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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

Chapter 7

Cash and Receivables

pepsico inc partial balance sheet
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

pepsico inc partial balance sheet3
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

pepsico inc partial balance sheet4
PepsiCo Inc. Partial Balance Sheet

ASSETS (in millions)

Current Assets:

Cash and equivalents

Key to

Classification:

readily

available to

pay debts

slide5
Pay to the order of:

ABC Co.

Cash
  • Coin & currency
  • Checking, savings & money market accounts
  • Undeposited, cashier, and certified checks
cash equivalents
Readily convertible to cash
  • Original maturity to investor of 3 months or less

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Cash Equivalents
  • Commercial paper
  • U.S. Treasury bills
  • Certain money market funds
cash management
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
bank statements
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

bank reconciliations step 1
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

example of reconciliation
Example of Reconciliation

Bank Statement Adjustments: Deposits

Balance per statement, July 31 $ 1,152

Add: Deposit in transit 449

bank reconciliations step 2
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.

example of reconciliation12
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)

bank reconciliations step 3
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.

example of reconciliation14
Example of Reconciliation

Cash Account Adjustments:

Credit Memoranda

Balance per books, July 31 $ 1,056

Add:

Note collected $ 200

Interest earned 36 236

bank reconciliations step 4
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.

example of reconciliation16
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)

bank reconciliations step 5
Bank Reconciliations - Step 5

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

bank reconciliations step 6
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
example of reconciliation19
Example of 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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bank reconciliation adjusting entries
Book adjustments are the basis for adjusting entriesBank Reconciliation Adjusting Entries

Bank Reconciliation

Balance per bank $$$

:

Adjusted balance $$$

Balance per books $$$

:

Adjusted balance $$$

bank reconciliation adjusting entries21
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.

petty cash
Date

Dept. of Treasurer

Jane Doe

Paycheck for

RECEIPT

Dr. Cr.

RECEIPT

RECEIPT

RECEIPT

Petty Cash
slide23
Petty Cash Transactions for Liz’s Pet Shop:

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

accounting for petty cash
Accounting for Petty Cash

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

seasonality and cash
Seasonality and Cash

Cash

Shortages

Cash

Shortages -

Excess

cash -

...or liquidate

investments

Borrow...

Invest

investment in c d
Investment in C.D.

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

investment in c d27
$500

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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

investment in c d28
$3,000

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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

reasons company s invest in other companies
Reasons Company's Invest in Other Companies
  • 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
Fair

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
Use fair value method to account for these investmentsInvestments Without Significant Influence
  • Held-to-Maturity Securities
  • Trading Securities
  • Available-for-Sale Securities
held to maturity securities
$10,000 9% Bond

Due 2019

Held-to-Maturity Securities
  • Bonds of other companies
  • Intent and ability to hold until maturity
held to maturity securities33
Held-to-Maturity Securities

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
$10,000 7% Bond

Due 2011

Recording Bond Purchase

Dr. Cr.

Investment in Bonds $100,000

Cash $100,000

To record the purchase of bonds.

recording receipt of interest payment
Interest for

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.

trading securities
Stocks

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
trading securities37
Stocks

Bonds

  • Unrealized gain or loss recognized on income statement

Income

Statement

Trading Securities
  • At end of each period, security is “marked to market”
trading securities38
Trading Securities

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.

recording unrealized gain or loss on trading securities
Recording Unrealized Gain or Loss on Trading Securities

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
Stocks

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
available for sale securities41
Stocks

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
available for sale securities42
Available-for-Sale Securities

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
Recording Unrealized Gain or Loss on AFS Securities

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
Classification of Investments Without Significant Influence

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

credit sales
Terms: 2%, 10;

net 30

Sales Invoice

Credit Sales
  • Slows inflow of cash
  • Risk of uncollectible accounts

Trade Credit

Retail Customer

Receivables

pepsico sample accounts receivable subsidiary ledger
Pepsico Sample Accounts Receivable Subsidiary Ledger

Total Due

ABC Distributors $ 25

HIJ Distributors 336

: :

: :

XYZ Distributors 108

$ 2,580

Gross Accounts

Receivable

pepsico inc partial balance sheet47
Pepsico, Inc.Partial Balance Sheet

(in millions)

1998

Accounts and notes receivable,

(less allowance of $127) $2,453

Net

Realizable

Value

Estimated

Uncollectible

Accounts

direct write off method
Future Period charged with expense of bad debt write-off

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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

allowance method
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Allowance Method

Period of Sale

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

balance sheet presentation allowance method
Balance Sheet Presentation - 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

allowance method51
Allowance Method

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

Bad debts expense XXX

Allowance for Doubtful Accts XXX

I estimate...

allowance method52
Allowance Method

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

Allowance for Doubtful Accts XXX

Accounts receivable XXX

Bankrupt

approaches to allowance method
Approaches to Allowance Method

% of Net Credit Sales

% of Accounts Receivable

  • Aging Method

Income Statement Approach

Balance Sheet Approach

percentage of net credit sales method
Percentage of Net Credit Sales Method

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

percentage of net credit sales method55
Percentage of Net Credit 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%

percentage of net credit sales method56
Journal entry:

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
Customer

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 =

aging method58
Desired ending balance from aging schedule

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
From T-account analysisAging Method Example

Dr.Cr.

Bad debts expense $10,500

Allowance for doubtful accounts $10,500

To record estimated bad debts.

comparison of methods
% of Net Sales

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
Accounts Receivable Turnover

Net Credit Sales

Average Accounts Receivable

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

accounts receivable turnover62
Too fast

credit policies too

stringent; may be

losing sales

Too slow

credit department

not operating effectively;

dissatisfied customers

Accounts Receivable Turnover
interest bearing promissory note
Principal

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
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.)

balance sheet presentation of discounted notes
Discount transferred to interest revenue over life of noteBalance 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

accelerating cash inflow from sales
Accelerating Cash Inflow From Sales
  • Sales Discounts
  • Credit Card Sales
  • Discounting Notes Receivable
credit card sales
Credit Card Sales
  • Competitive necessity
  • Credit card company:
    • Charges fee
    • Assumes risk of nonpayment
discounting notes receivable
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
Exhibit 7-8Liquid 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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