Chapter 7

Cash and Receivables

Prepared by:
Patricia Zima, CA
Mohawk College of Applied Arts and Technology
Updated for IFRS by:
Anupma Goel, CA
Seneca College of Applied Arts and Technology

Cash and Receivables

Cash
What is cash?

Receivables
Introduction
Recognition and
Management
measurement of
and control of
accounts receivable
cash
Valuation of
Reporting cash accounts receivable
Recognition,
Summary of
measurement, and
cash-related
valuation of shortitems
term notes
receivable
Recognition and
measurement of
long-term loans

Disposition
of
Receivables
Secured
borrowings
Sales of
receivables

Presentation,
Perspectives,
and
International
Standards
Presentation of
receivables and
loans
Perspectives
Canadian
GAAP and
international
accounting
standards-a
comparison

AppendixCash Controls
Using bank
accounts
The imprest
petty cash
system
Physical
protection of
cash balances
Reconciliation
of bank
balances

Financial Asset
Any asset that is:
(i) cash;
(ii) a contractual right to receive cash or
another financial asset from another party;
(iii) a contractual right to exchange financial
instruments with another party under
conditions that are potentially favourable to
the entity; or
(iv) an equity instrument of another entity
CICA Handbook, Section 3855.19
3

Section 1:

Cash

What is Cash?
Cash is reported as a current asset if it is readily
available to pay current obligations and is free of
restrictions
Cash consists of coins, currency, available funds
on deposit at the bank, and petty cash
Also includes money orders, certified cheques,
cashiers cheques, personal cheques, bank drafts,
and usually savings accounts
Postdated cheques, travel advances, and stamps
on hand are not classified as cash
5

Management and Control of

Cash
There are many risks associated with cash
Since cash is the most liquid asset, effective
internal control of cash is imperative
Internal controls need to prevent
unauthorized use of cash
Management must have all necessary
information to properly manage cash

Reporting of Cash

Reporting cash needs special attention of

the following:
1.
2.
3.
4.

Restricted cash
Cash in foreign currencies
Bank overdrafts
Cash equivalents

Restricted Cash
Compensating balances: minimum cash
balances maintained by a corporation in support
of existing borrowings
These funds are not available for use by the
corporation, but the bank can use the restricted
cash
Petty cash, special payroll, and dividend
accounts are examples of cash set aside for a
special purpose (usually not material)
8

Restricted Cash
If the compensating balance is material, must
be segregated from Cash as follows:
-Classified as current assets if they relate to
short-term loans
-Classified as non-current assets if set aside
for investment or financing purposes
(e.g. plant expansion)
Note disclosure of restricted cash is required

Foreign Currencies
Amount held in foreign currencies
is reported in Canadian dollars at
the balance sheet date
The exchange rate on the
balance sheet date is used to
translate foreign currencies into
Canadian dollars
If restrictions exist on the foreign
funds, those funds are reported
as restricted
10

Bank Overdrafts
Overdrafts represent cheques written in
excess of the cash account balance
Overdrafts are reported as current liabilities
(often reported as accounts payable)
In general, bank overdrafts should not be
offset against the Cash account
However, bank overdrafts may be offset
against available cash in another account if
both accounts are at the same bank
11

Cash Equivalents
Defined as short-term, highly liquid investments that
are readily convertible to known amounts of cash
subject to an insignificant risk of change in value.
Original maturity is generally three months or less
Excludes equity securities
Examples: treasury bills, money-market funds,
commercial paper
Cash equivalents are reported at fair value
Under IFRS some equity instruments can be classified
as cash equivalents. For example, preferred shares
acquired within a short time of their maturity and with a
specified redemption date.
12

Section 2:

Receivables

13

Receivables: Introduction
Loans and receivables are claims against
customers and other parties for money, goods,
or services
Receivables are classified as either current
(short-term) or noncurrent (long-term)
Classified as current receivables if there is the
expectation to collect within one year or
operating cycle (whichever is longer)
Receivables can be classified as either trade
receivables or nontrade receivables
14

Accounts Receivable: Issues

Trade receivables include:

Accounts receivable (verbal promise to pay,
normally within 30 to 60 days)
Notes receivable (written promises with
specified terms, e.g. interest rate and due
date)
Nontrade receivables include the following:
1. Advances to employees or other officers
2. Receivables from the government (e.g. GST
recoverable, income tax receivable)
3. Dividends and interest receivable
4. Amounts owing by insurance companies
15

Accounts Receivable: Trade

Discounts vs. Cash Discounts
Trade discounts are discounts given to customers
often for different quantities purchased (often
quoted as a percentage)
Trade discounts are not recorded; the price
charged (net of the discount) is recorded by the
seller as a receivable and revenue
Cash discounts (or sales discounts) encourage
customers to pay faster; they are recorded
Example of cash discounts: 2/10, n/30; the
customer will receive a 2% discount if payment
made within 10 days and the gross amount of the
invoice is due in 30 days

16

Accounts Receivable:
Recording Cash Discounts
Two methods: gross method and net method
Gross method records discounts when customers pay
within discount period
Sales Discounts are deducted from sales on the
income statement
Most common method
Net method records accounts receivable net of the
discount; discounts forfeited by customers are
recorded when not taken
Preferred method but rarely used
Sales Discounts Forfeited is recorded as Other
revenue if customer does not take the discount
17

Example of Gross Method

$10,000 sales on credit (terms 2/10, n/30)
DR Accounts Receivable 10,000
CR Sales Revenue
10,000
Customer pays account within discount period
DR Cash
9,800
DR Sales Discounts 200
CR Accounts Receivable 10,000
18

Example of Net Method

$10,000 sales on credit (terms 2/10, n/30)
DR Accounts Receivable 9,800
CR Sales Revenue
9,800
Customer pays account after discount period
DR Cash
10,000
CR Sales Discounts Forfeited
200
CR Accounts Receivable
9,800
19

Valuation of Accounts
Receivable
Short-term receivables are reported at their
net realizable value (NRV)
The NRV is the net amount of cash
expected to be collected, which is not
necessarily the amount legally receivable
Calculated as:
Gross accounts receivable less
estimated uncollectible accounts and any
returns, allowances, or cash discounts
20

Estimating Uncollectible
Receivables
The Allowance Method
Records estimated bad debt expense in the
same accounting period as the sale
(matching concept)
Receivables are reported at their estimated
realizable value i.e., net of an Allowance for
Doubtful Accounts
21

Estimating Uncollectible
Accounts:
The Allowance Method

The estimate of uncollectible accounts may be

based on:
Percentage of Sales (or net sales)
referred to as the Income Statement
approach
Outstanding Accounts Receivable
referred to as the Balance Sheet
approach
Many companies use the % of sales method
during the year and adjust at year end based
on the receivables approach
22

The Income Statement

Approach
Uses the relationship between sales and bad
debts
Matches the estimated cost of bad debts to
sales generated in the same accounting
period
Any existing balance in the balance sheet
account (Allowance for Doubtful Accounts) is
ignored when calculating the current years
bad debts expense
23

The Income Statement

Approach
Example:
Dockrill Corp. reports the following balances
for its first year of operations (2007):
Net credit sales: $400,000
The company estimates bad debts at 2% of
net credit sales
Determine estimated bad debts expense for
2007
24

The Income Statement

Approach

1 Estimated Bad Debts Expense:

$400,000 x 2% = $8,000

2 To record Bad Debts Expense:

Bad Debts Expense
$8,000
Allowance for Doubtful Accounts

$8,000

3 The Bad Debt expense for the year is $8,000. Note

that if the balance in the Allowance account after this
entry results in a net A/R amount that differs
materially from its NRV, the % used may need to be
changed or the balance sheet method used instead.
25

The Balance Sheet Approach

Uses past collection experience to estimate
uncollectible accounts, without identifying specific
accounts
Focus is to report accounts receivable at its net
realizable value
Does not focus on matching bad debt expense
to sales
Any existing balance in Allowance for Doubtful
Accounts is used to calculate the current years
bad debt expense
Can use: Percentage-of-receivables or aged
receivable analysis
26

The Balance Sheet Approach:

Aged Receivable Analysis
Wilson & Co. Aging Schedule
Customer

Balance

< 60
Days

Western

$ 98,000

$ 80,000

Brockville

320,000

320,000

Freeport

55,000

Manitoba

74,000

91 120
Days

> 120
Days

$ 18,000

$55,000
60,000

$547,000 $460,000
Estimated
Uncollectible

61 90
Days

4%

$14,000
$ 18,000
15%

$ 14,000
20%

$ 55,000
25%

27

The Balance Sheet Approach:

Aged Receivable Analysis
1 Calculate bad debts expense:
460,000 x .04
$18,400
18,000 x .15
2,700
14,000 x .20
2,800
55,000 x .25
13,750
Required balance in Allowance
$37,650 Cr.
less: current balance in Allowance
800 Cr.
Bad Debts Expense

$36,850*

2 To record bad debts expense:

Bad Debts Expense
*36,850
Allowance for Doubtful Accounts

36,850

28

Comparison of Methods for

Estimating Uncollectibles
Percentage-of-Sales
Matching

Sales

Bad Debt Expense

Income Statement
Approach

Percentage-of-Receivables (or
Aging Method)
Net Realizable Value

A/R

Allowance for
Doubtful Accounts

Balance Sheet Approach

29

Balance Sheet Presentation

Short-term accounts receivable are shown at
their net realizable value as follows:
Accounts Receivable
$ xxx
Less: Allow. for Doubtful Accounts
xxx
Net Realizable Value
$ xxx

30

Allowance Method: Writing Off

Accounts Receivable

When a specific customers account is determined to

be uncollectible, the following entry is made:
Dr. Allowance for Doubtful Accounts x
Cr. Accounts Receivable specific customer

(for the amount to be written off)

If payment is received after write-off of account,

the account is reinstated and payment is recorded:
Dr. Accounts Receivable
Cr. Allowance for Doubtful
Accounts

Dr. Cash
Cr. Accounts Receivable
(for the amount collected)
31

Direct Write-off Method

If uncollectible amounts are not material, the
allowance method is not required
Instead, direct write-off method can be used
Record bad debt expense only when specific
account is determined to be uncollectible:
Dr. Bad Debt Expense
x
Cr. Accounts Receivable
x
No allowance account is used
32

Recognition of Short-Term
Notes Receivable
Notes receivable differ from accounts receivable as
they are supported by a promissory note (with
specific terms)
All notes contain some interest
Notes are either:
Interest bearing
Have a stated rate of interest or
Zero-interest bearing (or non-interest bearing)
Interest rate not always stated
Interest amount is the difference between the
amount borrowed and the face amount
33

Interest Bearing Short-Term

Notes Receivable
Example: On March 14, 2008, Accounts Receivable of
$1,000 is exchanged for a 6% six-month note
March 14, 2008 (when note is issued):
Notes Receivable
1,000
Accounts Receivable
1,000
September 14, 2008 (on collection of note):
Cash
1,030
Notes Receivable
1,000
Interest Income
30
Interest = $1,000 x 6% x 6/12
34

Non-Interest Bearing
Short-Term Notes
Receivable

On February 23, 2008, a $5,000 nine-month non-interest

bearing note is issued; 8% is the implied interest rate
On issuance of note:
Notes Receivable
4,717
Cash
4,717*
*5,000 / (1 + 6%); 8% x 9/12 = 6%
On collection of note:
Cash
5,000
Notes Receivable
4,717
Interest Income
283
Interest = $4,717 x 8% x 9/12
35

Long-term Loans Receivable

Long-term loans receivable are recognized at
fair value i.e. the present value of the future
cash flows
When the stated interest rate is the same
as the market interest rate, the note or loan
is issued at its face value
When there is a difference between
interest rates, the note or loan is issued at
a premium or a discount (i.e. the present
value is greater or less than the face value)
36

Long-term Loans Receivable

Interest Bearing Notes
Example: Morgan Corp. issues a $10,000, 10%
three-year note; market interest rate is 12% and
annual interest payments are $1,000 (10% x $10,000)
In calculating the notes present value, use 12%
market rate to discount all future cash flows as
follows:
($10,000 x .71178) + ($1,000 x 2.40183) = $9,520
The note is issued at a discount (as proceeds < face)
Journal Entry at issuance of note:
Dr. Notes Receivable
10,000
Cr. Discount on Notes Receivable
Cr. Cash
9,520

480
37

Long-term Loans Receivable

Interest Bearing Notes
Example continued:
At date of issue, the company has an unamortized
discount of $480 (to be amortized over the 3 years)
The discount represents interest income to be
recognized over the 3 year life of the note
$9,520 x 12% = $1,142 (first year interest income)
Journal Entry to record first $1,000 interest
received:
Dr. Cash
1,000
Dr. Discount on Notes Receivable 142
Cr. Interest Income
1,142

38

Long-term Loans Receivable

Interest Bearing Notes
Example continued
Book value of Notes Receivable is now:
$10,000 ($480 - $142) = $9,662
Interest Income for second year:
$9,662 12% = $1,159
Journal Entry to record second $1,000 interest
received:
Dr. Cash
1,000
Dr. Disc. on Notes Receivable 159
Cr. Interest Income
1,159
39

Disposition of Accounts and

Notes Receivable

The holder of accounts or notes receivable may transfer them to

another company for cash

The transfer may be:

A secured borrowing

A sale of receivables

Holder retains ownership of receivables in a secured borrowing

transaction; the receivables are used as collateral

Holder transfers ownership of receivables in a sale

Under IFRS, an entity removes a financial asset from its balance sheet when:

its contractual rights to the assets cash flows expire;

it has transferred the asset and substantially all the risks and rewards of ownership; or

it has transferred the asset and has retained some substantial risks and rewards of
ownership, but the other party may sell the asset. The risks and rewards retained are
recognized as an asset.

The criteria for de-recognition differs - Canadian GAAP focuses on legal isolation
and surrender of control, as opposed to the risk/reward transfer. In addition,
Canadian GAAP does not permit partial de-recognition.

40

Transfer of Receivables:
Borrowing vs. Sale Treatment
Conditions
1. Are transferred assets isolated
from transferor? and
2. Does transferee have right to
pledge or sell the assets? and
3. Transferor does not maintain
control of the assets through
repurchase agreement?

Yes

No

Sale
Secured
Borrowing

41

Accounting for Transfers

of Receivables
Transfers
Secured Borrowing
Continuing
involvement by seller
Use components approach:
1. Reduce receivables,
2. Recognize component
assets and liabilities,
3, Record gain/loss

Sale
No continuing
involvement by seller
1. Reduce receivables,
2. Record gain/loss

42

Secured Borrowing
(Highlights)
Transferor records a finance charge
Transferor collects accounts receivable
Transferor records sales returns and sales
discounts
Transferor absorbs bad debts expense
Transferor records interest expense on
notes payable
Transferor pays the note periodically from
collections
43

Sale of Receivables (e.g.,

Factoring)
Ownership of receivables transferred to the
purchaser (the factor); receivables recorded as an
asset in the purchasers books
If sold without recourse, purchaser is fully
responsible for collections of the receivables
Seller records any retained proceeds as due from
factor (a receivable) which covers possible sales
discounts and sales returns and allowances
Seller records loss on sale of receivables
(basically the finance charge)
Seller records any recourse liability (if receivables
are sold with recourse i.e., sellers guarantee)
44

Presentation of Trade
Accounts
and Notes Receivable

Segregate types of receivables (i.e. ordinary

trade accounts, due from related parties and
other receivables segregated)
If > 1 year, report amount and maturity date
If < 1 year, report in current assets
Disclose if receivables pledged as collateral
for liabilities
Use allowance account to record impairments
45

For Loans and Receivables that

are Financial Instruments
Provide specific information about:
The significance of loans and receivables to a
companys financial position and
performance, and
The nature and extent of risks arising from
these assets
46

International Comparison
Loans and Receivables
Canadian and international GAAP are
substantially converged
Some differences still exist related to
transaction costs, related party
transactions, and derecognition, for
example

47

Analysis
Accounts Receivable Turnover:
Net Sales/Revenue
Average Trade Receivables (Net)
Days Sales Uncollected:
365 Days
A/R Turnover

48

Current IFRS GAAP

Comparisons
Main differences:
Under IFRS some equity instruments can be classified as cash
equivalents. For example, preferred shares acquired within a short
time of their maturity and with a specified redemption date.
Under IFRS, an entity removes a financial asset from its balance sheet
when:
its contractual rights to the assets cash flows expire;
it has transferred the asset and substantially all the risks and rewards of
ownership; or
it has transferred the asset and has retained some substantial risks and
rewards of ownership, but the other party may sell the asset. The risks and
rewards retained are recognized as an asset.

The criteria for de-recognition differs under Canadian GAAP. Canadian

GAAP focuses on legal isolation and surrender of control, as opposed
to the risk/reward transfer. In addition, Canadian GAAP does not
permit partial de-recognition.
49

Looking Ahead
The IASB is working on several projects
addressing the re-recognition of financial
assets and liabilities

50

COPYRIGHT
Copyright 2009 John Wiley & Sons Canada, Ltd.
All rights reserved. Reproduction or translation of
this work beyond that permitted by Access Copyright
(The Canadian Copyright Licensing Agency) is
unlawful. Requests for further information should be
addressed to the Permissions Department, John
Wiley & Sons Canada, Ltd. The purchaser may make
back-up copies for his or her own use only and not
for distribution or resale. The author and the
publisher assume no responsibility for errors,
omissions, or damages caused by the use of these
programs or from the use of the information
contained herein.

51