Cash and Receivables. Chapter. Learning Objectives. Nature and Composition of Cash. Additional Cash Issues

Transcription

1 Learning Objectives Cash and Receivables No substantial departures from the text, Chapter 7. Chapter UCSB, Anderson 7-2 UCSB, Anderson Nature and Composition of Cash Cash is classified as a... Current Asset To be reported as CASH: Must be readily available for the payment of current obligations, and... it must be free from any contractual restriction that limits its use in satisfying debts. Additional Cash Issues Bank Overdrafts (means negative cash) Happens when outstanding checks exceeds cash at bank plus deposits in transit (or when the Company has overdraft protection) Is this an asset? NO!!- current liability called bank overdraft Restricted Cash- such as cash held as collateral for bank. Requires disclosure Cash Equivalents Some companies include investments which are readily converted to cash within 90 days as a cash equivalent - requires disclosure. Hence their financial statement presentation for the cash line reads: cash and cash equivalents. 7-3 UCSB, Anderson 7-4 UCSB, Anderson

2 Account Classification Account Classification Items Account Items Account a. Coins and currency b. U.S. Treasury bonds c. Certificate of deposit d. NSF check (customer) e. Postdated checks f. Cash to be used for bond retirement g. Deposits in transit h. Shares of AOL stock Cash Temporary investments Temporary investments Accounts receivable Receivable Long-term investments (bond sinking fund) Cash Investments (ST or LT?) NOTE: Treasury bills are 1 year Or less, but treasury bonds always 1 year or more i. Savings account j. Petty cash k. Stamps l. Travel advances Cash Cash Postage expense Prepaid 7-5 UCSB, Anderson 7-6 UCSB, Anderson Cash Controls Why are cash controls important? Cash is most susceptible asset to theft. Because ultimately everything culminates in cash, consequently other problems frequently manifest themselves as unknown reconciling items when the bank reconciliation is performed. What do you think are the two most important cash controls to have? Segregation of duties (forces collusion) Check signing authority (have to get the cash out of the bank in order to steal it! 7-7 UCSB, Anderson Bank Reconciliation Reconciling Items: unrecorded by bank, but recorded by entity recorded by bank, but not by entity errors by the bank or the entity CRUTCH TOOL Reconciling From A to B (A at top of reconciliation): Recorded by A but NOT B: Opposite direction in reconciliation Recorded by B but NOT A: Same direction in reconciliation. 7-8 UCSB, Anderson

3 BANK RECONCILIATION CRUTCH Bank Reconciliation Example RECONCILING FROM BOTH X & Y RECORDED BY X BUT NOT Y Y BUT NOT X X No opposite direction same direction adjustment Increase= negative Increase= positive Decrease=positive Decrease= negative Y For example: XYZ Company. The following relevant information exists: The bank balance is $250,000 as of December 31, 200X while your general ledger shows cash at $200,000. Careful examination of activity reveals the following: There are $20 in bank fees which were not recorded in the general ledger; XYZ received checks and posted the entry for $95,000 during the last week of December which did not get deposited to the bank. XYZ wrote checks during the last week of December totaling $175,000 which have not yet cleared the bank. There was a $29,980 un-located reconciling item (general ledger exceeding bank) on every bank statement sense the beginning of the year. 7-9 UCSB, Anderson 7-10 UCSB, Anderson Bank reconciliation to example on previous slide: Balance per bank 250,000 Bank charges not recorded 20 entry required to Gl Deposit in transit 95,000 Outstanding checks (175,000) Other misc. 29,980 Possible error! 200, UCSB, Anderson Claims held against customers and others for money, goods, or services. Oral promises of the purchaser to pay for goods and services sold. Accounts Receivable Trade receivables if from their primary activities. Receivables 7-12 UCSB, Anderson Written promises to pay a certain sum of money on a specified future date. Notes Receivable

4 A/R Measurement A/R Measurement Trade Discounts Cash Discounts Inducements for prompt payment Reductions from the list price Not recognized in the accounting records Customers are billed net of discounts 10 % Discount for new Retail Store Customers 2/10, n/30 means: 2% discount if paid within 10 days, all of it if you don t! Can account for it using the Gross Method or Net Method (Illustration 7-4 pg. 321) Gross Method is more practical and common. Payment terms are 2/10, n/ UCSB, Anderson 7-14 UCSB, Anderson Sales Discounts: Gross VS Net Accounts Receivable Valuation Gross Method- MOST COMMON Net Method Sales of $10,000, terms 2/10, n/30 Accounts Receivable 10,000 Accounts Receivable 9,800 Sales 10,000 Sales 9,800 Valued at Net Realizable Value Methods of Accounting for Uncollectible Accounts Payment of $3,920 received WITHIN discount period (10 days) Cash 3,920 Cash 3,920 Accounts receivable 4,000 Accounts receivable 3,920 Sales discounts 80 Payment of $6,000 received AFTER discount period (10 days) Cash 6,000 A/R 120 Accounts receivable 6,000 Sales discounts forfeited 120 Cash 6,000 Accounts receivable 6,000 Direct Write-Off Theoretically undesirable: no matching receivable not stated at net realizable value Allowable if immaterial Allowance Method Losses are Estimated: Percentage-of-sales Percentage-of-receivables Other means ALWAYS have to assess whether the methodology utilized is reasonable (judment comes into play again!) 7-15 UCSB, Anderson 7-16 UCSB, Anderson

5 Accounting for A/R and Bad Debts How are these accounts presented on the Sheet? 7-17 UCSB, Anderson Balance End End. Assets Current Assets: Cash $ 346 Accounts receivable 500 Less allowance for doubtful accounts Inventory 812 Prepaids _ 40 Total current assets 1,673 Fixed Assets: Office equipment 5,679 Furniture & fixtures 6,600 Less: Accumulated depreciation (3,735) Total fixed assets 8,544 Total Assets $10, UCSB, Anderson Assets Current Assets: Cash $ 346 Accounts receivable, net of $25 allowance for doubtful accounts 475 Inventory 812 Prepaids _ 40 Total current assets 1,673 Fixed Assets: Office equipment 5,679 Furniture & fixtures 6,600 Less: Accumulated depreciation (3,735) Total fixed assets 8,544 Total Assets $10, UCSB, Anderson Accounting for A/R and Bad Debts Journal entry for credit sale of $100? Accounts receivable 100 Sales 100 End End UCSB, Anderson

6 Accounting for A/R and Bad Debts Journal entry for credit sale of $100? Accounts receivable 100 Sales 100 Sale 100 Accounting for A/R and Bad Debts Collected of $333 on account? Cash 333 Accounts receivable 333 Sale 100 End End UCSB, Anderson End End UCSB, Anderson Accounting for A/R and Bad Debts Collected of $333 on account? Cash 333 Accounts receivable 333 Sale Coll. Accounting for A/R and Bad Debts Adjustment of $15 for estimated Bad-Debts? Bad debt expense 15 Doubtful Accounts 15 Sale Coll. End End UCSB, Anderson End End UCSB, Anderson

7 Accounting for A/R and Bad Debts Adjustment of $15 for estimated Bad-Debts? Bad debt expense 15 Doubtful Accounts 15 Sale Coll. 15 Est. Accounting for A/R and Bad Debts Write-off of uncollectible accounts for $10? Doubtful accounts 10 Accounts receivable 10 Sale Coll. 15 Est. End End UCSB, Anderson End End UCSB, Anderson Accounting for A/R and Bad Debts Write-off of uncollectible accounts for $10? Doubtful accounts 10 Accounts receivable 10 Sale Coll. 15 Est. 10 W/O W/O 10 End End UCSB, Anderson Assets Current Assets: Cash $ 346 Accounts receivable, net of $30 allowance for doubtful accounts 227 Inventory 812 Prepaids _ 40 Total current assets 1,673 Fixed Assets: Office equipment 5,679 Furniture & fixtures 6,600 Less: Accumulated depreciation (3,735) Total fixed assets 8,544 Total Assets $10, UCSB, Anderson

8 Estimating Uncollectible Accounts: The Allowance Methods Percentage-of-sales method Percentage-of-receivable method: Ending Accounts Receivable Aging of Accounts Receivable Comparison of Methods Percentage of Sales Matching Sales --- Bad Debt Expense Percentage of Receivables Net Realizable Value Receivables - Bad Debt Income Statement Approach Balance Sheet Approach 7-29 UCSB, Anderson 7-30 UCSB, Anderson Estimating Bad Debt Expense Percentage-of-Sales Approach Data Charge sales $500,000 Estimated % of charge sales not collected 1.25% Accounts receivable balance $72,500 Estimated % of A/R not collected 8% Doubtful Accounts: $150 (credit balance) Charge sales $500,000 Estimated percentage x 1.25% Estimated expense $ 6,250 ====================================== What should the ending balance be for the allowance account? 7-31 UCSB, Anderson 7-32 UCSB, Anderson

9 Percentage-of-Sales Approach Actual balance (150) Adjustment (6,250) Ending balance (6,400) Journal entry: Bad debt expense 6,250 D.A. 6,250 Percentage-of-Receivables Approach Accounts receivable $72,500 Estimated percentage x 8% Desired balance $ 5, UCSB, Anderson 7-34 UCSB, Anderson Percentage-of-Receivables Approach Notes Receivable Actual balance 150 Cr. Desired balance 5,800 Cr. Amount of expense 5,650 Journal entry: Bad debt expense 5,650 D.A. 5,650 Represent claims from borrowers evidenced by a document referred to as the note or note agreement ; Can be secured or unsecured; Must be properly valued- meaning that impairments to their value must be reflected; All notes should be recorded using a reasonable market rate: There is NO such thing as a zero percent note (except for from your parents, and actually they expect you to care for them when they are old and feeble) This results in note premiums and discounts UCSB, Anderson 7-36 UCSB, Anderson

10 Interest-Bearing Note Date: January 1, 2001 Marie Co. made a loan to Don. Co. and received in exchange a 3-year, $5,000 note bearing interest at 12%. NOTE: Unless stated otherwise in the slides or in the text, the assumption is that any premium or discount on a note is granted as an addition/ deduction from the cash given on the note. Interest-Bearing Note Present Value at 12% Market Rate: $5,000 x = $3, $600 x = 1, $5, Journal Entry at Issuance: Notes receivable 5, Cash 5, UCSB, Anderson 7-38 UCSB, Anderson Interest-Bearing Note Present Value at 10% Market Rate: $5,000 x = $3, $600 x = 1, $5, Journal Entry at Issuance: Notes receivable 5, Premium on N/R Cash 5, Interest-Bearing Note Present Value at 15% Market Rate: $5,000 x = $3, $600 x = 1, $4, Journal Entry at Issuance: Notes receivable 5, Discount on N/R Cash 4, UCSB, Anderson 7-40 UCSB, Anderson

11 12% Note Discounted at 15% Cash Effective Un- Interest Interest Discount Amort. PV of Date 12% 15% Amort. Balance Note 1/1/ ,658 12/31/ ,757 12/31/ ,871 12/31/ ,000 JOURNAL ENTRY ACTIVITY OF 15% NOTE Note rec. Discount Interest OPENING ENTRY Balance Balance Income Cash Notes receivable 5,000 5,000 Note discount 342 (342) Cash 4,658 (4,658) (4,658) 5,000 (342) - END OF YEAR ONE PAYMENT ENTRY Cash Interest income 699 (699) discount Note (243) 5,000 (699) (4,058) END OF YEAR TWO PAYMENT ENTRY Cash Interest income 714 (714) discount Note (130) 5,000 (1,412) (3,458) END OF YEAR THREE PAYMENT ENTRY Cash Interest income 729 (731) discount Note Cash 5,000 5,000 Note receivable 5,000 (5,000) - 1 (2,143) 2, UCSB, Anderson 7-42 UCSB, Anderson Non-Interest-Bearing Note Computations for JE s: Marie Co. sold real estate to to Don. Co. for a purchase price of $1,000,000 payable as follows: $800,000 cash due at close of escrow and a $200,000 non-interest bearing note payable in one lump-sum at the end of 5 years. The cost basis of the real estate sold is $750,000. Is the purchase price of the real estate equal to, more than or less than $1,000,000? Less than $1,000,000. Assuming a lender would charge 8% for this note, the present value of the $200,000 note is about $136,117, so what was the purchase price? FACTS Cash 800,000 Future 200,000 Periods 5 Payment Rate 8% PRESENT VALUE RECEIVED PV of Cash 800,000 PV of note 136, ,117 AMORTIZATION TABLE Payment Interest Principle Period Balance 136, , ,889 10, ,760 11, , ,701 12, , ,717 13, , ,815 14, ,000 $936, UCSB, Anderson 7-44 UCSB, Anderson

12 11/12/96 Non-interest bearing note continued What is the entry to record the sale? Cash $800,000 Note receivable $ 136,117 Real estate $750,000 Gain on sale of real estate $ 186,117. What will be recorded at the end of the first year (assuming annual compounding)? Interest receivable $10,889 Interest income $10,889 At the end of the second year? (don t forget that the $10,889 interest receivable now accrues interest!) Interest receivable $11,760 Interest income $11,760 Same Journal entry in years 3,4 & 5 for $12,701, $3,717 and $14,815, respectively. WHEN IT IS ALL FINISHED, THERE WILL BE $63,883 OF ACCRUED INTEREST AND WHEN THE PAYMENT IS RECEIVED, THE FOLLOWING ENTRY WILL BE RECORDED: 49 Noninterest-Bearing Note Discounted at 15% Cash Effective Un- Interest Interest Amort. Discount PV of 0% 15% Amort. Balance Note Date 1/1/92 1,712 3,288 12/31/ ,219 3,781 12/31/ ,348 12/31/ ,000 Cash $200,000 Note Receivable $ 136,117 Accrued interet rec. $ 63, UCSB, Anderson 7-46 UCSB, Anderson