 on account?Collected of $333 on account?

CashCash 333333



Doubtful Accounts

Beg. 500 25 Beg.

End. 600 25 End.

Sale 100



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Collected of $333 on account?Collected of $333 on account?

CashCash 333333



Doubtful Accounts

Beg. 500 25 Beg.

End. 267 25 End.

Sale 100 333 Coll.



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Adjustment of $15 for estimated Bad-Debts?Adjustment of $15 for estimated Bad-Debts?

Bad debt expenseBad debt expense 1515

Allowance for Doubtful AccountsAllowance for Doubtful Accounts 1515


Doubtful Accounts

Beg. 500 25 Beg.

End. 267 25 End.

Sale 100 333 Coll.



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Adjustment of $15 for estimated Bad-Debts?Adjustment of $15 for estimated Bad-Debts?

Bad debt expenseBad debt expense 1515

Allowance for Doubtful AccountsAllowance for Doubtful Accounts 1515


Doubtful Accounts

Beg. 500 25 Beg.

End. 267 40 End.

Sale 100 333 Coll.

15 Est.



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Write-off of uncollectible accounts for $10?Write-off of uncollectible accounts for $10?

Allowance for Doubtful accountsAllowance for Doubtful accounts 1010



Doubtful Accounts

Beg. 500 25 Beg.

End. 267 40 End.

Sale 100 333 Coll.

15 Est.



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Write-off of uncollectible accounts for $10? Write-off of uncollectible accounts for $10?

Allowance for Doubtful accountsAllowance for Doubtful accounts 1010



Doubtful Accounts

Beg. 500 25 Beg.

End. 257 30 End.

Sale 100 333 Coll.

15 Est. W/O 10 10 W/O




Current Assets:

Cash 13$

Accounts receivable, net of $30 allowance 227

Inventory 812

Prepaids 40


Fixed Assets:





Assets


37 LO 5 Explain accounting issues related to valuation of accounts receivable.

Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable

An uncollectible account receivable is a loss of revenue that

requires, through proper entry in the accounts,

a decrease in the asset accounts receivable and

a related decrease in income and stockholders’ equity.

Uncollectible Accounts Receivable


Allowance MethodAllowance Method

Losses are Estimated:

Percentage-of-sales.

Percentage-of-receivables.

GAAP requires when material in amount.

Methods of Accounting for Uncollectible Accounts

Direct Write-OffDirect Write-Off

Theoretically deficient:

No matching.

Receivable not stated at cash realizable value.

Not GAAP when material in amount.



Emphasis on the Income Statement

relationships

Emphasis on the Income Statement

relationships

Emphasis on the Balance

Sheet relationships

Emphasis on the Balance

Sheet relationships

Illustration 7-6



Percentage-of-Sales Approach

Percentage based upon past experience and

anticipate credit policy.

Achieves proper matching of costs with revenues.

Existing balance in Allowance account not considered.


41 LO 5

Illustration: Gonzalez Company estimates from past experience

that about 1% of credit sales become uncollectible. If net credit

sales are $800,000 in 2012, it records bad debt expense as

follows.Bad Debt Expense 8,000

Allowance for Doubtful Accounts 8,000

Illustration 7-7



Percentage-of-Receivables Approach

Not matching.

Reports receivables at realizable value.

Companies may apply this method using

one composite rate, or

an aging schedule using different rates.



Bad Debt Expense 37,650


What entry would Wilson

make assuming that no balanceexisted in the

allowance account?

Illustration 7-8Accounts Receivable Aging Schedule



Bad Debt Expense ($37,650 – $800) 36,850


What entry would Wilson

make assuming the allowance account had a credit balance of $800 before

adjustment?

Illustration 7-8Accounts Receivable Aging Schedule


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LO 5 Explain accounting issues related to valuation of accounts receivable.

E7-7 (Recording Bad Debts): Sandel Company reports the following financial information before adjustments.

Instructions: Prepare the journal entry to record bad debt

expense assuming Sandel Company estimates bad debts at

(a) 1% of net sales and (b) 5% of accounts receivable.

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LO 5LO 5


Instructions: Prepare the journal entry assuming Sandel

estimates bad debts at (a) 1% of net sales.


Allowance for Doubtful Accounts 7,500($800,000 – $50,000) x 1% = $7,500

LO 5

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LO 5LO 5


Instructions: Prepare the journal entry assuming Sandel

estimates bad debts at (b) 5% of accounts receivable.


Allowance for Doubtful Accounts 6,000($160,000 x 5%) – $2,000) = $6,000

LO 5

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Illustration: Assume that the financial vice president of Brown Furniture authorizes a write-off of the $1,000 balance owed by Randall Co. on March 1, 2012. The entry to record the write-off is:


Accounts Receivable1,000

Assume that on July 1, Randall Co. pays the $1,000 amount that Brown had written off on March 1. These are the entries:

Accounts Receivable 1,000Allowance for Doubtful Accounts

1,000

Cash 1,000Accounts Receivable

1,000


LO 5

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End of Lecture 08End of Lecture 08End of Lecture 08End of Lecture 08

1 Practical Issues in Cash and Receivable Instructor Adnan Shoaib PART II: Corporate Accounting...

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