SSN 7e 07 Student

7/24/2019 SSN 7e 07 Student

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Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA

Charles W. Caldwell, D.B.A., CMA

Jon A. Booker, Ph.D., CPA, CIACnthia J. !oone, Ph.D., CPA

Cash and Receivables

Chapter 7


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7-2

Cash and Cash Equivalents

Balan"es in

"he"kin#a""ounts

Balan"es in

"he"kin#a""ounts

Curren"

and "oins

Curren"

and "oins

Cash e$ui%alents are short&term, hi#hl li$uid

in%estments that "an be readil "on%erted to "ash.

Cash e$ui%alents are short&term, hi#hl li$uid

in%estments that "an be readil "on%erted to "ash.

Money market

funds

Money market

funds Treasury bills

Treasury bills Commercial

paper

Commercial

paper

Cash

Cash

Items 'or de(osit su"h as

"he"ks and mone orders'rom "ustomers

Items 'or de(osit su"h as

"he"ks and mone orders'rom "ustomers


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7-3

Internal Control

Encourages adherence tocompany policies

and procedures

Encourages adherence tocompany policies

and procedures

Promotes operationalefficiency

Promotes operationalefficiency

Minimizes errors

and theft

Minimizes errors

and theft

Enhances the reliability and

accuracy of accounting data

Enhances the reliability and

accuracy of accounting data


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7-4

Internal Control Procedures

Cash Receipts Separate responsibilities for receiving cash, recording

cash transactions, and reconciling cash balances.

Match the amount of cash received ith the amountof cash deposited.

Close supervision of cash-handling and cash-recordingactivities.

Cash Receipts Separate responsibilities for receiving cash, recording

cash transactions, and reconciling cash balances.

Match the amount of cash received ith the amountof cash deposited.

Close supervision of cash-handling and cash-recordingactivities.

Cash !isbursements

"ll disbursements, e#cept pett$ cash, made b$chec%.

Separate responsibilities for cash disbursementdocuments, chec% authori&ation, chec% signing,and record %eeping.

Chec%s should be signed onl$ b$ authori&ed

Cash !isbursements

"ll disbursements, e#cept pett$ cash, made b$chec%.

Separate responsibilities for cash disbursementdocuments, chec% authori&ation, chec% signing,and record %eeping.

Chec%s should be signed onl$ b$ authori&ed


5/17

7-'

Accounts Receivable

Result from thecredit sales of

goods or servicesto customers.

Are classied ascurrent assets.

Are recorded net oftrade discounts.


6/17

7-(

Merchandise may bereturned

by acustomer

to asupplier.

A specialpricereduction,called an

allowance,may be given

as anincentive to

keep themerchandise.

Sales Returns

To avoid misstating the nancialstatements, sales revenue andaccounts receivable should be

reduced by the amount of returns in

the period of saleif the amount of


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7-7

Uncollectible Accounts Receivable

)ad debts result from credit customers hoare unable to pa$ the amount the$ oe,

regardless of continuing collection e*orts.

)ad debtsresult from credit customers hoare unable to pa$ the amount the$ oe,

regardless of continuing collection e*orts.

PAST DUE

+n conformit$ ith thematching principle, bad debt

e#pense should be recordedin the same accountingperiod in hich the sales

related to the uncollectible

account ere recorded.

+n conformit$ ith thematching principle,bad debt

e#pense should be recordedin thesameaccountingperiod in hich the sales

related to the uncollectible

account ere recorded.


8/17

7-

Uncollectible Accounts Receivable

Most businesses record an estimate of thebad debt expense by an adusting entry

at the end of the accounting period.

Most businesses record an estimate of thebad debt expenseby an adusting entry

at the end of the accounting period.

Bad debt e)(ense )))

Allowan"e 'or un"olle"tible a""ounts )))

!ontra assetaccount to

accounts receivable.

"ormally classiedas

aselling expenseand

closed at year#end.


9/17

7-

Allowance for Uncollectible Accounts

et reali&able value is the amount of the accountsreceivable that the business e#pects to collect.

Accounts Receivable$ess% Allowance for &ncollectibleAccounts

"et Reali'able (alue

Accounts Receivable$ess% Allowance for &ncollectibleAccounts

"et Reali'able (alue

+ncome Statement"pproach

)alance Sheet "pproach Composite Rate

"ging of Receivables

+ncome Statement"pproach

)alance Sheet "pproach Composite Rate

"ging of Receivables


10/17

7-/0

Income Statement Approach

)ocuses on past credit sales to makeestimate of bad debt expense.

*mphasi'es the matching principle byestimating the bad debt expenseassociated with the current period+s creditsales.

)ocuses on pastcredit salesto makeestimate of bad debt expense.

*mphasi'es thematching principlebyestimating thebad debt expenseassociated with the current period+s credit

sales.

)ad debt e#pense is computed asfollos1

)ad debt e#pense is computed asfollos1


11/17

7-//

Balance Sheet Approach ocuses on the collectabilit$ of accounts receivable to

ma%e the estimate of uncollectible accounts.

+nvolves the direct computation of the desired balancein the alloance for uncollectible accounts.

ocuses on the collectabilit$ of accounts receivable to

ma%e the estimate of uncollectible accounts. +nvolves the direct computation of the desired balance

in the alloance for uncollectible accounts.

Com(ute the desired balan"e in the allowan"e 'orun"olle"tible a""ounts.

Bad debt e)(ense is "om(uted as:


12/17

7-/2

Summary of Measurement and ReportingIssues for Accounts Receivable

Recognition!epends on the earnings process for most creditsales, revenue and the related receivables arerecogni&ed at the point of deliver$.

nitial valuation

+nitiall$ recorded at the e#change price agreedupon b$ the bu$er and seller.

-ubseuent valuation+nitial valuation reduced to net reali&able value b$1

/. 55"lloance for sales returns 2. 55"lloance for uncollectible accounts1 6he income statement approach 6he balance sheet approach!lassication

"lmost ala$s classied as a current asset.


13/17

7-/3

Notes Receivable

A ritten promise to pay a specific

amount at a specific future date!

E"en for

maturities less

than # year$ the

rate is

annualized!

E"en formaturities less

than # year$ the

rate is

annualized!


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7-/4

Financing with Receivables

Companies ma$ usetheir receivables to

obtain immediate cash.


15/17

7-/'

Deciding Whether to Account for a Transfer asa Sale or a Secured Borrowing


16/17

7-/(

This ratio measures ho many

times a company con"erts itsrecei"ables into cash each year!

%et SalesA"erage Accounts &ecei"able

&ecei"ablesTurno"er

&atio

'

This ratio is an appro(imation of thenumber of days the a"erage accounts

recei"able balance is outstanding!

)*+

&ecei"ables Turno"er &atio

A"erage

CollectionPeriod '

Receivables Management


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End of Chapter 7

SSN 7e 07 Student

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