Whbm07

293
-1

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
293
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
39
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Whbm07

  1. 1. Chapter 7 McGraw-Hill/Irwin FINANCIAL ASSETS © The McGraw-Hill Companies, Inc., 2002
  2. 2. How Much Cash Should a Business How Much Cash Should a Business Have? Have? McGraw-Hill/Irwin $ Every business needs enough cash to pay its bills! © The McGraw-Hill Companies, Inc., 2002
  3. 3. How Much Cash Should a Business How Much Cash Should a Business Have? Have? Financial Assets Cash Receivables Short-term Investments McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  4. 4. How Much Cash Should a Business How Much Cash Should a Business Have? Have? Collections from customers Cash (and cash equivalents) Accounts Cash payments receivable “Excess” cash is invested temporarily. Investments are sold as cash is needed. Marketable securities (short-term investments) McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  5. 5. The Valuation of Financial Assets The Valuation of Financial Assets Basis for Valuation in Type of Financial Asset the Balance Sheet Cash (and cash equivalents) Face amount Short-term investments Current market value (marketable securities) Receivables Net realizable value Estimated collectible amount Estimated collectible amount McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  6. 6. Cash Cash Coins and paper money Bank credit card sales Cash is defined as any deposit banks will accept. Checks Money orders Travelers’ checks McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  7. 7. Reporting Cash in the Balance Reporting Cash in the Balance Sheet Sheet Combined with cash on balance sheet Liquid shortterm investments Cash Equivalents Matures within 90 days of acquisition Stable market values McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  8. 8. Reporting Cash in the Balance Reporting Cash in the Balance Sheet Sheet Not available for paying current liabilities Not a current asset McGraw-Hill/Irwin “Restricted” Cash Listed as an investment © The McGraw-Hill Companies, Inc., 2002
  9. 9. Reporting Cash in the Balance Reporting Cash in the Balance Sheet Sheet Bank agrees in advance to lend money. Lines of Credit Liability is incurred when line of credit is used. McGraw-Hill/Irwin Unused line of credit is disclosed in notes. © The McGraw-Hill Companies, Inc., 2002
  10. 10. The Statement of Cash Flows The Statement of Cash Flows Statement of Cash Flows Summarizes cash transactions for an accounting period. Includes cash and cash equivalents. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  11. 11. Cash Management Cash Management Accurately account for cash. Accurately account for cash. Prevent theft and fraud. Prevent theft and fraud. Assure the availability of Assure the availability of adequate amounts of cash. adequate amounts of cash. Avoid unnecessarily large Avoid unnecessarily large amounts of idle cash. amounts of idle cash. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  12. 12. Using Excess Cash Balances Using Excess Cash Balances Efficiently Efficiently Cash available for long-term investment may be used to finance growth and expansion of the business, or to repay debt. McGraw-Hill/Irwin Cash not needed for business purposes should be distributed to the company’s stockholders. © The McGraw-Hill Companies, Inc., 2002
  13. 13. Internal Control Over Cash Internal Control Over Cash  Segregate authorization, custody and recording of  Segregate authorization, custody and recording of cash. cash.  Prepare a cash budget.  Prepare a cash budget.  Prepare a control listing of cash receipts.  Prepare a control listing of cash receipts.  Require daily deposits.  Require daily deposits.  Make all payments by check.  Make all payments by check.  Verify every expenditure before payment.  Verify every expenditure before payment.  Promptly reconcile bank statements.  Promptly reconcile bank statements. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  14. 14. Cash Over and Short Cash Over and Short On May 5, XBAR, Inc.’s cash drawer was counted and found to be $10 over. Cash Over and Short is debited for shortages Cash Over and Short is debited for shortages and credited for overages. and credited for overages. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  15. 15. Bank Statements Bank Statements Shows the beginning bank balance, deposits made, checks paid, other debits and credits in the month, and the ending bank balance. Bank Statement McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  16. 16. Reconciling the Bank Statement Reconciling the Bank Statement Explains the difference between cash reported on bank statement and cash balance in depositor’s accounting records. Provides information for reconciling journal entries. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  17. 17. Reconciling the Bank Statement Reconciling the Bank Statement Balance per Bank Balance per Depositor + Deposits in Transit + Deposits by Bank (credit memos) - Outstanding Checks - Service Charge - NSF Checks ± Bank Errors ± Book Errors = Adjusted Balance = Adjusted Balance McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  18. 18. Reconciling the Bank Statement Reconciling the Bank Statement All reconciling items on the book side require an adjusting entry to the cash account. Balance per Depositor + Deposits by Bank (credit memos) - Service Charge - NSF Checks ± Book Errors = Adjusted Balance McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  19. 19. Reconciling the Bank Statement Reconciling the Bank Statement Example Example Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank statement indicated a cash balance of $9,610, while the cash ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is shown on the next page. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  20. 20.  Outstanding checks totaled $2,417.  Outstanding checks totaled $2,417.  A $500 check mailed to the bank for deposit had  A $500 check mailed to the bank for deposit had not reached the bank at the statement date. not reached the bank at the statement date.  The bank returned a customer’s NSF check for  The bank returned a customer’s NSF check for $225 received as payment of an account $225 received as payment of an account receivable. receivable.  The bank statement showed $30 interest earned  The bank statement showed $30 interest earned on the bank balance for the month of July. on the bank balance for the month of July.  Check 781 for supplies cleared the bank for $268  Check 781 for supplies cleared the bank for $268 but was erroneously recorded in our books as but was erroneously recorded in our books as $240. $240.  A $486 deposit by Acme Company was  A $486 deposit by Acme Company was erroneously credited to our account by the bank. erroneously credited to our account by the bank. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  21. 21. Reconciling the Bank Statement Reconciling the Bank Statement Reconciling the Bank Statement Example Example Balance per bank statement, July 31 Additions: Deposit in transit Deductions: Bank error $ 486 Outstanding checks 2,417 Adjusted cash balance $ 9,610 Balance per depositor's records, July 31 Additions: Interest Deductions: Recording error $ 28 NSF check 225 Adjusted cash balance $ 7,430 McGraw-Hill/Irwin 500 2,903 $ 7,207 30 253 $ 7,207 © The McGraw-Hill Companies, Inc., 2002
  22. 22. Reconciling the Bank Statement Reconciling the Bank Statement Example Example GENERAL JOURNAL Date Account Titles and Explanation Jul 31 Cash P R Debit Credit 30 Interest Revenue 31 Supplies Inventory Accounts Receivable Cash McGraw-Hill/Irwin 30 28 225 253 © The McGraw-Hill Companies, Inc., 2002
  23. 23. Petty Cash Funds Petty Cash Funds Used for minor expenditures. Petty Cash Funds Has one custodian. McGraw-Hill/Irwin Replenished periodically. © The McGraw-Hill Companies, Inc., 2002
  24. 24. Short-Term Investments Short-Term Investments Bond Investments Readily Marketable Marketable Securities are . . . Capital Stock Investments Current Assets Almost As Liquid As Cash McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  25. 25. Mark-to-Market: A New Principle Mark-to-Market: A New Principle of Asset Valuation of Asset Valuation Short-term investments in marketable securities appear on the balance sheet at their current market value as of the balance sheet date. Treatment of Unrealized Classification Management's Intent Holding Gains and Losses Available for Held for short-term Reported in stockholders' sale securities resale (often 6 to 18 equity section of the months) balance sheet Trading Held for immediate Reported in "other" revenue securities resale (often within (expense) section of the hours or days) income statement Held to maturity Debt securities Reported in stockholders' securities intended to be held equity section of the © sheet until they mature balance The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin
  26. 26. Let’s turn our attention to accounts receivable. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  27. 27. Uncollectible Accounts Uncollectible Accounts If a company makes If a company makes credit sales to credit sales to customers, some customers, some accounts inevitably will accounts inevitably will turn out to be turn out to be uncollectible. uncollectible. McGraw-Hill/Irwin PAST DUE © The McGraw-Hill Companies, Inc., 2002
  28. 28. Reflecting Uncollectible Accounts Reflecting Uncollectible Accounts in the Financial Statements in the Financial Statements At the end of each period, record At the end of each period, record an estimate of the uncollectible an estimate of the uncollectible accounts. accounts. Selling expense Selling expense McGraw-Hill/Irwin Contra-asset account Contra-asset account © The McGraw-Hill Companies, Inc., 2002
  29. 29. The Allowance for Doubtful The Allowance for Doubtful Accounts Accounts Accounts receivable Less: Allowance for doubtful accounts Net realizable value of accounts receivable The net realizable value is the amount of accounts receivable that the business expects to collect. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  30. 30. Writing Off an Uncollectible Writing Off an Uncollectible Account Receivable Account Receivable When an account is determined to be uncollectible, When an account is determined to be uncollectible, it no longer qualifies as an asset and should be it no longer qualifies as an asset and should be written off. written off. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  31. 31. Writing Off an Uncollectible Writing Off an Uncollectible Account Receivable Account Receivable Assume that on January 5, K-Max determined that Jason Clark would not pay the $500 he owes. K-Max would make the following entry. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  32. 32. Writing Off an Uncollectible Writing Off an Uncollectible Account Receivable Account Receivable Assume that before this entry, the Accounts Receivable balance was $10,000 and the Allowance for Doubtful Accounts balance was $2,500. Let’s see what effect the write-off had on these accounts. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  33. 33. Writing Off an Uncollectible Writing Off an Uncollectible Account Receivable Account Receivable Before Write-Off Accounts receivable $ 10,000 Less: Allow. for doubtful accts. 2,500 Net realizable value $ 7,500 After Write-Off $ 9,500 2,000 $ 7,500 Notice that the $500 write-off did not change the net realizable value nor did it affect any income statement accounts. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  34. 34. Recovery of an Account Receivable Recovery of an Account Receivable Previously Written Off Previously Written Off Subsequent collections require that the original write-off Subsequent collections require that the original write-off entry be reversed before the cash collection is recorded. entry be reversed before the cash collection is recorded. GENERAL JOURNAL Date Account Titles and Explanation Accounts Receivable (X Customer) P R Debit $$$$ Allowance for Doubtful Accounts Cash Accounts Receivable (X Customer) McGraw-Hill/Irwin Credit $$$$ $$$$ $$$$ © The McGraw-Hill Companies, Inc., 2002
  35. 35. Monthly Estimates of Credit Losses Monthly Estimates of Credit Losses At the end of each At the end of each month, management month, management should estimate the should estimate the probable amount of probable amount of uncollectible accounts uncollectible accounts and adjust the and adjust the Allowance for Doubtful Allowance for Doubtful Accounts to this new Accounts to this new estimate. estimate. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  36. 36. Monthly Estimates of Credit Losses Monthly Estimates of Credit Losses Example Example At December 31, 2003, MusicLand’s accounting At December 31, 2003, MusicLand’s accounting records indicate the following: records indicate the following: Accounts Receivable = $50,000 Accounts Receivable = $50,000 Allowance for Doubtful Accounts = $200 (credit) Allowance for Doubtful Accounts = $200 (credit) Past experience suggests that 5% of receivables Past experience suggests that 5% of receivables are uncollectible. are uncollectible. What is MusicLand’s Uncollectible Accounts What is MusicLand’s Uncollectible Accounts Expense for 2003? Expense for 2003? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  37. 37. Monthly Estimates of Credit Losses Monthly Estimates of Credit Losses Example Example Desired balance in Allowance for Doubtful Accounts. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  38. 38. Let’s look at Let’s look at another way another way to estimate to estimate the the uncollectible uncollectible accounts! accounts! McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  39. 39. Estimating Credit Losses — The Estimating Credit Losses — The “Balance Sheet” Approach “Balance Sheet” Approach  Year-end Accounts Receivable is  Year-end Accounts Receivable is broken down into age broken down into age classifications. classifications.  Each age grouping has a  Each age grouping has a different likelihood of being different likelihood of being uncollectible. uncollectible.  Compute a separate allowance for  Compute a separate allowance for each age grouping. each age grouping. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  40. 40. Estimating Credit Losses — The Estimating Credit Losses — The “Balance Sheet” Approach “Balance Sheet” Approach At December 31, 2003, the receivables for EastCo, Inc. were categorized as follows:  McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  41. 41. Estimating Credit Losses — The Estimating Credit Losses — The “Balance Sheet” Approach “Balance Sheet” Approach At December 31, 2003, the receivables for EastCo, Inc. were categorized as follows:  McGraw-Hill/Irwin  © The McGraw-Hill Companies, Inc., 2002
  42. 42. Estimating Credit Losses — The Estimating Credit Losses — The “Balance Sheet” Approach “Balance Sheet” Approach At December 31, 2003, the receivables for EastCo, Inc. were categorized as follows:  McGraw-Hill/Irwin   © The McGraw-Hill Companies, Inc., 2002
  43. 43. Estimating Credit Losses — The Estimating Credit Losses — The “Balance Sheet” Approach “Balance Sheet” Approach EastCo’s unadjusted balance EastCo’s unadjusted balance in the allowance account is in the allowance account is $500. $500. Per the previous computation, Per the previous computation, the desired balance is $1,350. the desired balance is $1,350. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  44. 44. Guess What! Guess What! There is There is another another alternative to alternative to estimate the estimate the uncollectible uncollectible accounts! accounts! McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  45. 45. An Alternative Approach to An Alternative Approach to Estimating Credit Losses Estimating Credit Losses Uncollectible accounts’ percentage is based on actual uncollectible accounts from prior years’ credit sales. Focus is on determining the amount to record on the income statement as Uncollectible Accounts Expense. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  46. 46. An Alternative Approach to An Alternative Approach to Estimating Credit Losses Estimating Credit Losses Net Credit Sales × % Estimated Uncollectible Amount of Journal Entry McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  47. 47. An Alternative Approach to An Alternative Approach to Estimating Credit Losses Estimating Credit Losses In 2003, EastCo had credit sales of $60,000. Historically, 1% of EastCo’s accounts have been uncollectible. For 2003, the estimate of uncollectible accounts expense is $600. ($60,000 × .01 = $600) Now, prepare the adjusting entry for December 31, 2003. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  48. 48. An Alternative Approach to An Alternative Approach to Estimating Credit Losses Estimating Credit Losses McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  49. 49. Uncollectible Accounts Uncollectible Accounts Summary Summary % of Receivables % of Receivables Aging of Aging of Receivables Receivables % of Sales % of Sales Emphasis on Emphasis on Realizable Value Realizable Value Emphasis on Emphasis on Realizable Value Realizable Value Emphasis on Emphasis on Matching Matching Accts. Rec. Accts. Rec. All. for Doubtful Accts. Balance Sheet Balance Sheet Focus Focus McGraw-Hill/Irwin All. for Doubtful Accts. Balance Sheet Balance Sheet Focus Focus Sales Uncoll. Accts. Exp. Income Income Statement Statement Focus Focus © The McGraw-Hill Companies, Inc., 2002
  50. 50. Direct Write-Off Method Direct Write-Off Method This method makes no attempt to match revenue with the expense of uncollectible accounts. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  51. 51. Income Tax Regulations and Income Tax Regulations and Financial Reporting Financial Reporting Direct write-off method required to calculate taxable income. GAAP GAAP GAAP GAAP Taxable Income Allowance methods better match expenses with revenues. Financial Statement Income McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  52. 52. Internal Controls for Receivable Internal Controls for Receivable Separate the following duties: Maintenance of the accounts receivable Maintenance of the accounts receivable subsidiary ledger. subsidiary ledger. Custody of cash receipts. Custody of cash receipts.  Authorization of accounts receivable write Authorization of accounts receivable writeoffs. offs. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  53. 53. Management of Accounts Management of Accounts Receivable Receivable Credit Terms Extending credit encourages customers to buy from us . . . . . . but it ties up resources in accounts receivable. McGraw-Hill/Irwin Minimize Accounts Receivable © The McGraw-Hill Companies, Inc., 2002
  54. 54. Ways to Minimize Amounts in Ways to Minimize Amounts in Accounts Receivable Accounts Receivable Selling Accounts Receivable McGraw-Hill/Irwin Credit Card Sales © The McGraw-Hill Companies, Inc., 2002
  55. 55. Evaluating the Quality of Accounts Evaluating the Quality of Accounts Receivable Receivable Accounts Receivable Turnover Ratio Accounts Receivable Turnover Ratio This ratio provides useful information for This ratio provides useful information for evaluating how efficient management has evaluating how efficient management has been in granting credit to produce revenue. been in granting credit to produce revenue. Net Sales Average Accounts Receivable McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  56. 56. Evaluating the Quality of Accounts Evaluating the Quality of Accounts Receivable Receivable Avg. Number of Days to Collect A/R Avg. Number of Days to Collect A/R This ratio helps judge the liquidity of a This ratio helps judge the liquidity of a company’s accounts receivable. company’s accounts receivable. Days in Year Accounts Receivable Turnover Ratio McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
  57. 57. End of Chapter 7 End of Chapter 7 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

×