Intermediate Accounting - Chap007 pot

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Cash and Receivables 7 Insert Book Cover Picture 7-2 Cash Amounts on deposit with financial institutions Amounts on deposit with financial institutions Coins and currency Coins and currency Petty cash Petty cash Cashier’s checks Cashier’s checks Certified checks Certified checks Money orders Money orders 7-3 Cash Equivalents Items very near cash but not in negotiable form Items very near cash but not in negotiable form Money market funds Money market funds Treasury bills Treasury bills Commercial paper Commercial paper 7-4 Learning Objectives Define what is meant by internal control and describe some key elements of an internal control system for cash receipts and disbursements. 7-5 Internal Control of Cash Encourages adherence to company policies and procedures Encourages adherence to company policies and procedures Promotes operational efficiency Promotes operational efficiency Minimizes errors and theft Minimizes errors and theft Enhances the reliability and accuracy of accounting data Enhances the reliability and accuracy of accounting data 7-6 Control of Cash Receipts Separate responsibility for  handling cash,  recording cash transactions, and  reconciling cash balances. Agreed cash amounts deposited with cash amounts received. Close supervision of cash-handling and cash-recording activities. Separate responsibility for  handling cash,  recording cash transactions, and  reconciling cash balances. Agreed cash amounts deposited with cash amounts received. Close supervision of cash-handling and cash-recording activities. 7-7 Control of Cash Disbursements Separate responsibilities for  cash disbursement documents,  check writing,  check signing,  check mailing, and  record keeping. All disbursements, except petty cash, made by check. Separate responsibilities for  cash disbursement documents,  check writing,  check signing,  check mailing, and  record keeping. All disbursements, except petty cash, made by check. 7-8 Learning Objectives Explain the possible restrictions on cash and their implications for classification in the balance sheet. 7-9 Restricted Cash and Compensating Balances Restricted Cash Management’s intent to use a certain amount of cash for a specific purpose – future plant expansion, future payment of debt. Compensating Balance Minimum balance that must be maintained in a company’s account as support for funds borrowed from the bank. Restricted Cash Management’s intent to use a certain amount of cash for a specific purpose – future plant expansion, future payment of debt. Compensating Balance Minimum balance that must be maintained in a company’s account as support for funds borrowed from the bank. 7-10 Learning Objectives Distinguish between the gross and net methods of accounting for cash discounts [...]... method (a) the gross method (b) the net method (b) the net method  7-2 1 Cash Discounts 7-2 2 Learning Objectives Describe the accounting treatment for merchandise returns  7-2 3 Sales Returns and Allowances Sales Returns Sales Allowances Merchandise returned by a customer to a supplier A reduction in the cost of defective merchandise  7-2 4 Sales Returns and Allowances On June 1, a customer of LarCo returns... return of Record the journal entry for the return of merchandise merchandise  7-2 5 Sales Returns and Allowances Sales Returns and Allowances is a contra account that reduces Sales Revenue in the current accounting period  7-2 6 Learning Objectives Describe the accounting treatment of anticipated uncollectible accounts receivable  7-2 7 Uncollectible Accounts Receivable Bad debts result from credit customers... 7-1 1 Accounts Receivable Amounts due from Amounts due from customers for credit sales customers for credit sales Credit sales require: Credit sales require:   Maintaining a separate Maintaining a separate account receivable for each account receivable for each customer customer Accounting for bad debts Accounting for bad debts that result from credit sales that result from credit sales  7-1 2... 7-2 8 Uncollectible Accounts Receivable In conformity with the matching In conformity with the matching principle, bad debt expense should be principle, bad debt expense should be recorded in the same accounting recorded in the same accounting period in which the sales related to the period in which the sales related to the uncollectible account were recorded uncollectible account were recorded  7-2 9... bad debt expense by an adjusting entry at the end of the accounting period at the end of the accounting period GENERAL JOURNAL Date Description Dec 31 Bad Debt Expense Allowance for Uncollectible Accounts Page 78 Post Ref Debit Credit #### #### 7-3 0 Uncollectible Accounts Receivable Normally classified as a selling expense and closed at year-end Contra asset account to Accounts Receivable GENERAL JOURNAL... #### 7-3 1 Allowance for Uncollectible Accounts Accounts Receivable Accounts Receivable Less: Allowance for Uncollectible Accounts Less: Allowance for Uncollectible Accounts Net Realizable Value Net Realizable Value Net realizable value is the amount of the accounts receivable that the business expects to collect  7-3 2 Learning Objectives Describe the two approaches to estimating bad debts  7-3 3 Estimating... discount the discount period period  7-1 5 Cash Discounts Net Method Sales are recorded at the Sales discounts forfeited Sales are recorded at the Sales discounts forfeited invoice amount less the invoice amount less the are recorded if payment are recorded if payment discount is received after the discount is received after the discount period discount period  7-1 6 Cash Discounts On May 10, Eddy, Inc... the journal entry to record the sale if Prepare the journal entry to record the sale if Eddy uses: Eddy uses: (a) the gross method (a) the gross method (b) the net method (b) the net method  7-1 7 Cash Discounts 7-1 8 Cash Discounts Assume that on May 19, Eddy, Inc received Assume that on May 19, Eddy, Inc received a check in full payment of the sale made a check in full payment of the sale made on May... to record the cash Prepare the journal entry to record the cash receipt if Eddy uses: receipt if Eddy uses: (a) the gross method (a) the gross method (b) the net method (b) the net method  7-1 9 Cash Discounts 7-2 0 Cash Discounts Instead of the payment on May 19, now assume Instead of the payment on May 19, now assume that Eddy, Inc received a check on May 31, in that Eddy, Inc received a check on May... payment payment Increase likelihood of Increase likelihood of collections collections  7-1 3 Cash Discounts 2/10,n/30 Discount Discount Percent Percent Number of Number of Days Days Discount is Discount is Available Available Otherwise, Otherwise, Net (or All) Net (or All) is Due is Due Credit Credit Period Period 7-1 4 Cash Discounts Gross Method Sales are Sales are recorded at the recorded at the invoice . theft Enhances the reliability and accuracy of accounting data Enhances the reliability and accuracy of accounting data 7-6 Control of Cash Receipts Separate responsibility. with cash amounts received. Close supervision of cash-handling and cash-recording activities. 7-7 Control of Cash Disbursements Separate responsibilities