McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 5 Accounting for and Presentation of Current Assets

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Inventorie s Short-term Securities Current assets include cash and those assets that are expected to be converted to cash or used up within one year, or an operating cycle, whichever is longer. What are Current Assets? Cash Current Assets include Deferred Tax Assets Accounts and Notes Receivable Prepaid Expenses

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Cash Coins and paper money Checking accounts Money orders Undeposited receipts Petty cash funds Cash includes... L O 1

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved The Internal Control System Internal Control Over Cash Require daily deposits. Require daily deposits. Make all payments by check. Make all payments by check. Promptly reconcile bank statements. Promptly reconcile bank statements. Internal Control Over Cash Require daily deposits. Require daily deposits. Make all payments by check. Make all payments by check. Promptly reconcile bank statements. Promptly reconcile bank statements. Internal control objectives are to ensure: 1.Effective and efficient operations. 2.Reliable financial reporting. 3.Compliance with applicable laws and regulations. L O 2

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Bank Statements Beginning Bank Balance + Deposits processed by the bank - Checks which have cleared the account +/- Other adjustments made by the bank = Ending Balance Bank Statement L O 3

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Bank Reconciliation - Objective Identify Differences Between Ending cash balance reported on bank statement Compared to Ending cash balance in depositor’s accounting records. Provides information for adjusting journal entries. L O 3

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Short-Term Marketable Securities Bond Investments Capital Stock Investments Current Assets Almost As Liquid As Cash Readily Marketable Marketable Securities are... L O 4

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Uncollectible Accounts If a company makes credit sales to customers, some accounts inevitably will turn out to be uncollectible. If a company makes credit sales to customers, some accounts inevitably will turn out to be uncollectible. PAST DUE L O 5

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Balance Sheet Presentation The net realizable value is the amount of accounts receivable that the business expects to collect. L O 5

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved A note is a written promise to pay a specific amount at a specific future date. Notes Receivable Notes typically include an interest charge for use of the money during the time period of the note. L O 6

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved In a perpetual inventory system, inventory entries are as follows: Inventories Cost of Goods sold is an Expense L O 7

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Specific Identification Specific Identification When a unit is sold, the specific cost of the unit sold is added to cost of goods sold. L O 8

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Cost of Goods Available for Sale During the Year Units Available for Sale During the Year ÷ Weighted-Average Calculate the average cost of the items in beginning inventory plus purchases made during the year. L O 8

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Costs of Goods Sold Oldest Costs Ending Inventory Recent Costs First-In, First-Out (FIFO) L O 8

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Recent Costs Ending Inventory Oldest Costs Last-In, First-Out Method (LIFO) Costs of Goods Sold Recent Costs L O 8

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved Examples: Insurance Rent Prepaid Expenses require adjusting entries Assets are decreased Expenses are increased Expenses that have been paid in the current fiscal period but will not be subtracted from revenue until a subsequent fiscal period. Prepaid Expenses and Other Current Assets L O 10