Cash and Receivables Accounting

Chapter
7-2
C H A P T E RC H A P T E R 77
CASH AND RECEIVABLESCASH AND RECEIVABLES
Intermediate Accounting
13th Edition
Kieso, Weygandt, and Warfield

Chapter
7-3
1.1. Identify items considered cash.Identify items considered cash.
2.2. Indicate how to report cash and related items.Indicate how to report cash and related items.
3.3. Define receivables and identify the different types of receivables.Define receivables and identify the different types of receivables.
4.4. Explain accounting issues related to recognition of accountsExplain accounting issues related to recognition of accounts
receivable.receivable.
5.5. Explain accounting issues related to valuation of accountsExplain accounting issues related to valuation of accounts
receivable.receivable.
6.6. Explain accounting issues related to recognition of notes receivable.Explain accounting issues related to recognition of notes receivable.
7.7. Explain accounting issues related to valuation of notes receivable.Explain accounting issues related to valuation of notes receivable.
8.8. Explain accounting issues related to disposition of accounts andExplain accounting issues related to disposition of accounts and
notes receivable.notes receivable.
9.9. Describe how to report and analyze receivables.Describe how to report and analyze receivables.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Chapter
7-4
What is cash?What is cash?
Reporting cashReporting cash
Summary of cash-Summary of cash-
related itemsrelated items
CashCash ReceivablesReceivables
Recognition of accountsRecognition of accounts
receivablereceivable
Valuation of accountsValuation of accounts
Recognition of notesRecognition of notes
Valuation of notesValuation of notes
Disposition of accountsDisposition of accounts
and notes receivableand notes receivable
Presentation andPresentation and
analysisanalysis
Cash and ReceivablesCash and ReceivablesCash and ReceivablesCash and Receivables

Chapter
7-5
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.
What is Cash?What is Cash?What is Cash?What is Cash?
LO 1 Identify items considered cash.LO 1 Identify items considered cash.
Cash

Chapter
7-6
Short-term, highly liquid investments that are both
Reporting CashReporting CashReporting CashReporting Cash
LO 2 Indicate how to report cash and related items.LO 2 Indicate how to report cash and related items.
Cash Equivalents
(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
7-7
Companies segregate restricted cash from “regular”
cash for reporting purposes.
Examples, restricted for:
(1) plant expansion, (2) retirement of long-term debt,
and (3) compensating balances.
Restricted Cash
Illustration 7-1

Chapter
7-8
When a company writes a check for more than the
amount in its cash account.
Bank Overdrafts
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
7-9
Summary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related ItemsSummary of Cash-Related Items
Illustration 7-2

Chapter
7-10
ReceivablesReceivablesReceivablesReceivables
LO 3 Define receivables and identify the different types of receivables.LO 3 Define receivables and identify the different types of receivables.
Written promises to pay
a sum of money on a
specified future date.
Claims held against customers and others for
money, goods, or services.
Oral promises of the
purchaser to pay for
goods and services sold.
AccountsAccounts
ReceivableReceivable
AccountsAccounts
NotesNotes
NotesNotes

Chapter
7-11
Nontrade Receivables
1. Advances to officers and employees.
2. Advances to subsidiaries.
3. Deposits to cover potential damages or losses.
4. Deposits as a guarantee of performance or payment.
5. Dividends and interest receivable.
6. Claims against:
a) Insurance companies for casualties sustained.
b) Defendants under suit.
c) Governmental bodies for tax refunds.
d) Common carriers for damaged or lost goods.
e) Creditors for returned, damaged, or lost goods.
f) Customers for returnable items (crates, containers, etc.).

Chapter
7-12
Nontrade Receivables
Illustration 7-3

Chapter
7-13
Recognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts ReceivablesRecognition of Accounts Receivables
LO 4 Explain accounting issues related to recognition of accounts receivable.LO 4 Explain accounting issues related to recognition of accounts receivable.
Trade DiscountsTrade Discounts
Reductions from the list
price
Not recognized in the
accounting records
Customers are billed net
of discounts
Trade DiscountsTrade Discounts
Reductions from the list
price
Not recognized in the
accounting records
Customers are billed net
of discounts
10 %
Discount
for new
Retail
Store
Customers

Chapter
7-14
Cash DiscountsCash Discounts
Inducements for promptInducements for prompt
paymentpayment
Gross Method vs.Gross Method vs.
Net MethodNet Method
Cash DiscountsCash Discounts
Inducements for promptInducements for prompt
paymentpayment
Gross Method vs.Gross Method vs.
Net MethodNet Method Payment
terms are
2/10, n/30

Chapter
7-15
Cash Discounts (Sales Discounts)
Illustration 7-4

Chapter
7-16
E7-5:E7-5: On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10,
n/60, f.o.b. shipping point. On June 12, the company received a
check for the balance due from Arquette Company. Prepare the
journal entries on Bolton Company books to record the sale
assuming Bolton records sales using the gross method.
Sales 2,000
Accounts receivable 2,000June 3
Cash ($2,000 x 98%) 1,960
Sales discounts 40
Accounts receivable 2,000
June 12

Chapter
7-17
n/60, f.o.b. shipping point. On June 12, the company received a
check for the balance due from Arquette Company. Prepare the
journal entries on Bolton Company books to record the sale
assuming Bolton records sales using the net method.
Sales 1,960
Cash ($2,000 x 98%) 1,960
June 12

Chapter
7-18
n/60, f.o.b. shipping point. Prepare the journal entries on Bolton
Company books to record the sale assuming Bolton records sales
using the net method, and Arquette did not remit payment until
July 29.
Sales 1,960
Cash 2,000
Sales Discounts Forfeited 40
June 12

Chapter
7-19
A company should measure receivables in terms of
their present value.
The profession specifically excludes from present
value considerations “receivables arising from
transactions with customers in the normal course
of business which are due in customary trade terms
not exceeding approximately one year.”
Nonrecognition of Interest Element

Chapter
7-20
How are these accounts presented on the BalanceHow are these accounts presented on the Balance
Sheet?Sheet?
How are these accounts presented on the BalanceHow are these accounts presented on the Balance
Sheet?Sheet?
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 500 25 End.
Accounting for Accounts ReceivableAccounting for Accounts ReceivableAccounting for Accounts ReceivableAccounting for Accounts Receivable

Chapter
7-21 LO 4 Explain accounting issues related to recognition of accounts receivable.LO 4 Explain accounting issues related to recognition of accounts receivable.
Current Assets:
Cash 346$
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaids 40
Total current assets 1,673
Fixed Assets:
Office equipment 5,679
Furniture & fixtures 6,600
Less: Accumulated depreciation (3,735)
Total fixed assets 8,544
Total Assets 10,217$
Assets

Chapter
Current Assets:
Cash 346$
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaids 40
Fixed Assets:
Total Assets 10,217$
Assets

Chapter
7-23
Journal entry for credit sale of $100?Journal entry for credit sale of $100?
Accounts receivableAccounts receivable 100100
SalesSales 100100
SalesSales 100100
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 500 25 End.

Chapter
7-24
SalesSales 100100
SalesSales 100100
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 600 25 End.
Sale 100

Chapter
7-25
Collected of $333 on account?Collected of $333 on account?
CashCash 333333
CashCash 333333
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 600 25 End.
Sale 100

Chapter
7-26
CashCash 333333
CashCash 333333
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 25 End.
Sale 100 333 Coll.

Chapter
7-27
Adjustment of $15 for estimated Bad-Debts?Adjustment of $15 for estimated Bad-Debts?
Bad debt expenseBad debt expense 1515
Allowance for Doubtful AccountsAllowance for Doubtful Accounts 1515
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 25 End.
Sale 100 333 Coll.

Chapter
7-28
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 40 End.
Sale 100 333 Coll. 15 Est.

Chapter
7-29
Write-off of uncollectible accounts for $10?Write-off of uncollectible accounts for $10?
Allowance for Doubtful accountsAllowance for Doubtful accounts 1010
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 267 40 End.

Chapter
7-30
Accounts Receivable
Allowance for
Doubtful Accounts
Beg. 500 25 Beg.
End. 257 30 End.
W/O 1010 W/O

Chapter
Current Assets:
Cash 13$
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaids 40
Fixed Assets:
Total Assets 9,636$
Assets

Chapter
7-32
Valuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts ReceivableValuation of Accounts Receivable
LO 5 Explain accounting issues related to valuation of accounts receivable.LO 5 Explain accounting issues related to valuation of accounts receivable.
Reporting Receivables
Classification
Valuation (net realizable value)
Uncollectible Accounts Receivable
Sales on account raise the possibility of accounts
not being collected.

Chapter
7-33 LO 5 Explain accounting issues related to valuation of accounts receivable.LO 5 Explain accounting issues related to valuation of accounts receivable.
An uncollectible account receivable is a loss of revenue that
requires, through proper entry in the accounts,
 a decrease in the asset accounts receivable and
 a related decrease in income and stockholders’ equity.
Uncollectible Accounts Receivable

Chapter
7-34 LO 5 Explain accounting issues related to valuation of accounts receivable.LO 5 Explain accounting issues related to valuation of accounts receivable.
Allowance MethodAllowance Method
Losses are Estimated:
Percentage-of-sales
Percentage-of-
receivables
GAAP
Methods of Accounting for Uncollectible Accounts
Direct Write-OffDirect Write-Off
Theoretically undesirable:
No matching
Receivable not stated at
net realizable value
Not GAAP

Chapter
7-35
Uncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts ReceivableUncollectible Accounts Receivable
Income
Statement
Approach
Income
Statement
Approach
Balance
Sheet
Approach
Balance
Sheet
Approach

Chapter
7-36
Percentage-of-Sales Approach - matches costs with
revenues because it relates the charge to the period in
which a company records the sale.
Appropriate if there is a fairly stable relationship
between previous years’ credit sales and bad debts.

Chapter
7-37
Illustration: Chad Shumway Corp.
estimates from past experience that
about 2 percent of credit sales become uncollectible. If
Chad Shumway has credit sales of $400,000 in 2010, it
records bad debt expense as follows.
Bad Debt Expense 8,000
Allowance for Doubtful Accounts 8,000
Percentage-of-Sales Approach

Chapter
7-38
Percentage-of-Receivables Approach
 not matching.
 reports receivables at net realizable value.
Companies may apply this method using
 one composite rate, or
 an aging schedule of accounts receivable.

Chapter
7-39
What entry
would Wilson
make assuming
that no balance
existed in the
allowance
account?

Chapter
7-40
Bad Debt Expense ($37,650 – $800) 36,850
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of $800 before
adjustment?

Chapter
7-41
E7-7 (Recording Bad Debts) Sandel Company reports the
following financial information before adjustments.
Instructions: Prepare the journal entry to record bad debt
expense assuming Sandel Company estimates bad debts at
(a) 1% of net sales and (b) 5% of accounts receivable.

Chapter
7-42
LO 5LO 5
Instructions: Prepare the journal entry assuming Sandel
estimates bad debts at (a) 1% of net sales.
($800,000 – $50,000) x 1% = $7,500
LO 5LO 5

Chapter
7-43
LO 5LO 5
Instructions: Prepare the journal entry assuming Sandel
estimates bad debts at (b) 5% of accounts receivable.
($160,000 x 5%) – $2,000) = $6,000
LO 5LO 5

Chapter
7-44
Percentage of Sales approach:
Summary
Bad debt expense estimate is related to a nominal account
(Sales), any balance in the allowance account is ignored.
Achieves a proper matching of cost and revenues.
Percentage of Receivables approach:
Results in a more accurate valuation of receivables on the
balance sheet.
Method may also be applied using an aging schedule.

Chapter
7-45
Supported by a formal promissory note.
Recognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes ReceivableRecognition of Notes Receivable
LO 6 Explain accounting issues related to recognition of notes receivable.LO 6 Explain accounting issues related to recognition of notes receivable.
Notes Receivable
A negotiable instrument
Maker signs in favor of a Payee
Interest-bearing (has a stated rate of interest) OR
Zero-interest-bearing (interest included in face amount)

Chapter
7-46
Generally originate from:
Customers who need to extend payment period
of an outstanding receivable
High-risk or new customers
Loans to employees and subsidiaries
Sales of property, plant, and equipment
Lending transactions (the majority of notes)

Chapter
7-47 LO 6 Explain accounting issues related to recognition of notes receivable.LO 6 Explain accounting issues related to recognition of notes receivable.
Short-Term Long-Term
Record at
Face Value,
less allowance
Record at
Present Value
of cash expected
to be collected
Interest Rates
Stated rate = Market rate
Stated rate > Market rate
Stated rate < Market rate
Note Issued at
Face Value
Premium
Discount

Chapter
7-48
Illustration: Bigelow Corp. lends Scandinavian Imports
$10,000 in exchange for a $10,000, three-year note bearing
interest at 10 percent annually. The market rate of interest
for a note of similar risk is also 10 percent. How does Bigelow
record the receipt of the note?
Note Issued at Face ValueNote Issued at Face ValueNote Issued at Face ValueNote Issued at Face Value
0 1 2 3
1,000 1,000 Interest$1,000
$10,000 Principal
4
i = 10%
n = 3

Chapter
7-49
$1,000 x 2.48685 = $2,487
Interest Received Factor Present Value
PV of Interest

Chapter
7-50
$10,000 x .75132 = $7,513
Principal Factor Present Value
PV of Principal

Chapter
7-51
Summary Present value of interest $ 2,487
Present value of principal 7,513
Note current market value $10,000
Date Account Title Debit Credit
Jan. yr. 1
Dec. yr. 1
Notes receivable 10,000
Cash 10,000
Cash 1,000
Interest revenue 1,000

Chapter
7-52
Illustration: Jeremiah Company receives a three-year,
$10,000 zero-interest-bearing note. The market rate of
interest for a note of similar risk is 9 percent. How does
Jeremiah record the receipt of the note?
Zero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing NoteZero-Interest-Bearing Note
0 1 3 3
$0 $0 Interest$0
$10,000 Principal
4
i = 9%
n = 3

Chapter
7-53
$10,000 x .77218 = $7,721.80
PV of Principal

Chapter
Illustration 7-11

Chapter
7-55
Journal Entries for Zero-Interest-Bearing note
Present value of Principal $7,721.80
Jan. yr. 1 Notes receivable 10,000.00
Discount on notes receivable 2,278.20
Cash 7,721.80
Dec. yr. 1 Discount on notes receivable 694.96
Interest revenue 694.96
($7,721.80 x 9%)

Chapter
7-56
Illustration: Morgan Corp. makes a loan to Marie Co. and
receives in exchange a three-year, $10,000 note bearing
interest at 10 percent annually. The market rate of interest
for a note of similar risk is 12 percent. How does Morgan
record the receipt of the note?
Interest-Bearing NoteInterest-Bearing NoteInterest-Bearing NoteInterest-Bearing Note
0 1 2 3
1,000 1,000 Interest$1,000
$10,000 Principal
4
i = 12%
n = 3

Chapter
7-57
$1,000 x 2.40183 = $2,402
Interest Received Factor Present Value
PV of Interest

Chapter
7-58
$10,000 x .71178 = $7,118
PV of Principal

Chapter
7-59
Illustration: How does Morgan record the receipt of the
note?
Illustration 7-13
Notes Receivable 10,000
Discount on Notes Receivable 480
Cash 9,520

Chapter
Illustration 7-14

Chapter
7-61
Journal Entries for Interest-Bearing Note
Beg. yr. 1 Notes receivable 10,000
Discount on notes receivable 480
Cash 9,520
End. yr. 1
($9,520 x 12%)
Cash 1,000
Discount on notes receivable 142
Interest revenue 1,142

Chapter
7-62
Notes Received for Property, Goods, or Services
In a bargained transaction entered into at arm’s length, the
stated interest rate is presumed to be fair unless:
1. No interest rate is stated, or
2. Stated interest rate is unreasonable, or
3. Face amount of the note is materially different from
the current cash sales price.

Chapter
7-63
Illustration: Oasis Development Co. sold a corner lot to Rusty
Pelican as a restaurant site. Oasis accepted in exchange a
five-year note having a maturity value of $35,247 and no
stated interest rate. The land originally cost Oasis $14,000.
At the date of sale the land had a fair market value of
$20,000. Oasis uses the fair market value of the land,
$20,000, as the present value of the note. Oasis therefore
records the sale as:
Discount on Notes Receivable 15,247
Land 14,000
Gain on Sale of Land 6,000
($35,247 - $20,000) = $15,247

Chapter
7-64
Valuation of Notes ReceivableValuation of Notes ReceivableValuation of Notes ReceivableValuation of Notes Receivable
LO 7 Explain accounting issues related to valuation of notes receivable.LO 7 Explain accounting issues related to valuation of notes receivable.
Short-Term reported at Net Realizable Value (same
as accounting for accounts receivable).
Long-Term - FASB requires companies disclose not
only their cost but also their fair value in the notes
to the financial statements.
 Fair Value Option. Companies have the option to use
fair value as the basis of measurement in the
financial statements.

Chapter
7-65
Valuation of Notes ReceivableValuation of Notes ReceivableValuation of Notes ReceivableValuation of Notes Receivable
LO 7 Explain accounting issues related to valuation of notes receivable.LO 7 Explain accounting issues related to valuation of notes receivable.
Illustration (recording fair value option): Assume that
Escobar Company has notes receivable that have a fair value
of $810,000 and a carrying amount of $620,000. Escobar
decides on December 31, 2010, to use the fair value option
for these receivables. This is the first valuation of these
recently acquired receivables. At December 31, 2010,
Escobar makes an adjusting entry to record the increase in
value of Notes Receivable and to record the unrealized
holding gain, as follows.
Unrealized Holding Gain or Loss—Income 190,000

Chapter
7-66
Disposition of Accounts and Notes ReceivableDisposition of Accounts and Notes ReceivableDisposition of Accounts and Notes ReceivableDisposition of Accounts and Notes Receivable
LO 8LO 8 Explain accounting issues related to dispositionExplain accounting issues related to disposition
of accounts and notes receivable.of accounts and notes receivable.
Owner may transfer accounts or notes receivables
to another company for cash.
Reasons:
Competition.
Sell receivables because money is tight.
Billing / collection are time-consuming and costly.
Transfer accomplished by:
1. Secured borrowing
2. Sale of receivables

Chapter
7-67
Disposition of Accounts and Notes ReceivableDisposition of Accounts and Notes ReceivableDisposition of Accounts and Notes ReceivableDisposition of Accounts and Notes Receivable
Secured Borrowing
Illustration: March 1, 2010, Howat Mills, Inc. provides
(assigns) $700,000 of its accounts receivable to Citizens
Bank as collateral for a $500,000 note. Howat Mills continues
to collect the accounts receivable; the account debtors are
not notified of the arrangement. Citizens Bank assesses a
finance charge of 1 percent of the accounts receivable and
interest on the note of 12 percent. Howat Mills makes
monthly payments to the bank for all cash it collects on the
receivables. See Illustration 7-15.

Chapter
7-68
Illustration 7-15
Secured Borrowing - IllustrationSecured Borrowing - IllustrationSecured Borrowing - IllustrationSecured Borrowing - Illustration

Chapter
7-69
E7-13: On April 1, 2010, Prince Company assigns $500,000 of its
accounts receivable to the Third National Bank as collateral for a
$300,000 loan due July 1, 2010. The assignment agreement calls for
Prince Company to continue to collect the receivables. Third National
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).
Secured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - Exercise
Instructions:
a) Prepare the April 1, 2010, 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, 2010,
through June 30, 2010.
c) On July 1, 2010, Prince paid Third National all that was due from
the loan it secured on April 1, 2010.

Chapter
7-70
Exercise 7-13 continued
(a) Cash 290,000
Finance Charge 10,000
Notes Payable 300,000
($500,000 x 2% = $10,000)
(b) Cash 350,000
Accounts Receivable 350,000
(c) Notes Payable 300,000
Interest Expense 7,500
Cash 307,500
(10% x $300,000 x 3/12 = $7,500)
Secured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - ExerciseSecured Borrowing - Exercise

Chapter
7-71
Factors are finance companies or banks that buy receivables
from businesses for a fee.
Sales of ReceivablesSales of ReceivablesSales of ReceivablesSales of Receivables
Illustration 7-16

Chapter
7-72
Sale Without Recourse
Purchaser assumes risk of collection
Transfer is outright sale of receivable
Seller records loss on sale
Seller use Due from Factor (receivable) account to
cover discounts, returns, and allowances
Sale With Recourse
Seller guarantees payment to purchaser
Financial components approach used to record transfer

Chapter
7-73
Illustration: Crest Textiles, Inc. factors $500,000 of accounts
receivable with Commercial Factors, Inc., on a without recourse
basis. Commercial Factors assesses a finance charge of 3
percent of the amount of accounts receivable and retains an
amount equal to 5 percent of the accounts receivable (for
probable adjustments). Crest Textiles and Commercial Factors
make the following journal entries for the receivables
transferred without recourse.
Illustration 7-17

Chapter
7-74
Illustration: Assume Crest Textiles sold the receivables on a
with recourse basis. Crest Textiles determines that this
recourse obligation has a fair value of $6,000. To determine the
loss on the sale of the receivables, Crest Textiles computes
the net proceeds from the sale as follows.
Illustration 7-19
Loss on Sale Computation
Illustration 7-18
Net Proceeds
Computation

Chapter
7-75
Illustration: Prepare the journal entries for both Crest
Textiles and Commercial Factors for the receivables sold with
recourse.
Cash 460,000
Due from Factor 25,000
Loss on Sale of Receivables 21,000
Accounts (Notes) Receivable 500,000
Recourse Liability 6,000
Accounts Receivable 500,000
Due to Crest Textiles 25,000
Financing Revenue 15,000
Cash 460,000
Commercial
Factors,
Inc.
Crest
Textiles,
Inc.

Chapter
7-76
The FASB
concluded that a
sale occurs only if
the seller
surrenders control
of the receivables
to the buyer.
Three conditions
must be met.
Secured Borrowing versus SaleSecured Borrowing versus SaleSecured Borrowing versus SaleSecured Borrowing versus Sale
Illustration 7-21

Chapter
7-77
General rule in classifying receivables are:
1. Segregate the different types of receivables that a company
possesses, if material.
2. Appropriately offset the valuation accounts against the
proper receivable accounts.
3. Determine that receivables classified in the current assets
section will be converted into cash within the year or the
operating cycle, whichever is longer.
4. Disclose any loss contingencies that exist on the receivables.
5. Disclose any receivables designated or pledged as collateral.
6. Disclose all significant concentrations of credit risk arising
from receivables.
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
LO 9 Describe how to report and analyze receivables.LO 9 Describe how to report and analyze receivables.

Chapter
7-78
Analysis of Receivables
Presentation and AnalysisPresentation and AnalysisPresentation and AnalysisPresentation and Analysis
This Ratio used to:
Assess the liquidity of the receivables.
Measure the number of times, on average, a company
collects receivables during the period.
Illustration 7-23
LO 9 Describe how to report and analyze receivables.LO 9 Describe how to report and analyze receivables.

Chapter
7-79
 The accounting and reporting related to cash is essentially the
same under both iGAAP and U.S. GAAP.
 The basic accounting and reporting issues related to recognition
and measurement of receivables are essentially the same
between iGAAP and U.S. GAAP.
 Although iGAAP implies that receivables with different
characteristics should be reported separately, there is no
standard that mandates this segregation.

Chapter
7-80
 The FASB, the IASB have adopted a piecemeal approach in
which disclosure of fair value information in the notes is the
first step. The second step is the fair value option.
 iGAAP and U.S. GAAP standards on the fair value option are
similar but not identical.
 iGAAP and U.S. GAAP differ in the criteria used to derecognize
a receivable.

Chapter
7-81 LO 10 Explain common techniques employed to control cash.LO 10 Explain common techniques employed to control cash.
Management faces two problems in accounting for cash
transactions:
1. establish proper controls to prevent any unauthorized
transactions by officers or employees, and
2. provide information necessary to properly manage cash
on hand and cash transactions.

Chapter
To obtain desired control objectives, a company can vary the
number and location of banks and the types of accounts.
 General checking account
 Collection float.
 Lockbox accounts
 Imprest bank accounts
Using Bank AccountsUsing Bank Accounts

Chapter
To pay small amounts for miscellaneous expenses.
The Imprest Petty Cash SystemThe Imprest Petty Cash System
Steps:
1. Record $300 transfer of funds to petty cash:
Petty Cash 300
Cash 300
2. The petty cash custodian obtains signed receipts from
each individual to whom he or she pays cash

Chapter
7-84
Steps:
LO 10 Explain common techniques employed to control cash.LO 10 Explain common techniques employed to control cash.
Office Supplies Expense 42
Postage Expense 53
Entertainment Expense 76
Cash Over and Short 2
Cash 173
3. Custodian receives a company check to replenish the
fund.

Chapter
7-85
Steps:
Cash 50
Petty cash 50
4. If the company decides that the amount of cash in the
petty cash fund is excessive by $50, it lowers the fund
balance as follows.

Chapter
Physical Protection of Cash BalancesPhysical 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 (reconcile) the balance shown in the
general ledger.

Chapter
Reconciliation of Bank BalancesReconciliation of Bank Balances
Schedule explaining any differences between the
bank’s and the company’s records of cash.
Reconciling Items:
1. Deposits in transit.
2. Outstanding checks.
3. Bank charges and credits.
4. Bank or Depositor errors.
Time Lags

Chapter
Reconciliation of Bank BalancesReconciliation of Bank Balances Illustration 7A-1
Bank Reconciliation Form
and Content

Chapter
Reconciliation of Bank BalancesReconciliation of Bank Balances

Chapter
Illustration 7A-2

Chapter
7-91
Cash 542Nov. 30
Office expense 18
Accounts receivable 220
Accounts payable 180
Interest revenue 600
Illustration:Illustration: Journalize the adjusting entries at November 30
on the books of Nugget Mining Company.

Chapter
7-92
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.
Review QuestionReview Question

Chapter
7-93 LO 11 Describe the accounting for a loan impairment.LO 11 Describe the accounting for a loan impairment.
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.

Chapter
Background -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 adjustable-rate debt with short-term 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
Subprime lending was a
little over $50 billion in
2000 and had increased
almost ten times by 2005.
Illustration 7B-1

Chapter
Beyond the
subprime loans
was the
practice of
securitization.
Illustration 7B-2

Chapter
Impairment Measurement and ReportingImpairment 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
Illustration: At December 31, 2009, 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-3

Chapter
Illustration: Computation of Impairment Loss
Illustration 7B-4
Recording Impairment Losses

Chapter
7-100
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