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Chapter 7

Chapter 7 – Cash and receivables.docx

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ACC 414
Else Grech

Chapter 7 – Cash and receivables CASH  What is cash o Cash: most liquid asset and is the standard medium of exchange and the basis for measuring and accounting for all other items  Consists of coins, currency, and other available funds that are on deposit at a bank o Cash equivalents or short-term investments: money market funds, certificates of deposit, and similar types of deposits and short-term paper that allow investors to earn interest  Reporting cash o Restricted cash  Fund balances that are not material are not segregated from cash on the financial statements  When an amount is material, restricted cash is segregated from regular cash statement  Separately disclosed and reported in the Current Assets section or is classified separately in the Long  Compensating balances: the portion of any demand deposit that a corporation keeps as support for its existing or maturing obligations with a lending institution.  Legally restricted balances have to be reported separately in current assets or noncurrent assets, as appropriate (note disclosure) o Cash in foreign currencies  Foreign currency is translated into Canadian dollars at the exchange rate on the balance sheet date, included as cash in current assets  Foreign balances may not even qualify for recognition as assets due to severe restriction o Bank overdrafts: occurs when cheques are written for more than the amount in the cash account.  Generally reported in the Current liabilities section and should generally not offset against the Cash account. o Cash equivalents: short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value (investments with original maturities of three months or less)  Usually held for meeting upcoming cash requirements  Treasury bills, commercial paper, and money-market funds 1 Item Classification Comment Cash Cash Report is as cash. If restricted, identify and report it separately as a current or noncurrent asset Petty Cash/ Change funds Cash Report as cash Short-term paper Cash equivalent Classify as cash equivalents if investments have a maturity of less than three months when acquired Short-term paper Short-term Classify as short-term investments if investments have a investments maturity of 3-12 months when acquired Postdated cheques /IOUs Receivables Classify as receivable if assumed to be collectable Travel advances Receivables / Classify if they are collectible from employees Prepaid expense (receivable)or to be spent on travel in future(prepaid) Postage on hand Prepaid expense These may also be classified as office supplies inventory Bank overdrafts Current liability If there is a right of offset, report as a reduction of cash Compensating balances Cash  deposit Classify as current or noncurrent in the balance sheet. Separately classified as a deposit that is maintained as a compensating balance. Disclose details of arrangement. RECEIVABLES  Receivables: claims that a company has against customers and others, usually for specific cash receipts in the future o Receivable is a financial asset if the claim is a contractual right to receive cash or other financial assets from another party o Loans and receivables: result from one party delivering cash to a borrower in exchange for a promise to repay the amount on a specific date(s) or on demand + interest  Not considered cash or cash-equivalents  Not traded in an active market o Trade receivables: amounts owed by customers to whom the company has sold goods or services as part of its normal business operations.  Open account receivables  short-term extensions of credit that are based on purchasers oral promise to pay goods that have been sold  Notes receivables  written promise to pay a certain amount of money on a specified future date 2 o Loan receivables: created when one party advances cash or other assets to a borrower and receives a promise to be repaid later.  Financing transactions by borrowers  Investing transactions by lenders o Nontrade receivables written promises either rto pay cash or deliver other assets  Created by a variety of transactions  Generally reported as separate items in the balance sheet or in a note that is cross- referenced to the balance sheet ` o Account and notes receivables  assumed to be short-term trade receivables o Loans receivables  based on long-term nontrade loans or notes RECEIVABLES  BASIC ACCOUNTING ISSUES  Recognition and measurement of accounts receivable o General account standards  Recognize an account receivable when the entity becomes a party to the contractual provisions of the financial instrument  Measure the receivable initially at its fair value  After initial recognition, measure receivables at amortized cost **entity must have legal claim to receive cash or other financial iasstet o Trade discount  Used to avoid frequent changes in catalogues, to quote different prices for different quantities purchased. o Cash discount (sales discount)  Offered to encourage fast payments.  Companies usually take the discount as it means they are using their money effectibely  Receivables are to be recorded assuming no discount will be made. Discount will be recorded only once payment is received  Gross method: the accounts receivable are measured at their gross amount and any sales discounts are reported as a deduction from sales  Net method: receivables are already at their realizable value so no further adjustment is needed  “sales discount forfeited”  other revenue o Sales return and allowances  Probably sales returns and price reductions are estimated and deducted as contra accounts against sales on the income statement and accounts receivables on the balance sheet  Repoted in the same period as the sales that they relate to o nonrecognition of interest element  When a company has to wait for the cash receipts, the receivanles face amount is not a good measure of its face value 3  In practice, accountants generally ignore this for accounts receivable because the discount amount is not usually material when compared with the net income for the period  Impairment of accounts receivable o Receivables have to be assessed for indications of uncollectibility or impairment.  If there has been a “significant adverse change” in either the expected timing of the future cash flows or in the amount expected to be repaid.  Bad debts or uncollectible accounts o Estimating uncollectible trade accounts receivable  Most companies are exposed to varying levels of credit risk  the likelihood of loss because of the failure of the other party to fully pay the amount owed  The accounting issue  ensuring that a reasonable estimate is made of the amount of accounts receivable that is unlikely to be collected  Most important indicator used to identify impaired accou
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