Cash short term investments and accounts receivable
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Cash, Short-term Investments and Accounts Receivable. Chapter 4. Cash, Short-term Investments and Accounts Receivable. Chapter 4. Chapter 4 Learning Objectives. Account for the major types of transactions involving cash, short-term investments, and accounts receivable.

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Cash short term investments and accounts receivable

Cash, Short-term Investmentsand Accounts Receivable

Chapter 4

Chapter 4


Cash short term investments and accounts receivable1

Cash, Short-term Investmentsand Accounts Receivable

Chapter 4

Chapter 4


Cash short term investments and accounts receivable

Chapter 4Learning Objectives

  • Account for the major types of transactions involving cash, short-term investments, and accounts receivable.

  • Prepare a bank reconciliation and related entries.

  • Estimate and record bad debts for accounts receivable.

  • Use ratios and other analysis techniques to make decisions about cash, short-term investments, and accounts receivable.

Chapter 4

Chapter 4

3


Cash and cash equivalents

Cash and Cash Equivalents

To qualify as a cash equivalent, an item must be readily convertible into a specific amount of cash and have very little risk of a change in value from the time it is acquired to the time it is changed back into cash.

Chapter 4


Petty cash

Petty Cash

Most organizations keep a limited amount of petty cash on hand (in a petty cash box, for example) to pay for small items.

What issues are of concern when a petty cash

fund is in use?

Chapter 4


Entry to establish petty cash

Entry to Establish Petty Cash

Chapter 4


Entry to replenish petty cash

Entry to Replenish Petty Cash

Chapter 4


Cash short term investments and accounts receivable

Review

The entry to establish petty cash includes a:

  • debit to the Cash account.

  • credit to the Petty Cash account.

  • debit to the Petty Cash account.

  • debit to the Petty Cash Expense account.

Chapter 4

Chapter 4

8


Cash short term investments and accounts receivable

Review

The entry to establish petty cash includes a:

  • debit to the Cash account.

  • credit to the Petty Cash account.

  • debit to the Petty Cash account.

  • debit to the Petty Cash Expense account.

Chapter 4

Chapter 4

9


Cash short term investments and accounts receivable

Problem Review

Prepare the entry on January 1 to establish a petty cash fund for $100.

Prepare the entry on January 31 to replenish petty cash assuming $19 was spent on postage, $55 on office supplies, and $20 on coffee and doughnuts.

Chapter 4

Chapter 4

10


Cash short term investments and accounts receivable

Problem Review Solution

Chapter 4


Bank reconciliations

Bank Reconciliations

  • Deposits in Transit

  • Outstanding Checks

  • Deposits Unknown to Firm

  • Bank Fees

  • NSF Checks

  • Errors (on the part of the Bank or Firm)

Chapter 4


Cash short term investments and accounts receivable

Categorizing items for the bank reconciliation

Found on Bank Stmt

(Adjust Cash Ledger)

Found on Cash Ledger

(Adjust Bank Balance)

Increase

Interest Earned

Direct Deposits

Company errors

Deposits in Transit

Bank Errors

Decrease

Service Charges

NSF Charges

Drafts

Company errors

Outstanding Checks

Bank Errors

Chapter 4


Bank reconciliation illustrated

Bank Reconciliation Illustrated

Chapter 4


Bank reconciliation journal entries

Bank Reconciliation Journal Entries

Chapter 4


Cash short term investments and accounts receivable

Review

A NSF check received from a customer is shown on bank reconciliation statement as a(n):

  • addition to the book balance.

  • deduction from the bank balance.

  • deduction from the book balance.

  • addition to the bank balance.

Chapter 4

Chapter 4

16


Cash short term investments and accounts receivable

Review

A NSF check received from a customer is shown on bank reconciliation statement as a(n):

  • addition to the book balance.

  • deduction from the bank balance.

  • deduction from the book balance.

  • addition to the bank balance.

Chapter 4

Chapter 4

17


Cash short term investments and accounts receivable

Review

Outstanding checks are shown on bank reconciliation statement as a(n):

  • addition to the book balance.

  • deduction from the bank balance.

  • deduction from the book balance.

  • addition to the bank balance.

Chapter 4

Chapter 4

18


Cash short term investments and accounts receivable

Review

Outstanding checks are shown on bank reconciliation statement as a(n):

  • addition to the book balance.

  • deduction from the bank balance.

  • deduction from the book balance.

  • addition to the bank balance.

Chapter 4

Chapter 4

19


Cash short term investments and accounts receivable

Review

The journal entry to record bank charges for printing checks includes a:

  • debit to Cash.

  • credit to Accounts Payable.

  • debit to Miscellaneous Expense.

  • credit to Miscellaneous Expense.

Chapter 4

Chapter 4

20


Cash short term investments and accounts receivable

Review

The journal entry to record bank charges for printing checks includes a:

  • debit to Cash.

  • credit to Accounts Payable.

  • debit to Miscellaneous Expense.

  • credit to Miscellaneous Expense.

Chapter 4

Chapter 4

21


Short term investments

Short-Term Investments

  • Companies need to hold an adequate amount of cash to meet current obligations, but do not generally want to hold significantly more cash than will be needed.

  • Companies often make short-term investments of excess cash in the stocks and bonds of other companies.

  • These investments are referred to as available-for-sale securities.

  • Available-for-sale securities are shown on on the balance sheet at fair market value rather than cost.

  • Such an adjustment requires an end-of-period adjusting entry to record a gain or loss relative to the investment cost.

Chapter 4


Adjusting entries for available for sale securities

Adjusting Entries for Available-for-Sale Securities

Assume Caliope Co. purchased $2,500 of stock in Orleans Corp. in November 2009. By Dec. 31, 2009, the stock was worth $2,200. Caliope Co. would prepare the following adjusting entry:

Chapter 4


Contra revenue accounts

Contra Revenue Accounts

Sales Discounts

Sales Returns and Allowances

  • What are contra revenue accounts?

  • How and why are they used?

Chapter 4


Sales discounts illustrated

Sales Discounts Illustrated

Assume that Payne Company sells $400 of merchandise with credit

terms of 2/10, n/30 to Brenda Joyner on March 1. Payne Company

would record the following entry on March 1.

Chapter 4


Sales discounts illustrated continued

Sales Discounts Illustrated continued

Assume that Brenda Joyner pays the amount due to Payne

Company on March 11. Payne Company would record the

following entry:

Chapter 4


Sales discounts illustrated continued1

Sales Discounts Illustrated continued

Assume now that Brenda Joyner pays the amount due to Payne

Company on March 31 instead of March 11. Payne Company

would record the following entry:

Chapter 4


Sales returns and allowances illustrated

Sales Returns and Allowances Illustrated

Assume now that on March 4 Brenda Joyner wants to return

$100 of merchandise purchased from Payne Company on

March 1. Payne Company records the following journal entry

on March 4.

Chapter 4


Income statement presentation of contra revenue accounts

Income Statement Presentation of Contra Revenue Accounts

Sales Returns and Allowances and Sales Discounts are both subtracted from Sales to obtain Net Sales on the income statement.

Following is an example of an income statement with contra revenue accounts.

Chapter 4


Cash short term investments and accounts receivable

Review

The amount paid to the seller within the discount period on a $1,500 sale on account, with credit terms of 2/10, n/30, and a credit for a return of $300 is:

  • $1,200.

  • $1,176.

  • $1,224.

  • $1,470.

Chapter 4

Chapter 4

30


Cash short term investments and accounts receivable

Review

The amount paid to the seller within the discount period on a $1,500 sale on account, with credit terms of 2/10, n/30, and a credit for a return of $300 is:

  • $1,200.

  • $1,176.

  • $1,224.

  • $1,470.

Chapter 4

Chapter 4

31


Cash short term investments and accounts receivable

Uncollectible Accounts

  • Two key activities are associated with a credit sale: making the sale and collecting the resulting receivable.

  • Whenever a business decides to extend credit to customers, there is the potential for bad debts.

  • When it becomes apparent that a receivable will not be collected, the business should eliminate, or write off, that receivable.

  • The two ways to account for bad debt write-offs are the direct write-off method and the allowance method.

Chapter 4


Recording bad debts

Recording Bad Debts

Direct Write-Off

Easy

Not GAAP

Violates Matching

Accurate

Allowance Method

Not so Easy

GAAP

Matches Expense/Revenue

Requires Estimation

Chapter 4


Direct write off

Direct Write-Off

NOT GAAP

Sept. 18Uncollectible Accounts Expense300

Accounts Receivable - D. Duck300

To write off account receivable.

Chapter 4


Allowance method

Allowance Method

2010

Aug.10 Accounts Receivable-Kent Pai 2,300

Sales 2,300

To record a credit sale in 2010.

Dec 31Uncollectible Accounts Expense27,000

Allowance for Uncollectible Accounts27,000

To record an estimate for bad debts related to 2010 credit sales.

2011

Feb. 18 Allowance for Uncollectible Accounts 2,300

Accounts Receivable – Kent Pai 2,300

To write off an accounts receivable in 2011 from a 2010 credit sale.

Chapter 4


Reinstating accounts receivable

Reinstating Accounts Receivable

May 15Accounts Receivable – Saffron Cheng920

Allowance for Uncollectible Accounts920

To reinstate an account previously written off.

May 15Cash920

Accounts Receivable – Saffron Cheng920

To collect a reinstated account previously written off.

Chapter 4


Cash short term investments and accounts receivable

Review

The entry to write off an account using the allowance method involves a debit to:

  • Uncollectible Accounts Expense.

  • Accounts Receivable.

  • Allowance for Uncollectible Accounts.

  • Sales Discounts.

Chapter 4

Chapter 4

37


Cash short term investments and accounts receivable

Review

The entry to write off an account using the allowance method involves a debit to:

  • Uncollectible Accounts Expense.

  • Accounts Receivable.

  • Allowance for Uncollectible Accounts.

  • Sales Discounts.

Chapter 4

Chapter 4

38


Cash short term investments and accounts receivable

Review

The Allowance for Uncollectible Accounts is classified as a:

  • liability account.

  • contra asset account.

  • contra liability account.

  • stockholders’ equity account.

Chapter 4

Chapter 4

39


Cash short term investments and accounts receivable

Review

The Allowance for Uncollectible Accounts is classified as a:

  • liability account.

  • contra asset account.

  • contra liability account.

  • stockholders’ equity account.

Chapter 4

Chapter 4

40


Cash short term investments and accounts receivable

Problem Review

  • Prepare the entry on December 15, 2009, to record a sale on account for $5,000 to June DeLucas.

  • Prepare the entry on March 31, 2010, to write off the account in full for June DeLucas using the allowance method.

Chapter 4

Chapter 4

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Cash short term investments and accounts receivable

Problem Review Solution

Chapter 4


Credit card receivables

Credit Card Receivables

Feb. 20Credit Cards Receivable 6,000

Sales Revenue 6,000

To record Visa sales.

Feb. 22 Cash 5,850

Credit Card Expense 150

Credit Cards Receivable 6,000

To record Visa deposit and related service charge.

What are the costs and benefits of accepting credit cards?

Chapter 4


Financial ratios

Financial Ratios

Financial ratiosare measures that express the relationship or interrelationships between, or among, two or more financial statement items.

Liquidity refers to an entity's ability to finance its day-to-day operations and to pay its liabilities as they mature.

Quick assets generally include cash and cash equivalents, short-term investments, and the net amount of current notes and accounts receivable.

Chapter 4


Relevant financial ratios

Relevant Financial Ratios

Quick ratio = Quick Assets ÷ Current Liabilities

A/R turnover ratio = Net credit sales ÷ Average A/R

Age of receivables = 360 days ÷ A/R turnover ratio

Chapter 4


Alternative method for a r turnover

Alternative Method for A/R Turnover

One Day’s Sales = Sales ÷ 360 days

A/R turnover = Average A/R ÷ One Day’s Sales

Chapter 4


Turnover example

Turnover Example

Chapter 4


Cash short term investments and accounts receivable

Problem Review

Compute the quick ratio for MamaMia Soup Company for Year 1 and Year 2 based on the following information.

Chapter 4

Chapter 4

48


Cash short term investments and accounts receivable

Problem Review Solution

Year 1

Quick ratio = Quick Assets/Current Liabilities

= ($94 + 42 + $578)/$1,465

= $674/$1,465

= .46

Year 2

Quick ratio = Quick Assets/Current Liabilities

= ($63 + $7 + $646)/$1,851

= $716/$1,851

= .39

Chapter 4

Chapter 4

49


Cash short term investments and accounts receivable

THE END!

Chapter 4

Chapter 4

50


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