Cash and Receivables

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What is cash?
Cash, the most liquid of assets, is the standard medium of exchange and the basis for measuring and accounting for all other items. Cash consists of coin, currency, and available funds on deposit at the bank.

Negotiable instruments such as money orders, certified checks, cashiers checks, personal checks, and bank drafts are also viewed as cash. Companies treat postdated checks and I.O.U.s as receivable.

They also treat travel advances as receivable if collected from employees or deducted from their salaries. Otherwise, companies classified as part of office supplies inventory or as a prepaid expense.

Petty cash funds and change funds are used to meet current operating expenses and liquidate current liabilities, companies include these funds in current assets as cash.

Management And Control Of Cash

Cash is the asset most susceptible to improper diversion and use.

Management faces two problems in accounting for cash transactions:

(1)

to establish proper controls to prevent any unauthorized transactions by officer or employees. (2)to provide information necessary to properly manage cash on hand and cash transactions.

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Reporting Cash
Restricted cash. Bank overdrafts. Cash equivalents.

Restricted cash
Petty cash, payroll, and dividend funds are examples of cash set aside for a particular purpose. In most situations, these fund balances are not material. Therefore, companies do not segregate them from cash in the financial statements.

When material in amount, companies segregate restricted cash from regular cash for reporting purposes. Cash classified in the long-term section is frequently set aside for plant expansion, retirement of longterm debt.

Banks and lending institutions often require customers to maintain minimum cash balances in checking or savings accounts. The SEC defines these minimum balances, call compensating balances.

To avoid misleading investors about the amount of cash available to meet recurring obligations:

The SEC recommends that companies state separately legally restricted deposits held as compensating balances against short-term borrowing arrangements among the Cash and cash equivalent items in current assets.

Bank Overdrafts
Bank overdrafts occur when a company writes a check for more than the amount in its cash account. Bank overdrafts are generally not offset against the cash account.

A major exception is when available cash is present in another account in the same bank on which the overdraft occurred.

Cash Equivalents
A current classification that has become popular is Cash and cash equivalents. Cash equivalents are short-term, highly liquid investments that are both :

(a) readily convertible to known amounts of cash (b) so near their maturity that they present insignificant risk of changes in interest rates.

SUMMARY OF CASH-RELATED ITEMS

Cash and cash equivalents include the medium of exchange and most negotiable instruments. If the item cannot be quickly converted to coin or currency, a company separately classifies it as an investment, receivable, or prepaid expense.

Companies segregate and classify cash that is unavailable for payment of currently maturing liabilities in the long-term assets section.

Receivables
Receivables are claims held against customers and others for money, goods, or services. Companies expect to collect current receivables within a year or during the current operating cycle, whichever is longer. They classify all other receivables as noncurrent.

Accounts receivable are oral promises of the purchaser to pay for goods and services sold. They represent open accounts resulting from short-term extensions of credit. Notes receivable are written promises to pay a certain sum of money on a specified future date.

Nontrade receivables arise from a variety of transactions.

1. advances to officers and employees. 2.advances to subsidiaries. 3.deposits paid to cover potential damages or losses. 4.deposits paid as a guarantee of performance or payment. 5.dividends and interest receivable.


a)

6.claims against:
insurance companies for casualties sustained . Defendants under suit. Governmental bodies for tax refunds. Common carriers for damaged or lost goods. Creditors for returned, damaged, or lost goods. Customers for returnable items (crates, containers, etc.)

b)

c)
d) e)

f)

Because of the peculiar nature of nontrade receivables, companies generally report them as separate items in the balance sheet.

Recognition of Accounts Receivable

The exchange price is the amount due from the debtor (a customer or a borrow).

Two factors may complicate the measurement of exchange price:

(1) the availability of discounts (trade and cash discounts) (2) the length of time between the sale and the due date of payments (the interest element)

Trade Discounts
Prices may be subject to a trade or quantity discount. Companies use such trade discounts to avoid frequent changes in catalogs, to alter prices for different quantities purchased, or to hide the true invoice from competitors.

Trade discounts are commonly quoted in percentages.

Cash Discounts (Sales Discounts)

Companies offer cash discounts to induce prompt payment. (1)Gross amount

Companies usually record sales and related sales discount transactions by entering the receivable and sale at the gross amount.

Companies record sales discounts only when they receive payment within the discount period. The income statement shows sales discounts as a deduction from sales to arrive at net sales.

(2)Net amount
A company considers Sales Discounts Forfeited as an Other revenue item.

Nonrecognition of Interest Element

Ideally, company should measure receivables in terms of their present value, that is , the discounted value of the cash to be received in the future.

In practice, companies ignore interest revenue related to accounts receivable because the amount of the discount is not usually material in relation to the net income for the period.


1. 2.

Bad Debt Expense Account Receivable


1.
Bad Debt Expense Allowance for Doubtful Accounts

2.
Allowance for Doubtful Accounts Account Receivable

3. (1) Account Receivable Allowance for Doubtful Accounts (2) Cash Account Receivable

Percentage-of-Sales Approach

The percentage-of-sales approach matches costs with revenues because it relates the charge to the period in which a company records the sale. The bad debt expense estimate is related to a nominal account (sales), any balance in the allowance is ignored.

Net sales* Debt rate = Bad debt expense 2

Allowance for Doubtful Accounts

Before adjusted 1 Bad debt expense 2

Adjusted 3 1+2=3

Percentage-of-Receivables Approach

A company can estimate the percentage of its outstanding receivables that will become uncollectible, without identifying specific accounts. This procedure provides a reasonably accurate estimate of the receivables realizable value. But it does not fit the concept of matching cost and revenues.

Companies

may apply this method using one composite ratethat reflects an estimate of the uncollectible receivables. Or, companies may set up an aging schedule of accounts receivable.

A/R * Bad debt rate = Allowance of Doubtful Accounts 2 Allowance of Doubtful Accounts + ()Before adjusted Allowance of Doubtful Accounts () = Bad debt expense

Allowance for Doubtful Accounts Before adjusted 1 Bad debt expense 3 Adjusted 2 2-1=3

Disposition of Accounts Receivable

In the normal course of events, companies collect accounts and notes receivable when due and then remove them from the books. In order to accelerate the receipt of cash from receivables, the owner may transfer accounts or notes receivables to another company for cash.

1 2 3

1 2

1 2 3

1 2

(1)
92 10 1 $150,000 $120,000(80%) 12%$120,0002% 10/ 1 $117,600 (120,000-2,400) 2,400 (120,0002%) $120,000

10/31 $90,000$10,000$1,600 $78,400 $ 78,400 10,000 1,600 $ 90,000

11/16 $10,000 $ 50,000 10,000 $60,000 (150,000-90,000)

12/ 1 $120,000 2,400 (120,00012%122) $122,400

 1 $150,000 90% 10% 5%

(2)

$127,500 7,500 15,000 $150,000

$150,000 $127,500 7,500 15,000

 $150,000 90% 10% 5% $6,000

2

$127,500 13,500 15,000 $150,000 6,000

$150,000 $127,500 7,500 15,000

Accounts Receivable Turnover

Analysts frequently compute financial ratios to evaluate the liquidity of a companys accounts receivable. To assess the liquidity of the receivables, they use the receivables turnover ratio.

Net Sales Average Trade Receivables (net) = Accounts Receivable Turnover

() =

Part of cash -. - -.

Part of receivable - - &

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