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McGraw-Hill/Irwin
Slide 7-2
Cash
Coins Coins and and currency currency
Certified Certified checks checks Amounts Amounts on on deposit deposit with with financial financial institutions institutions
2004 The McGraw-Hill Companies, Inc.
Slide 7-3
Cash Equivalents
Items Items very very near near cash cash but but not not in in negotiable negotiable form form
Money Money market market funds funds Treasury Treasury bills bills Commercial Commercial paper paper
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-4
Enhances Enhances the the reliability reliability and and accuracy accuracy of of accounting accounting data data
McGraw-Hill/Irwin
Slide 7-5
Agreed Agreed cash cash amounts amounts deposited deposited ith ith cash cash amounts amounts received. received. Close Close supervision supervision of of cash!handling cash!handling and and cash! cash! recording recording activities. activities.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-6
riting, riting, chec# chec# signing, signing, chec# chec# mailing, mailing, and and record record #eeping. #eeping.
All All disbursements, disbursements, e$cept e$cept petty petty cash, cash, made made by by chec#. chec#.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-7
of of cash cash for for a a specific specific purpose purpose ( ( future future plant plant e$pansion, e$pansion, future future payment payment of of debt. debt.
in in a a company's company's account account as as support support for for funds funds borro borro ed ed from from the the ban#. ban#.
McGraw-Hill/Irwin
Slide 7-8
Accounts Receivable
Amounts Amounts due due from from customers customers for for credit credit sales. sales. Credit Credit sales sales require: require:
Maintaining Maintaining a a separate separate
account account receivable receivable for for each each customer. customer. Accounting Accounting for for bad bad debts debts that that result result from from credit credit sales. sales.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-9
Cash "iscounts
Increase Increasesales sales Encourage Encourageearly early payment payment Increase Increaselikelihood likelihoodof of collections collections
McGraw-Hill/Irwin
Slide 7-10
Cash "iscounts
)*+,,n*-,
"iscount "iscount Percent Percent !umber !umber of of "ays "ays "iscount "iscount is is A#ailable A#ailable $therwise% $therwise% !et !et &or &or All' All' is is "ue "ue Credit Credit Period Period
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-11
Cash "iscounts
(ales (ales are are recorded recorded at at the the in#oice in#oice amounts amounts (ales (ales discounts discounts are are recorded recorded if if payment payment is is recei#ed recei#ed within within the the discount discount period period
2004 The McGraw-Hill Companies, Inc.
)ross Method
McGraw-Hill/Irwin
Slide 7-12
Cash "iscounts
!et Method
(ales (ales discounts discounts forfeited forfeited (ales are are recorded recorded at at the the (ales in#oice in#oice amount amount less less the the are are recorded recorded if if payment payment discount is discount is recei#ed recei#ed after after the the discount discount period period
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-13
Cash "iscounts
.n .n &ay &ay +,, +,, Eddy, Eddy, Inc. Inc. sold sold /0,,,, /0,,,, of of merchandise merchandise to to a a customer customer sub1ect sub1ect to to a a cash cash discount discount of of +*+,, +*+,, n*-,. n*-,. Eddy Eddy uses uses the the periodic periodic method method to to account account for for inventory. inventory. 2repare 2repare the the 1ournal 1ournal entry entry to to record record the the sale sale if if Eddy Eddy uses3 uses3 4a5 4a5 the the gross gross method. method. 4b5 4b5 the the net net method. method.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-14
Cash "iscounts
McGraw-Hill/Irwin
Slide 7-15
Cash "iscounts
Assume Assume that that on on &ay &ay +6, +6, Eddy, Eddy, Inc. Inc. received received a a chec# chec# in in full full payment payment of of the the sale sale made made on on &ay &ay +,. +,. 2repare 2repare the the 1ournal 1ournal entry entry to to record record the the cash cash receipt receipt if if Eddy Eddy uses3 uses3 4a5 4a5 the the gross gross method. method. 4b5 4b5 the the net net method. method.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-16
Cash "iscounts
McGraw-Hill/Irwin
Slide 7-17
Cash "iscounts
Instead Instead of of the the payment payment on on &ay &ay +6, +6, no no assume assume that that Eddy, Eddy, Inc. Inc. received received a a chec# chec# on on &ay &ay -+, -+, in in full full payment payment of of the the sale sale made made on on &ay &ay +,. +,. 2repare 2repare the the 1ournal 1ournal entry entry to to record record the the cash cash receipt receipt if if Eddy Eddy uses3 uses3 4a5 4a5 the the gross gross method. method. 4b5 4b5 the the net net method. method.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-18
Cash "iscounts
McGraw-Hill/Irwin
Slide 7-19
McGraw-Hill/Irwin
Slide 7-20
Slide 7-21
(ales *eturns and Allowances is a contra account that reduces (ales *e#enue in the current accounting period
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-22
McGraw-Hill/Irwin
PA(T "+E
Slide 7-23
McGraw-Hill/Irwin
Slide 7-24
Page ./
Credit
McGraw-Hill/Irwin
Slide 7-25
)E!E*A, -$+*!A,
"ate "escription Allowance for +ncollectible Accounts
McGraw-Hill/Irwin
Page ./
Post *ef "ebit 4444 4444 Credit
Slide 7-26
Accounts Accounts *ecei#able *ecei#able ,ess6 ,ess6 Allowance Allowance for for +ncollectible +ncollectible Accounts Accounts !et !et *ealizable *ealizable 7alue 7alue Net realizable value is the amount of the accounts receivable that the business expects to collect.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-27
Income Income Statement Statement Approach Approach %alance %alance Sheet Sheet Approach Approach
Composite Composite Rate Rate Aging Aging of of Receivables Receivables
PA(T "+E
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-28
e e
!mphasizes !mphasizes the the matching matching principle principle b" b"
estimating estimating the the bad bad debt debt expense expense associated associated #ith #ith the the current current period$s period$s credit credit sales. sales.
McGraw-Hill/Irwin
Slide 7-29
McGraw-Hill/Irwin
Slide 7-30
McGraw-Hill/Irwin
Slide 7-31
McGraw-Hill/Irwin
Slide 7-32
McGraw-Hill/Irwin
Slide 7-33
Compute the estimate of the Allo#ance for 'ncollectible Accounts. %ad (ebts !xpense is computed as:
McGraw-Hill/Irwin
Slide 7-34
Past Past e3perience e3perience suggests suggests that that @= @= of of recei#ables recei#ables are are uncollectible uncollectible >hat >hat is is Music,ands Music,ands 2ad 2ad "ebts "ebts E3pense E3pense for for 8990? 8990?
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-35
McGraw-Hill/Irwin
Slide 7-36
Slide 7-37
amount amountwith withthe thebalance balancein inthe theallowance allowance account account
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-38
McGraw-Hill/Irwin
Slide 7-39
EastCos EastCosunadCusted unadCustedbalance balance in inthe theallowance allowanceaccount accountis is :@99 :@99 Per Perthe thepre#ious pre#iouscomputation% computation% the thedesired desiredbalance balanceis is:1%0@9 :1%0@9
Prepare the entry to record bad debts e3pense at "ec 01% 8990
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-40
EastCos EastCosunadCusted unadCustedbalance balance in inthe theallowance allowanceaccount accountis is :@99 :@99 Per Perthe thepre#ious pre#iouscomputation% computation% the thedesired desiredbalance balanceis is:1%0@9 :1%0@9
McGraw-Hill/Irwin
Slide 7-41
2alance 2alance(heet (heet Approach Approach Emphasis Emphasis on on *ealizable *ealizable 7alue 7alue
Accts *ec All for +ncoll Accts
Slide 7-42
9ncollectible Accounts
As accounts become uncollectible) the follo#ing entr" is made:
)E!E*A, -$+*!A,
"ate "escription Allowance for +ncollectible Accounts Accounts *ecei#able Post *ef "ebit 4444 4444
Page <E
Credit
Slide 7-43
Page <E
Post *ef "ebit 4444 4444 Credit
McGraw-Hill/Irwin
Slide 7-44
McGraw-Hill/Irwin
Slide 7-45
;otes Receivable
McGraw-Hill/Irwin
Slide 7-46
;otes Receivable
P*$MI(($*B !$TE :8%999 Dace 7alue
"ue "ate Payee "ate of !ote
National Ban
Boston, M! Two thousand and noF199555555555555555555555555555555555555 "ollars plus interest at the annual rate of
Interest *ate
McGraw-Hill/Irwin
18=
Maker
"anet #ee
2004 The McGraw-Hill Companies, Inc.
Slide 7-47
Interest Computation
E#en E#enfor for maturities maturitiesless less than than1 1year% year% the therate rateis is annualized annualized
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-48
Interest!%earing ;otes
.n November /) 0110) *inn) &nc. loans 203)111 to *est#ard) Co. 4he note bears interest at /05 and is due on November /) 0116. 7repare the +ournal entr" on November /) 0110) (ecember 6/) 0110) ,"ear8end- and November /) 0116.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-49
Interest!%earing ;otes
McGraw-Hill/Irwin
Slide 7-50
Interest!%earing ;otes
:8@%999 :8@%999 G G 18= 18=H H :0%999 :0%999 55 :@99 :@99 H H :8%@99 :8%@99
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-51
;oninterest!%earing ;otes
Interest is deducted 4discounted5 from the face value of the note. Cash proceeds equal face value of note less discount.
McGraw-Hill/Irwin
Slide 7-52
;oninterest!%earing ;otes
.n .n 9anuar" 9anuar" /) /) 0116) 0116) *inn) *inn) &nc. &nc. accepted accepted a a 203)111 203)111 noninterest8bearing noninterest8bearing note note from from *est#ard) *est#ard) Co Co as as pa"ment pa"ment for for a a sale. sale. 4he 4he note note is is discounted discounted at at /05 /05 and and is is due due on on (ecember (ecember 6/) 6/) 0116. 0116. 7repare 7repare the the +ournal +ournal entries entries on on 9anuar" 9anuar" /) /) 0116) 0116) and and (ecember (ecember 6/) 6/) 0116. 0116.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-53
;oninterest!%earing ;otes
)E!E*A, -$+*!A,
"ate 8990 -an 1 !otes *ecei#able "iscount on !otes *ecei#able (ales *e#enue :8@%999 G 18= H :0%999 "ec 01 Cash "iscount on !otes *ecei#able Interest *e#enue !otes *ecei#able
McGraw-Hill/Irwin
Page @<
Post *ef "ebit 8@%999 0%999 88%999 Credit
"escription
Slide 7-54
Method Method depends depends on on the the surrender surrender of of control control over over the the receivables receivables transferred. transferred.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-55
collateral) collateral) and and the the promise promise that that an" an" failure failure to to repa" repa" debt debt #ill #ill result result in in proceeds proceeds from from specific specific accounts accounts receivable receivable collections collections being being used used to to repa" repa" the the debt. debt. Accounts Accounts Receivable Receivable Assigned. Assigned.
McGraw-Hill/Irwin
Slide 7-56
7ledged 7ledged Receivable Receivable are are disclosed disclosed in in notes notes
McGraw-Hill/Irwin
Slide 7-57
8 Accounts *ecei#able
*ETAI,E*
1 Merchandise
ou
as h
DACT$* &Transferee'
A A factor factor is is a a financial financial institution institution that that bu"s bu"s receivables receivables for for cash) cash) handles handles the the billing billing and and collection collection of of the the receivables receivables and and charges charges a a fee fee for for the the service. service.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
as
ei #a bl e
nt s
ec
Slide 7-58
receivable receivable before before maturity. maturity. > =ransferor =ransferor cannot cannot require require return return of of specific specific receivables. receivables.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-59
McGraw-Hill/Irwin
Slide 7-60
surrender surrender of of control control to to be be recogni?ed recogni?ed as as a a sale. sale. If If the the transaction transaction fails fails to to meet meet the the three three conditions conditions necessary necessary to to be be classified classified as as a a sale, sale, it it ill ill be be treated treated as as a a secured secured borro borro ing. ing.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-61
"iscounting a ;ote
.n .n Ma" Ma" 6/) 6/) Apex Apex discounts discounts a a customer$s customer$s 203)111 203)111 note note receivable receivable at at the the ban ban .. 4he 4he note note #as #as dated dated Ma" Ma" / / and and matures matures in in ;1 ;1 da"s. da"s. 4he 4he receivable receivable bears bears interest interest at at /05 /05 and and the the ban ban charges charges a a discount discount of of /35 /35 on on the the maturit" maturit" value value of of the the note. note. 7repare 7repare the the +ournal +ournal entr" entr" to to record record the the discounting discounting of of the the note note receivable receivable as as a a secured secured borro#ing. borro#ing.
McGraw-Hill/Irwin
2004 The McGraw-Hill Companies, Inc.
Slide 7-62
"iscounting a ;ote
)E!E*A, -$+*!A,
"ate May 01 Cash !otes *ecei#able Interest *e#enue
McGraw-Hill/Irwin
Page <E
Post *ef "ebit 8@%19< 8@ 8@%999 99 19< 8@
2004 The McGraw-Hill Companies, Inc.
"escription
Credit
Slide 7-63
"iscounting a ;ote
&f &f the the three three conditions conditions for for sale sale treatment treatment are are met) met) the the transaction transaction #ould #ould be be accounted accounted for for as as a a sale) sale) recognizing recognizing a a gain gain or or loss loss for for the the difference difference bet#een bet#een the the cash cash proceeds proceeds and and the the boo boo value value of of the the note. note.
McGraw-Hill/Irwin
Slide 7-64
End of Chapter 7
McGraw-Hill/Irwin