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 Expense Balance 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 Expense Balance Sheet Approach, Allowance Method

12 Bad Debt Expense Income 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 Expense Income 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