Cash and Receivables

1. Cash and Receivables Sid Glandon, DBA, CPA Associate Professor of Accounting

2. Cash and Cash Equivalents • Cash • coin and currency • demand deposits • Cash equivalents • Short-investments (90 days) • Money market funds • Treasury bills • Commercial paper

3. Internal Controls • Separation of duties • Checking accounts • Petty cash funds • Physical protection of cash • Protection of the accounting information system records • Bank reconciliations

4. Bank Reconciliation • Three steps • Reconciliation per bank • Reconciliation per book • Adjusting journal entries

5. Items Not Considered Cash • Overdraft without the right of offset • Restricted cash accounts • Investments • Post dated checks from customers • Loans to employees

6. Restricted Cash • Not available to cover current liabilities • Bond sinking funds • Compensating balances

7. Receivables • Accounts receivable (Trade) • Notes receivable • Nontrade receivables • Advances to officers and employees • Advances to subsidiaries • Deposits • Dividends and interest receivable • Claims against others

8. Initial Valuation • Initial valuation is the amount expected to be received, converted into cash within operating cycle • Trade discounts • Selling price less than normal list price • Cash or sales discounts • Incentive for paying invoice on time • gross method • net method

9. Subsequent Valuation • Sales Returns • Uncollectible accounts • Allowance method • Balance sheet approach • Income statement approach

10. Bad Debt ExpenseBalance Sheet Approach, Allowance Method • Prepare a schedule of aged accounts receivable • Determine amount or percentage that will likely not be collected • Adjust the allowance account to reflect the computed amount by • Journalize • Bad debt expense-debit • Allowance for doubtful accounts-credit

11. Bad Debt ExpenseBalance Sheet Approach, Allowance Method

12. Bad Debt ExpenseIncome Statement Approach, Net Sales Method • Determine net credit sales • Calculate estimated percentage of bad debt expense against net credit sales • Journalize • Bad debt expense-debit • Allowance for doubtful accounts-credit

13. Bad Debt ExpenseIncome Statement Approach, Net Sales Method

14. Balance Sheet Approach, Allowance Method T-Account: Allowance for Doubtful Accounts • Beginning credit balance • Debit allowance account to write-off accounts as uncollectible • Credit allowance account to reinstate accounts previously written-off • Analyze unadjusted year-end balance • Determine required ending balance • Prepare adjusting journal entry to achieve required ending balance

15. T-Account: Allowance for Doubtful Accounts

16. Writing-Off of Uncollectible Accounts

17. Reinstatement of Previously Written-Off Accounts and Collection in Current Year

18. Adjusting the Allowance Account at Year-End and Recording Bad Debt Expense

19. Balance Sheet Presentation

20. Recognition of Notes Receivable • Interest-bearing notes • Note issued at face value • Repayment of face amount plus interest • Noninterest-bearing notes • Zero-interest-bearing notes • Note issued at discount, interest is imputed at market rate • Repayment of face amount

21. Financing with Receivables • Secured borrowing • Assigned or pledged • Sales of receivables • Factoring • Securitization • Sales without recourse • Sales with recourse

22. Discounting a Note • Step #1, Accrued interest to the date of discount • Step #2, Calculate the maturity value of the note • Step #3, Calculate the discount • Step #4, Calculate the cash proceeds