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					6 Cash and
  Receivables




                I    ntermediate
                    Accounting
                     中级会计学

                Accounting School · Zhongnan
                University of Economics & Law
Intermediate Accounting 6 Cash and Receivables




                               1.           Accounting for cash



                  Cash is the resources
                     on hand to meet
                  planned expenditures
                     and emergency
                        situations.
Intermediate Accounting 6 Cash and Receivables




         Components of Cash vs. non-components


                                                 Cash

    Included in Cash                                    Excluded from Cash
      • Coins and currency                              • Certificates of deposit
      • Checking accounts                               • Bank overdrafts
      • Savings accounts                                • Postdated checks
      • Negotiable checks                               • Travel advances
      • Bank drafts                                     • Postage stamps
Intermediate Accounting 6 Cash and Receivables




                              Cash and Cash Equivalents



                                                      Many companies report
                                                  investments in very short-term,
                                                 interest-earning securities as cash
                                                  equivalents in the balance sheet.
Intermediate Accounting 6 Cash and Receivables




                                         Cash Management


                                        Control Over Receipts

       Immediately count the receipts (by the person
        opening the mail or the sales person using the cash
        register).
       Record daily all cash receipts in the accounting
        records.
       Deposit daily all receipts in the company’s bank
        account.
Intermediate Accounting 6 Cash and Receivables




                                         Cash Management


                                       Control Over Payments

       Make all payments by check (except petty cash items) so
        that a record exists for every company expenditure.
       Authorize and sign all checks only after an expenditure is
        verified and approved.
       Periodically reconcile the cash balance in the bank
        statements with the company’s accounting records.
Intermediate Accounting 6 Cash and Receivables




                                                 Petty Cash


        A petty cash system is a cash fund created to allow
        a company to pay for small amounts that might be
        impractical or impossible to pay by check.

          The entry to record the establishment of the fund is:
             Petty Cash          500
               Cash                      500

          The petty cash account is neither debited nor credited again
           unless the fund size is to be increased or decreased.
Intermediate Accounting 6 Cash and Receivables




                                                 Petty Cash


          As money is paid from the fund, prenumbered vouchers
           are prepared to document the expenditures but no journal
           entries are made until the fund is reimbursed.
          At the time of reimbursement, appropriate expense
           accounts are debited and the cash account is credited as
               follows :
              Office Supplies Expense                  120
               Postage Expense                         150
                    Cash                                      370
Intermediate Accounting 6 Cash and Receivables




                                  2. Bank Reconciliation

                                          A company prepares a monthly
                                          bank reconciliation in order to
                                          analyze and reconcile the
                                          differences between the cash
                                          balance on the monthly bank
                                          statement and the company's
                                          accounting record of the proper
                                          cash balance.
Intermediate Accounting 6 Cash and Receivables




                         Common causes of differences


                 Outstanding checks
                 Deposits in transit
                 Charges made by the bank
                 Deposits made directly by the
                  bank
                 Errors
Intermediate Accounting 6 Cash and Receivables



                        Procedures in preparing a bank
                                                 reconciliation

                ① Compare the deposits listed on the company's
                  records with the deposits on the bank statement;
                ② Compare the checks listed in the company's
                  records with the checks shown on the bank
                  statement;
                ③ Identify any deposits or charges made directly by
                  the bank that are not included in the company's
                  records;
                ④ Determine the effect of any errors;
                ⑤ Complete the bank reconciliation
Intermediate Accounting 6 Cash and Receivables




                                                  Lee Corporation
                                                 Bank Reconciliation
                                                    July 31, 2005
    Balance per bank.... $4,135                        Balance per books.............. $3,950
    Additions to bank                                  Additions to book
     balance:                                           balance:
    Deposits in transit....       500                  Direct deposit...................…       450
      Total................... $4,635                  Interest.............................…    71
                                                          Total............................… $4,471
    Deductions from bank
     balance:                                          Deductions from book
    Outstanding checks:                                 balance:
      191....... $251                                  Service charge...........…   $    7
      192....... 125                                   NSF check.................…     100
      195....... 75      451                           Error in recording check 180    287
    Adj. bank balance $4,184                           Adj. book balance            $4,184
Intermediate Accounting 6 Cash and Receivables




                                           3. Special topics

                                     Electronic funds transfer systems

         The use of computer systems to transfer funds between
         parties without the use of checks, is increasingly being
         used by banks to process the large number of cash
         transactions generated by large companies.
          Because fewer physical source documents (in the form of
         checks) are available to substantiate such transactions, the
         importance of internal controls, such as bank
         reconciliations, is even greater.
Intermediate Accounting 6 Cash and Receivables




                                                 Special topics


                                                 Compensating balances

         Banks may require a portion of any amount loaned to
         remain on deposit with the bank for the duration of the loan
         period. These required deposits are called compensating
         balances.
         SEC requires that compensating balances be separately
         reported on a company's balance sheet if the compensating
         balances are legally restricted. If they are not legally
         restricted, they are disclosed in the notes to the financial
         statements.
Intermediate Accounting 6 Cash and Receivables




                                             4. Receivables



                                                   Receivables are all claims
                                                   against other entities.
                                                   They are usually settled in
                                                   cash.
                                                  Trade receivables:
                                                   Receivables arising from
                                                   normal operating activities.
                                                  Nontrade receivables:
                                                   All receivables arising
                                                   from activities other than
                                                   normal operations.
 Intermediate Accounting 6 Cash and Receivables




                                         Trade Receivables


                                             Trade Receivables

   Revenue                                  Recording and            Recording and
Recognition and                            Reporting Accounts         Reporting Notes
    Valuation                                   Receivable               Receivable
• Normal                            • Cash discounts               • Interest-bearing
  circumstances                     • Sales returns and allowances • Non-interest-
• Right of return                   • Uncollectible accounts         bearing
• Valuation                         • Financing arrangements       • Discounted
Intermediate Accounting 6 Cash and Receivables




                                      Accounts receivable


                                       Cash (sales) discounts

                                                               A cash (sales)
                                  .
                                                           discount is offered to
                                                               customers to
                                                             encourage prompt
                                                              payment of bills
Intermediate Accounting 6 Cash and Receivables




            Accounting for Cash (sales) discounts


                                          Gross price method

        Assume on March 15, $1,000 of merchandise is sold on account.
        The terms of the agreement are 2/10, n/30. The firm uses the
        gross method for record sales on account.
        Entry on date of sale:
               Accounts Receivable                       1,000
                      Sales                                      1,000


                                                 Continued
Intermediate Accounting 6 Cash and Receivables




            Accounting for Cash (sales) discounts


                                          Gross price method
      If paid within the discount period:
              Cash                                               980
              Sales Discounts                                    20
                      Accounts Receivable                              1,000

    If not paid within the discount period:
            Cash                                               1,000
                   Accounts Receivable                                 1,000
Intermediate Accounting 6 Cash and Receivables




            Accounting for Cash (sales) discounts


                                             Net price method

        This time, assume that all sales on account are recording using the
        net method. Again, the terms of the agreement are 2/10, n/30.

     At the point of sale (March 15):
            Accounts Receivable                                 980
                  Sales                                               980




                                                 Continued
Intermediate Accounting 6 Cash and Receivables




            Accounting for Cash (sales) discounts


                                             Net price method
      If paid within the discount period:
              Cash                                               980
                      Accounts Receivable                               980

    If not paid within the discount period:
            Cash                                                1,000
                    Sales Discounts Not Taken                            20
                    Accounts Receivable                                 980
Intermediate Accounting 6 Cash and Receivables




                       Sales Returns and Allowances

        Felton Company sold $1,000 of merchandise. When delivered, it
        was determined that the wrong color had been sent. The customer
        agrees to keep the merchandise for a reduction in price of $100.
        What are the journal entries?

        Sales entry:
               Accounts Receivable (Cash)....… 1,000
                   Sales..................................…. 1,000
       Sales allowance entry:
              Sales Returns and Allowances..…         100
                  Accounts Receivable (Cash)..               100
Intermediate Accounting 6 Cash and Receivables




                       Sales Returns and Allowances

        Felton Company sold $1,000 of merchandise. One week later,
        when it was delivered, $100 in merchandise (cost, $60) was the
        wrong color. With Felton’s approval, it was returned. What are
        the journal entries?

        Sales entry:
               Accounts Receivable (Cash)....… 1,000
                   Sales..................................…. 1,000
        Sales return entry:
               Sales Returns and Allowances..… 100
                   Accounts Receivable (Cash)..              100
               Inventory………………………… 60
                   Cost of Goods Sold………….                     60
Intermediate Accounting 6 Cash and Receivables




         6. Valuation of accounts receivable for
                                uncollectible accounts


         Bad debt occur when customers do not pay for items or
          services purchased on credit.
         Bad debts are uncollectible accounts receivable.
         Bad Debt Expense is reported as a selling or general and
          administrative expense.
         Accounts receivable are reported on the balance sheet at
          their net realizable value.
Intermediate Accounting 6 Cash and Receivables




           Accounting for Uncollectible Receivables
                       (Direct Method)

        Write Off:
            Bad Debts Expense…………….                      400
                   Accounts Receivable……….                         400
                To write off an uncollectible account.


           This entry is made when the account has been determined
          uncollectible. Since this determination was made after the
         period in which the sale takes place, the matching principle is
              violated. This method is not accepted under GAAP.
Intermediate Accounting 6 Cash and Receivables




           Accounting for Uncollectible Receivables
               (Estimated Bad Debts Method)


                  Bad debts can be estimated
                 based on sales or on accounts
                          receivable.
Intermediate Accounting 6 Cash and Receivables




                            Estimated Bad Debts Method


         1. Relationship to sales (income statement
            approach):
              a. Percentage of sales
              b. Percentage of net credit sales
         2. Relationship to accounts receivable (balance
            sheet approach):
              a. Percentage of outstanding accounts
                  receivable
              b. Aging of accounts receivable
Intermediate Accounting 6 Cash and Receivables




                            Estimated Bad Debts Method

    In this method, an estimate of the total uncollectible accounts is
    made at the end of the period, and an expense is recognized.
         Bad Debts Expense………………….. 2,000
            Allowance for Doubtful Accounts..                    2,000
         To record estimated uncollectible accounts.

    When the account is then determined to be uncollectible, the
    write-off entry is:
      Allowance for Doubtful Accounts……...         400
          Accounts Receivable………………                      400
         To write off an uncollectible account.
Intermediate Accounting 6 Cash and Receivables




                  7. Generating immediate cash from
                                       accounts receivable

              There are three basic forms of
             financing agreements to obtain
             cash from accounts receivable.


                                                    Pledging
                                                    Assigning
                                                    Factoring
Intermediate Accounting 6 Cash and Receivables




      Accounts Receivable Financing Agreements


Retain Risks and                             Transfer Some Risks     Transfer Risks
  Benefits of                                  and Benefits of       and Benefits of
  Ownership                                      Ownership             Ownership



        Pledge                                     Assign                Factor

 (Collateral for                        (Specific Receivables with    (Sale without
    Loans)                                      Recourse)               Recourse)
Intermediate Accounting 6 Cash and Receivables




                                                 Pledging


                                           When a company pledges its accounts
                                          receivable, it is using these accounts as
                                           collateral for a loan, and the servicing
                                            activities remain its responsibility.
Intermediate Accounting 6 Cash and Receivables




                 Assignment of Accounts Receivable



               When a company assigns its
             accounts receivable to a financial
                 institution, it enters into a
                lending agreement with the
               institution to receive cash on
                specific customer accounts.
Intermediate Accounting 6 Cash and Receivables




                    Factoring of Accounts Receivable



                                           When a company factors its accounts
                                           receivable, it sells individual accounts
                                              to a financial institution (called a
                                                            factor).
Intermediate Accounting 6 Cash and Receivables




                     Factoring of Accounts Receivable

                  Payment of Accounts

                                                   Factor
                      Receivable




                                                    Goods and
                                                 Services Provided
              Customers                                              Company
                                                   Accounts
                                                  Receivable
                                                  Established
Intermediate Accounting 6 Cash and Receivables




                                                 Factoring

   Lee Corporation sells $80,000 of accounts receivable to a factor,
      receives 90% of the value of the factored accounts, and is
      charged a 15% commission based on the gross amount of
                    factored accounts receivable.


 Cash ($80,000 x .90) - $12,000                              60,000
 Receivables from Factor0.10
              $80,000 x                                       8,000
 Factoring Expense
              $80,000 x 0.15                                 12,000
    Accounts Receivable                                               80,000
Intermediate Accounting 6 Cash and Receivables




                                      8. Notes Receivable

                                          A note receivable is an
                                   unconditional written agreement to
                                   collect a certain sum of money on a
                                               specific date.
Intermediate Accounting 6 Cash and Receivables




                                           Notes Receivable


          Notes receivable generally have two attributes that
                 are not found in accounts receivable:

        They are negotiable instruments, which means that they are
         legally and readily transferable among parities and may be
         used to satisfy debts by the holders of these instruments.
        They usually involve interest, requiring the separation of
         the receivables into its principal and interest components.
Intermediate Accounting 6 Cash and Receivables




                                          Notes Receivable


                                                 Interest-Bearing

 Received a $5,000, 60-day, 12% note on October 1, 2004.
    Notes Receivable                                                5,000
       Sales                                                                 5,000
                                                                            $5,000
 Received maturity value on December 1, 2004.                               x 0.12 x
                                                                            60/360
    Cash                                                            5,100
       Notes Receivable                                                     5,000
       Interest Revenue                                                       100
Intermediate Accounting 6 Cash and Receivables




                                          Notes Receivable


                                          Non-Interest-Bearing

 Received a $5,100, 60-day, non-interest-bearing note on October 1,
 2004.
   Notes Receivable                                              5,100
      Interest Revenue                                                     100
      Sales                                                              5,000

Received maturity value on December 1, 2004.
   Cash                                                          5,100
      Notes Receivable                                                   5,100
Intermediate Accounting 6 Cash and Receivables




                          Notes Receivable Discounted



                            On August 1, 2004, the Kasper
                         Corporation discounts a customer’s
                          note at its bank at a 14% discount
                          rate. The note was received from
                         the customer on August 1, is for 90
                           days, has a face value of $5,000,
                         and carries an interest rate of 12%.
Intermediate Accounting 6 Cash and Receivables




                          Notes Receivable Discounted

      1. Face value of note                         $5,000.00
      2. Interest to maturity
           ($5,000 x 0.12 x 90/360)                    150.00
      3. Maturity value of note                     $5,150.00
      4. Discount ($5,150 x 0.14 x 60/360)            (120.17 )
      5. Proceeds                                   $5,029.83
      6. Accrued interest revenue: $50
      7. Book value of note ($5,000 + $50)          (5,050.00 )
      8. Loss from discounting of note              $ (20.17 )
Intermediate Accounting 6 Cash and Receivables




                          Notes Receivable Discounted

   August 31, 2004
   Interest Receivable                             50.00
       Interest Revenue                                       50.00
   Cash                                          5029.83
   Loss from Discounting of Note                   20.17
       Notes Receivable Discounted                          5,000.00
       Interest Receivable                                     50.00

   October 30, 2004
   Notes Receivable Discounted                   5,000.00
       Notes Receivable                                     5,000.00
Intermediate Accounting 6 Cash and Receivables




                          Notes Receivable Discounted

                                 Assume instead that on
                              November 3, 2004 the bank
                            notified Kasper that the note had
                             not been paid and also charged
                                    Kasper a $10 fee.



    Notes Receivable Dishonored                        5,160
    Notes Receivable Discounted                        5,000
       Notes Receivable                                         5,000
       Cash                                                     5,160
Intermediate Accounting 6 Cash and Receivables




                                      The End

				
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