INTERMEDIATE Intermediate ACCOUNTING Intermediate Accounting Accounting F I F T E E N T H 7-1 E D I T I O N Prepared by Prepared by Coby Harmon Prepared by Coby Harmon Coby Harmon University of California Santa Barbara University of California, Santa Barbara University of California, Santa Barbara Westmont College Westmont College kieso weygandt warfield team for success PREVIEW OF CHAPTER Intermediate Accounting 15th Edition Kieso Weygandt Warfield 7-2 Cash and Receivables LEARNING LEARNINGOBJECTIVES OBJECTIVES After studying this chapter, you should be able to: 7-3 Identify items considered cash Indicate how to report cash and related items Define receivables and identify the different types of receivables Explain accounting issues related to recognition of accounts receivable Explain accounting issues related to valuation of accounts receivable Explain accounting issues related to recognition and valuation of notes receivable Explain the fair value option Explain accounting issues related to disposition of accounts and notes receivable Describe how to report and analyze receivables Cash What is Cash? 7-4 Most liquid asset Standard medium of exchange Basis for measuring and accounting for all 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 LO Identify items considered cash Cash and Receivables LEARNING LEARNINGOBJECTIVES OBJECTIVES After studying this chapter, you should be able to: 7-5 Identify items considered cash Indicate how to report cash and related items Define receivables and identify the different types of receivables Explain accounting issues related to recognition of accounts receivable Explain accounting issues related to valuation of accounts receivable Explain accounting issues related to recognition and valuation of notes receivable Explain the fair value option Explain accounting issues related to disposition of accounts and notes receivable Describe how to report and analyze receivables Cash Reporting Cash Cash Equivalents Short-term, highly liquid investments that are both a) readily convertible to cash, and b) so near their maturity that they present insignificant risk of changes in value Examples: Treasury bills, Commercial paper, and Money market funds 7-6 LO Indicate how to report cash and related items Reporting Cash Restricted Cash Companies segregate restricted cash from “regular” cash Examples, restricted for: (1) plant expansion, (2) retirement of long-term debt, and compensating balances (3) Illustration 7-1 7-7 LO Reporting Cash Bank Overdrafts Company writes a check for more than the amount in its cash account 7-8 Generally reported as a current liability Offset against other cash accounts only when accounts are with the same bank LO Indicate how to report cash and related items Cash-Related Items Illustration 7-2 7-9 LO Cash and Receivables LEARNING LEARNINGOBJECTIVES OBJECTIVES After studying this chapter, you should be able to: Identify items considered cash Indicate how to report cash and related items Define receivables and identify the different types of receivables Explain accounting issues related to recognition of accounts receivable Explain accounting issues related to valuation of accounts receivable 7-10 Explain accounting issues related to recognition and valuation of notes receivable Explain the fair value option Explain accounting issues related to disposition of accounts and notes receivable Describe how to report and analyze receivables APPENDIX 7A CASH CONTROLS Illustration: Journalize the adjusting entry on the books of Nugget Mining Company Nov 30 Cash 542 Office Expense Accounts Receivable 7-99 18 220 Accounts Payable 180 Interest Revenue 600 LO 10 Explain common techniques employed to control cash APPENDIX 7A CASH CONTROLS Question The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is: a outstanding checks b deposit in transit c a bank error d bank service charges 7-100 LO 10 Explain common techniques employed to control cash APPENDIX 7B IMPAIRMENT OF RECEIVABLES Companies evaluate their receivables to determine their ultimate collectibility Allowance method is appropriate when: probable that an asset has been impaired and amount of the loss can be reasonably estimated Long-term receivables such as loans that are identified as impaired, companies perform an additional impairment evaluation 7-101 LO 11 Describe the accounting for a loan impairment APPENDIX 7B IMPAIRMENT OF RECEIVABLES Impairment Measurement and Reporting Impairment loss is calculated as the difference between 7-102 the investment in the loan (generally the principal plus accrued interest) and the expected future cash flows discounted at the loan’s historical effective-interest rate LO 11 Describe the accounting for a loan impairment APPENDIX 7B IMPAIRMENT OF RECEIVABLES Illustration: At December 31, 2013, Ogden Bank recorded an investment of $100,000 in a loan to Carl King The loan has an historical effective-interest rate of 10 percent, the principal is due in full at maturity in three years, and interest is due annually The loan officer performs a review of the loan’s expected future cash flow and utilizes the present value method for measuring the required impairment loss Illustration 7B-1 7-103 LO 11 Describe the accounting for a loan impairment APPENDIX 7B IMPAIRMENT OF RECEIVABLES Illustration: Computation of impairment loss Illustration 7B-2 Recording Impairment Loss Bad Debt Expense 12,434 Allowance for Doubtful Accounts 7-104 12,434 LO 11 Describe the accounting for a loan impairment LOST IN TRANSLATION WHAT’S YOUR PRINCIPLE Floyd Norris, noted financial writer for the New York Times, recently wrote in his blog that he attended a conference to discuss the financial crisis in subprime lending He highlighted, and provided “translations” of, some of the statements he heard at that conference: • “There is a problem of misaligned incentives.” Translation: Many parties in the lending process were complicit in not performing due diligence on loans because there were lots of fees to be had if the loans were made, good loans or bad • “It is pretty clear that there was a failure in some key assumptions that were supporting our analytics and our models.” Translation: The rating agencies that evaluated the risk level of these securities made many miscalculations Some structured finance products that were given superior ratings are no longer worth much • “The plumbing of the U.S economy has been deeply damaged It is a long window of 7-105vulnerability.” Translation: The U.S has caused a financial crisis as a result of poor lending practices, and many financial institutions are fighting to survive • “I’m glad that this time we did not cause it.” Translation: Other countries realized they had caused financial crises in the past but were not to blame for the current U.S financial situation • “What you see is what you get If you don’t see it, it will get you.” Translation: A large number of financial institutions have to take losses on assets that are not reported on their balance sheet Their continuing interest in some of the loans that they supposedly sold is now coming back to them and they will have to report losses Source: Floyd Norris blog, http://www.norris.blogs.nytimes.com/ (accessed June 2008) LO 11 RELEVANT FACTS - Similarities 7-106 The accounting and reporting related to cash is essentially the same under both IFRS and GAAP In addition, the definition used for cash equivalents is the same Like GAAP, cash and receivables are generally reported in the current assets section of the balance sheet under IFRS Similar to GAAP, IFRS requires that loans and receivables be accounted for at amortized cost, adjusted for allowances for doubtful accounts LO 12 Compare the accounting procedures for cash and receivables under GAAP and IFRS RELEVANT FACTS - Differences 7-107 Under IFRS, companies may report cash and receivables as the last items in current assets under IFRS Under 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 GAAP has explicit guidance in the area The fair value option is similar under GAAP and IFRS but not identical The international standard related to the fair value option is subject to certain qualifying criteria not in the U.S standard In addition, there is some difference in the financial instruments covered LO 12 Compare the accounting procedures for cash and receivables under GAAP and IFRS RELEVANT FACTS - Differences 7-108 Under IFRS, bank overdrafts are generally reported as cash Under GAAP, such balances are reported as liabilities IFRS and 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 GAAP uses loss of control as the primary criterion In addition, IFRS generally permits partial transfers; GAAP does not LO 12 Compare the accounting procedures for cash and receivables under GAAP and IFRS 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 That said, in IFRS 9, which was issued in 2009, the IASB created a split model, where some financial instruments are recorded at fair value but other financial assets, such as loans and receivables, can be accounted for at amortized cost if certain criteria are met Critics say that this can result in two companies with identical securities accounting for those securities in different ways A proposal by the FASB would require that nearly all financial instruments, including loans and receivables, be accounted for at fair value It has been suggested that IFRS will likely be changed or replaced as the FASB and IASB continue to deliberate the best treatment for financial instruments In fact, one member of the IASB said that companies should ignore IFRS and continue to report under the old standard, because in his opinion, it is extremely likely that it would be changed before the mandatory adoption date of this standard in 2013 7-109 LO 12 IFRS SELF-TEST QUESTION Under IFRS, receivables are to be reported on the balance sheet at: a amortized cost b amortized cost adjusted for estimated loss provisions c historical cost d replacement cost 7-110 LO 12 Compare the accounting procedures for cash and receivables under GAAP and IFRS IFRS SELF-TEST QUESTION Which of the following statements is false? a Receivables include equity securities purchased by the company b Receivables include credit card receivables c Receivables include amounts owed by employees as result of company loans to employees d Receivables include amounts resulting from transactions with customers 7-111 LO 12 Compare the accounting procedures for cash and receivables under GAAP and IFRS IFRS SELF-TEST QUESTION Under IFRS: a the entry to record estimated uncollected accounts is the same as GAAP b loans and receivables should only be tested for impairment as a group c it is always acceptable to use the direct write-off method d all financial instruments are recorded at fair value 7-112 LO 12 Compare the accounting procedures for cash and receivables under GAAP and IFRS Copyright Copyright © 2013 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein 7-113 ...PREVIEW OF CHAPTER Intermediate Accounting 15th Edition Kieso Weygandt Warfield 7-2 Cash and Receivables LEARNING LEARNINGOBJECTIVES OBJECTIVES After studying this chapter, you should... types of receivables Explain accounting issues related to recognition of accounts receivable Explain accounting issues related to valuation of accounts receivable Explain accounting issues related... Explain accounting issues related to valuation of accounts receivable Explain accounting issues related to recognition and valuation of notes receivable Explain the fair value option Explain accounting