Ucf Acg2021 Chapter Five Power Point

8/14/2019 Ucf Acg2021 Chapter Five Power Point

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Chapter Five

Short-Term Investmentsand Receivables


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Short-Term Investments

Short-Term Investments are investments that acompany plans to hold for 1 year or less.

Trading Securities

Available-for-Sale Securities

Held-to-Maturity Securities

Trading Securities are always a current asset(short-term).

Available-for-Sale and Held-to-Maturity Securitiesare either a short-term or long-term asset based

on managements intention of length of holding.


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Short-Term Investments

Trading Securities: intended to be soldin the very near future for more thantheir cost.

Available-for-Sale Securities: all

investments not classified as TradingSecurities or Held-to-Maturity Securities.

Held-to-Maturity Securities: the investor

intends to hold the securities until theirmaturity date; these securities earninterest revenue for the investor.


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Trading Securities

NOTE: VERY IMPORTANT EXCEPTION TO PREVIOUS RULES!

The market-value method is used to account for alltrading securities. Trading securities are reported onthe balance sheet at their market value as opposed totheir book value. (i.e. the price that was paid to acquirethe asset)

Adjusting entries are carried out at the end of the year

to bring the securities up to current market value. Unrealized Gains or Unrealized Losses capture the

difference between the cost of investment and currentmarket value.

Gain or loss based on whether market value is > cost ofinvestment

Unrealized because the investment is not sold.


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Trading Investments

Microsoft Corporation purchases Ford MotorCompany stock on May 18, paying $100,000, withthe intention of selling the stock within a fewmonths.

General Journal

Date Accounts and Explanations PR Debit Credit

May 18 Short-term investment 100,000Cash 100,000

Purchased investment

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren


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Trading Securities

Assume that Microsofts fiscal year ends onMay 31, and the investment in Ford has acurrent market value of $102,000 on this

date.

General Journal

Date Accounts and Explanations PR Debit Credi

May 31 Short-Term Investment 2,000

Unrealized Gain on Investments 2,000

Adjusted investment to marketvalue



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Trading Securities

Trading Securities (Short-Term Investments)Cost 100,000Adjustment to

market value 2,000Balance 102,000


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Reporting on the Balance Sheetand the Income Statement

Balance SheetCurrent Assets: $XXX

Cash XXXShort-term investments at market value 102,000Accounts receivable XXX

Income StatementRevenues $ XXXExpenses XXX

Other revenues, gains, and (losses):Interest revenue XXXUnrealized gain on investment 2,000


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Receivables

Receivables represent monetary claimsagainst others. They are assets for a businessbecause they represent resources expectedto produce a future benefit.

You may think of them as the opposite of aloan, since receivables are when others owethe business money.

Accounts Receivable: an informal promise to pay;generally arises from the sale of goods and

services.

Notes Receivable: a formal, written contract.


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Accounts Receivable (A/R)

GENERAL LEDGER

Accounts ReceivableBal. 9,000

ACCOUNTS RECEIVABLESUBSIDIARY RECORD

AstonBal. 5,000

Harris

Salazar

Bal. 1,000

Bal. 3,000

The total value of A/R is the

total amount owedto the

business by its customers.


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Accounting for UncollectibleAccounts (Bad Debts)

Why do bad debts (uncollectibleaccounts) arise?

Collections lag sales

Some people will not pay their bills, andthe company cannot collect from all.

Two ways to account for bad debtexpense:

1.Allowance Method

2.Direct Write Off.


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The Allowance Method

Records collection losses on the basis of estimates,not waiting to see which customers will not pay. Preferred method

Using estimates ensures that receivables are reported attheir proper value

Matches expenses (i.e., bad debt expense) with the proper

revenues (i.e., the sales or service revenue that ld to theexpense).

The estimate of the uncollectible accounts isrecorded in the account Allowance for UncollectibleAccounts (Allow. For U.A.)orAllowance for Doubtful

Accounts (Allow. for D/A). Allowance for Doubtful Accountsis acontra accountto Accounts Receivable


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Balance Sheet(partial)Accounts receivable xxxLess: Allowance for Uncollectible Accounts xx

Accounts receivable, net $ xxxIncome Statement(partial)Expenses:Uncollectible-Account Expense* xx

* = Also known as Bad Debt Expense.


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How do we estimate a companysuncollectible accounts?

Two Methods:

Percent-of-sales Uncollectible-account expense =

percentage of revenue

Aging-of-Receivables

Analyze individual receivables fromcustomers based on how long they havebeen outstanding


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The Allowance Method Percent of Sales

In the Percent-of-Sales approach (the IncomeStatement approach), uncollectible-accountexpense is determined by multiplying the net salesby a percentage that is based on past collectionexperience.

Steps:

1. Multiply Total Revenue by the EstimatedUncollectible Expense % (this is always given). Thisresult gives you the amount to use in your journalentry.

2. Prepare the Journal entry:

Uncollectible Account Expense Dr

Allowance for Uncollectible Accounts Cr


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Example Kansas City Title Company has ending

Accounts Receivable of $500,000 (debit) andending Allowance for Uncollectible Accounts

of $2,000 (credit)prior to year-endadjustments.

Total Sales Revenue for the year is$2,000,000. Kansas City Title estimates that

3% of sales will be uncollectible. What is the balance of the Uncollectible-Account Expense, Allowance for UncollectibleAccounts, and the Net Accounts Receivable?


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Solution* Uncollectible Account Expense

= ($2,000,000 Revenue *.03) = $60,000

Allowance for Uncollectible Expense

= ($2,000,000 Revenue *.03) = $60,000 additionalin the allowance + $2,000 beginning balance =$62,000 ending balance

Net Accounts Receivable

($500,000 ending balance - $62,000 in Allowance

for Doubtful Accounts) = $438,000 net balance


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The Allowance Method Aging-of-Receivables

In the Aging-of-Receivables (the BalanceSheet approach), individual receivables fromspecific customers are analyzed based on howlong they have been outstanding.

Steps:

1. Categorize accounts receivable via an agingschedule.

2. Apply a percentage to the total of each category,based on past collection experience. Thisrepresents an estimate of the A/R the company

will not collect, which is the desired balance inthe Allowance for Doubtful Accounts.

3. Uncollectible Account Expense is the differencebetween the balance before adjustment and thedesired ending balance.


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DaysOverdue

AccountsReceivable

Estimated %Uncollectible

Allowance forUncollectible

Accounts

1-30 days $1,555 6 $93

31-60 days 750 10 75

61-90 days 311 20 62

90 + days 219 79 173

$2,835 $403



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December 31, 20x5

Accounts Receivable

Bal. 2,835

Allowance forUncollectible Accounts

120

Accounts before the year-end adjustment:


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The Allowance Method - Aging-of-Receivables

Accounts after the year-end adjustment:

December 31, 20x5

Accounts ReceivableBal. 2,835

Allowance forUncollectible Accounts120

Adj. 283

403


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Accounts after the year-end adjustment:

General Journal


Dec 31 Uncollectible-Account Expense 283

Allowance for Uncollectible

Accounts 283

Recorded expense for the year($403-120)

Adjusting Entry



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The Allowance Method - Aging-of-Receivables

Example:

Kansas City Title has ending Accounts receivable of$500,000 (debit) and an ending Allowance forDoubtful Accounts of $2,000 (credit).

An aging of the accounts reveals that $380,000 ofthe receivables are current, $80,000 are 1-30 dayspast due, and $40,000 are more than 30 days pastdue. Historically, 1% of the current accounts, 5% ofthe accounts 1-30 days past due, and 40% of theaccounts more than 30 days past due areuncollectible.

What is the balance of the Allowance for UncollectibleAccounts, Uncollectible-Account Expense, and the NetAccounts Receivable?


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Solution* Allowance for Uncollectible Expense

= ($380,000*1%) + ($80,000* 5%) + ($40,000 *40%)*= $23,800 (The % of receivables collectively

determine the desired balance in the allowance)

Uncollectible Account Expense = ($23,800 Allow for D/A ending balance - $2,000

Allow for D/A beginning balance) = $21,800

Net Accounts Receivable ($500,000 ending balance - $23,800 in Allowance

for Doubtful Accounts) = $476,200 net balance


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Comparing the Allowance Methods

Allowance Method

Adjusts Allowance for

Uncollectible Accounts

BY

Amount of

UNCOLLECTIBLE-

ACCOUNT EXPENSE


Adjusts Allowance for

Uncollectible Accounts

TO

Amount of

UNCOLLECTIBLE

RECEIVABLES

Percent-of-Sales



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Writing Off Uncollectible Accounts

Suppose that early in 2006, the credit departmentdetermines that the company cannot collect fromtwo customers. These accounts must be writtenoff.

1. The journal entry to write off the account is:

Allowance for Uncollectible Accounts Dr XX

Accounts Receivable Cr XX

2. The write-off of an account does notaffect netincome or net accounts receivable. Why??


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Writing Off Uncollectible Accounts

General Journal

Date Accounts and Explanations PR Debit Cred

Allowance for Uncollectible

Accounts 400

Accounts Receivable Customer # 161

Accounts Receivable Customer # 239Wrote off uncollectible receivables



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Direct Write-Off Method (alternative tothe Allowance Method)

An account is written off only when it isdecided that a specific customersreceivable is uncollectible.

General Journal


Jan 2 Uncollectible-Account Expense 2,000

Accounts Receivable-Jones 2,000

Wrote off a bad account



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Direct Write-Off Method

Balance Sheet(partial)Accounts receivable $8,000Only net receivable is shown

Income Statement(partial)Expenses:Uncollectible-account expense $ 2,000

Weaknesses of this Method:

1. No Allowance for Uncollectibles

2. Poor matching of Revenues and Expenses


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Two Key Liquidity Ratios

The Days Sales in Receivables and the Acid-Test Ratio help investors measure liquidityand evaluate a companys financial position.

Days Sales in Receivables (the collectionperiod) helps to measure the quality ofreceivables by calculating how long it takes,on average, to collect receivables.

This indicates how many days sales remain inAccounts Receivables, awaiting collection.

This is a measure of quality because the oldera receivable gets, the less likely it is to getpaid.


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Days Sales in (Average) AccountsReceivable

= Average net Accounts Receivable*One days sales**

*Average net Accounts Receivable is calculated byadding the beginning and ending net AccountsReceivable balances together and dividing by two.

**One Days Sales is calculated by dividing Net Sales

Revenue by 365.

A lowernumber indicates greaterliquidity.


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Acid Test Ratio (Quick Ratio)=Cash + S/T Investments + Net current

receivables*

Total Current Liabilities

The higherthe acid-test ratio, the better thebusiness is able to pay its current liabilities.

* Inventory is excluded even though it is a currentasset, because inventory is not as liquid as thecurrent assets included in the quick ratio.


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Ucf Acg2021 Chapter Five Power Point

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