s for today: l discuss cash denominated in various currencies l discuss financial reporting of...

s for Today:

Discuss cash denominated in various currencies

Discuss financial reporting of temporary investments

Discuss accounts receivable

Cash includes ...

petty cash on hand cash in the bank Government of Canada T-Bills commercial paper

Cash Denominated in Various Currencies

What do financial statement users want to know?

how much cash is flowing through the company?

will the cash maintain its purchasing power until it is used?

what is the current value of cash in relation to other assets?

Reporting Foreign Currencies

"Unit of measure" assumption When reporting currencies in the financial

statements, assume the company does business only in one currency

Use the currency that is most meaningful to the financial statement users


Foreign Currency Translation

•one currency is adopted for financial statement reporting

• foreign currencies are translated into the reporting currency

• gains or losses from increases or decreases in the value of the foreign currency are reported on the income statement in Canada (in the US, reported in equity on the B/S, not in I/S)



Date FC Amount Exchange Rate Reporting Currency Amount

B.o.Y. 1,000 1:1 1,000E.o.Y. 1,000 1:1.1

Illustration




B.o.Y. 1,000 1:1 1,000E.o.Y. 1,000 1:1.1 1,100







B.o.Y. 1,000 1:1 1,000E.o.Y. 1,000 1:1.1 1,100Difference 0 100




Dr. Cash 100

Cr. Foreign Exch Gain 100

• Bank Reconciliation – ensuring that the bank’s records match

the company’s records

Class Exercise:

6-9 page 355

minor equity shares in other companies debt instruments issued by governments (e.g.,Government of Canada Savings Bonds)

debt instruments issued by other businesses

Temporary Investments can include ...

the key features are that (1) management must intend the investments to be temporary, AND (2) they must be marketable

Cash

InventoryAccounts

Receivable

Temporary Investments

buy

sell

Note that Temporary Investments often are not the core activity of a business …

Temporary Investments

what is the current value of the investments?

will the value change before the investments are sold?


what are the risks of holding the investment(s)?

Temporary Investments (TI)

What do the financial statements tell users?what is the current value of the investments?

will the value change before the investments are sold?

what are the risks of holding the investment(s)?

TI initially reported on the B/S at original costlosses in investment value are recordedgains in investment value above original cost are not reported

application of conservatism ("lower of cost and market" rule)market values are disclosed if substantially greater than cost

speculations about the future are not reported

described in the financial statement notes (if deemed significant)

Some details about TI accountingTI initially reported on the B/S at original costlosses in investment value are recordedgains in investment value above original cost are not reported

How do you apply the LCM Rule to a portfolio?

application of conservatism ("lower of cost and market" rule)

Investment Cost

A-B $ 1,000 Big Rock $ 600 Total $ 1,600

the debits and credits ...




Investment Cost

A-B $ 1,000 Big Rock $ 600 Total $ 1,600


record the initial investment ...

Dr. Temporary Investments $ 1,600 Cr. Cash $ 1,600




Investment Cost

A-B $ 1,000 Big Rock $ 600 Total $ 1,600





Investment Cost Market

A-B $ 1,000 $ 300 Big Rock $ 600 $ 800 Total $ 1,600 $ 1,100





Investment Cost Market LCM-Portfolio

A-B $ 1,000 $ 300 Big Rock $ 600 $ 800 Total $ 1,600 $ 1,100 $ 1,100

the debits and credits ... record the write-down to LCM

Dr. Unrealized loss on Temporary Investments (exp--I/S) $ 500 Cr. Valuation Allowance for Temp Invstmnts (xA--B/S) $ 500

the valuation allowance is a contra-asset account that allows asset values to be reduced without losing track of original cost just like "accumulated amortization"

More details about TI accounting the debits and credits ... record the write-down to LCM

Dr. Unrealized loss on Temporary Investments (exp--I/S) $ 500 Cr. Valuation Allowance for Temp Invstmnts (xA--B/S) $ 500

the valuation allowance is a contra-asset account that allows asset values to be reduced without losing track of original cost just like "accumulated amortization"

BALANCE SHEETCurrent AssetsCash $ 25,549Temporary Investments (cost) 1,600Less: Valuation Allowance (500)Temporary Investments (LCM) 1,100Accounts receivable 9,882Etc.

INCOME STATEMENTSales Revenues $2000Cost of Goods Sold (950)Gross Profit 1050SG&A Expenses (150)Unrealized loss on TIs (500)Net income before tax 400Etc.

Accounts Receivable

(amounts owed to a company by its customers)


how much is owed to the company?

what is the level of customer satisfaction?

how much is the company likely to collect in cash?

how long does the company wait to be paid?

how many orders is the company likely to receive in the future?

Accounts Receivable


What do the financial statements tell users?

reported as "gross accounts receivable" on the B/S

2001 2000

Accounts receivable, gross

Less: Allowance for uncollectibles

Accounts receivable, net

35,556 25,999

(755) (400)

34,801 25,599

Mondetta Inc.Balance Sheet

As at February 28

Accounts Receivable



reported as "net accounts receivable" on the B/Safter deducting an "allowance for doubtful accounts"



2001 2000

Accounts receivable, gross

Less: Allowance for uncollectibles

35,556 25,999

(755) (400)

34,801 25,599


As at February 28

Accounts Receivable



reported as "net accounts receivable" on the B/Safter deducting an "allowance for doubtful accounts"


Accounts Receivable




how many orders is the company likely to receive in the future?

not required to be reported in the financial statementsorders represent promises for future transactions

too speculative (i.e., unreliable) to be recorded in the accounting recordshaven’t met revenue recognition criteria at the order stage of the earnings process

some companies voluntarily report this information (in the notes)

Accounts Receivable What do the financial statements tell users?




Not directly reported in the financial statementsBut trends can be inferred from the number of

days to collect accounts receivable



how long does the company wait to be paid?calculate from sales and average accounts receivable numbers


how long does the company wait to be paid?

calculate from sales and average accounts receivable numbers

1. Calculate the average sales per day in the period.2. Calculate the average receivables outstanding in the period.3. From 1 & 2, calculate number of days sales in receivables.


how long does the company wait to be paid?calculate from sales and average accounts receivable numbersusing BCE as an example

Accounts Receivable What do the financial statements tell users?how long does the company wait to be paid?

calculate from sales and average accounts receivable numbers

Calculate the average sales per day in the period.

using BCE as an example ...

Calculate the average receivables outstanding in the period.

From 1 & 2, calculate number of days sales in receivables.

$33,191,000,000 / 365 days = $90,934,246 / day

($9,027,000,000 + 7,072,000,000) / 2 = $8,049,500,000

$8,049,500,000 / $90,934,246 = 88.5 days in receivables

88.5 days seems long (almost 3 months) need to compare to prior years (89 in '97) and competitors (AT&T, MCI, etc.)A

naly

sis


how long does the company wait to be paid?if the number of days sales in receivables is big or increasing ...

suggests possible problems with collecting from customers


how long does the company wait to be paid?if the number of days sales in receivables is big or increasing ...

suggests possible problems with collecting from customers

–why aren't customers paying sooner?–what do they think of the company's product? are they disappointed?–are they waiting to see what competitors are coming out with?–is the sales force extending payment schedules just to boost sales?–are they being soft on credit to make up for prices that are too high?

should lead you to ask questions such as:

The Debits and Credits of Receivables

• Goals of Accounting for Receivables– track what is owed by each customer– report the amount that is likely to be collected– match the cost of extending credit to the

revenues earned

a listing of all customer balances is maintained the total of this listing is reported as gross A/R

Customer Total Balance

0-30 Days

30-60

Days

60-90 Days

>90 Days

Pizza Nitza $2,000 $4,00 -- -- $1,600

… … … … … …

Zed’s Heads $3,300 $2,200 $1,100 -- --

TOTAL $35,556 $14,699 $12,276 $1,449 $7,132

The Debits and Credits of Receivables•Goals of Accounting for Receivables

– track what is owed by each customer

– report the amount that is likely to be collected

– match the cost of extending credit to the revenues earned

each time the financial statements are prepared, management makes an estimate of the amount of receivables that are not likely to be collected this amount is recorded in the "allowance for doubtful accounts" (which is deducted from gross A/R)

Beginning

Ending

Allowance for Doubtful Accounts (xA)

Estimated Uncollectible This Period

Accounts Written Off This Period


2001 2000

Accounts receivable, grossLess: Allowance for uncollectibles

35,556 25,999

(755) (400)

34,801 25,599


As at February 28

The Debits and Credits of Receivables• Goals of Accounting for Receivables




an expense called "bad debt expense" is recorded at the same time the "allowance for doubtful accounts" is adjusted ...

Dr. Bad Debt Expense (I/S) Cr. Allowance for Doubtful Accounts (B/S)

Net Income

2001 2000

Sales Revenue

Less: Cost of Goods Sold Bad Debt Expense etc.

65,986 75,889

225 139

101

Mondetta Inc.Income Statement

For the year ended February 28

35,335 25,778

...

403

...

•Goals of Accounting for Receivables





an expense called "bad debt expense" is recorded at the same time the "allowance for doubtful accounts" is adjusted ...

Dr. Bad Debt Expense (I/S) Cr. Allowance for Doubtful Accounts (B/S)

this single entry achieves the objective of matching the cost of extending credit to the period in which the credit sales are recorded it also enables A/R to be reported at net realizable value

•Goals of Accounting for Receivables





the only time the A/R balance is reduced is when cash is collected or a known uncollectible balance is written-off

Dr. Allowance for Doubtful Accounts $ YY Cr. Accounts Receivable $ YY

the only time a Bad Debt Expense is recorded is when the amount of uncollectibles is estimated and recorded


Dr. Cash $ XXX Cr. Accounts Receivable $ XXX

Dr. Bad Debt Expense $ ZZ Cr. Allowance for Doubtful Accounts $ ZZ

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