Cash and Receivables

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C
6
hapter
Cash and Receivables
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Objectives

• 1. Understand the importance of cash management.
• 2. Prepare a bank reconciliation.
• 3. Discuss revenue recognition when the right of
  return exists.
• 4. Understand the credit policies relates to
  accounts receivable.
• 5. Explain the gross and net methods to account
  for cash discounts.

3
Objectives
6. Estimate and record bad debts using a
percentage of sales. 7. Estimate and record bad
debts using an aging analysis. 8. Explain
pledging, assignment, and factoring of accounts
receivable. 9. Account for short-term notes
receivable. 10. Prepare a proof of cash.
4
Cash
Cash

• Coins and currency
• Checking accounts
• Savings accounts
• Negotiable checks
• Bank drafts

• Certificates of deposit
• Bank overdrafts
• Postdated checks
• Travel advances
• Postage stamps

5
Cash Management
Control Over Receipts

• The person opening the mail or the sales person
  using the cash register should count the receipts
  immediately.
• All cash receipts are recorded daily in the
  accounting records.
• All receipts are deposited daily in the companys
  bank account.

6
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 companys accounting
  records.

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Petty Cash
First An employee is appointed petty cash
custodian.
Petty Cash 500 Cash 500
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Petty Cash
Second Petty cash vouchers are printed,
prenumbered, and given to the custodian of the
fund.
At all times the total of the cash in the fund
plus the amounts of expenditure vouchers should
be equal to 500 (in this case).
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Petty Cash
the vouchers are sorted into expense categories
and the remaining cash is counted.
Third When the amount of cash in the petty cash
fund becomes low and/or at the end of accounting
period,...
Assume that a count at the end of the month shows
67.54 remaining in the petty cash fund.
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Petty Cash
The fund is short 4.40 (71.94 - 67.54).
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Petty Cash
The company records the actual expenses and the
amount needed to replenish the fund. Office
Supplies Expense 34.16 Postage
Expense 178.00 Transportation Expense 132.14 Mis
cellaneous Expense 83.76 Cash Short and
Over 4.40 Cash 432.46
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Bank Reconciliation

• Outstanding checks
• Deposits in transit
• Charges made by the bank
• Deposits made directly by the bank
• Errors

Causes of the difference between the cash
balance and the companys bank statement balance.
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Bank Reconciliation
Cash balance from company records 6,925
Cash balance from bank statement 7,218
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Bank Reconciliation
Cash balance from bank statement 7,218 Add
Receipts recorded on the companys records but
not reported on the bank statement. 629
7,847
Cash balance from bank statement 7,218
Deposits in transit and cash received but not yet
deposited totaled 629.
15
Bank Reconciliation
Cash balance from bank statement 7,218 Add
Receipts recorded on the companys records but
not reported on the bank statement. 629
7,847
Cash balance from bank statement 7,218 Add
Receipts recorded on the companys records but
not reported on the bank statement. 629
7,847 Deduct Outstanding checks
(516)
Outstanding checks totaled 516.
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Bank Reconciliation
Cash balance from bank statement 7,218 Add
Receipts recorded on the companys records but
not reported on the bank statement. 629
7,847 Deduct Outstanding checks
(516) Adjusted Cash Balance 7,331
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Bank Reconciliation
Cash balance from company records 6,925
Cash balance from company records 6,925 Add
Interest earned on the funds on deposit.
715
Cash balance from company records 6,925 Add
Interest earned on the funds on deposit.
715 7,640
Interest earned on the funds on deposit.
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Bank Reconciliation
Cash balance from company records 6,925 Add
Interest earned on the funds on deposit.
715 7,640
Cash balance from company records 6,925 Add
Interest earned on the funds on deposit.
715 7,640 Deduct Bank service
charge (9)
Bank service charge, 9.
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Bank Reconciliation
Cash balance from company records 6,925 Add
Interest earned on the funds on deposit.
715 7,640 Deduct Bank service
charge (9)
Cash balance from company records 6,925 Add
Interest earned on the funds on deposit.
715 7,640 Deduct Bank service
charge (9) NSF checks (300)
Customers checks were returned for lack of funds
(NSF check), 300.
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Bank Reconciliation
21
Bank Reconciliation
Adjusted cash balance per company records 7,331
Adjusted cash balance per bank statement 7,331
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Receivables
Trade Receivables

• Normal circumstances
• Right of return
• Valuation

• Cash discounts
• Sales returns and allowances
• Uncollectible accounts
• Financing arrangements

• Interest-bearing
• Non-interest-bearing
• Discounted

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Receivables
Right of Return

• The sales price is fixed or determinable at the
  date of sale.
• The buyer has paid or will pay the seller, and
  the obligation is not contingent upon the resale
  of the product.
• The buyers obligation to the seller would not be
  changed by theft or damage to the product.

Each of the following criteria must be satisfied
when the right of return exists in order to
recognize revenue at the time of sale.
Continued
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Receivables
Right of Return

• The buyer has an economic substance apart from
  the seller.
• The seller does not have significant obligations
  for future performance to directly bring about
  resale of the product by the buyer.
• The seller can reasonably estimate the amount of
  future returns.

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Accounts Receivable
Internal Control Procedures for Accounts
Receivable

• Prenumbered sales invoices.
• Separation of the sales function from the cash
  collection responsibilities.

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Sales Discounts
Alternative Methods of Accounting for Sales
Discounts
Gross Price Method
Net Price Method
Sold 8,000 of merchandise to various customers
on December 4, 2000 with terms of 2/10, n/EOM
Accounts Receivable 8,000 Sales 8,000
Accounts Receivable 7,840 Sales 7,840
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Sales Discounts
Alternative Methods of Accounting for Sales
Discounts
Gross Price Method
Net Price Method
On December 12 received payment on goods
originally billed at 5,500.
Cash 5,390 Sales Disc. Taken 110 Accts.
Receivable 5,500
Cash 5,390 Accts. Receivable 5,390
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Sales Discounts
Alternative Methods of Accounting for Sales
Discounts
Gross Price Method
Net Price Method
Received payment on goods billed at 1,500 on
December 30 (after the discount period).
Cash 1,500 Accts. Receivable 1,500
Cash 1,500 Accts. Receivable 1,470 Sales
Discounts Not Taken 30
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Sales Discounts
Alternative Methods of Accounting for Sales
Discounts
Gross Price Method
Net Price Method
Year-end adjustment at the end of the period.
No entry required
Accounts Receivable 20 Sales Discounts Not
Taken 20
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Loss Contingencies
FASB Statement No. 5 requires that estimated
losses from loss contingencies be accrued against
income and...
recorded as reductions in assets or as
liabilities when both of these conditions are met.

• Information available prior to the issuance of
  the financial statements indicates that it is
  probable that an asset has been impaired or a
  liability has been incurred at the date of the
  financial statements.
• The amount of the loss can be reasonably
  estimated.

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Estimated Bad Debts Method
Bad debts can be estimated based on sales or on
accounts receivable.
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Estimated Bad Debts Method

• Relationship to sales (income statement
  approach)
• Percentage of sales
• Percentage of net credit sales
• Relationship to accounts receivable (balance
  sheet approach)
• Percentage of outstanding accounts receivable
• Aging of accounts receivable

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Estimated Bad Debts Method
Percentage of Sales
If a companys net credit sales during the year
were 525,000 and bad debts historically amount
to 2 of net credit sales, what is the required
adjusting entry?
Bad Debt Expense 10,500 Allowance for Doubtful
Accounts 10,500
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Estimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
If a company has determined that there has been a
4 relationship between actual bad debts and the
year-end account receivable balance(475,000),
what would be the required adjusting entry?
475,000 x 0.04 19,000
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Estimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
If a company has determined that there has been a
4 relationship between actual bad debts and the
year-end account receivable balance(475,000),
what would be the required adjusting entry?
14,500 (required adjustment)
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Estimated Bad Debts Method
Percentage of Outstanding Accounts Receivable
If a company has determined that there has been a
4 relationship between actual bad debts and the
year-end account receivable balance(475,000),
what would be the required adjusting entry?
Bad Debt Expense 14,500 Allowance for Doubtful
Accounts 14,500
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Aging of Accounts Receivable

• Gather the unpaid invoices in each customers
  account.
• Classify the invoice amounts according to the
  length of time the invoice has been outstanding.
• Multiply the total amount in each age group by
  the applicable estimated uncollectible
  percentage.
• Make a journal entry to bring the balance in
  Allowance for Doubtful Accounts to the amount
  calculated in Step 3.

Examine Exhibit 6-3 carefully.
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Aging of Accounts Receivable
Age
Under 60 days 53,500 60-120 days 34,500 121-240
days 3,600 241-360 days 15,700 Over 1 year
14,500 121,800
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Aging of Accounts Receivable
If the firm has a current 1,350 debit balance,
the required adjusting entry would be--
Bad Debt Expense 17,680 Allowance for Doubtful
Accounts 17,680
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Writing Off Uncollectibles
Accounts Receivable
175,000
Net realizable value 166,250
Net realizable value 166,250
Allowance for Doubtful Accounts 850 Accounts
Receivable 850
A customers account totaling 850 is determined
to be uncollectible.
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Collection of an Account Previously Written Off
Later, a payment for 850 is received from the
account that was written off in the previous
slide.
Accounts Receivable 850 Allowance for Doubtful
Accounts 850
Cash 850 Accounts Receivable 850
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Accounts Receivable Financing Agreements
There are three basic forms of financing
agreements to obtain cash from accounts
receivable.

• Pledging
• Assigning
• Factoring

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Accounts Receivable Financing Agreements
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Factoring
FASB Statement No. 125 states that a company
records transfer of financial assets (e.g.,
accounts receivable) in which it surrenders
control over the financial assets to another
company as a sale when all the following
conditions are met

• The transferred assets have been isolated from
  the transferor.
• The transferee obtains the right to exchange.
• The transferor does not maintain effective
  control over the transferred assets through an
  agreement that entitles and obligates the
  transferor to repurchase the transferred assets
  before their maturity.

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Assignment of Accounts Receivable
On December 1, 2000 the Trussel Company assigned
60,000 of its accounts to a finance company.
The finance company advances 80 of the accounts
receivable assigned less a service charge of
500. It also charges an annual interest of 12
on any outstanding loan balance.
(60,000 x 0.80) - 500
Cash 47,500 Assignment Service Charge
Expense 500 Notes Payable 48,000
60,000 x 0.80
Accounts Receivable Assigned 60,000 Accounts
Receivable 60,000
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Assignment of Accounts Receivable
On December 31, 2000 Trussel collects 10,000 on
assigned accounts. This amount along with the
12 interest for one month is paid to the finance
company.
Cash 10,000 Accounts Receivable Assigned 10,000
Notes Payable 10,000 Interest Expense 480 Cash
10,480
48,000 x 0.12 x 1/12
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Factoring
Factor 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.
(80,000 x .90) - 12,000
Cash 60,000 Receivables from Factor 8,000 Factorin
g Expense 12,000 Accounts Receivable 80,000
80,000 x 0.10
80,000 x 0.15
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Notes Receivable
A note receivable is an unconditional written
agreement to collect a certain sum of money on a
specific date.
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Notes Receivable
Notes receivable generally have two attributes
that are not found in accounts receivable.
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Notes 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.

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Notes Receivable
Interest-Bearing
Received a 5,000, 60-day, 12 note on October 1,
2000.
Notes Receivable 5,000 Sales 5,000
5,000 x 0.12 x 60/360
Received maturity value on December 1, 2000.
Cash 5,100 Notes Receivable 5,000 Interest
Revenue 100
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Notes Receivable
Non-Interest-Bearing
Received a 5,100, 60-day, non-interest-bearing
note on October 1, 2000.
Notes Receivable 5,100 Interest
Revenue 100 Sales 5,000
Received maturity value on December 1, 2000.
Cash 5,100 Notes Receivable 5,100
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Notes Receivable Discounted
On August 1, 2000, the Kasper Corporation
discounts a customers 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.
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Notes Receivable Discounted

• Face value of note 5,000.00
• Interest to maturity (5,000 x 0.12 x 90/360)
  150.00
• Maturity value of note 5,150.00
• Discount (5,150 x 0.14 x 60/360) (120.17)
• Proceeds 5,029.83
• Accrued interest revenue 50
• Book value of note (5,000 50) (5,050.00)
• Loss from discounting of note 20.17

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Notes Receivable Discounted
August 31, 2000
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, 2000
Notes Receivable Discounted 5,000.00 Notes
Receivable 5,000.00
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Notes Receivable Discounted
Assume instead that on November 3, 2000 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
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Appendix Proof of Cash

• The reconciliation of the bank balance and book
  balance for the previous month.
• The reconciliation of the receipts recorded by
  the bank for the current month with the receipts
  recorded on the books.
• The reconciliation of the payments recorded by
  the bank for the current month with the payments
  recorded on the books.
• The reconciliation of the bank balance and book
  balance for the current month.

The proof of cash provides four separate
reconciliations.
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C
6
hapter
The End