1. Gary A. Porter and Curtis L. Norton
Using Financial Accounting Information: The Alternative to Debits and Credits Fifth Edition
Gary A. Porter and Curtis L. Norton
Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

2. Apple’s Consolidated Balance Sheets (Partial)
ASSETS (in millions) September 25, September 27, 2003
Current assets:
Cash and cash equivalents $2, $3,396
Short-term investments , ,170
Accounts receivable, less
allowances of $47 and $
Inventories
Deferred tax assets
Other current assets
Total current assets $7, $5,887
higher
higher

3. Apple’s Consolidated Balance Sheets (Partial)
ASSETS (in millions)
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable
Inventories
Deferred tax assets
Other current assets
Total current assets
Highly liquid
Less
liquid

4. Reasons Companies Invest in Other Companies
Short-term cash excesses
Long-term investing for future cash needs
Exert influence over investee
Obtain control of investee
LO1

5. Accounting for Common-Stock Investments
No significant
influence 0%
20%
Fair
Value
Method
Significant
influence
50%
Equity
Method
Control
100%
Consolidated
Financial
Statements
Our
focus
in Appendix

6. Credit Sales Slows inflow of cash Risk of uncollectible accounts
Trade Credit
Terms: 2/10,
net 30
Sales Invoice
Retail Customer
Receivables
LO2

7. Apple Corporation Sample Accounts Receivable Subsidiary Ledger
Total Due
Acme $ 10,000
Baxter ,000
Jones ,000
Martin ,000
Smith ,000
$100,000
Gross Accounts
Receivable

8. Apple’s Consolidated Balance Sheets (Partial)
(amounts in millions)
Accounts receivables, less allowances of $47 and $49, respectively $ $766
Net
Realizable
Value
Estimated
Uncollectible
Accounts

9. Accounting for Bad Debts: Direct Write-off Method
Future period charged
with expense of bad debt
write-off
Period of sale
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Acct. Rec Bad Debt Expense
Baxter (500) (500)

10. Accounting for Bad Debts: Allowance Method
Period of sale
Estimated bad debt expense (and allowance account) recorded in the same period 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 28 29 30 31 27

11. Accounting for Bad Debts: Allowance Method
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Allowance for Bad Debt Expense
Doubtful Acct (6,000)
(6,000)
(1% X $600,000 = $6,000)

12. Balance Sheet Presentation – Allowance Method
Roberts Corp.
Partial Balance Sheet
Accounts receivable $250,000
Less: Allowance for
doubtful accounts ,000
Net accounts receivable $244,000 6

13. Accounting for Bad Debts: Allowance Method
To write-off of account determined uncollectible:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Allowance for
Doubtful Acct
500
Acct. Rec. – Dexter
(500)

14. Approaches to Allowance Method
% of Net Credit Sales
% of Accounts Receivable
Aging Method
Income Statement Approach
Balance Sheet Approach

15. Percentage of Net Credit Sales Method
Example:
Assume prior years’ net credit sales and bad debt
expense is as follows:
Year Net Credit Sales Bad Debts
$1,250,000 $ 26,400
,340, ,350
,200, ,100
,650, ,150
,120, ,700
$7,560,000 $153,700 3

16. Percentage of Net Credit Sales Method
Example:
Develop bad debt percentage:
$153,700
$7,560,000 =
use 2% 3

17. Percentage of Net Credit Sales Method
Example:
2007 Net credit sales $2,340,000 (given)
Bad debt percentage %
Bad debts expense $ ,800
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues Expenses Equity
Allowance for Bad Debt Expense
Doubt Acct (46,800)
(46,800) 4

18. Aging Method Estimated Percent Estimated Amount
Category Amount Uncollectible Uncollectible
Current $ 85, % $
Past due:
1–30 days , % ,248
31–60 days , % ,450
61–90 days , % ,400
90+ days , % ,600
Totals $168, $14,554

19. Aging Method
Assume the Allowance for Doubtful Accounts has a beginning credit balance of $1,230:
Credit balance required in allowance account after adjustment $14,554
Less: Credit balance in allowance account before adjustment ,230
Amount for bad debt expense entry $13,324

20. Aging Method
Assume the Allowance for Doubtful Accounts has a beginning balance of $1,230:
Balance Sheet Income Statement Assets = Liabilities + Stockholders’ + Revenues – Expense
Equity
Allowance for Bad Debts Expense Doubt Accts (13,324)
(13,324)

21. Aging Method
The net realizable value of accounts receivable would be determined as follows:
Accounts receivable $168,500
Less: Allowance for doubtful accounts ,554
Net realizable value $153,946

22. Accounts Receivable Turnover
Net Credit Sales
Average Accounts Receivable
Indicates how quickly a company is collecting (i.e., turning over) its receivables
LO3

23. Accounts Receivable Turnover
Too fast
credit policies too
stringent; may be
losing sales
Too slow
credit department
not operating effectively;
dissatisfied customers

24. Interest-Bearing Promissory Note
Principal
Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on March 13, 2008.
Date: December 13, 2007
Signed:_________
Interest
Maturity
Date
Baker Corporation
LO4 14

25. Interest-Bearing Promissory Note
To record the receipt of the note on December 13
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Revenues - Expenses Equity
Notes Sales Revenue
Receivable ,000
15,000

26. Interest-Bearing Promissory Note
To record interest:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Interest Interest
Receivable Revenue 90
90 *
*Interest = $15,000 × 12% × 18/360

27. Interest-Bearing Promissory Note
To record the collection of the note on March 13, 2008:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Cash 15, Interest Revenue
Notes
Receivable (15,000)
Interest
Receivable (90)
*15,000 × 12% × 72/360

28. Accelerating the Cash Inflow from Sales
Credit card sales
Discounting notes receivable
LO5

29. Credit Card Sales Competitive necessity Credit card company:
Charges fee
Assumes risk of nonpayment

30. Discounting Notes Receivable
Sell note prior to maturity date for cash
Receive less than face value (i.e., discounted amount)
Can be sold with or without recourse
Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on December 31, 2007.
Date: January 1, 2007
Signed:_________
Baker Corporation
$$$

31. Liquid Assets and the Statement of Cash Flows – Indirect Method
Operating Activities
Net income xxx
Increase in accounts receivable –
Decrease in accounts receivable
Increase in notes receivable –
Decrease in notes receivable
Investing Activities
Purchases of held-to-maturity and
available-for-sale securities –
Sales/maturities of held-to-maturity and
available-for-sale securities
Financing Activities
LO6

32. Accounting for Investments in Stocks and Bonds
Appendix
Accounting for Investments in
Stocks and Bonds

33. Security Investment Categories
Held-to-maturity securities
Trading securities
Available-for-sale securities
Use fair value method to account for these investments
LO7

34. Held-to-Maturity Securities
Bonds of other companies
Intent and ability to hold until maturity
Example:
$100,000, 9% bond
due 2019

35. Held-to-Maturity Securities
Example:
On 1/1/07, Atlantic buys:
$100,000, 10% face value
Bonds mature in ten years
Interest payable semiannually
Record the purchase of the bonds and receipt of the first interest payment

36. Recording Bond Purchase
To record purchase of ABC bonds:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Investment
in Bonds 100,000
Cash (100,000)
$100,000, 10% bond
due 2017

37. Recording Receipt of Interest Payment
To record interest income on ABC bonds:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Cash 5, Interest Revenue 5,000
Interest for
Investor
Borrower

38. Recording Bond Sale To record sale of Investment in ABC bonds:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Cash 99, Loss on Sale of Bonds
Investment (1,000)
in Bonds (100,000)
Interest for
Investor
Borrower

39. Trading Securities
Stocks
Bonds
Purchased to generate profit from short-term appreciation
Intend to sell in near term (classified as current assets)

40. Trading Securities
Stocks
Bonds
At end of each period, security is “marked to market”
Income
Statement
Unrealized gain or loss recognized on income statement

41. Trading Securities Record the unrealized gain or loss at 12/31/07
Example:
Dexter Corp. holds the following trading securities at 12/31/07:
Total Fair Value
On Security Total Cost December 31, 2007
Menlo preferred stock $25, $27,500
Canby common stock , ,000
Record the unrealized gain or loss at 12/31/07

42. Recording Unrealized Gain/ Loss on Trading Securities
To adjust trading securities to fair value:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Investment *Unrealized Gain
Trading Menlo 1,500
Securities 2,500
Investment
Canby (1,000)
*income statement account

43. Available-for-Sale Securities
Securities not classified as either held-to-maturity or trading
Stocks
Bonds
Balance
Sheet
Unrealized gain or loss accumulated in stockholders’ equity account

44. Available-for-Sale Securities
Example:
Lenox Corp. holds the following available-for-sale
securities at 12/31/07:
Total Fair Value on
Security Total Cost December 31, 2007
Adair preferred stock $15,000 $16,000
Casey common stock , ,500
Record the unrealized gain or loss at 12/31/07

45. Recording Unrealized Gain/ Loss on Available-for-Sale Securities
To adjust available-for-sale securities to fair value:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ + Revenues - Expenses Equity
Investment *Unrealized Loss in Adair 1, Avail for Sale
Investment Securities (1,500) in Casey (2,500)
*part of Stockholders’ Equity

46. Accounting for Investments without Significant Influence
Report Report
Recognize on Balance Changes in
Categories as Income Sheet at Fair Value on
Held-to-maturity Interest Cost N/A
Trading Interest, dividends Fair value Income statement
Available-for-Sale Interest, dividends Fair value Balance sheet

47. End of Chapter 7