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Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIACnthia J. !oone, Ph.D., CPA
Cash and Receivables
Chapter 7
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7-2
Cash and Cash Equivalents
Balan"es in
"he"kin#a""ounts
Balan"es in
"he"kin#a""ounts
Curren"
and "oins
Curren"
and "oins
Cash e$ui%alents are short&term, hi#hl li$uid
in%estments that "an be readil "on%erted to "ash.
Cash e$ui%alents are short&term, hi#hl li$uid
in%estments that "an be readil "on%erted to "ash.
Money market
funds
Money market
funds Treasury bills
Treasury bills Commercial
paper
Commercial
paper
Cash
Cash
Items 'or de(osit su"h as
"he"ks and mone orders'rom "ustomers
Items 'or de(osit su"h as
"he"ks and mone orders'rom "ustomers
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7-3
Internal Control
Encourages adherence tocompany policies
and procedures
Encourages adherence tocompany policies
and procedures
Promotes operationalefficiency
Promotes operationalefficiency
Minimizes errors
and theft
Minimizes errors
and theft
Enhances the reliability and
accuracy of accounting data
Enhances the reliability and
accuracy of accounting data
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7-4
Internal Control Procedures
Cash Receipts Separate responsibilities for receiving cash, recording
cash transactions, and reconciling cash balances.
Match the amount of cash received ith the amountof cash deposited.
Close supervision of cash-handling and cash-recordingactivities.
Cash Receipts Separate responsibilities for receiving cash, recording
cash transactions, and reconciling cash balances.
Match the amount of cash received ith the amountof cash deposited.
Close supervision of cash-handling and cash-recordingactivities.
Cash !isbursements
"ll disbursements, e#cept pett$ cash, made b$chec%.
Separate responsibilities for cash disbursementdocuments, chec% authori&ation, chec% signing,and record %eeping.
Chec%s should be signed onl$ b$ authori&ed
Cash !isbursements
"ll disbursements, e#cept pett$ cash, made b$chec%.
Separate responsibilities for cash disbursementdocuments, chec% authori&ation, chec% signing,and record %eeping.
Chec%s should be signed onl$ b$ authori&ed
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Accounts Receivable
Result from thecredit sales of
goods or servicesto customers.
Are classied ascurrent assets.
Are recorded net oftrade discounts.
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Merchandise may bereturned
by acustomer
to asupplier.
A specialpricereduction,called an
allowance,may be given
as anincentive to
keep themerchandise.
Sales Returns
To avoid misstating the nancialstatements, sales revenue andaccounts receivable should be
reduced by the amount of returns in
the period of saleif the amount of
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7-7
Uncollectible Accounts Receivable
)ad debts result from credit customers hoare unable to pa$ the amount the$ oe,
regardless of continuing collection e*orts.
)ad debtsresult from credit customers hoare unable to pa$ the amount the$ oe,
regardless of continuing collection e*orts.
PAST DUE
+n conformit$ ith thematching principle, bad debt
e#pense should be recordedin the same accountingperiod in hich the sales
related to the uncollectible
account ere recorded.
+n conformit$ ith thematching principle,bad debt
e#pense should be recordedin thesameaccountingperiod in hich the sales
related to the uncollectible
account ere recorded.
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Uncollectible Accounts Receivable
Most businesses record an estimate of thebad debt expense by an adusting entry
at the end of the accounting period.
Most businesses record an estimate of thebad debt expenseby an adusting entry
at the end of the accounting period.
Bad debt e)(ense )))
Allowan"e 'or un"olle"tible a""ounts )))
!ontra assetaccount to
accounts receivable.
"ormally classiedas
aselling expenseand
closed at year#end.
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Allowance for Uncollectible Accounts
et reali&able value is the amount of the accountsreceivable that the business e#pects to collect.
Accounts Receivable$ess% Allowance for &ncollectibleAccounts
"et Reali'able (alue
Accounts Receivable$ess% Allowance for &ncollectibleAccounts
"et Reali'able (alue
+ncome Statement"pproach
)alance Sheet "pproach Composite Rate
"ging of Receivables
+ncome Statement"pproach
)alance Sheet "pproach Composite Rate
"ging of Receivables
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Income Statement Approach
)ocuses on past credit sales to makeestimate of bad debt expense.
*mphasi'es the matching principle byestimating the bad debt expenseassociated with the current period+s creditsales.
)ocuses on pastcredit salesto makeestimate of bad debt expense.
*mphasi'es thematching principlebyestimating thebad debt expenseassociated with the current period+s credit
sales.
)ad debt e#pense is computed asfollos1
)ad debt e#pense is computed asfollos1
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Balance Sheet Approach ocuses on the collectabilit$ of accounts receivable to
ma%e the estimate of uncollectible accounts.
+nvolves the direct computation of the desired balancein the alloance for uncollectible accounts.
ocuses on the collectabilit$ of accounts receivable to
ma%e the estimate of uncollectible accounts. +nvolves the direct computation of the desired balance
in the alloance for uncollectible accounts.
Com(ute the desired balan"e in the allowan"e 'orun"olle"tible a""ounts.
Bad debt e)(ense is "om(uted as:
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Summary of Measurement and ReportingIssues for Accounts Receivable
Recognition!epends on the earnings process for most creditsales, revenue and the related receivables arerecogni&ed at the point of deliver$.
nitial valuation
+nitiall$ recorded at the e#change price agreedupon b$ the bu$er and seller.
-ubseuent valuation+nitial valuation reduced to net reali&able value b$1
/. 55"lloance for sales returns 2. 55"lloance for uncollectible accounts1 6he income statement approach 6he balance sheet approach!lassication
"lmost ala$s classied as a current asset.
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Notes Receivable
A ritten promise to pay a specific
amount at a specific future date!
E"en for
maturities less
than # year$ the
rate is
annualized!
E"en formaturities less
than # year$ the
rate is
annualized!
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Financing with Receivables
Companies ma$ usetheir receivables to
obtain immediate cash.
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Deciding Whether to Account for a Transfer asa Sale or a Secured Borrowing
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This ratio measures ho many
times a company con"erts itsrecei"ables into cash each year!
%et SalesA"erage Accounts &ecei"able
&ecei"ablesTurno"er
&atio
'
This ratio is an appro(imation of thenumber of days the a"erage accounts
recei"able balance is outstanding!
)*+
&ecei"ables Turno"er &atio
A"erage
CollectionPeriod '
Receivables Management
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End of Chapter 7