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Chapter 7

7-2

How much cash should a How much cash should a business Have?business Have?

“As little as necessary”

Cash

Marketable Securities

Receivable

7-3

The Valuation of Financial The Valuation of Financial AssetsAssetsType of Financial Assets

Basis for Valuation in the Balance Sheet

Cash (and cash equivalents) Face amountShort-term investments (marketable securities)

Current market value

Receivables Net realizable value

Estimated collectible amount

7-4

REPORTING CASH IN REPORTING CASH IN THE BALANCE SHEETTHE BALANCE SHEET

7-5

CashCashCoins and

paper money

Checks

Money orders

Travelers’ checks

Bank credit card sales

Cash is defined as

any deposit banks will

accept.

7-6

Restricted CashRestricted Cash

Investments and Restricted Funds

Line of Credit

7-7

Cash ManagementCash ManagementProvide accurate accounting for

cash receipts, cash disbursements, and cash balances.

Prevent or minimize losses from theft or fraud.

Anticipate the need of borrowingPrevent unnecessary bank

deposits.

7-8

Bank StatementsBank StatementsReconciling the bank statementDifference b/w bank record and depositor record:Outstanding checks.Deposits in transitService chargesCharges for depositing NSF checksCredit for interest earnedMiscellaneous bank charges and

credits

7-9

Reconciling the Bank Reconciling the Bank StatementStatement

Balance per Bank

+ Deposits in Transit

- Outstanding Checks

± Bank Adjustments

= Adjusted Balance

Balance per Depositor

+ Deposits by Bank (credit memos)

- Service Charge - NSF Checks

± Book Adjustments

= Adjusted Balance

7-10

Petty cash FundsPetty cash FundsA small amount of cash on hand

with which to make some minor expenditures.

Office suppliesTaxi faresDoughnuts for an office meeting

7-11

Short-Term InvestmentsShort-Term InvestmentsBond

Investments

Capital Stock

Investments

Current Assets

Almost As Liquid As

Cash

Readily Marketable

Marketable Securities

are . . .

7-12

Accounting for marketable Accounting for marketable securitiessecurities

Purchase of marketable securities

Recognition of investment revenue

Sale of investment

7-13

ReceivablesReceivablesUncollectable account

Reflecting uncollectible accounts in the financial statements

7-14

The Allowance for The Allowance for Doubtful AccountsDoubtful Accounts

The net realizable value is the amount of accounts receivable that the business expects to

collect.Accounts receivableLess: Allowance for doubtful accountsNet realizable value of accounts receivable

7-15

Writing Off an Writing Off an Uncollectible Account Uncollectible Account ReceivableReceivableWhen an account is determined

to be uncollectible, it no longer qualifies as an asset and should

be written off.

7-16

Before Write-Off

After Write-Off

Accounts receivable 10,000$ 9,500$ Less: Allow. for doubtful accts. 2,500 2,000 Net realizable value 7,500$ 7,500$

Notice that the $500 write-off did not change the net realizable value nor did it affect any

income statement accounts.

Writing Off an Writing Off an Uncollectible Account Uncollectible Account ReceivableReceivable

7-17

Estimating Credit Losses Estimating Credit Losses — The Balance Sheet — The Balance Sheet ApproachApproach

Year-end Accounts Receivable is broken down into age

classifications.

Each age grouping has a different likelihood of being

uncollectible.

Compute a separate allowance for each age grouping.

7-18

Estimating Credit Losses Estimating Credit Losses — The Balance Sheet — The Balance Sheet ApproachApproach

At December 31, the receivables for EastCo, Inc. were categorized as follows:

7-19

EastCo’s unadjusted balance in the allowance

account is $500.Per the previous

computation, the desired balance is $1,350.

Estimating Credit Losses — Estimating Credit Losses — The Balance Sheet The Balance Sheet ApproachApproach

7-20

Estimating Credit Losses Estimating Credit Losses — The Income Statement — The Income Statement ApproachApproach

Net Credit Sales% Estimated Uncollectible

Amount of Journal Entry

Uncollectible accounts’ percentage is based on actual uncollectible accounts from prior

years’ credit sales.

7-21

Estimating Credit Losses - Estimating Credit Losses - The Income Statement The Income Statement ApproachApproachIn 2009, EastCo had credit sales of

$60,000. Historically, 1% of EastCo’s credit sales has been uncollectible.

For 2009, the estimate of uncollectible accounts expense is $600. ($60,000 ×

.01 = $600)

7-22

Recovery of an Account Recovery of an Account Receivable Previously Receivable Previously Written OffWritten Off Subsequent collections require that the original write-off entry be reversed before the cash collection is recorded.

GENERAL JOURNAL

Date Account Titles and ExplanationPR Debit Credit

Accounts Receivable (X Customer) $$$$Allowance for Doubtful Accounts $$$$

Cash $$$$Accounts Receivable (X Customer) $$$$

7-23

Notes Receivable and Notes Receivable and Interest RevenueInterest Revenue The interest formula includes

three variables:

Interest = Principal × Interest Rate × Time

When computing interest for one year, “Time” equals 1. When the computation period is less

than one year, then “Time” is a fraction.For example, if we needed to compute interest for

3 months, “Time” would be 3/12.

7-24

On November 1, Hall Company loans $10,000 to Porter Company on a 90-day note earning 12

percent interest. On December 31st, Hall Company needs an adjusting entry to record the interest

revenue on the Porter Company note.

Notes Receivable and Notes Receivable and Interest RevenueInterest Revenue

$10,00012% 60/360 = $200

7-25

What entry would Hall Companymake on the maturity date?

Notes Receivable and Notes Receivable and Interest RevenueInterest Revenue

$10,00012% 90/360 = $300

7-26

Self-testing QuestionSelf-testing QuestionSolve the Demonstration problem

Brief Exercise 7.1, 7.4