Ch. 7 Cash & Receivables - Acct 311

Current Assets

cash available for current operations or to pay current liabilities

Investments or other assets

cash that is restricted and not available for current operations

Internal Controls

policies, procedures, and mechanisms that a company implements to ensure the integrity of its financial information, safeguard assets, and prevent fraud.

Cash Equivalents 

highly liquid investments that have a maturity date of three months or less form the date of purchase (ex. T-bills, money market funds, commercial paper)

1st Purpose of Internal Controls 

Encourage adherence to company policies and procedures

2nd Purpose of Internal Controls

Promote operational efficiency

3rd Purpose of Internal Controls

Minimize errors and theft

4th Purpose of Internal Controls

Enhance the reliability and accuracy of accounting data

Principles of Internal Controls (activities)

Job Description

Separation of Duties 

Documentation of transactions

Restriction on access to assets 

Internal Control of Cash Receipt Process

Every responsibility, handling, recording, transactions, and balancing, is done by a different employee (separation of duties)

Internal Control of Cash Disbursement Process

Every responsibility, check writing, check signing, check mailing, disbursement documentation, record keeping, is done by different employees (separation of duties)

Periodic Reconciliation (cash internal control)

most important tool used in the control of cash, reconciling book balances and bank balances

Accounts Receivable

Amount due from customers for credit sales, almost always current assets.

Bad Debt Expense (uncollectable-account exps)

Amount uncollectible from credit customers, must be recorded in the same period with related sales (matching principle), income statement expense.

Allowance Method (for recording Bad Debt Exp)

Under this method, bad debt expense is estimated and recorded at the end of the period, in accordance with GAAP. 

Allowance Method Entry

Bad Debt Expense (debit)

Allowance for Doubtful accounts (credit) (contra asset)

Direct Write-Off Method (for recording Bad Debt Exp)

Bad debt exp is not estimated and recorded at the end of the period, recorded only when almost certain uncollectible. Then directly removed from accounts receivable, not in accordance with GAAP.

Direct Write-Off Method Entry

Bad Expense Account (debit)

      Accounts Receivable (credit)

Percentage of Sales Method (income stat. approach)

Under this method you can compute bad debt expense directly, uncollectible percentage is given on credit sales.

ex. Current Bad Debt Exp = (Current Year Net Credit Sales * Uncollectible Percentage)

Percentage of Receivables Method (balance sht approach)

Under this method, cannot directly compute bad debt exp, must first compute total ending allowance for doubtful accounts.

ex. step 1 Ending Allowance for DA, step 2 Current Bad Debt Exp

Aging of Receivables 

When accounts receivables are broken down into age classifications, each group having different likelihood of being uncollectible.

Cash Discount

Amount in reduction in the sales price offered by the seller to customers for payments within the discount period, or sales discount to the seller.

Cash Discount Term

In order, shows the discount percent, days discount available, net due otherwise, and credit period. 

Gross Method (recording cash discount)

Sales are re-recorded at the invoice price when made, and any sales discount is recognized only if the customer pays within the discount period.

Net Method (recording cash discount)

Sales are initially recorded at the discounted price, and if customers pay after the discount period, the forfeited discount is recognized as interest revenue.

Sale of receivables without Recourse

In this case, the buyer of receivables (factor) assumes the risk of uncollectability and absorbs any credit losses.

Sale of receivables with Recourse 

The seller of receivables guarantees payment to the buyer (factor) in the event the debtor fails to pay.

Sale of Receivables

When companies sell their receivables to a “factor” if they need money. 

Factor

Banks or finance companies which buy receivables for a fee and then collects money directly from customers.

Notes Receivable

Written promise by customers to pay a certain point in time and also carries interest, current liability if receivable within one year, but long-term liability if receivable after one year (from balance sheet date)

Discounting Notes Receivable

Transfer of a note receivable to a financial institution (before maturity date) is called discounting. Either regarded as a sale or as a borrowing.