Financial Assets

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Chapter 7

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
How much cash should a business
Have?
“As little as necessary”

Cash

Marketable Securities

Receivable

7-2
 The Valuation of Financial Assets
Basis for Valuation in
Type of Financial Assets the Balance Sheet
Cash (and cash equivalents) Face amount
Short-term investments Current market value
(marketable securities)
Receivables Net realizable value

Estimated
Estimated collectible
collectible amount
amount

7-3
REPORTING CASH IN
THE BALANCE SHEET

7-4
Cash
Coins and
paper
money
Cash is Checks

defined as
any deposit
Bank credit
card sales
banks will Money orders
accept.

Travelers’ checks

7-5
Restricted Cash

Investments and Restricted Funds

Line of Credit

7-6
Cash Management
Provide accurate accounting for cash
receipts, cash disbursements, and cash
balances.
Prevent or minimize losses from theft or
fraud.
Anticipate the need of borrowing
Prevent unnecessary bank deposits.

7-7
Bank Statements
Reconciling the bank statement
Difference b/w bank record and depositor record:
Outstanding checks.
Deposits in transit
Service charges
Charges for depositing NSF checks
Credit for interest earned
Miscellaneous bank charges and credits

7-8
Reconciling the Bank Statement
Balance per Bank Balance per Depositor

+ Deposits by Bank
+ Deposits in Transit
(credit memos)

- Service Charge
- Outstanding Checks
- NSF Checks

± Bank Adjustments ± Book Adjustments

= Adjusted Balance = Adjusted Balance

7-9
Petty cash Funds
A small amount of cash on hand with
which to make some minor expenditures.

Office supplies
Taxi fares
Doughnuts for an office meeting

7-10
Short-Term Investments
Capital
Bond
Stock
Investments
Investments
Marketable
Securities
Readily
Marketable
are . . . Current Assets

Almost As
Liquid As
Cash
7-11
Accounting for marketable
securities

Purchase of marketable securities

Recognition of investment revenue

Sale of investment

7-12
Receivables
Uncollectable account

Reflecting uncollectible accounts in the

financial statements

7-13
The Allowance for Doubtful
Accounts
The net realizable value is the amount of
accounts receivable that the business
expects to collect.

Accounts receivable
Less: Allowance for doubtful accounts
Net realizable value of accounts receivable

7-14
Writing Off an Uncollectible
Account Receivable
When
When anan account
account isis determined
determined to to be
be
uncollectible,
uncollectible,itit no
no longer
longer qualifies
qualifies as
as
an
an asset
asset and
and should
should be
be written
written off.
off.

7-15
 Writing Off an Uncollectible
Account Receivable

Before After
Write-Off Write-Off
Accounts receivable $ 10,000 $ 9,500
Less: Allow. for doubtful accts. 2,500 2,000
Net realizable value $ 7,500 $ 7,500

Notice that the $500 write-off did not change

the net realizable value nor did it affect any
income statement accounts.
7-16
 Estimating Credit Losses — The
Balance Sheet Approach

 Year-end
Year-end Accounts
Accounts Receivable
Receivable is
is
broken
broken down
down into
into age
age
classifications.
classifications.


 Each
Each age
age grouping
grouping has
has aa
different
different likelihood
likelihood of
of being
being
uncollectible.
uncollectible.

 Compute
Compute aa separate
separate allowance
allowance for
for
each
each age
age grouping.
grouping.

7-17
Estimating Credit Losses — The
Balance Sheet Approach
At December 31, the receivables for EastCo,
Inc. were categorized as follows:

  

7-18
 Estimating Credit Losses — The
Balance Sheet Approach
EastCo’s
EastCo’sunadjusted
unadjusted
balance
balancein
inthe
theallowance
allowance
account
accountisis$500.
$500.
Per
Perthe
theprevious
previous
computation,
computation, the
thedesired
desired
balance
balanceisis $1,350.
$1,350.

7-19
 Estimating Credit Losses — The
Income Statement Approach
Uncollectible accounts’ percentage is based
on actual uncollectible accounts from prior
years’ credit sales.

Net Credit Sales

× % Estimated Uncollectible
Amount of Journal Entry

7-20
Estimating Credit Losses - The
Income Statement Approach
In
In 2009,
2009, EastCo
EastCo had
had credit
credit sales
sales of
of $60,000.
$60,000.
Historically,
Historically, 1%
1% of
of EastCo’s
EastCo’s credit
credit sales
sales has
has
been
been uncollectible.
uncollectible. For
For 2009,
2009, the
the estimate
estimate of
of
uncollectible
uncollectible accounts
accounts expense
expense isis $600.
$600.
($60,000
($60,000 ×× .01
.01 == $600)
$600)

7-21
Recovery of an Account Receivable
Previously Written Off
Subsequent
Subsequent collections
collections require
require that
that the
the
original
original write-off
write-off entry
entry be
be reversed
reversed before
before
the
the cash
cash collection
collection is
is recorded.
recorded.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Accounts Receivable (X Customer) $$$$
Allowance for Doubtful Accounts $$$$

Cash $$$$
Accounts Receivable (X Customer) $$$$

7-22
 Notes Receivable and Interest
Revenue
The
The interest
interest formula
formula includes
includes three
three
variables:
variables:

Interest = Principal × Interest Rate × Time

When
Whencomputing
computinginterest
interestfor
forone
oneyear,
year,“Time”
“Time”
equals
equals1.
1. When
Whenthethecomputation
computationperiod
periodis isless
less
than
thanone
oneyear,
year,then
then“Time”
“Time”isisaafraction.
fraction.
For
Forexample,
example,ififwe
weneeded
neededto tocompute
computeinterest
interestfor for
33months,
months,“Time”
“Time”would
wouldbebe 3/12
3
/12..

7-23
 Notes Receivable and Interest
Revenue
On
On November
November 1, 1, Hall
Hall Company
Company loansloans $10,000
$10,000 toto
Porter
Porter Company
Company on on aa 90-day
90-day note
note earning
earning 1212
percent
percent interest.
interest. On
On December
December 31 31st,, Hall
st
Hall Company
Company
needs
needs anan adjusting
adjusting entry
entry to
to record
record thethe interest
interest
revenue
revenue onon the
the Porter
Porter Company
Company note. note.

$10,000 × ×
$10,000 × 12% × 60//360
12% 60
360
=
= $200
$200 7-24
Notes Receivable and Interest
Revenue
What
What entry
entry would
would Hall
Hall Company
Company
make
make on
on the
the maturity
maturity date?
date?
$10,000 × ×
$10,000 × 12% × 90//360
12% 90
360
=
= $300
$300

Days remaining in November (30-1) 29

Days in December 31
Days needed in January 30
Note term in Days 90
7-25
Self-testing Question
Solve the Demonstration problem
Brief Exercise
7.1, 7.4

7-26