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Chapter 7

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  1. Chapter 7 Cash and Receivables

  2. 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

  3. 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

  4. PepsiCo Inc. Partial Balance Sheet ASSETS (in millions) Current Assets: Cash and equivalents Key to Classification: readily available to pay debts

  5. Pay to the order of: ABC Co. Cash • Coin & currency • Checking, savings & money market accounts • Undeposited, cashier, and certified checks

  6. Readily convertible to cash • Original maturity to investor of 3 months or less 1 2 3 4 5 6 7 8 9 10 1 2 3 11 12 13 14 15 16 17 4 5 6 7 8 9 10 1 2 3 18 19 20 21 22 23 24 11 12 13 14 15 16 17 4 5 6 7 8 9 10 25 26 27 28 29 30 31 18 19 20 21 22 23 24 11 12 13 14 15 16 17 25 26 27 28 29 30 31 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Cash Equivalents • Commercial paper • U.S. Treasury bills • Certain money market funds

  7. 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

  8. 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

  9. 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

  10. Example of Reconciliation Bank Statement Adjustments: Deposits Balance per statement, July 31 $ 1,152 Add: Deposit in transit 449

  11. 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.

  12. 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)

  13. 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.

  14. Example of Reconciliation Cash Account Adjustments: Credit Memoranda Balance per books, July 31 $ 1,056 Add: Note collected $ 200 Interest earned 36 236

  15. 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.

  16. 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)

  17. Bank Reconciliations - Step 5 Identify errors made by the bank or the company in recording transactions during the period.

  18. 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

  19. 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 19

  20. Book adjustments are the basis for adjusting entries Bank Reconciliation Adjusting Entries Bank Reconciliation Balance per bank $$$ : Adjusted balance $$$ Balance per books $$$ : Adjusted balance $$$

  21. 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.

  22. Date Dept. of Treasurer Jane Doe Paycheck for RECEIPT Dr. Cr. RECEIPT RECEIPT RECEIPT Petty Cash

  23. 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

  24. 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

  25. Seasonality and Cash Cash Shortages Cash Shortages - Excess cash - ...or liquidate investments Borrow... Invest

  26. 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

  27. $500 1 2 3 4 5 6 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

  28. $3,000 1 2 3 4 5 6 12 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

  29. 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

  30. 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

  31. Use fair value method to account for these investments Investments Without Significant Influence • Held-to-Maturity Securities • Trading Securities • Available-for-Sale Securities

  32. $10,000 9% Bond Due 2019 Held-to-Maturity Securities • Bonds of other companies • Intent and ability to hold until maturity

  33. 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

  34. $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.

  35. 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.

  36. Stocks Bonds • Intent to sell in near term (classified as current assets) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Trading Securities • Purchased to generate profit from short-term appreciation

  37. Stocks Bonds • Unrealized gain or loss recognized on income statement Income Statement Trading Securities • At end of each period, security is “marked to market”

  38. 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.

  39. 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.

  40. 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

  41. 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

  42. 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.

  43. 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.

  44. 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

  45. Terms: 2%, 10; net 30 Sales Invoice Credit Sales • Slows inflow of cash • Risk of uncollectible accounts Trade Credit Retail Customer Receivables

  46. Pepsico Sample Accounts Receivable Subsidiary Ledger Total Due ABC Distributors $ 25 HIJ Distributors 336 : : : : XYZ Distributors 108 $ 2,580 Gross Accounts Receivable

  47. Pepsico, Inc.Partial Balance Sheet (in millions) 1998 Accounts and notes receivable, (less allowance of $127) $2,453 Net Realizable Value Estimated Uncollectible Accounts

  48. Future Period charged with expense of bad debt write-off 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 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

  49. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Allowance Method Period of Sale Estimated bad debt expense (and allowance account) recorded in same period

  50. 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