This document discusses accounting for cash and receivables. It defines cash and explains how to report different types of cash like restricted cash and cash equivalents. It also discusses accounting for receivables including recognition, measurement and impairment of accounts receivable. Methods for estimating uncollectible receivables like the allowance method are explained. The document provides examples to illustrate accounting for cash discounts and calculating bad debt expense using the allowance procedure.

1. Prepared by:
Dragan Stojanovic, CA
Rotman School of Management, University of Toronto
Chapter 7
Cash and Receivables

2. 2
Cash and Receivables
Cash
•What is cash?
•Reporting cash
•Summary of cash-
related items
Presentation,
Disclosure, and
Analysis of
Receivables
•Presentation and
disclosure
•Analysis
Receivables
•Recognition and
measurement of
accounts receivable
•Impairment of accounts
receivable
•Recognition and
measurement of short-
term notes and loans
receivable
•Recognition and
measurement of long-
term notes and loans
receivable
•Derecognition of
receivables
IFRS / Private
Entity GAAP
Comparison
•Comparison of
IFRS and private
entity GAAP
•Looking ahead

3. 3
Financial Asset
“Any asset that is:
(i) cash;
(ii) a contractual right to receive cash or
another financial asset from another party;
(iii) a contractual right to exchange financial
instruments with another party under
conditions that are potentially favourable to
the entity; or
(iv) an equity instrument of another entity”
CICA Handbook, Section 3856

4. 4
Cash and Receivables
Cash
•What is cash?
•Reporting cash
•Summary of cash-
related items
Presentation,
Disclosure, and
Analysis of
Receivables
•Presentation and
disclosure
•Analysis
Receivables
•Recognition and
measurement of
accounts receivable
•Impairment of accounts
receivable
•Recognition and
measurement of short-
term notes and loans
receivable
•Recognition and
measurement of long-
term notes and loans
receivable
•Derecognition of
receivables
IFRS / Private
Entity GAAP
Comparison
•Comparison of
IFRS and private
entity GAAP
•Looking ahead

5. 5
What is Cash?
• Cash is reported as a current asset if it is readily
available to pay current obligations and is free of
restrictions
• Cash consists of coins, currency, available funds
on deposit at the bank, and petty cash
• Also includes money orders, certified cheques,
cashier’s cheques, personal cheques, bank drafts,
and usually savings accounts
• Postdated cheques, travel advances, and stamps
on hand are not classified as cash

6. 6
Reporting of Cash
• Reporting cash needs special attention of
the following:
1. Restricted cash
2. Cash in foreign currencies
3. Bank overdrafts
4. Cash equivalents

7. 7
Restricted Cash
• Compensating balances: minimum cash
balances maintained by a corporation in support
of existing borrowings
• These funds are not available for use by the
corporation, but the bank can use the restricted
cash
• Petty cash, special payroll, and dividend
accounts are examples of cash set aside for a
special purpose (usually not material)

8. 8
Restricted Cash
• If the restricted cash balance is material, must
be segregated from Cash as follows:
– Classified as current assets if they relate to
short-term loans
– Classified as non-current assets if set aside
for investment or financing purposes (e.g.
plant expansion)
• Note disclosure of restricted cash is required

9. 9
Foreign Currencies
• Amount held in foreign currencies is reported
in Canadian dollars at the balance sheet date
• The exchange rate on the balance sheet date
is used to translate foreign currencies into
Canadian dollars
• If restrictions exist on the foreign funds, those
funds are reported as restricted

10. 10
Bank Overdrafts
• Overdrafts represent cheques written in
excess of the cash account balance
• Overdrafts are reported as current liabilities
(often reported as accounts payable)
• In general, bank overdrafts should not be
offset against the Cash account
• However, bank overdrafts may be offset
against available cash in another account if
both accounts are at the same bank

11. 11
Cash Equivalents
• Defined as “short-term, highly liquid investments that
are readily convertible to known amounts of
cash…subject to an insignificant risk of change in
value.”
• Original maturity is generally three months or less
• Excludes equity securities
• Examples: treasury bills, money-market funds,
commercial paper
• Cash equivalents are reported at fair value
• Under IFRS some equity instruments can be classified
as cash equivalents. For example, preferred shares
acquired within a short time of their maturity and with a
specified redemption date.

12. 12
Cash and Receivables
Cash
•What is cash?
•Reporting cash
•Summary of cash-
related items
Presentation,
Disclosure, and
Analysis of
Receivables
•Presentation and
disclosure
•Analysis
Receivables
•Recognition and
measurement of
accounts receivable
•Impairment of accounts
receivable
•Recognition and
measurement of short-
term notes and loans
receivable
•Recognition and
measurement of long-
term notes and loans
receivable
•Derecognition of
receivables
IFRS / Private
Entity GAAP
Comparison
•Comparison of
IFRS and private
entity GAAP
•Looking ahead

13. 13
Receivables: Introduction
• Loans and receivables are claims against
customers and other parties for money, goods,
or services
• Receivables are classified as either current
(short-term) or noncurrent (long-term)
• Classified as current receivables if there is the
expectation to collect within one year or
operating cycle (whichever is longer)
• Receivables can be classified as either trade
receivables or nontrade receivables

14. 14
Accounts Receivable: Issues
• Trade receivables include:
• Accounts receivable (verbal promise to pay,
normally within 30 to 60 days)
• Notes receivable (written promises with
specified terms, e.g. interest rate and due
date)
• Nontrade receivables include the following:
1. Advances to employees or other officers
2. Receivables from the government (e.g. GST
recoverable, income tax receivable)
3. Dividends and interest receivable
4. Amounts owing by insurance companies

15. 15
Accounts Receivable: Trade
Discounts vs. Cash Discounts
• Trade discounts are discounts given to customers
often for different quantities purchased (often
quoted as a percentage)
• Trade discounts are generally not recorded; the
price charged (net of the discount) is recorded by
the seller as a receivable and revenue
• Cash discounts (or sales discounts) encourage
customers to pay faster; they are recorded
• Example of cash discounts: 2/10, n/30; the
customer will receive a 2% discount if payment
made within 10 days and the gross amount of the
invoice is due in 30 days

16. 16
Accounts Receivable: Recording
Cash Discounts
• Two methods: gross method and net method
• Gross method records discounts when customers pay
within discount period
– “Sales Discounts” are deducted from sales on the
income statement
– Most common method
• Net method records accounts receivable net of the
discount; discounts forfeited by customers are
recorded when not taken
– Preferred method but rarely used
– “Sales Discounts Forfeited” is recorded as “Other
revenue” if customer does not take the discount

17. 17
Example of Gross Method
• $10,000 sales on credit (terms 2/10, n/30)
DR Accounts Receivable 10,000
CR Sales Revenue 10,000
• Customer pays account within discount period
DR Cash 9,800
DR Sales Discounts 200
CR Accounts Receivable 10,000

18. 18
Example of Net Method
• $10,000 sales on credit (terms 2/10, n/30)
DR Accounts Receivable 9,800
CR Sales Revenue 9,800
• Customer pays account after discount period
DR Cash 10,000
CR Sales Discounts Forfeited 200
CR Accounts Receivable 9,800

19. 19
Impairment of Accounts
Receivable
• Short-term receivables are reported at their net realizable
value (NRV)
• The NRV is the net amount of cash expected to be collected,
which is not necessarily the amount legally receivable
• Calculated as:
Gross accounts receivable less
estimated uncollectible accounts and any returns,
allowances, or cash discounts
• Loans and receivables impaired if these is “significant
adverse change” in expected configuration of cash flows (i.e.
timing or amount)

20. 20
Estimating Uncollectible Receivables
The Allowance Method
• Records estimated impairment to properly
value accounts receivables and record the
bad debt losses as expense in the same
accounting period as the sale (matching
concept)
• Receivables are reported at their estimated
realizable value – i.e., net of an Allowance for
Doubtful Accounts

21. 21
Estimating Uncollectible Accounts
• The estimate of uncollectible accounts may be
based on:
• Allowance Procedure Only: management
frequently estimates uncollectible amounts
and adjusts the Allowance for Doubtful
Accounts
• Mix of Procedures: initially may use
percentage of sales (or net sales), but must
still adjust at year-end to ensure that
Allowance for Doubtful accounts is
appropriate
• Regardless of procedure used, net accounts
receivable at year-end must be reported at net
realizable value (key focus is on measurement of
accounts receivable at net realizable value)

22. 22
• Uses past collection experience to estimate
uncollectible accounts, without identifying specific
accounts
• Focus is to report accounts receivable at its net
realizable value
– Does not focus on matching bad debt expense
to sales
• Any existing balance in Allowance for Doubtful
Accounts is used to calculate the current year’s
bad debt expense
• Can use: Percentage-of-receivables or aged
receivable analysis
Allowance Procedure Only

23. 23
Wilson & Co. – Aging Schedule
$ 55,000$ 14,000$ 18,000$460,000$547,000
25%20%15%4%Estimated
Uncollectible
$14,00060,00074,000Manitoba
$55,00055,000Freeport
320,000320,000Brockville
$ 18,000$ 80,000$ 98,000Western
> 120
Days
91 – 120
Days
61 – 90
Days
< 60
Days
BalanceCustomer
Allowance Procedure Only

24. 24
Allowance Procedure Only
Calculate the impairment and bad debts expense:
460,000 x .04 $18,400
18,000 x .15 2,700
14,000 x .20 2,800
55,000 x .25 13,750
Required balance in Allowance $37,650 Cr.
less: current balance in Allowance 800 Cr.
Write-down amount for period $36,850*
To record the write-down for the period:
Bad Debts Expense *36,850
Allowance for Doubtful Accounts 36,850
2
1

25. 25
Mix of Procedures
• Initial use of “percentage-of-sales” approach is
based on the relationship between sales and
bad debts
• Matches the estimated cost of bad debts to
sales generated in the same accounting period
• Any existing balance in the balance sheet
account (Allowance for Doubtful Accounts) is
initially ignored when calculating the current
period’s bad debts expense
• Receivables are also reviewed at year-end to
ensure that balance is appropriate, and
adjustment to Allowance for Doubtful Accounts
is made

26. 26
Mix of Procedures: Example
Example:
• Dockrill Corp. reports the following balances
for its first year of operations (2011):
– Net credit sales: $400,000
• The company estimates bad debts at 2% of
net credit sales
• Determine estimated bad debts expense for
2011

27. 27
Mix of Procedures: Example
Estimated Bad Debts Expense:
$400,000 x 2% = $8,000
1
2 To record Bad Debts Expense:
Bad Debts Expense $8,000
Allowance for Doubtful Accounts $8,000
3
At year end, management determines that $9,900
will not be collectible, and that balance of Allowance
account year-end adjustments is $7,500:
Bad Debt Expense $2,400
Allowance for Doubtful Accounts $2,400
($9,900 - $7,500 = $2,400)

28. 28
Balance Sheet Presentation
• Short-term accounts receivable are shown at
their net realizable value as follows:
Accounts Receivable $ xxx
Less: Allow. for Doubtful Accounts xxx
Net Realizable Value $ xxx

29. 29
Allowance Method: Writing Off
Accounts Receivable
• When a specific customer’s account is determined to
be uncollectible, the following entry is made:
Dr. Allowance for Doubtful Accounts x
Cr. Accounts Receivable –specific customer x
(for the amount to be written off)
• If payment is received after write-off of account,
the account is reinstated and payment is recorded:
Dr. Accounts Receivable
Cr. Allowance for Doubtful
Accounts
Dr. Cash
Cr. Accounts Receivable
(for the amount collected)

30. 30
Direct Write-off Method
• If uncollectible amounts are not material, the
allowance method is not required
• Instead, direct write-off method can be used
• Record bad debt expense only when specific
account is determined to be uncollectible:
Dr. Bad Debt Expense x
Cr. Accounts Receivable x
• No allowance account is used

31. 31
Recognition of Short-Term
Notes Receivable
• Notes receivable differ from accounts receivable as
they are supported by a promissory note (with
specific terms)
• All notes contain some interest
• Notes are either:
– Interest bearing
• Have a stated rate of interest or
– Zero-interest bearing (or non-interest bearing)
• Interest rate not always stated
• Interest amount is the difference between the
amount borrowed and the face amount

32. 32
Interest Bearing Short-Term
Notes Receivable
• Example: On March 14, 2011, Accounts Receivable of
$1,000 is exchanged for a 6% six-month note
March 14, 2011(when note is issued):
Notes Receivable 1,000
Accounts Receivable 1,000
September 14, 2011 (on collection of note):
Cash 1,030
Notes Receivable 1,000
Interest Income 30
Interest = $1,000 x 6% x 6/12

33. 33
Non-Interest Bearing
Short-Term Notes Receivable
• On February 23, 2011, a $5,000 nine-month non-interest
bearing note is issued; 8% is the implied interest rate
On issuance of note:
Notes Receivable 4,717
Cash 4,717*
*5,000 / (1 + 6%); 8% x 9/12 = 6%
On collection of note:
Cash 5,000
Notes Receivable 4,717
Interest Income 283
Interest = $4,717 x 8% x 9/12

34. 34
Long-term Loans Receivable
• Long-term loans receivable are recognized at
fair value – i.e. the present value of the future
cash flows
– When the stated interest rate is the same
as the market interest rate, the note or loan
is issued at its face value
– When there is a difference between
interest rates, the note or loan is issued at
a premium or a discount (i.e. the present
value is greater or less than the face value)

35. 35
Long-term Loans Receivable –
Interest Bearing Notes
• Example: Morgan Corp. issues a $10,000, 10%
three-year note; market interest rate is 12% and
annual interest payments are $1,000 (10% x $10,000)
• In calculating the note’s present value, use 12%
market rate to discount all future cash flows as
follows:
($10,000 x .71178) + ($1,000 x 2.40183) = $9,520
• The note is issued at a discount (as proceeds < face)
Journal Entry at issuance of note:
Dr. Notes Receivable 9,520
Cr. Cash 9,520

36. 36
Long-term Loans Receivable –
Interest Bearing Notes
• Example continued:
• At date of issue, the company has an unamortized
discount of $480 (to be amortized over the 3 years)
• The discount represents interest income to be
recognized over the 3 year life of the note
• $9,520 x 12% = $1,142 (first year interest income)
Journal Entry to record first $1,000 interest received:
Dr. Cash 1,000
Dr. Notes Receivable 142
Cr. Interest Income 1,142

37. 37
Long-term Loans Receivable –
Interest Bearing Notes
• Example continued:
• Book value of Notes Receivable is now:
$10,000 – ($480 - $142) = $9,662
• Interest Income for second year:
$9,662 × 12% = $1,159
Journal Entry to record second $1,000 interest received:
Dr. Cash 1,000
Dr. Disc. on Notes Receivable 159
Cr. Interest Income 1,159

38. 38
Long-term Loans Receivable –
Interest Bearing Notes
• Example continued:
• Under straight-line method (as opposed to the
effective interest rate method), initial discount of
$480 is recognized as interest income evenly
over 3 years at $480 / 3 years = $160 per year
• IFRS requires the use of effective interest method
of amortization
• Private entity GAAP does not specify the
amortization method

39. 39
• The holder of accounts or notes receivable may
transfer them to another company for cash
• The transfer may be:
– A secured borrowing
– A sale of receivables
• Holder retains ownership of receivables in a
secured borrowing transaction; the receivables
are used as collateral
• Holder transfers ownership of receivables in a
sale
• Specific standards are still in state of flux, so
focus is on key concepts
Derecognition of Receivable

40. 40
Borrowing vs. Sale Treatment:
pre-2011 Canadian GAAP
Conditions
1. Are transferred assets isolated
from transferor? and
2. Does transferee have right to
pledge or sell the assets? and
3. Transferor does not maintain
control of the assets through
repurchase agreement?
Yes Sale
Secured
Borrowing
No

41. 41
Accounting for Transfers
of Receivables
Secured Borrowing Sale
Transfers
Continuing
involvement by seller
No continuing
involvement by seller
Use components approach:
1. Reduce receivables,
2. Recognize component
assets and liabilities,
3. Record gain/loss
1. Reduce receivables,
2. Record gain/loss

42. 42
Secured Borrowing
(Highlights)
• Transferor records a finance charge
• Transferor collects accounts receivable
• Transferor records sales returns and sales
discounts
• Transferor absorbs bad debts expense
• Transferor records interest expense on
notes payable
• Transferor pays the note periodically from
collections

43. 43
Sale of Receivables (e.g., Factoring)
• Ownership of receivables transferred to the
purchaser (the factor); receivables recorded as an
asset in the purchaser’s books
• If sold without recourse, purchaser is fully
responsible for collections of the receivables
• Seller records any retained proceeds as “due from
factor” (a receivable) which covers possible sales
discounts and sales returns and allowances
• Seller records gain/loss on sale of receivables
(normally a loss, representing the finance charge)
• Seller records any recourse liability (if receivables
are sold with recourse i.e., seller’s guarantee)

44. 44
Cash and Receivables
Cash
•What is cash?
•Reporting cash
•Summary of cash-
related items
Presentation,
Disclosure, and
Analysis of
Receivables
•Presentation and
disclosure
•Analysis
Receivables
•Recognition and
measurement of
accounts receivable
•Impairment of accounts
receivable
•Recognition and
measurement of short-
term notes and loans
receivable
•Recognition and
measurement of long-
term notes and loans
receivable
•Derecognition of
receivables
IFRS / Private
Entity GAAP
Comparison
•Comparison of
IFRS and private
entity GAAP
•Looking ahead

45. 45
Presentation of Trade Accounts
and Notes Receivable
• Segregate types of receivables (i.e. ordinary trade
accounts, due from related parties and other
receivables segregated)
• If > 1 year, report amount and maturity date
• If < 1 year, report in current assets
• Use allowance account to record impairments
(IFRS also requires reconciliation of changes in the
allowance account during accounting period)
• Income statement disclosure of interest income,
impairment losses, and any reversals of such
losses

46. 46
Analysis
Accounts Receivable Turnover:
Net Sales/Revenue
Average Trade Receivables (Net)
Days Sales Uncollected:
365 Days
A/R Turnover

47. 47
Cash and Receivables
Cash
•What is cash?
•Reporting cash
•Summary of cash-
related items
Presentation,
Disclosure, and
Analysis of
Receivables
•Presentation and
disclosure
•Analysis
Receivables
•Recognition and
measurement of
accounts receivable
•Impairment of accounts
receivable
•Recognition and
measurement of short-
term notes and loans
receivable
•Recognition and
measurement of long-
term notes and loans
receivable
•Derecognition of
receivables
IFRS / Private
Entity GAAP
Comparison
•Comparison of
IFRS and private
entity GAAP
•Looking ahead

48. 48
Comparison
• Both private entity GAAP and IFRS are in
state of flux
• IFRS generally requires more extensive
disclosures

49. 49
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