Cash and Receivables

Cash and Cash and ReceivablesReceivablesCash and Cash and

ReceivablesReceivables

Chapter6

An electronic presentation by Douglas Cloud

Pepperdine University

An electronic presentation by Douglas Cloud

Pepperdine University

1. Understand the importance of cash management.

2. Prepare a bank reconciliation.3. Discuss revenue recognition when the right

of return exists.4. Understand the credit policies relates to

accounts receivable.5. Explain the gross and net methods to

account for cash discounts.

ObjectivesObjectives

ContinuedContinuedContinuedContinued

6. Estimate and record bad debts using a percentage of sales.

7. Estimate and record bad debts using an aging analysis.

8. Explain pledging, assignment, and factoring of accounts receivable.

9. Account for short-term notes receivable.

10. Prepare a proof of cash (Appendix)

ObjectivesObjectives

CashCash

Cash is the resources on hand to meet planned

expenditures and emergency situations.

CashCash

• Coins and currency• Checking accounts• Savings accounts• Negotiable checks• Bank drafts

Included in Cash Excluded from Cash

• Certificates of deposit• Bank overdrafts• Postdated checks• Travel advances• Postage stamps

Cash EquivalentsCash Equivalents

Cash equivalents are short-term, highly liquid investments that are readily

convertible into known amounts of cash and near their maturity.

Cash ManagementCash Management

Immediately count the receipts (by the person opening the mail or the sales person using the cash register).

Record daily all cash receipts in the accounting records.

Deposit daily all receipts in the company’s bank account.

Control Over ReceiptsControl Over Receipts

Cash ManagementCash Management

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 PaymentsControl Over Payments

Petty CashPetty Cash

First: An employee is appointed petty

cash custodian.

First: An employee is appointed petty

cash custodian.

Petty Cash 500Cash 500

A journal entry is made to record the

establishment of the fund.

A journal entry is made to record the

establishment of the fund.

Second: Petty cash vouchers are printed,

prenumbered, and given to the custodian of the fund.

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).

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).

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.

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.

…the vouchers are sorted into expense categories and

the remaining cash is counted.

The sorting of vouchers indicated the following costs were incurred during the month:

Office supplies $ 34.16Postage 178.00Transportation 132.14Miscellaneous 83.76Total expenses $428.06

The sorting of vouchers indicated the following costs were incurred during the month:

Office supplies $ 34.16Postage 178.00Transportation 132.14Miscellaneous 83.76Total expenses $428.06

The fund’s expected balance is $71.94 ($500.00 - The fund’s expected balance is $71.94 ($500.00 - $428.06). There is a shortage of $4.40 ($71.94 - $67.54).$428.06). There is a shortage of $4.40 ($71.94 - $67.54).

The company records the actual expenses and the amount needed to replenish the fund.

Office Supplies Expense 34.16Postage Expense 178.00Transportation Expense 132.14Miscellaneous Expense 83.76Cash Short and Over 4.40

Cash 432.46

The company records the actual expenses and the amount needed to replenish the fund.

Office Supplies Expense 34.16Postage Expense 178.00Transportation Expense 132.14Miscellaneous Expense 83.76Cash Short and Over 4.40

Cash 432.46

Bank ReconciliationBank 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.

Cash balance

from bank statement

$7,218

Cash balance

from company records $6,925

Cash balance from bank statement $7,218 Add: Receipts recorded on the company’s

records but not reported on the bankstatement. 629

$7,847

Deposits in transit and cash received but not yet deposited

totaled $629.

Deposits in transit and cash received but not yet deposited

totaled $629.

Cash balance from bank statement $7,218

$7,847

Outstanding checks totaled $516.

$7,847 Deduct: Outstanding checks (516 )

$7,847 Deduct: Outstanding checks (516 )Adjusted Cash Balance $7,331

Cash balance from company records $6,925

Cash balance from company records $6,925 Add: Notes receivable ($700) and interest

($15) collected by bank 715

Notes receivable totaling $700 and interest totaling $15 were

collected by the bank.

Notes receivable totaling $700 and interest totaling $15 were

collected by the bank.

($15) collected by bank 715 $7,640

Bank service charge, $9.Bank service charge, $9.

Deduct: Bank service charge (9 )

Bank service charge, $9.Bank service charge, $9.

Deduct: Bank service charge (9 )

Customers’ checks were returned for lack of funds

(NSF check), $300.

Deduct: Bank service charge (9 )NSF checks (300 )

(NSF check), $300.

Deduct: Bank service charge (9 )NSF checks (300 )

Adjusted Cash Balance $7,331

Adjusted cash balance per

bank statement

$7,331

Adjusted cash balance per company records $7,331

Journal Entries

Cash 715Notes Receivable (note collected) 700Interest Revenue (interest collected) 15

Miscellaneous Expense (bank service charge) 9Accounts Receivable (NSF check) 300

Cash 309

Those receivables expected to be collected or satisfied within one year

or the current operating cycle, whichever is longer, are classified as

current assets; the remainder are classified as noncurrent.

Those receivables expected to be collected or satisfied within one year

or the current operating cycle, whichever is longer, are classified as

current assets; the remainder are classified as noncurrent.

Trade ReceivablesTrade 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

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.

Right of ReturnRight of Return

Each of the following criteria must be satisfied when the right of return exists in order to recognize revenue

at the time of sale.

Each of the following criteria must be satisfied when the right of return exists in order to recognize revenue

at the time of sale.

ContinuedContinuedContinuedContinued

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 ReturnRight of Return

Accounts ReceivableAccounts Receivable

• Prenumbered sales invoices.

• Separation of the sales function from the cash collection responsibilities.

Internal Control Procedures for Accounts Receivable

Sales DiscountsSales Discounts

Alternative Methods of Accounting for Sales DiscountsAlternative Methods of Accounting for Sales Discounts

Gross Price Gross Price MethodMethod

Net Price Net Price MethodMethod

Sold $8,000 of merchandise to various customers on

December 4, 2004 with terms of 2/10, n/EOM

Sold $8,000 of merchandise to various customers on

December 4, 2004 with terms of 2/10, n/EOM

Accounts Receivable 8,000Sales 8,000

Accounts Receivable 7,840

Sales 7,840

$8,000 - ($8,000 x 0.02)

On December 13 received payment on goods originally

billed at $5,500.

On December 13 received payment on goods originally

billed at $5,500.

Cash 5,390Sales Disc. Taken 110

Accts. Receivable 5,500

Cash 5,390

Accts. Receivable 5,390

$5,500 - ($5,500 x 0.02)

Received payment on goods billed at $1,500 on December 30 (after the discount period).

Cash 1,500Accts. Receivable 1,500

Cash 1,500Accts. Receivable 1,470Sales Discounts Not Taken 30

$1,500 - ($1,500 x 0.02)

Classified as” Other Items” Classified as” Other Items” on the income statementon the income statement

No entry required Accounts Receivable 20Sales Discounts Not Taken 20

Year-end adjustment at the end of the period.

Loss ContingenciesLoss 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...

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.

… recorded as reductions in assets or as liabilities when both of

these conditions are met.

Estimated Bad Debts MethodEstimated Bad Debts Method

Bad debts can be estimated based on sales or on accounts

receivable.

Bad debts can be estimated based on sales or on accounts

receivable.

1. Relationship to sales (income statement approach):

a. Percentage of salesb. Percentage of net credit sales

2. Relationship to accounts receivable (balance sheet approach):

a. Percentage of outstanding accounts receivable

b. Aging of accounts receivable

Percentage of SalesPercentage 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 Expense 10,500Allowance for Doubtful Accounts 10,500

$525,000 x 0.02

Percentage of Outstanding Accounts Receivable

Allowance for Doubtful Accounts

4,500 (current balance)

$475,000 x 0.04 = $19,000$475,000 x 0.04 = $19,000

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?

4,500 (current balance) 19,000 (required balance)14,500 (required adjustment)

Aging of Accounts ReceivableAging 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 Exhibit 6-3 carefully.Examine Exhibit 6-3 carefully.

Under 60 days $ 53,500

60-120 days 34,500

121-240 days 3,600

241-360 days 15,700

Over 1 year 14,500

$121,800

Estimated Percentage Uncollectible

Estimated Amounts

Uncollectible

= $ 1,070

= 2,760

= 4,710

= 7,250

$16,330

If the firm has a current $1,350 debit balance, the required adjusting entry would be--

$16,330 + $1,350

Writing Off UncollectiblesWriting Off Uncollectibles

Accounts Receivable

175,000

Net realizable value = $166,250

A customer’s account totaling $850 is determined to be uncollectible.

Allowance for Doubtful Accounts 850Accounts Receivable 850

Net realizable value = $166,250

Collection of an Account Previously Written Off

Later, a payment for $850 is received from the account that was

written off in the previous slide.

Later, a payment for $850 is received from the account that was

written off in the previous slide.

Accounts Receivable 850Allowance for Doubtful Accounts 850

Cash 850Accounts Receivable 850

Accounts Receivable Financing AgreementsAccounts Receivable

Financing Agreements

• Pledging

• Assigning

• Factoring

• Pledging

• Assigning

• Factoring

There are three basic forms of financing

agreements to obtain cash from accounts receivable.

There are three basic forms of financing

agreements to obtain cash from accounts receivable.

Accounts Receivable Financing AgreementsAccounts Receivable

Financing Agreements

Retain Risks and Benefits of Ownership

Pledge

(Collateral for Loans)

Transfer Some Risks and Benefits of

Ownership

Assign

(Specific Receivables with Recourse)

Transfer Risks and Benefits of

Ownership

Factor

(Sale without Recourse)

FactoringFactoring

1. The transferred assets have been isolated from the transferor.

2. The transferee obtains the right to exchange the transferred assets.

3. The transferor does not maintain effective control over the transferred assets through an agreement that entitles and obligates the transferor to repurchase the transferred assets before their maturity.

The FASB addressed these issues when it concluded in FASB Statement No. 140 that a transferor records the transfer of financial assets to the transferee as a sale when all of the following conditions are met:

PledgingPledging

When a company pledges its accounts receivable, it is using

these accounts as collateral for a loan, and the servicing activities

remain its responsibility.

When a company pledges its accounts receivable, it is using

these accounts as collateral for a loan, and the servicing activities

remain its responsibility.

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.

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 ReceivableAssignment of Accounts Receivable

On December 1, 2004 the Trussel Company assigned $60,000 of its accounts to a finance company. The finance company advances 80% of the accounts receivable assigned

less a service charge of $500. It also charges an annual interest of 12% on any outstanding loan balance.

On December 1, 2004 the Trussel Company assigned $60,000 of its accounts to a finance company. The finance company advances 80% of the accounts receivable assigned

less a service charge of $500. It also charges an annual interest of 12% on any outstanding loan balance.

Cash 47,500Assignment Service Charge Expense 500

Notes Payable 48,000

($60,000 x 0.80) - $500

$60,000 x 0.80

Accounts Receivable Assigned 60,000Accounts Receivable 60,000

Notes Payable 10,000Interest Expense 480

Cash 10,480

Assignment of Accounts ReceivableAssignment of Accounts Receivable

On December 31, 2004 Trussel collects $10,000 on assigned accounts. This amount along with the 12%

interest for one month is paid to the finance company.

On December 31, 2004 Trussel collects $10,000 on assigned accounts. This amount along with the 12%

interest for one month is paid to the finance company.

Cash 10,000Accounts Receivable Assigned 10,000

$48,000 x 0.12 x 1/12

When a company factors its accounts receivable, it

sells individual accounts to a financial institution

(called a factor).

When a company factors its accounts receivable, it

sells individual accounts to a financial institution

(called a factor).

Factoring of Accounts ReceivableFactoring of Accounts Receivable

Factor Corporation sells $80,000 of accounts receivable to a factor, receives 90% of the value of the factored accounts, and is charged a 15% commission based on

the gross amount of factored accounts receivable.

Factor Corporation sells $80,000 of accounts receivable to a factor, receives 90% of the value of the factored accounts, and is charged a 15% commission based on

the gross amount of factored accounts receivable.

FactoringFactoring

Cash 60,000Receivables from Factor 8,000Factoring Expense 12,000

Accounts Receivable 80,000

($80,000 x .90) - $12,000$80,000 x 0.10$80,000 x 0.15

Notes ReceivableNotes Receivable

A note receivable is an unconditional written agreement to collect a certain sum of money

on a specific date.

A note receivable is an unconditional written agreement to collect a certain sum of money

on a specific date.

Notes receivable generally have two attributes that are not found in

accounts receivable.

Notes receivable generally have two attributes that are not found in

accounts receivable.

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.

Interest-BearingInterest-Bearing

Received a $5,000, 60-day, 12% note on October 1, 2004.

Notes Receivable 5,000Sales 5,000

Received maturity value on December 1, 2004.

Cash 5,100Notes Receivable 5,000Interest Revenue 100

$5,000 x 0.12 x 60/360

Non-Interest-BearingNon-Interest-Bearing

Received a $5,100, 60-day, non-interest-bearing note on October 1, 2004.Notes Receivable 5,100

Interest Revenue 100Sales 5,000

Received maturity value on December 1, 2004.

Cash 5,100Notes Receivable 5,100

Notes Receivable DiscountedNotes Receivable Discounted

On August 1, 2004, 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%.

On August 1, 2004, 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%.

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)

October 30, 2004Notes Receivable Discounted 5,000.00

Notes Receivable 5,000.00

Cash 5029.83Loss from Discounting of Note 20.17

Notes Receivable Discounted 5,000.00Interest Receivable 50.00

August 31, 2004Interest Receivable 50.00

Interest Revenue 50.00

Assume instead that on November 3, 2004 the bank notified Kasper that the note had not been paid and also charged Kasper a $10 fee.

Notes Receivable Dishonored 5,160Notes Receivable Discounted 5,000

Notes Receivable 5,000Cash 5,160

Appendix: Proof of CashAppendix: Proof of Cash

1. The reconciliation of the bank balance and book balance for the previous month.

2. The reconciliation of the receipts recorded by the bank for the current month with the receipts recorded on the books.

3. The reconciliation of the payments recorded by the bank for the current month with the payments recorded on the books.

4. The reconciliation of the bank balance and book balance for the current month.

The proof of cash provides four separate

reconciliations.

The proof of cash provides four separate

reconciliations.

Chapter6

The EndThe EndThe EndThe End

Cash and Receivables

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