1 chapter 7 cash, investments, and receivables financial accounting 4e by porter and norton
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1
Chapter 7
Cash, Investments,
and Receivables
Financial Accounting 4e by Porter and Norton
2
PepsiCo Inc. Consolidated Balance Sheet (partial)
ASSETS (in millions) Dec. 29 Dec. 30 2001 2000 .Current Assets:Cash and cash equivalents $ 683 $1,038Short-term investments, at cost 966 467
1,649 1,505Accounts & notes receivable 2,142 2,129Inventories 1,310 1,192Prepaid expenses & other assets 752 791
Total Current Assets $5,853 $5,617
higher
lower
3
PepsiCo Inc.Consolidated Balance Sheet (partial)
ASSETS (in millions)
Current Assets:Cash and cash equivalentsShort-term investments, at costAccounts and notes receivable
InventoriesPrepaid expenses & other assets
Total Current AssetsLess
Liquid
Highly Liquid
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
4
PepsiCo Inc. Consolidated Balance Sheet (partial)
ASSETS (in millions)
Current Assets:Cash and equivalents
Key to classification
as cash: readily available topay debts
5
Cash
Coin & currency
Checking, savings & money market accounts
Undeposited, cashier, and certified checks
Pay to
the o
rder o
f:
ABC Co
.
6
Cash Equivalents
Commercial paper U.S. Treasury bills Certain money market funds
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
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Readily convertible to cash
Original maturity to investor of 3 months or less
7
Cash Management
Necessary to ensure company has neither too little nor too much cash on hand
Tools: Cash Flows Statement Bank Reconciliations Petty Cash Funds
8
Cash balance, beginning of period +
= Cash balance, end of period
Bank Statements
Deposits Customer notes
and interest collected by bank
Interest earned
Canceled checks NSF checks Service charges
9
Bank Reconciliation - Step 1
Deposits in Transit: Late period deposits not yet reflected on
bank statement
Trace deposits on bank statement to books. Identify deposits in transit. Add to bank balance.
Example of Reconciliation
Balance per statement, June 30 $ 3,308.59Add: Deposit in transit
642.30
Bank Statement Adjustments: Deposits
10
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Bank Reconciliation - Step 2
Outstanding checks: Checks written but not yet presented to
bank
Trace checks cleared by bank to books. Identify outstanding checks. Subtract from bank balance.
Pay to
the o
rder o
f:
XYZ Co
.ABC
Co.
Example of ReconciliationBank Statement Adjustments:
Checks Outstanding
Balance per statement, June 30 $3,308.59Add: Deposit in transit 642.30Deduct: Outstanding checks:
Check No. 496 $ 79.89Check No. 501 213.20Check No. 502 424.75 (717.84)
Adjusted balance, June 30 $3,233.05
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Bank Reconciliation - Step 3
Credit memoranda: Interest earned,
customer notes collected
List all other additions (credit memoranda) shown on the bank statement. Add to book balance.
Example of ReconciliationCash Account Adjustments:
Credit Memoranda
Balance per books, June 30 $ 2,895.82
Add:Note collected $500.00 Interest on note 50.00Interest earned 15.45Recording error, #498 54.00 619.45
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List all other subtractions (debit memoranda) shown on the bank statement. Subtract from book balance.
Bank Reconciliation - Step 4
Debit memoranda: NSF checks, service
charges, etc.
Date
Non-Sufficient Funds
Example of ReconciliationCash Account Adjustments:
Debit Memoranda
Balance per books, June 30 $ 2,895.82Add: Note collected $500.00
Interest on note 50.00 Interest earned 15.45 Recording error, #498 54.00 619.45
Deduct: NSF check $245.72 Collection fee – note 16.50 Service charge 20.00 (282.22)
Adjusted balance, June 30 $ 3,233.0516
17
Bank Reconciliation - Step 5
Identify errors made by the bank or the company in recording transactions during the period.
18
Bank Reconciliation - 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 $$$:
Adjusted balance $$$
Adjusted balances for book and bank
must agree
Example of Reconciliation
Balance per statement, June 30 $ 3,308.59:
Adjusted balance, June 30 $ 3,233.05
Bank Statement Adjustments
Balance per books, June 30 $ 2,895.82:
Adjusted balance, June 30 $ 3,233.05
Cash Account Adjustments
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Bank Reconciliation Adjusting Entries
Bank Reconciliation
Balance per bank $$$:
Adjusted balance $$$
Balance per books $$$:
Adjusted balance $$$
Book adjustments are the basis
for adjusting
entries
21
Bank Reconciliation Adjusting Entries
Dr. Cr.
Accounts Receivable 245.72Collection Fee Expense 16.50Rent Expense - Lockbox 20.00Cash 337.23
Notes Receivable 500.00Interest revenue 65.45Supplies 54.00
To record bank reconciliation adjustments.
22
Petty Cash
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
RECEIPT
Payche
ck for
Date
Dept.
of Tre
asurer
Jane D
oe
Dr. Cr.RECEIPT
RECEIPT
RECEIPT
23
Prepare the journal entry to record the petty cash fund replenishment
Petty Cash Transactions for Keese Corporation:
Original Fund Balance $200.00
Petty Cash Expenditures:
U.S. Post Office 55.00
Overnight Delivery Service 69.50
Office Supply Express 45.30
Coin & currency per count 26.50
24
Accounting for Petty Cash
* $200.00 - ($55.00 + 69.50 + 45.30 + 26.50) =$200.00 - $196.30 = $3.70 short
Journal Entry to Replenish Fund:
Postage Expense 55.00
Delivery Expense 69.50
Office Expense 45.30
Cash Over and Short* 3.70
Cash 173.50
Investment in CD
Purchase of investment: Dr. Cr.
Short-Term
Investments – CD 100,000
Cash 100,000
Invest $100,000 in a 120-day CD. Principal plus interest @ 6% due upon investment maturity.
Example:
25
Year-end adjusting entry : Dr. Cr.
Interest Receivable 1,500 Interest Revenue 1,500
Investment in CD
Interest = Principal x Rate x Time$1,500 = $100,000 x 6% x 90/360
26
October – 29 daysNovember – 30 daysDecember – 31 days
90 days
Upon investment maturity: Dr. Cr.
Cash 102,000Short-Term Investments - CD
100,000Interest Receivable 1,500Interest Revenue* 500
Investment in CD
27
Interest earned in January:
$100,000 x 6% x 30/360 = $500
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Reasons Companies Invest in Other Companies
Short-term cash excesses
Long-term investing for future cash needs
Exert influence over investee
Obtain control of investee
29
Accounting for Common-Stock Investments
No significantinfluence
0% 20%
FairValue
Method
Significantinfluence
50%
EquityMethod
Control
100%
ConsolidatedF/S
OurFocus
30
Investments Without Significant Influence
Held-to-Maturity Securities
Trading Securities
Available-for-Sale Securities
Use fair value method to
account for these investments
31
Held-to-Maturity Securities
Bonds of other companies Intent and ability to hold until maturity
$100,000 9% BondDue 2019
32
Held-to-Maturity Securities
On 1/1/04, Homer buys: $100,000; 10% bonds @ face value. Bonds mature December 31, 2013 Interest payable semiannually
.
Example:
Record the purchase of the bonds and receipt of the first interest payment
33
Recording Bond Purchase
Dr. Cr.
Investment in Bonds 100,000Cash 100,000To record the purchase of Simpson bonds.
$100,000 10% BondDue 2014
34
Recording Receipt of Interest Payment
Dr. Cr.
Cash ($100,000 x 10% x 1/2) 5,000 Interest Income 5,000
To record interest income on Simpson bonds.
Interest forInvestor
Borrower
35
Recording Bond Sale
Dr. Cr.
Cash 99,000
Loss on Sale of Bonds 1,000 Investment in Bonds 100,000To record sale of Simpson bonds.
Interest forInvestor
Borrower
36
Trading Securities
Purchased to generate profit from short-term appreciation
Stocks Bonds
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25 26 28 29 30 3127
Intent to sell in near term (classified as current assets)
37
Trading Securities
IncomeStatement
Unrealized gain or loss recognized on income statement
At end of each period, security is “marked to market”
Stocks Bonds
38
Trading Securities
Dexter Corp. holds the following trading securities at 12/31/04:
Cost Market
Menlo preferred stock $25,000 $27,500
Canby common stock 40,000 39,000
Example:
Record the unrealized gain or loss at 12/31/04.
39
Recording Unrealized Gain or Loss on Trading Securities
Dr. Cr.
Investment in Menlo Preferred Stock 2,500
Investment in Canby Common Stock 1,000 Unrealized Gain - Trading Securities* 1,500
To adjust trading securities to fair value.
* income statement account
40
Available-for-Sale Securities
Securities not classified as held-to-maturity or trading
Stocks
Bonds
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Can be classified as short-term or long-term, depending on expected date of disposition
41
Available-for-Sale Securities
BalanceSheet
Unrealized gain or loss accumulated in stockholders’ equity account
Also “marked to market” at end of accounting period
StocksBonds
42
Available-for-Sale Securities
Lenox Corp. holds the following AFS securities at 12/31/04:
Cost Market
Adair preferred stock $15,000 $16,000
Casey common stock 35,000 32,500
Example:
Record the unrealized gain or loss at 12/31/04.
43
Recording Unrealized Gain or Loss on AFS Securities
Dr. Cr.Unrealized Gain/Loss – AFS Securities* 1,500Investment in Adair Preferred Stock 1,000
Investment in Casey Common Stock 2,500
To adjust available-for-sale (AFS) securities to fair value.
* part of Stockholders’ Equity
44
Accounting for Investments Without Significant Influence
Recognize Report Report FVCategories as income on BS at changes onHeld-to-maturity interest cost N/ATrading interest, div. fair value Income stmt.Avail.-for-Sale interest, div. fair value Balance sheet
45
Credit Sales
Slows inflow of cash Risk of uncollectible
accounts
Trade Credit
Retail Customer Receivables Terms: 2/10,
net 30
Sales Invoice
46
Menkhaus Corporation Sample Accounts Receivable Subsidiary Ledger
Total Due
ABC Distributors $ 25
HIJ Distributors 336
: :
: :
XYZ Distributors 108
$ 1,105 Gross AccountsReceivable
In 000s
47
Winnebago Industries, Inc.Consolidated Balance Sheet (partial)
2001 2000
Receivables, less allowance
for doubtful accounts ($244
and $1,168, respectively) $20,183 $32,045
Net Realizable
Value
Estimated
Uncolle
ctible
Accounts
48
Accounting for Bad Debts:Direct Write-off Method
Journal entry to record write-off inperiod determined to be uncollectible:
Bad Debt Expense XXX
Accounts Receivable – Dexter XXX
Period of Sale Future Period charged with expense of bad debt write-off
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4 5 6 7 8 9 10
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25 26 28 29 30 3127
49
Accounting for Bad Debts: Allowance Method
Period of Sale Estimated bad debt
expense (and allowance account) recorded in
same period
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4 5 6 7 8 9 10
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50
Roberts Corp.Partial Balance Sheet
Current assets:Accounts receivable $ 250,000 Less: allowance for doubtful accounts ( 6,000)Net accounts receivable $ 244,000
Balance Sheet Presentation - Allowance Method
51
Accounting for Bad Debts: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...
52
Accounting for Bad Debts:Allowance Method
Journal entry to record bad debt write-off in period determined uncollectible:
Allowance for Doubtful Accts XXX
Accounts Receivable – Z Co. XXX
Bankrupt
53
Approaches to Allowance Method
% of Net Credit Sales
% of Accounts Receivable » Aging Method
Income Statement Approach
Balance Sheet
Approach
54
Example:
Percentage of Net Credit Sales Method
Assume prior years’ net credit sales and bad debt expense is as follows:
Year Net credit sales Bad debts1999 $1,250,000 $ 26,4002000 1,340,000 29,3502001 1,200,000 23,1002002 1,650,000 32,1502003 2,120,000 42,700
$7,560,000 $153,700
55
Example:
Percentage of Net Credit Sales Method
Develop bad debt percentage:
$153,700$7,560,000
use 2%
= 0.02033
56
Percentage of Net Credit Sales Method
2004 Net credit sales $2,340,000 (given)
Bad debt percentage 2%
Bad debts expense 46,800
Example:
Journal entry:
Bad Debts Expense 46,800
Allowance for Doubtful Accts 46,800
Aging Method
57
Est. Percent Est. AmountCategory Amount Uncollectible
UncollectibleCurrent $ 85,600 1% $ 856Past due: 1-30 days 31,200 4% 1,248 31-60 days 24,500 10% 2,450 61-90 days 18,000 30% 5,400 90+ days 9,200 50% 4,600 Totals $168,500 $14,554
58
Aging Method
Allowance for Doubtful Accts
$1,230
Assume Allowance account has a beginning credit balance of $1,230:
Requiredadjustment13,324
$14,554
Desired ending
balance from aging schedule
59
From T-account analysis
Aging Method Example
Dr. Cr.
Bad Debts Expense 13,324
Allowance for Doubtful
Accounts 13,324
To record estimated bad debts.
60
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
61
Accounts Receivable Turnover
Net Credit Sales
Average Accounts Receivable
Indicates how quickly a company is collecting (i.e.,
turning over) its receivables
62
Accounts Receivable Turnover
Too fast
credit policies too stringent; may be losing sales
Too slow
credit department not operating effectively; dissatisfied customers
63
Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on March 13, 2005.
Date: December 13, 2004
Signed:_________
Interest-Bearing Promissory Note
Baker Corporation
MaturityDate
Principal
Interest
64
In exchange for $9,000 applied toward my purchase today, I promise to pay $9,900 in six months.
Date: November 1, 2004
Signed:_________J.E. Privett
Non-Interest-Bearing Promissory Note
Effective interest rate on note = 20%
$900 12 $9,000 x 6
65
12/31/04 4/30/05
Notes receivable $ 9,900 $ 9,900
Less: Discount on
notes receivable ( 600) - 0 -
$ 9,300 $ 9,900
Balance Sheet Presentation of Discounted Notes
Discount transferred to interest revenue
over life of note
Upon Maturity
66
Accelerating Cash Inflow From Sales
Sales Discounts Credit Card Sales Discounting Notes Receivable
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
67
Credit Card Sales
Competitive necessity Credit card company:
» Charges fee» Assumes risk of nonpayment
68
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
Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on December 31, 1998.
Date: January 1, 1998
Signed:_________Baker Corporation
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Operating Activities Net income xxxx Increase in accounts receivable - Decrease in accounts receivable + Increase in notes receivable - Decrease in notes receivable +Investing Activities Purchases of held-to-maturity and available-for-sale securities -
Sales/maturities of held-to-maturity and
available-for-sale securities +
Financing Activities
Liquid Assets and the Statement of Cash Flows - Indirect Method
69
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End of Chapter 7
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