Bài giảng kế toán kiểm toán chapter 2 cash and receivables

checks, money orders received from customers These forms of cash represent amounts readily available to pay off debt or to use in operations without any...  May 31, 2003 The appropriat

Chapter 2

1 Cash and Cash Equivalents

1.1 Definition

 Cash

- Cash in bank: Balances in checking accounts, and

items acceptable for deposit in these accounts (e.g

checks, money orders received from customers)

These forms of cash represent amounts readily available

to pay off debt or to use in operations without any

1.1 Definition (cont)

 Cash equivalents

- Treasury bills

- Commercial paper

These investments must have a maturity date no

longer than three months from the date of

purchase.

1.2 Petty cash

 Small amount on cash on hand to pay for

low-cost items such as postage, office supplies,

delivery charges, and entertainment expenses

Journal entries

 May 1, 2003

A petty cash fund is established by writing a

check to the custodian

 May 31, 2003

The appropriate expense accounts are debited

when the petty cash fund is reimbursed

1.3 Bank Reconciliation

 Differences between the cash book and bank

balance occur due to differences in the timing

of recognition of certain transactions and errors

 Step 1: Adjust the bank balance to the corrected cash balance

 Step 2: Adjust the book balance to the corrected cash balance

Step 1: Adjustments to Bank Balance

+ Deposits outstanding + Collections by bank

- Check outstanding - Service charges

- NSF checks +/- Errors +/- Errors

-

-Corrected balance Corrected balance

The two corrected balances must equal.

1.4 Restricted cash and compensating balances

 Restricted cash

Cash that is restricted in some way and not available for

current use usually is reported as investments and

funds or other assets.

 Compensating balances

The borrower us asked to maintain a specified balance in

a low-interest or noninterest-bearing account at the

2 Accounts Receivable

2.1 Classification

2.2 Initial valuation of accounts receivable

2.3 Subsequent valuation of accounts receivable

2.1 Classification

 Accounts receivable are current assets because,

by definition, they will be converted to cash

within the normal operating cycle

2.2 Initial valuation of accounts

receivable

 The typical accounts receivable is valued at the amount expected to be received, not the present value of that amount

 Trade Discount

 Cash Discount (sales discount)

Trade Discount

 Usually a percentage reduction from the list

price to change prices or to give quantity

discount to large customers

 The discount is recognized indirectly by

recording the sale at the net of discount price,

not at the list price

Cash Discount (sales discount)

 Reduce the amount to be paid if remittance is

made within a specified short period of time

 Represent reduction not in the selling price of

good or service but in the amount to be paid

within a specified period of time to provide

incentive for quick payment

Cash discount: journal entries

The Hawthorne Manufacturing Company offers credit

customers a 2% cash discount if the sales price is paid within 10 days Any amounts not paid within 10 days

are due in 30 days These repayment terms are stated

as 2/10, n/30 On October 5, 2003, Hawthorne sold

merchandise at a price of $20,000 The customer paid

$13,720 ($14,000 less the 2% cash discount) on

October 14 and the remaining balance of $6,000 on

Cash discount: journal entries

 By either method, net sales is reduced by

discount taken

 Discounts not taken are included in sales

revenue using the gross method and interest

revenue using the net method

2.3 Subsequent Valuation

Two situations possibly could cause the cash

collected to be less than the initial valuation of

the receivable:

1. Sales returns: The customer could return the

product

2. Uncollectible Accounts Receivable: The

customer could default and not pay the agreed

Sales returns

 Recognizing sales returns when they occur

could result in an overstatement of income in

the period of the related sale

 To avoid misstating the financial statements,

when amounts are material, when amount are

material, returns should be anticipated by

subtracting an allowance for estimated returns

During 2003, its first year of operations, the Hawthorne

Manufacturing Company sold merchandise on account for $2,000,000 This merchandise cost $1,200,000

(60% of the selling price) Industry experience

indicates that 10% of all sales will be returned

Customers returned $130,000 in sales during 2003,

prior to making payment The entries to record sales

and merchandise returned during the year, assuming

 If sales returns are material, they should be

estimated and recorded in the same period in

the same as the related sales

 The allowance for sales returns is a contra

account to accounts receivable When returns

actually occur in the following reporting period, the allowance for sales returns is debited In this way, income is not reduced in the return period

Uncollectible Accounts Receivable

 Income statement approach

Estimate bad debt expense as a percentage of each

period’s net sales The balance sheet amount is an

indirect outcome of estimating bad dent expense.

 Balance sheet approach

Determine bad debt expense by estimating the net

realizable value of accounts receivable to be reported

The Hawthorne Manufacturing Company sells its

products offering 30 days’ credit to its customers

During 2003, its first year of operations, the following events occurred:

Cash collections from credit customers (895,000) Accounts receivable, end of year $305,000 There were no specific accounts determined to be