1. CASH & RECEIVABLES

2. Policies & procedures designed to:
INTERNAL CONTROL
Policies & procedures designed to:
Protect assets
Provide accurate records
Ensure compliance with laws and policies
Evaluate performance & assist in accomplishment of strategic objectives
More than protection of assets
More than coverage of financial reporting
More than “compliance”
NOTICE THE STRATEGIC IMPLICATIONS
Internal control has ALWAYS been a part of the audit process
In the past a “check-the-box” approach may have been used too frequently
Emphasis on management’s reponsibility
Top management can no longer “dodge” their responsibility for internal control or lack of knowledge about the financial statements and their contents

3. INTERNAL CONTROL OF CASH General Policies
Separate physical custody and record keeping
Account for all cash transactions (no netting)
Maintain minimum cash balances on hand
Conduct periodic test counts of cash
Prepare appropriate bank reconciliations

4. CASH RECEIPTS
Separate responsibility for handling and recording receipts
Close supervision of handling of cash receipts
Deposit ALL receipts in a bank account as frequently as possible (prefer DAILY)

5. CASH DISBURSEMENTS
Separate responsibilities for disbursement documents, check preparation, check signing, mailing, and record keeping
All disbursements (except minor) made by check
Close control of petty cash funds
Adequate source documents to support ALL disbursements

6. Deposits with financial institutions Negotiable instruments
COMPOSITION OF CASH
Coins and currency
Including change funds
Petty cash
Deposits with financial institutions
Negotiable instruments
Cashier’s checks
Certified checks
Money orders

7. CASH EQUIVALENTS Short-term, highly liquid investments Examples
Readily convertible to known amounts of cash
Near to maturity (little change in interest)
Examples
Treasury bills
Commercial paper
Money market funds

8. PETTY CASH Imprest fund for small routine disbursements Examples
Cab fares
Postage (C.O.D., etc.)
Office supplies
Delivery charges
Pizza for the office
Balance in the fund = Cash on hand + receipts = Authorized amount of the fund

9. BANK RECONCILIATION
Explains difference between cash reported on bank statement and balance reported on the accounting records
Basis for adjusting accounting records
Major control devise

10. BANK RECONCILIATION Two sections of reconciliation:
-- Reconcile bank statement balance to adjusted
(correct) balance.
-- Reconcile book balance to adjusted (correct)
balance.
The adjusted balances above are equal.
All reconciling items in book balance section
require adjusting entries.

11. BANK RECONCILIATION FORMAT
Bank balance Book balance
Ending bank bal. $ xx Ending book balance $ xx
Additions: Additions:
Cash on hand Collections by bank
Deposits in transit Deductions:
NSF Checks
Deductions: Bank service chgs.
Checks outstanding
Correct cash balance $xxx Correct cash balance $xxx

12. RECEIVABLES
Claims held against customers or others for money or services
Current
Noncurrent
Trade receivables – amounts owed by customers for services rendered as part of normal business operation
Nontrade receivables – arise from other types of transactions

13. ACCOUNTS RECEIVABLE Discounts
Trade discounts
Granted to encourage a sale
Reduction in final selling price
Not recorded (part of negotiation)
Cash discounts
Inducement for prompt payment
Interest rate offered is often significant
Recording methods
Gross – only discounts taken are recorded (contra revenue)
Net – sale is recorded net of discount (discounts forfeited shown as “Other revenue”)

15. SALES RETURNS & ALLOWANCES
Reduction in receivable (or refund) for items returned or damaged
Contra revenue
Methods of recording
Estimated with an allowance established
Recorded when actually granted

16. ACCOUNTS RECEIVABLE Valuation
Net realizable value
Amount expected to be received in cash
Uncollectible accounts generally inevitable
Issue is how to account for “bad debts”

17. UNCOLLECTIBLE ACCOUNTS
Direct write-off method
No material uncollectibles occur
Amount of uncollectibles cannot be reliably estimated
Bad debts expense recognized in period when it is determined the account cannot be collected

18. UNCOLLECTIBLE ACCOUNTS
Allowance method
Uncollectibles are probable
Amount can be reasonably estimated
Bad debt expense is recorded in same period as the underlying revenue
MATCHING PRINCIPLE

19. Adjusting entry for estimate: Bad debts expense (Debit)
ALLOWANCE METHOD
Adjusting entry for estimate:
Bad debts expense (Debit)
Allowance for doubtful accounts (Credit)
Allowance for doubtful accounts is a contra account to Accounts receivable

20. Accounts Receivable (Credit)
ALLOWANCE METHOD
As accounts become uncollectible, the following
entry is made:
Allowance for Doubtful Accounts (Debit)
Accounts Receivable (Credit)
This entry has no net effect on Accounts receivable or total assets

21. ALLOWANCE METHOD Accounts Receivable (Debit)
If an account previously written off proves to be collectible, the following entries are made:
Accounts Receivable (Debit)
Allowance for Doubtful Accounts (Credit)
Cash (Debit)
Accounts Receivable (Credit)
This approach provides detailed information (in the subsidiary ledger) of the recovery of this amount

22. Accounts receivable method
ESTIMATING BAD DEBTS
Credit sales method
Income statement approach
Accounts receivable method
Balance sheet approach
Composite rate
Aging of Accounts receivable balances
Past Due

23. ESTIMATING BAD DEBTS Credit Sales Method
Method emphasizes the matching principle and is
considered an income statement approach
An average percentage relationship between
actual bad debt losses and net credit sales is
determined based on historical information.
Bad debts expense = Net credit sales x (historical %)

24. ESTIMATING BAD DEBTS Accounts Receivable Method
Uses the historical relationship between
accounts receivable and bad debt losses
The historical rate, or multiple rates, is applied to
the net accounts receivable to determine the
balance in the Allowance for Doubtful Accounts.
Bad Debt Expense is the amount of adjustment
necessary to bring the Allowance account to its
desired ending balance.

25. NOTES RECEIVABLE Unconditional written promise …
Made & signed by the maker (borrower)…
To pay the bearer or stated payee …
A definite amount of money …
Plus a stated interest rate …
The note does not have to include a stated interest rate. If none exists, an imputed rate is assumed
On the maturity date …
On demand, a specific date, or at the end of a stated period

26. NOTES RECEIVABLE Valuation
Short-term
Generally shown at face value (less allowances for uncollectibility)
Long-term
Reported at present value of cash expected to be collected
Face value = NPV if market rate = stated rate
Zero-interest notes
Recorded at NPV (using effective rate)

27. SALE OF RECEIVABLES Factoring
Acceleration of receipt of cash from receivables
Common example is approach used by credit card companies (MasterCard or VISA)
Sale without Recourse
Purchaser assumes risk of uncollectibility
Sale with Recourse
Seller assumes risk of uncollectibility