Kế toán tài chính 2 - Chapter 9: Short - Term financial assets

Short-Term Financial AssetsMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 9Learning ObjectivesIdentify and explain the management issues related to short-term financial assets.Explain cash, cash equivalents, and the importance of electronic funds transfer.Identify types of short-term investments and explain the financial reporting implications.2Copyright © Houghton Mifflin Company. All rights reserved.Learning Objectives (cont’d)Define accounts receivable and apply the allowance method of accounting for uncollectible accounts.Define promissory note, and compute and record promissory notes receivable.3Copyright © Houghton Mifflin Company. All rights reserved.Management Issues Related to Short-Term Financial AssetsObjective 1Identify and explain the management issues related to short-term financial assets4Copyright © Houghton Mifflin Company. All rights reserved.Key Issues in Dealing with Short-Term Financial AssetsManagement must address three key issues regarding short-term financial assetsManaging cash needs during seasonal changesSetting credit policiesFinancing receivables5Copyright © Houghton Mifflin Company. All rights reserved.Managing Cash Needs During Seasonal CyclesMost companies experience seasonal cycles of business activity during the yearSales may be weak or strongExpenditures may be high or lowCompanies must carefully plan cash inflows, outflows, borrowing, and investing6Copyright © Houghton Mifflin Company. All rights reserved.Setting Credit PoliciesCompanies sell on credit to be competitive and increase salesTo increase the likelihood of selling to customers who will pay on time, companies develop control procedures and maintain a credit department7Copyright © Houghton Mifflin Company. All rights reserved.Measuring the Effect of a Company’s Credit PoliciesTwo common measures of the effect of a company’s credit policies are Receivable turnoverReflects the relative size of a company's accounts receivable and the success of its seasonal conditions and interest ratesAverage days’ sales uncollectedShows, on average, how long it takes to collect accounts receivable8Copyright © Houghton Mifflin Company. All rights reserved. Compute the receivable turnover for Pioneer Corporation This means that, on average, receivables were turned into cash 5.8 times during the accounting periodReceivable Turnover reflects the relative size of a company's accounts receivable and the success of its seasonal conditions and interest rates9Copyright © Houghton Mifflin Company. All rights reserved.Receivable Turnover for Selected Industries10Copyright © Houghton Mifflin Company. All rights reserved.Average Days’ Sales Uncollected is a relative measure that, on average, shows how long it takes to collect accounts receivable Compute Pioneer’s average days’ sales uncollected This means that the average length of time it takes Pioneer Corp. to receive payment for credit sales is 62.9 days 11Copyright © Houghton Mifflin Company. All rights reserved.Financing ReceivablesCompanies with significant amounts tied up in accounts receivable may not be willing or able to wait until cash is collectedSolutionsSet up financing companiesBorrow funds using receivables as collateralFactoring SecuritizationDiscounting12Copyright © Houghton Mifflin Company. All rights reserved.Financing Companies are companies set up by corporations to help their customers pay for the purchase of their productsExamplesFord Motor Credit Company (FMCC)General Motors Acceptance Corp. (GMAC)Sears Roebuck Acceptance Corp. (SRAC)13Copyright © Houghton Mifflin Company. All rights reserved.BorrowingSome companies borrow funds using their accounts receivable as collateralIf the company does not pay back its loan, the creditor takes possession of the accounts receivable and converts them to cash to satisfy the loan14Copyright © Houghton Mifflin Company. All rights reserved.A credit card sale is an example of factoring without recourse because the credit card issuer accepts the risk of nonpaymentFactoring is the sale or transfer of accounts receivableWith recourseThe seller of the receivables is liable to the purchaser if a receivable is not collectedWithout recourseThe factor that buys the accounts receivable bears any losses from uncollectible accounts15Copyright © Houghton Mifflin Company. All rights reserved.Factoring (cont’d)The factor charges a fee for its serviceUsually about 1 percent for sales with recourseHigher fees for sales without recourse because of increased riskSelling receivables with recourse creates a contingent liabilityA potential liability that can develop into a real liability if a particular subsequent event occurs16Copyright © Houghton Mifflin Company. All rights reserved.Securitization is the sale of batches of a company’s accounts receivable at a discount to companies and investorsThe buyer receives the full amount when the receivables are paidThe revenue is the amount of the discount17Copyright © Houghton Mifflin Company. All rights reserved.Discounting is the sale of promissory notes held as notes receivableThe holder of the note (usually the payee) receives proceeds equal to the maturity value of the note less the interest amountThe seller of the note expects to collect the maturity value of the note (principal plus interest) in the maturity date18Copyright © Houghton Mifflin Company. All rights reserved. DiscussionIndicate whether each of the following is related to (a) managing cash needs during seasonal cycles (b) setting credit policies (c) financing receivablesSelling accounts receivable to a factorBorrowing funds for short-term needs during slow periodsConducting thorough checks of new customers’ ability to payInvesting cash that is not currently needed for operations1. c2. a3. b4. a19Copyright © Houghton Mifflin Company. All rights reserved.Cash and Cash EquivalentsObjective 2Explain cash, cash equivalents, and the importance of electronic funds transfer20Copyright © Houghton Mifflin Company. All rights reserved.CashThe most liquid of all assetsReadily available to pay debtsIncludesCurrency and coins on handChecks and money orders from customersDeposits in bank checking and savings accountsCompensating balancesMinimum amount a bank requires to be held in an accountRestrict cash, increase the interest of loans, and reduce a company’s liquidityAmounts must be reported in notes to financial statements21Copyright © Houghton Mifflin Company. All rights reserved.Cash Equivalents are short-term, highly liquid investments that will revert to cash in 90 days or less from the time of purchaseIncludeMoney market accountsCommercial paperU.S. Treasury billsThese funds revert to cash so quickly they are regarded as cash on the balance sheet22Copyright © Houghton Mifflin Company. All rights reserved.Cash on HandKept for cash registers and for paying expenses that are impractical to pay by checkKept in an imprest (petty cash) fundThe fund is established at a fixed amountReceipts are maintained for expendituresThe fund is periodically reimbursed to restore it to its fixed amount23Copyright © Houghton Mifflin Company. All rights reserved.Banking and Electronic Funds TransferEFT (Electronic Funds Transfer)A company has cash transferred from its bank to another company’s bank instead of writing checksWal-Mart Stores, Inc. makes 75% of its payments to suppliers this wayDebit cardsA customer’s retail purchase is deducted directly from his/her bank accountThe bank documents transactions for the retailerThe retailer must develop new internal controls24Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat items are included in the cash account? What is a compensating balance?Cash consists of coins and currency on hand, checks and money orders received from customers, and deposits in bank checking accounts A compensating balance is the minimum amount a bank requires in a company’s bank account as part of a credit-granting arrangement 25Copyright © Houghton Mifflin Company. All rights reserved.Short-Term InvestmentsObjective 3Identify types of short-term investments and explain the financial reporting implications26Copyright © Houghton Mifflin Company. All rights reserved.Short-Term Investments are investments with a maturity of more than 90 days, but are intended to be held only until cash is needed for current operationsAlso called marketable securities27Copyright © Houghton Mifflin Company. All rights reserved.Short-Term Versus Long-Term InvestmentsMaturity of more than 90 days and less than one yearMaturity of one year or moreTemporary investment of excess cash to be used in current operationsAssets not used in the normal operation of a businessReported under current assets on the balance sheetReported under investments on the balance sheetIncludeHeld-to-maturity securitiesAvailable-for-sale securitiesTrading securitiesIncludeHeld-to-maturity securitiesAvailable-for-sale securitiesShort-Term InvestmentsLong-Term Investments28Copyright © Houghton Mifflin Company. All rights reserved.Held-to-Maturity Securities are debt securities that management intends to hold to their maturity and whose cash value is not needed until that dateMay be short- or long-term investments29Copyright © Houghton Mifflin Company. All rights reserved. Dec. 1, 20x4: Purchased U.S. Treasury bills that will mature in 120 days at $100,000 for $97,000Dec. 31, 20x4: Accrued interest income on U.S. Treasury billsOn December 31, the U.S. Treasury bills would be shown on the balance sheet as a short-term investment at their amortized cost of $97,750 ($97,000 + $750)Example of Held-to-Maturity Securities30Copyright © Houghton Mifflin Company. All rights reserved. March 31, 20x5: U.S. Treasury bills matureExample of Held-to-Maturity Securities31Copyright © Houghton Mifflin Company. All rights reserved.Trading Securities are debt and equity securities that are bought and held principally for the purpose of being sold in the near termAre always short-term investmentsFrequently bought and sold to generate profits on short-term changes in their prices32Copyright © Houghton Mifflin Company. All rights reserved.Trading Securities (cont’d)Classified as current assets on the balance sheetValued at fair (market) valueAn increase or decrease in the total trading portfolio is included in net income in the accounting period in which the increase or decrease occurs33Copyright © Houghton Mifflin Company. All rights reserved. Example of Trading SecuritiesOct. 25, 20x4: Purchased 10,000 shares of Exxon Mobil Corp. for $900,000 ($90 per share) and 5,000 shares of Texaco, Inc. for $300,000 (60 per share)34Copyright © Houghton Mifflin Company. All rights reserved. Example of Trading SecuritiesDec. 31, 20x4: Exxon Mobil’s share price has decreased to $80 per share and Texaco’s has risen to $64 per shareUnrealized loss on investments will appear on the income statement as a reduction in incomeThe loss is unrealized because the securities have not been sold35Copyright © Houghton Mifflin Company. All rights reserved. Example of Trading SecuritiesDec. 31, 20x4: Exxon Mobil’s share price has decreased to $80 per share and Texaco’s has risen to $64 per shareThe Allowance to Adjust Short-Term Investments to Market account appears on the balance sheet as a contra-asset36Copyright © Houghton Mifflin Company. All rights reserved. Example of Trading SecuritiesMar. 2, 20x5: Sold 5,000 shares of Texaco for $70 per shareThe realized gain will appear on the income statementNote that the realized gain was unaffected by the adjustment for the unrealized loss at the end of 20x437Copyright © Houghton Mifflin Company. All rights reserved. Example of Trading Securities20x5: Purchased 2,000 shares of BP Corporation at $64 per shareDec 31, 20x5: The price of Exxon Mobil’s stock has risen to $95 per share and BP’s stock price has fallen to $58 per shareA $118,000 debit brings the Allowance to Adjust Short-Term Investments to Market account’s $80,000 credit balance to a $38,000 debit balanceCopyright © Houghton Mifflin Company. All rights reserved. Allowance to Adjust Short-Term Investments to MarketDec 31, 20x4 bal. 80,000Recall that on Dec. 31, 20x4 this account was credited $80,000 to reflect the amount by which the cost of the investment portfolio exceeded its market valueDec 31, 20x5 bal. 38,000Dec 31, 20x5 adj. 118,000Allowance to Adjust Short-Term Investments to Market Account is adjusted at the end of every accounting period to reflect the difference between the market value of the investment portfolio and its costOn Dec. 31, 20x5, the market value of the investment portfolio exceeded its cost by $38,000. The new balance of this account is a $38,000 debit balanceA debit adjustment of $118,000 must be made to the account to reflect the correct balance39Copyright © Houghton Mifflin Company. All rights reserved.Available-for-Sale Securities are debt and equity securities that do not meet the criteria for either held-to-maturity or trading securitiesMay be short- or long-term investmentsAre accounted for in the same way as trading securities except that the unrealized gain or loss is not reported on the income statementReported as a special item in the stockholders’ equity section of the balance sheet40Copyright © Houghton Mifflin Company. All rights reserved.Dividend and Interest Income for all three categories of short-term investments is shown in the other income and expenses section of the income statement41Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat are unrealized gains and losses on trading securities? On what statement are they reported?Unrealized gains and losses on trading securities are changes in the fair market value of securities that have not been sold. Because the securities have not been sold, the gains or losses have not been realized. They are reported on the income statement42Copyright © Houghton Mifflin Company. All rights reserved.Accounts ReceivableObjective 4Define accounts receivable and apply the allowance method of accounting for uncollectible accounts43Copyright © Houghton Mifflin Company. All rights reserved.Accounts Receivable (A/R) are short-term financial assets that arise from sales on credit to customersAlso called trade creditTrade credit terms vary by industryInstallment A/R arise from the sale of goods on terms that allow the buyer to make a series of time paymentsAlthough the payment period may be 24 months or more, are still classified as current assets if customary in the industry44Copyright © Houghton Mifflin Company. All rights reserved.Accounts Receivable (cont’d)Receivables from other than regular customers (employees, owners, officers) are shown separately with a title such as Receivables from EmployeesNormally, individual customer accounts receivable have debit balancesIf a customer has a credit balance, this is shown as a current liability on the balance sheet45Copyright © Houghton Mifflin Company. All rights reserved.Accounts Receivable as a Percentage of Total Assets for Selected Industries46Copyright © Houghton Mifflin Company. All rights reserved.Uncollectible Accounts are accounts owed by customers who will not or cannot pay Also called bad debtsRepresent a loss or an expense of selling on creditCompanies sell on credit to increase their volume of sales, thereby increasing their earningsLosses may be recognized using theDirect charge-off methodAllowance method47Copyright © Houghton Mifflin Company. All rights reserved.The Direct Charge-Off Method recognizes the loss at the time the A/R is determined to be uncollectibleReduces A/R and increases Uncollectible Accounts ExpenseUsed for federal tax purposes but not GAAP, because it violates the matching principle48Copyright © Houghton Mifflin Company. All rights reserved.The Allowance Method matches bad debt losses against the sales they help produceAt the time of sale, management cannot identify which customers will not pay To observe the matching rule, losses from uncollectible accounts must be estimatedThe estimate becomes an expense in the fiscal year in which the sales are made49Copyright © Houghton Mifflin Company. All rights reserved. Example of the Allowance MethodDec. 31, 20x4: Management estimated that approximately $6,000 of the $100,000 of accounts receivable was uncollectibleUncollectible Accounts Expense appears on the income statement as an operating expenseAllowance for Uncollectible Accounts appears on the balance sheet as a contra-asset account that is deducted from Accounts ReceivableAccounts receivable may be shown “net,” with the amount of the Allowance for Uncollectible Accounts shown in a note to the financial statements50Copyright © Houghton Mifflin Company. All rights reserved.Allowance for Uncollectible AccountsAlso calledAllowance for Doubtful AccountsAllowance for Bad DebtsReserve for Bad DebtsAn older phrase that should not be used in modern practiceUncollectible Accounts ExpenseAlso called Bad Debts Expense51Copyright © Houghton Mifflin Company. All rights reserved.Estimating Uncollectible Accounts ExpenseIt is necessary to estimate the expense to cover expected losses for the yearManagement makes the final decisionCan be optimistic or pessimistic about expected lossesIf optimistic, expense smaller and net income higherIf pessimistic, expense larger and net income smallerIn either case, the estimated loss should be realistic, based on experience, the economy, etc52Copyright © Houghton Mifflin Company. All rights reserved.Estimating Uncollectible Accounts Expense (cont’d)Two common methodsPercentage of net sales methodAccounts receivable aging method53Copyright © Houghton Mifflin Company. All rights reserved.Percentage of Net Sales Method is a way of estimating uncollectible accounts based on the assumption that a predictable proportion of each dollar of sales will not be collectedUsually based on the company’s historical losses54Copyright © Houghton Mifflin Company. All rights reserved. Dec. 31, 20x9: Account balances: Sales, $645,000; Sales Returns and Allowances, $40,000; Sales Discounts, $5,000; Allowance for Uncollectible Accounts, $3,600. Management estimates that uncollectible accounts will average about 2 percent of net salesAllowance for Uncollectible AccountsAfter the above entry is posted, Allowance for Uncollectible Accounts will have a credit balance of $15,600Dec 31, bal. 3,600Dec 31, adj. 12,000Dec 31, adj. bal. 15,600Example of the Percentage of Net Sales Method55Copyright © Houghton Mifflin Company. All rights reserved.Accounts Receivable Aging Method is a way of estimating uncollectible accounts that is based on the assumption that a predictable proportion of each dollar of accounts receivable still owed will not be collectedAlso called aging of accounts receivable56Copyright © Houghton Mifflin Company. All rights reserved.Aging of Accounts Receivable is the process of listing each customer’s receivable account according to the due date of the accountIf the account is past due, there is a possibility it will not be paidThe further the past due an account is, the greater the likelihood it will not be paid57Copyright © Houghton Mifflin Company. All rights reserved.Analysis of Accounts Receivable by AgeThe total past due for each category is multiplied by the estimated percentage uncollectible 58Copyright © Houghton Mifflin Company. All rights reserved.Analysis of Accounts Receivable by AgeThe sum of the totals for each category is the estimated balance of Allowance for Uncollectible Accounts =59Copyright © Houghton Mifflin Company. All rights reserved.Notice that the estimated percentage uncollectible increases as accounts become further past dueAnalysis of Accounts Receivable by Age 60Copyright © Houghton Mifflin Company. All rights reserved. Example of the Accounts Receivable Aging Method (Case 1)Dec. 31, 20x5: Management has estimated that $2,459 of Accounts Receivable are uncollectible. Allowance for Uncollectible Accounts has a credit balance of $800Allowance for Uncollectible AccountsA credit adjustment of $1,659 will bring the account to its target balanceDec 31, bal. 800Dec 31, adj. 1,659Dec 31, adj. bal. 2,459The target balance for the account is a credit balance of $2,45961Copyright © Houghton Mifflin Company. All rights reserved. Example of the Accounts Receivable Aging Method (Case 2)Dec. 31, 20x2: Management has estimated that $2,459 of Accounts Receivable are uncollectible. Allowance for Uncollectible Accounts has a debit balance of $800Allowance for Uncollectible AccountsA credit adjustment of $3,259 will bring the account to its target balanceDec 31, bal. 800Dec 31, adj. 3,259Dec 31, adj. bal. 2,459The target balance for the account is a credit balance of $2,45962Copyright © Houghton Mifflin Company. All rights reserved.Comparison of the Two Methods63Copyright © Houghton Mifflin Company. All rights reserved.Why Accounts Written Off Will Differ from EstimatesThe total of Accounts Receivable written off rarely equals the estimated uncollectible amountWhen the total of accounts written off is less than estimated uncollectible accountsThe allowance account will have a credit balance at year endWhen the total of accounts written off is greater than estimated uncollectible accountsThe allowance account will have a debit balance at year end64Copyright © Houghton Mifflin Company. All rights reserved.Writing Off an Uncollectible AccountWhen it becomes clear an account will not be collected, the amount should be written off to Allowance for Uncollectible AccountsThe uncollectible amount was already accounted for as an expense when the allowance was established65Copyright © Houghton Mifflin Company. All rights reserved. Bal. 2,209 Dec 31, bal. 2,459Example of Writing Off an Uncollectible AccountJan. 15, 20x6: R. Deering, who owes the company $250, is declared bankrupt by federal courtAllowance for Uncollectible AccountsNet realizable value of A/RBefore write-off $44,400 – $2,459 = $41,941Jan. 15 250The write-off does not affect the estimated net realizable value of accounts receivableAccounts Receivable Dec 31, bal. 44,400Jan. 15 250Bal. 44,150After write-off $44,150 – $2,209 = $41,941Copyright © Houghton Mifflin Company. All rights reserved.Recovery of Accounts Receivable Written OffOccasionally a customer whose account has been written off as uncollectible will pay all or part of the amount owedTwo journal entries are requiredOne to reverse the earlier write-offAnother to show the collection of the account67Copyright © Houghton Mifflin Company. All rights reserved. Example of Recovering an Account Previously Written OffSep. 1, 20x6: R. Deering notified the company that he could pay $100 of his account and sent a check for $5068Copyright © Houghton Mifflin Company. All rights reserved.DiscussionAccording to generally accepted accounting principles, at what point in the cycle of selling and collecting does a loss on an uncollectible account occur?According to GAAP, a loss from an uncollectible account occurs at the time the sale on credit is made69Copyright © Houghton Mifflin Company. All rights reserved.Notes ReceivableObjective 5Define promissory note, and compute and record promissory notes receivable70Copyright © Houghton Mifflin Company. All rights reserved.Notes Receivable is a collective term for written promissory notes due in less than one year and are held by the payeeMany companies accept notes receivable in settlement of past-due accountsNotes produce interest incomeNotes represent a stronger claim than do accounts receivableSelling or discounting notes is a common financing method71Copyright © Houghton Mifflin Company. All rights reserved.Promissory Notes are unconditional promises to pay a definite sum of moneyon demand or at a future dateThe signer of the note is called the makerThe entity to whom payment is to be made is called the payeeThe payee regards all promissory notes it holds that are due in less than one year as notes receivable in the current assets section of the balance sheetThe maker regards them as notes payable in the current liability section of the balance sheet72Copyright © Houghton Mifflin Company. All rights reserved.Computations for Promissory NoteSeveral terms are important in accounting for promissory notes 1. Maturity dateThe date on which the note must be paid 2. Duration of noteThe length of time in days between a promissory note’s issue date and its maturity date 3. Interest and interest rateThe cost of borrowing money or the return for lending moneyUsually stated on an annual basis 4. Maturity valueThe total proceeds of a note at the maturity date73Copyright © Houghton Mifflin Company. All rights reserved. June 1: Received a 30-day, 12 percent note from J. Halsted in settlement of an existing account receivable, $4,000July 1: Note plus interest is collectedAccounting Entries for Promissory Notes74Copyright © Houghton Mifflin Company. All rights reserved. July 1: J. Halsted dishonors her noteAccounting Entries for Promissory Notes (cont’d)When the maker of a note does not pay the note, it is said to be dishonoredInterest earned is recorded because the maker of the note is still obligated to pay the principal and interestTransferring the dishonored note receivable to Accounts ReceivableLeaves only notes that have not matured and are presumed to be collectible in Notes ReceivableEstablishes a record in the borrower’s Accounts Receivable account that a note receivable has been dishonored75Copyright © Houghton Mifflin Company. All rights reserved. Sep. 30: Record accrued interest earned on a 60-day, 8 percent, $2,000 note received August 31Oct 30: Received payment of note plus interestAccounting Entries for Promissory Notes (cont’d)76Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is a promissory note? Who is the maker? Who is the payee?A promissory note is an unconditional promise to pay a definite sum of money on demand or at a future date The person who signs the note and therefore promises to pay is called the maker The person to whom payment should be made is called the payee77Copyright © Houghton Mifflin Company. All rights reserved.Time for ReviewIdentify and explain the management issues related to short-term financial assetsExplain cash, cash equivalents, and the importance of electronic funds transferIdentify types of short-term investments and explain the financial reporting implications78Copyright © Houghton Mifflin Company. All rights reserved.More ReviewDefine accounts receivable and apply the allowance method of accounting for uncollectible accountsDefine promissory note, and compute and record promissory notes receivable79Copyright © Houghton Mifflin Company. All rights reserved.