Issues in Accounting

7/17/2019 Issues in Accounting

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Practical Issues in Cashand Receivable

Instructor

Adnan Shoaib

PART II: Corporate Accounting Concepts and Issues

Lecture 08



2

1. Identify items considered cash.

2. Indicate how to report cash and related items.

3. Define receivables and identify the different types of receivables.

4. Explain accounting issues related to recognition of accounts receivable.

. Explain accounting issues related to valuation of accounts receivable.

Learning ObjectivesLearning Objectives

Learning ObjectivesLearning Objectives



3

What is cash?

Reporting cash

Suar! o"

cash#related

ites

CashSpecialIssues

Recognition o"

notes

receivable

$aluation o"

notes

receivable

Cash and ReceivablesCash and Receivables

Cash and ReceivablesCash and Receivables

%ccountsReceivable

&otesReceivable

Recognition o"

accounts

receivable

$aluation o"

accounts

receivable

'air value

option

(isposition o"

accounts and

notes

receivable

Presentationand anal!sis



)

!ost li"uid asset

#tandard medium of exchange

$asis for measuring and accounting for all items

%urrent asset

*+aples, coin& currency& available funds on deposit at

the ban'& money orders& certified chec's& cashier(s chec's&

personal chec's& ban' drafts and savings accounts.

What is Cash?What is Cash?

What is Cash?What is Cash?

LO 1 Identify items considered cash.

Cash



-

#hort)term& highly li"uid investments that are both

Reporting CashReporting Cash


LO 2 Indicate how to report cash and related items.

Cash *.uivalents

*a+ readily convertible to cash& and

*b+ so near their maturity that they present insignificant

ris' of changes in interest rates.

*+aples, ,reasury bills& %ommercial paper& and !oneymar'et funds.



/

%ompanies segregate restricted cash from -regular cash.

Examples& restricted for/

*1+ plant expansion& *2+ retirement of long)term debt&

and *3+ compensating balances.



LO 2

Restricted Cash

Illustration 0#1



%ompany writes a chec' for more than the amount in its

cash account.

Reporting CashReporting CashReporting CashReporting Cash

LO 2 Indicate how to report cash and related items.

an Overdra"ts

0enerally reported as a current liabilit!.

O""set against other cash accounts onl! when accounts

are with the same ban'.



Suar! o" Cash#Related ItesSuar! o" Cash#Related ItesSuar! o" Cash#Related ItesSuar! o" Cash#Related Ites

LO 2

Illustration 0#2



Internal ControlInternal ControlInternal ControlInternal Control

*ncourages adherence tocopan! policiesand procedures

*ncourages adherence tocopan! policiesand procedures

Prootes operationale""icienc!

Prootes operationale""icienc!

5inii6es errorsand the"t

5inii6es errorsand the"t

*nhances the reliabilit! and

accurac! o" accounting data

*nhances the reliabilit! and

accurac! o" accounting data



Internal Control ProceduresInternal Control ProceduresInternal Control ProceduresInternal Control Procedures

Cash ReceiptsCash Receipts Separate responsibilities for receiving cash, recording cash

transactions, and reconciling cash balances.

Match the amount of cash received with the amount of cashdeposited.

Close supervision of cash-handling and cash-recordingactivities.

Cash ReceiptsCash Receipts Separate responsibilities for receiving cash, recording cash

transactions, and reconciling cash balances.

Match the amount of cash received with the amount of cashdeposited.

Close supervision of cash-handling and cash-recordingactivities.

Cash DisbursementsCash Disbursements

All disbursements, except petty cash, made by check. Separate responsibilities for cash disbursement documents,

check authoriation, check signing, and record keeping.

Checks should be signed only by authoried individuals.

Cash DisbursementsCash Disbursements

All disbursements, except petty cash, made by check. Separate responsibilities for cash disbursement documents,

check authoriation, check signing, and record keeping.

Checks should be signed only by authoried individuals.



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Copensating alancesCopensating alancesCopensating alancesCopensating alances

Copensating alanceCopensating alance

5iniu balance that ust be5iniu balance that ust be

aintained in a copan!8s banaintained in a copan!8s banaccount as support "or "undsaccount as support "or "unds

borro9ed "ro the ban:borro9ed "ro the ban:

Copensating alanceCopensating alance

5iniu balance that ust be5iniu balance that ust be

aintained in a copan!8s banaintained in a copan!8s ban

account as support "or "undsaccount as support "or "unds

borro9ed "ro the ban:borro9ed "ro the ban:



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%ccounts Receivable%ccounts Receivable%ccounts Receivable%ccounts Receivable

LO 3 Define receivables and identify the different types of receivables.

ritten promises to pay asum of money on a

specified future date.

Receivables ) %laims held against customers andothers for money& goods& or services.

ral promises of thepurchaser to pay for goods

and services sold.

%ccounts%ccounts

ReceivableReceivable

%ccounts%ccounts

ReceivableReceivable &otes&otes


&otes&otes




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&ontrade Receivables1. dvances to officers and employees.

2. dvances to subsidiaries.

3. Deposits to cover potential damages or losses.

4. Deposits as a guarantee of performance or payment.

. Dividends and interest receivable.

5. %laims against/ Insurance companies for casualties sustained6defendants under suit6 governmental bodies for tax refunds6 common

carriers for damaged or lost goods6 creditors for returned& damaged&

or lost goods6 customers for returnable items *crates& containers&

etc.+.





1)

&ontrade Receivables



Illustration 0#3



1-

Recognition o" %ccounts ReceivablesRecognition o" %ccounts ReceivablesRecognition o" %ccounts ReceivablesRecognition o" %ccounts Receivables

LO !"plain accountin# issues related to reco#nition of accounts receivable.

7eductions from the list

price

8ot recogni9ed in the

accounting records

%ustomers are billed net of

discounts

17 ;

(iscount "orne9 Retail

Store

Custoers

<rade (iscounts



1/



Inducements for prompt

payment

0ross !ethod vs. 8et

!ethod

Cash (iscounts

:aymentterms are2;1<& n;3<



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Cash (iscountsCash (iscountsCash (iscountsCash (iscounts

Sales are recordedat the invoice

aounts:

Sales are recordedat the invoice

aounts:

Sales discounts are recorded as reduction

o" revenue i" pa!ent isreceived 9ithin the

discount period:

Sales discounts are recorded as reduction

o" revenue i" pa!ent isreceived 9ithin the

discount period:

Gross

Method

Sales are recorded atthe invoice aountless the discount:

Sales are recorded atthe invoice aountless the discount:

Sales discounts "or"eitedare recorded

as interest revenue i"pa!ent is received a"ter

the discount period:

Sales discounts "or"eitedare recorded

as interest revenue i"pa!ent is received a"ter

the discount period:

Net

Method



1



Cash (iscounts =Sales (iscounts>Illustration 0#)



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5erchandisea! be

returned b! a

custoer toa supplier:

% special pricereduction calledan allo9ance

a! be given as

an incentive toeep the

erchandise:

Sales ReturnsSales ReturnsSales ReturnsSales Returns

<o avoid isstating the "inancial stateentssales revenue and accounts receivableshould be reduced b! the aount o" returnsin the period o" sale i" the aount o" returns

is anticipated to be aterial:



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Sales ReturnsSales ReturnsSales ReturnsSales Returns

During the first year of operations& =awthorne sold >2&<<<&<<<of merchandise that had cost them >1&2<<&<<< *5<?+.

Industry experience indicates 1<? return rate. During theyear >13<&<<< was returned prior to customer payment.7ecord the returns and the end of the year ad@ustment ::

%ctual Returns#ales returns 13<&<<< ccounts receivable 13<&<<<

Inventory AB&<<<

%ost of goods sold *5<?+ AB&<<<%djusting *ntries#ales returns A<&<<< llowance for sales returns A<&<<<

Inventory)estimated returns 42&<<<

%ost of goods sold *5<?+ 42&<<<



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*0#-, n Cune 3& $olton %ompany sold to r"uette %ompanymerchandise having a sale price of >2&<<< with terms of 2;1<& n;5<&

f.o.b. shipping point. n Cune 12& the company received a chec' for

the balance due from r"uette %ompany. :repare the @ournal entries

on $olton %ompany boo's to record the sale assuming $olton records

sales using the gross ethod.

#ales 2&<<<

ccounts receivable 2&<<<@une 3



%ash *>2&<<< x B?+ 1&5<

#ales discounts 4<

ccounts receivable 2&<<<

@une 12



22


f.o.b. shipping point. n Cune 12& the company received a chec' for

the balance due from r"uette %ompany. :repare the @ournal entries

on $olton %ompany boo's to record the sale assuming $olton records

sales using the net ethod.

#ales 1&5<

ccounts receivable 1&5<@une 3



%ash *>2&<<< x B?+ 1&5<

ccounts receivable 1&5<

@une 12



23


f.o.b. shipping point. :repare the @ournal entries on $olton %ompany

boo's to record the sale assuming $olton records sales using the net

ethod& and %r.uette did not reit pa!ent until @ul! 24.

#ales 1&5<

ccounts receivable 1&5<@une 3



%ash 2&<<<

ccounts receivable 1&5<

#ales Discounts orfeited 4<

@une 12



2)

company should measure receivables in terms of their

present value.

&on#Recognition o" Interest *leent


In practice& companies ignore interest revenue related to

accounts receivable because& for current assets& the

amount of the discount is

not usually material in

relation to the net income

for the period.




2-

=ow are these accounts presented on the $alance #heetF=ow are these accounts presented on the $alance #heetF

%ccounts Receivable%llo9ance "or

(oubt"ul %ccounts

eg: -77 2- eg:

*nd: -77 2- *nd:





2/ LO !"plain accountin# issues related to reco#nition of accounts receivable.




20 LO !"plain accountin# issues related to reco#nition of accounts receivable.




2

@ournal entr! "or credit sale o" A177?@ournal entr! "or credit sale o" A177? ccounts receivable ccounts receivable 1<<1<<

#ales#ales 1<<1<<


(oubt"ul %ccounts

eg: -77 2- eg:

*nd: -77 2- *nd:





24


(oubt"ul %ccounts

eg: -77 2- eg:

*nd: /77 2- *nd:

Sale 177



@ournal entr! "or credit sale o" A177?@ournal entr! "or credit sale o" A177?

ccounts receivable ccounts receivable 1<<1<<

#ales#ales 1<<1<<



37

Collected o" A333 on account?Collected o" A333 on account?

%ash%ash 333333

ccounts receivable ccounts receivable 333333


(oubt"ul %ccounts

eg: -77 2- eg:

*nd: /77 2- *nd:

Sale 177





31

Collected o" A333 on account?Collected o" A333 on account?

%ash%ash 333333

ccounts receivable ccounts receivable 333333


(oubt"ul %ccounts

eg: -77 2- eg:

*nd: 2/0 2- *nd:

Sale 177 333 Coll:





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%djustent o" A1- "or estiated ad#(ebts?%djustent o" A1- "or estiated ad#(ebts?

$ad debt expense$ad debt expense 11

llowance for Doubtful ccounts llowance for Doubtful ccounts 11


(oubt"ul %ccounts

eg: -77 2- eg:

*nd: 2/0 2- *nd:

Sale 177 333 Coll:





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%djustent o" A1- "or estiated ad#(ebts?%djustent o" A1- "or estiated ad#(ebts?

$ad debt expense$ad debt expense 11

llowance for Doubtful ccounts llowance for Doubtful ccounts 11


(oubt"ul %ccounts

eg: -77 2- eg:

*nd: 2/0 )7 *nd:

Sale 177 333 Coll: 1- *st:





3)

Write#o"" o" uncollectible accounts "or A17?Write#o"" o" uncollectible accounts "or A17?

llowance for Doubtful accounts llowance for Doubtful accounts 1<1<

ccounts receivable ccounts receivable 1<1<


(oubt"ul %ccounts

eg: -77 2- eg:

*nd: 2/0 )7 *nd:

Sale 177 333 Coll: 1- *st:





3-

Write#o"" o" uncollectible accounts "or A17?Write#o"" o" uncollectible accounts "or A17?

llowance for Doubtful accounts llowance for Doubtful accounts 1<1<

ccounts receivable ccounts receivable 1<1<


(oubt"ul %ccounts

eg: -77 2- eg:

*nd: 2-0 37 *nd:

Sale 177 333 Coll: 1- *st:

WBO 17 17 WBO





3/ LO !"plain accountin# issues related to reco#nition of accounts receivable.




30 LO $ !"plain accountin# issues related to valuation of accounts receivable.

$aluation o" %ccounts Receivable$aluation o" %ccounts Receivable$aluation o" %ccounts Receivable$aluation o" %ccounts Receivable

n uncollectible account receivable is a loss of revenue that

re"uires& through proper entry in the accounts&

a decrease in the asset accounts receivable and

a related decrease in income and stoc'holders( e"uity.

ncollectible %ccounts Receivable




%llo9ance 5ethod%llo9ance 5ethod

Gosses are Estimated/

:ercentage)of)sales.

:ercentage)of)receivables.

0: re"uires whenmaterial in amount.

5ethods o" %ccounting "or ncollectible %ccounts

(irect Write#O"" (irect Write#O""

,heoretically deficient/

8o matching.

7eceivable not stated atcash reali9able value.

8ot 0: when materialin amount.





*phasis onthe IncoeStateent

relationships

*phasis onthe IncoeStateent

relationships

*phasis on

the alanceSheet

relationships

*phasis on

the alanceSheetrelationships

Illustration 0#/




)7 LO $ !"plain accountin# issues related to valuation of accounts receivable.

Percentage#o"#Sales %pproach

:ercentage based upon past experience and

anticipate credit policy.

chieves proper matching of costs with revenues.

Existing balance in llowance account not considered.




)1 LO $

Illustration, 0on9ale9 %ompany estimates from past experiencethat about 1? of credit sales become uncollectible. If net credit

sales are >B<<&<<< in 2<12& it records bad debt expense as follows.

$ad Debt Expense B&<<< llowance for Doubtful ccounts B&<<<

Illustration 0#0





Percentage#o"#Receivables %pproach 8ot matching.

7eports receivables at reali9able value.

%ompanies may apply this method using

one composite rate& or

an aging schedule using different rates.





ad (ebt *+pense 30/-7

%llo9ance "or (oubt"ul %ccounts 30/-7

hat entry

would ilson

ma'e assuming

that no balance

existed in the

allowance

accountF

Illustration 0#%ccounts Receivable%ging Schedule




)) LO $ !"plain accountin# issues related to valuation of accounts receivable.

ad (ebt *+pense =A30/-7 D A77> 3/-7

%llo9ance "or (oubt"ul %ccounts 3/-7

hat entry

would ilson

ma'e assuming

the allowance

account had a

credit balance

o" A77 before

ad@ustmentF

Illustration 0#%ccounts Receivable%ging Schedule




)-


LO $ !"plain accountin# issues related to valuation of accounts receivable.

*0#0 =Recording ad (ebts>, #andel %ompany reports thefollowing financial information before ad@ustments.

Instructions, :repare the @ournal entry to record bad debt

expense assuming #andel %ompany estimates bad debts at

*a+ 1? of net sales and *b+ ? of accounts receivable.



)/


LO $ LO $


Instructions, :repare the @ournal entry assuming #andel

estimates bad debts at *a+ 1; o" net sales.

$ad Debt Expense A&<<

llowance for Doubtful ccounts A&<<

*>B<<&<<< H ><&<<<+ x 1? >A&<<

LO $



)0


LO $ LO $


Instructions, :repare the @ournal entry assuming #andel

estimates bad debts at *b+ -; o" accounts receivable.

$ad Debt Expense 5&<<<

llowance for Doubtful ccounts 5&<<<

*>15<&<<< x ?+ H >2&<<<+ >5&<<<

LO $



)

Illustration, ssume that the financial vice president of $rownurniture authori9es a write)off of the >1&<<< balance owed by

7andall %o. on !arch 1& 2<12. ,he entry to record the write)off is/

llowance for Doubtful ccounts 1&<<<

ccounts 7eceivable 1&<<<

ssume that on Culy 1& 7andall %o. pays the >1&<<< amount that

$rown had written off on !arch 1. ,hese are the entries/

ccounts 7eceivable 1&<<< llowance for Doubtful ccounts 1&<<<

%ash 1&<<<

ccounts 7eceivable 1&<<<


LO $



*nd o" Lecture 7*nd o" Lecture 7*nd o" Lecture 7*nd o" Lecture 7

Issues in Accounting

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