devry Accounting 212 FINANCIAL ACCOUNTING slides ch5

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3. Short-Term Investments and
Receivables
Chapter 5
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4. Account for short-term investments
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5. Short-Term Investments
• Also called marketable securities
• Easily convertible into cash
• Expected to be held one year or less
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6. Short-Term Investment Categories
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7. Trading Securities
• Held for a short time and then sold
• Can be debt or equity securities of another
company
• Earn interest or dividend revenue
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8. Unrealized Gains and Losses
Trading securities are reported on the
balance sheet at current market value
If market value ?
has increased
If market value
has decreased ?
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9. Adjusting Trading Securities to
Market
JOURNAL
Date Accounts and explanation Debit Credit
Investment in ABC stock
Unrealized gain on investments ?
Adjusted investment to market value
JOURNAL
Date Accounts and explanation Debit Credit
Unrealized loss on investment
Investment in ABC stock ?
Adjusted investment to market value
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10. Balance Sheet & Income Statement
Reporting
Balance Sheet Income Statement
Current assets: Revenues $$$
Cash $$$ Expenses $$$
Short-term investments, Other revenue, gains and
at market value $$$ (losses):
Accounts receivable $$$ Interest revenue $$$
Dividend revenue $$$
Unrealized gain on
investments $$$
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11. Realized Gains and Losses
Only reported when investment is sold
If sales price > ?
carrying amount
If sales price <
carrying amount ?
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12. Exercise 5-19A
ACA Inc.
Balance Sheet
December 31
Current assets:
Short-term investments at market value
ACA Inc.
Income Statement
For the year ending December 31
Other income, revenue,(loss):
Dividend revenue
Unrealized loss on investments
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13. Account for, and control, accounts receivable
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14. Receivables
• Third most liquid asset
• Monetary claims against others
• Acquired mainly by ?
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15. Accounts Receivable
• Amounts collectible from customers
• Balance in general ledger
• Subsidiary ledger
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16. General Ledger Accounts Receivable Subsidiary Ledger
Customer A
$2,000
Accounts receivable
$5,000
Total Customer B
$5,000 $1,800
Customer C
$1,200
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17. Notes Receivable
• More formal than accounts receivable
• Written promise to pay a sum at the maturity
date
• Also called promissory notes
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18. Internal Control: Collections on
Account
• Separate cash-handling and cash accounting
duties
• Another option ?
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19. Risks of Selling on Credit
Issues Plan of action
What are the benefits and costs of
extending credit to customers?
Extend credit to only creditworthy
customers
Separate cash-handling and
accounting duties to keep
employees from stealing cash from
customers
Pursue collection from customers
to maximize cash flow
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20. Uncollectible Receivables
Benefit of selling on credit Cost of selling on credit
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20

21. Use the allowance method for uncollectible
receivables
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22. The Allowance Method
• Records collection losses based on company’s
collection experience
• Estimates Uncollectible-Accounts Expense
• Also sets up Allowance for Uncollectible
Accounts
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23. Net Realizable Value
Balance Sheet
Current assets:
Accounts receivable $100,000
Less: Allowance for uncollectible accounts (5,000)
Accounts receivable, net $95,000
Balance Sheet
Current assets:
Accounts receivable, less allowance of $5,000 $95,000
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24. Methods to Estimate Uncollectibles
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25. Percent-of-Sales Method
• Emphasizes matching concept
Uncollectible
Estimated % Revenue Accounts
uncollectible
Expense
JOURNAL
Date Accounts and explanation Debit Credit
Uncollectible accounts expense
Allowance for uncollectible accounts
Recorded uncollectible accounts expense
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26. Aging-of-Receivables
• Focuses on proper valuation of accounts
receivable on the balance sheet
• Individual customer balances analyzed based on
time outstanding
• Allowance for Uncollectible Accounts adjusted to
equal amount from aging schedule
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27. Age of Account
1-30 31-60 61-90 Over 90 Total
Customer days days days days Balance
Customer A $100 $500 $600
Customer B 400 400
All others 5,000 1,500 600 400 7,500
Totals $5,100 $1,900 $1,100 $400 $8,500
Est. percent uncollectible 1% 3% 8% 20%
Allowance balance should be: $51 $57 $88 $80 $276
Allowance for Uncollectible Accounts
Balance before adjustment $31
$245 Adjustment needed
$276
Ending balance equals aging schedule
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28. Aging-of-Receivables
JOURNAL
Date Accounts and explanation Debit Credit
Uncollectible accounts expense 245
Allowance for uncollectible accounts 245
Recorded uncollectible accounts expense
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29. Writing Off Uncollectible Accounts
JOURNAL
Date Accounts and explanation Debit Credit
Allowance for uncollectible accounts 900
Accounts Receivable 900
Write off customer account
Allowance for Uncollectible
Accounts Receivable Accounts
Bal. $50,000 $900 $900 $3,000 Bal.
$49,100 $2,100
No impact on
Income Statement
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30. Impact of Write-Off
Balance Sheet – Before Write Off
Current assets:
Accounts receivable $50,000
Less: Allowance for uncollectible accounts (3,000)
Accounts receivable, net $47,000
Balance Sheet – After Write Off
Current assets:
Accounts receivable $49,100
Less: Allowance for uncollectible accounts (2,100)
Accounts receivable, net $47,000
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31. Comparing Allowance Methods
Approaches
Percent-of-Sales Aging-of-Receivables
Adjusts Allowance for Adjusts Allowance for
Uncollectible Accounts Uncollectible Accounts
BY
BY TO
TO
The amount of The amount of
The amount of
UNCOLLECTIBLE ACCOUNTS UNCOLLECTIBLE ACCOUNTS
UNCOLLECTIBLE ACCOUNTS
EXPENSE RECEIVABLE
RECEIVABLE
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32. Exercise 5-22A
JOURNAL
Date Accounts and explanation Debit Credit
Accounts receivable
Sales revenue
Cash
Accounts receivable
Allowance for uncollectible accounts
Accounts receivable
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33. Exercise 5-22A
JOURNAL
Date Accounts and explanation Debit Credit
Uncollectible-account expense
Allowance for uncollectible accounts
Allowance for
Accounts receivable
Uncollectible Accounts
Bal. $30,000 $137,000 Payments Write-offs $2,300 $2,000 Bal.
Sales $161,000 $2,300 Write-offs $6,440 Adj.
$51,700 $6,140
Net AR =
$45,560
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34. Exercise 5-22A
Balance Sheet
Current assets:
Accounts receivable
Less: Allowance for uncollectible accounts
Accounts receivable, net
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35. Direct Write-Off Method
• Waits until a specific account is uncollectible to
record the expense
• Inferior to Allowance method
JOURNAL
Date Accounts and explanation Debit Credit
Uncollectible-account Expense
Accounts Receivable
Write off customer account
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36. Computing Cash Collections from
Customers
Accounts Receivable
Beginning balance
$1000 Write-offs $30
of uncollectibles
Sales on credit
$5000 Collections from customers
? $4704
Ending balance
$1500
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37. Account for notes receivable
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38. Notes Receivable
• Can be current or long-term assets
• Terms:
Creditor
Debtor
Interest
Maturity date
Maturity value
Principal
Term
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39. Principal Date Interest
Starts
PROMISSORY NOTE
$3,000 June 1, 2010
Amount Date
For value received, I promise to pay to the order of
Second National Bank Payee (Creditor)
Omaha, Nebraska
Principal Three thousand and no/100s-------------------------------- Dollars
Maturity Date
On March 1, 2011
plus interest at the annual rate of 6 percent
Patricia Maker
Alexander (Debtor)
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40. Accounting for Notes Receivable
JOURNAL
Date Accounts and explanation Debit Credit
2010
6-1 Notes receivable 3,000
Cash 3,000
12-31 Interest receivable 105
Interest revenue 105
2011
3-1 Cash 3,135
Notes receivable 3,000
Interest receivable 105
Interest revenue 30
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41. Interest
• Interest rates are usually expressed as an annual
percent
• For time periods less than a year, a fraction is
used
• Often interest is computed based on days
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42. Speeding Up Cash Flow
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43. Use two new ratios to evaluate a business
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44. Acid-Test (or Quick) Ratio
Cash + Short-term investments + Net current receivables
Total current liabilities
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45. Short Exercise 5-13
Acid-test ratio
?
?
= 1.05
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46. Days’ Sales in Receivables (Collection
Period)
Net sales
One day’s
sales 365
Average receivables
Days’ sales in
receivables
One day’s sales
(Beginning net receivables + Ending net receivables)/2
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47. Short Exercise 5-13
Days’ sales in receivable
One day’s
sales
Days’ sales in
receivables
= ? days
(Beginning net receivables + Ending net receivables)/2
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