1 Chapter 7 Cash, Investments, and Receivables Financial Accounting 4e by Porter and Norton.

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Chapter 7

Cash, Investments,

and Receivables

Financial Accounting 4e by Porter and Norton

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PepsiCo Inc. Consolidated Balance Sheet (partial)

ASSETS (in millions) Dec. 29 Dec. 30 2001 2000 .Current Assets:Cash and cash equivalents $ 683 $1,038Short-term investments, at cost 966 467

1,649 1,505Accounts & notes receivable 2,142 2,129Inventories 1,310 1,192Prepaid expenses & other assets 752 791

Total Current Assets $5,853 $5,617

higher

lower

3

PepsiCo Inc.Consolidated Balance Sheet (partial)

ASSETS (in millions)

Current Assets:Cash and cash equivalentsShort-term investments, at costAccounts and notes receivable

InventoriesPrepaid expenses & other assets

Total Current AssetsLess

Liquid

Highly Liquid

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FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

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PepsiCo Inc. Consolidated Balance Sheet (partial)

ASSETS (in millions)

Current Assets:Cash and equivalents

Key to classification

as cash: readily available topay debts

5

Cash

Coin & currency

Checking, savings & money market accounts

Undeposited, cashier, and certified checks

Pay to

the o

rder o

f:

ABC Co

.

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Cash Equivalents

Commercial paper U.S. Treasury bills Certain money market funds

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Readily convertible to cash

Original maturity to investor of 3 months or less

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Cash Management

Necessary to ensure company has neither too little nor too much cash on hand

Tools: Cash Flows Statement Bank Reconciliations Petty Cash Funds

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Cash balance, beginning of period +

= Cash balance, end of period

Bank Statements

Deposits Customer notes

and interest collected by bank

Interest earned

Canceled checks NSF checks Service charges

9

Bank Reconciliation - Step 1

Deposits in Transit: Late period deposits not yet reflected on

bank statement

Trace deposits on bank statement to books. Identify deposits in transit. Add to bank balance.

Example of Reconciliation

Balance per statement, June 30 $ 3,308.59Add: Deposit in transit

642.30

Bank Statement Adjustments: Deposits

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Outstanding checks: Checks written but not yet presented to

bank

Trace checks cleared by bank to books. Identify outstanding checks. Subtract from bank balance.

Pay to

the o

rder o

f:

XYZ Co

.ABC

Co.

Example of ReconciliationBank Statement Adjustments:

Checks Outstanding

Balance per statement, June 30 $3,308.59Add: Deposit in transit 642.30Deduct: Outstanding checks:

Check No. 496 $ 79.89Check No. 501 213.20Check No. 502 424.75 (717.84)

Adjusted balance, June 30 $3,233.05

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Credit memoranda: Interest earned,

customer notes collected

List all other additions (credit memoranda) shown on the bank statement. Add to book balance.

Example of ReconciliationCash Account Adjustments:

Credit Memoranda

Balance per books, June 30 $ 2,895.82

Add:Note collected $500.00 Interest on note 50.00Interest earned 15.45Recording error, #498 54.00 619.45

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List all other subtractions (debit memoranda) shown on the bank statement. Subtract from book balance.


Debit memoranda: NSF checks, service

charges, etc.

Date

Non-Sufficient Funds

Example of ReconciliationCash Account Adjustments:

Debit Memoranda

Balance per books, June 30 $ 2,895.82Add: Note collected $500.00

Interest on note 50.00 Interest earned 15.45 Recording error, #498 54.00 619.45

Deduct: NSF check $245.72 Collection fee – note 16.50 Service charge 20.00 (282.22)

Adjusted balance, June 30 $ 3,233.0516

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Identify errors made by the bank or the company in recording transactions during the period.

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Use the information collected in Steps 1 - 5 to prepare the bank reconciliation.

Bank Reconciliation

Balance per bank $$$:

Adjusted balance $$$

Balance per books $$$:


Adjusted balances for book and bank

must agree

Example of Reconciliation

Balance per statement, June 30 $ 3,308.59:


Bank Statement Adjustments

Balance per books, June 30 $ 2,895.82:


Cash Account Adjustments

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Bank Reconciliation Adjusting Entries

Bank Reconciliation

Balance per bank $$$:


Balance per books $$$:


Book adjustments are the basis

for adjusting

entries

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Bank Reconciliation Adjusting Entries

Dr. Cr.

Accounts Receivable 245.72Collection Fee Expense 16.50Rent Expense - Lockbox 20.00Cash 337.23

Notes Receivable 500.00Interest revenue 65.45Supplies 54.00

To record bank reconciliation adjustments.

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Petty Cash

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RECEIPT

Payche

ck for

Date

Dept.

of Tre

asurer

Jane D

oe

Dr. Cr.RECEIPT

RECEIPT

RECEIPT

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Prepare the journal entry to record the petty cash fund replenishment

Petty Cash Transactions for Keese Corporation:

Original Fund Balance $200.00

Petty Cash Expenditures:

U.S. Post Office 55.00

Overnight Delivery Service 69.50

Office Supply Express 45.30

Coin & currency per count 26.50

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Accounting for Petty Cash

* $200.00 - ($55.00 + 69.50 + 45.30 + 26.50) =$200.00 - $196.30 = $3.70 short

Journal Entry to Replenish Fund:

Postage Expense 55.00

Delivery Expense 69.50

Office Expense 45.30

Cash Over and Short* 3.70

Cash 173.50

Investment in CD

Purchase of investment: Dr. Cr.

Short-Term

Investments – CD 100,000

Cash 100,000

Invest $100,000 in a 120-day CD. Principal plus interest @ 6% due upon investment maturity.

Example:

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Year-end adjusting entry : Dr. Cr.

Interest Receivable 1,500 Interest Revenue 1,500

Investment in CD

Interest = Principal x Rate x Time$1,500 = $100,000 x 6% x 90/360

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October – 29 daysNovember – 30 daysDecember – 31 days

90 days

Upon investment maturity: Dr. Cr.

Cash 102,000Short-Term Investments - CD

100,000Interest Receivable 1,500Interest Revenue* 500

Investment in CD

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Interest earned in January:

$100,000 x 6% x 30/360 = $500

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Reasons Companies Invest in Other Companies

Short-term cash excesses

Long-term investing for future cash needs

Exert influence over investee

Obtain control of investee

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Accounting for Common-Stock Investments

No significantinfluence

0% 20%

FairValue

Method

Significantinfluence

50%

EquityMethod

Control

100%

ConsolidatedF/S

OurFocus

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Investments Without Significant Influence

Held-to-Maturity Securities

Trading Securities

Available-for-Sale Securities

Use fair value method to

account for these investments

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Bonds of other companies Intent and ability to hold until maturity

$100,000 9% BondDue 2019

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On 1/1/04, Homer buys: $100,000; 10% bonds @ face value. Bonds mature December 31, 2013 Interest payable semiannually

.

Example:

Record the purchase of the bonds and receipt of the first interest payment

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Recording Bond Purchase

Dr. Cr.

Investment in Bonds 100,000Cash 100,000To record the purchase of Simpson bonds.

$100,000 10% BondDue 2014

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Recording Receipt of Interest Payment

Dr. Cr.

Cash ($100,000 x 10% x 1/2) 5,000 Interest Income 5,000

To record interest income on Simpson bonds.

Interest forInvestor

Borrower

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Recording Bond Sale

Dr. Cr.

Cash 99,000

Loss on Sale of Bonds 1,000 Investment in Bonds 100,000To record sale of Simpson bonds.

Interest forInvestor

Borrower

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Trading Securities

Purchased to generate profit from short-term appreciation

Stocks Bonds

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Intent to sell in near term (classified as current assets)

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Trading Securities

IncomeStatement

Unrealized gain or loss recognized on income statement

At end of each period, security is “marked to market”

Stocks Bonds

38

Trading Securities

Dexter Corp. holds the following trading securities at 12/31/04:

Cost Market

Menlo preferred stock $25,000 $27,500

Canby common stock 40,000 39,000

Example:

Record the unrealized gain or loss at 12/31/04.

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Recording Unrealized Gain or Loss on Trading Securities

Dr. Cr.

Investment in Menlo Preferred Stock 2,500

Investment in Canby Common Stock 1,000 Unrealized Gain - Trading Securities* 1,500

To adjust trading securities to fair value.

* income statement account

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Securities not classified as held-to-maturity or trading

Stocks

Bonds

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Can be classified as short-term or long-term, depending on expected date of disposition

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BalanceSheet

Unrealized gain or loss accumulated in stockholders’ equity account

Also “marked to market” at end of accounting period

StocksBonds

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Lenox Corp. holds the following AFS securities at 12/31/04:

Cost Market

Adair preferred stock $15,000 $16,000

Casey common stock 35,000 32,500

Example:

Record the unrealized gain or loss at 12/31/04.

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Recording Unrealized Gain or Loss on AFS Securities

Dr. Cr.Unrealized Gain/Loss – AFS Securities* 1,500Investment in Adair Preferred Stock 1,000

Investment in Casey Common Stock 2,500

To adjust available-for-sale (AFS) securities to fair value.

* part of Stockholders’ Equity

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Accounting for Investments Without Significant Influence

Recognize Report Report FVCategories as income on BS at changes onHeld-to-maturity interest cost N/ATrading interest, div. fair value Income stmt.Avail.-for-Sale interest, div. fair value Balance sheet

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Credit Sales

Slows inflow of cash Risk of uncollectible

accounts

Trade Credit

Retail Customer Receivables Terms: 2/10,

net 30

Sales Invoice

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Menkhaus Corporation Sample Accounts Receivable Subsidiary Ledger

Total Due

ABC Distributors $ 25

HIJ Distributors 336

: :

: :

XYZ Distributors 108

$ 1,105 Gross AccountsReceivable

In 000s

47

Winnebago Industries, Inc.Consolidated Balance Sheet (partial)

2001 2000

Receivables, less allowance

for doubtful accounts ($244

and $1,168, respectively) $20,183 $32,045

Net Realizable

Value

Estimated

Uncolle

ctible

Accounts

48

Accounting for Bad Debts:Direct Write-off Method

Journal entry to record write-off inperiod determined to be uncollectible:

Bad Debt Expense XXX

Accounts Receivable – Dexter XXX

Period of Sale Future Period charged with expense of bad debt write-off

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Accounting for Bad Debts: Allowance Method

Period of Sale Estimated bad debt

expense (and allowance account) recorded in

same period

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Roberts Corp.Partial Balance Sheet

Current assets:Accounts receivable $ 250,000 Less: allowance for doubtful accounts ( 6,000)Net accounts receivable $ 244,000

Balance Sheet Presentation - Allowance Method

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Accounting for Bad Debts:Allowance Method

Journal entry to record estimated bad debt expense in period of sale:

Bad Debts Expense XXX

Allowance for Doubtful Accts XXX

I estimate...

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Accounting for Bad Debts:Allowance Method

Journal entry to record bad debt write-off in period determined uncollectible:

Allowance for Doubtful Accts XXX

Accounts Receivable – Z Co. XXX

Bankrupt

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Approaches to Allowance Method

% of Net Credit Sales

% of Accounts Receivable » Aging Method

Income Statement Approach

Balance Sheet

Approach

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Example:

Percentage of Net Credit Sales Method

Assume prior years’ net credit sales and bad debt expense is as follows:

Year Net credit sales Bad debts1999 $1,250,000 $ 26,4002000 1,340,000 29,3502001 1,200,000 23,1002002 1,650,000 32,1502003 2,120,000 42,700

$7,560,000 $153,700

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Example:


Develop bad debt percentage:

$153,700$7,560,000

use 2%

= 0.02033

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2004 Net credit sales $2,340,000 (given)

Bad debt percentage 2%

Bad debts expense 46,800

Example:

Journal entry:

Bad Debts Expense 46,800

Allowance for Doubtful Accts 46,800

Aging Method

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Est. Percent Est. AmountCategory Amount Uncollectible

UncollectibleCurrent $ 85,600 1% $ 856Past due: 1-30 days 31,200 4% 1,248 31-60 days 24,500 10% 2,450 61-90 days 18,000 30% 5,400 90+ days 9,200 50% 4,600 Totals $168,500 $14,554

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Aging Method

Allowance for Doubtful Accts

$1,230

Assume Allowance account has a beginning credit balance of $1,230:

Requiredadjustment13,324

$14,554

Desired ending

balance from aging schedule

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From T-account analysis

Aging Method Example

Dr. Cr.

Bad Debts Expense 13,324

Allowance for Doubtful

Accounts 13,324

To record estimated bad debts.

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Comparison of Methods

% of Net Sales

Allowance Account

XX

Computes bad debt expense (of which the credit is recorded here)

Aging

Allowance Account

XX Computes ending balance

in the allowance account

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Accounts Receivable Turnover

Net Credit Sales

Average Accounts Receivable

Indicates how quickly a company is collecting (i.e.,

turning over) its receivables

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Accounts Receivable Turnover

Too fast

credit policies too stringent; may be losing sales

Too slow

credit department not operating effectively; dissatisfied customers

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Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on March 13, 2005.

Date: December 13, 2004

Signed:_________

Interest-Bearing Promissory Note

Baker Corporation

MaturityDate

Principal

Interest

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In exchange for $9,000 applied toward my purchase today, I promise to pay $9,900 in six months.

Date: November 1, 2004

Signed:_________J.E. Privett

Non-Interest-Bearing Promissory Note

Effective interest rate on note = 20%

$900 12 $9,000 x 6

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12/31/04 4/30/05

Notes receivable $ 9,900 $ 9,900

Less: Discount on

notes receivable ( 600) - 0 -

$ 9,300 $ 9,900

Balance Sheet Presentation of Discounted Notes

Discount transferred to interest revenue

over life of note

Upon Maturity

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Accelerating Cash Inflow From Sales

Sales Discounts Credit Card Sales Discounting Notes Receivable

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Credit Card Sales

Competitive necessity Credit card company:

» Charges fee» Assumes risk of nonpayment

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Discounting Notes Receivable

Sell note prior to maturity date for cash Receive less than face value (i.e.,

discounted amount) Can be sold with or without recourse

Baker Corporation promises to pay HighTec, Inc. $15,000 plus 12% annual interest on December 31, 1998.

Date: January 1, 1998

Signed:_________Baker Corporation

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Operating Activities Net income xxxx Increase in accounts receivable - Decrease in accounts receivable + Increase in notes receivable - Decrease in notes receivable +Investing Activities Purchases of held-to-maturity and available-for-sale securities -

Sales/maturities of held-to-maturity and

available-for-sale securities +

Financing Activities

Liquid Assets and the Statement of Cash Flows - Indirect Method

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End of Chapter 7

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1 Chapter 7 Cash, Investments, and Receivables Financial Accounting 4e by Porter and Norton.

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