Essay on Chapter 6 Slides

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CHAPTER 6
CASH AND RECEIVABLES
ACCT3110, Intermediate Financial Accounting I

ANNOUNCEMENTS



Exam #3, see schedule.
Monitor CNOW quiz dates.

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CASH AND CASH EQUIVALENTS
Included in Cash:
Coins and currency
Checking accounts
Savings accounts
Negotiable checks
Bank drafts

Excluded from Cash:
Sinking funds (L-T Inv.)
Certificates of deposit (S-T Inv.)
Bank overdrafts (current liab.)
Postdated checks (receivable)
Travel advances (prepaid exp.)

Cash equivalents: short-term, highly liquid investments that are readily convertible into known amounts of cash and near their maturity (90 days) when purchased (e.g., commercial paper, T-bills, money market funds).
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RECEIVABLES
Receivables – amounts owed to the company by customers and other parties arising from the company’s operations.
Receivables expected to be collected or satisfied within one year or the current operating cycle, whichever is longer, are classified as current assets; the remainder are classified as noncurrent.

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RECEIVABLES
Trade receivables – arise from the sale of the company’s products or services to customers. Can be classified into two categories:
1.
2.

Accounts receivable – nonwritten promises to pay
Notes receivable – unconditional written promises to pay

Nontrade receivables – arise from transactions not directly related to the sale of products or services to customers.
Examples include deposits with utilities, advances to subsidiaries, loans made by nonfinancial companies, deposits made to guarantee performance, and declared dividends and accrued interest on investments.
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NORMAL REVENUE RECOGNITION
A company records revenue from credit sales based on the revenue recognition criteria, i.e., the revenue is realized and earned. •


realized – a noncash resource is exchanged for cash or a near cash resource earned – the earning process is complete or virtually complete.

General rule – revenue is recognized at the point of sale.
Exceptions – revenue recognition may be postponed because of the uncertainty surrounding cash collection or because there is a material “right of return.”
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TRADE (QUANTITY) DISCOUNTS
Companies may offer a trade (quantity) discount for purchases in excess of a certain quantity.
Example –
A company offers a 10% trade discount and a customer purchases 100 units of an item with a list price of $80 per unit, the customer is billed $7,200 [$8,000 – (0.10 * $8,000)] as the invoice price. This $7,200 is then subject to any cash (sales) discounts (explained on following slides).

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CASH (SALES) DISCOUNTS
Companies may offer a cash/sales discount to encourage prompt payments.
Example –
“2/10, n/30”
2% discount if payment is made within 10 days, otherwise the total amount is due within 30 days (net of returns and allowances) Equal to an annual effect rate > 30%!

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CASH (SALES) DISCOUNTS
Two alternative methods may be followed when accounting for cash discounts (***carefully study Example 6.1 in text***):
Gross method – record total invoice price at time of sale (i.e., assume discount will not be taken). If the customer takes advantage of the discount, the discount is debited to the “Sales Discounts Taken” account (a contra-sales revenue account that reduces Net Sales).
Net method – record net invoice price at time of sale (i.e., assume discount will be taken). If the customer does not take advantage of the discount, the discount is credited to the “Sales Discounts Not Taken” account (this account is treated like interest revenue and reported in the “Other Items” section of the income statement).
CAUTION: There is a typo in Example 6.1 in text on page 6-10. The Dec. 13 th date should be Dec 10th (i.e., within 10 days).
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SALES RETURNS AND
ALLOWANCES
When goods are sold that are found to be defective, the customer may retain the goods and be allowed a reduction in the purchase price. This reduction is called a sales allowance.
When the customer returns goods to the seller, the exchange is called a sales return.
If…