Chapter 6 - Cash and Receivables Notes

  • Chapter 6 Overview: Focuses on cash and receivables, detailing how to report and value them.

Learning Objectives

  • Able to report cash and related items.
  • Define and recognize accounting issues related to receivables.
  • Explain valuation issues for accounts and notes receivable.

Cash Reporting

  • Cash: Most liquid asset; includes coin, bank deposits, checks, etc.
  • Cash Equivalents: Short-term, liquid investments (e.g., treasury bills, money market funds).
  • Restricted Cash: Segregated if material; reported for future use (e.g., plant expansion).
  • Compensating Balance: Minimum balance banks require; reported as current/noncurrent depending on borrowing.

Receivables Overview

  • Types of Receivables:
    • Trade Receivables: Claims from customers for sales.
    • Nontrade Receivables: Includes advances, deposits, dividends receivable.
  • Recognition: Accounts receivable recognized when a good/service is transferred, according to revenue recognition principles.
  • Transaction Price: Expected to be received; considers variable elements like discounts or returns.

Valuation of Receivables

  • Uncollectible Accounts: Recorded as Bad Debt Expense. Methods include:
    • Direct Write-Off Method: Charges specific uncollectibles directly to expense.
    • Allowance Method: Estimates uncollectibles and ensures receivables are stated at net realizable value.
  • Adjusting Entries: Required to account for estimated uncollectibles and when accounts are written off.

Additional Accounting Issues

  • Notes Receivable: Supported by formal promissory notes; can be interest-bearing or zero-interest.
  • Present Value: Notes recognized at PV of future cash flows, adjusted based on implicit rates if not stated.

Disposition of Receivables

  • Companies may transfer receivables for cash, emphasizing reasons for sales without/with recourse.
  • Sales Without Recourse: Buyer assumes collection risk; record losses.
  • Sales With Recourse: Seller guarantees payment; recognizes potential losses.

Presentation and Analysis

  • Segregation and disclosure of receivables on financial statements is critical for providing clarity on monetary health.
  • Use ratios like Accounts Receivable Turnover to assess liquidity.