Cash Receivables by Rgd9zu

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									Chapter

  7       FINANCIAL ASSETS

          A.Cash (& Cash
            Equivalents)
          B.Short-term
            investments
          C.Receivables

                             1
  Interrelationship among financial assets

             Collections
                from          Cash (and cash
             customers         equivalents)           Cash
Accounts                                            payments

receivable
                “Excess”                     Investments
                  cash is                     are sold as
                 invested                       cash is
               temporarily.                    needed.
                               Marketable
                                securities
                               (short-term
                              investments)
                                                            2
     The Valuation of Financial Assets
                              Basis for Valuation in
  Type of Financial Asset      the Balance Sheet
Cash (and cash equivalents)   Face amount
Short-term investments        Current market value
(marketable securities)
Receivables                   Net realizable value


                   Estimated collectible amount


                                                     3
     A - Definition of Cash & Cash
          Equivalents – IAS7
Cash comprises cash on hand and demand
 deposits (e.g. current/savings account at
 banks)
Cash equivalents are short-term, highly
 liquid investments that are readily
 convertible to known amounts of cash and
 which are subject to an insignificant risk of
 changes in value.

                                                 4
Other forms of cash – Restricted Cash

                 Not available
                  for paying
                     current
                   liabilities




                 “Restricted”
 Not a current      Cash         Listed as an
     asset                       investment


                                                5
Other forms of cash – Lines of Credit

                 Bank agrees in
                 advance to lend
                     money.



                      Lines of
                       Credit


     Liability is                    Unused line of
incurred when line                 credit is disclosed
 of credit is used.                     in notes.
                                                         6
       The Statement of Cash Flows


Statement of Cash Flows      Summarizes cash
                            transactions for an
                            accounting period.

                          Includes cash and cash
                                equivalents.



                                                  7
              Cash Management
 Accurately account for cash.
 Prevent theft and fraud.
 Assure the availability of
  adequate amounts of cash.
 Avoid unnecessarily large
  amounts of idle cash.




                                 8
        Using Excess Cash Balances
                Efficiently
Cash available may be    Cash not needed for
used to finance growth    business purposes
 and expansion of the    should be distributed
 business, or to repay     to the company’s
         debt.               stockholders.




                                           9
        Internal Control Over Cash
 Segregate authorization, custody and recording of
  cash.
 Prepare a cash budget.
 Prepare a control listing of cash receipts.
 Require daily deposits.
 Make all payments by cheque.
 Verify every expenditure before payment.
 Promptly reconcile bank statements.

                                                 10
         Bank Statements
Shows the beginning bank balance,
deposits made, cheques paid, other
debits and credits in the month, and
     the ending bank balance.




                           Bank
                         Statement
                                       11
 Reconciling the Bank Statement
Explains the difference between cash
reported on bank statement and cash
  balance in depositor’s accounting
               records.


      Provides information for
     reconciling journal entries.


                                       12
   Reconciling the Bank Statement
 Balance per Bank        Balance per Depositor


                        + Deposits by Bank
+ Deposits in Transit
                           (credit memos)

                        - Service Charge
- Outstanding
                        - NSF cheques
cheques

± Bank Errors           ± Book Errors


= Adjusted Balance      = Adjusted Balance

                                             13
   Reconciling the Bank Statement
All reconciling       Balance per Depositor

 items on the        + Deposits by Bank
   book side            (credit memos)

   require an        - Service Charge
   adjusting         - NSF cheques

  entry to the       ± Book Errors
cash account.
                     = Adjusted Balance

                                          14
  Reconciling the Bank Statement
             Example
   Prepare a July 31 bank reconciliation
 statement and the resulting journal entries
  for the Simmons Company. The July 31
bank statement indicated a cash balance of
 $9,610, while the cash ledger account on
    that date shows a balance of $7,430.

Additional information necessary for the
reconciliation is shown on the next page.
                                            15
   Outstanding cheques totaled $2,417.
   A $500 cheque mailed to the bank for deposit
    had not reached the bank at the statement date.
   The bank returned a customer’s NSF cheque for
    $225 received as payment of an account
    receivable.
   The bank statement showed $30 interest earned
    on the bank balance for the month of July.
   cheque 781 for supplies cleared the bank for
    $268 but was erroneously recorded in our books
    as $240.
   A $486 deposit by Acme Company was
    erroneously credited to our account by the bank.
                                                  16
Reconciling the Bank Statement
                  Example
Balance per bank statement, July 31        $ 9,610
Additions:
   Deposit in transit                          500
Deductions:
   Bank error                $    486
   Outstanding checks           2,417        2,903
Adjusted cash balance                      $ 7,207

Balance per depositor's records, July 31   $ 7,430
Additions:
   Interest                                     30
Deductions:
   Recording error            $      28
   NSF check                       225         253
Adjusted cash balance                      $ 7,207
                                                     17
       Reconciling the Bank Statement
                  Example

                 GENERAL JOURNAL

Date       Account Titles and Explanation   Debit        Credit
Jul 31 Cash                                         30
          Interest Revenue                                      30


    31 Supplies Inventory                           28
       Accounts Receivable                      225
          Cash                                               253




                                                           18
         Petty Cash Funds

             Used for minor
             expenditures.




             Petty Cash
               Funds


 Has one                      Replenished
custodian.                    periodically.
                                              19
   B. Short-Term Investments (marketable
securities) – covered more in IAS32 & IAS 39
                               Capital Stock
      Bond                     Investments
   Investments                   (Shares)
                 Marketable
   Readily
                 Securities
                                Current Assets
  Marketable      are . . .
                   Almost As
                   Liquid As
                     Cash

                                               20
           As per IAS32 & IAS 39

Short-term investments (marketable securities)
appear on the balance sheet at fair value as of the
balance sheet date.
Fair value – is the amount for which an asset could
be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length
transaction




                                                 21
     C – Accounts Receivable

         Uncollectible Amounts


 If a company makes
      credit sales to
    customers, some
accounts inevitably will
      turn out to be
      uncollectible.
                             PAST DUE

                                    22
       Reflecting Uncollectible Accounts
          in the Financial Statements
                   At the end of each period, record
                     an estimate of the uncollectible
                                accounts.

               GENERAL JOURNAL

Date        Account Titles and Explanation       Debit     Credit
        Uncollectible Accounts Expense              $$$$
           Allowance for Doubtful Accounts                    $$$$


       Selling expense                   Contra-asset account
                                                              23
      The Allowance for Doubtful
              Accounts

Accounts receivable
Less: Allowance for doubtful accounts
Net realizable value of accounts receivable

  The net realizable value is the amount of
    accounts receivable that the business
               expects to collect.

                                              24
Monthly Estimates of Credit Losses

 At the end of each
 month, management
 should estimate the
 probable amount of
uncollectible accounts
    and adjust the
Allowance for Doubtful
 Accounts to this new
       estimate.

                                25
    Monthly Estimates of Credit Losses
    – Total Receivables – Approach(1)
At December 31, 2003, MusicLand’s accounting
       records indicate the following:
Accounts Receivable = $50,000 (debit balance)
  Allowance for Doubtful Accounts = $200
              (credit balance)
Past experience suggests that 5% of receivables
               are uncollectible.
 What is MusicLand’s Uncollectible Accounts
             Expense for 2003?
                                              26
        Monthly Estimates of Credit Losses
        – Total Receivables - Approach(1)
Desired balance in Allowance               Allowance for
   for Doubtful Accounts.                Doubtful Accounts
        $        50,000                                200
    ×             5.00%                              2,300
    = $           2,500                              2,500


                GENERAL JOURNAL

 Date       Account Titles and Explanation       Debit     Credit
Dec. 31 Uncollectible Accounts Expense             2,300
            Allowance for Doubtful Accounts                  2,300

                                                              27
       Estimating Credit Losses —
Receivables Aging Analysis - Approach(2)
 Year-end Accounts Receivable is
      broken down into age
         classifications.


    Each age grouping has a
   different likelihood of being
          uncollectible.


 Compute a separate allowance
      for each age grouping.

                                      28
       Estimating Credit Losses —
Receivables Aging Analysis - Approach(2)

     At December 31, 2003, the receivables for
     EastCo, Inc. were categorized as follows:
                           EastCo, Inc.
              Schedule of Accounts Receivable by Age
                        December 31, 2003
                             Accounts     Estimated Estimated
                            Receivable Bad Debts Uncollectible
     Days Past Due           Balance       Percent   Amount
Current                      $   45,000
1 - 30                           15,000
31 - 60
Over 60
                                 5,000
                                  2,000
                             $   67,000
                                                           29
       Estimating Credit Losses —
Receivables Aging Analysis - Approach(2)
     At December 31, 2003, the receivables for
     EastCo, Inc. were categorized as follows:
                           EastCo, Inc.
              Schedule of Accounts Receivable by Age
                        December 31, 2003
                             Accounts     Estimated Estimated
                            Receivable Bad Debts Uncollectible
     Days Past Due           Balance       Percent   Amount
Current                      $   45,000         1%
1 - 30                           15,000         3%
31 - 60
Over 60
                                 5,000
                                  2,000
                                               5%
                                               10%
                             $   67,000
                                                           30
       Estimating Credit Losses —
Receivables Aging Analysis - Approach(2)
     At December 31, 2003, the receivables for
     EastCo, Inc. were categorized as follows:
                           EastCo, Inc.
              Schedule of Accounts Receivable by Age
                        December 31, 2003
                             Accounts     Estimated Estimated
                            Receivable Bad Debts Uncollectible
     Days Past Due           Balance       Percent   Amount
Current                      $   45,000         1% $      450
1 - 30                           15,000         3%        450
31 - 60
Over 60
                                 5,000
                                  2,000
                                               5%
                                               10%
                                                         250
                                                          200
                             $   67,000            $    1,350
                                                           31
          Estimating Credit Losses —
   Receivables Aging Analysis- Approach(2)
  EastCo’s unadjusted balance              Allowance for
   in the allowance account is           Doubtful Accounts
               $500.                                   500
                                                       850
 Per the previous computation,
                                                     1,350
 the desired balance is $1,350.


               GENERAL JOURNAL

 Date       Account Titles and Explanation       Debit     Credit
Dec. 31 Uncollectible Accounts Expense               850
           Allowance for Doubtful Accounts                     850
                                                              32
       Estimating Credit Losses
        – Sales – Approach(3)

      Uncollectible accounts’
   percentage is based on actual
    uncollectible accounts from
      prior years’ credit sales.

Focus is on determining the amount to
  record on the income statement as
   Uncollectible Accounts Expense.


                                        33
   Estimating Credit Losses
    – Sales – Approach(3)

  Net Credit Sales
x % Estimated Uncollectible
= Amount of Journal Entry




                              34
        Estimating Credit Losses
         – Sales - Approach(3)
 In 2003, EastCo had credit sales of $60,000.

  Historically, 1% of EastCo’s accounts have
                 been uncollectible.

For 2003, the estimate of uncollectible accounts
                expense is $600.

            ($60,000 × .01 = $600)

Now, prepare the adjusting entry for December
                  31, 2003.
                                                35
             Estimating Credit Losses
              – Sales – Approach(3)
               GENERAL JOURNAL

 Date       Account Titles and Explanation   Debit     Credit
Dec. 31 Uncollectible Accounts Expense           600
           Allowance for Doubtful Accounts                 600




                                                          36
             Uncollectible Accounts
                   Summary
                        Aging of
% of Receivables                             % of Sales
                       Receivables

 Emphasis on          Emphasis on          Emphasis on
Realizable Value     Realizable Value       Matching

Accts.               Accts.               Sales
 Rec.     All. for    Rec.     All. for             Uncoll.
         Doubtful             Doubtful              Accts.
          Accts.               Accts.                Exp.

                                               Income
  Balance Sheet        Balance Sheet
                                              Statement
      Focus                Focus
                                                Focus
                                                          37
       Writing off an Uncollectible Account
        Receivable – Allowance Method
When an account is determined to be uncollectible,
  it no longer qualifies as an asset and should be
                       written off.


               GENERAL JOURNAL

Date        Account Titles and Explanation    Debit     Credit
        Allowance for Doubtful Accounts          $$$$
           Accounts Receivable (X Customer)                $$$$



                                                           38
        Writing Off an Uncollectible Account
         Receivable – Allowance Method
   Assume that on January 5, K-Max determined that
      Jason Clark would not pay the $500 he owes.


        K-Max would make the following entry.
                 GENERAL JOURNAL

 Date        Account Titles and Explanation   Debit     Credit
Jan.   5 Allowance for Doubtful Accounts          500
            Accounts Receivable (J. Clark)                  500

                                                           39
   Writing Off an Uncollectible Account
    Receivable – Allowance Method
Assume that before this entry, the Accounts
  Receivable balance was $10,000 and the
  Allowance for Doubtful Accounts balance
                was $2,500.

 Let’s see what effect the write-off had on
              these accounts.


                                              40
    Writing Off an Uncollectible Account
     Receivable – Allowance Method

                                  Before        After
                                 Write-Off     Write-Off
Accounts receivable              $ 10,000      $ 9,500
Less: Allow. for doubtful accts.    2,500         2,000
Net realizable value             $ 7,500       $ 7,500

   Notice that the $500 write-off did not change the net
       realizable value nor did it affect any income
                   statement accounts.

                                                       41
        Writing off an Uncollectible Account
        Receivable - Direct Write-Off Method

     This method makes no attempt to
     match revenue with the expense of
          uncollectible accounts.



               GENERAL JOURNAL

 Date       Account Titles and Explanation    Debit    Credit
June 15 Uncollectible Accounts Expense          $$$$
           Accounts Receivable (X Customer)               $$$$
                                                          42
       Income Tax Regulations and
           Financial Reporting
                      Direct write-off method
                       or specific provision
                       required to calculate
                          taxable income.
 Taxable Income



                       Allowance methods
                      better match expenses
                          with revenues.

    Financial
Statement Income
                                                43
    Recovery of an Account Receivable
         Previously Written Off
 Subsequent collections require that the original write-off entry be
         reversed before the cash collection is recorded.

             GENERAL JOURNAL
Date    Account Titles and Explanation              Debit      Credit
       Accounts Receivable (X Customer)                 $$$$
          Allowance for Doubtful Accounts                          $$$$
                          or
       Accounts Receivable (X Customer)                 $$$$
          Uncollectible Accounts Expense                           $$$$

       Cash                                             $$$$
          Accounts Receivable (X Customer)                         $$$$
                                                                   44
    Internal Controls for Receivable

  Separate the following duties:
Record Keeping of the accounts receivable
 subsidiary ledger.
Custody of cash receipts.
Authorization of accounts receivable write-
 offs.

                                          45
        Management of Accounts
             Receivable

                     Extending credit encourages
 Credit Terms
                     customers to buy from us . . .




. . . but it ties up resources      Minimize
   in accounts receivable.         Accounts
                                   Receivable

                                                46
Evaluating the Quality of Accounts
            Receivable

  Avg. Number of Days to Collect A/R
 This ratio helps judge the liquidity of a
     company’s accounts receivable.


              Days in Year
    Accounts Receivable Turnover Ratio


                                             47
Evaluating the Quality of Accounts
            Receivable

 Accounts Receivable Turnover Ratio
This ratio provides useful information for
 evaluating how efficient management has
been in granting credit to produce revenue.

              Net Sales
      Average Accounts Receivable


                                         48

								
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