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Chapter 7 Cash and Receivables PepsiCo Inc. Partial Balance Sheet ASSETS (in millions) December 30, 1998 Current Assets: Cash and equivalents $ 311 Short-term investments 83 394 Accounts & notes receivable 2,453 Inventories 1,016

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Chapter 7 l.jpg

Chapter 7

Cash and Receivables


Pepsico inc partial balance sheet l.jpg
PepsiCo Inc. Partial Balance Sheet

ASSETS (in millions) December 30,

1998

Current Assets:

Cash and equivalents $ 311

Short-term investments 83

394

Accounts & notes receivable 2,453

Inventories 1,016

Prepaid expenses & other assets 499

Total Current Assets $4,362


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Highly Liquid

Less

Liquid

PepsiCo Inc.Partial Balance Sheet

ASSETS (in millions)

Current Assets:

Cash and equivalents

Short-term investments

Accounts and notes receivable

Inventories

Prepaid expenses & other assets

Total Current Assets


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PepsiCo Inc. Partial Balance Sheet

ASSETS (in millions)

Current Assets:

Cash and equivalents

Key to

Classification:

readily

available to

pay debts


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Pay to the order of:

ABC Co.

Cash

  • Coin & currency

  • Checking, savings & money market accounts

  • Undeposited, cashier, and certified checks


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Cash Equivalents

  • Commercial paper

  • U.S. Treasury bills

  • Certain money market funds


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Cash Management

  • Necessary to ensure company has neither too little or too much cash on hand

  • Tools:

    • Cash Flow Statement

    • Bank Reconciliations

    • Petty Cash Funds


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Deposits

Customer notes collected by bank

Interest earned

Canceled checks

NSF checks

Service charges

Bank Statements

Cash balance, beginning of period +

= Cash balance, end of period


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Bank Reconciliations - Step 1

Trace deposits on bank statement to books. Identify deposits in transit. Add to bank balance.

Deposits in Transit: Late period deposits not yet reflected on bank statement


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Example of Reconciliation

Bank Statement Adjustments: Deposits

Balance per statement, July 31 $ 1,152

Add: Deposit in transit 449


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Bank Reconciliations - Step 2

Trace checks cleared by bank to books. Identify outstanding checks. Subtract from bank balance.

Outstanding Checks: Checks written but not yet presented to bank

ABC Co.

Pay to the order of:

XYZ Co.


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Example of Reconciliation

Bank Statement Adjustments:

Checks Outstanding

Balance per statement, July 31 $ 1,152

Add: Deposit in transit 449

Deduct: Outstanding checks:

Check No. 495 $217

Check No. 521 121

Check No. 522 243 (581)


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Bank Reconciliations - Step 3

List all other additions (credit memoranda) shown on the bank statement. Add to book balance.

Credit memoranda: Interest earned, customer notes collected, etc.


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Example of Reconciliation

Cash Account Adjustments:

Credit Memoranda

Balance per books, July 31 $ 1,056

Add:

Note collected $ 200

Interest earned 36 236


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Date

Non-Sufficient Funds

Bank Reconciliations - Step 4

List all other subtractions (debit memoranda) shown on the bank statement. Subtract from book balance.

Debit memoranda: NSF checks, service charges, etc.


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Example of Reconciliation

Cash Account Adjustments:

Debit Memoranda

Balance per books, July 31 $ 1,056

Add:

Note collected $ 200

Interest earned 36 236

Deduct:

NSF check 235

Collection fee 17

Service charge 20 (272)


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Bank Reconciliations - Step 5

Identify errors made by the bank or the company in recording transactions during the period.


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Use the information collected in Steps 1 - 5 to prepare the bank reconciliation.

Bank Reconciliation

Balance per bank $$$

:

Adjusted balance $$$

Balance per books $$$

:

Adjusted balance $$$

Book and bank adjusted balances must agree

Bank Reconciliations - Step 6


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Example of Reconciliation bank reconciliation.

Bank Statement Adjustments

Balance per statement, July 31 $ 1,152

:

Adjusted balance $ 1,020

Cash Account Adjustments

Balance per books, July 31 $ 1,056

:

Adjusted balance, July 31 $ 1,020

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Book adjustments are the basis for adjusting entries bank reconciliation.

Bank Reconciliation Adjusting Entries

Bank Reconciliation

Balance per bank $$$

:

Adjusted balance $$$

Balance per books $$$

:

Adjusted balance $$$


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Bank Reconciliation bank reconciliation.Adjusting Entries

Dr.Cr.

Accounts receivable $235

Collection fee expense 17

Service charge expense 20

Notes receivable $200

Interest revenue 36

Cash 36

To record bank reconciliation adjustments.


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Date bank reconciliation.

Dept. of Treasurer

Jane Doe

Paycheck for

RECEIPT

Dr. Cr.

RECEIPT

RECEIPT

RECEIPT

Petty Cash


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Petty Cash Transactions for Liz’s Pet Shop: bank reconciliation.

Original Fund Balance $200.00

Petty Cash Expenditures:

Postage stamps $ 38.40

Employee IOU 20.00

Office Supplies 18.60

Coin & Currency per Count 121.00

Prepare the journal entry to record the petty cash fund replenishment


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Accounting for Petty Cash bank reconciliation.

Journal Entry to Replenish Fund:

* $200.00 - ($38.40 + 20.00 + 18.60 + 121.00) = $200.00 - $198.00 = $2.00 short

Postage expense $ 38.40

Accts. Receivable -Employees 20.00

Office Supplies Expense 18.60

Cash Over and Short* 2.00

Cash $ 79.00


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Seasonality and Cash bank reconciliation.

Cash

Shortages

Cash

Shortages -

Excess

cash -

...or liquidate

investments

Borrow...

Invest


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Investment in C.D. bank reconciliation.

Example:

Invest $60,000 in a six-month C.D. Principal plus interest @ 10% due upon investment maturity.

Purchase of investment: Dr.Cr.

Short-term Investment - CD $ 60,000

Cash $ 60,000


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$500 bank reconciliation.

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Investment in C.D.

Monthly adjusting entry : Dr. Cr.

Interest receivable $500

Interest revenue $500

Interest = Principal x Rate x Time

$500 = $60,000 x 10% x 1/12

12

interest = 10% per year


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$3,000 bank reconciliation.

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Investment in C.D.

Upon investment maturity: Dr. Cr.

Cash $63,000

Interest receivable

($500 x 6 mos.) 3,000

Short-term investment - CD 60,000

interest = 10% per year


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Reasons Company's Invest in Other Companies bank reconciliation.

  • Short-term cash excesses

  • Long-term investing for future cash needs

  • Exert influence over investee

  • Obtain control of investee


Investor s ownership in common stock l.jpg

Fair bank reconciliation.

Value

Method

Equity

Method

Consolidated

F/S

0%

20%

50%

100%

No significant

influence

Significant

influence

Control

Investor's Ownership in Common Stock

Our

Focus


Investments without significant influence l.jpg

Use fair value method to account for these investments bank reconciliation.

Investments Without Significant Influence

  • Held-to-Maturity Securities

  • Trading Securities

  • Available-for-Sale Securities


Held to maturity securities l.jpg

$10,000 9% Bond bank reconciliation.

Due 2019

Held-to-Maturity Securities

  • Bonds of other companies

  • Intent and ability to hold until maturity


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Held-to-Maturity Securities bank reconciliation.

Example:

On 1/1/01, Whirlpool Corp. purchases:

  • $100,000; 7% bonds @ face value.

  • Bonds mature December 31, 2011

  • Interest payable semiannually

    .

Record the purchase of the bonds and receipt of the first interest payment


Recording bond purchase l.jpg

$10,000 7% Bond bank reconciliation.

Due 2011

Recording Bond Purchase

Dr. Cr.

Investment in Bonds $100,000

Cash $100,000

To record the purchase of bonds.


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Interest for bank reconciliation.

Investor

Borrower

Recording Receipt of Interest Payment

Dr. Cr.

Cash ($100,000 x 7% x 1/2) $ 3,500

Interest Income $3,500

To record receipt of the first semiannual interest payment.


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Stocks bank reconciliation.

Bonds

  • Intent to sell in near term (classified as current assets)

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Trading Securities

  • Purchased to generate profit from short-term appreciation


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Stocks bank reconciliation.

Bonds

  • Unrealized gain or loss recognized on income statement

Income

Statement

Trading Securities

  • At end of each period, security is “marked to market”


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Trading Securities bank reconciliation.

Example:

Eagle Corp. holds the following trading securities at 12/31/00:

CostMarket

Star Inc. Common Stock $5,000 $5,600

Bluechip Co. Bonds $4,500 $4,300

Record the unrealized gain or loss at 12/31/00.


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Recording Unrealized Gain or Loss on Trading Securities bank reconciliation.

Dr.Cr.

Star Inc. Common Stock $ 600

Bluechip Co. Bonds $ 200

Unrealized gain -

trading securities 400

(income statement account)

To adjust trading securities to fair value.


Available for sale securities l.jpg

Stocks bank reconciliation.

Bonds

  • Can be classified as short-term or long-term, depending on expected date of disposition

Available-for-Sale Securities

  • Securities not classified as held-to-maturity or trading


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Stocks bank reconciliation.

Bonds

  • Unrealized gain or loss accumulated in stockholders’ equity account

Balance

Sheet

Available-for-Sale Securities

  • Also “marked to market” at end of accounting period


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Available-for-Sale Securities bank reconciliation.

Example:

Brown Bear Corp. holds the following AFS securities at 12/31/00:

CostMarket

Wiley Co. Preferred Stock $8,000 $8,100

Howard Inc. Bonds $6,300 $5,700

Record the unrealized gain or loss at 12/31/00.


Recording unrealized gain or loss on afs securities l.jpg
Recording Unrealized Gain or Loss on AFS Securities bank reconciliation.

Dr.Cr.

Wiley Co. Preferred Stock $ 100

Unrealized loss - available-

for-sale securities 500

(part of Stockholders’ Equity)

Howard Inc. Bonds $ 600

To adjust available-for-sale securities to fair value.


Classification of investments without significant influence l.jpg
Classification of Investments Without Significant Influence bank reconciliation.

Investor Corporation

Partial Balance Sheet

ASSETS

Current Assets:

Trading securities

Available-for-sale securities

Held-to-maturity securities

Long-term Assets:

Available-for-sale securities

Held-to-maturity securities

To be sold or

maturing within

one year

To be sold or

maturing after

one year


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Terms: 2%, 10; bank reconciliation.

net 30

Sales Invoice

Credit Sales

  • Slows inflow of cash

  • Risk of uncollectible accounts

Trade Credit

Retail Customer

Receivables


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Pepsico Sample Accounts Receivable Subsidiary Ledger bank reconciliation.

Total Due

ABC Distributors $ 25

HIJ Distributors 336

: :

: :

XYZ Distributors 108

$ 2,580

Gross Accounts

Receivable


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Pepsico, Inc. bank reconciliation.Partial Balance Sheet

(in millions)

1998

Accounts and notes receivable,

(less allowance of $127) $2,453

Net

Realizable

Value

Estimated

Uncollectible

Accounts


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Future Period charged with expense of bad debt write-off bank reconciliation.

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Direct Write-off Method

Period of Sale

Journal entry to record write-off in period determined to be uncollectible:

Bad debt expense XXX

Accounts receivable XXX


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1 bank reconciliation.

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Allowance Method

Period of Sale

Estimated bad debt expense (and allowance account) recorded in same period


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Balance Sheet Presentation - bank reconciliation.Allowance Method

XYZ Company

Partial Balance Sheet

Current assets:

Accounts receivable 200,000

Less: allowance for

doubtful accounts ( 22,000)

Net accounts receivable 178,000


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Allowance Method bank reconciliation.

Journal entry to record estimated bad debt expense in period of sale:

Bad debts expense XXX

Allowance for Doubtful Accts XXX

I estimate...


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Allowance Method bank reconciliation.

Journal entry to record bad debt write-off in period determined uncollectible:

Allowance for Doubtful Accts XXX

Accounts receivable XXX

Bankrupt


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Approaches to Allowance Method bank reconciliation.

% of Net Credit Sales

% of Accounts Receivable

  • Aging Method

Income Statement Approach

Balance Sheet Approach


Percentage of net credit sales method l.jpg
Percentage of Net Credit Sales Method bank reconciliation.

Example:

Assume prior years’ net credit sales and bad debt expense is as follows:

1999 1998

Bad debts $17,900 $15,300

Credit sales $1,800,000 $1,700,000


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Percentage of Net Credit bank reconciliation.Sales Method

Example:

Develop bad debt percentage:

1999 1998

Bad debts $17,900 $15,300

divide by

Credit sales $1,800,000$1,700,000

1.0% .9%

use 1%


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Journal entry: bank reconciliation.

Bad debts expense $20,000

Allowance for doubtful accts $20,000

Percentage of Net Credit Sales Method

Example:

2000 Net credit sales $2,000,000 (given)

Bad debt percentage _ 1%

Bad debts expense 20,000


Aging method l.jpg

Customer bank reconciliation.

ABC Co.

:

XYZ Co.

Age of Receivables

31-60 61-90

Total CurrentDaysDays

$ 30,000 10,000 15,000 5,000

:

:

$200,000 140,000 40,000 20,000

Aging Method

Porter CompanyAging of Accounts ReceivableDecember 31, 2000

Estimated uncollectible % 2% 10% 30%

2,800 4,000 6,000

Desired allow. $ 12,800 =


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Desired ending balance from aging schedule bank reconciliation.

Required

adjustment

10,500

$12,800

Aging Method

Assume Allowance account has a beginning credit balance of $2,300:

Allowance for Doubtful Accts

$2,300


Aging method example l.jpg

From T-account analysis bank reconciliation.

Aging Method Example

Dr.Cr.

Bad debts expense $10,500

Allowance for doubtful accounts $10,500

To record estimated bad debts.


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% of Net Sales bank reconciliation.

Allowance Account

XX

Computes bad debt expense (of which the credit is recorded here)

Aging

Allowance Account

XX

Computes ending balance in the allowance account

Comparison of Methods


Accounts receivable turnover l.jpg
Accounts Receivable Turnover bank reconciliation.

Net Credit Sales

Average Accounts Receivable

Indicates how quickly a company is collecting (i.e. turning over) its receivables


Accounts receivable turnover62 l.jpg

Too fast bank reconciliation.

credit policies too

stringent; may be

losing sales

Too slow

credit department

not operating effectively;

dissatisfied customers

Accounts Receivable Turnover


Interest bearing promissory note l.jpg

Principal bank reconciliation.

Interest

Maturity

Date

Interest-Bearing Promissory Note

Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on December 31, 2001.

Date: January 1, 2000

Signed:_________

Baker Corporation


Non interest bearing promissory note l.jpg

In exchange for $9,000 applied toward my purchase today, I promise to pay $9,900 in six months.

Date: January 1, 2000

Signed:_________

S.J. Devona

Non-Interest-Bearing Promissory Note

Effective interest rate on note = 20% ($900 interest / $9,000 x 12/6 mos.)


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Discount transferred to interest revenue over life of note promise to pay $9,900 in six months.

Balance Sheet Presentation of Discounted Notes

1/1/006/30/00

Notes receivable $ 9,900 $ 9,900

Less: discount on notes receivable 900 - 0 -

$ 9,000 $ 9,900

Upon

Maturity


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Accelerating Cash Inflow promise to pay $9,900 in six months. From Sales

  • Sales Discounts

  • Credit Card Sales

  • Discounting Notes Receivable


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Credit Card Sales promise to pay $9,900 in six months.

  • Competitive necessity

  • Credit card company:

    • Charges fee

    • Assumes risk of nonpayment


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Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on December 31, 1998.

Date: January 1, 1998

Signed:_________

Baker Corporation

Discounting Notes Receivable

  • Sell note prior to maturity date for cash

  • Receive less than face value (i.e. discounted amount)

  • Can be sold with or without recourse


Liquid assets and the statement of cash flows indirect method l.jpg

Exhibit 7-8 12% annual interest on December 31, 1998.

Liquid Assets and the Statement of Cash Flows - Indirect Method

Operating Activities

Net income xxxx

Increase in accounts receivable -

Decrease in accounts receivable +

Increase in notes receivable -

Decrease in notes receivable +

Investing Activities

Financing Activities

69

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.


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End of Chapter 7 12% annual interest on December 31, 1998.


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