Kế toán, kiểm toán - Chapter 6: The current asset classification, cash, and accounts receivable

2Chapter 6:The Current Asset Classification, Cash, and Accounts Receivable3Describe the current asset classification and its role in financial analysis and control.Learning Objective 14Current Asset ClassificationFigure 6-1 The operating cycleA current asset is defined as any asset that is intended to be converted into cash within one year or the company’s operating cycle, whichever is longer.5Relative Size of Current Assets6Measures Using Current Assets – Current Ratio7Limitations of the Current Assets ClassificationAs noted by Leopold A. Bernstein: “The current ratio is not fully up to the task [of assessing short-term liquidity] because it is a static or “stock” concept of what resources are available at a given moment to meet the obligations at that moment.”Due to these limitations, cash flow data from the statement of cash flows is increasingly being used by creditors and investors to evaluate solvency.8Current assets are assets whicha. can be used immediately to retire liabilities.b. are newly acquired.c. have been converted into cash in the previous year.d. are intended to be converted into cash within one year.9Explain the techniques used to manage, account for, and control cash.Learning Objective 210Cash Includes coin, currency, and checking accounts, money orders, certified checks, cashier’s checks, personal checks and bank drafts. Cash equivalents are short term highly liquid investments with maturities of three months or less. Issues include Restrictions on the use of cashProper management of cashControl of cash11Cash Figure 6-4 – Cash as a percentage of total assets and current assets12Proper Management of CashRestrictions placed on a company’s access to its cash are typically imposed by creditors to help ensure future interest and principal payments.Compensating balances are sometimes requiredRecord Control of cashPhysical Control of cashConcept Practice 2 14Define accounts receivable and indicate how the allowance method is used to value accounts receivable on the financial statements. Learning Objective 315Accounts ReceivableAccounts receivable arise from selling goods or services to customers on account.Recorded at face amount to be collected.However, we must also reflect the fact that a portion of A/R may not be collected.We adjust to Net Realizable ValueReasons for lack of/partial collection:sales discounts (cash discounts)sales returnssales allowancesuncollectible A/R (bad debts) 16Allowance for Doubtful Accounts We create a contra account to A/R (called Allowance for Doubtful Accounts) to indicate the portion of A/R that will not be collected due to defaults on payments by customers.Direct write off is not consistent with GAAP because it does not achieve a matching of revenues and expenses due to the time between the recording of the sale and the decision to finally write off an asset. Assets are overvalued until the final write off. 17 Allowance MethodThere are three basic stepsBad debts are estimatedAn adjusting journal is made to recognize the expense and reduce the net balance in A/RA write-off journal entry is made when the bad debt occurs (it is determined the item is not collectable) 18Estimating the Bad DebtNote that we do not know in any given period which A/Rs will not be collected. Therefore, we must estimate uncollectibles. There are two methods: 1. Percentage of sales 2. Aging schedule of accounts receivableBoth methods are used to estimate for an adjusting journal entry at the end of the period. This entry ensures that bad debt expenses are matched against the revenues reported19Percentage of Sales MethodTypically based on credit salesCalculation: Credit Sales x % = Bad Debt Expense (focus on the debit side of the AJE)The percentage chosen by management for this calculation is normally based on the past experience of the company.20Adjusting Journal EntryBased on the estimate, a journal entry is recordedDebit – Bad Debt Expense XXX Credit – Allowance for Doubtful Accounts XXXBad debt expense recognizes there is a cost that must be matched with revenue as some credit sales will be uncollectible.Allowance for Doubtful Accounts decreases the net realizable value of Accounts Receivables on the Balance Sheet.21The Write – Off Journal EntryWhen a determination is made that a specific A/R is not collectable, it should be removed from the ledger with a write-off JEDebit- Allowance for Doubtful Accounts XXX Credit – Accounts Receivable XXXNet realizable value of the Accounts Receivable does not change because both the A/R and the Allowance are effected. 22Bad Debt RecoveriesIf written off amounts are later collected, reverse the write-off entry for the collected amount (this reestablishes the receivable)Debit – Accounts Receivable XXX Credit – Allowance for Doubtful Accounts XXXThen record the cash collectionDebit – Cash XXX Credit – Accounts Receivable XXX23Inaccurate Estimates of Bad DebtEstimates of Bad Debt are Estimates so are rarely ‘correct’Over time, over estimates and under estimates should tend toward averaging out and may be ignored. If there is a large debit or credit balance in the preadjustment Allowance for Doubtful Accounts, it may indicate that estimates are poorly done or biased.Methodology for estimates should be reviewedPotential adjustment should be made24An Aging Schedule – Another Method of Estimating Bad DebtReceivables do not get better with age. Older items are less likely to be collected.25An Aging Schedule – Used as a Management ToolMaintaining control over receivables is an important part of effective management for companiesIdentify slow moving accountsDirect collection effortsEstimate how much a company is losing in potential interest charges26Sales ReturnsSales returns can be a significant issue for some companies and industries.They may take place some time (60 days or more) after the initial sale.Returns are estimated similar to bad debts where they are material.The income statement and the accounts receivables on the balance sheet must be adjusted.27Problem 6-3, Part a – Glacier Ice CompanyPercentage of Sales method (a) 2017 Net sales = Gross Sales – Sales Returns and Allowances = 1,800,000 - 20,000 = 1,780,000B.D. Expense = 3% of net sales = .03 (1,780,000) = $53,400 AJE at 12/31: Bad Debt Expense 53,400 Allow. for D.A. 53,40028Problem 6-3, Part bAllowance for Doubtful AccountsW/O 70,000 65,000 Beginning 53,400 AJE 48,400 End. Balance Note that, for the percentage of sales method, the AJE is posted before calculating the ending balance (this is not the case for the percentage of receivables method).29Problem 6-4, Part cPercentage of Sales method (c) 2018 Net sales = Gross Sales – Sales Returns and Allowances = 1,500,000 - 50,000 = 1,450,000 B.D. Expense = 3% of net sales = .03 (1,450,000) = $43,500 AJE at 12/31: Bad Debt Expense 43,500 Allow. for D.A. 43,50030Problem 6-4, Part dAllowance for Doubtful AccountsW/O 85,000 48,400 Beginning 43,500 AJE 6,900 End. Balance 31Albert Company uses the allowance method of accounting for bad debts. Albert:a. is violating the matching principle.b. will record bad debt expense only when an account is determined to be uncollectible.c. will not sell to customers on account any more. d. will report accounts receivable in the balance sheet at their net realizable value.32The journal entry to record the recovery of a previously written-off $2,000 account receivable (for David Company) under the allowance method would include:a. a credit to Bad Debt Expense.b. a credit to Cash.c. a debit to Accounts Payable – David Company. d. a credit to Allowance for Doubtful Accounts.33Identify and discuss two fundamental issues important to financial statement users when considering accounts receivable. Learning Objective 434When Should a Receivable be Recorded?Revenue recognition criteria must be metThis is subjectiveGAAP still relies on management discretionTiming of revenue recognition and receivables are significant in the financial statementsPremature recognition of sales is the most prevalent form of corporate fraud35Balance Sheet Valuation of ReceivablesReceivables must be carried on the balance sheet at the actual value that can be collected. Estimating uncollectible accounts can be challenging and is subjective to management. This can have a large impact on the Income Statement and Balance sheet.Users must evaluate the allowance and bad debt write offs in addition to changes in the Accounts Receivable balance.Concept Practice 4 37Discuss the basic relationships among accounts receivable, foreign currencies, and hedging. Learning Objective 538International Perspective: Receivables, Foreign Currencies, and HedgingFor multinational corporations, sales and receivables can be denominated in foreign currency.This means there is a risk based on changing exchange rates.Gain or Loss possible based on the exchange rate.Hedging is a strategy companies use to limit the risk of foreign exchange transactions.39Hedging is used toa. reduce risks associated with holding receivables denominated in foreign companies.b. calculate the current ratio for multinational companies.c. translate foreign currency into U.S. dollars. d. ‘window dress’ uncollectible accounts.40Wiley © 2017