Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   1
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   2
Short-Term Investments andReceivablesChapter 5            Copyright ©2010 Pearson Education Inc. Publishing as Prentice Ha...
Account for short-term investments           Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   4
Short-Term Investments• Also called marketable securities• Easily convertible into cash• Expected to be held one year or l...
Short-Term Investment Categories        Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   6
Trading Securities• Held for a short time and then sold• Can be debt or equity securities of another  company• Earn intere...
Unrealized Gains and Losses        Trading securities are reported on the        balance sheet at current market value   I...
Adjusting Trading Securities to Market                                          JOURNALDate Accounts and explanation      ...
Balance Sheet & Income Statement ReportingBalance Sheet                                         Income StatementCurrent as...
Realized Gains and Losses         Only reported when investment is sold   If sales price >                                ...
Exercise 5-19A                                     ACA Inc.                                   Balance Sheet               ...
Account for, and control, accounts receivable          Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall....
Receivables• Third most liquid asset• Monetary claims against others• Acquired mainly by ?            Copyright ©2010 Pear...
Accounts Receivable• Amounts collectible from customers• Balance in general ledger• Subsidiary ledger            Copyright...
General Ledger                              Accounts Receivable Subsidiary Ledger                                         ...
Notes Receivable• More formal than accounts receivable• Written promise to pay a sum at the maturity  date• Also called pr...
Internal Control: Collections onAccount• Separate cash-handling and cash accounting  duties• Another option ?            C...
Risks of Selling on CreditIssues                                               Plan of actionWhat are the benefits and cos...
Uncollectible ReceivablesBenefit of selling on credit                             Cost of selling on credit               ...
Use the allowance method for uncollectiblereceivables          Copyright ©2010 Pearson Education Inc. Publishing as Prenti...
The Allowance Method• Records collection losses based on company’s  collection experience• Estimates Uncollectible-Account...
Net Realizable Value                                 Balance Sheet    Current assets:    Accounts receivable              ...
Methods to Estimate Uncollectibles         Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   24
Percent-of-Sales Method  • Emphasizes matching concept                                                                    ...
Aging-of-Receivables• Focuses on proper valuation of accounts  receivable on the balance sheet• Individual customer balanc...
Age of Account                                         1-30            31-60             61-90          Over 90   TotalCus...
Aging-of-Receivables                                           JOURNALDate Accounts and explanation                       ...
Writing Off Uncollectible Accounts                                            JOURNAL Date Accounts and explanation       ...
Impact of Write-Off               Balance Sheet – Before Write Off    Current assets:    Accounts receivable              ...
Comparing Allowance MethodsApproaches    Percent-of-Sales                                                 Aging-of-Receiva...
Exercise 5-22A                                            JOURNALDate Accounts and explanation                            ...
Exercise 5-22A                                           JOURNAL Date Accounts and explanation                            ...
Exercise 5-22A                              Balance Sheet  Current assets:  Accounts receivable  Less: Allowance for uncol...
Direct Write-Off Method• Waits until a specific account is uncollectible to  record the expense• Inferior to Allowance met...
Computing Cash Collections fromCustomers          Accounts Receivable    Beginning balance        $1000                   ...
Account for notes receivable            Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   37
Notes Receivable• Can be current or long-term assets• Terms:  Creditor  Debtor  Interest  Maturity date  Maturity value  P...
Principal                                                                                         Date Interest           ...
Accounting for Notes Receivable                                            JOURNALDate    Accounts and explanation        ...
Interest• Interest rates are usually expressed as an annual  percent• For time periods less than a year, a fraction is  us...
Speeding Up Cash Flow        Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   42
Use two new ratios to evaluate a business           Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   43
Acid-Test (or Quick) Ratio  Cash + Short-term investments + Net current receivables                      Total current lia...
Short Exercise 5-13Acid-test ratio                                            ?                                           ...
Days’ Sales in Receivables (CollectionPeriod)                                           Net sales  One day’s    sales     ...
Short Exercise 5-13Days’ sales in receivable   One day’s     sales  Days’ sales in   receivables                          ...
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.   48
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Hhtfa8e ch05 stud devry Accounting 212 FINANCIAL ACCOUNTING

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Hhtfa8e ch05 stud devry Accounting 212 FINANCIAL ACCOUNTING

  1. 1. Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 1
  2. 2. Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 2
  3. 3. Short-Term Investments andReceivablesChapter 5 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 3
  4. 4. Account for short-term investments Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 4
  5. 5. Short-Term Investments• Also called marketable securities• Easily convertible into cash• Expected to be held one year or less Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 5
  6. 6. Short-Term Investment Categories Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 6
  7. 7. Trading Securities• Held for a short time and then sold• Can be debt or equity securities of another company• Earn interest or dividend revenue Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 7
  8. 8. Unrealized Gains and Losses Trading securities are reported on the balance sheet at current market value If market value ? has increased If market value has decreased ? Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 8
  9. 9. Adjusting Trading Securities to Market JOURNALDate Accounts and explanation Debit Credit Investment in ABC stock Unrealized gain on investments ? Adjusted investment to market value JOURNALDate Accounts and explanation Debit Credit Unrealized loss on investment Investment in ABC stock ? Adjusted investment to market value Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 9
  10. 10. Balance Sheet & Income Statement ReportingBalance Sheet Income StatementCurrent assets: Revenues $$$ Cash $$$ Expenses $$$ Short-term investments, Other revenue, gains and at market value $$$ (losses): Accounts receivable $$$ Interest revenue $$$ Dividend revenue $$$ Unrealized gain on investments $$$ Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 10
  11. 11. Realized Gains and Losses Only reported when investment is sold If sales price > ? carrying amount If sales price < carrying amount ? Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 11
  12. 12. Exercise 5-19A ACA Inc. Balance Sheet December 31 Current assets: Short-term investments at market value ACA Inc. Income Statement For the year ending December 31 Other income, revenue,(loss): Dividend revenue Unrealized loss on investments Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 12
  13. 13. Account for, and control, accounts receivable Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 13
  14. 14. Receivables• Third most liquid asset• Monetary claims against others• Acquired mainly by ? Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 14
  15. 15. Accounts Receivable• Amounts collectible from customers• Balance in general ledger• Subsidiary ledger Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 15
  16. 16. General Ledger Accounts Receivable Subsidiary Ledger Customer A $2,000Accounts receivable$5,000 Total Customer B $5,000 $1,800 Customer C $1,200 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 16
  17. 17. Notes Receivable• More formal than accounts receivable• Written promise to pay a sum at the maturity date• Also called promissory notes Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 17
  18. 18. Internal Control: Collections onAccount• Separate cash-handling and cash accounting duties• Another option ? Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 18
  19. 19. Risks of Selling on CreditIssues Plan of actionWhat are the benefits and costs ofextending credit to customers?Extend credit to only creditworthycustomersSeparate cash-handling andaccounting duties to keepemployees from stealing cash fromcustomersPursue collection from customersto maximize cash flow Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 19
  20. 20. Uncollectible ReceivablesBenefit of selling on credit Cost of selling on credit Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 20
  21. 21. Use the allowance method for uncollectiblereceivables Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 21
  22. 22. The Allowance Method• Records collection losses based on company’s collection experience• Estimates Uncollectible-Accounts Expense• Also sets up Allowance for Uncollectible Accounts Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 22
  23. 23. Net Realizable Value Balance Sheet Current assets: Accounts receivable $100,000 Less: Allowance for uncollectible accounts (5,000) Accounts receivable, net $95,000 Balance Sheet Current assets: Accounts receivable, less allowance of $5,000 $95,000 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 23
  24. 24. Methods to Estimate Uncollectibles Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 24
  25. 25. Percent-of-Sales Method • Emphasizes matching concept UncollectibleEstimated % Revenue Accountsuncollectible Expense JOURNALDate Accounts and explanation Debit Credit Uncollectible accounts expense Allowance for uncollectible accounts Recorded uncollectible accounts expense Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 25
  26. 26. Aging-of-Receivables• Focuses on proper valuation of accounts receivable on the balance sheet• Individual customer balances analyzed based on time outstanding• Allowance for Uncollectible Accounts adjusted to equal amount from aging schedule Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 26
  27. 27. Age of Account 1-30 31-60 61-90 Over 90 TotalCustomer days days days days BalanceCustomer A $100 $500 $600Customer B 400 400All others 5,000 1,500 600 400 7,500Totals $5,100 $1,900 $1,100 $400 $8,500Est. percent uncollectible 1% 3% 8% 20%Allowance balance should be: $51 $57 $88 $80 $276 Allowance for Uncollectible AccountsBalance before adjustment $31 $245 Adjustment needed $276 Ending balance equals aging schedule Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 27
  28. 28. Aging-of-Receivables JOURNALDate Accounts and explanation Debit Credit Uncollectible accounts expense 245 Allowance for uncollectible accounts 245 Recorded uncollectible accounts expense Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 28
  29. 29. Writing Off Uncollectible Accounts JOURNAL Date Accounts and explanation Debit Credit Allowance for uncollectible accounts 900 Accounts Receivable 900 Write off customer account Allowance for Uncollectible Accounts Receivable AccountsBal. $50,000 $900 $900 $3,000 Bal. $49,100 $2,100 No impact on Income Statement Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 29
  30. 30. Impact of Write-Off Balance Sheet – Before Write Off Current assets: Accounts receivable $50,000 Less: Allowance for uncollectible accounts (3,000) Accounts receivable, net $47,000 Balance Sheet – After Write Off Current assets: Accounts receivable $49,100 Less: Allowance for uncollectible accounts (2,100) Accounts receivable, net $47,000 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 30
  31. 31. Comparing Allowance MethodsApproaches Percent-of-Sales Aging-of-Receivables Adjusts Allowance for Adjusts Allowance for Uncollectible Accounts Uncollectible Accounts BY BY TO TO The amount of The amount of The amount ofUNCOLLECTIBLE ACCOUNTS UNCOLLECTIBLE ACCOUNTS UNCOLLECTIBLE ACCOUNTS EXPENSE RECEIVABLE RECEIVABLE Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 31
  32. 32. Exercise 5-22A JOURNALDate Accounts and explanation Debit Credit Accounts receivable Sales revenue Cash Accounts receivable Allowance for uncollectible accounts Accounts receivable Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 32
  33. 33. Exercise 5-22A JOURNAL Date Accounts and explanation Debit Credit Uncollectible-account expense Allowance for uncollectible accounts Allowance for Accounts receivable Uncollectible Accounts Bal. $30,000 $137,000 Payments Write-offs $2,300 $2,000 Bal.Sales $161,000 $2,300 Write-offs $6,440 Adj. $51,700 $6,140 Net AR = $45,560 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 33
  34. 34. Exercise 5-22A Balance Sheet Current assets: Accounts receivable Less: Allowance for uncollectible accounts Accounts receivable, net Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 34
  35. 35. Direct Write-Off Method• Waits until a specific account is uncollectible to record the expense• Inferior to Allowance method JOURNALDate Accounts and explanation Debit Credit Uncollectible-account Expense Accounts Receivable Write off customer account Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 35
  36. 36. Computing Cash Collections fromCustomers Accounts Receivable Beginning balance $1000 Write-offs $30 of uncollectibles Sales on credit $5000 Collections from customers ? $4704 Ending balance $1500 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 36
  37. 37. Account for notes receivable Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 37
  38. 38. Notes Receivable• Can be current or long-term assets• Terms: Creditor Debtor Interest Maturity date Maturity value Principal Term Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 38
  39. 39. Principal Date Interest Starts PROMISSORY NOTE $3,000 June 1, 2010 Amount Date For value received, I promise to pay to the order of Second National Bank Payee (Creditor) Omaha, NebraskaPrincipal Three thousand and no/100s-------------------------------- Dollars Maturity Date On March 1, 2011 plus interest at the annual rate of 6 percent Patricia Maker Alexander (Debtor) Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 39
  40. 40. Accounting for Notes Receivable JOURNALDate Accounts and explanation Debit Credit20106-1 Notes receivable 3,000 Cash 3,00012-31 Interest receivable 105 Interest revenue 10520113-1 Cash 3,135 Notes receivable 3,000 Interest receivable 105 Interest revenue 30 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 40
  41. 41. Interest• Interest rates are usually expressed as an annual percent• For time periods less than a year, a fraction is used• Often interest is computed based on days Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 41
  42. 42. Speeding Up Cash Flow Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 42
  43. 43. Use two new ratios to evaluate a business Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 43
  44. 44. Acid-Test (or Quick) Ratio Cash + Short-term investments + Net current receivables Total current liabilities Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 44
  45. 45. Short Exercise 5-13Acid-test ratio ? ? = 1.05 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 45
  46. 46. Days’ Sales in Receivables (CollectionPeriod) Net sales One day’s sales 365 Average receivables Days’ sales in receivables One day’s sales (Beginning net receivables + Ending net receivables)/2 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 46
  47. 47. Short Exercise 5-13Days’ sales in receivable One day’s sales Days’ sales in receivables = ? days (Beginning net receivables + Ending net receivables)/2 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 47
  48. 48. Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 48

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