Cash and Receivables – Part 1 INTERMEDIATE ACCOUNTING I CHAPTER 7

Cash includes:  Currency and coins  Unrestricted amounts on deposit in checking accounts  Unrestricted amounts on deposit in savings accounts  Items acceptable for deposit in bank accounts o Customer checks (bank drafts) o Certified checks o Cashier’s checks o Money orders Cash equivalents include  liquid investments readily convertible to a known cash amount that typically have a maturity date of three months or less from the date of purchase  Examples o Money market funds o U.S. Treasury bills o Commercial paper CASH AND CASH EQUIVALENTS Disclosure Notes: The company’s criteria for cash equivalents must be described in a disclosure note.

Cash reported on the balance sheet under Current Assets is assumed to be available for current operations or to pay current liabilities. RESTRICTED CASH AND COMPENSATING BALANCES Restricted cash is earmarked for a specific purpose and not available for use in current operations. Restrictions on cash can be informal, arising from management intent, or might be contractually imposed, such as a compensating balance or sinking fund. New building fund Loan repayment Compensating balance – a minimum or average balance required to be maintained on deposit with a financial institution Disclosure Notes: Any material cash restrictions are described in the disclosure notes. Restricted cash, if material, is shown as a separate item on the balance sheet and is classified according to when the cash is intended to be used.

Internal control refers to a company's plan to (a) encourage adherence to company policies and procedures, (b) promote operational efficiency, (c) minimize errors and theft, and (d) enhance the reliability and accuracy of accounting data. The main focus of internal controls over cash is to improve the accuracy and reliability of accounting information and to safeguard the company’s assets. INTERNAL CONTROL OF CASH Below are some common practices of internal controls over cash Separation of duties - Individuals that have physical responsibility for assets should not also have access to accounting records Periodic reconciliation of book balances and bank balances All disbursements, other than very small disbursements from petty cash, should be made by check. All expenditures should be authorized before a check is prepared Checks should be signed only by authorized individuals. Forced vacations for those responsible for accounting for cash

TRADE DISCOUNTS Trade discounts allow a customer to pay an amount that is below the list price without having to publish new catalogs. Trade discounts are not recorded separately in the accounting records; they are simply used in determining the negotiated invoice price of the item purchased/sold. Example : Company A approaches Company B about purchasing 100 widgets. The widgets are listed in Company B’s catalog at $10 each but Company B offers a 20% trade discount. At what amount will Company A record the purchase of 100 widgets on account? Merchandise Inventory800 Accounts Payable800 List Price$ 10 Less: Trade Discount 2 ($10 X 20%) Selling Price $ 8 Times Num Widgets 100 Total Purchase Price$800 Recall that the trade discount is not recorded separately; this is just part of the process to determine the price initially paid for the merchandise.

Cash discounts reduce the amount to be paid if remittance is made within a specified short period of time. Gross method – records the sale at the gross price (no discount) and the discount is taken only if the receivable is paid within the discount period. Net method – records the sale at the net price (taking out the discount). If the receivable is paid within the discount period, no additional adjustments are required. If the customer does not pay the bill within the discount period, the difference in the amount received and the amount paid is considered interest revenue. CASH DISCOUNTS

CASH DISCOUNTS – Example 1 October 5, 2013 Accounts Receivable20,000 Sales20,000 Gross Method October 14, 2013 Cash13,720 Sales Discounts (14,000 X.02) 280 Accounts Receivable 14,000 November 4, 2013 Cash6,000 Accounts Receivable 6,000 The Hawthorne Manufacturing Company offers credit customers a 2% cash discount if the sales price is paid within 10 days. Any amounts not paid within 10 days are due in 30 days. These repayment terms are stated as 2/10, n/30. On October 5, 2013, Hawthorne sold merchandise at a price of $20,000. The customer paid $13,720 ($14,000 less the 2% cash discount) on October 14 and the remaining balance of $6,000 on November 4. Draft the appropriate journal entries to record the sale and cash collection, using the gross method.

CASH DISCOUNTS – Example 2 October 5, 2013 Accounts Receivable (20,000 – 400*) 19,600 Sales19,600 Net Method October 14, 2013 Cash13,720 Accounts Receivable 13,720 November 4, 2013 Cash6,000 Accounts Receivable 5,880 Interest Revenue (Difference) 120 The Hawthorne Manufacturing Company offers credit customers a 2% cash discount if the sales price is paid within 10 days. Any amounts not paid within 10 days are due in 30 days. These repayment terms are stated as 2/10, n/30. On October 5, 2013, Hawthorne sold merchandise at a price of $20,000. The customer paid $13,720 ($14,000 less the 2% cash discount) on October 14 and the remaining balance of $6,000 on November 4. Draft the appropriate journal entries to record the sale and cash collection, using the net method. *$20,000 X.02 = $400 cash discount.

Cash and Receivables – Part 1 INTERMEDIATE ACCOUNTING I END OF PRESENTATION