1. Short-Term Investments & Receivables Pr. Zoubida SAMLAL

2. Learning Objective 1 Account for short-term investments

4. Accounting for Short-Term Investments Also called marketable securities Held for one year or less Most liquid asset other than cash Placed into three categories: Trading Investments Available- for-Sale Held-to- Maturity

5. Trading Investments Held for short time and then sold – Gain or loss recorded Dividend revenue may also be received At year-end, trading investments are adjusted to equal their market value – Results in an unrealized gain or loss Selling price > cost = GainSelling price < cost = Loss

6. Unrealized Gains & Losses Difference between market price and cost of investment at year-end Unrealized – investment has not been sold Market price > cost = Unrealized gain Market price < cost = Unrealized loss

7. Realized vs. Unrealized Realized Investment sold to third party Gain or loss = difference between selling price and cost Word “realized” usually dropped from title Unrealized Company still owns investment Gain or loss = difference between market value and cost Word “unrealized” is kept in account title

8. Entries to Adjust to Market JOURNAL DateAccountsDebitCredit Short-term investments$$$ Unrealized gain on investments $$$ Adjusted investment to market value (when greater than cost) Unrealized loss on investments$$$ Short-term investments $$$ Adjusted investment to market value (when less than cost)

9. Reporting on Financial Statements Balance Sheet Trading Investment – Reported at current market value – Listed directly under “cash” in the current asset section Income Statement Gains and losses – From sales of investments Investment revenue – From dividends or interest earned Unrealized gain or loss – From entry to adjust to market value

10. Exercise 1 Part of your job responsibilities as a finance manager is to invest in short term trading investments. 1.On 1 dec. You bought 1000 shares of XYZ company at USD 10 2.On 15 dec. You received a cash dividend of USD 1 per share 3.On 31 dec the price of XYZ share dropped to USD 8 per share 4. On 31 dec you decided to sell off all your investment at USD 8 per share a)Please post the account entries of each transaction b)How transaction 3 is different from transaction 4

11. Solution 1 JOURNAL DateAccountsDebitCredit Dec 1Trading investment$10,000 Cash $10,000 a. Short term trading investment XYZ at USD 10 Dec 15Cash$1000 Dividend revenue $1000 b. Dividend distribution received in cash USD 1 per share

12. Solution 1 ( con´t) JOURNAL DateAccountsDebitCredit Dec 31Unrealized loss$2,000 Trading investment $2,000 c. Adjusting our short term investment to the market value of USD 8 per share Dec 31Cash$8000 Loss from selling the investment$2000 Trade Investment ( initial purchase price) $10000 d. Investment sold at loss of USD2 per share

13. Solution 1 ( con´t) How transaction 3 is different from transaction 4 -> Our transaction n° 3 is a readjustment to our investment or what we call mark to market our investment. --> Unrealized loss because the investment is not yet sold. -> Our transaction n° 4 is a sell off to our investment or selling at loss of 2USD (selling price–purchasing price or USD 8 – USD 10). --> here we have a realized loss that we posted into our revenues account.

14. When Unrealized loss JOURNAL Date Accounts Debit Credit 12-31 Unrealized loss _______ Trading Investments ________ What would be the amount of the unrealized loss? Compute the difference between the cost and market value.

15. JOURNAL Date Accounts Debit Credit 1-11 Cash Gain on sale of investments Trading Investments Your selling price? Your loss= Sell- buy Initial purchase When realized loss

16. When Unrealized Gain JOURNAL Date Accounts Debit Credit Trading Investments _______ Unrealized gain ________ What would be the amount of the unrealized gain ? Compute the difference between the cost and market value.

17. JOURNAL Date Accounts Debit Credit Cash Gain on sale of investments Trading Investments Your selling price? Your gain = Sell- buy Initial purchase When realized Gain

18. Learning Objective 2 Apply internal controls to receivables

19. Receivables Monetary claims against others Third most liquid asset Accounts Receivable – Amounts owed by customers for selling goods or services Notes Receivable – Lending money to outsiders – More formal than accounts receivable

20. Internal Control over Cash Collections on Account Separate cash-handling from cash-accounting duties Cash-handling – One person receives customer checks and makes deposits Cash-accounting – Another person makes entries to customer accounts

21. Accounting for Uncollectible Receivables Extending credit to customers bears some risk Risk: Some customers do not pay the amount owed Cost: Uncollectible accounts

22. Application exercise Case Perinity Inc. is a company that sells 50% of its product cash while. 80% of its credit sales are paid on time a.What is the total amount of account receivable if the sales revenues are USD 1 million? b. How much uncollectible does it have?

23. Learning Objective 3 Use the allowance method for uncollectible receivables

24. Allowance Method Amount of uncollectible accounts is estimated An expense is recorded as part of the adjusting process A contra-asset is recorded that reduces accounts receivable on the balance sheet A contra-asset is always paired with an asset and reduces its balance

25. Entry to Record Uncollectible accounts JOURNAL Accounts Debit Credit Uncollectible accounts expense Allowance for uncollectible accounts Goes on the Income Statement Goes on the Balance Sheet netted with a A. receivable

26. Balance Sheet Current assets: Accounts receivable$$,$$$ Less: Allowance for Uncollectible Accounts( $,$$$) Accounts receivable, net$$,$$$ Accounts receivable, net$$,$$$ OR

27. Methods to Estimate Un- collectibles Percent-of-sales Expense is estimated based on credit sales Income Statement approach Aging-of-receivables Accounts receivable analyzed based on how long outstanding Balance Sheet approach

28. APPLICATION EXERCISE Age of Accounts 1 - 30 Days 31 - 60 Days 61 - 90 DaysOver 90 Days sales $ 110,000 $ 60,000 $ 50,000 $ 15,000 %uncollectible0.5%1%60%40% During the monthly closing of it’s A/R accounts, Perinity Inc posted its uncollected received classified by their age. The company has a beginning allowance balance of USD $7,400. Is it sufficient or should it adjust its allowance?

29. Solution Age of Accounts Age 1 - 30 Days 31 - 60 Days 61 - 90 DaysOver 90 Days sales $ 110,000 $ 60,000 $ 50,000 $ 15,000 % Uncllected0.5%1%60%40% uncollected $ 550 $ 600 $ 30,000 $ 6,000 $37,150= Total Uncollected receivable

30. Solution Aging Schedule$37,150 Balance in Allowance$7,400 Adjustment needed JOURNAL Date Accounts Debit Credit 12- 31 Uncollectible accounts expense_______ Allowance for uncollectible accounts______ Adjustment needed = Aging schedule - Balance

31. Solution Allowance for Uncollectible Accounts $7,400 Balance before adjustment $37,150 Balance per aging schedule $29,750 Adjusting entry

32. Uncollectible Accounts Methods Percent-of-SalesAging-of-Receivables Adjust Allowance for Uncollectible Accounts BYTO The Amount of UNCOLLECTIBLE ACCOUNT EXPENSE The Amount of UNCOLLECTIBLE ACCOUNTS RECEIVABLE

33. Writing Off a Specific Account JOURNAL Date Accounts Debit Credit Allowance for uncollectible accounts $$$$ Accounts receivable $$$$ The allowance is used to absorb specific accounts that are determined to uncollectible When it’s determined a customer cannot pay, the following entry is made:

34. Learning Objective 4 Account for notes receivable

35. Notes Receivable Terms Creditor Debtor Interest Maturity Date Maturity Value Principal Term Party to whom money is owed; lender Date debtor must pay the note Sum of principal and interest on note Amount borrowed by debtor Length of time money is borrowed Party that owes money; borrower Cost of borrowing money; percent

36. Accounting for Notes Receivable To record the receipt of a note receivable, the following entry is made: JOURNAL Date Accounts Debit Credit Notes Receivable $$,$$$ Cash $$,$$$

37. Accounting for Notes Receivable Interest needs to be accrued on any note receivable outstanding at year end: JOURNAL Date Accounts Debit Credit Interest receivable $$,$$$ Interest revenue $$,$$$ Interest is computed by the formula: Principal x rate x time Time = date note is signed to end-of-year

38. ACCOUNTING FOR NOTES RECEIVABLE When payment is received on note, the following entry is made JOURNAL DateAccountsDebitCredit Cash Notes Receivable Interest receivable Interest revenue For maturity value Zeroes out adjustment For remaining interest earned For principal

39. Credit and Bank Card Sales Credit Cards – American Express and Discover Bank Cards – VISA and MasterCard Both charge the retailer a fee

40. Learning Objective 5 Use two new ratios to evaluate a business

41. Days’ Sales in Receivables How long it takes a company to collect its average amount of receivable Compute one day’s sales Days’ sales in receivables Net Sales 365 Days Average receivables One Day’s Sales

42. Acid-Test Ratio Also called quick ratio which measures how much your short term assets represents in terms of short term liabilities A more stringent measure of a company’s ability to pay its current liabilities Cash + Short-term investments + net receivables Total current liabilities

43. Which is better having a high acid ratio or low acid ratio?