PowerPoint Chapter (PowerPoint advanced finance Chapter7)

8/13/2019 PowerPoint Chapter (PowerPoint advanced finance Chapter7)

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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA

Cynthia J. Rooney, Ph.D., CPACopyright 2012 The McGraw-Hill Companies, I

nc.McGraw-Hill/Irwin

Financial AssetsChapter 7


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How Much Cash Should aBusiness Have?


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7-3

The Valuation of FinancialAssets

Type of Financial Assets

Basis for Valuation in

the Balance Sheet

Cash (and cash equivalents) Face amount

Short-term investments(marketable securities)

Current market value

Receivables Net realizable value

Estimated collectible amount


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Cash

Coins andpapermoney

Checks

Money orders

Travelers checks

Bank creditcard sales

Cashisdefined as

any depositbanks will

accept.


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Reporting Cash in theBalance Sheet

CashEquivalents

RestrictedCash

Lines ofCredit


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Cash Management

Accurately account for cash.

Prevent theft and fraud.

Assure the availability of adequateamounts of cash.

Prevent unnecessarily large amounts

of idle cash.


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Internal Control Over Cash

Segregate authorization, custody andrecording of cash.

Prepare a cash budget (or forecast).

Prepare a control listing of cashreceipts.

Require daily deposits.

Make all payments by check. Require that every expenditure be

verified before payment.

Promptly reconcile bank statements.


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Reconciling the BankStatement

Explains the difference between cashreported on bank statement and cash

balance in depositors accountingrecords.

Provides information forreconciling journal entries.


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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


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12/407-12


Balance per bank statement, July 31 9,610$

Additions:

Deposit in transit 500

Deductions:

Bank error 486$

Outstanding checks 2,417 2,903Adjusted cash balance 7,207$

Balance per depositor's records, July 31 7,430$

Additions:

Interest 30

Deductions:

Recording error 28$

NSF check 225 253

Adjusted cash balance 7,207$


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GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Jul 31 Cash 30

Interest Revenue 30

31 Supplies Inventory 28

Accounts Receivable 225

Cash 253


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Short-Term Investments

BondInvestments

CapitalStock

Investments

Current Assets

Almost AsLiquid As

Cash

ReadilyMarketable

Marketable

Securitiesare . . .


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Purchase of MarketableSecurities

Foster Corporation purchases as a short-terminvestment 4,000 shares of The Coca-Cola

Company on December 1. Foster paid$48.98 per share, plus a brokerage

commission of $80.

GENERAL JOURNAL

Date Account Titles and Explanation Debit CreditDec 1 Marketable Securities 196,000

Cash 196,000

Total Cost: (4,000 $48.98) + $80 = $196,000

Cost per Share: $196,000 4,000 = $49.00


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Recognition of InvestmentRevenueOn December 15, Foster Corporation

receives a $0.30 per share dividendon its 4,000 shares of Coca-Cola.

GENERAL JOURNAL


Dec 15 Cash 1,200

Dividend Revenue 1,200

4,000 $0.30 = $1,200


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Sales of Investments at aGainOn December 18, Foster Corporation sells

500 shares of its Coca-Cola stock for$50.04 per share, less a $20 brokerage

commission.

GENERAL JOURNAL


Dec 18 Cash 25,000

Marketable Securities 24,500

Gain on Sale of Investment 500

Sales Proceeds: (500 $50.04) - $20 = $25,000

Cost Basis: 500 $49 = $24,500Gain on Sale: $25,000 - $24,500 = $500


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Sales of Investments at aLoss

On December 27, Foster Corporation sells anadditional 2,500 shares of its Coca-Colastock for $48.01 per share, less a $25

brokerage fees.


Dec 27 Cash 120,000

Loss on Sale of Investment 2,500


Sales Proceeds: (2,500 $48.01) - $25 = $120,000Cost Basis: 2,500 $49 = $122,500Loss on Sale: $120,000 - $122,500 = $2,500


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Adjusting MarketableSecurities to Market ValueOn December 31, Foster Corporations remaining

shares of Coca-Cola capital stock have a currentmarket value of $47,000. Prior to any adjustment,the companys Marketable Securities account has

a balance of $49,000 (1,000 $49 per share).

GENERAL JOURNAL

Date Account Titles and Explanation Debit CreditDec 31 Unrealized Holding Loss on Investments 2,000


Unrealized Loss: $47,000 - $49,000 = ($2,000)


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Presentation of MarketableSecurities in the Balance Sheet


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GENERAL JOURNAL


Uncollectible Accounts Expense $$$$

Allowance for Doubtful Accounts $$$$

Reflecting Uncollectible Accountsin the Financial Statements

At the end of each period, record anestimateof the uncollectible accounts.

Contra-asset accountSelling expense


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Writing Off an UncollectibleAccount Receivable

When an account is determined tobe uncollectible, it no longer

qualifies as an asset and shouldbe written off.

GENERAL JOURNAL


Jan. 5 Allowance for Doubtful Accounts 500

Accounts Receivable (J. Clark) 500


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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 notchangethe net realizable value nor did it affect any

income statement accounts.

Writing Off an UncollectibleAccount Receivable


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Monthly Estimates of CreditLosses

At the end of eachmonth, managementshould estimate theprobable amount of

uncollectible accountsand adjust the

Allowance for DoubtfulAccounts to this new

estimate.Two Approaches to Estimating Credit Losses1. Balance Sheet Approach2. Income Statement Approach


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Estimating Credit Losses The Balance Sheet Approach

Year-end Accounts Receivable isbroken down into age

classifications.

Each age grouping has adifferent likelihood of being

uncollectible.

Compute a separate allowancefor each age grouping.


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EastCo, Inc.

Schedule of Accounts Receivable by AgeDecember 31, 2009

Days Past Due

Accounts

Receivable

Balance

Estimated

Bad Debts

Percent

Estimated

Uncollectible

Amount

Current 45,000$ 1% 450$1 - 30 15,000 3% 450

31 - 60 5,000 5% 250

Over 60 2,000 10% 200

67,000$ 1,350$


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


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GENERAL JOURNAL


Dec. 31 Uncollectible Accounts Expense 850

Allowance for Doubtful Accounts 850

EastCos unadjustedbalance in the allowance

account is $500.Per the previous

computation, the desiredbalance is $1,350.

500

850

1,350

Allowance for

Doubtful Accounts


s ma ng re osses


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Net Credit Sales

% Estimated UncollectibleAmount of Journal Entry

Uncollectible accounts percentage is basedon actual uncollectible accounts from prior

years credit sales.

s ma ng re osses The Income Statement

Approach

s ma ng re osses


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GENERAL JOURNAL


Dec. 31 Uncollectible Accounts Expense 600

Allowance for Doubtful Accounts 600

In the current year, EastCo had credit salesof $60,000. Historically, 1% of EastCoscredit sales has been uncollectible. For

the current year, the estimate ofuncollectible accounts expense is $600.($60,000 .01 = $600)

s ma ng re osses The Income Statement

Approach

Recovery of an Account


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Recovery of an AccountReceivable Previously Written

OffSubsequent collections require that theoriginal write-off entry be reversedbefore the cash collection is recorded.

GENERAL JOURNAL


Accounts Receivable (X Customer) $$$$

Allowance for Doubtful Accounts $$$$

Cash $$$$



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Direct Write-Off Method

This method makes no attempt tomatch revenues with the expense of

uncollectible accounts.

GENERAL JOURNAL


June 15 Uncollectible Accounts Expense $$$$



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Management of AccountsReceivableExtending credit encourages customers to

buy from us but it ties up resources inaccounts receivable.

FactoringAccounts

Receivable

Credit Card

Sales


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Notes Receivable and InterestRevenue

The interest formula includes threevariables:

Interest = Principal Interest Rate Time

When computing interest for one year, Timeequals 1. When the computation period is less

than one year, then Time is a fraction.

For example, if we needed to compute interest for3 months, Time would be 3/12.


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What entry would Hall Companymake on February 1, the maturity

date?

Notes Receivable and InterestRevenue

Date Description Debit Credit

Feb. 1 Cash 10,300Interest Receivable 200

Interest Revenue 100

Notes Receivable 10,000

$10,000 12% 3/12= $300


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Financial Analysis andDecision Making

Accounts Receivable Turnover Rate

This ratio provides useful information for

evaluating how efficient management hasbeen in granting credit to producerevenue.

Net SalesAverage Accounts Receivable


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Financial Analysis andDecision Making

Avg. Number of Days to Collect A/R

This ratio helps judge the liquidity of acompanys accounts receivable.

Days in YearAccounts Receivable Turnover Ratio


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End of Chapter 7

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