Download - Ucf Acg2021 Chapter Five Power Point
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Chapter Five
Short-Term Investmentsand Receivables
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Short-Term Investments
Short-Term Investments are investments that acompany plans to hold for 1 year or less.
Trading Securities
Available-for-Sale Securities
Held-to-Maturity Securities
Trading Securities are always a current asset(short-term).
Available-for-Sale and Held-to-Maturity Securitiesare either a short-term or long-term asset based
on managements intention of length of holding.
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Short-Term Investments
Trading Securities: intended to be soldin the very near future for more thantheir cost.
Available-for-Sale Securities: all
investments not classified as TradingSecurities or Held-to-Maturity Securities.
Held-to-Maturity Securities: the investor
intends to hold the securities until theirmaturity date; these securities earninterest revenue for the investor.
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Trading Securities
NOTE: VERY IMPORTANT EXCEPTION TO PREVIOUS RULES!
The market-value method is used to account for alltrading securities. Trading securities are reported onthe balance sheet at their market value as opposed totheir book value. (i.e. the price that was paid to acquirethe asset)
Adjusting entries are carried out at the end of the year
to bring the securities up to current market value. Unrealized Gains or Unrealized Losses capture the
difference between the cost of investment and currentmarket value.
Gain or loss based on whether market value is > cost ofinvestment
Unrealized because the investment is not sold.
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Trading Investments
Microsoft Corporation purchases Ford MotorCompany stock on May 18, paying $100,000, withthe intention of selling the stock within a fewmonths.
General Journal
Date Accounts and Explanations PR Debit Credit
May 18 Short-term investment 100,000Cash 100,000
Purchased investment
2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
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Trading Securities
Assume that Microsofts fiscal year ends onMay 31, and the investment in Ford has acurrent market value of $102,000 on this
date.
General Journal
Date Accounts and Explanations PR Debit Credi
May 31 Short-Term Investment 2,000
Unrealized Gain on Investments 2,000
Adjusted investment to marketvalue
2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
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Trading Securities
Trading Securities (Short-Term Investments)Cost 100,000Adjustment to
market value 2,000Balance 102,000
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Reporting on the Balance Sheetand the Income Statement
Balance SheetCurrent Assets: $XXX
Cash XXXShort-term investments at market value 102,000Accounts receivable XXX
Income StatementRevenues $ XXXExpenses XXX
Other revenues, gains, and (losses):Interest revenue XXXUnrealized gain on investment 2,000
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Receivables
Receivables represent monetary claimsagainst others. They are assets for a businessbecause they represent resources expectedto produce a future benefit.
You may think of them as the opposite of aloan, since receivables are when others owethe business money.
Accounts Receivable: an informal promise to pay;generally arises from the sale of goods and
services.
Notes Receivable: a formal, written contract.
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Accounts Receivable (A/R)
GENERAL LEDGER
Accounts ReceivableBal. 9,000
ACCOUNTS RECEIVABLESUBSIDIARY RECORD
AstonBal. 5,000
Harris
Salazar
Bal. 1,000
Bal. 3,000
The total value of A/R is the
total amount owedto the
business by its customers.
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Accounting for UncollectibleAccounts (Bad Debts)
Why do bad debts (uncollectibleaccounts) arise?
Collections lag sales
Some people will not pay their bills, andthe company cannot collect from all.
Two ways to account for bad debtexpense:
1.Allowance Method
2.Direct Write Off.
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The Allowance Method
Records collection losses on the basis of estimates,not waiting to see which customers will not pay. Preferred method
Using estimates ensures that receivables are reported attheir proper value
Matches expenses (i.e., bad debt expense) with the proper
revenues (i.e., the sales or service revenue that ld to theexpense).
The estimate of the uncollectible accounts isrecorded in the account Allowance for UncollectibleAccounts (Allow. For U.A.)orAllowance for Doubtful
Accounts (Allow. for D/A). Allowance for Doubtful Accountsis acontra accountto Accounts Receivable
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The Allowance Method
Balance Sheet(partial)Accounts receivable xxxLess: Allowance for Uncollectible Accounts xx
Accounts receivable, net $ xxxIncome Statement(partial)Expenses:Uncollectible-Account Expense* xx
* = Also known as Bad Debt Expense.
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The Allowance Method
How do we estimate a companysuncollectible accounts?
Two Methods:
Percent-of-sales Uncollectible-account expense =
percentage of revenue
Aging-of-Receivables
Analyze individual receivables fromcustomers based on how long they havebeen outstanding
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The Allowance Method Percent of Sales
In the Percent-of-Sales approach (the IncomeStatement approach), uncollectible-accountexpense is determined by multiplying the net salesby a percentage that is based on past collectionexperience.
Steps:
1. Multiply Total Revenue by the EstimatedUncollectible Expense % (this is always given). Thisresult gives you the amount to use in your journalentry.
2. Prepare the Journal entry:
Uncollectible Account Expense Dr
Allowance for Uncollectible Accounts Cr
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The Allowance Method Percent of Sales
Example Kansas City Title Company has ending
Accounts Receivable of $500,000 (debit) andending Allowance for Uncollectible Accounts
of $2,000 (credit)prior to year-endadjustments.
Total Sales Revenue for the year is$2,000,000. Kansas City Title estimates that
3% of sales will be uncollectible. What is the balance of the Uncollectible-Account Expense, Allowance for UncollectibleAccounts, and the Net Accounts Receivable?
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The Allowance Method Percent of Sales
Solution* Uncollectible Account Expense
= ($2,000,000 Revenue *.03) = $60,000
Allowance for Uncollectible Expense
= ($2,000,000 Revenue *.03) = $60,000 additionalin the allowance + $2,000 beginning balance =$62,000 ending balance
Net Accounts Receivable
($500,000 ending balance - $62,000 in Allowance
for Doubtful Accounts) = $438,000 net balance
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The Allowance Method Aging-of-Receivables
In the Aging-of-Receivables (the BalanceSheet approach), individual receivables fromspecific customers are analyzed based on howlong they have been outstanding.
Steps:
1. Categorize accounts receivable via an agingschedule.
2. Apply a percentage to the total of each category,based on past collection experience. Thisrepresents an estimate of the A/R the company
will not collect, which is the desired balance inthe Allowance for Doubtful Accounts.
3. Uncollectible Account Expense is the differencebetween the balance before adjustment and thedesired ending balance.
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The Allowance Method Aging-of-Receivables
DaysOverdue
AccountsReceivable
Estimated %Uncollectible
Allowance forUncollectible
Accounts
1-30 days $1,555 6 $93
31-60 days 750 10 75
61-90 days 311 20 62
90 + days 219 79 173
$2,835 $403
2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
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The Allowance Method Aging-of-Receivables
December 31, 20x5
Accounts Receivable
Bal. 2,835
Allowance forUncollectible Accounts
120
Accounts before the year-end adjustment:
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The Allowance Method - Aging-of-Receivables
Accounts after the year-end adjustment:
December 31, 20x5
Accounts ReceivableBal. 2,835
Allowance forUncollectible Accounts120
Adj. 283
403
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Aging-of-Receivables
Accounts after the year-end adjustment:
General Journal
Date Accounts and Explanations PR Debit Credit
Dec 31 Uncollectible-Account Expense 283
Allowance for Uncollectible
Accounts 283
Recorded expense for the year($403-120)
Adjusting Entry
2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
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The Allowance Method - Aging-of-Receivables
Example:
Kansas City Title has ending Accounts receivable of$500,000 (debit) and an ending Allowance forDoubtful Accounts of $2,000 (credit).
An aging of the accounts reveals that $380,000 ofthe receivables are current, $80,000 are 1-30 dayspast due, and $40,000 are more than 30 days pastdue. Historically, 1% of the current accounts, 5% ofthe accounts 1-30 days past due, and 40% of theaccounts more than 30 days past due areuncollectible.
What is the balance of the Allowance for UncollectibleAccounts, Uncollectible-Account Expense, and the NetAccounts Receivable?
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The Allowance Method Aging-of-Receivables
Solution* Allowance for Uncollectible Expense
= ($380,000*1%) + ($80,000* 5%) + ($40,000 *40%)*= $23,800 (The % of receivables collectively
determine the desired balance in the allowance)
Uncollectible Account Expense = ($23,800 Allow for D/A ending balance - $2,000
Allow for D/A beginning balance) = $21,800
Net Accounts Receivable ($500,000 ending balance - $23,800 in Allowance
for Doubtful Accounts) = $476,200 net balance
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Comparing the Allowance Methods
Allowance Method
Adjusts Allowance for
Uncollectible Accounts
BY
Amount of
UNCOLLECTIBLE-
ACCOUNT EXPENSE
Aging-of-Receivables
Adjusts Allowance for
Uncollectible Accounts
TO
Amount of
UNCOLLECTIBLE
RECEIVABLES
Percent-of-Sales
2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
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Writing Off Uncollectible Accounts
Suppose that early in 2006, the credit departmentdetermines that the company cannot collect fromtwo customers. These accounts must be writtenoff.
1. The journal entry to write off the account is:
Allowance for Uncollectible Accounts Dr XX
Accounts Receivable Cr XX
2. The write-off of an account does notaffect netincome or net accounts receivable. Why??
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Writing Off Uncollectible Accounts
General Journal
Date Accounts and Explanations PR Debit Cred
Allowance for Uncollectible
Accounts 400
Accounts Receivable Customer # 161
Accounts Receivable Customer # 239Wrote off uncollectible receivables
2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
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Direct Write-Off Method (alternative tothe Allowance Method)
An account is written off only when it isdecided that a specific customersreceivable is uncollectible.
General Journal
Date Accounts and Explanations PR Debit Credit
Jan 2 Uncollectible-Account Expense 2,000
Accounts Receivable-Jones 2,000
Wrote off a bad account
2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
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Direct Write-Off Method
Balance Sheet(partial)Accounts receivable $8,000Only net receivable is shown
Income Statement(partial)Expenses:Uncollectible-account expense $ 2,000
Weaknesses of this Method:
1. No Allowance for Uncollectibles
2. Poor matching of Revenues and Expenses
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Two Key Liquidity Ratios
The Days Sales in Receivables and the Acid-Test Ratio help investors measure liquidityand evaluate a companys financial position.
Days Sales in Receivables (the collectionperiod) helps to measure the quality ofreceivables by calculating how long it takes,on average, to collect receivables.
This indicates how many days sales remain inAccounts Receivables, awaiting collection.
This is a measure of quality because the oldera receivable gets, the less likely it is to getpaid.
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Two Key Liquidity Ratios
Days Sales in (Average) AccountsReceivable
= Average net Accounts Receivable*One days sales**
*Average net Accounts Receivable is calculated byadding the beginning and ending net AccountsReceivable balances together and dividing by two.
**One Days Sales is calculated by dividing Net Sales
Revenue by 365.
A lowernumber indicates greaterliquidity.
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Two Key Liquidity Ratios
Acid Test Ratio (Quick Ratio)=Cash + S/T Investments + Net current
receivables*
Total Current Liabilities
The higherthe acid-test ratio, the better thebusiness is able to pay its current liabilities.
* Inventory is excluded even though it is a currentasset, because inventory is not as liquid as thecurrent assets included in the quick ratio.
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Questions?
Any questions or concerns?