Reporting and analyzing receivables and investments
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7. Reporting and Analyzing Receivables and Investments. Chapter. UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee. ACCT 201 ACCT 201 ACCT 201. Day #2. IS FUN!. ACCOUNTING. Chapter 7 - Day 2 - Agenda.

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Reporting and analyzing receivables and investments

7

Reporting and Analyzing Receivables and Investments

Chapter

UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201

Day #2

IS FUN!

ACCOUNTING


Reporting and analyzing receivables and investments

Chapter 7 - Day 2 - Agenda


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201

Notes Receivable


Notes receivable

Notes Receivable

A note is a writtenpromise to pay a specific amount at a specific future date.


Reporting and analyzing receivables and investments

Notes Receivable

Term

Payee

Maker

ACCT 201 ACCT 201 ACCT 201

Exh.

7.14

$1,000.00

July 10, 2002

after date I promise to pay to

Ninety days

the order of

TechCom Company, Los Angeles, CA

One thousand and no/100 ---------------------------------

Dollars

Payable at

First National Bank of Los Angeles, CA

Value received with interest at per annum

12%

Julia Browne

No. Due

42

Oct. 8, 2002

For TechCom.


Reporting and analyzing receivables and investments

Notes Receivable

Principal

Interest Rate

ACCT 201 ACCT 201 ACCT 201

Due Date

Exh.

7.14

$1,000.00

July 10, 2002

after date I promise to pay to

Ninety days

the order of

TechCom Company, Los Angeles, CA

One thousand and no/100 ---------------------------------

Dollars

Payable at

First National Bank of Los Angeles, CA

Value received with interest at per annum

12%

Julia Browne

No. Due

42

Oct. 8, 2002

For TechCom.


Reporting and analyzing receivables and investments

Interest Computation

Even for maturities less than 1 year, the rate is annualized.

If the note is expressed in days, base a year on 360 days.

ACCT 201 ACCT 201 ACCT 201

Exh.

7.16


Interest computation

Interest Computation

  • On March 1, 2002, Smithson, Inc. purchased a copier for $9,000 from Machines, Inc. Smithson gave Machines, Inc. a 12% note due in 90 days in payment for the copier.

  • How much interest will be paid to Machines, Inc. in 90 days?


Reporting and analyzing receivables and investments

Interest Computation

ACCT 201 ACCT 201 ACCT 201

Exh.

7.16


End of period adjustments

End-of-Period Adjustments

  • When a note receivable is outstanding at the end of an accounting period, the company must prepare an adjusting entry to accrue interest income.


Converting receivables to cash before maturity

Converting Receivables to Cash Before Maturity

  • Sell the accounts receivable to a financing company or bank (called factoring).

  • Borrow money and pledge the receivables as security for the loan (called pledging).


Full disclosure principle

Full-Disclosure Principle

  • Requires financial statements and notes to report all relevant information about the operations and financial position of a company.

    • Potential tax assessments

    • Guarantee of debts of others

    • Outstanding lawsuits


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201

Short-Term Investments


Short term investments marketable securities

Short-Term Investments (Marketable Securities)

  • Management intends to convert to cash within one year or the operating cycle whichever is longer.

  • Are readily convertible to cash.


Short term investments

Short-Term Investments . . .

  • Debt Securities reflect creditor relationship (notes, bonds, etc.)

  • Equity Securities reflect owner relationship (stock).


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201

Accounting for Short-Term Investments


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201

7-9

Exercise

Accounting For Short-Term Investment Transactions


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201

7-9

Exercise

  • Prepare journal entries to record the following transactions involving the short-term investments of Morford Co., all of which occurred during year 2002.


Reporting and analyzing receivables and investments

a.

Short-Term Investments

ACCT 201 ACCT 201 ACCT 201

On February 15, paid $120,000 cash to purchase MRI’s 90-day short term debt securities (120,000 principal), which are dated February 15 and pay 8% interest (categorized as held-to-maturity securities).


Reporting and analyzing receivables and investments

b.

Short-Term Investments

ACCT 201 ACCT 201 ACCT 201

On March 22, purchased 700 shares of GRE Company stock at $27.50 per share plus a $150 brokerage fee. These shares are categorized as trading securities.


Reporting and analyzing receivables and investments

c.

Short-Term Investments

ACCT 201 ACCT 201 ACCT 201

On May 1, received a check from MRI in payment of the principal and 90 days’ interest on the debt securities purchased in transaction a.


Reporting and analyzing receivables and investments

d.

Short-Term Investments

ACCT 201 ACCT 201 ACCT 201

On August 1, paid $80,000 cash to purchase Flash Electronics’ 10% debt securities $80,000 principal), dated July 30, 2002, and maturing January 30, 2003 (categorized as available-for-sale securities).


Reporting and analyzing receivables and investments

e.

Short-Term Investments

ACCT 201 ACCT 201 ACCT 201

On September 1, received a $1.00 per share cash dividend on the GRE Company stock purchased in transaction b.


Reporting and analyzing receivables and investments

f.

Short-Term Investments

ACCT 201 ACCT 201 ACCT 201

On October 8, sold 350 shares of GRE Co. stock for $34 per share, less a $140 brokerage fee.


Reporting and analyzing receivables and investments

g.

Short-Term Investments

ACCT 201 ACCT 201 ACCT 201

On October 30, received a check from Flash Electronics for 90 days’ interest on the debt securities purchased in transaction d.


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201

Valuing and reporting short-term investments


Short term investments1

Short-Term Investments . . .

  • Held-To-Maturity Securities

  • Trading Securities

  • Available-For-Sale Securities


Held to maturity securities

Held-to-Maturity Securities

  • Debt securities that management intends to hold to their maturity whose cash value is not needed until that date.

  • Carried on the Balance Sheet at cost.


Trading securities

Trading Securities

  • Debt and equity securities that are bought and held principally for the purpose of being sold in the near term.

  • Frequently bought and sold to generate profits on short-term changes in their prices.


Trading securities1

Trading Securities

  • Entire portfolio of trading securities is reported at its market value with a “market adjustment” from the cost of the portfolio.


Trading securities2

Trading Securities

  • Any unrealized gain (or loss)from a change in the market value of the portfolio of trading securities during a period is reported on the income statement.


Available for sale securities

Available-for-Sale Securities

  • Debt and equity securities not classified as trading or held-to-maturity securities.


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201

7-10

Exercise

Accounting For Trading Securities


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201

  • Focus Co. purchases short-term investments in trading securities at a cost of $66,000 on December 27, 2002.

  • (This is the first and only purchase of such securities).

  • At December 31, 2002, these securities had a market value of $72,000.


Reporting and analyzing receivables and investments

Trading Securities

ACCT 201 ACCT 201 ACCT 201

Let’s record the purchase.


Reporting and analyzing receivables and investments

Trading Securities

ACCT 201 ACCT 201 ACCT 201

  • Prepare the 12/31/02 year-end adjusting entry for the trading securities’ portfolio. (Year-end value = $72,000)


Reporting and analyzing receivables and investments

Trading Securities

ACCT 201 ACCT 201 ACCT 201

  • For each account in the entry for part 1, explain how it is reported in financial statements.


Reporting and analyzing receivables and investments

Trading Securities

ACCT 201 ACCT 201 ACCT 201

An adjunct asset account in the Balance Sheet. It increases the balance of the ST Investments – Trading account to the securities market value of $72,000.

  • For each account in the entry for part 1, explain how it is reported in financial statements.

Reported in the Other Revenues and Gains section of the Income Statement.


Reporting and analyzing receivables and investments

Trading Securities

ACCT 201 ACCT 201 ACCT 201

  • Prepare the 01/03/03 entry when Focus sells one-half of these securities for $35,000


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201

7-11

Exercise

Adjusting available-for-sale securities to market.


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201

  • On 12/31/02, Quaker Company held the following ST investments in its portfolio of available-for-sale securities.

  • Quaker had no ST investments in its prior accounting periods.

  • Prepare the 12/31/02 adjusting entry to report these securities at market value.


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201


Reporting and analyzing receivables and investments

Available-for-Sale Securities

ACCT 201 ACCT 201 ACCT 201

  • Make the journal entry.


Short term investments2

Held To Maturity

Trading

Available for Sale

Debt securities held to maturity.

Debt & Equity securities actively traded.

Debt & Equity securities not in the other two categories.

Cost.

Market value.*

Market value.**

Exh.

7.17

Short-Term Investments

*Unrealized gains/losses reported on the income statement.

**Unrealized gains/losses reported in the equity section of the balance sheet and in comprehensive income.


Reporting and analyzing receivables and investments

ACCT 201 ACCT 201 ACCT 201

Chapter 7 Ratios


Accounts receivable turnover

Accounts Receivable Turnover

  • This ratio provides useful information for evaluating how efficient management has been in granting credit to produce revenue.

Net sales

Average accounts receivable


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