1. FINANCIAL FINANCIAL ACCOUNTING ACCOUNTING A U s e r P e r s p e c t i v e A U s e r P e r s p e c t i v e Third Canadian Edition Third Canadian Edition Hoskin  Fizzell

2. 2 Cash, Temporary Investments, and Accounts & Notes Receivable 6 C h a p t e r

3. 3 Asset with probable future value Asset with probable future value Purchasing power Purchasing power Medium of exchange Medium of exchange Ownership is evidenced by possession Ownership is evidenced by possession Difficult to control Difficult to control – Need for internal control procedures Cash

4. 4 Record at face value Record at face value – Value is assumed not to change Unit-of-measure assumption Unit-of-measure assumption – Canadian practice – Results of a company’s activities can be measured by a monetary unit - the Canadian dollar Cash Valuation Methods

5. 5 Control to prevent loss or theft Control to prevent loss or theft Safeguarding of all assets Safeguarding of all assets Policies and procedures established for handling of assets Policies and procedures established for handling of assets Internal Control Systems

6. 6 Effective systems should include: Effective systems should include: – Physical measures to protect assets from theft and vandalism – Separation of duties – An effective record-keeping system Internal Control Systems

7. 7 Bank reconciliation Bank reconciliation – Ensures that the accounting records agree with the bank records – Differences may be due to timing, incomplete date, and errors – Normally made every month Internal Control Systems

8. 8 Bank Reconciliation For the Month of March

9. 9 The appropriate cash balance is $9,550.87 The appropriate cash balance is $9,550.87 Journal entry to adjust the cash account Journal entry to adjust the cash account SE-Bank charge expense 25.75 A-Accounts receivable 186.80 A-Cash 212.55 Bank Reconciliation

10. 10 Reconciling items include: Reconciling items include: – Outstanding cheques – Outstanding deposits – Bank service charges – Errors in recording items – Any other item that affects cash Bank Reconciliation

11. 11 The person who reconciles the bank account should not be the person who is responsible for the bank account or the accounting records The person who reconciles the bank account should not be the person who is responsible for the bank account or the accounting records Sufficient cash should be readily accessible to pay expenses Sufficient cash should be readily accessible to pay expenses Control Measures

12. 12 Cash may be invested in marketable securities Cash may be invested in marketable securities – Temporary (short-term) investments – Debt or equity interest in another entity Temporary Investments

13. 13 Historical cost Historical cost – Changes in market value have no effect – A realized gain or loss is recognized when the securities are sold Valuation Methods

14. 14 Market value Market value – Changes in market value are recognized as unrealized gains or losses – Other income is recognized when interest or a dividend is received Valuation Methods

15. 15 Canadian practice Canadian practice – Lower of cost or market (LCM) Temporary investments shown at cost, unless Temporary investments shown at cost, unless Market value has declined below cost, then Market value has declined below cost, then Shown at market value Shown at market value Valuation Methods

16. 16 Each investment is recorded in its own subsidiary account Each investment is recorded in its own subsidiary account A-Investment in HTMS 10,000 A-Investment in ATS 20,000 A-Investment in LFS 30,000 A-Short-term investments 60,000 Initial Acquisition

17. 17 SUBSIDIARY ACCOUNTS CONTROL ACCOUNT A-Investment in HTMS 10,000 A-Investment in ATS 20,000 A-Investment in LFS 30,000 A-Short-term Investments 60,000 Initial Acquisition

18. 18 Dividend/Interest Recognition Income recognized each period, as earned Income recognized each period, as earned Could be accrued, resulting in a receivable Could be accrued, resulting in a receivable A-Cash 1,200 SE-Dividend/interest income 1,200 (Income statement account)

19. 19 Unrealized Losses/Recoveries LCM Rule LCM Rule – Compare the market value of the investments to their original cost – Determine the lower of the two – Carry the investment at this lower value – Apply to entire portfolio or to individual securities

20. 20 Unrealized Losses/Recoveries Cost: $60,000 Cost: $60,000 Market value of portfolio: $57,000 Market value of portfolio: $57,000 SE-Unrealized loss on value of temporary investments 3,000 XA-Valuation allowance for temporary investments 3,000 XA-Valuation allowance for temporary investments 3,000

21. 21 Unrealized Losses/Recoveries If the market value has increased If the market value has increased – Companies can recover unrealized losses – But can never recognize unrealized gains above the original cost

22. 22 Unrealized Losses/Recoveries Market value of portfolio has increased: $62,000 Market value of portfolio has increased: $62,000 XA-Valuation allowance for temporary investments 3,000 SE-Recovery of unrealized loss on valuation of temporary investments 3,000 The additional $2,000 cannot be recognized The additional $2,000 cannot be recognized

23. 23 Investment HTMS was sold for $12,000 Investment HTMS was sold for $12,000 Cost had been $10,000 Cost had been $10,000 A-Cash 12,000 A-Investment in HTMS 10,000 SE-Realized gain on sale of temporary investment 2,000 Realized Losses/Recoveries

24. 24 Disclosure of Temporary Investments Marketable securities [Market value $3,501,315 (1999- $1,580,147)] December 31 2000 December 31 1999 3,322,957 1,558,377

25. 25 Amounts owed from customers as a result of selling goods and services on credit Amounts owed from customers as a result of selling goods and services on credit Represents the right to receive payment at some future date Represents the right to receive payment at some future date Uncertainty that the customer will not pay (bad debt) Uncertainty that the customer will not pay (bad debt) Accounts Receivable

26. 26 Accounts Receivable Valuation Methods Gross payment method Gross payment method – Ignores the effects of bad debts Time value of money to be received Time value of money to be received Possibility that the receivable will not be paid Possibility that the receivable will not be paid Factoring: A/R can be sold Factoring: A/R can be sold

27. 27 Accounts Receivable Valuation Methods Canadian practice Canadian practice – Show receivable at the gross payments amount, less allowances for bad debts and returns

28. 28 Methods of Accounting for Doubtful Accounts Allowance method Allowance method Percentage of credit sales method Percentage of credit sales method Aging of accounts receivable method Aging of accounts receivable method Direct write-off method Direct write-off method

29. 29 Matching concept: Matching concept: – When revenues from a sale are recognized, related expenses must be recognized at the same time Bad debts are reductions in revenues, not expenses Bad debts are reductions in revenues, not expenses Companies must estimate uncollectible (doubtful) amounts Companies must estimate uncollectible (doubtful) amounts Allowance Method

30. 30 Allowance for doubtful accounts Allowance for doubtful accounts – Contra account to accounts receivable SE-Bad debts expense 325 XA-Allowance for doubtful accounts 325 Reduces Reduces – Net carrying value of A/R – Net income Allowance Method

31. 31 Write off of an account receivable Write off of an account receivable XA-Allowance for doubtful accounts 300 A-Accounts receivable300 Allowance Method

32. 32 Recovery of a written-off account receivable Recovery of a written-off account receivable A-Accounts receivable 50 XA-Allowance for doubtful accounts 50 A-Cash 50 A-Accounts receivable 50 Allowance Method

33. 33 Estimating Doubtful Accounts Percentage of credit sales method Percentage of credit sales method Aging of accounts receivable method Aging of accounts receivable method

34. 34 Percentage of Credit Sales Method Assumes that the bad debt expense is based on total credit sales Assumes that the bad debt expense is based on total credit sales Multiply credit sales by an appropriate percentage Multiply credit sales by an appropriate percentage Percentage is based on collection history Percentage is based on collection history

35. 35 Recognizes the loss from the uncollectible account in the period in which the company decides that the account is uncollectible Recognizes the loss from the uncollectible account in the period in which the company decides that the account is uncollectible Violates the matching concept Violates the matching concept SE-Bad debt expense 300 A-Accounts receivable 300 Direct Write-Off Method

36. 36 Promissory note Promissory note – Written contract between the maker and the payee – Interest is calculated on the principal amount of the note Collateral Collateral – Asset that the payee has the right to receive if the note is defaulted Notes Receivable

37. 37 Implied interest Implied interest – Interest is included in the amount stated in the note Explicit interest Explicit interest – Interest is calculated based on the amount stated in the note Interest on Notes Receivable

38. 38 Interest on Notes Receivable Short-term notes receivable Short-term notes receivable – Simple-interest calculations Long-term notes receivable Long-term notes receivable – Compound interest calculations

39. 39 Interest = Principal x Interest Rate x Time Principal - amount borrowed Interest Rate - stated as a yearly amount Time - stated as a fraction of year Simple Interest Formula

40. 40 Nov. 20: Acceptance of a 12 percent note, with a maturity of 60 days Nov. 20: Acceptance of a 12 percent note, with a maturity of 60 days A-Notes receivable 1,000 A-Accounts receivable 1,000 Dec. 31: One month’s interest (year end) Dec. 31: One month’s interest (year end) Interest = $1,000 x 12% x 30/360 A-Interest receivable 10 SE-Interest revenue 10 Simple Interest

41. 41 Jan. 31: Accrue interest for January Jan. 31: Accrue interest for January A-Interest receivable 10 SE-Interest revenue 10 Jan. 31: Cash payment Jan. 31: Cash payment A-Cash 1,020 A-Notes receivable 1,000 A-Interest receivable 20 Simple Interest

42. 42 Liquidity Liquidity – The ability to convert assets into cash to pay liabilities – Measures Current ratio Current ratio Quick ratio Quick ratio Short-Term Liquidity

43. 43 Current Ratio = Current Assets Current Liabilities Current Ratio = $2,299.3 $1,343.7 = 1.7 Current Ratio

44. 44 Quick Ratio = Current Assets - Inventory - Prepaid Expenses Current Liabilities Quick Ratio= $2,299.3 - 864.5 - 123.3 - 110.3 $1,343.7 =.89 Quick Ratio

45. 45 Accounts Receivable Turnover A/R Turnover= Total Sales Revenue Average A/R A/R Turnover for 2001 = 101,092,000 (10,068,000 + 7,644,000)/2 = 11.42 A/R Turnover for 2000 =12.09

46. 46 Copyright © 2003 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Copyright