5-1 prepared by coby harmon university of california, santa barbara westmont college copyright...

5-3 LO 1 ACCOUNT FOR SHORT-TERM INVESTMENTS Reasons to Invest in Other Companies Companies invest in debt or equity securities for at least two reasons: 1.Have excess cash 2.For strategic reasons, such as obtaining the ability to influence another company Copyright 2015 Pearson Education Inc. All rights reserved.

5-4 LO 1 Reasons to Invest in Other Companies To be classified as a current asset, an investment must meet both of the following criteria: Must be liquid (easily convertible to cash); and Investor must intend to either convert to cash within one year or current operating cycle, whichever is longer, or use it to pay a current liability Otherwise, the investment is classified as a long-term asset Copyright 2015 Pearson Education Inc. All rights reserved.

5-5 Available-for- Sale Held-to- Maturity LO 1 Categories of Investments in Securities Debt (bonds, notes, etc.) or equity (stock) Expected to be sold within the near term through active trading Generate income or losses on a day-to-day basis through changes in their prices Reasons to Invest in Other Companies Trading Copyright 2015 Pearson Education Inc. All rights reserved.

5-6 Held-to- Maturity LO 1 Categories of Investments in Securities Held with intent of selling some time in the future Not classified as either trading or held-to-maturity Reasons to Invest in Other Companies Trading Available-for- Sale Copyright 2015 Pearson Education Inc. All rights reserved.

5-7 Available-for- Sale LO 1 Categories of Investments in Securities Debt securities (bonds, notes, or other instruments with established maturity dates) Investor has intent and ability to hold until they mature Reasons to Invest in Other Companies Trading Held-to- Maturity Copyright 2015 Pearson Education Inc. All rights reserved.

5-9 LO 1 Suppose that, on June 18, 2014, Apple, Inc., purchases 5,000 shares of Intel stock as a trading security. For simplicity, suppose that the Intel stock is Apple, Inc.s only short-term investment. Apple, Inc., buys the Intel stock during 2014 for $20 per share, paying $100,000 cash. Apple, Inc., records the purchase of the investment at cost: AccountDebitCredit Investment in Trading Securities Cash 100,000 Purchase investment June 18 Trading Securities Copyright 2015 Pearson Education Inc. All rights reserved.

5-10 LO 1 Assume that, on June 30, Apple, Inc., receives a cash dividend of $4,000 from Intel. Apple, Inc., records the dividend revenue as: AccountDebitCredit Cash Dividend Revenue 4,000 Received cash dividend June 30 Trading Securities Copyright 2015 Pearson Education Inc. All rights reserved.

5-11 If fair value has increased If fair value has decreased Unrealized gain Unrealized loss Unrealized Gains and Losses Trading Securities Trading securities are reported on the balance sheet at current fair (market) value LO 1 Copyright 2015 Pearson Education Inc. All rights reserved.

5-12 10,000 LO 1 Unrealized Gains and Losses. Apple, Inc.s 2014 fiscal year ends on September 27. On this date, the fair market value of Intels stock is $110,000. Apple, Inc., adjusts the investment in Intel securities to its current fair value with the following journal entry: AccountDebitCredit Investment in Trading Securities Unrealized Gain on Trading Securities 10,000 Adjusted investment to fair value Investment in Trading Securities Unrealized Gain on Trading Securities (other income) 100,000 110,000 10,000 Copyright 2015 Pearson Education Inc. All rights reserved.

5-13 10,000 LO 1 Unrealized Gains and Losses. On September 26, 2015, the end of Apple, Inc.s fiscal year, the fair value of Intel stock is $105,000. In preparation for its 2015 balance sheet, Apple, Inc., makes the following adjusting entry: AccountDebitCredit Unrealized Loss on Trading Securities Investment in Trading Securities 5,000 Adjusted investment to fair value Investment in Trading Securities Unrealized Loss on Trading Securities (other income) 100,000 105,000 5,000 Copyright 2015 Pearson Education Inc. All rights reserved.

5-14 Sales price > carrying amount Sales price < carrying amount Realized gain Realized loss Realized Gains and Losses Trading Securities Occurs only when the investor sells an investment LO 1 Copyright 2015 Pearson Education Inc. All rights reserved.

5-15 LO 1 Realized Gains and Losses. Suppose Apple, Inc., sells its Intel stock on June 19, 2016 for $107,000. Apple, Inc., makes the following journal entry: AccountDebitCredit Cash Investment in Trading Securities 107,000 105,000 Sale of investments at a gain Gain on Sale of Trading Securities 2,000 Copyright 2015 Pearson Education Inc. All rights reserved.

5-16 Same as Trading Securities Recording initial purchase Recording dividend revenue Adjusting to fair value Different from Trading Securities Unrealized gains and losses reported as other comprehensive income (loss) for each period Accumulated and reported as accumulated other comprehensive income (loss) in stockholders equity Available-for-Sale Securities LO 1 Copyright 2015 Pearson Education Inc. All rights reserved.

5-19 LO 1 Eastern Corporation, the investment banking company, often has extra cash to invest. Suppose Eastern buys 1,000 shares of Dream, Inc., stock at $57 per share. Assume Eastern expects to hold the Dream stock for one month and then sell it. The purchase occurs on December 15, 2014. At December 31, the market price of a share of Dream stock is $58 per share. Requirements 1. What type of investment is this to Eastern? Give the reason for your answer. Illustration Trading Eastern intends to sell the stock within a short time Copyright 2015 Pearson Education Inc. All rights reserved.

5-20 LO 1 Illustration. 2. Record Easterns purchase of the Dream stock on December 15 and the adjustment to market value on December 31. AccountDebitCredit Investment in Trading Securities Cash 57,000 Dec. 15 Investment in Trading Securities Unrealized Gain on Trading Securities 1,000 Dec. 31 (1,000 shares x $57) [(1,000 shares x $58) - $57,000] Copyright 2015 Pearson Education Inc. All rights reserved.

5-21 Illustration. 3. Show how Eastern would report this investment on its balance sheet at December 31 and any gain or loss on its income statement for the year ended December 31, 2014. LO 4 Copyright 2015 Pearson Education Inc. All rights reserved.

5-22 Illustration. 4. Suppose Eastern did not intend to treat the Dream stock as a trading security, but still intended to treat it as a short-term investment. How do your answers for parts 1-3 change? LO 4 Requirements 1. What type of investment is this to Eastern? Give the reason for your answer. Available-for-Sale Facts state it is not a trading security Copyright 2015 Pearson Education Inc. All rights reserved.

5-23 LO 1 Illustration. 2. Record Easterns purchase of the Dream stock on December 15 and the adjustment to market value on December 31. AccountDebitCredit Investment in AFSS Cash 57,000 Dec. 15 Investment in AFSS Securities Unrealized Gain on AFSS (OCI) 1,000 Dec. 31 (1,000 shares x $57) [(1,000 shares x $58) - $57,000] Copyright 2015 Pearson Education Inc. All rights reserved.

5-24 Illustration. 3. Show how Eastern would report this investment on its balance sheet at December 31 and any gain or loss on its income statement for the year ended December 31, 2014. LO 4 Copyright 2015 Pearson Education Inc. All rights reserved.

5-25 Ethics and the Current Ratio There are several strategies for increasing the current ratio 1.Launch a major sales effort 2.Pay off some current liabilities before year-end 3.Reclassifying investments as current assets LO 1 Copyright 2015 Pearson Education Inc. All rights reserved.

5-27 LO 2 APPLY GAAP FOR PROPER REVENUE RECOGNITION Revenue Recognition When performance obligation satisfied Goods transferred or services provided to customer Price is fixed or determinable Collection reasonably assured Revenue is cash value of goods or services transferred Impacted by shipping terms and payment incentives offered Copyright 2015 Pearson Education Inc. All rights reserved.

5-28 LO 2 Assume Apple, Inc., delivers a truckload of iPhones to an AT&T Wireless warehouse in Florida. On the truck are 30,000 iPhone 6s, each of which Apple, Inc., sells to AT&T Wireless for $100 on account. Apple, Inc., records the following: AccountDebitCredit Accounts Receivable Sales Revenue 3,000,000 (30,000 x $100) APPLY GAAP FOR PROPER REVENUE RECOGNITION Copyright 2015 Pearson Education Inc. All rights reserved.

5-29 LO 2 Shipping Terms FOB (free on board) shipping point FOB (free on board) destination Shipping Terms At the point when the goods leave the sellers shipping dock At the point of delivery to the customer Ownership Changes Hands and Revenue Recognized Copyright 2015 Pearson Education Inc. All rights reserved.

5-30 LO 2 Discounts offered for early payment Typical incentive Sales Discounts 2% discount if paid within 10 days Full amount due in 30 days 2/10, n/30 Copyright 2015 Pearson Education Inc. All rights reserved.

5-31 LO 2 Discounts offered for early payment Typical incentive 2/10, n/30 If Apple, Inc. offered AT&T Wireless terms of 2/10, n/30 and AT&T pays the invoice within 10 days, it is entitled to a $60,000 discount ($3,000,000 sale times 2%). The collection of this receivable is recorded as follows: AccountDebitCredit Cash Sales Discount 2,940,000 60,000 Sales Discounts Accounts Receivable 3,000,000 Copyright 2015 Pearson Education Inc. All rights reserved.

5-32 LO 2 Right to return unsatisfactory or damaged merchandise to the retailer for a refund or exchange Suppose that of the 30,000 iPhones Apple, Inc., sells to AT&T Wireless, 100 are returned (or Apple, Inc., grants AT&T Wireless an allowance) because they are damaged in shipment. Apple, Inc., would record the following entry: AccountDebitCredit Sales Returns and Allowances Accounts Receivable 10,000 Sales Returns and Allowances Copyright 2015 Pearson Education Inc. All rights reserved.

5-34 LO 3 ACCOUNT FOR AND CONTROL ACCOUNTS RECEIVABLE Types of Receivables Third most liquid asset Monetary claims against others Acquired mainly by: Selling goods and services (accounts receivable) Lending money (notes receivable) Copyright 2015 Pearson Education Inc. All rights reserved.

5-36 LO 3 ACCOUNT FOR AND CONTROL ACCOUNTS RECEIVABLE Accounts Receivable Amounts collectible from customers from the sale of goods and services Sometimes called trade receivables The Accounts Receivable account serves as a control Summarizes total receivables from all customers Subsidiary ledger kept with a separate account for each customer Copyright 2015 Pearson Education Inc. All rights reserved.

5-37 LO 3 ACCOUNT FOR AND CONTROL ACCOUNTS RECEIVABLE Accounts Receivable Bal.9,000 Brown Bal.5,000 FedEx Bal.1,000 Moodys Bal.3,000 GENERAL LEDGER ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER Total $9,000 Copyright 2015 Pearson Education Inc. All rights reserved.

5-38 LO 3 ACCOUNT FOR AND CONTROL ACCOUNTS RECEIVABLE Notes Receivable Borrower signs a written promise to pay the lender A definite sum plus interest At the maturity date May require the borrower to pledge security Copyright 2015 Pearson Education Inc. All rights reserved.

5-39 LO 3 Other Receivables Miscellaneous category for all receivables other than accounts receivable and notes receivable Examples Interest receivable Advances to employees ACCOUNT FOR AND CONTROL ACCOUNTS RECEIVABLE Copyright 2015 Pearson Education Inc. All rights reserved.

5-40 LO 3 Internal Controls Over Cash Collections on Account Separate cash-handling and cash accounting duties Bookkeeper should Not handle cash Record amounts from remittance advices Separate employee should open incoming mail and make deposit Lockbox system Copyright 2015 Pearson Education Inc. All rights reserved.

5-41 LO 3 Issues Plan of Action What are the benefits and the costs of extending credit to customers? BenefitIncrease in sales. Cost Risk of not collecting. Run a credit check on prospective customers. Extend credit only to creditworthy customers. Managing Receivables Design the internal control system to separate duties. Separate cash-handling and accounting duties to keep employees from stealing the cash collected from customers. Keep a close eye on customer payment habits. Send second and third statements to slow-paying customers, if necessary. Pursue collection from customers to maximize cash flow. Copyright 2015 Pearson Education Inc. All rights reserved.

5-42 LO 3 Accounting for Receivables Issues Plan of Action Measure and report receivables on the balance sheet at net realizable value, the amount you expect to collect. This is the appropriate amount to report for receivables. Measure and report the expense associated with failure to collect receivables. This expense is called uncollectible-account expense and is reported on the income statement. Report receivables at NRV: Balance sheet Receivables$1,000 Less: Allowance for uncollectible accounts(80) Receivables, net$ 920 Measure the expense of not collecting from customers: Income statement Sales (or service) revenue$8,000 Expenses: Uncollectible-account expense190 Copyright 2015 Pearson Education Inc. All rights reserved.

5-44 LO 4 EVALUATE COLLECTIBILITY USING THE ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS Benefits of Selling on Credit Cost of Selling on Credit Customers can buy on credit, so sales and profits increase Company cannot collect from some customers Recorded as uncollectible- account expense Copyright 2015 Pearson Education Inc. All rights reserved.

5-45 LO 4 Allowance Method Records collection losses based on companys collection experience Records Uncollectible-Account Expense (Income Statement) Sets up Allowance for Uncollectible Accounts Contra-account to Accounts Receivable Amount of receivables business expects to not collect Copyright 2015 Pearson Education Inc. All rights reserved.

5-48 Percent-of-Sales Method Aging-of- Receivables Method Income Statement Approach Balance Sheet Approach Two basic ways to estimate uncollectibles: LO 4 Allowance Method Copyright 2015 Pearson Education Inc. All rights reserved.

5-49 Percent-of-Sales Method Income Statement Approach Two basic ways to estimate uncollectibles: LO 4 Allowance Method Estimate % Uncollectible Sales Revenue Uncollectible- Account Expense X= Copyright 2015 Pearson Education Inc. All rights reserved.

5-50 LO 4 Percent-of-Sales. Assume it is September 29, 2012, and Apple, Inc.s accounts have these balances before the year-end adjustments (amounts in millions): Accounts Receivable Allowance for Uncollectible Accounts 11,02810 Suppose Apple, Inc.s credit department estimates that uncollectible- account expense is 0.0005 (1/20 of 1%) of total revenues, which are $156,508 million. The entry that records uncollectible-account expense for the year also updates the allowance as follows (using Apple, Inc., figures). Copyright 2015 Pearson Education Inc. All rights reserved.

5-51 LO 4 Percent-of-Sales. Suppose Apple, Inc.s credit department estimates that uncollectible-account expense is 0.0005 (1/20 of 1%) of total revenues, which are $156,508 million. The entry that records uncollectible-account expense for the year also updates the allowance as follows (using Apple, Inc., figures). AccountDebitCredit Uncollectible-Account Expense Allowance for Uncollectible Accounts 78 Sep. 29 Uncollectible-Account Expense =$156,508 x.0005 = $78 Copyright 2015 Pearson Education Inc. All rights reserved.

5-52 LO 4 Percent-of-Sales. Accounts Receivable Allowance for Uncollectible Accounts 11,02810 Adj78 Bal88 Net accounts receivable, $10,940 Uncollectible- Account Expense 78 Employs the expense recognition (matching) concept Copyright 2015 Pearson Education Inc. All rights reserved.

5-53 Aging-of- Receivables Method Balance Sheet Approach Two basic ways to estimate uncollectibles: LO 4 Allowance Method Estimate % Uncollectible Accounts Receivable Allowance for Uncollectible Accounts X= Copyright 2015 Pearson Education Inc. All rights reserved.

5-54 LO 4 Aging-of-Receivables. Assume it is September 29, 2012, and Apple, Inc.s receivables accounts show the following before the year-end adjustment (amounts in millions): Accounts Receivable Allowance for Uncollectible Accounts 11,02810 Apple, Inc.s accounts receivable aging schedule shows that the company will not collect $98. Copyright 2015 Pearson Education Inc. All rights reserved.

5-56 LO 4 AccountDebitCredit Uncollectible-Account Expense Allowance for Uncollectible Accounts 88 Sep. 29 Allowance for Uncollectible Accounts $98 - $10 = $88 Aging-of-Receivables. The aging method will bring the balance of the allowance account ($10) to the needed amount as determined by the aging schedule ($98). To update the allowance, Apple, Inc., would make the following adjusting entry at year-end: = Copyright 2015 Pearson Education Inc. All rights reserved.

5-57 LO 4 Accounts Receivable Allowance for Uncollectible Accounts 11,02810 Adj88 Bal98 Net accounts receivable, $10,930 Uncollectible- Account Expense 88 Aging-of-Receivables. Copyright 2015 Pearson Education Inc. All rights reserved.

5-58 LO 4 Accounts ReceivableRS 9 Accounts Receivable, Net = $10,930 Write Off Uncollectible Accounts. Assume that at the beginning of fiscal 2013, Apple, Inc., had these accounts receivable (amounts in millions): Accounts ReceivableOther 11,016 Allowance for Uncollectible Accounts 98 Accounts ReceivableTM Total Accounts Receivable = $11,028 3 Copyright 2015 Pearson Education Inc. All rights reserved.

5-59 Write Off Uncollectible Accounts. Early in fiscal 2013, Apple, Inc.s credit department determines that Apple, Inc., cannot collect from RS. Apple, Inc., then writes off this receivable with the following entry: LO 4 AccountDebitCredit Allowance for Uncollectible Accounts Accounts Receivable RS 9 9 Jan. 31 + 9 - 9 Copyright 2015 Pearson Education Inc. All rights reserved.

5-60 Write Off Uncollectible Accounts. Early in fiscal 2013, Apple, Inc.s credit department determines that Apple, Inc., cannot collect from RS. Apple, Inc., then writes off this receivable with the following entry: LO 4 AccountDebitCredit Allowance for Uncollectible Accounts Accounts Receivable RS 9 9 Jan. 31 Accounts ReceivableRS Allowance for Uncollectible Accounts 98999 89 0 Copyright 2015 Pearson Education Inc. All rights reserved.

5-61 LO 4 Accounts ReceivableRS Accounts Receivable, Net = $10,930 Write Off Uncollectible Accounts. After the write-off, Apple, Inc.s accounts show these amounts: Accounts ReceivableOther 11,016 Allowance for Uncollectible Accounts 98 Accounts ReceivableTM Total Accounts Receivable = $11,019 9 3 99 89 Copyright 2015 Pearson Education Inc. All rights reserved.

5-64 Illustration LO 4 On November 30, High Peaks Party Planners had a $34,000 balance in Accounts Receivable and a $3,000 credit balance in Allowance for Uncollectible Accounts. During December, High Peaks Party Planners made credit sales of $159,000. December collections on account were $130,000, and write-offs of uncollectible receivables totaled $2,700. Uncollectible-accounts expense is estimated as 1% of credit sales. Requirements 1.Journalize sales, collections, write-offs of uncollectibles, and uncollectible-account expense by the allowance method during December. Explanations are not required. 2.Show how High Peaks Party Planners will report accounts receivable and net sales on its December 31 balance sheet and income statement for the month ended December 31. Copyright 2015 Pearson Education Inc. All rights reserved.

5-65 Illustration. During December, High Peaks Party Planners made credit sales of $159,000. December collections on account were $130,000, and write-offs of uncollectible receivables totaled $2,700. LO 4 AccountDebitCredit Accounts Receivable Sales Revenue 159,000 Dec Cash Accounts Receivable 130,000 Allowance for Uncollectible Accounts Accounts Receivable 2,700 Dec Copyright 2015 Pearson Education Inc. All rights reserved.

5-66 Illustration. High Peaks made credit sales of $159,000. Uncollectible-accounts expense is estimated as 1% of credit sales. LO 4 AccountDebitCredit Uncollectible-Account Expense Allowance for Uncollectible Accounts 1,590 Dec Accounts Receivable Allowance for Uncollectible Accounts 34,000 159,000 Bal.60,300 2,700 130,000 2,7001,590 3,000 Bal.1,890 Accounts Receivable, Net = $58,410 Copyright 2015 Pearson Education Inc. All rights reserved.

5-67 Illustration. Show how High Peaks Party Planners will report accounts receivable and net sales on its December 31 balance sheet and income statement for the month ended December 31. LO 4 Copyright 2015 Pearson Education Inc. All rights reserved.

5-68 LO 4 Direct Write-Off Method Record expense when specific customers account proves to be uncollectible Not GAAP 1.No allowance for uncollectibles 2.Receivables (assets) may be overstated 3.Fails to recognize expense in same period in which sales revenue is earned Required method for federal income tax purposes Copyright 2015 Pearson Education Inc. All rights reserved.

5-69 The journal entry to record the write off of the RS receivable using the direct write-off method is as follows: LO 4 AccountDebitCredit Uncollectible-Account Expense Accounts Receivable RS 9 9 Jan. 31 Direct Write-Off Method Copyright 2015 Pearson Education Inc. All rights reserved.

5-70 LO 4 Computing Cash Collections from Customers AccountDebitCredit Accounts Receivable Sales (or Service) Revenue 1,800 Accounts Receivable Beginning balance200 Sales on account1,800 Record revenue on account Copyright 2015 Pearson Education Inc. All rights reserved.

5-71 LO 4 Computing Cash Collections from Customers AccountDebitCredit Allowance for Uncollectible Accounts Accounts Receivable 100 Accounts Receivable Beginning balance200Write-off of uncollectible100 Sales on account1,800 Write-off of uncollectible account Copyright 2015 Pearson Education Inc. All rights reserved.

5-72 LO 4 Computing Cash Collections from Customers AccountDebitCredit Cash Accounts Receivable 1,500 Accounts Receivable Beginning balance200Write-off of uncollectible100 Sales on account1,800Collections from customers1,500 Ending balance400 Record collection on account Copyright 2015 Pearson Education Inc. All rights reserved.

5-73 LO 4 Computing Cash Collections from Customers Accounts Receivable Beginning balance200Write-off of uncollectible100 Sales on account1,800Collections from customers1,500 Ending balance400 Receivables typically hold only five items Can solve for Collections from Customers when sales, write-offs, beginning and ending balances are known Collections from customers Copyright 2015 Pearson Education Inc. All rights reserved.

5-75 LO 5 ACCOUNT FOR NOTES RECEIVABLE Terms CreditorParty to whom money is owed; lender DebtorParty that borrowed and owes money; maker, borrower InterestCost of borrowing money; stated as annual percentage rate Maturity dateDate when debtor must pay note Maturity valueSum of principal and interest PrincipalAmount borrowed by debtor TermLength of time from when note was signed to when payment must be made Classified as current or long-term Copyright 2015 Pearson Education Inc. All rights reserved.

5-82 LO 5 Consider the promissory note in Exhibit 5-5. After Lauren Holland signs the note, Continental Bank gives her $1,000 cash. The bank makes the following entry to record the loan. AccountDebitCredit Aug 31 Notes ReceivableL.Holland Cash 1,000 Accounting for Notes Receivable Made a loan Copyright 2015 Pearson Education Inc. All rights reserved.

5-83 Principal x Interest Rate x Time = Amount of Interest LO 5 Continental Bank earns interest revenue during September, October, November, and December. At December 31, 2014, the bank accrues 9% interest revenue for four months: AccountDebitCredit Dec 31 Interest Receivable Interest Revenue 30 Accounting for Notes Receivable Accrued interest $1,000.094/12$30 Calculation of Accrued Interest: Copyright 2015 Pearson Education Inc. All rights reserved.

5-85 LO 5 The bank collects the note on February 28, 2015, and records the following: AccountDebitCredit Feb 28 Cash Notes ReceivableL.Holland 1,045 1,000 Accounting for Notes Receivable Interest Receivable 30 Interest Revenue 15 Interest Revenue for January and February = $1,000 x.09 x 2/12 = $15 Copyright 2015 Pearson Education Inc. All rights reserved.

5-86 LO 5 Interest Rates usually expressed as an annual percent Fraction used for time periods less than an year Months/12 Days/365 Accounting for Notes Receivable Copyright 2015 Pearson Education Inc. All rights reserved.

5-88 LO 6 Strategies to shorten credit cycle: Sales discounts Interest on past due customer accounts Effective credit and collection procedures Emphasize credit card and bankcard sales SHOW HOW TO SPEED UP CASH FLOW FROM RECEIVABLES Copyright 2015 Pearson Education Inc. All rights reserved.

5-89 LO 6 Apple, Inc., sells a computer and peripheral devices for $5,000 at one of its stores, and the customer pays with a VISA card. VISA charges companies a 2% processing fee. AccountDebitCredit Cash Credit Card Discount Expense 4,900 100 Credit Card or Bankcard Sales Credit card fee =$5,000 x 2% = $100 Sales Revenue 5,000 Copyright 2015 Pearson Education Inc. All rights reserved.

5-90 LO 6 Company sells receivables to a factor Factor pays discounted price Benefits company with immediate receipt of cash Expensive and loss of control over collection process Used by companies with Weak or insufficient credit history Significant amount of debt Selling (Factoring) Receivables Copyright 2015 Pearson Education Inc. All rights reserved.

5-91 LO 6 To illustrate, suppose a company wishes to speed up cash flow and therefore sells $100,000 of accounts receivable, receiving cash of $95,000. The company would record the sale of the receivables: AccountDebitCredit Cash Financing Expense 95,000 5,000 Accounts Receivable 100,000 Selling (Factoring) Receivables Copyright 2015 Pearson Education Inc. All rights reserved.

5-93 LO 7 Quick (Acid-Test) Ratio Higher the ratio, the easier it is to pay current liabilities Apple, Inc.s quick ratio is 1.04 $1.04 of quick assets to pay each $1 of current liabilities Ratio value is considered excellent What constitutes an acceptable quick ratio depends on the industry Copyright 2015 Pearson Education Inc. All rights reserved.

5-94 LO 7 Days Sales in Receivables 1. Average daily sales = Net sales 365 days 2. Days sales in receivables = Average net receivables * Average daily sales Beginning net receivables + Ending net receivables 2 * Average net receivables = Copyright 2015 Pearson Education Inc. All rights reserved.

5-96 Cash and Cash Equivalents Marketable securities Net current receivables $6,000$22,000$56,000 LO 7 Total current liabilities ++ = $15,000 + $107,000.69 Fairly weak Compute Arcadias quick (acid-test) ratio Copyright 2015 Pearson Education Inc. All rights reserved.

5-98 LO 7 Days Sales in Receivables 1. Average daily sales = Net sales 365 days 2. Days sales in receivables = Average net receivables * Average daily sales Illustration = = $728,000 365 days = $1,995 ($56,000 + $70,000) / 2 $1,995 = 31.6 days 31.6 days sales in receivables is within an acceptable range relative to credit terms of net 30 days. Copyright 2015 Pearson Education Inc. All rights reserved.

5-99 This work is protected by United States copyright law and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright Copyright 2015 Pearson Education Inc. All rights reserved.

5-1 prepared by coby harmon university of california, santa barbara westmont college copyright...

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