1 Cash and Receivables C hapter 6. 2 1.Understand the importance of cash management. 2.Prepare a...

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Cash and ReceivablesCash and

Receivables

Chapter6

2

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

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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.

ObjectivesObjectives

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CashCash

Cash

• 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

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Cash ManagementCash Management

The person opening the mail or the sales person using the cash register should count the receipts immediately.

All cash receipts are recorded daily in the accounting records.

All receipts are deposited daily in the company’s bank account.

Control Over ReceiptsControl Over Receipts

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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

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Petty CashPetty Cash

First: An employee is appointed petty

cash custodian.

First: An employee is appointed petty

cash custodian.

Petty Cash 500Cash 500

Petty Cash 500Cash 500

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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).

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Third: When the amount of cash in the petty cash fund becomes low and/or at the end of accounting period,...

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.

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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 is short $4.40 ($71.94 - $67.54).The fund is short $4.40 ($71.94 - $67.54).

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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

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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.

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Cash balance

from bank statement

$7,218

Cash balance

from company records $6,925

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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

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$7,847


Outstanding checks totaled $516.

Outstanding checks totaled $516.



$7,847 Deduct: Outstanding checks (516)

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


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Cash balance from company records $6,925


Cash balance from company records $6,925 Add: Interest earned on the funds on

deposit. 715

Interest earned on the funds on deposit.

Interest earned on the funds on deposit.


deposit. 715 $7,640

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deposit. 715 $7,640


deposit. 715 $7,640

Deduct: Bank service charge (9)


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

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deposit. 715 $7,640



deposit. 715 $7,640

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


Customers’ checks were returned for lack of funds

(NSF check), $300.

Customers’ checks were returned for lack of funds

(NSF check), $300.

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deposit. 715 $7,640



deposit. 715 $7,640

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

Adjusted Cash Balance $7,331

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Adjusted cash balance per

bank statement

$7,331

Adjusted cash balance per company records $7,331

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ReceivablesReceivables

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

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The sales price is fixed or determinable at the date of sale.

The buyer has paid or will pay the seller, and the obligation is not contingent upon the resale of the product.

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

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The buyer has an economic substance apart from the seller.

The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.

The seller can reasonably estimate the amount of future returns.


Right of ReturnRight of Return

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Accounts ReceivableAccounts Receivable

• Prenumbered sales invoices.

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

Internal Control Procedures for Accounts Receivable

Internal Control Procedures for Accounts Receivable

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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, 2000 with terms of 2/10, n/EOM

Sold $8,000 of merchandise to various customers on

December 4, 2000 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)

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On December 12 received payment on goods originally

billed at $5,500.

On December 12 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)

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

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

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No entry required Accounts Receivable 20Sales Discounts Not Taken 20

Year-end adjustment at the end of the period.

Year-end adjustment at the end of the period.

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Loss ContingenciesLoss Contingencies

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.

The amount of the loss can be reasonably estimated.

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.

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.

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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.

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Relationship to sales (income statement approach):

a Percentage of sales

b Percentage of net credit sales

Relationship to accounts receivable (balance sheet approach):

a Percentage of outstanding accounts receivable

b Aging of accounts receivable


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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?

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

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Percentage of Outstanding Accounts Receivable


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?



Allowance for Doubtful Accounts

4,500 (current balance)

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

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





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Aging of Accounts ReceivableAging of Accounts Receivable

Gather the unpaid invoices in each customer’s account.

Classify the invoice amounts according to the length of time the invoice has been outstanding.

Multiply the total amount in each age group by the applicable estimated uncollectible percentage.

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.

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x 2

x 8

x 15

x 30

x 50

%


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

Age

Estimated Percentage Uncollectible

Estimated Amounts

Uncollectible

= $ 1,070

= 2,760

= 540

= 4,710

= 7,250

$16,330

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

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


$16,330 + $1,350

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Writing Off UncollectiblesWriting Off Uncollectibles


8,750

Accounts Receivable

175,000

Net realizable value = $166,250

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

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

Allowance for Doubtful Accounts 850Accounts Receivable 850

Net realizable value = $166,250

850

850

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Collection of an Account Previously Written Off

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

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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.

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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)

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FactoringFactoring

The transferred assets have been isolated from the transferor.

The transferee obtains the right to exchange. 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.

FASB Statement No. 125 states that a company records transfer of financial assets (e.g., accounts receivable) in which

it surrenders control over the financial assets to another company as a sale when all the following conditions are met:

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Assignment of Accounts ReceivableAssignment of Accounts Receivable

On December 1, 2000 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, 2000 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

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Notes Payable 10,000Interest Expense 480

Cash 10,480

Assignment of Accounts ReceivableAssignment of Accounts Receivable

On December 31, 2000 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, 2000 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

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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

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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.

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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.

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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.

They usually involve interest, requiring the separation of the receivables into its principal and interest components.


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Interest-BearingInterest-Bearing

Received a $5,000, 60-day, 12% note on October 1, 2000.

Notes Receivable 5,000Sales 5,000

Received maturity value on December 1, 2000.

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

$5,000 x 0.12 x 60/360

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Non-Interest-BearingNon-Interest-Bearing

Received a $5,100, 60-day, non-interest-bearing note on October 1, 2000.Notes Receivable 5,100

Interest Revenue 100Sales 5,000

Received maturity value on December 1, 2000.

Cash 5,100Notes Receivable 5,100

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Notes Receivable DiscountedNotes Receivable Discounted

On August 1, 2000, 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, 2000, 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%.

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Face value of note $5,000.00 Interest to maturity

($5,000 x 0.12 x 90/360) 150.00 Maturity value of note $5,150.00 Discount ($5,150 x 0.14 x 60/360) (120.17) Proceeds $5,029.83 Accrued interest revenue: $50 Book value of note ($5,000 + $50) (5,050.00) Loss from discounting of note $ 20.17


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October 30, 2000Notes 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, 2000Interest Receivable 50.00

Interest Revenue 50.00

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Assume instead that on November 3, 2000 the bank notified Kasper that the note had not been paid and also charged Kasper a $10 fee.

Assume instead that on November 3, 2000 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

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Appendix: Proof of CashAppendix: Proof of Cash The reconciliation of the bank balance and book

balance for the previous month. The reconciliation of the receipts recorded by the bank

for the current month with the receipts recorded on the books.

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

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.

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