financial accounting chapter 7

7/23/2019 Financial Accounting chapter 7

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The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

FINANCIAL ASSETS

Chapter

7


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How Much Cash Should a BusinessHave?


$

Everybusiness

needsenough

cash to pay

its bills!


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Cash

Short-term

Investments

Receivables

Financial

Assets


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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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The Valuation of Financial Assets

The Valuation of Financial Assets

)ype o Financial Asset

*asis or +aluation in

the *alance Sheet

Cash !and cash e#uivalents" Face amount

Short-term investments!maretable securities"

Current maret value

Receivables ,et realiable value

Estimated collectible amount

Estimated collectible amount


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Cash

Cash

Coins andpapermoney

Checs

Money orders

)ravelers. checs

*an creditcard sales

Cashisdeined as

any depositbans /ill

accept(


7/57 The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

Combined/ith cash onbalance sheet

Reporting Cash in the BalanceSheet


0i#uid short-term

investments

Stablemaretvalues

Matures/ithin 12 dayso ac#uisition

CashE#uivalents



,ot availableor paying

currentliabilities



,ot a currentasset

0isted as aninvestment

%Restricted'Cash



*an agrees inadvance to lend

money(



0iability isincurred /hen lineo credit is used(

3nused line ocredit is disclosed

in notes(

0ines oCredit



The Stateent of Cash FlowsThe Stateent of Cash Flows

Summaries cash

transactions or anaccounting period(

Statement o Cash Flo/s

Includes cash and cash

e#uivalents(



Cash ManageentCash Manageent

Accurately account for cash.

Prevent theft and fraud.

Assure the availability ofadequate amounts of cash.

Avoid unnecessarily large

amounts of idle cash.

Accurately account for cash.

Prevent theft and fraud.

Assure the availability ofadequate amounts of cash.

Avoid unnecessarily large

amounts of idle cash.



!sing "#cess Cash Balances"fficientl$

!sing "#cess Cash Balances"fficientl$

Cash available orlong-term investment

may be used to inance

gro/th and e&pansiono the business4 or to

repay debt(

Cash not needed orbusiness purposes

should be distributedto the company.sstocholders(



Internal Control Over Cash

Segregate authoriation4 custody and recording ocash(

5repare a cash budget(

5repare a control listing o cash receipts(

Re#uire daily deposits(

Mae all payments by chec(+eriy every e&penditure beore payment(

5romptly reconcile ban statements(

Internal Control Over Cash

Segregate authoriation4 custody and recording ocash(

5repare a cash budget(

5repare a control listing o cash receipts(

Re#uire daily deposits(

Mae all payments by chec(

+eriy every e&penditure beore payment(

5romptly reconcile ban statements(



Cash %ver and ShortCash %ver and Short

Cash 6ver and Short is debited or shortagesand credited or overages(

Cash 6ver and Short is debited or shortagesand credited or overages(

6n May 74 8*AR4 Inc(.s cash dra/er /ascounted and ound to be $92 over(



Ban& StateentsBan& Stateents

Sho/s the beginning ban balance4deposits made4 checs paid4 other

debits and credits in the month4 andthe ending ban balance(

*an

Statement


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Reconciling the Ban& StateentReconciling the Ban& Stateent

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

balance in depositor.s accountingrecords(

5rovides inormation orreconciling :ournal entries(


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*alance per *an

; Ad:usted *alance

*alance per


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All reconcilingitems on the

boo sidere#uireanad:usting

entry to thecash account(

*alance per


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Reconciling the Ban& Stateent"#aple


Prepare a July 31 ban reconciliationstatement and the resulting !ournal entriesfor the "immons Company. #he July 31

ban statement indicated a cash balance of$%&'1(& )hile the cash ledger account on

that date sho)s a balance of $*&+3(.

Additional information necessary for thereconciliation is sho)n on the ne,t page.


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Outstanding checs totaled $-&+1*.

A $(( chec mailed to the ban for deposit had

not reached the ban at the statement date. #he ban returned a customer/s 0" chec for

$-- received as payment of an accountreceivable.

#he ban statement sho)ed $3( interest earnedon the ban balance for the month of July.

Chec *21 for supplies cleared the ban for $-'2

but )as erroneously recorded in our boos as$-+(.

A $+2' deposit by Acme Company )aserroneously credited to our account by the ban.

Outstanding checs totaled $-&+1*.

A $(( chec mailed to the ban for deposit had

not reached the ban at the statement date. #he ban returned a customer/s 0" chec for

$-- received as payment of an accountreceivable.

#he ban statement sho)ed $3( interest earnedon the ban balance for the month of July.

Chec *21 for supplies cleared the ban for $-'2

but )as erroneously recorded in our boos as$-+(.

A $+2' deposit by Acme Company )aserroneously credited to our account by the ban.


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*alance per ban statement4 ?uly @9 1492$AdditionsB


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HE,ERA0 ?63R,A0


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3sed or minore&penditures(

'ett$ Cash Funds'ett$ Cash Funds

as onecustodian(

Replenishedperiodically(

5etty CashFunds


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Short(Ter )nvestentsShort(Ter )nvestents

*ondInvestments

CapitalStoc

Investments

Current Assets

Almost As0i#uid As

Cash

ReadilyMaretable

MaretableSecurities

are ( ( (


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Mar&(to(Mar&et* A +ew 'rincipleof Asset Valuation

Mar&(to(Mar&et* A +ew 'rincipleof Asset Valuation

Short-term investments in maretable securitiesappear on the balance sheet at their current maret

value as o the balance sheet date(

Classiication ManagementGs Intent)reatment o 3nrealied

olding Hains and 0osses

Available or

sale securities

eld or short-term

resale !oten to 9D

months"

Reported in stocholdersG

e#uity section o the

balance sheet

)rading

securities

eld or immediate

resale !oten /ithin

hours or days"

Reported in JotherJ revenue

!e&pense" section o the

income statement

eld to maturity

securities


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0et.s turn ourattention to accounts

receivable(


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!ncollecti,le Accounts!ncollecti,le Accounts

If a company maes

credit sales tocustomers& someaccounts inevitably )ill

turn out to be

uncollectible.

If a company maes

credit sales tocustomers& someaccounts inevitably )ill

turn out to be

uncollectible. 5AS)


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Reflecting !ncollecti,le Accountsin the Financial Stateents

Reflecting !ncollecti,le Accountsin the Financial Stateents

At the end of each period& recordan estimate of the uncollectible

accounts.

At the end of each period& recordan estimateof the uncollectible

accounts.

Contra-asset accountContra-asset account

Selling e&penseSelling e&pense


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The Allowance for -ou,tfulAccounts

The Allowance for -ou,tfulAccounts

Accounts receivable

0essB Allo/ance or doubtul accounts,et realiable value o accounts receivable

#he net realiable valueis the amount ofaccounts receivable that the business

e,pects to collect.


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.riting %ff an !ncollecti,leAccount Receiva,le


4hen an account is determined to be uncollectible&it no longer qualifies as an asset and should be

)ritten off.

4hen an account is determined to be uncollectible&it no longer qualifies as an asset and should be

)ritten off.


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Assume that on January & 567a,determined that Jason Clar )ould not pay

the $(( he o)es.

567a, )ould mae the follo)ing entry.


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Assume that before this entry& the Accounts8eceivable balance )as $1(&((( and theAllo)ance for 9oubtful Accounts balance

)as $-&((.

:et/s see )hat effect the )rite6off had onthese accounts.


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*eore

Krite-6

Ater

Krite-6

Accounts receivable 924222$ 14722$0essB Allo/( or doubtul accts( E4722 E4222

,et realiable value 4722$ 4722$

,otice that the $722 /rite-o did notchange the netrealiable value nor did it aect any income

statement accounts(


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Recover$ of an Account Receiva,le'reviousl$ .ritten %ff

Recover$ of an Account Receiva,le'reviousl$ .ritten %ff

HE,ERA0 ?63R,A0


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Monthl$ "stiates of Credit /ossesMonthl$ "stiates of Credit /osses

At the end of each month&management should

estimate the probableamount of uncollectibleaccounts and ad!ust theAllo)ance for 9oubtful

Accounts to this ne)estimate.

At the end of each month&management shouldestimatethe probable

amount of uncollectibleaccounts and ad!ust theAllo)ance for 9oubtfulAccounts to this ne)

estimate.


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At $724222Allo/ance or $22 credit"

5ast e&perience suggests that 7L o receivablesare uncollectible(

Khat is Music0and.s 3ncollectible AccountsE&pense or 22@

At $724222Allo/ance or $22 credit"

5ast e&perience suggests that 7L o receivablesare uncollectible(

Khat is Music0and.s 3ncollectible AccountsE&pense or 22@

Monthl$ "stiates of Credit /osses"#aple

Monthl$ "stiates of Credit /osses"#aple


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0et.s loo atanother /ay

to estimatethe

uncollectibleaccounts!

0et.s loo atanother /ay

to estimatethe



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"stiating Credit /osses 0 The1Balance Sheet2 Approach


Near-end Accounts Receivable isbroen do/n into age

classiications(

Near-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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At


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At


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At


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EastCo.s unad:usted balancein the allo/ance account is

$722(

5er the previous computation4the desired balance is $94@72(

EastCo.s unad:usted balancein the allo/ance account is

$722(

5er the previous computation4the desired balance is $94@72(




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Huess Khat!

)here isanother

alternative toestimate theuncollectible

accounts!

Huess Khat!

)here isanother

alternative toestimate the


A Al i A h


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An Alternative Approach to"stiating Credit /osses


3ncollectible accounts.percentage is based on actualuncollectible accounts rom

prior years. credit sales(

Focus is on determining the amount to

record on the income statement as3ncollectible Accounts E&pense(

A Al i A h


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,et Credit Sales

L Estimated 3ncollectibleAmount o ?ournal Entry

,et Credit Sales

L Estimated 3ncollectibleAmount o ?ournal Entry

A Al i A h


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In -((3& ;astCo had credit sales of $'(&(((.


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! ll ti,l A t


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!ncollecti,le AccountsSuar$

!ncollecti,le AccountsSuar$

L o ReceivablesL o Receivables

Emphasis onRealiable +alue

Emphasis on

Realiable +alue

Accts(Rec( All( or


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-irect .rite(%ff Method-irect .rite(%ff Method

)his method maes no attempt tomatch revenue /ith the e&pense o

uncollectible accounts(

) T R l ti d


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)ncoe Ta# Regulations andFinancial Reporting

)ncoe Ta# Regulations andFinancial Reporting


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)nternal Controls for Receiva,le)nternal Controls for Receiva,le

Separate the ollo/ing dutiesB

7aintenance of the accounts receivablesubsidiary ledger.

Custody of cash receipts.

Authoriation of accounts receivable )rite6offs.

7aintenance of the accounts receivable

subsidiary ledger.

Custody of cash receipts.

Authoriation of accounts receivable )rite6offs.

f A

M t f A t


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Manageent of AccountsReceiva,le

Manageent of AccountsReceiva,le

Credit )erms

MinimieAccounts

Receivable

E&tending credit encouragescustomers to buy rom us ( ( (

( ( ( but it ties up resourcesin accounts receivable(

. Mi i i A i

. t Mi i i A t i


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.a$s to Minii3e Aounts inAccounts Receiva,le

.a$s to Minii3e Aounts inAccounts Receiva,le

Selling

AccountsReceivable

Credit

CardSales

" l i h 4 li f A

" l ti th 4 lit f A t


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"valuating the 4ualit$ of AccountsReceiva,le


Accounts 8eceivable #urnover 8atio

#his ratio provides useful information for

evaluating ho) efficient management hasbeen in granting credit to produce revenue.

Accounts 8eceivable #urnover 8atio

#his ratio provides useful information for

evaluating ho) efficient management hasbeen in granting credit to produce revenue.

,et SalesAverage Accounts Receivable

" l i h 4 li f A

" l ti th 4 lit f A t


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Avg. 0umber of 9ays to Collect AB8

#his ratio helps !udge the liquidity of acompany/s accounts receivable.

Avg. 0umber of 9ays to Collect AB8

#his ratio helps !udge the liquidity of a

company/s accounts receivable.


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"nd of Chapter 7"nd of Chapter 7

financial accounting chapter 7

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