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Coby Harmon: Prepared by University of California, Santa Barbara Westmont College
Coby Harmon: Prepared by University of California, Santa Barbara Westmont College
Coby Harmon: Prepared by University of California, Santa Barbara Westmont College
Coby Harmon
University of California, Santa Barbara
Westmont College
7-1
CHAPTER 7
Cash and Receivables
LEARNING
LEARNINGOBJECTIVES
OBJECTIVES
After studying this chapter, you should be able to:
1. Indicate how to report cash 4. Explain accounting issues
and related items. related to recognition and
2. Define receivables and explain valuation of notes receivable.
accounting issues related to 5. Explain additional accounting
their recognition. issues related to accounts and
3. Explain accounting issues notes receivables.
related to valuation of
accounts receivable.
7-2
PREVIEW OF CHAPTER 7
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
7-3
LEARNING OBJECTIVE 1
Cash Indicate how to report cash
and related items.
Cash
Most liquid asset.
Standard medium of exchange.
Basis for measuring and accounting for all other items.
Current asset.
Examples: Coin, currency, available funds on deposit at
the bank, money orders, certified checks, cashier’s checks,
personal checks, bank drafts and savings accounts.
7-4 LO 1
Cash
Reporting Cash
Cash Equivalents
7-5 LO 1
Reporting
Reporting Cash
Cash
Restricted Cash
Companies segregate restricted cash from “regular” cash.
7-6 LO 1
Reporting
Reporting Cash
Cash
Bank Overdrafts
Company writes a check for more than the amount in its
cash account.
Generally reported as a current liability.
Included as a component of cash if such overdrafts are
repayable on demand and are an integral part of a
company’s cash management (such as the common
practice of establishing off setting arrangements against
other accounts at the same bank).
7-7 LO 1
ILLUSTRATION 7.2
Classification of Cash-Related Items
7-8 LO 1
LEARNING OBJECTIVE 2
Receivables
Receivables Define receivables and explain accounting
issues related to their recognition.
Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
7-9 LO 2
Receivables
Non-Trade Receivables
1. Advances to officers and employees.
2. Advances to subsidiaries.
ILLUSTRATION 7.3
Receivables Statement of Financial
Position Sheet Presentations
7-11 LO 2
Recognition
Recognition of
of Accounts
Accounts Receivables
Receivables
7-12 LO 2
Recognition
Recognition of
of Accounts
Accounts Receivables
Receivables
7-13 LO 2
Recognition
Recognition of
of Accounts
Accounts Receivables
Receivables
7-14 LO 2
Receivables
Variable Consideration
In some cases, the price of a good or service is dependent
on future events. These future events often include such
items as discounts, returns and allowances, rebates, and
performance bonuses.
7-15 LO 2
Variable
Variable Consideration
Consideration
Trade Discounts
Use to:
Avoid frequent changes in 10 %
catalogs. Discount for
new Retail
Alter prices for different
Store
quantities purchased.
Customers
Hide the true invoice price
from competitors.
7-16 LO 2
Variable Consideration
7-17 LO 2
Cash
Cash Discounts
Discounts (Sales
(Sales Discounts)
Discounts)
ILLUSTRATION 7.5
Entries under Gross and Net Methods
7-18 LO 2
Variable Consideration
7-19 LO 2
Sales
Sales Returns
Returns and
and Allowances
Allowances
7-20 LO 2
Sales
Sales Returns
Returns and
and Allowances
Allowances
7-21 LO 2
Sales Returns and Allowances
7-22 LO 2
Variable Consideration
7-23 LO 2
Accounts Receivable
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
7-24 LO 2
Accounts Receivable
Brown Furniture
Statement of Financial Position (partial)
Current Assets:
Cash $ 330
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaid expense 40
Total current assets 1,657
7-25 LO 2
Accounts Receivable
Alternate
Alternate
Brown Furniture Presentation
Presentation
Statement of Financial Position (partial)
Current Assets:
Cash $ 330
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaid expense 40
Total current assets 1,657
7-26 LO 2
Accounts
Accounts Receivable
Receivable
Journal entry for credit sale of $100?
Accounts Receivable 100
Sales Revenue 100
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
7-27 LO 2
Accounts
Accounts Receivable
Receivable
Journal entry for credit sale of $100?
Accounts Receivable 100
Sales Revenue 100
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100
7-28 LO 2
Accounts
Accounts Receivable
Receivable
Collected $333 on account?
Cash 333
Accounts Receivable 333
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100
7-29 LO 2
Accounts
Accounts Receivable
Receivable
Collected $333 on account?
Cash 333
Accounts Receivable 333
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.
7-30 LO 2
Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll.
7-31 LO 2
Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
7-32 LO 2
Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Accounts Receivable 10
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
7-33 LO 2
Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Accounts Receivable 10
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
10 W/O W/O 10
7-34 LO 2
Accounts Receivable
Brown Furniture
Statement of Financial Position (partial)
Current Assets:
Cash $ 330
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaid expense 40
Total current assets 1,409
7-35 LO 2
Valuation of LEARNING OBJECTIVE 3
Accounts Explain accounting issues
related to valuation of
Receivable accounts receivable.
2) Allowance method
7-36 LO 3
Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
7-37 LO 3
Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
7-38 LO 3
Valuation
Valuation of
of Accounts
Accounts Receivable
Receivable
7-39 LO 3
Allowance
Allowance Method
Method for
for Uncollectible
Uncollectible
Accounts
Accounts
Recording Estimated Uncollectibles
Illustration: Assume that Brown Furniture in 2019, its first
year of operations, has credit sales of £1,800,000. Of this
amount, £150,000 remains uncollected at December 31. The
credit manager estimates that £10,000 of these sales will be
uncollectible. The adjusting entry to record the estimated
uncollectibles (assuming a zero balance in the allowance
account) is:
7-40 LO 3
Recording
Recording Estimated
Estimated Uncollectibles
Uncollectibles
ILLUSTRATION 7.5
Presentation of Allowance for Doubtful Accounts
7-41 LO 3
Allowance Method for Uncollectible
Accounts
Recording the Write-Off of an Uncollectible
Account
When companies have exhausted all means of
collecting a past-due account and collection appears
impossible, the company should write off the account.
In the credit card industry, for example, it is standard
practice to write off accounts that are 210 days past
due.
7-42 LO 3
Write-Off
Write-Off of
of an
an Uncollectible
Uncollectible Account
Account
Assume that on July 1, Randall plc pays the £1,000 amount that
Brown had written off on March 1. These are the entries:
Accounts Receivable 1,000
Allowance for Doubtful Accounts 1,000
Cash 1,000
Accounts Receivable 1,000
7-43 LO 3
Allowance Method for Uncollectible
Accounts
Estimating the Allowance
Percentage-of-Receivables Approach
Reports estimate of receivables at cash realizable value.
7-44 LO 3
Estimating
Estimating the
the Allowance
Allowance ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule
7-45 LO 3
Estimating the Allowance
ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule
What entry
would Wilson
make assuming
that the
allowance
account had a
zero balance?
7-46 LO 3
Estimating the Allowance
ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of €800 before
adjustment?
7-47 LO 3
Estimating the Allowance
7-48 LO 3
Estimating the Allowance
7-51 LO 4
Notes Receivable
7-52 LO 4
Recognition of Notes Receivable
Short-Term Long-Term
Record at
Record at
Present Value
Face Value,
of cash expected
less allowance
to be collected
7-53 LO 4
Note
Note Issued
Issued at
at Face
Face Value
Value
0 1 2 3 4
n=3
ILLUSTRATION 7.7
Time Diagram for Note Issued at Face Value
7-54 LO 4
Note
Note Issued
Issued at
at Face
Face Value
Value
TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1
PV of Interest
7-55 LO 4
Note
Note Issued
Issued at
at Face
Face Value
Value
TABLE 6.2 PRESENT VALUE OF 1
PV of Principal
7-56 LO 4
Note
Note Issued
Issued at
at Face
Face Value
Value
7-57 LO 4
Zero-Interest-Bearing
Zero-Interest-Bearing Notes
Notes
i = 9%
$10,000 Principal
PV-0A $0 $0 $0 Interest
0 1 2 3 4
n=3
ILLUSTRATION 7.9
Time Diagram for Zero-
Interest-Bearing Note
7-58 LO 4
Zero-Interest-Bearing
Zero-Interest-Bearing Notes
Notes
TABLE 6.2 PRESENT VALUE OF 1
PV of Principal
7-59 LO 4
Zero-Interest-Bearing
Zero-Interest-Bearing Notes
Notes
ILLUSTRATION 7.10
Discount Amortization Schedule—
Effective-Interest Method
7-60 LO 4
Zero-Interest-Bearing
Zero-Interest-Bearing Notes
Notes ILLUSTRATION 7.10
Discount Amortization
Schedule—Effective-
Interest Method
i = 12%
€10,000 Principal
0 1 2 3 4
n=3
7-63 LO 4
Interest-Bearing
Interest-Bearing Notes
Notes
TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1
PV of Interest
7-64 LO 4
Interest-Bearing
Interest-Bearing Notes
Notes
TABLE 6.2 PRESENT VALUE OF 1
PV of Principal
7-65 LO 4
Interest-Bearing
Interest-Bearing Notes
Notes
ILLUSTRATION 7.12
Computation of Present
Illustration: Record the receipt of the note? Value—Effective Rate
Different from Stated Rate
7-66 LO 4
Interest-Bearing
Interest-Bearing Notes
Notes
ILLUSTRATION 7.13
Discount Amortization Schedule—
Effective-Interest Method
7-67 LO 4
Interest-Bearing
Interest-Bearing Notes
Notes ILLUSTRATION 7.13
Discount Amortization Schedule—
Effective-Interest Method
7-69 LO 4
Notes
Notes for
for Property,
Property, Goods,
Goods, or
or Services
Services
7-70 LO 4
Valuation of Notes Receivable
7-71 LO 4
LEARNING OBJECTIVE 5
Other Issues Explain additional accounting
issues related to accounts and
Related to notes receivables.
Receivables
Derecognition of Receivables
1. When the receivable no longer has any value; that is,
the contractual rights to the cash flows of the
receivable no longer exist.
2. When a company transfers (e.g., sells) a receivable to
another company, thereby transferring the risks and
rewards of ownership to this other company.
7-72 LO 5
Derecognition of Receivables
Transfer of Receivables
Various reasons for transfer of receivables to another party
Accelerate the receipt of cash.
Competition.
Sell receivables because money is tight.
Billing / collection are time-consuming and costly.
Transfer of receivables for cash happens in two ways:
1. Sales of receivables.
2. Secured borrowing.
7-73 LO 5
Sales
Sales of
of Receivables
Receivables ILLUSTRATION 7.14
Basic Procedures in Factoring
7-75 LO 5
Sale
Sale without
without Guarantee
Guarantee
ILLUSTRATION 7.6
Entries for Sale of Receivables without Guarantee
7-76 LO 5
Sales of Receivables
7-77 LO 5
Derecognition of Receivables
Secured Borrowing
Using receivables as collateral in a borrowing transaction.
7-78 LO 5
ILLUSTRATION 7.17
7-79 Entries for Transfer of Receivables—Secured Borrowing
Secured
Secured Borrowing
Borrowing
Illustration: On April 1, 2019, Prince Company assigns $500,000 of its
accounts receivable to the Hibernia Bank as collateral for a $300,000 loan
due July 1, 2019. The assignment agreement calls for Prince Company to
continue to collect the receivables. Hibernia Bank assesses a finance
charge of 2% of the accounts receivable, and interest on the loan is 10% (a
realistic rate of interest for a note of this type).
Instructions:
a) Prepare the April 1, 2019, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000 of the
accounts receivable during the period from April 1, 2019, through
June 30, 2019.
c) On July 1, 2019, Prince paid Hibernia all that was due from the loan it
secured on April 1, 2019.
7-80 LO 5
Secured
Secured Borrowing
Borrowing
Instructions:
a) Prepare the April 1, 2019, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000.
c) On July 1, 2019, Prince paid Hibernia all that was due from the loan it
secured on April 1, 2019.
a) Cash 290,000
Finance Charge ($500,000 x 2%) 10,000
Notes Payable 300,000
b) Cash 350,000
Accounts Receivable 350,000
7-82 LO 5
Presentation and Analysis
General rules in classifying receivables are:
1. Segregate and report carrying amounts of different categories of
receivables.
2. Indicate receivables classified as current and non-current in the
statement of financial position.
3. Appropriately offset the valuation accounts for receivables that are
impaired, including a discussion of individual and collectively
determined impairments.
4. Disclose the fair value of receivables in such a way that permits it to
be compared with its carrying amount.
5. Disclose information to assess the credit risk inherent in the
receivables.
6. Disclose any receivables pledged as collateral.
7. Disclose all significant concentrations of credit risk arising from
receivables.
7-83 LO 5
Presentation and Analysis
Analysis of Receivables
Illustration: Louis Vuitton (LVMH Group) (FRA) reported 2015
net sales of €35,664 million, its beginning and ending accounts
receivable balances were €2,274 million an €2,521 million,
respectively. The computation of its accounts receivable turnover
is as follows.
ILLUSTRATION 7.20
Computation of Accounts Receivable Turnover
7-84 LO 5
Presentation and Analysis
7-85 LO 5
APPENDIX 7A Cash Controls
LEARNING OBJECTIVE 6
Explain common techniques employed to control cash.
7-86 LO 6
Using Bank Accounts
► Collection float
► Lockbox accounts
7-87 LO 6
The Imprest Petty Cash System
7-88 LO 6
The Imprest Petty Cash System
Steps:
7-89 LO 6
The Imprest Petty Cash System
Steps:
Cash 50
Petty cash 50
7-90 LO 6
Physical Protection of Cash Balances
Company should
Minimize the cash on hand.
Only have on hand petty cash and current day’s receipts.
Keep funds in a vault, safe, or locked cash drawer.
Transmit each day’s receipts to the bank as soon as
practicable.
Periodically prove the balance shown in the general ledger.
7-91 LO 6
Reconciliation of Bank Balances
7-92 LO 6
Reconciliation of Bank Balances ILLUSTRATION 7A.1
Bank Reconciliation
Form and Content
7-93 LO 6
Reconciliation of Bank Balances
To illustrate, Nugget Mining Company’s books show a cash balance at the Melbourne Bank
on November 30, 2019, of $20,502. The bank statement covering the month of November
shows an ending balance of $22,190. An examination of Nugget’s accounting records and
November bank statement identified the following reconciling items.
1. A deposit of $3,680 that Nugget mailed November 30 does not appear on the bank
statement.
2. Checks written in November but not charged to the November bank statement are:
Check #7327 $ 150
#7348 4,820
#7349 31
3. Nugget has not yet recorded the $600 of interest collected by the bank November 20 on
Sequoia Co. bonds held by the bank for Nugget.
4. Bank service charges of $18 are not yet recorded on Nugget’s books.
5. The bank returned one of Nugget’s customer’s checks for $220 with the bank
statement, marked “NSF.” The bank deducted $220 from Nugget’s account.
6. Nugget discovered that it incorrectly recorded check #7322, written in November for
$131 in payment of an account payable, as $311.
7. A check for Nugent Oil Co. in the amount of $175 that the bank incorrectly charged to
Nugget accompanied the statement.
7-94 LO 6
Reconciliation of Bank Balances
ILLUSTRATION 7A.2
Sample Bank
Reconciliation
7-95 LO 6
Reconciliation of Bank Balances
Journalize the required adjusting entries at November 30.
Cash 600
Interest Revenue 600
(To record interest on Sequoia Co. bonds, collected by bank)
Cash 180
Accounts Payable 180
(To correct error in recording amount of check #7322)
LEARNING OBJECTIVE 7
Compare the accounting procedures for cash and receivables under IFRS and
U.S. GAAP.
7-97 LO 7
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to cash and receivables.
Similarities
• The accounting and reporting related to cash is essentially the same under
both U.S. GAAP and IFRS. In addition, the definition used for cash
equivalents is the same.
• Like IFRS, cash and receivables are generally reported in the current assets
section of the statement of financial position (balance sheet) under U.S.
GAAP.
7-98 LO 7
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to cash and receivables.
Similarities
• Like IFRS, for trade and other accounts receivable without a significant
financing component, an allowance for uncollectible accounts should be
recorded to result in receivables reported at cash (net) realizable value. The
estimation approach used is similar to that under IFRS.
• Similar to U.S. GAAP, IFRS requires that loans and receivables be
accounted for at amortized cost, adjusted for allowances for doubtful
accounts.
7-99 LO 7
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
• Under IFRS, companies may report cash and receivables as the last items
in current assets under IFRS. Under U.S. GAAP, these items are reported in
order of liquidity.
• While IFRS implies that receivables with different characteristics should be
reported separately, there is no standard that mandates this segregation.
U.S. GAAP has explicit guidance in the area.
7-100 LO 7
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
• Unlike U.S. GAAP, IFRS has a different approach to estimating uncollectible
accounts on receivables with a significant financing component (e.g., notes
receivable). For long-term receivables that have not experienced a
deterioration in credit quality after origination, uncollectible accounts are
estimated based on expected losses over the next 12 months. For long-
term receivables that experience a credit quality decline, uncollectible
accounts are estimated based on lifetime expected losses (which is the
model used under U.S. GAAP for all receivables).
• Under IFRS, bank overdrafts are generally reported as cash. Under U.S.
GAAP, such balances are reported as liabilities.
7-101 LO 7
GLOBAL ACCOUNTING INSIGHTS
Relevant Facts
Differences
• IFRS and U.S. GAAP differ in the criteria used to account for transfers of
receivables. IFRS is a combination of an approach focused on risks and
rewards and loss of control. U.S. GAAP uses loss of control as the primary
criterion (see the About the Numbers discussion below). In addition, IFRS
generally permits partial transfers; U.S. GAAP does not.
7-102 LO 7
GLOBAL ACCOUNTING INSIGHTS
On the Horizon
Both the IASB and the FASB have indicated that they believe that financial
statements would be more transparent and understandable if companies
recorded and reported all financial instruments at fair value. With the recently
issued guidance on impairments by both boards, IFRS and U.S. GAAP are
now more closely aligned with earlier recognition of impairments. Most believe
that both Boards’ approaches to estimating uncollectible accounts represent
improvements and address the weakness in previous bad debt accounting that
was highlighted by the financial crisis. Time will tell if one model or the other
provides more useful information to investors and creditors.
7-103 LO 7
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7-104