Business Accounting Chap

8/21/2019 Business Accounting Chap

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© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

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FINANCIAL ASSETS

Chapter

7


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7-2

How Much Cash Should a BusinessHave?


$

Everybusiness

needsenough

cash to pay

its bills!


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7-3



Cash

Short-term

Investments

Receivables

Financial

Assets


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7-4



Accounts

receivable

Maretablesecuritiesshort-term

investments"

Cash and cashe#uivalents"

Collectionsrom

customers Cashpayments

%E&cess'cash is

invested

temporarily

Investmentsare sold as

cash is

needed


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7-5

The Valuation of Financial Assets

The Valuation of Financial Assets

Estimated collectible amount

Estimated collectible amount


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7-6

Cash

Cash

Coins andpaper money

Checs

Money orders

(ravelers) checs

*an creditcard sales

Cash isdeined as

any depositbans +ill

accept,


7/48© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

7-7

The Statement of Cash FlowsThe Statement of Cash Flows

Summaries cash

transactions or anaccounting period,

Statement o Cash Flo+s

Includes cash and cash

e#uivalents,



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Using Ecess Cash Balances Efficientl!Using Ecess Cash Balances Efficientl!

Cash available orlong-term investment

may be used to inance

gro+th and e&pansiono the business. or to

repay debt,

Cash not needed orbusiness purposes

should be distributedto the company)sstocholders,



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Cash "ve# and Sho#tCash "ve# and Sho#t

Cash /ver and Short is debited or shortagesand credited or overages,

Cash /ver and Short is debited or shortagesand credited or overages,

/n May 0. 1*AR. Inc,)s cash dra+er +ascounted and ound to be $23 over,



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Ban$ StatementsBan$ Statements

Sho+s the beginning ban balance.deposits made. checs paid. other

debits and credits in the month. andthe ending ban balance,

*an

Statement



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%econciling the Ban$ Statement%econciling the Ban$ Statement

E&plains the dierence bet+een cashreported on ban statement and cash

balance in depositor)s accountingrecords,

4rovides inormation orreconciling 5ournal entries,



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*alance per *an

6 7eposits in (ransit

- /utstanding Checs

8 *an Errors

9 Ad5usted *alance

*alance per 7epositor

6 7eposits by *ancredit memos"

- Service Charge- :SF Checs

8 *oo Errors

9 Ad5usted *alance



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All reconcilingitems on the

boo sidere#uire anad5usting

entry to thecash account,

*alance per 7epositor

6 7eposits by *ancredit memos"

- Service Charge- :SF Checs

8 *oo Errors

9 Ad5usted *alance



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Prepare a July 31 bank reconciliation stateentan! the resultin" #ournal entries $or the%ions Copany& 'he July 31 bank

stateent in!icate! a cash balance o$ (9)610)*hile the cash le!"er account on that !atesho*s a balance o$ (7)430&

+!!itional in$oration necessary $or thereconciliation is sho*n on the ne,t pa"e&



7-15

utstan!in" checks totale! (2)417&

+ (500 check aile! to the bank $or !eposit ha!

not reache! the bank at the stateent !ate& 'he bank returne! a custoer.s /% check $or

(225 receie! as payent o$ an accountreceiable&

'he bank stateent sho*e! (30 interest earne!on the bank balance $or the onth o$ July&

Check 781 $or supplies cleare! the bank $or (268

but *as erroneously recor!e! in our books as(240&

+ (486 !eposit by +ce Copany *aserroneously cre!ite! to our account by the bank&

utstan!in" checks totale! (2)417&

+ (500 check aile! to the bank $or !eposit ha!

not reache! the bank at the stateent !ate& 'he bank returne! a custoer.s /% check $or

(225 receie! as payent o$ an accountreceiable&

'he bank stateent sho*e! (30 interest earne!on the bank balance $or the onth o$ July&

Check 781 $or supplies cleare! the bank $or (268

but *as erroneously recor!e! in our books as(240&

+ (486 !eposit by +ce Copany *aserroneously cre!ite! to our account by the bank&


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7-16


*alance per ban statement. ;uly 23$Additions?

7eposit in transit 033

7eductions?

*an error @>$

/utstanding checs B.@2C B.=3


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7-17


E:ERAF ;/GR:AF

7ate Account (itles and E&planation 7ebit Credit

;ul


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7-18

Sho#t&Te#m 'nvestmentsSho#t&Te#m 'nvestments

*ondInvestments

Capital StocInvestments

Current Assets

Almost Asi#uid As Cash

ReadilyMaretable

MaretableSecurities

are , , ,


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7-19

et)s turn our

attention to accountsreceivable,


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7-20

Uncollecti(le AccountsUncollecti(le Accounts

$ a copany akes cre!itsales to custoers) soe

accounts ineitably *illturn out to be

uncollectible&

$ a copany akes cre!it

sales to custoers) soeaccounts ineitably *ill

turn out to be

uncollectible& 4AS( 7GE


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7-21

%eflecting Uncollecti(le Accounts inthe Financial Statements

%eflecting Uncollecti(le Accounts inthe Financial Statements

+t the en! o$ each perio!) recor!an estiate o$ the uncollectible

accounts&

+t the en! o$ each perio!) recor!an estiate o$ the uncollectible

accounts&

Contra-asset accountContra-asset account

Selling e&penseSelling e&pense


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7-22

The Allowance fo# )ou(tful AccountsThe Allowance fo# )ou(tful Accounts

Accounts receivable

ess? Allo+ance or doubtul accounts:et realiable value o accounts receivable

'he net realiable alue is the aount o$accounts receiable that the business e,pects

to collect&


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7-23

*#iting "ff an Uncollecti(le Account%eceiva(le


hen an account is !eterine! to be uncollectible) it nolon"er uali$ies as an asset an! shoul! be *ritten o$$&

hen an account is !eterine! to be uncollectible) it nolon"er uali$ies as an asset an! shoul! be *ritten o$$ &


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7-24



+ssue that on January 5) -a, !eterine!that Jason Clark *oul! not pay the (500 he

o*es&

-a, *oul! ake the $ollo*in" entry&


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7-25



+ssue that be$ore this entry) the +ccountseceiable balance *as (10)000 an! the

+llo*ance $or oubt$ul +ccounts balance *as

(2)500&

:et.s see *hat e$$ect the *rite-o$$ ha! on these

accounts&


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7-26



*eore

Hrite-/

Ater

Hrite-/

Accounts receivable 23.333$ =.033$ess? Allo+, or doubtul accts, B.033 B.333

:et realiable value C.033$ C.033$

:otice that the $033 +rite-o did not change the netrealiable value nor did it aect any income

statement accounts,


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7-27

Monthl! Estimates of C#edit +ossesMonthl! Estimates of C#edit +osses

+t the en! o$ each onth)ana"eent shoul!

estiate the probableaount o$ uncollectibleaccounts an! a!#ust the +llo*ance $or oubt$ul

+ccounts to this ne*estiate&

+t the en! o$ each onth)ana"eent shoul!estiate the probable

aount o$ uncollectibleaccounts an! a!#ust the +llo*ance $or oubt$ul

+ccounts to this ne*estiate&

(+o Approaches to Estimating

Credit osses?

2, *alance Sheet Approach

B, Income Statement Approach


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7-28

Estimating C#edit +osses , TheBalance Sheet A--#oach


ear-end Accounts Receivable isbroen do+n into age

classiications,

ear-end Accounts Receivable isbroen do+n into age

classiications,

Each age grouping has adierent lielihood o being

uncollectible,

Each age grouping has adierent lielihood o being

uncollectible,

Compute a separate allo+ance oreach age grouping,

Compute a separate allo+ance oreach age grouping,


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7-29



At 7ecember


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7-30



At 7ecember


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7-31



At 7ecember


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7-32

EastCo)s unad5usted balancein the allo+ance account is

$033,

4er the previous computation.the desired balance is $2.


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7-33

et)s loo at

another +ayto estimate

credit losses!

et)s loo atanother +ayto estimate

credit losses!


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7-34

Estimating C#edit +osses , The'ncome Statement A--#oach


Gncollectible accounts)percentage is based on actualuncollectible accounts rom

prior years) credit sales,

Focus is on determining the amount to

record on the income statement asGncollectible Accounts E&pense,


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7-35



:et Credit Sales

J Estimated GncollectibleAmount o ;ournal Entry

:et Credit Sales

J Estimated GncollectibleAmount o ;ournal Entry


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7-36



n 2005) ;astCo ha! cre!it sales o$ (60)000&

(60)000 ? &01 @ (600A

/o*) prepare the a!#ustin" entry $or

eceber 31) 2005&


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7-37



7 38

ll i(l


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7-38

Uncollecti(le AccountsSumma#!

Uncollecti(le AccountsSumma#!

Aging oReceivables

Aging oReceivables

Emphasis onRealiable Kalue

Emphasis on

Realiable Kalue

Accts,Rec, All, or

7oubtul

Accts,

*alance SheetFocus

*alance SheetFocus

J o Credit SalesJ o Credit Sales

Emphasis onMatching

Emphasis on

Matching

SalesGncoll,Accts,

E&p,

IncomeStatement Focus

IncomeStatement Focus

7 39

f A i (l


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7-39

%ecove#! of an Account %eceiva(le.#eviousl! *#itten "ff

%ecove#! of an Account %eceiva(le.#eviousl! *#itten "ff

E:ERAF ;/GR:AF

7ate Account (itles and E&planation 7ebit Credit

Accounts Receivable !1 Customer" $$$$

Allo+ance or 7oubtul Accounts $$$$

Cash $$$$

Accounts Receivable !1 Customer" $$$$

Subse#uent collections re#uire that the original +rite-o entry bereversed beore the cash collection is recorded,

Subse#uent collections re#uire that the original +rite-o entry bereversed beore the cash collection is recorded,

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7-40

A promissory note is an unconditional promise in+riting to pay on demand or at a uture date a deinite

sum o money,

A promissory note is an unconditional promise in+riting to pay on demand or at a uture date a deinite

sum o money,

/otes %eceiva(le and 'nte#est %evenue /otes %eceiva(le and 'nte#est %evenue

akerBthe person *hosi"ns the note an! therebyproises to pay&

PayeeBthe person to *hopayent is to be a!e&

akerBthe person *hosi"ns the note an! thereby

proises to pay&

PayeeBthe person to *hopayent is to be a!e&

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7-41

4R/MISS/R :/(E

Location Date

ater this date

promises to pay to the order o

the sum o +ith interest at the rate

o per annum,

signed title

Miami. Fl :ov, 2. B330

:inety days 4orter Company

John Caldwell

Lall Company

$23.333,33

2B,3J

C) Porter Copany


4orter Company is replacing an e&isting Accounts Receivable

+ith this :ote Receivable +ith Lall Company,

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7-42

/n :ovember 2. B330. Lall Company +ouldmae the ollo+ing entry,


7 43


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7-43

Interest is a charge made or theuse o money,

(he borro+er incurs interest

e&pense,

(he lender earns interestrevenue,

Interest is a charge made or theuse o money,

(he borro+er incurs interest

e&pense,

(he lender earns interestrevenue, Interest

rates

do+n!


:en!er

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7-44

(he interest ormula includes three variables? (he interest ormula includes three variables?

Interest 9 4rincipal Interest Rate (imeHhen computing interest or one year. %(ime'e#uals 2, Hhen the computation period is less

than one year. then %(ime' is a raction,

Hhen computing interest or one year. %(ime'e#uals 2, Hhen the computation period is less

than one year. then %(ime' is a raction,


For e&ample. i +e needed to compute interest or< months. %(ime' +ould be


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7 45

Hhat entry +ould Lall Company mae on7ecember 3 N3 9 $B33

7-46


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7 46

Hhat entry +ould Lall Company mae onthe maturity dateO

Hhat entry +ould Lall Company mae onthe maturity dateO


$23.333 2BJ =3 N3 9 $


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7 47

I 4orter Company deaulted on the note.Lall Company +ould mae the ollo+ing

entry on the maturity date,

I 4orter Company deaulted on the note.Lall Company +ould mae the ollo+ing

entry on the maturity date,


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End of Cha-te# 7End of Cha-te# 7

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