1. ACG 2021 Financial Accounting
Chapter 5 – Accounting for Short-Term Investments and Accounts Receivable

2. Short-Term Investments
Next most liquid Asset after Cash
Investments that a company plans to hold for one year or less.
Three Types:
Held-to-maturity securities
Usually Cash Loans
Trading investments
Stocks or Bonds
Available-for-sale investments
Discussed later
(Held-to-maturity and available-for-sale securities could also be long-term.)

3. Trading Investments Use of Excess Cash Buy Low, Sell High
Most often, stock or bonds of another company

4. Held-to-Maturity Investments
Typically Note Receivable
Business organization lends excess cash, expecting interest in return
Investor expects to hold until maturity date
These Investments earn interest revenue for the investor

5. Reporting Short-Term Investments
Balance Sheet
Current Assets
Trading investments reported at current market value
Income Statement
Interest and dividend revenue reported under Other Revenue.
Gains and losses reported under Other Revenue.
Including Unrealized Gains and Losses

6. Accounting for Trading Investments
Record Purchase
Adjust at end of period to Market Value
Unrealized Gain
Increases Trading Investment balance (debit)
Unrealized Loss
Decreases Trading Investment balance (credit)
Record Sale
Compare Sale price to ENDING balance
Which includes all previous adjustments to market value
Sale price > ENDING balance = Gain
Sale price < Ending balance = Loss

7. Accounting for Trading Investments
Investments that can be traded
Stocks, Bonds
Oracle Corporation purchases Ford Motor Company stock on May 18, paying $100,000, with the intention of selling the stock within a few months.
May 18 Short-term investment 100,000
Cash 100,000
Purchased investment

8. Accounting for Unrealized Gain/(Loss)
Oracle fiscal year ends on May 31, and the investment in Ford has a current market value of $102,000 on this date.
May 31 Short-Term Investment 2,000
Unrealized Gain on Investments ,000
Adjusted investment to market value

9. Short-Term Investments
Cost 100,000
Adjustment to
market value 2,000
Balance 102,000
What happens if at the next reporting period, if we sell
Ford’s stock for $105,000? What’s the entry?
What if we sell the stock for $95,000? What’s the entry?

10. Realized Gain / (Loss) When Investor Sells Asset Realized Gain
Sales Price > Investment Balance
Realized Loss
Sales Price < Investment
Cash ,000
Short-Term Invest 102,000
Gain on Sale of Invest ,000
Sold at a gain
Cash ,000
Loss on Sale of Invest ,000
Short-Term Invest 102,000
Sold at a loss

11. Accounting for Dividends Rcv’d
On May 27, Oracle receives a cash dividend of $4,000 from Ford.
May 27 Cash 4,000
Dividend revenue 4,000
Received cash dividend

12. Reporting on the Balance Sheet and the Income Statement

13. ACG 2021 Financial Accounting
Accounting for:
Accounts Receivable

14. Receivables Receivables are the 3rd most liquid Assets after:
Cash
Short-term Investments
Receivables are monetary claims against the business organization customers.
Business organization extends credit to customers to make a sale
How many business do you know where you can only pay with cash?
Two major types:
Accounts receivable (trade receivables) – amount to be collected from customers from the sale of goods and services
Notes receivable – written promise to pay
Secured
Collateralized loan
Unsecured

15. Issues When Extending Credit
Benefits
Increase Sales Volume
Grow market share
Grow Business
Consequences
Customers take a long time to pay
Ratio: Days Sales in Receivables
Customers don’t pay at all
Additional expense from management of collection process
Higher risk of $’s being stolen by employee

16. Accounting for Accounts Receivable
Main Account Receivable Account
Debits are for new amounts owed by ALL customers
Credits are for payments made by ALL customers
Account balance is total owed by ALL customers
Subsidiary Account Receivables
Separate accounts maintained for each customer
Debits are only for new amounts owed by particular customer
Credits are only for payments paid by particular customer
Account balance is total owed by particular customer

17. Accounts Receivable Accounts Receivable Bal. 9,000 Aston Bal. 5,000
GENERAL LEDGER
Accounts Receivable
Bal. 9,000
ACCOUNTS RECEIVABLE
SUBSIDIARY RECORD
Aston
Bal. 5,000
Harris
Salazar
Bal. 1,000
Bal. 3,000

18. Issues in Accounting for Receivables
Measure and report receivables at net realizable value.
The amount the business organization expects to collect
Total Accounts receivable – Estimated Uncollectible $’s
Estimate reduces Accounts Receivable (credit) and creates an expense (debit)
Measure and report the expense associated with failure to collect.
Why? What accounting principle requires us to report this expense?
Matching: Must match costs with revenues that the costs generate…
Extending credit creates revenue, we must record the cost of extending credit
Two accounting methods for recording uncollectible accounts receivable
Allowance Method (based on Estimation)
Estimation technique #1: Percent of Sales
Estimation technique #2: Aging of Accounts Receivable
Direct Write-off Method

19. Uncollectible Receivables
Allowance method
record losses based on an estimate of uncollectible accounts.
Percent-of-sales method
computes expense as a percent of revenue
income statement approach
Aging-of-receivables method
Computes ending allowance account balance
individual receivables are analyzed based on how long they have been outstanding
balance sheet approach

20. Contra Accounts Allowance account = Contra Accounts Receivable
Contra Account is related to a “main” account
Contra Account has opposite normal balance from “main” account
Accounts Receivable = Assets = Normal Debit Balance
Allowance for Uncollectible Accounts = Contra Asset = Normal Credit Balance
Accounts Receivable – Allowance for Uncollectible Accounts = Net Realizable Value

21. Estimating Uncollectible A/R
We need 3 T-Accounts
Bad Debt Expense (debit)
Cost of not collecting A/R’s
Allowance for Uncollectible Accounts (credit)
Contra account that indicates what we expect not to collect
Accounts Receivable (no adjustment, used to calculate NRV)
Total (Gross) amount owed by customers
Step 1: Determine Estimate
Know what that estimate is
Step 2: Record Estimate
% of Sales
Debit Bad Debt Expense
Credit Allowance for Uncollectible Accounts
Aging of A/R
New Ending Balance in Allowance Account
Subtract Beginning Balance from Ending Balance =

22. Uncollectible Accounts
Percent-of-Sales
Total sales are $33,000. The credit department estimates that uncollectible-account expense is 1% of total revenues.
Dec 31 Uncollectible-Account Expense
($33,000 x .01) 330
Allowance for Uncollectible Accounts 330
Recorded expense for the year
Allowance for
Uncollectible Accounts
Accounts Receivable
3,105
Net
Accounts Receivable
$3,105 – 350 = $2,755 20
330
Bal. 3,105
Bal

23. Aging-of-Receivables
Critical Point!!!!

24. Aging-of-Receivables
Dec 31 Uncollectible-Account Expense 214
Allowance for Uncollectible Accounts 214
Recorded expense for the year
Allowance for
Uncollectible Accounts
Accounts Receivable
3,105
Net
Accounts Receivable
$3,105 – 384 = $2,721
170
214
Bal. 3,105
Bal
End Bal (384) – Beg Bal (170) = Expense (214)

25. Aging-of-Receivables
Current balance in allowance account is $170.
Calculate the adjustment needed to bring the balance to $384.
Expense: $384 – $170 = $214

26. Financial Statements using The Allowance Method
Balance Sheet (partial)
Accounts receivable $10,000
Less: Allowance for uncollectible accounts – 900
Accounts receivable, net $ 9,100
Accounts receivable, net of allowance for doubtful accounts of $701 and $767 at
December 31, 2005 and 2006, respectively , ,394
Income Statement (partial)
Expenses:
Uncollectible-account expense $ 2,000

27. Writing off Uncollectible Accounts
Decrease the Allowance account and remove the account receivable.
Mar 31 Allowance for Uncollectible Accounts
Accounts Receivable 100
What is the effect on total assets?
Why is there no expense recorded?

28. Aging-of-Receivables
Comparing the Methods
Allowance Method
Percent-of-Sales
Aging-of-Receivables
Adjusts Allowance for
Uncollectible Accounts BY
Calculating Expense
Adjusts Allowance for
Uncollectible Accounts TO
Calculating Ending
Allowance Balance
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

29. Direct Write-Off Method
No allowance is established and the expense is recognized when accounts are written off.
Mar 31 Uncollectible Account Expense
Accounts Receivable
Accounts Receivable – Sarasota Pipe 61
Accounts Receivable – Miller Auto Sales 39

30. Direct Write-Off Method
Assets are overstated on the balance sheet because no allowance account is used.
Poor matching of uncollectible-account expense against revenue. Net income is overstated.

31. Basic Accounting for Accounts Receivable
Provided $1,000 Goods/Services on account
Accounts Receivable 1,000
Sales Revenue ,000
Receive $1,000 payment from customer on account
Cash ,000
Accounts Receivable ,000

32. ACG 2021 Financial Accounting
Accounting for Notes Receivable and Cash Flow Issues

33. Some Definitions Creditor Debtor Debt Instrument Equity Security
Who the money is owed to
Debtor
Who owes the money
Debt Instrument
Legal Document representing debt
Represented by a payable for the debtor
Represented by a receivable for the creditor
Equity Security
Stock certificate, ownership of a corporation
Maturity
Date when debt instrument must be paid
Term
Time from inception to maturity of debt instrument
If < 1 year, listed as Current Asset / Liability
If > 1 year
Current Portion is Current Asset / Liability
Portion due after 1 year is Long term Asset/Liability

34. Notes Receivable Creditor has a note receivable.
Debtor has a note payable.
Principal is the amount borrowed.
Interest is revenue to the lender/creditor and expense to the borrower/debtor.
Accrues over the period of the note
If period straddles two accounting periods
Adjusting Entry must be made to reflect interest earned during each period – recall accrued revenues.

35. Notes Receivable Notes Receivable – L. Holland 1,000 Cash 1,000
Laura Holland signs a $1,000 note dated Aug. 31, 20X5 with a maturity date of Feb. 28, 20X6. To record this on the bank’s books: (How many months is this loan for? How many accounting periods does it cover?
Notes Receivable – L. Holland 1,000
Cash 1,000
Made a loan
To record interest earned at Dec. 31, 20X5:
Interest Receivable (1,000 x .09 x 4/12) 30
Interest Revenue 30
Accrued interest revenue

36. Notes Receivable To record collection of the note on Feb. 28, 20X6:
Cash 1,045
Note Receivable – L. Holland 1,000
Interest Receivable 30
Interest Revenue (1,000 x .09 x 2/12) 15
Collected note at maturity

37. How to Speed Up Cash Flow
Credit card or bankcard sales
Selling receivables (Factoring)
Discounting notes receivable

38. How to Speed Up Cash Flow
Recording a credit card or bankcard sale
Cash 97,000
Financing Expense 3,000
Sales Revenue 100,000
To record a credit card sale of $100,000 and a 3% financing fee
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

39. How to Speed Up Cash Flow
Recording the sale of receivables
Cash 95,000
Financing Expense 5,000
Trade Accounts Receivable 100,000
Sold accounts receivable
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

40. Reporting on the Statement of Cash Flows
Receivables bring in cash when the business collects from customers.
Operating Activities
Investment transactions change Cash
Investing Activities

41. ACG 2021 Financial Accounting
Acid Test & Days Sales in Receivables Ratios

42. Ratios Acid Test Ratio = Day’s Sales in Receivables =
Cash + ST Investments + Net Receivables
Acid Test Ratio =
Total Current Liabilities
Average Net Accounts Receivable
Day’s Sales in Receivables =
Average Daily Sales

43. Acid-Test Ratio A stringent test of liquidity
Measures entity’s ability to pay its current liabilities immediately

44. Days’ Sales in Receivables
How long does it take to collect the average receivables for an organization?
Step 1: Determine Organizations sales for a single day
One day’s sales = Net sales ÷ 365 days
Step 2: Determine Organizations Average Receivables
(Beginning Balance + Ending Balance) / 2
Step 3: Calculate Ratio
A smaller number indicates a quick conversion to cash.

45. BBBB and BBY Ratios BlackBoard Best Buy Acid Test
FYE FYE
Day’s Sales in Receivables
FYE
Best Buy
FYE FYE
FYE

46. End of Chapter 5