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CHAPTER 7

CHAPTER 7. Cash and Receivables. ……..…………………………………………………………. Cash. readily available free from contractual restrictions restricted cash: current or long-term Would a bank accept it for deposit?. Separate Disclosure. Other Assets. Petty cash account. Bank overdraft.

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CHAPTER 7

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  1. CHAPTER 7 Cash and Receivables ……..…………………………………………………………... Cash • readily available • free from contractual restrictions • restricted cash: current or long-term • Would a bank accept it for deposit?

  2. Separate Disclosure Other Assets Petty cash account Bank overdraft Advances to subsidiaries Certificates of deposit Liabilities Cash

  3. Separate Disclosure Other Assets Minimum cash balance Money market funds Liabilities Cash

  4. RECEIVABLES Estimate: - uncollectible - sales returns Current Receivables Reported at net realizable value • trade receivables • accounts receivable • notes receivable • nontrade receivables • tax refunds, advances, etc. Noncurrent Receivables • classified as long-term assets

  5. 2/10, n/30 Trade Discounts • a reduction in catalog price • usually stated as a percentage • record the sale at the discounted amount • no one pays full price! Sales Discounts • a discount for prompt payment • Gross Method vs. Net Method (cf. Illustration 7-4)

  6. Uncollectible Accounts Receivable Direct Method To write-off an account as uncollectible: Bad Debts Expense 540 Accounts Receivable 540 • not an acceptable method • violation of the matching principle • failure to report net realizable value

  7. A/R 7,700 90,000 87,000 Sales Bad Debt Exp 0 90,000 0 Allow for DA 500 Allowance Method To write-off accounts as uncollectible: To record bad debts expense for the year:

  8. Sales Bad Debt Exp A/R 0 90,000 0 7,700 90,000 87,000 960 Allow for DA 500 960 Allowance Method – Percentage of Sales • Bad Debts = % of credit sales • $900 = 1% x $90,000 To record bad debts expense for the year:

  9. Sales Bad Debt Exp A/R 0 90,000 0 7,700 90,000 87,000 960 Allow for DA 500 9,740 960 Allowance Method – Percentage of Receivables • Allowance for DA = % of A/R • $487 = 5% x $9,740 To record bad debts expense for the year:

  10. NOTES RECEIVABLE Periods Rate PV Annuity FV AD? Notes Issued at Face Value • Bigelow Corp sells merchandise to customer for a 3-year, $5,000 note bearing interest at 10% annually. Market rate for a similar note is 10%.

  11. To record receipt of the note: To record the interest received:

  12. Periods Rate PV Annuity FV AD? Noninterest-bearing Notes • Bigelow Corp sells merchandise to customer for a 3-year, $5,000 noninterest-bearing note. Market rate for a similar note is 10%.

  13. Date Cash Received Int Rev. (10%) Discount Amortized Carrying Amount 7/1/03 3,757 To record receipt of the note: 7/1/04 7/1/05 To record the interest earned:

  14. Periods Rate PV Annuity FV AD? Interest-bearing Notes • Bigelow Corp sells merchandise to customer for a 3-year, $5,000, 6% note. Interest on the note will be paid semiannually. The market rate for a similar note is 10%.

  15. Date Cash Received Int Rev. (5% semi) Discount Amortized Carrying Amount 7/1/03 4,492 To record receipt of the note: 1/1/04 7/1/04 To record the first interest payment received:

  16. Periods Rate PV Annuity FV AD? Notes Received for Property • Bigelow Corp sells an office building for a 5-year, $225,000 note bearing interest at 2% annually. Information on the building: Original cost $230,000 Accumulated deprec 69,000 Appraisal value 194,000

  17. Cost 230,000 Accum depr 69,000 PV 194,000 FV 225,000 To record sale of building:

  18. DISPOSITION OF ACCOUNTS RECEIVABLE Secured Borrowing • A/R are used as collateral when borrowing money • Notes or loans payable are recorded as usual • A/R remain on the books of the company • no special entry when they become collateral • collection of A/R recorded as usual • collections are remitted to the lender

  19. Sale of Receivables • Factoring: sale of receivables to a bank • Securitization: sales of a share in a pool of assets that include receivables Sale without Recourse Cash 460,000 Due from Factor 25,000 Loss on Sale of Receiv 15,000 A/R 500,000

  20. Proceeds retained by the factor for possible discounts, returns, and allowances. The estimated value of the recourse obligation. Sale with Recourse Cash 460,000 Due from Factor 25,000 Loss on Sale of Receiv 21,000 A/R 500,000 Recourse Liability 6,000

  21. PRESENTATION AND ANALYSIS - RECEIVABLES A/R Turnover = Net Sales Average Net Trade Receivables Presentation • Separate current from noncurrent • Report net realizable value • Disclose receivables pledged as collateral Analysis

  22. PETTY CASH SYSTEM Fund Established Expenses Paid Receipt Fund Reimbursed Receipt Receipt Receipt Receipt Receipt Petty Cash 500 Cash 500 No entry Office Exp 130 Auto Exp 215 Misc Exp 130 Cash 475

  23. BANK RECONCILIATIONS Balance per bank $13,417.20 Add: Deposits in Transit Oct. 31, 2006 2,013.00 Less: Checks Outstanding #5164 $ 220.00 #5170 35.50 #5171 756.67 1,012.17 Adjusted balance per bank $14,418.03 Balance per books $14,425.53 Less: Bank service charge 7.50 Adjusted balance per books $14,418.03

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