Upload
renee-well
View
223
Download
1
Tags:
Embed Size (px)
Citation preview
1
ACG 2021Financial Accounting
Chapter 5 – Accounting for Short-Term Investments and Accounts Receivable
2
Short-Term Investments
Next most liquid Asset after Cash Investments that a company plans to hold for
one year or less.Three Types:
– Held-to-maturity securities• Usually Cash Loans
– Trading investments• Stocks or Bonds
– Available-for-sale investments• Discussed later
(Held-to-maturity and available-for-sale securities could also be long-term.)
3
Trading Investments
Use of Excess CashBuy Low, Sell HighMost often, stock or bonds of
another company
4
Held-to-Maturity Investments
Typically Note Receivable– Business organization lends excess
cash, expecting interest in return
Investor expects to hold until maturity date
These Investments earn interest revenue for the investor
5
Reporting Short-Term Investments
Balance Sheet– Current Assets– Trading investments reported at
current market valuecurrent market valueIncome Statement
– Interest and dividend revenue reported under Other Revenue.
– Gains and losses reported under Other Revenue.
• Including Unrealized Gains and Losses
6
Accounting for Trading InvestmentsRecord PurchaseAdjust at end of period to Market Value
– Unrealized Gain• Increases Trading Investment balance (debit)
– Unrealized Loss• Decreases Trading Investment balance (credit)
Record Sale– Compare Sale price to ENDING balance
• Which includes all previous adjustments to market value
– Sale price > ENDING balance = Gain– Sale price < Ending balance = Loss
Accounting for Trading Investments
Investments that can be traded
– Stocks, Bonds
Oracle Corporation purchases Ford Motor Company stock on May 18, paying $100,000, with the intention of selling the stock within a few months.
General Journal
Date Accounts and Explanations PR Debit Credit
May 18 Short-term investment 100,000Cash 100,000
Purchased investment
Accounting for Unrealized Gain/(Loss)Oracle fiscal year ends on May 31, and the
investment in Ford has a current market value of $102,000 on this date.
General Journal
Date Accounts and Explanations PR Debit Credit
May 31 Short-Term Investment 2,000 Unrealized Gain on Investments 2,000Adjusted investment to market value
9
Short-Term Investments
Short-Term InvestmentsCost 100,000Adjustment to market value 2,000Balance 102,000
What happens if at the next reporting period, if we sellFord’s stock for $105,000? What’s the entry?What if we sell the stock for $95,000? What’s the entry?
10
Realized Gain / (Loss)
When Investor Sells AssetRealized Gain
– Sales Price > Investment Balance
Realized Loss– Sales Price < Investment
Cash 105,000Short-Term Invest 102,000Gain on Sale of Invest 3,000
Sold at a gain
Cash 95,000Loss on Sale of Invest 7,000
Short-Term Invest 102,000Sold at a loss
Accounting for Dividends Rcv’d
On May 27, Oracle receives a cash dividend of $4,000 from Ford.
General Journal
Date Accounts and Explanations PR Debit Credit
May 27 Cash 4,000Dividend revenue 4,000
Received cash dividend
12
Reporting on the Balance Sheetand the Income Statement
13
ACG 2021Financial Accounting
Accounting for:
Accounts Receivable
14
Receivables
Receivables are the 3rd most liquid Assets after:– Cash– Short-term Investments
Receivables are monetary claims against the business organization customers.– Business organization extends credit to customers to make
a sale• How many business do you know where you can only pay with
cash? Two major types:
– Accounts receivable (trade receivables) – amount to be collected from customers from the sale of goods and services
– Notes receivable – written promise to pay• Secured
– Collateralized loan• Unsecured
15
Issues When Extending Credit
Benefits Increase Sales VolumeGrow market shareGrow Business
ConsequencesCustomers take a long
time to pay– Ratio: Days Sales in
Receivables
Customers don’t pay at all
Additional expense from management of collection process
Higher risk of $’s being stolen by employee
16
Accounting for Accounts ReceivableMain Account Receivable Account
– Debits are for new amounts owed by ALL customers
– Credits are for payments made by ALL customers
– Account balance is total owed by ALL customers
Subsidiary Account Receivables– Separate accounts maintained for each customer
• Debits are only for new amounts owed by particular customer
• Credits are only for payments paid by particular customer
• Account balance is total owed by particular customer
17
Accounts Receivable
GENERAL LEDGER
Accounts ReceivableBal. 9,000
ACCOUNTS RECEIVABLESUBSIDIARY RECORD
AstonBal. 5,000
Harris
Salazar
Bal. 1,000
Bal. 3,000
18
Issues in Accounting for Receivables
Measure and report receivables at net realizable valuenet realizable value.
– The amount the business organization expects to collect
• Total Accounts receivable – Estimated Uncollectible $’s
– Estimate reduces Accounts Receivable (credit) and creates an expense (debit)
Measure and report the expense associated with failure to collect.
– Why? What accounting principle requires us to report this expense?
• Matching: Must match costs with revenues that the costs generate…
– Extending credit creates revenue, we must record the cost of extending credit
Two accounting methods for recording uncollectible accounts
receivable
– Allowance Method (based on Estimation)
• Estimation technique #1: Percent of Sales
• Estimation technique #2: Aging of Accounts Receivable
– Direct Write-off Method
19
Uncollectible Receivables
Allowance method– record losses based on an estimate of uncollectible
accounts.
• Percent-of-sales method
– computes expenseexpense as a percent of revenue
– income statement approach
• Aging-of-receivables method
– Computes ending allowance account balanceending allowance account balance
– individual receivables are analyzed based on how long they
have been outstanding
– balance sheet approach
20
Contra Accounts
Allowance account = Contra Accounts Receivable– Contra Account is related to a “main” account
– Contra Account has opposite normal balance from “main”
account
• Accounts Receivable = Assets = Normal Debit Balance
• Allowance for Uncollectible Accounts = Contra Asset =
Normal Credit Balance
• Accounts Receivable – Allowance for Uncollectible Accounts
= Net Realizable Value
21
Estimating Uncollectible A/R We need 3 T-Accounts
– Bad Debt Expense (debit)• Cost of not collecting A/R’s
– Allowance for Uncollectible Accounts (credit)• Contra account that indicates what we expect not to collect
– Accounts Receivable (no adjustment, used to calculate NRV)• Total (Gross) amount owed by customers
Step 1: Determine Estimate– Know what that estimate is
Step 2: Record Estimate– % of Sales
• Debit Bad Debt Expense• Credit Allowance for Uncollectible Accounts
– Aging of A/R• New Ending Balance in Allowance Account• Subtract Beginning Balance from Ending Balance =
– Credit Allowance for Uncollectible Accounts– Debit Bad Debt Expense
22
Percent-of-SalesTotal sales are $33,000. The credit department estimates that uncollectible-account expense is 1% of total revenues.
Dec 31 Uncollectible-Account Expense($33,000 x .01) 330
Allowance for Uncollectible Accounts330
Recorded expense for the year
Accounts Receivable3,105
Bal. 3,105
Allowance forUncollectible Accounts
20
330330
Bal. 350
Net Accounts Receivable
$3,105 – 350 = $2,755
23
Aging-of-Receivables
Age of Account (Dollar amounts in millions)
Customer 1-30 Days
31-60 Days
61-90 Days
Over 90 Days
Total Balance
Hertz Rent-A-Car * * * * *
* * * * * *
* * * * * *
* * * * * *
* * * * * *
* * * * * *
Totals $1,800 $ 760 $ 326 $ 219 $3,105 Estimated percent uncollectible............
X 4%
X 10%
X 18.7%
X 80%
Allowance for Uncollectible Accounts balance should be
$ 72
+ $ 76
+ $ 61
+ $ 175
= $ 384
Critical Point!!!!
24
Aging-of-Receivables
Dec 31 Uncollectible-Account Expense 214
Allowance for Uncollectible Accounts214
Recorded expense for the year
Accounts Receivable3,105
Bal. 3,105
Allowance forUncollectible Accounts
170
214
Bal. 384384
Net Accounts Receivable
$3,105 – 384 = $2,721
End Bal (384) – Beg Bal (170) = Expense (214)
25
Aging-of-Receivables
Current balance in allowance account is $170.
Calculate the adjustment needed to bring the balance to $384.
Expense: $384 – $170 = $214
26
Financial Statements using The Allowance Method
Balance Sheet (partial)Accounts receivable $10,000Less: Allowance for uncollectible accounts – 900Accounts receivable, net $ 9,100
Income Statement (partial)Expenses:Uncollectible-account expense $ 2,000
Accounts receivable, net of allowance for doubtful accounts of $701 and $767 atDecember 31, 2005 and 2006, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,136 52,394
27
Writing off Uncollectible Accounts
Decrease the Allowance account and remove the account receivable.
Mar 31 Allowance for Uncollectible Accounts 100
Accounts Receivable 100
What is the effect on total assets?Why is there no expense recorded?
28
Comparing the Methods
Allowance Method
Adjusts Allowance forUncollectible Accounts
BY
Calculating Expense
Aging-of-Receivables
Adjusts Allowance forUncollectible Accounts
TO
Calculating EndingAllowance Balance
Percent-of-Sales
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
29
Direct Write-Off Method
No allowance is established and the expense is recognized when accounts are written off.
Mar 31 Uncollectible Account Expense 100 Accounts Receivable 100
Accounts Receivable – Sarasota Pipe61
Accounts Receivable – Miller Auto Sales39
30
Direct Write-Off Method
Assets are overstated on the balance sheet because no allowance account is used.
Poor matching of uncollectible-account expense against revenue. Net income is overstated.
31
Basic Accounting for Accounts ReceivableProvided $1,000 Goods/Services on
account Accounts Receivable 1,000
Sales Revenue 1,000
Receive $1,000 payment from customer on account Cash 1,000
Accounts Receivable 1,000
32
ACG 2021Financial Accounting
Accounting for Notes Receivable and Cash Flow Issues
33
Some Definitions Creditor
– Who the money is owed to Debtor
– Who owes the money Debt Instrument
– Legal Document representing debt• Represented by a payable for the debtor• Represented by a receivable for the creditor
Equity Security– Stock certificate, ownership of a corporation
Maturity– Date when debt instrument must be paid
Term– Time from inception to maturity of debt instrument
• If < 1 year, listed as Current Asset / Liability• If > 1 year
– Current Portion is Current Asset / Liability– Portion due after 1 year is Long term Asset/Liability
34
Notes Receivable
Creditor has a note receivable.Debtor has a note payable.Principal is the amount borrowed.Interest is revenue to the lender/creditor
and expense to the borrower/debtor.– Accrues over the period of the note– If period straddles two accounting periods
• Adjusting Entry must be made to reflect interest earned during each period – recall accrued revenues.
35
Notes ReceivableLaura Holland signs a $1,000 note dated Aug. 31, 20X5 with a maturity date of Feb. 28, 20X6. To record this on the bank’s books: (How many months is this loan for? How many accounting periods does it cover?
Notes Receivable – L. Holland 1,000
Cash 1,000
Made a loan
To record interest earned at Dec. 31, 20X5:
Interest Receivable (1,000 x .09 x 44/12) 30
Interest Revenue 30
Accrued interest revenue
36
Notes ReceivableTo record collection of the note on Feb. 28, 20X6:
Cash 1,045
Interest Revenue (1,000 x .09 x 22/12)15Collected note at maturity
Interest Receivable30
Note Receivable – L. Holland1,000
37
How to Speed Up Cash Flow
Credit card or bankcard salesSelling receivables (Factoring)Discounting notes receivable
General Journal
Date Accounts and Explanations PR Debit Credit
Cash 97,000
Financing Expense 3,000
Sales Revenue 100,000To record a credit card sale of$100,000 and a 3% financing fee
How to Speed Up Cash Flow
Recording a credit card or bankcard sale
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
How to Speed Up Cash Flow
Recording the sale of receivables
General Journal
Date Accounts and Explanations PR Debit Credit
Cash 95,000
Financing Expense 5,000
Trade Accounts Receivable 100,000Sold accounts receivable
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
40
Reporting on theStatement of Cash FlowsReceivables bring in cash when the
business collects from customers.– Operating Activities
Investment transactions change Cash– Investing Activities
41
ACG 2021Financial Accounting
Acid Test & Days Sales in Receivables Ratios
42
Ratios
Acid Test Ratio = Cash + ST Investments + Net Receivables
Total Current Liabilities
Day’s Sales in Receivables =Average Net Accounts Receivable
Average Daily Sales
43
A stringent test of liquidityMeasures entity’s ability to pay its current
liabilities immediately
Acid-Test Ratio
44
How long does it take to collect the average receivables for an organization?
Step 1: Determine Organizations sales for a single day– One day’s sales = Net sales ÷ 365 days
Step 2: Determine Organizations Average Receivables– (Beginning Balance + Ending Balance) / 2
Step 3: Calculate Ratio
A smaller number indicates a quick conversion to cash.
Days’ Sales in Receivables
45
BBBB and BBY Ratios
BlackBoard– Acid Test
• FYE 2005 1.8 FYE 2006 .58
– Day’s Sales in Receivables• FYE 2006 78
Best Buy– Acid Test
• FYE 2006 .70 FYE 2007 .69
– Day’s Sales in Receivables• FYE 2007 5.06
46
End of Chapter 5