Lecture Intermediate Accounting (13th edition) - Chapter 7: Cash and receivables

After completing 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...and other contents.

Chapter 7-1 CHAPTER CASH AND RECEIVABLES Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield  Chapter 7-2 Learning Objectives Learning Objectives 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 of notes receivable Explain accounting issues related to valuation of notes receivable Explain accounting issues related to disposition of accounts and notes receivable Describe how to report and analyze receivables Chapter 7-3 Cash and Receivables Cash and Receivables Cash What is cash? Reporting cash Summary of cashrelated items Chapter 7-4 Receivables Recognition of accounts receivable Valuation of accounts receivable Recognition of notes receivable Valuation of notes receivable Disposition of accounts and notes receivable Presentation and analysis What is Cash? What is Cash? Cash 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 Chapter 7-5 LO 1  Identify items considered cash Reporting Cash Reporting Cash Cash Equivalents Short­term, 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 interest rates Examples: Treasury bills, Commercial paper, and Money market funds Chapter 7-6 LO 2  Indicate how to report cash and related items Reporting Cash Reporting Cash Restricted Cash Companies segregate restricted cash from “regular” cash for reporting  purposes Examples, restricted for: (1) plant expansion, (2) retirement of long­term debt, and (3)  compensating balances Illustration 7­1 Chapter 7-7 LO 2  Indicate how to report cash and related items Reporting Cash Reporting Cash Bank Overdrafts When a company writes a check for more than the amount in its cash  account Generally reported as a current liability Offset against cash account only when available cash is present in  another account in the same bank on which the overdraft occurred Chapter 7-8 LO 2  Indicate how to report cash and related items Summary of Cash­Related Items Summary of Cash­Related Items Illustration 7­2 Chapter 7-9 LO 2  Indicate how to report cash and related items Receivables Receivables Claims held against customers and others         for money, goods, or  services Oral promises of the purchaser to  pay for goods and services sold Written promises to pay a sum of  money on a specified future date Accounts Receivable Accounts Receivable Notes Receivable Notes Receivable Chapter 7-10 LO 3  Define receivables and identify the different types of receivables Physical Protection of Cash Balances Company should Chapter 7-86  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 (reconcile) the balance shown in the general ledger LO 10  Explain common techniques employed to control cash Reconciliation of Bank Balances Schedule explaining any differences between the bank’s and the  company’s records of cash Reconciling Items: Deposits in transit Outstanding checks Bank charges and credits Time Lags Bank or Depositor errors Chapter 7-87 LO 10  Explain common techniques employed to control cash Reconciliation of Bank Balances Chapter 7-88 Illustration 7A­1 Bank Reconciliation Form and Content LO 10  Explain common techniques employed to control cash Reconciliation of Bank Balances Chapter 7-89 LO 10  Explain common techniques employed to control cash Illustration 7A­2 Chapter 7-90 LO 10  Explain common techniques employed to control cash Illustration:  Journalize the adjusting entries at November 30 on the books of  Illustration:   Nugget Mining Company Nov. 30 Cash Office expense  Accounts receivable Chapter 7-91 542 18 220 Accounts payable 180 Interest revenue 600 LO 10  Explain common techniques employed to control cash Review 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 Chapter 7-92 LO 10  Explain common techniques employed to control cash 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 Long­term receivables such as loans that are identified as impaired,  companies perform an additional impairment evaluation Chapter 7-93 LO 11  Describe the accounting for a loan impairment Background ­  Example:  Subprime loan crisis  From 2000 to 2005 home prices appreciated at rapid rate.   Low interest rates also encouraged speculation, as many believed that home prices  would continue to increase.   Speculators intended to sell the house in a short period  Many adjustable­rate debt with short­term low teaser rates that would adjust to  higher market rates after two or three years.   Many lending institutions gave loans to individuals whose financial condition  would make it difficult for them to make the payments over the life of the loan.  These loans, often referred to as subprime loans Chapter 7-94 LO 11  Describe the accounting for a loan impairment Background ­  Example:  Subprime loan crisis Illustration 7B­1 Subprime lending was a little over  $50 billion in 2000 and had  increased almost ten times by 2005 Chapter 7-95 LO 11  Describe the accounting for a loan impairment Background ­  Example:  Subprime loan crisis Illustration 7B­2 Beyond the  subprime loans was  the practice of  securitization Chapter 7-96 LO 11  Describe the accounting for a loan impairment Impairment Measurement and Reporting Impairment loss is calculated as the difference between   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 Chapter 7-97 LO 11  Describe the accounting for a loan impairment Illustration:  At December 31, 2009, Ogden Bank recorded an investment of $100,000  in a loan to Carl King. The loan has an historical effective­interest 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 7B­3 Chapter 7-98 LO 11  Describe the accounting for a loan impairment Illustration:  Computation of Impairment Loss Illustration 7B­4 Recording Impairment Losses Bad Debt Expense  Allowance for Doubtful Accounts  Chapter 7-99 12,437 12,437 LO 11  Describe the accounting for a loan impairment Copyright Copyright Copyright © 2009 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 back­up 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 Chapter 7-100 ... Describe how to report? ?and? ?analyze? ?receivables Chapter 7-3 Cash? ?and? ?Receivables Cash? ?and? ?Receivables Cash What is cash? Reporting cash Summary of cashrelated items Chapter 7-4 Receivables Recognition.. .CHAPTER CASH AND RECEIVABLES Intermediate? ?Accounting 13th Edition Kieso, Weygandt,? ?and? ?Warfield  Chapter 7-2 Learning Objectives Learning Objectives Identify items considered? ?cash Indicate how to report? ?cash? ?and? ?related items... Customers for returnable items (crates, containers, etc.) LO 3  Define? ?receivables? ?and? ?identify the different types of? ?receivables Receivables Receivables Nontrade? ?Receivables Illustration 7­3 Chapter 7-1 2 LO 3  Define? ?receivables? ?and? ?identify the different types of receivables