ch07 - Intermediate Acc IFRS (Cash and Receivable)

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
7-1
CHAPTER 7
Cash and Receivables
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Indicate how to report cash 4. Explain accounting issues
and related items. related to recognition and
valuation of notes receivable.
2. Define receivables and
explain accounting issues 5. Explain additional accounting
related to their recognition. issues related to accounts and
notes receivables.
3. Explain accounting issues
related to valuation of
accounts receivable.
7-2
PREVIEW OF CHAPTER 7
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
7-3
LEARNING OBJECTIVE 1
Cash Indicate how to report cash
and related items.
Cash
 Most liquid asset.
 Standard medium of exchange.
 Basis for measuring and accounting for all other items.
 Current asset.
 Examples: Coin, currency, available funds on deposit at

the bank, money orders, certified checks, cashier’s checks,
personal checks, bank drafts and savings accounts.
7-4 LO 1
Cash
Reporting Cash
Cash Equivalents
Short-term, highly liquid investments that are both
a) readily convertible to cash, and

b) so near their maturity that they present insignificant
risk of changes in value.
Examples: Government bonds, commercial paper, and

money market funds
7-5 LO 1
Reporting Cash
Restricted Cash
Companies segregate restricted cash from “regular” cash.
Examples, restricted for:

(1) plant expansion, (2) retirement of long-term debt, and (3)
compensating balances.
ILLUSTRATION 7.2
Disclosure of Restricted Cash
7-6 LO 1
Reporting Cash
Bank Overdrafts
Company writes a check for more than the amount in its
cash account.
 Generally reported as a current liability.
 Included as a component of cash if such overdrafts are

repayable on demand and are an integral part of a
company’s cash management (such as the common
practice of establishing off setting arrangements against
other accounts at the same bank).
7-7 LO 1
ILLUSTRATION 7.2
Classification of Cash-Related Items
7-8 LO 1
Receivables Define receivables and explain accounting
issues related to their recognition.
Receivables - Claims held against customers and

others for money, goods, or services.
Oral promises of the Written promises to pay a

purchaser to pay for goods certain sum of money on a
and services sold. specified future date.
Accounts Notes
Receivable Receivable
7-9 LO 2
Receivables
Non-Trade Receivables
1. Advances to officers and employees.
2. Advances to subsidiaries.
3. Deposits paid to cover potential damages or losses.
4. Deposits paid as a guarantee of performance or payment.
5. Dividends and interest receivable.
6. Claims against: Insurance companies for casualties sustained;

defendants under suit; governmental bodies for tax refunds;
common carriers for damaged or lost goods; creditors for returned,
damaged, or lost goods; customers for returnable items (crates,
containers, etc.).
7-10 LO 2
Non-Trade
Receivables
ILLUSTRATION 7.3
Receivables Statement of Financial
Position Sheet Presentations
7-11 LO 2
Recognition of Accounts Receivables
 Accounts receivable generally arise as part of a

revenue arrangement.
 The revenue recognition principle indicates that a

company should recognize revenue when it satisfies
its performance obligation by transferring the good or
service to the customer.
7-12 LO 2
For example, if Lululemon Athletica, Inc. (CAN) sells a

yoga outfit to Jennifer Burian for $100 on account, the yoga
outfit is transferred when Jennifer obtains control of this
outfit. When this change in control occurs, Lululemon
should recognize an account receivable and sales revenue.
Lululemon makes the following entry:
Accounts Receivable 100

Sales Revenue 100
7-13 LO 2
Some key indicators that Lululemon has transferred and

that Jennifer has obtained control of the yoga outfit.
1. Lululemon has the right to payment from the customer.
2. Lululemon has passed legal title to the customer.
3. Lululemon has transferred physical possession of the

goods.
4. Lululemon no longer has significant risks and rewards of

ownership of the goods.
5. Jennifer has accepted the asset.
7-14 LO 2
Receivables
Measurement of the Transaction Price

The transaction price is the amount of consideration that a
company expects to receive from a customer in exchange
for transferring goods or services.
Variable Consideration
In some cases, the price of a good or service is dependent
on future events. These future events often include such
items as discounts, returns and allowances, rebates, and
performance bonuses.
7-15 LO 2
Trade Discounts
Use to:
 Avoid frequent changes in 10 %
catalogs. Discount for
new Retail
 Alter prices for different
Store
quantities purchased.
Customers
 Hide the true invoice price
from competitors.
7-16 LO 2
Cash Discounts (Sales Discounts)

 Offered to induce prompt
payment.
 Terms such as 2/10, n/30,

2/10, E.O.M., or net 30,
Payment
E.O.M. terms are
 Gross Method vs. Net 2/10, n/30
Method.
7-17 LO 2
Cash Discounts (Sales Discounts)
ILLUSTRATION 7.5
Entries under Gross and Net Methods
7-18 LO 2
Sales Returns and Allowances

 Sales Returns and Allowances is a contra revenue
account to Sales Revenue.
 Allowance for Sales Returns and Allowances is a contra

asset account to Accounts Receivable.
 The use of both Sales Returns and Allowances, and

Allowance for Sales Return and Allowances accounts is
helpful to identify potential problems associated with
inferior merchandise, inefficiencies in filling orders, or
delivery or shipment mistakes.
7-19 LO 2
Illustration: Assume that Max Glass sells hurricane glass to Oliver

Builders. As part of the sales agreement, Max includes a provision
that if Oliver is dissatisfied with the product, Max will grant an
allowance on the sales price or agree to take the product back.
On January 4, 2019, Max sells $5,000 of hurricane glass to Oliver
on account. Max records the sale on account as follows.
Accounts Receivable 5,000

Sales Revenue 5,000
7-20 LO 2
Illustration: Assume that Max Glass sells hurricane glass to Oliver

Builders. As part of the sales agreement, Max includes a provision
that if Oliver is dissatisfied with the product, Max will grant an
allowance on the sales price or agree to take the product back.
On January 16, 2019, Max grants an allowance of $300 to Oliver
because some of the hurricane glass is defective. The entry to
record this transaction is as follows.
Sales Returns and Allowances 300

7-21 LO 2
On January 31, 2019, before preparing financial statements, Max

estimates that an additional $100 in sales returns and allowances
will result from the sale to Oliver on January 4, 2019. An adjusting
entry to record this additional allowance is as follows.
Sales Returns and Allowances 100

Allowance for Sales Returns and Allowances 100
7-22 LO 2
Time Value of Money

 Theoretically, any revenue after the period of sale is interest
revenue.
 Companies ignore interest revenue related to accounts

receivable because the amount of the discount is not
usually material in relation to the net income for the period.
 The profession specifically excludes from present value

considerations “receivables arising from transactions with
customers in the normal course of business which are due
in customary trade terms not exceeding approximately one
year.”
7-23 LO 2
Accounts Receivable
How are these accounts presented on the Statement of

Financial Position?
Allowance for
Accounts Receivable Doubtful Accounts
Beg. 500 25 Beg.
End. 500 25 End.
7-24 LO 2
Accounts Receivable
Brown Furniture
Statement of Financial Position (partial)
Current Assets:
Cash $ 330
Accounts receivable 500
Less: Allowance for doubtful accounts (25) 475
Inventory 812
Prepaid expense 40
Total current assets 1,657
7-25 LO 2
Accounts Receivable
Alternate
Brown Furniture Presentation
Current Assets:
Cash $ 330
Accounts receivable, net of $25 allowance 475
Inventory 812
Prepaid expense 40
7-26 LO 2
Accounts Receivable
Journal entry for credit sale of $100?
Sales Revenue 100
Allowance for
Beg. 500 25 Beg.
End. 500 25 End.
7-27 LO 2
Accounts Receivable
Journal entry for credit sale of $100?
Sales Revenue 100
Allowance for
Beg. 500 25 Beg.
Sale 100
End. 600 25 End.
7-28 LO 2
Accounts Receivable
Collected $333 on account?
Cash 333
Allowance for
Beg. 500 25 Beg.
Sale 100
End. 600 25 End.
7-29 LO 2
Accounts Receivable
Collected $333 on account?
Cash 333
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll.
End. 267 25 End.
7-30 LO 2
Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll.
End. 267 25 End.
7-31 LO 2
Accounts Receivable
Adjustment of $15 for estimated bad debts?
Bad Debt Expense 15
Allowance for Doubtful Accounts 15
Allowance for
Beg. 500 25 Beg.
Sale 100 333 Coll. 15 Est.
End. 267 40 End.
7-32 LO 2
Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Allowance for
Beg. 500 25 Beg.
End. 267 40 End.
7-33 LO 2
Accounts Receivable
Write-off of uncollectible accounts for $10?
Allowance for Doubtful accounts 10
Allowance for
Beg. 500 25 Beg.
10 W/O W/O 10
End. 257 30 End.
7-34 LO 2
Accounts Receivable
Brown Furniture
Current Assets:
Cash $ 330
Accounts receivable, net of $30 allowance 227
Inventory 812
Prepaid expense 40
7-35 LO 2
Valuation of LEARNING OBJECTIVE 3
Explain accounting issues
Accounts Receivable related to valuation of
accounts receivable.
Uncollectible Accounts Receivable

 Record credit losses as debits to Bad Debt Expense (or
Uncollectible Accounts Expense).
 Normal and necessary risk of doing business on credit.
 Two methods to account for uncollectible accounts:

1) Direct write-off method
2) Allowance method
7-36 LO 3
Valuation of Accounts Receivable
Methods of Accounting for Uncollectible Accounts
Direct Write-Off Method Allowance Method

Theoretically deficient: Losses are estimated:
 Fails to record expenses as  Percentage-of-sales.
incurred.  Percentage-of-receivables.
 Receivable not stated at  IFRS requires when bad
cash realizable value. debts are material in
 Not appropriate when amount.
amount uncollectible is
material.
7-37 LO 3
Direct Write-Off Method for Uncollectible Accounts

When a company determines a particular account to be
uncollectible, it charges the loss to Bad Debt Expense.
Assume, for example, that on December 10 Cruz Ltd. writes off
as uncollectible Yusado’s NT$8,000,000 balance. The entry is:
Bad Debt Expense 8,000,000

Accounts Receivable (Yusado) 8,000,000
7-38 LO 3
Allowance Method for Uncollectible Accounts

 Involves estimating uncollectible accounts at the end
of each period.
 Ensures that companies state receivables on the
statement of financial position at their cash realizable
value.
 Companies estimate uncollectible accounts and cash
realizable value using information about past and
current events as well as forecasts of future
collectibility.
7-39 LO 3
Recording Estimated Uncollectibles

Illustration: Assume that Brown Furniture in 2019, its first year
of operations, has credit sales of £1,800,000. Of this amount,
£150,000 remains uncollected at December 31. The credit
manager estimates that £10,000 of these sales will be
uncollectible. The adjusting entry to record the estimated
uncollectibles (assuming a zero balance in the allowance
account) is:
Bad Debt Expense 10,000

Allowance for Doubtful Accounts 10,000
7-40 LO 3
Recording Estimated Uncollectibles
ILLUSTRATION 7.5
Presentation of Allowance for Doubtful Accounts
The amount of £140,000 represents the cash realizable value of

the accounts receivable at the statement date.
7-41 LO 3
Recording the Write-Off of an Uncollectible

Account
 When companies have exhausted all means of
collecting a past-due account and collection appears
impossible, the company should write off the account.
 In the credit card industry, for example, it is standard
practice to write off accounts that are 210 days past
due.
7-42 LO 3
Write-Off of an Uncollectible Account
Illustration: The financial vice president of Brown Furniture

authorizes a write-off of the £1,000 balance owed by Randall plc on
March 1. The entry to record the write-off is:

Assume that on July 1, Randall plc pays the £1,000 amount that
Brown had written off on March 1. These are the entries:
Cash 1,000
7-43 LO 3
Estimating the Allowance

Percentage-of-Receivables Approach
 Reports estimate of receivables at cash realizable value.
Companies may apply this method using

 one composite rate, or
 an aging schedule using different rates.
7-44 LO 3
Estimating the Allowance ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule
7-45 LO 3
ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule
What entry
would Wilson
make assuming
that the
allowance
account had a
zero balance?

7-46 LO 3
ILLUSTRATION 7.6
Accounts Receivable
Aging Schedule
What entry
would Wilson
make assuming
the allowance
account had a
credit balance
of €800 before
adjustment?
Bad Debt Expense (€26,610 – €800) 25,810

7-47 LO 3
Illustration: Duncan SA reports the following financial information

before adjustments.
Instructions: Prepare the journal entry to record Bad Debt

Expense assuming Duncan Company estimates bad debts at
(a) 5% of accounts receivable and (b) 5% of accounts
receivable but Allowance for Doubtful Accounts had a $1,500
debit balance.
7-48 LO 3

before adjustments.
Instructions: Prepare the journal entry to record Bad Debt

Expense assuming Duncan Company estimates bad debts at
(a) 5% of accounts receivable.
€100,000 x 5% = €5,000 - €2,000 = €3,000
7-49 LO 3

before adjustments.
Instructions: Prepare the journal entry to record Bad Debt Expense

assuming Duncan Company estimates bad debts at (b) 5% of
accounts receivable but the Allowance had a $1,500 debit balance.
€100,000 x 5% = €5,000 + €1,500 = €6,500
7-50 LO 3
Notes Receivable Explain accounting issues
related to recognition and
valuation of notes receivable.
Supported by a formal promissory note.

 Written promise to pay a certain sum of money at a
specific future date.
 A negotiable instrument.
 Maker signs in favor of a Payee.
 Interest-bearing (has a stated rate of interest) OR
 Zero-interest-bearing (interest included in face

amount).
7-51 LO 4
Notes Receivable
Generally originate from:

 Customers who need to extend payment period of an
outstanding receivable.
 High-risk or new customers.
 Loans to employees and subsidiaries.
 Sales of property, plant, and equipment.
 Lending transactions (the majority of notes).
7-52 LO 4
Recognition of Notes Receivable
Short-Term Long-Term
Record at
Record at
Present Value
Face Value,
of cash expected
less allowance
to be collected
Interest Rates Note Issued at

Stated rate = Market rate Face Value
Stated rate > Market rate Premium
Stated rate < Market rate Discount
7-53 LO 4
Note Issued at Face Value
Illustration: Bigelow SA lends Scandinavian Imports €10,000 in

exchange for a €10,000, three-year note bearing interest at 10
percent annually. The market rate of interest for a note of similar
risk is also 10 percent. How does Bigelow record the receipt of
the note?
i = 10%
€10,000 Principal
PV-OA €1,000 €1,000 €1,000 Interest
0 1 2 3 4
n=3
ILLUSTRATION 7.7
Time Diagram for Note Issued at Face Value
7-54 LO 4
TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1
PV of Interest
€1,000 x 2.48685 = €2,487

Interest Received Factor Present Value
7-55 LO 4
TABLE 6.2 PRESENT VALUE OF 1
PV of Principal
€10,000 x .75132 = €7,513

Principal Factor Present Value
7-56 LO 4
Summary Present value of interest € 2,487

Present value of principal 7,513
Note current market value €10,000
Journal Entries
Jan. yr. 1 Notes Receivable 10,000

Cash 10,000
Dec. yr. 1 Cash 1,000

Interest Revenue 1,000
7-57 LO 4
Zero-Interest-Bearing Notes
Illustration: Jeremiah Company receives a three-year, $10,000

zero-interest-bearing note. The market rate of interest for a note
of similar risk is 9 percent. How does Jeremiah record the
receipt of the note?
i = 9%
$10,000 Principal
PV-0A $0 $0 $0 Interest
0 1 2 3 4
n=3
ILLUSTRATION 7.9
Time Diagram for Zero-
Interest-Bearing Note
7-58 LO 4
PV of Principal
$10,000 x .77218 = $7,721.80

7-59 LO 4
ILLUSTRATION 7.10
Discount Amortization Schedule—
Effective-Interest Method
7-60 LO 4
Zero-Interest-Bearing Notes ILLUSTRATION 7.10
Discount Amortization
Schedule—Effective-
Interest Method
Prepare the journal entry to record the receipt of the note.
Notes Receivable 7,721.80

Cash 7,721.80
7-61 LO 4
Zero-Interest-Bearing Notes ILLUSTRATION 7.10
Discount Amortization
Schedule—Effective-
Interest Method
Record interest revenue at the end of the first year.
Notes Receivable 694.96

Interest Revenue ($7,721.80 x 9%) 694.96
7-62 LO 4
Interest-Bearing Notes
Illustration: Morgan Group makes a loan to Marie Co. and
receives in exchange a three-year, €10,000 note bearing interest
at 10 percent annually. The market rate of interest for a note of
similar risk is 12 percent. Prepare the journal entry to record the
receipt of the note?
i = 12%
€10,000 Principal
PV-0A €1,000 €1,000 €1,000 Interest
0 1 2 3 4
n=3
7-63 LO 4
TABLE 6.4 PRESENT VALUE OF AN ORDINARY ANNUITY OF 1
PV of Interest
€1,000 x 2.40183 = €2,402

Interest Received Factor Present Value
7-64 LO 4
PV of Principal
€10,000 x .71178 = €7,118

7-65 LO 4
ILLUSTRATION 7.12
Illustration: Record the receipt of the note? Computation of Present
Value—Effective Rate
Different from Stated Rate
Notes Receivable 9,520

Cash 9,520
7-66 LO 4
ILLUSTRATION 7.13
7-67 LO 4
Interest-Bearing Notes ILLUSTRATION 7.13
Record interest revenue at the end of the first year.
Cash 1,000
Notes Receivable 142
Interest Revenue 1,142
7-68 LO 4
Notes Receivable
Notes Received for Property, Goods, or Services

In a bargained transaction entered into at arm’s length, the
stated interest rate is presumed to be fair unless:
1. No interest rate is stated, or
2. Stated interest rate is unreasonable, or
3. Face amount of the note is materially different from the
 current cash sales price or
 from the current market value of the debt instrument.
7-69 LO 4
Notes for Property, Goods, or Services
Illustration: Oasis Development Co. sold a corner lot to Rusty Pelican

as a restaurant site. Oasis accepted in exchange a five-year note
having a maturity value of $35,247 and no stated interest rate. The
land originally cost Oasis $14,000. At the date of sale the land had a
fair market value of $20,000. Oasis uses the fair market value of the
land, $20,000, as the present value of the note. Oasis therefore
records the sale as:
Notes Receivable 20,000

Land 14,000
Gain on Sale of Land ($20,000 - $14,000) 6,000
7-70 LO 4
Valuation of Notes Receivable
 Companies record and report short-term notes receivable at

their cash realizable value.
 Computations and estimations involved in valuing short-term
notes receivable and in recording bad debt expense and the
related allowance exactly parallel that for trade accounts
receivable.
7-71 LO 4
Other Issues Related Explain additional accounting
issues related to accounts and
to Receivables notes receivables.
Derecognition of Receivables
1. When the receivable no longer has any value; that is,
the contractual rights to the cash flows of the
receivable no longer exist.
2. When a company transfers (e.g., sells) a receivable to
another company, thereby transferring the risks and
rewards of ownership to this other company.
7-72 LO 5
Transfer of Receivables
Various reasons for transfer of receivables to another party
 Accelerate the receipt of cash.
 Competition.
 Sell receivables because money is tight.
 Billing / collection are time-consuming and costly.
Transfer of receivables for cash happens in two ways:
1. Sales of receivables.
2. Secured borrowing.
7-73 LO 5
Sales of Receivables
ILLUSTRATION 7.14
Basic Procedures in Factoring
Factors are finance companies or banks that buy receivables

from businesses for a fee.
7-74 LO 5
Sale without Guarantee

 Purchaser assumes risk of collection and absorbs any
credit losses.
 Transfer is outright sale of receivable.
 Seller records loss on sale.
 Seller uses a Due from Factor (receivable) account to

cover probable sales discounts, sales returns, and
sales allowances.
7-75 LO 5
Sale without Guarantee
Illustration: Crest Textiles, Inc. factors €500,000 of accounts

receivable with Commercial Factors, Inc., on a non-guarantee basis.
Commercial Factors assesses a finance charge of 3 percent of the
amount of accounts receivable and retains an amount equal to 5
percent of the accounts receivable (for probable adjustments). Crest
Textiles and Commercial Factors make the following journal entries
for the receivables transferred without guarantee.
ILLUSTRATION 7.6
Entries for Sale of Receivables without Guarantee
7-76 LO 5
Sale with Guarantee

 Seller guarantees payment to purchaser.
 Transfer is considered a borrowing—sometimes referred

to as a failed sale.
Assume Crest Textiles sold the receivables on a

ILLUSTRATION 7.16
with guarantee basis. Sale with Guarantee
7-77 LO 5
Secured Borrowing
Using receivables as collateral in a borrowing transaction.
Illustration: On March 1, 2019, Meng Mills, Inc. provides (assigns)

NT$700,000 of its accounts receivable to Sino Bank as collateral for
a NT$500,000 note. Meng Mills continues to collect the accounts
receivable; the account debtors are not notified of the arrangement.
Sino Bank assesses a finance charge of 1 percent of the accounts
receivable and interest on the note of 12 percent. Meng Mills makes
monthly payments to the bank for all cash it collects on the
receivables.
7-78 LO 5
ILLUSTRATION 7.17
7-79 Entries for Transfer of Receivables—Secured Borrowing
Secured Borrowing
Illustration: On April 1, 2019, Prince Company assigns $500,000 of its
accounts receivable to the Hibernia Bank as collateral for a $300,000 loan
due July 1, 2019. The assignment agreement calls for Prince Company to
continue to collect the receivables. Hibernia Bank assesses a finance
charge of 2% of the accounts receivable, and interest on the loan is 10% (a
realistic rate of interest for a note of this type).
Instructions:
a) Prepare the April 1, 2019, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000 of the
accounts receivable during the period from April 1, 2019, through
June 30, 2019.
c) On July 1, 2019, Prince paid Hibernia all that was due from the loan it
secured on April 1, 2019.
7-80 LO 5
Secured Borrowing
Instructions:
a) Prepare the April 1, 2019, journal entry for Prince Company.
b) Prepare the journal entry for Prince’s collection of $350,000.
c) On July 1, 2019, Prince paid Hibernia all that was due from the loan it
secured on April 1, 2019.
a) Cash 290,000
Finance Charge ($500,000 x 2%) 10,000
Notes Payable 300,000
b) Cash 350,000
c) Notes Payable 300,000

Interest Expense (10% x $300,000 x 3/12) 7,500
Cash 307,500
7-81 LO 5
Summary of Transfers ILLUSTRATION 7.18
Accounting for Transfers
of Receivables
7-82 LO 5
Presentation and Analysis
General rules in classifying receivables are:
1. Segregate and report carrying amounts of different categories of
receivables.
2. Indicate receivables classified as current and non-current in the
statement of financial position.
3. Appropriately offset the valuation accounts for receivables that are
impaired, including a discussion of individual and collectively
determined impairments.
4. Disclose the fair value of receivables in such a way that permits it to
be compared with its carrying amount.
5. Disclose information to assess the credit risk inherent in the
receivables.
6. Disclose any receivables pledged as collateral.
7. Disclose all significant concentrations of credit risk arising from
receivables.
7-83 LO 5
Analysis of Receivables
Illustration: Louis Vuitton (LVMH Group) (FRA) reported 2015 net
sales of €35,664 million, its beginning and ending accounts
receivable balances were €2,274 million an €2,521 million,
respectively. The computation of its accounts receivable turnover
is as follows.
ILLUSTRATION 7.20
Computation of Accounts Receivable Turnover
7-84 LO 5
Analysis of Receivables ILLUSTRATION 7.20

Computation of Accounts
Receivable Turnover
This Ratio used to:
 Assess the liquidity of the receivables.
 Measure the number of times, on average, a company

collects receivables during the period.
7-85 LO 5
APPENDIX 7A Cash Controls
Explain common techniques employed to control cash.
Management faces two problems in accounting for cash

transactions:
1. Establish proper controls to prevent any unauthorized

transactions by officers or employees.
2. Provide information necessary to properly manage cash on

hand and cash transactions.
7-86 LO 6
Using Bank Accounts
To obtain desired control objectives, a company can vary the

number and location of banks and the types of accounts.
► General checking account
► Collection float
► Lockbox accounts
► Imprest bank accounts
7-87 LO 6
The Imprest Petty Cash System
Used to pay small amounts for miscellaneous expenses.

Steps:
1. Record the transfer of $300 to petty cash:
Petty Cash 300

Cash 300
2. Petty cash custodian obtains signed receipts from each

individual to whom he or she pays cash.
7-88 LO 6
Steps:
3. Custodian receives a company check to replenish the

fund.
Supplies Expense 42
Postage Expense 53
Miscellaneous Expense 76
Cash Over and Short 2
Cash 173
7-89 LO 6
Steps:
4. If the company decides that the amount of cash in the

petty cash fund is excessive by $50, it lowers the fund
balance as follows.
Cash 50
Petty cash 50
7-90 LO 6
Physical Protection of Cash Balances
Company should
 Minimize the cash on hand.
 Only have on hand petty cash and current day’s receipts.
 Keep funds in a vault, safe, or locked cash drawer.
 Transmit each day’s receipts to the bank as soon as
practicable.
 Periodically prove the balance shown in the general ledger.
7-91 LO 6
Reconciliation of Bank Balances
Schedule explaining any differences between the bank’s

and the company’s records of cash.
Reconciling Items:
1. Deposits in transit.
2. Outstanding checks.
3. Bank charges Time Lags

4. Bank credits.
5. Bank or depositor errors.
7-92 LO 6
Reconciliation of Bank Balances ILLUSTRATION 7A.1
Bank Reconciliation
Form and Content
7-93 LO 6
To illustrate, Nugget Mining Company’s books show a cash balance at the Melbourne Bank
on November 30, 2019, of $20,502. The bank statement covering the month of November
shows an ending balance of $22,190. An examination of Nugget’s accounting records and
November bank statement identified the following reconciling items.
1. A deposit of $3,680 that Nugget mailed November 30 does not appear on the bank
statement.
2. Checks written in November but not charged to the November bank statement are:
Check #7327 $ 150
#7348 4,820
#7349 31
3. Nugget has not yet recorded the $600 of interest collected by the bank November 20 on
Sequoia Co. bonds held by the bank for Nugget.
4. Bank service charges of $18 are not yet recorded on Nugget’s books.
5. The bank returned one of Nugget’s customer’s checks for $220 with the bank statement,
marked “NSF.” The bank deducted $220 from Nugget’s account.
6. Nugget discovered that it incorrectly recorded check #7322, written in November for
$131 in payment of an account payable, as $311.
7. A check for Nugent Oil Co. in the amount of $175 that the bank incorrectly charged to
Nugget accompanied the statement.
7-94 LO 6
ILLUSTRATION 7A.2
Sample Bank
Reconciliation
7-95 LO 6
Journalize the required adjusting entries at November 30.
Cash 600
Interest Revenue 600
(To record interest on Sequoia Co. bonds, collected by bank)
Cash 180
Accounts Payable 180
(To correct error in recording amount of check #7322)
Office Expense (bank charges) 18

Cash 18
(To record bank service charges for November)

Cash 220
(To record customer’s check returned NSF)
7-96 LO 6
GLOBAL ACCOUNTING INSIGHTS
Compare the accounting procedures for cash and receivables under IFRS and
U.S. GAAP.
The basic accounting and reporting issues related to recognition and

measurement of cash and receivables is similar between U.S. GAAP and
IFRS. For example, the definition of cash and cash equivalents as well as the
use of allowance accounts, how to record discounts, use of the allowance
method to account for bad debts, and factoring are similar for both IFRS and
U.S. GAAP. In the wake of the international credit crisis, the Boards worked
together to improve the accounting for loan impairments and securitizations.
7-97 LO 7
Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to cash and receivables.
Similarities
• The accounting and reporting related to cash is essentially the same under
both U.S. GAAP and IFRS. In addition, the definition used for cash
equivalents is the same.
• Like IFRS, cash and receivables are generally reported in the current assets
section of the statement of financial position (balance sheet) under U.S.
GAAP.
7-98 LO 7
Relevant Facts
Following are the key similarities and differences between U.S. GAAP and
IFRS related to cash and receivables.
Similarities
• Like IFRS, for trade and other accounts receivable without a significant
financing component, an allowance for uncollectible accounts should be
recorded to result in receivables reported at cash (net) realizable value. The
estimation approach used is similar to that under IFRS.
• Similar to U.S. GAAP, IFRS requires that loans and receivables be
accounted for at amortized cost, adjusted for allowances for doubtful
accounts.
7-99 LO 7
Relevant Facts
Differences
• Under IFRS, companies may report cash and receivables as the last items
in current assets under IFRS. Under U.S. GAAP, these items are reported in
order of liquidity.
• While IFRS implies that receivables with different characteristics should be
reported separately, there is no standard that mandates this segregation.
U.S. GAAP has explicit guidance in the area.
7-100 LO 7
Relevant Facts
Differences
• Unlike U.S. GAAP, IFRS has a different approach to estimating uncollectible
accounts on receivables with a significant financing component (e.g., notes
receivable). For long-term receivables that have not experienced a
deterioration in credit quality after origination, uncollectible accounts are
estimated based on expected losses over the next 12 months. For long-term
receivables that experience a credit quality decline, uncollectible accounts
are estimated based on lifetime expected losses (which is the model used
under U.S. GAAP for all receivables).
• Under IFRS, bank overdrafts are generally reported as cash. Under U.S.
GAAP, such balances are reported as liabilities.
7-101 LO 7
Relevant Facts
Differences
• IFRS and U.S. GAAP differ in the criteria used to account for transfers of
receivables. IFRS is a combination of an approach focused on risks and
rewards and loss of control. U.S. GAAP uses loss of control as the primary
criterion (see the About the Numbers discussion below). In addition, IFRS
generally permits partial transfers; U.S. GAAP does not.
7-102 LO 7
On the Horizon
Both the IASB and the FASB have indicated that they believe that financial
statements would be more transparent and understandable if companies
recorded and reported all financial instruments at fair value. With the recently
issued guidance on impairments by both boards, IFRS and U.S. GAAP are
now more closely aligned with earlier recognition of impairments. Most believe
that both Boards’ approaches to estimating uncollectible accounts represent
improvements and address the weakness in previous bad debt accounting that
was highlighted by the financial crisis. Time will tell if one model or the other
provides more useful information to investors and creditors.
7-103 LO 7
COPYRIGHT
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Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
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 Standard medium of exchange.

 Basis for measuring and accounting for all other items.

 Examples: Coin, currency, available funds on deposit at

Short-term, highly liquid investments that are both

a) readily convertible to cash, and

Examples: Government bonds, commercial paper, and

Examples, restricted for:

 Included as a component of cash if such overdrafts are

Receivables - Claims held against customers and

Oral promises of the Written promises to pay a

3. Deposits paid to cover potential damages or losses.

4. Deposits paid as a guarantee of performance or payment.

5. Dividends and interest receivable.

6. Claims against: Insurance companies for casualties sustained;

 Accounts receivable generally arise as part of a

 The revenue recognition principle indicates that a

For example, if Lululemon Athletica, Inc. (CAN) sells a

Accounts Receivable 100

Some key indicators that Lululemon has transferred and

2. Lululemon has passed legal title to the customer.

3. Lululemon has transferred physical possession of the

4. Lululemon no longer has significant risks and rewards of

5. Jennifer has accepted the asset.

Measurement of the Transaction Price

Cash Discounts (Sales Discounts)

 Terms such as 2/10, n/30,

Sales Returns and Allowances

 Allowance for Sales Returns and Allowances is a contra

 The use of both Sales Returns and Allowances, and

Illustration: Assume that Max Glass sells hurricane glass to Oliver

Accounts Receivable 5,000

Illustration: Assume that Max Glass sells hurricane glass to Oliver

Sales Returns and Allowances 300

On January 31, 2019, before preparing ﬁnancial statements, Max

Sales Returns and Allowances 100

Time Value of Money

 Companies ignore interest revenue related to accounts

 The profession specifically excludes from present value

How are these accounts presented on the Statement of

End. 500 25 End.

End. 500 25 End.

End. 600 25 End.

End. 600 25 End.

End. 267 25 End.

End. 267 25 End.

End. 267 40 End.

End. 267 40 End.

End. 257 30 End.

Uncollectible Accounts Receivable

 Normal and necessary risk of doing business on credit.

 Two methods to account for uncollectible accounts:

Methods of Accounting for Uncollectible Accounts

Direct Write-Off Method Allowance Method

Direct Write-Off Method for Uncollectible Accounts

Bad Debt Expense 8,000,000

Allowance Method for Uncollectible Accounts

Recording Estimated Uncollectibles

Bad Debt Expense 10,000