1. Unit 9 Seminar Cash and Receivables COPYRIGHT © 2010 South-Western/Cengage Learning

2. 2 Cash is the lifeblood for companies, and infusions are coming more frequently from nontraditional sources. According to a recent Federal Reserve Payments Study, noncash payments grew by 4.6% over the previous three years and had a total value of $75.8 trillion. Of these noncash payments, more than two-thirds were made electronically, with debit cards being the most frequently used electronic payment type. Show Me the Money!

3. 3  Debit and credit cards are used most frequently.  The automated clearing house (ACH) is an electronic network that provides for the interbank clearing of electronic payments.  ACH payments currently represent 91% of the value of all electronic payments. Show Me the Money!

4. 4  Direct deposit of payroll and social security  Electronic payments of bills –Mortgages –Utility bills –Insurance premiums  The conversion of checks by businesses Automated Clearing House (ACH) ACH payments include:

5. 5  Accounts receivable conversion (ARC) –Paper checks received at the bank lockbox are converted into automated clearing house debits and then the check is destroyed. –ARC payments are about one-third cheaper than paper checks. –Float time is cut in half.  Check Clearing for the 21 st Century Act (Check 21) –Gives legal status to substitute checks –Allows merchants to scan and transmit checks to the bank Electronic Banking

6. 6 Cash is the resource on hand to meet planned payments and emergency situations. Cash

7. Excluded from Cash 7 Cash Coins and currency Checking accounts Savings accounts Negotiable checks Bank drafts Included in Cash Certificates of deposit Bank overdrafts Postdated checks Travel advances Postage stamps

8. 8 Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and so near their maturity that there is little risk of changes in value because of changes in interest rates. Cash Equivalents

9. 9 Cash Management  The person opening the mail or the salesperson using the cash register should count the receipts immediately.  All cash receipts are recorded daily in the accounting records.  All receipts are deposited daily in the company’s bank account. Control Over Receipts

10. 10  Make all payments by check or electronic payment (except petty cash items) so that a record exists for every company expenditure.  Authorize and sign all checks only after an expenditure is verified and approved.  Periodically reconcile the cash balance in the bank statement with the company’s accounting records. Control Over Payments Cash Management

11. 11 Those receivables expected to be collected or satisfied within one year or the current operating cycle, whichever is longer, are classified as current assets; the remainder are classified as noncurrent. Receivables

12. 12 1.The sales price is known at the date of sale. 2.The buyer has paid or will pay the seller, and the obligation is not contingent upon the resale of the product. 3.The buyer’s obligation to the seller would not be changed by theft or damage to the product. Each of the following criteria must be satisfied when the right of return exists in order to recognize revenue at the time of sale. ContinuedContinued Receivables

13. 13 4.The buyer has an economic substance apart from the seller. 5.The seller does not have significant obligations to help the buyer sell the product. 6.The seller can reasonably estimate the amount of future returns. Receivables Each of the following criteria must be satisfied when the right of return exists in order to recognize revenue at the time of sale.

14. 14 Accounts Receivable  Prenumbered sales invoices  Separation of the sales function from the cash collection responsibilities Internal Control Procedures for Accounts Receivable

15. 15 Sales Discounts  Increase sales  Encourage prompt payment  Increase likelihood of collection

16. 16 A 2% discount may be subtracted from the invoice price if payment is made within 10 days, otherwise the total amount is due within 30 days (net of returns and allowances). 2/10, n/30 Calculation of Sales Discounts

17. 17 Sales Returns and Allowances  When goods are sold that are found to be defective, the customer may retain the goods and be allowed a reduction in the purchase price. This reduction is called a sales allowance.  When the customer returns good to the seller, the exchange is called a sales return.

18. 18 Loss Contingencies 1.Information available prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements. 2.The amount of the loss can be reasonably estimated. 1.Information available prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements. 2.The amount of the loss can be reasonably estimated. GAAP requires that estimated losses from loss contingencies be accrued against income and… …recorded as reductions in assets or as liabilities when both of these conditions are met.

19. 19 Estimated Bad Debts Method Bad debts can be estimated based on sales or on accounts receivable.

20. 20 1.Relationship to sales (income statement approach): Percentage of sales Percentage of net credit sales 2.Relationship to accounts receivable (balance sheet approach): Percentage of outstanding accounts receivable Aging of accounts receivable Estimated Bad Debts Method

21. 21 Aging of Accounts Receivable 1.Review the unpaid invoices in each customer’s account. 2.Classify the invoice amounts according to the length of time the invoice has been outstanding. 3.Multiply the total amount in each age group by the applicable estimated uncollectible percentage. 4.Make a journal entry to bring the balance in Allowance for Doubtful Accounts to the amount calculated in Step 3.

22. 22 Net Credit Sales Average Net Receivables Receivables turnover indicates how many times receivables are “turned over” or collected each period. Activity Ratios Ratio Analysis

23. 23 Accounts Receivable Financing Agreements 1.Pledging 2.Assigning 3.Factoring 1.Pledging 2.Assigning 3.Factoring There are three basic forms of financing agreements to obtain cash from accounts receivable.

24. 24 When a company pledges its accounts receivable, it is using these accounts as collateral for a loan, and the servicing activities remain its responsibility. Pledging

25. 25 When a company assigns its accounts receivable to a financial institution, it enters into a lending agreement with the institution to receive cash on specific customer accounts. Assignment

26. 26 When a company factors its accounts receivable, it sells individual accounts to a financial institution (called a factor). Factoring

27. 27 Credit Card Sales  Many retail companies accept national credit cards, such as VISA, MasterCard, American Express, and Diner’s Club.  The retailer either deposits the credit card receipts at the bank or receives an electronic transfer of funds from the credit card company.  The retailer is assessed a service charge by the credit card company.  This charge is accounted for as an operating expense.

28. 28 A note receivable is an unconditional written agreement to collect a certain sum of money on a specific date. Notes Receivable

29. 29 Notes receivable generally have two attributes that are not found in accounts receivable. Notes Receivable

30. 30 1.They are negotiable instruments, which means that they are legally transferable among parities and may be used to satisfy debts by the holders of these instruments. 2.They usually involve interest, requiring the separation of the receivable into its principal and interest components. Notes Receivable

31. 31 IFRS vs. U.S. GAAP  Same –Cash and cash equivalents –Sales discounts –Allowance for doubtful accounts –Pledging, assignment, and factoring  Different –IFRS category loans and receivables not defined under GAAP –IFRS allows receivables to be classified as “available-for-sale”

32. 32 Appendix: Petty Cash 1.An employee is appointed petty cash custodian. Petty Cash500 Cash500 Petty Cash500 Cash500