Cash, Investments,

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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)
• Current Assets
• Cash and cash equivalents
• Short-term investments, at cost
• Accounts and notes receivable
• Inventories
• Prepaid expenses other assets
• Total Current Assets

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Cash

• Coin currency
• Checking, savings money market accounts
• Undeposited, cashier, and certified checks

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Cash Equivalents

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

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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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Example of Reconciliation
Bank Statement Adjustments Checks Outstanding

Balance per statement, June 30 3,308.59 Add
Deposit in transit 642.30 Deduct
Outstanding checks Check No. 496
79.89 Check No. 501 213.20 Check No. 502
424.75 (717.84) Adjusted balance, June 30
3,233.05
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Example of Reconciliation
Bank Statement Adjustments

• Balance per statement, June 30 3,308.59
• Adjusted balance, June 30 3,233.05

Cash Account Adjustments
Balance per books, June 30
2,895.82 Adjusted balance, June 30
3,233.05
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Petty Cash
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Investment in CD
Invest 100,000 in a 120-day CD. Principal plus
interest _at_ 6 due upon investment maturity.
Example

• Purchase of investment Dr. Cr.
• Short-Term
• Investments CD 100,000
• Cash 100,000

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Investment in CD

• Year-end adjusting entry Dr. Cr.
• Interest Receivable 1,500
• Interest Revenue 1,500

Interest Principal x Rate x Time 1,500
100,000 x 6 x 90/360
October 29 days November 30 days December
31 days 90 days
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Investment in CD

• Upon investment maturity Dr. Cr.
• Cash 102,000
• Short-Term Investments - CD 100,000
• Interest Receivable 1,500
• Interest Revenue 500

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
Our Focus
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Investments Without Significant Influence

• Held-to-Maturity Securities
• Trading Securities
• Available-for-Sale Securities

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Held-to-Maturity Securities

• Bonds of other companies
• Intent and ability to hold until maturity

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Trading Securities

• Purchased to generate profit from short-term
  appreciation

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Trading Securities

• At end of each period, security is marked to
  market

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Available-for-Sale Securities

• Securities not classified as held-to-maturity or
  trading

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Available-for-Sale Securities

• Also marked to market at end of accounting
  period

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Accounting for Investments Without Significant
Influence
Recognize Report Report FV Categories as
income on BS at changes on Held-to-maturity intere
st cost N/A Trading 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
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Menkhaus Corporation Sample Accounts Receivable
Subsidiary Ledger

• Total Due
• ABC Distributors 25
• HIJ Distributors 336
• XYZ Distributors 108
• 1,105

In 000s
Gross Accounts Receivable
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Winnebago Industries, Inc.Consolidated Balance
Sheet (partial)

• 2001 2000
• Receivables, less allowance
• for doubtful accounts (244
• and 1,168, respectively) 20,183
  32,045

Estimated Uncollectible Accounts
Net Realizable Value
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Accounting for Bad DebtsDirect Write-off Method
Period of Sale

• Journal entry to record write-off in period
  determined to be uncollectible
• Bad Debt Expense XXX
• Accounts Receivable Dexter XXX

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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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Balance Sheet Presentation - Allowance Method

• Roberts Corp.
• Partial Balance Sheet
• Current assets
• Accounts receivable 250,000
• Less allowance for
• doubtful accounts ( 6,000)
• Net accounts receivable 244,000

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Accounting for Bad DebtsAllowance 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 DebtsAllowance 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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Percentage of Net Credit Sales Method
Example

• Assume prior years net credit sales and bad debt
  expense is as follows
• Year Net credit sales Bad debts
• 1999 1,250,000 26,400
• 2000 1,340,000 29,350
• 2001 1,200,000 23,100
• 2002 1,650,000 32,150
• 2003 2,120,000 42,700
• 7,560,000 153,700

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Percentage of Net Credit Sales Method
Example

• 2004 Net credit sales 2,340,000 (given)
• Bad debt percentage 2
• Bad debts expense 46,800

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Aging Method

• Est. Percent Est. Amount
• Category Amount Uncollectible Uncollectible
• Current 85,600 1 856
• Past 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
Assume Allowance account has a beginning credit
balance of 1,230
Allowance for Doubtful Accts
1,230
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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

• Aging
• Allowance Account
• XX
• Computes ending balance in the allowance account

• of Net Sales
• Allowance Account
• XX
• Computes bad debt expense (of which the credit is
  recorded here)

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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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Interest-Bearing Promissory Note
Baker Corporation promises to pay HighTec, Inc.
15,000 plus 12 annual interest on March 13,
2005. Date December 13, 2004 Signed_________
Baker Corporation
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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

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End of Chapter 7