Cash And Receivables

Learning ObjectivesCash and ReceivablesNo substantial departures from the text, Chapter 7.Chapter7Slide7-1UCSB, AndersonSlide7-2Nature and Composition of CashCash is classified as a . Current AssetAdditional Cash Issues Bank Overdrafts (means negative cash)– Happens when outstanding checks exceeds cash at bank plusdeposits in transit (or when the Company has overdraftprotection)To be reported as CASH: Must be readily available for the payment ofcurrent obligations, and . it must be free from any contractual restrictionthat limits its use in satisfying debts.UCSB, Anderson– Is this an asset?NO!!- current liability called “bankoverdraft” Restricted Cash- such as cash held as collateral for bank. Cash Equivalents– Requires disclosure Some companies include investments which are readily convertedto cash within 90 days as a “cash equivalent”- requiresdisclosure. Hence their financial statement presentation forthe cash line reads: “cash and cash equivalents”.Slide7-3UCSB, AndersonSlide7-4UCSB, Anderson

Account ClassificationItemsAccount ClassificationAccounta.b.c.d.e.f.Coins and currencyCashU.S. Treasury bondsTemporary investmentsCertificate of depositTemporary investmentsNSF check (customer)Accounts receivablePostdated checksNOTE: Treasury Receivablebills are 1 yearCash to be usedforbut treasuryLong-terminvestmentsOr less,bonds always(bond sinking fund)bond retirement 1 year or moreCashg. Deposits in transitInvestments (ST or LT?)h. Shares of AOL stockSlide7-5UCSB, AndersonItemsi.j.k.l.Slide7-6Cash ControlsSavings accountPetty cashStampsTravel advancesCashCashPostage expensePrepaidUCSB, AndersonBank ReconciliationWhy are cash controls important? Cash is most susceptible asset to theft. Because ultimately everything culminates in cash,consequently other problems frequently manifestthemselves as unknown “reconciling items” whenthe bank reconciliation is performed.What do you think are the two most important cashcontrols to have? Segregation of duties (forces collusion) Check signing authority (have to get the cash outof the bank in order to steal it!Slide7-7AccountUCSB, AndersonReconciling Items: unrecorded by bank, but recorded by entity recorded by bank, but not by entity errors by the bank or the entityCRUTCH TOOLReconciling From A to B (A at top of reconciliation): Recorded by A but NOT B: Opposite direction inreconciliation Recorded by B but NOT A: Same direction inreconciliation.Slide7-8UCSB, Anderson

BANK RECONCILIATION CRUTCHRECONCILINGFROMXBOTH X & YNoadjustmentRECORDED BYX BUT NOT YY BUT NOT Xopposite directionsame directionIncrease negativeIncrease positiveDecrease positiveDecrease negativeYSlide7-9UCSB, AndersonBank Reconciliation ExampleFor example: XYZ Company. The following relevant informationexists: The bank balance is 250,000 as of December 31, 200X whileyour general ledger shows cash at 200,000. Carefulexamination of activity reveals the following:– There are 20 in bank fees which were not recorded in thegeneral ledger;– XYZ received checks and posted the entry for 95,000during the last week of December which did not getdeposited to the bank.– XYZ wrote checks during the last week of Decembertotaling 175,000 which have not yet cleared the bank.– There was a 29,980 un-located reconciling item (generalledger exceeding bank) on every bank statement sense thebeginning of the year.Slide7-10Bank reconciliation to example on previous slide:UCSB, AndersonClaims held against customers and others formoney, goods, or services.ReceivablesBalance per bankBank charges not recordedDeposit in transitOutstanding checksOther misc.250,00020 entry required to Gl95,000(175,000)29,980 Possible error!200,000Oral promises of thepurchaser to pay forgoods and servicessold.Written promises to paya certain sum o CashSlide7-395,000.00248.71UCSB, Anderson5,248.71Slide7-405,000.00UCSB, Anderson342.464,657.54

12% Note Discounted at 60069971472999114129JOURNAL ENTRY ACTIVITY OF 15% NOTEUnAmort.Balance3422431290OPENING ENTRYNotes receivable5,000Note discountCashPV ofNote4,6584,7574,8715,000Note rec.Discount InterestBalanceBalance 0114(130)END OF YEAR ONE PAYMENT ENTRYCash600Interest income699Note discount99600Slide7-41UCSB, Anderson600(731)131(5,000)-1UCSB, Anderson800,000200,0005‐8%PRESENT VALUE RECEIVEDPV of Cash800,000PV of note136,117936,117AMORTIZATION TABLEPaymentInterestPrinciplePeriod‐Assuming a lender would charge 8% for this note, the present value ofthe 200,000 note is about 136,117, so what was the e136,117147,006158,766171,468185,185200,000 936,117UCSB, Anderson(2,143)FACTSLess than ymentRateIs the purchase price of the real estate equal to, more than or less than 1,000,000?Slide7-43(1,412)Computations for JE’s:Marie Co. sold real estate to to Don. Co. for a purchase price of 1,000,000 payable as follows: 800,000 cash due at close ofescrow and a 200,000 non-interest bearing note payable in onelump-sum at the end of 5 years. The cost basis of the real estatesold is ng Note(699)(714)END OF YEAR THREE PAYMENT ENTRYCash600Interest income729Note discount1295,000Note receivable(4,658)(4,658)(699)END OF YEAR TWO PAYMENT ENTRYCash600Interest income714Note discount114Cash-CashUCSB, Anderson2,142

Non-interest bearing note continuedNoninterest-Bearing NoteDiscounted at 15%What is the entry to record the sale?Date1/1/9212/31/9212/31/9312/31/94Cash 800,000Note receivable 136,117Real estate 750,000Gain on sale of real estate 186,117 .What will be recorded at the end of the first year (assuming annual compounding)?Interest receivable 10,889Interest ort.00049356765249356765249 10,889At the end of the second year? (don’t forget that the 10,889 interest receivable now accruesinterest!)Interest receivable 11,760Interest income 11,760Same Journal entry in years 3,4 & 5 for 12,701, 3,717 and 14,815, respectively.WHEN IT IS ALL FINISHED, THERE WILL BE 63,883 OF ACCRUED INTEREST AND WHEN THEPAYMENT IS RECEIVED, THE FOLLOWING ENTRY WILL BE RECORDED:CashSlide7-45Note ReceivableAccrued interet rec. 200,000 136,117 63,883UCSB, AndersonSlide7-46UCSB, AndersonUnAmort.Balance1,7121,219652-PV ofNote3,2883,7814,3485,00011/12/96

Accounts receivable 100 Sales 100 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End. 600 25 End. Sale 100 Slide 7-22 UCSB, Anderson Accounting for A/R and Bad Debts Collected of 333 on account ? Cash 333 Accounts receivable 333 Accounts Receivable Allowance for Doubtful Accounts Beg. 500 25 Beg. End.