1

Cash and Receivables

Sid Glandon, DBA, CPAAssociate Professor of

Accounting

2

Cash and Cash Equivalents Cash

coin and currency demand deposits

Cash equivalents Short-investments (90 days) Money market funds Treasury bills Commercial paper

3

Internal Controls Separation of duties Checking accounts Petty cash funds Physical protection of cash Protection of the accounting

information system records Bank reconciliations

4

Bank Reconciliation Three steps

Reconciliation per bank Reconciliation per book

Adjusting journal entries

5

Items Not Considered Cash Overdraft without the right of

offset Restricted cash accounts Investments Post dated checks from customers Loans to employees

6

Restricted Cash Not available to cover current

liabilities Bond sinking funds Compensating balances

7

Receivables Accounts receivable (Trade) Notes receivable Nontrade receivables

Advances to officers and employees Advances to subsidiaries Deposits Dividends and interest receivable Claims against others

8

Initial Valuation Initial valuation is the amount expected

to be received, converted into cash within operating cycle Trade discounts

Selling price less than normal list price Cash or sales discounts

Incentive for paying invoice on time gross method net method

9

Subsequent Valuation

Sales Returns Uncollectible accounts

Allowance method Balance sheet approach Income statement approach

10

Bad Debt ExpenseBalance Sheet Approach, Allowance Method

Prepare a schedule of aged accounts receivable

Determine amount or percentage that will likely not be collected

Adjust the allowance account to reflect the computed amount by

Journalize Bad debt expense-debit Allowance for doubtful accounts-credit

11

Bad Debt ExpenseBalance Sheet Approach, Allowance Method

ACCOUNT DEBIT CREDITBad debt expense XXX Allowance for doubtful accounts XXXTo adjust the allowance for doubtful accounts

12

Bad Debt ExpenseIncome Statement Approach, Net Sales Method

Determine net credit sales Calculate estimated percentage of

bad debt expense against net credit sales

Journalize Bad debt expense-debit Allowance for doubtful accounts-

credit

13

Bad Debt ExpenseIncome Statement Approach, Net Sales Method

ACCOUNT DEBIT CREDITBad debt expense XXX Allowance for doubtful accounts XXXTo record bad debt expense for the year

14

Balance Sheet Approach, Allowance Method T-Account: Allowance for Doubtful Accounts

Beginning credit balance Debit allowance account to write-off

accounts as uncollectible Credit allowance account to reinstate

accounts previously written-off Analyze unadjusted year-end balance Determine required ending balance Prepare adjusting journal entry to

achieve required ending balance

15

T-Account: Allowance for Doubtful Accounts

Date Description Debit Credit1/1/06 Beginning balance $25,0002006 Accounts written-off during the year $15,0002006 Accounts reinstated, previously written-off 5,000

12/31/06 Unadjusted ending balance 15,00012/31/06 Required adjusting journal entry 5,00012/31/06 Required ending balance $20,000

16

Writing-Off of Uncollectible Accounts

Date Account Debit Credit2006 Allowance for doubtful accounts $15,000

Accounts receivable $15,000To record the write-off of uncollectable accounts receivable during 2006.

17

Reinstatement of Previously Written-Off Accounts and Collection in Current Year

Date Account Debit Credit2006 Accounts receivable $5,000

Allowance for doubtul accounts $5,000

Date Account Debit Credit2006 Cash $5,000

Accounts receivable $5,000

To record the reinstatement of accounts previously written-off.

To record the collection on accounts previously written-off.

18

Adjusting the Allowance Account at Year-End and Recording Bad Debt Expense

Date Account Debit Credit12/31/06 Bad debt expense $5,000

Allowance for doubtful accounts $5,000

To adjust the allowance account based on an analysis of the collectibility of accounts receivable and record bad debt expense for the year of 2006.

19

Balance Sheet Presentation

Current Assets:Cash XXXAccounts receivable XXXLess allowance for doubtful accounts XXXNet realizable receivables XXX Total current assets XXX

ASSETS

20

Recognition of Notes Receivable

Interest-bearing notes Note issued at face value Repayment of face amount plus

interest Noninterest-bearing notes

Zero-interest-bearing notes Note issued at discount, interest is

imputed at market rate Repayment of face amount

21

Financing with Receivables

Secured borrowing Assigned or pledged

Sales of receivables Factoring Securitization

Sales without recourse Sales with recourse

22

Discounting a Note

Step #1, Accrued interest to the date of discount

Step #2, Calculate the maturity value of the note

Step #3, Calculate the discount Step #4, Calculate the cash

proceeds