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Short-Term Investments and Receivables
Short-Term Investments and Receivables
Short-Term Investments and Receivables
Chapter 5
Learning Objective 1
Account for short-term investments.
Short-term Investments
Short-term investments (marketable securities) are investments that a company plans to hold for one year or less.
Short-term investments are the most liquid asset after cash.
Short-term Investments
Suppose that Celestica Inc. purchases McCain Foods Ltd. shares on Dec. 18, paying $100,000 cash. December 18
Short-term Investments
On Dec. 27, Celestica receives a cash dividend of $4,000 from McCain.
Dec. 27
Short-term Investments
Celestica fiscal year ends on Dec. 31, and the investment in McCain has a current market value of $102,000 on this date.
GAIN because the market value ($102,000) is Greater than Celesticas investment cost
Short-term Investments
Unrealized Gain because Celestica has not yet sold the investment
Dec 31
2,000
2,000
Short-term Investments
If the Celestica investment in McCain shares had decreased in value to $95,000
Unrealized Loss because Celestica has not yet sold the investment Dec 31 Unrealized Loss on Investments 5,000 Temporary Investments 5,000
Short-term Investments
Balance Sheet temporary assets are current assets
Income Statement temporary asset can either earn Interest Revenue or dividend revenue. All gains & losses are also reported on the income statement
Question #1
ABC Co. purchased a temporary investment in shares of XYZ Co. for $14,000. At year end, the investment had a market value of $12,000. The $2,000 decrease in value in the temporary investment should be: a. recorded as a realized loss on the income statement b. deducted from the value of the asset on the balance sheet c. only disclosed as part of the market value of marketable securities d. both A and B.
Learning Objective 2
Results from selling goods and services on credit and by lending money
Accounts receivable are a current asset on the balance sheet
Accounts Receivable
GENERAL LEDGER ACCOUNTS RECEIVABLE SUBSIDIARY RECORD
Learning Objective 3
Apply internal controls to receivables.
Learning Objective 4
Use the allowance method for uncollectible receivables.
The cost: The company will be unable to collect from some credit customers.
$ 2,000
Percentage-of-Sales
It computes uncollectible-account expense as a percentage of revenue.
Percentage-of-Sales
The credit department estimates that uncollectible-account expense is 0.4% of total revenues, which were $200 for 2011.
Dec. 31 (in millions) Uncollectible-Account Expense ($200 0.004) 0.8 Allowance for Uncollectible Accounts Recorded expense for the year
0.8
Percentage-of-Sales
Dec. 31, 2011 (in millions) after adjustment
Allowance for Uncollectible Accounts 0.6 0.8 1.4
Aging-of-Receivables
This method is a balance-sheet approach because it focuses on accounts receivable.
Individual receivables from specific customers are analyzed based on how long they have been outstanding. A percentage of Accounts receivable could also be used.
Aging-of-Receivables
Accounts before the year-end adjustment: Dec. 31, 2011 (in millions)
Accounts Receivable Bal. 50 Allowance for Uncollectible Accounts 0.6
Aging-of-Receivables
Aging the Accounts Receivable Days Overdue 1-30 days 31-60 days 61-90 days 91 + days
Allowance for Accounts Estimated % Uncollectible Receivable Uncollectible Accounts $ 16.5 2 $ 0.33 12.2 5 0.61 3.6 10 0.36 0.7 35 0.20 $ 33.0 $ 1.50
Aging-of-Receivables
Uncollectible-Account Expense 0.9 Allowance for Uncollectible Accounts ($ 1.5 - $ 0.6) Recorded expense for the year
0.9
Accounts after the year-end adjustment: Dec. 31, 2011 (in millions)
Accounts Receivable Bal. 50
Allowance for Uncollectible Accounts Accounts Receivable Customer # Accounts Receivable Customer # Wrote off uncollectible receivables
0.6
0.4 0.2
Question #2
ABC Co. has the following information on its unadjusted trial balance at Dec. 31, 2011: Accounts receivable 40,000 Allowance for uncollectible accounts 1,200 (debit) The company uses the aging of receivables method and determined that $2,000 of receivables would not be collected. What amount should be reported as the bad debt expense on the Dec. 31, 2011 income statement? a. $2,000 b. $800 c. $2,400 d. $3,200
Learning Objective 5
Account for notes receivable.
Notes Receivable
Notes receivable are more formal than accounts receivable
The principal amount of the note is the amount borrowed by the debtor
1,000
1,000
December 31, 2010 Interest Receivable Interest Revenue Accrued interest revenue
30
30
1,000 30 15
Cash 64.48 Interac fee (assumed rate) 1.00 Sales Revenue 65.48 To record a sale of groceries for 65.48
Question #3
If the adjusting entry to accrue interest on a note receivable is omitted, then: a. Assets, net income, and shareholders equity are overstated b. Assets, net income, and shareholders equity are understated c. Liabilities are understated, net income is overstated and shareholders equity is overstated d. Assets are overstated, net income and shareholders equity are understated
Learning Objective 6
Use ratios to evaluate a business
Current Ratio
This measures the entitys ability to pay its current liabilities with current assets.
Current ratio = Current assets Current liabilities Rule of thumb: A strong current ratio is 1.50
Acid-Test Ratio
This is a stringent test of liquidity which measures the entitys ability to pay its current liabilities immediately.
(Cash + Short-term investments + receivable Total current liabilities
This ratio value is extremely high and indicates great liquidity for this company.
These transactions are reported as operating activities on the cash flow statement.
Question #4
Net sales total $600,000. Beginning and ending accounts receivable are $52,000 and $38,000 respectively. Calculate days sales in receivables (rounded). a. b. c. d. 32 days 23 days 43 days 27 days
End of Chapter 5