Kế toán, kiểm toán - Chapter 7: Cash and receivables

Cash and Receivables7Insert Book Cover PictureCash Amounts on deposit with financial institutionsCoins and currencyPetty cashCashier’s checksCertified checksMoney ordersCash EquivalentsItems very near cash but not in negotiable formMoney marketfundsTreasury billsCommercialpaperLearning ObjectivesDefine what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements.LO1Internal Control of CashEncourages adherence to company policies and proceduresPromotes operational efficiencyMinimizes errorsand theftEnhances the reliability and accuracy of accounting dataControl of Cash ReceiptsSeparate responsibility for handling cash, recording cash transactions, and reconciling cash balances.Agreed cash amounts deposited with cash amounts received.Close supervision of cash-handling and cash-recording activities.Control of Cash DisbursementsSeparate responsibilities for cash disbursement documents, check writing, check signing, check mailing, and record keeping.All disbursements, except petty cash, made by check.Learning ObjectivesExplain the possible restrictions on cash and their implications for classification in the balance sheet.LO2Restricted Cash andCompensating Balances Restricted Cash Management’s intent to use a certain amountof cash for a specific purpose – future plant expansion, future payment of debt. Compensating Balance Minimum balance that must be maintainedin a company’s account as support forfunds borrowed from the bank.Learning ObjectivesDistinguish between the gross and net methods of accounting for cash discountsLO3Credit sales require:Maintaining a separate account receivable for each customer.Accounting for bad debts that result from credit sales.Amounts due fromcustomers for credit sales.Accounts ReceivableCash DiscountsIncrease sales.Encourage early payment.Increase likelihood of collections.Cash discounts . . .2/10,n/30Number of Days Discount is AvailableOtherwise, Net (or All) is Due CreditPeriodDiscount PercentCash DiscountsCash DiscountsSales are recorded at the invoice amounts.Sales discounts are recorded if payment is received within the discount period.Gross MethodCash DiscountsSales are recorded at the invoice amount less the discount.Sales discounts forfeited are recorded if payment is received after the discount period.Net MethodCash Discounts On May 10, Eddy, Inc. sold $5,000 of merchandise to a customer subject to a cash discount of 1/10, n/30.  Prepare the journal entry to record the sale if Eddy uses: (a) the gross method.(b) the net method.Cash DiscountsCash DiscountsAssume that on May 19, Eddy, Inc. received a check in full payment of the sale made on May 10. Prepare the journal entry to record the cash receipt if Eddy uses:(a) the gross method.(b) the net method.Cash DiscountsCash DiscountsInstead of the payment on May 19, now assume that Eddy, Inc. received a check on May 31, in full payment of the sale made on May 10. Prepare the journal entry to record the cash receipt if Eddy uses:(a) the gross method.(b) the net method.Cash DiscountsLearning ObjectivesDescribe the accounting treatment for merchandise returns.LO4Sales ReturnsMerchandise returned by a customer to a supplier.Sales AllowancesA reduction in the cost of defective merchandise.Sales Returns and AllowancesSales Returns and AllowancesOn June 1, a customer of LarCo returns $750 of merchandise. The merchandise had been purchased on account and the customer had not yet paid. LarCo uses the periodic method to account for inventory.Record the journal entry for the return of merchandise.Sales Returns and AllowancesSales Returns and Allowances is a contra account that reduces Sales Revenue in the current accounting period.Learning ObjectivesDescribe the accounting treatment of anticipated uncollectible accounts receivable.LO5Uncollectible Accounts Receivable Bad debts result from credit customers who are unable to pay the amount they owe, regardless of continuing collection efforts.PAST DUEUncollectible Accounts ReceivableIn conformity with the matching principle, bad debt expense should be recorded in the same accounting period in which the sales related to the uncollectible account were recorded.Uncollectible Accounts ReceivableMost businesses record an estimate of the bad debt expense by an adjusting entry at the end of the accounting period.Uncollectible Accounts ReceivableNormally classified asa selling expense andclosed at year-end.Contra asset account toAccounts Receivable.Allowance for Uncollectible AccountsNet realizable value is the amount of the accounts receivable that the business expects to collect.Accounts ReceivableLess: Allowance for Uncollectible AccountsNet Realizable ValueLearning ObjectivesDescribe the two approaches to estimating bad debts.LO6Income Statement ApproachBalance Sheet ApproachComposite RateAging of ReceivablesPAST DUEEstimating Bad DebtsIncome Statement ApproachFocuses on past credit sales to make estimate of bad debt expense.Emphasizes the matching principle by estimating the bad debt expense associated with the current period’s credit sales. Bad debts expense iscomputed as follows:Income Statement ApproachIn 2006, MusicLand has credit sales of $400,000 and estimates that 0.6% of credit sales are uncollectible.What is Bad Debts Expense for 2006?Income Statement ApproachMusicLand computes estimated Bad Debts Expense of $2,400.Income Statement ApproachBalance Sheet ApproachFocuses on the collectibility of accounts receivable to make the estimate of uncollectible accounts.Involves the direct computation of the desired balance in the allowance for uncollectible accounts. Compute the desired balance in the Allowance for Uncollectible Accounts. Bad Debts Expense is computed as:Balance Sheet ApproachComposite RateOn Dec. 31, 2006, MusicLand has $50,000 in Accounts Receivable and a $200 credit balance in Allowance for Uncollectible Accounts. Past experience suggests that 5% of receivables are uncollectible. What is MusicLand’s Bad Debts Expense for 2006?Balance Sheet ApproachComposite RateDesired balance in Allowancefor Uncollectible AccountsBalance Sheet ApproachComposite RateNow, let’s look at the accounts receivable aging approach! Year-end Accounts Receivable is broken down into age classifications. Each age grouping has a different likelihood of being uncollectible. Compute desired uncollectible amount.Balance Sheet Approach Aging of Receivables Compare desired uncollectible amount with the existing balance in theallowance account. At December 31, 2006, the receivables for EastCo, Inc. were categorized as follows:Balance Sheet Approach Aging of ReceivablesEastCo’s unadjusted balance in the allowance account is $500.Per the previous computation, the desired balance is $1,350.Prepare the entry to record bad debts expense at Dec. 31, 2006. Balance Sheet Approach Aging of ReceivablesBalance Sheet Approach Aging of ReceivablesEastCo’s unadjusted balance in the allowance account is $500.Per the previous computation, the desired balance is $1,350. Balance Sheet ApproachEmphasis on Realizable ValueAccts. Rec.All. for Uncoll. Accts.Income Statement FocusBalance Sheet FocusIncome Statement ApproachEmphasis on MatchingSalesBad Debts Exp.Methods to Estimate Bad DebtsUncollectible Accounts As accounts become uncollectible, the following entry is made: So what happens if someone pays after a write-off of the accounts receivable?Collection of PreviouslyWritten-Off AccountsWhen a customer makes a payment after an account has been written off, two journal entries are required. If uncollectible accounts are immaterial, bad debts are simply recorded as they occur (without the use of an allowance account). Direct Write-off MethodLearning ObjectivesDescribe the accounting treatment of short-term notes receivable.LO7PROMISSORY NOTEFace Value Date after date I promise to pay to the order ofWestward, Inc. Dollarsplus interest at the annual rate of . $25,000Nov. 1, 2006 One year12% Twenty-five thousand and no/100------------------------Janet Lee , Winn,Co. MakerPayeePrincipalInterest RateDate of NoteTermNotes ReceivableEven for maturities less than 1 year, the rate is annualized.Interest ComputationInterest-Bearing NotesOn November 1, 2006, Westward, Inc. loans $25,000 to Winn, Co. The note bears interest at 12% and is due on November 1, 2007.Prepare the journal entry on November 1, 2006, December 31, 2006, (year-end) and November 1, 2007 for Westward.Interest-Bearing NotesInterest-Bearing Notes$25,000 × 12% = $3,000 - $500 = $2,500 Noninterest-Bearing Notes Actually do bear interest. Interest is deducted (discounted) from the face value of the note. Cash proceeds equal face value of note less discount.Noninterest-Bearing NotesOn January 1, 2006, Westward, Inc. accepteda $25,000 noninterest-bearing note from Winn, Co as payment for a sale. The note is discounted at 12% and is due on December 31, 2006. Prepare the journal entries on January 1, 2006, and December 31, 2006 for Westward.Noninterest-Bearing NotesLearning ObjectivesDifferentiate between the use of receivablesin financing arrangements accounted foras a secured borrowing and thoseaccounted for as a sale.LO8Financing With ReceivablesSecured borrowingorSale of receivablesMethod depends on thesurrender of control overthe receivables transferred.Secured Borrowing – Assigning The use of specific receivables for collateral, and the promise that any failure to repay debt will result in proceeds from specific accounts receivable collections being used to repay the debt.Reclassify Accounts Receivable as Accounts Receivable Assigned. Secured Borrowing – Pledging Receivables in general are pledged as collateral for loans. Pledged receivables are disclosed in notes to the financial statements.Sale of Accounts ReceivableFACTOR (Transferee)SUPPLIER(Transferor)RETAILER1. Merchandise2. Accounts Receivable3. Accounts Receivable4. Cash5. CashA factor is a financial institution that buys receivablesfor cash, handles the billing and collection of thereceivables and charges a fee for the service.Treat as a sale if all of these conditions are met:Receivables are isolated from transferor.Transferee has right to pledge or exchange receivables.Transferor does not have control over the receivables.Transferor cannot repurchase receivable before maturity.Transferor cannot require returnof specific receivables.Sale of Accounts ReceivableSale of Accounts ReceivableWithout recourseAn ordinary sale of receivables to the factor.Factor assumes all risk of uncollectibility. Control of receivable passes to the factor.Receivables are removed from the books,cash is received and a financing expense or loss is recognized.With recourseTransferor (seller) retains risk of uncollectibility,Must meet the three conditions of determining surrender of control to be recognized as a sale.If the transaction fails to meet the three conditions necessary to be classified asa sale, it will be treated as asecured borrowing.Sale of Accounts ReceivableDiscounting a NoteOn December 31, Apex accepted a nine-month 10 percent note for $200,000 from a customer. Three months later on March 31, Apex discounted the note at its local bank. The bank’s discount rate 12 percent. Prepare the journal entry to record the discounting of the note receivable as a sale.Discounting a NoteBefore the preparing the journal entry torecord the discounting, Apex must recordthe accrued interest on the note fromDecember 31 until March 31.$200,000 × 10% × 3/12Discounting a Note$205,000 - $202,100Discounting a NoteIf the three conditions for sale treatment arenot met, the transaction would be recordedas a secured borrowing.Learning ObjectivesDescribe the variables that influence a company’s investment in receivables and calculate the key ratios used by analyststo monitor that investment.LO9Receivables ManagementProduct orservice soldCreditand collectionpoliciesLevel of salesFactors influencinga company’s investmentin receivablesThis ratio measures how many times a company converts its receivables into cash each year. Net Sales Average Accounts ReceivableReceivablesTurnoverRatio=This ratio is an approximation of the number of days the average accounts receivable balance is outstanding. 365 Receivables Turnover RatioAverage Collection Period=Receivables ManagementDell vs. Apple comparisonCompute the receivables turnover ratioand the average collection periodfor both companies.Receivables Management(All dollar amounts in millions)Receivables Management Net Sales Average Accounts ReceivableReceivablesTurnoverRatio=Dell$41,444($3,635 + $2,586)/2 = 13.32 Apple$8,279($774 + $766)/2 = 10.75 Receivables ManagementDell36513.32 = 27.4 days Apple36510.75 = 34 days 365 Receivables Turnover RatioAverage Collection Period=Appendix 7Cash ControlsBank ReconciliationProvides information for reconciling journal entries.Explains the difference between cash reported on bank statement and cash balance on company’s books.Bank Reconciliation Bank Balance + Deposits in Transit- Outstanding Checks± Bank Errors= Corrected Balance Book Balance+ Bank Collections- Service Charges - NSF Checks± Book Errors= Corrected BalanceBank Reconciliation Balance per Bank+ Deposits in Transit- Outstanding Checks± Bank Errors= Adjusted BalanceAll reconciling items on the book side require an adjusting entry to the cash account. Book Balance+ Bank Collections- Service Charges - NSF Checks± Book Errors= Corrected Balance Let’s prepare a May 31 bank reconciliationfor the Hawthorne Company.  The May 31 bank statement indicated a balance of $34,680. The cash general ledger account on that date shows a balance of $35,276. Additional information necessary for the reconciliation is shown on the next screen. Bank ReconciliationCash receipts not yet deposited on May 31 totaled $2,965. A $1,020 check mailed to the bank for deposit had not reached the bank at the statement date.Outstanding checks totaled $5,536.A check written to pay for raw materials purchased on account cleared the bank for $1,790 but was erroneously recorded at $790.The bank statement showed $80 in service charges in May. The bank returned NSF checks in the amount of $2,187 received as payment on accounts receivable.The bank collected a note receivable for $1,120 that included $120 of interest. Bank ReconciliationBank ReconciliationBank ReconciliationPrepare the entries to adjust the cash account to the corrected balance.Bank ReconciliationUsed for minor expenditures.Petty CashHas one custodian.Replenished periodically.Petty cash fundPetty Cash Hawthorne Co. established a petty cashfund on May 1 by writing a check for $200to the petty cash custodian.Prepare the May1st journal entry to record the establishment of the fund.Petty CashDuring May, the petty cash custodian paid bills using cash from the fund totaling $160 as follows:Postage $40Office supplies 35Delivery charges 55Entertainment 30Prepare the May 31 journal entry to record replenishing the fund.End of Chapter 7