Kế toán, kiểm toán - Chapter 7: Cash and receivables

CHAPTER 7:CASH AND RECEIVABLESChapter 7: Cash and ReceivablesAfter studying this chapter, you should be able to:Understand cash and accounts receivable from a business perspective.Define financial assets, and identify items that are considered cash and cash equivalents and how they are reported.Define receivables and identify the different types of receivables from an accounting perspective.Account for and explain the accounting issues related to the recognition and measurement of accounts receivable.Account for and explain the accounting issues related to the impairment in value of accounts receivable.Continued3After studying this chapter, you should be able to:(Continued)Account for and explain the accounting issues related to the recognition and measurement of short-term notes and loans receivable.Account for and explain the accounting issues related to the recognition and measurement of long-term notes and loans receivable.Account for and explain the basic accounting issues related to the derecognition of receivables.Explain how receivables and loans are reported and analyzed. Identify differences in accounting between accounting standards for private enterprises (ASPE) and IFRS, and what changes are expected in the near future.4Chapter 7: Cash and ReceivablesCash and Receivables5Understanding Cash and Accounts ReceivableManaging and controlling cash and accounts receivable are critical objectives for many companiesKey concerns relating to management and control of cash includeImplementing appropriate internal controls, including regular bank reconciliations Minimizing “idle” cashKey concerns relating to management and control of accounts receivable includeImplementing appropriate internal controls, including appropriate credit policiesSpeeding up the collection cycle6Financial Asset“Any asset that is:(i) cash;(ii) a contractual right to receive cash or another financial asset from another party;(iii) a contractual right to exchange financial instruments with another party under conditions that are potentially favourable to the entity; or(iv) an equity instrument of another entity” CICA Handbook, Part II, Section 38567What is Cash? Cash is reported as a current asset if it is readily available to pay current obligations and is free of restrictionsCash consists of coins, currency, available funds on deposit at the bank, and petty cashAlso includes money orders, certified cheques, cashier’s cheques, personal cheques, bank drafts, and usually savings accountsPost-dated cheques, travel advances, and stamps on hand are not classified as cash8Reporting of CashReporting cash needs special attention in the case of the following:Restricted cashCash in foreign currenciesBank overdraftsCash equivalents9Restricted CashCompensating balances: minimum cash balances maintained by a corporation in support of existing borrowingsThese funds are not available for use by the corporation, but the bank can use the restricted cash Petty cash, special payroll, and dividend accounts are examples of cash set aside for a special purpose (usually not material)10Restricted CashIf the restricted cash balance is material, must be segregated from regular cash for reporting purposesClassified as current or non-current assets depending on date of availability or expected disbursementNote disclosure of restricted cash is required11Foreign CurrenciesAmount held in foreign currencies is reported in Canadian dollars on the date of the statement of financial position (i.e. balance sheet date)The exchange rate on the date of the statement of financial position is used to translate foreign currencies into Canadian dollarsIf restrictions exist on the foreign funds, those funds are reported as restricted12Bank Overdrafts Overdrafts represent cheques written in excess of the cash account balanceOverdrafts are reported as current liabilities (often reported as accounts payable)In general, bank overdrafts should not be offset against the Cash accountHowever, bank overdrafts may be offset against available cash in another account if both accounts are at the same bank13Cash EquivalentsDefined as “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.”Original maturity is generally three months or lessTypical examples: treasury bills, money-market funds, commercial paperASPE excludes equity securitiesUnder IFRS, some equity instruments can be classified as cash equivalents (for example, preferred shares acquired within a short time of their maturity date)Cash equivalents are reported at fair value14Receivables: IntroductionLoans and receivables are specific claims against customers and other parties for cash (or other assets)Receivables are classified as either current (short-term) or noncurrent (long-term)Classified as current receivables if there is the expectation to collect within one year or operating cycle (whichever is longer) Receivables can be classified as either trade receivables or nontrade receivables15Accounts Receivable: IssuesTrade receivables include:Accounts receivable (verbal promise to pay, normally within 30 to 60 days)Notes receivable (written promises with specified terms, e.g. interest rate and due date)Nontrade receivables include the following:Advances to employees or other officersDelayed payment terms from a purchaserReceivables from the government (e.g. GST recoverable, income tax receivable)Dividends and interest receivableAmounts owing by insurance companies16Accounts Receivable: Trade Discounts vs. Cash DiscountsTrade discounts are discounts given to customers often for different quantities purchased (often quoted as a percentage)Trade discounts are generally not recorded; the price charged (net of the discount) is recorded by the seller as a receivable and revenueCash discounts (or sales discounts) encourage customers to pay faster; they are recordedExample of cash discounts: 2/10, n/30; the customer will receive a 2% discount if payment made within 10 days and the gross amount of the invoice is due in 30 days17Accounts Receivable: Recording Cash DiscountsTwo methods: gross method and net methodGross method records discounts when customers pay within discount period“Sales Discounts” are deducted from sales on the income statementMost common methodNet method records accounts receivable net of the discount; discounts forfeited by customers are recorded when not takenPreferred method (theoretically) but rarely used“Sales Discounts Forfeited” is recorded as “Other revenue” if customer does not take the discount18Example of Gross Method$10,000 sales on credit (terms 2/10, n/30) Dr. Accounts Receivable 10,000Cr. Sales Revenue 10,000Customer pays account within discount period Dr. Cash 9,800 Dr. Sales Discounts 200Cr. Accounts Receivable 10,00019Example of Net Method$10,000 sales on credit (terms 2/10, n/30) Dr. Accounts Receivable 9,800Cr. Sales Revenue 9,800Customer pays account after discount period Dr. Cash 10,000 Cr. Sales Discounts Forfeited 200 Cr. Accounts Receivable 9,80020Impairment of Accounts ReceivableShort-term receivables are reported at their net realizable value (NRV)The NRV is the net amount of cash expected to be collected, which is not necessarily the amount legally receivableCalculated as: Gross accounts receivable less estimated uncollectible accounts and any returns, allowances, or cash discountsLoans and receivables are impaired if there is “significant adverse change” in expected configuration of cash flows (i.e. timing or amount)21Estimating Uncollectible ReceivablesThe Allowance MethodRecords estimated impairment to properly value accounts receivables and record the bad debts as expense in the same accounting period as the sale (matching concept)Receivables are reported at their estimated net realizable value – i.e., net of an Allowance for Doubtful Accounts22Estimating Uncollectible AccountsThe estimate of uncollectible accounts may be based on: Allowance Procedure Only: management frequently analyses accounts receivable, estimates uncollectible amounts and adjusts the Allowance for Doubtful Accounts Mix of Procedures: initially may use percentage of sales (or net sales), but must still adjust at year-end to ensure that Allowance for Doubtful accounts is appropriateRegardless of procedure used, net accounts receivable at year-end must be reported at net realizable value (key focus is on measurement of accounts receivable at net realizable value)23Allowance Procedure OnlyUses past collection experience to estimate uncollectible accountsFocus is to report accounts receivable at net realizable valueDoes not focus on matching bad debt expense to salesAny existing balance in Allowance for Doubtful Accounts is used to calculate the current year’s bad debt expense24Allowance Procedure OnlyWilson & Co. – Aging Schedule25Allowance Procedure OnlyCalculate the impairment and bad debts expense: 460,000 x .04 $18,400 18,000 x .15 2,700 14,000 x .20 2,800 55,000 x .25 13,750Required balance in Allowance $37,650 Cr.less: current balance in Allowance 800 Cr.Write-down amount for period $36,850*To record the write-down for the period: Bad Debts Expense *36,850 Allowance for Doubtful Accounts 36,8502126Mix of ProceduresInitial use of “percentage-of-sales” approach is based on the relationship between sales and bad debtsMatches the estimated cost of bad debts to sales generated in the same accounting periodAny existing balance in the balance sheet account (Allowance for Doubtful Accounts) is initially ignored when calculating the current period’s bad debts expenseReceivables are also reviewed at year-end to ensure that balance is appropriate, and adjustment to Allowance for Doubtful Accounts is made27Mix of Procedures: ExampleExample:Dockrill Corp. reports the following balances for its first year of operations (2017): Net credit sales: $400,000The company estimates bad debts at 2% of net credit salesDetermine estimated bad debts expense for 201728Mix of Procedures: ExampleEstimated Bad Debts Expense: $400,000 x 2% = $8,00012To record Bad Debts Expense:Bad Debts Expense $8,000 Allowance for Doubtful Accounts $8,000 3At year end if management determines that $9,900 will not be collectible, and that balance of Allowance account before year-end adjustments is $7,500:Bad Debt Expense $2,400 Allowance for Doubtful Accounts $2,400($9,900 - $7,500 = $2,400)29Balance Sheet PresentationShort-term accounts receivable are shown at their net realizable value as follows: Accounts Receivable $ xxx Less: Allowance for Doubtful Accounts xxx Net Realizable Value $ xxx30Allowance Method: Writing Off Accounts ReceivableWhen a specific customer’s account is determined to be uncollectible, the following entry is made: Dr. Allowance for Doubtful Accounts x Cr. Accounts Receivable –specific customer x (for the amount to be written off)If payment is received after write-off of account, the account is reinstated and payment is recorded:Dr. Accounts Receivable Cr. Allowance for Doubtful AccountsDr. Cash Cr. Accounts Receivable(for the amount collected)31Direct Write-off MethodIf uncollectible amounts are highly immaterial, the allowance method is sometimes not used Instead, direct write-off method may be usedRecord bad debt expense only when specific account is determined to be uncollectible: Dr. Bad Debt Expense x Cr. Accounts Receivable xNo allowance account is used32Recognition of Short-Term Notes ReceivableNotes receivable differ from accounts receivable as they are supported by a promissory note (with specific terms)All notes contain some interestNotes are either:Interest bearingHave a stated rate of interest orZero-interest bearing (or non-interest bearing)Interest rate not always statedInterest amount is the difference between the amount borrowed and the face amount33Interest Bearing Short-Term Notes Receivable Example: On March 14, 2017, Accounts Receivable of $1,000 is exchanged for a 6% six-month note March 14, 2017 (when note is issued):Notes Receivable 1,000 Accounts Receivable 1,000September 14, 2017 (on collection of note):Cash 1,030 Notes Receivable 1,000 Interest Income 30 Interest = $1,000 x 6% x 6/12 34Non-Interest Bearing Short-Term Notes Receivable On February 23, 2017, a $5,000 nine-month non-interest bearing note is issued; 8% is the implied interest rateOn issuance of note:Notes Receivable 4,717 Cash 4,717* *5,000 / (1 + 6%); 8% x 9/12 = 6%On collection of note:Cash 5,000 Notes Receivable 4,717 Interest Income 283 Interest = $4,717 x 8% x 9/12 35Long-term Loans ReceivableLong-term loans receivable are recognized at fair value – i.e. the present value of the future cash flowsWhen the stated interest rate is the same as the market interest rate, the note or loan is issued at its face valueWhen there is a difference between interest rates, the note or loan is issued at a premium or a discount (i.e. the present value is greater or less than the face value)36Long-term Loans Receivable – Interest Bearing NotesExample: Morgan Corp. issues a $10,000, 10% three-year note; market interest rate is 12% and annual interest payments are $1,000 (10% x $10,000)In calculating the note’s present value, use 12% market rate to discount all future cash flows as follows: ($10,000 x .71178) + ($1,000 x 2.40183) = $9,520The note is issued at a discount (as proceeds 1 year, report amount and maturity dateUse allowance account to record impairments (IFRS also requires reconciliation of changes in the allowance account during accounting period)Income statement disclosure of interest income, impairment losses, and any reversals of such losses47AnalysisAccounts Receivable Turnover:Net Sales/RevenueAverage Trade Receivables (Net)Days Sales Uncollected:365 DaysA/R Turnover48ComparisonIFRS generally requires more extensive disclosuresThe two sets of standards are very similarIFRS allows preferred shares that are close to their maturity date to be qualify as a cash equivalentASPE does not require use of the effective interest method, whereas IFRS generally doesWhen determining whether an asset should be derecognized, ASPE considers who has control of the asset, where as IFRS considers whether the risks and rewards of ownership have been transfered.49