Cash & Rec - 1

CASH & RECEIVABLES

Cash & Rec - 2

INTERNAL CONTROL

Policies & procedures designed to:– Protect assets– Provide accurate records– Ensure compliance with laws and

policies– Evaluate performance & assist in

accomplishment of strategic objectives

Cash & Rec - 3

INTERNAL CONTROL OF CASHGeneral Policies

Separate physical custody and record keeping

Account for all cash transactions (no netting)

Maintain minimum cash balances on hand

Conduct periodic test counts of cash

Prepare appropriate bank reconciliations

Cash & Rec - 4

CASH RECEIPTS

Separate responsibility for handling and recording receipts

Close supervision of handling of cash receipts

Deposit ALL receipts in a bank account as frequently as possible (prefer DAILY)

Cash & Rec - 5

CASH DISBURSEMENTS

Separate responsibilities for disbursement documents, check preparation, check signing, mailing, and record keeping

All disbursements (except minor) made by check

Close control of petty cash funds Adequate source documents to support

ALL disbursements

Cash & Rec - 6

COMPOSITION OF CASH

Coins and currency – Including change funds

Petty cash Deposits with financial institutions Negotiable instruments

– Cashier’s checks– Certified checks– Money orders

Cash & Rec - 7

CASH EQUIVALENTS

Short-term, highly liquid investments – Readily convertible to known amounts of

cash– Near to maturity (little change in

interest)

Examples– Treasury bills– Commercial paper– Money market funds

Cash & Rec - 8

PETTY CASH

Imprest fund for small routine disbursements

Examples– Cab fares– Postage (C.O.D., etc.)– Office supplies– Delivery charges– Pizza for the office

Balance in the fund = Cash on hand + receipts = Authorized amount of the fund

Cash & Rec - 9

BANK RECONCILIATION

Explains difference between cash reported on bank statement and balance reported on the accounting records

Basis for adjusting accounting records

Major control devise

BANK RECONCILIATION

Two sections of reconciliation: -- Reconcile bank statement balance to adjusted (correct) balance. -- Reconcile book balance to adjusted (correct) balance.

The adjusted balances above are equal.

All reconciling items in book balance section require adjusting entries.

BANK RECONCILIATION FORMAT

Bank balance Book balance

Ending bank bal. $ xx Ending book balance $ xxAdditions: Additions: Cash on hand Collections by bank Deposits in transit Deductions:

NSF ChecksDeductions: Bank service chgs. Checks outstanding

Correct cash balance $xxx Correct cash balance $xxx

Cash & Rec - 12

RECEIVABLES

Claims held against customers or others for money or services – Current– Noncurrent

Trade receivables – amounts owed by customers for services rendered as part of normal business operation

Nontrade receivables – arise from other types of transactions

Cash & Rec - 13

ACCOUNTS RECEIVABLEDiscounts

Trade discounts – Granted to encourage a sale– Reduction in final selling price– Not recorded (part of negotiation)

Cash discounts– Inducement for prompt payment– Interest rate offered is often significant– Recording methods

• Gross – only discounts taken are recorded (contra revenue)

• Net – sale is recorded net of discount (discounts forfeited shown as “Other revenue”)

ACCOUNTS RECEIVABLECASH DISCOUNTS

2/10, n/302/10, n/30Percentage

Discount# of Days

Discount isAvailable

Otherwise,Net (or All)

is Due

Net Amountis Due in this

# of Days

Cash & Rec - 15

SALES RETURNS & ALLOWANCES

Reduction in receivable (or refund) for items returned or damaged

Contra revenue Methods of recording

– Estimated with an allowance established

– Recorded when actually granted

Cash & Rec - 16

ACCOUNTS RECEIVABLEValuation

Net realizable value

Amount expected to be received in cash

Uncollectible accounts generally inevitable

Issue is how to account for “bad debts”

Cash & Rec - 17

UNCOLLECTIBLE ACCOUNTS

Direct write-off method– No material uncollectibles occur

– Amount of uncollectibles cannot be reliably estimated

– Bad debts expense recognized in period when it is determined the account cannot be collected

Cash & Rec - 18

Allowance method– Uncollectibles are probable

– Amount can be reasonably estimated

– Bad debt expense is recorded in same period as the underlying revenue

•MATCHING PRINCIPLE

UNCOLLECTIBLE ACCOUNTS

Cash & Rec - 19

ALLOWANCE METHOD

Adjusting entry for estimate: Bad debts expense (Debit)

Allowance for doubtful accounts (Credit)

Allowance for doubtful accounts is a contracontra account to Accounts receivable

Cash & Rec - 20

ALLOWANCE METHOD

As accounts become uncollectible, the following entry is made:

Allowance for Doubtful Accounts (Debit)

Accounts Receivable (Credit)

This entry has no net effect on Accounts receivable or total assets

Cash & Rec - 21

ALLOWANCE METHOD

If an account previously written off proves to be collectible, the following entries are made:

Accounts Receivable (Debit) Allowance for Doubtful Accounts (Credit)

Cash (Debit) Accounts Receivable (Credit)

• This approach provides detailed information (in the subsidiary ledger) of the recovery of this amount

Cash & Rec - 22

ESTIMATING BAD DEBTS

Credit sales method– Income statement approach

Accounts receivable method– Balance sheet approach

•Composite rate•Aging of Accounts receivable

balances

Past Due

Cash & Rec - 23

Method emphasizes the matching principlematching principle and is considered an income statementincome statement approach

An average percentage relationship between actual bad debt losses and net credit salesnet credit sales is determined based on historical information.

Bad debts expenseBad debts expense = Net credit sales x (historical %)

ESTIMATING BAD DEBTSCredit Sales Method

Cash & Rec - 24

ESTIMATING BAD DEBTSAccounts Receivable Method

Uses the historical relationship between accounts receivableaccounts receivable and bad debt losses

The historical rate, or multiple rates, is applied to the net accounts receivable to determine the balance in the Allowance for Doubtful Accountsbalance in the Allowance for Doubtful Accounts.

Bad Debt Expense Bad Debt Expense is the amount of adjustment necessary to bring the Allowance account to its desired ending balance.

Cash & Rec - 25

NOTES RECEIVABLE

Unconditional written promise … Made & signed by the maker (borrower)… To pay the bearer or stated payee … A definite amount of money … Plus a stated interest rate …

– The note does not have to include a stated interest rate. If none exists, an imputed rate is assumed

On the maturity date …– On demand, a specific date, or at the end of a

stated period

Cash & Rec - 26

NOTES RECEIVABLEValuation

Short-term– Generally shown at face value (less

allowances for uncollectibility) Long-term

– Reported at present value of cash expected to be collected

– Face value = NPV if market rate = stated rate

Zero-interest notes– Recorded at NPV (using effective rate)

Cash & Rec - 27

SALE OF RECEIVABLESFactoring

Acceleration of receipt of cash from receivables

Common example is approach used by credit card companies (MasterCard or VISA)

Sale without Recourse– Purchaser assumes risk of uncollectibility

Sale with Recourse– Seller assumes risk of uncollectibility