financial assets required in cost accounting

cost

1. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
FINANCIAL ASSETS
Chapter
7

2. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
The Valuation of Financial Assets
Type of Financial Asset
Basis for Valuation in
the Balance Sheet
Cash (and cash equivalents)Face amount
Short-term investments
(marketable securities)
Current market value
Receivables Net realizable value
Estimated collectible amount

3. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Internal Control Over Cash
Segregate authorization, custody and recording of
cash.
Prepare a cash budget.
Prepare a control listing of cash receipts.
Require daily deposits.
Make all payments by check.
Verify every expenditure before payment.
Promptly reconcile bank statements.

4. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Bank Statements
Shows the beginning bank balance,
deposits made, checks paid, other
debits and credits in the month, and
the ending bank balance.
Bank
Statement

5. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Reconciling the Bank Statement
Explains the difference between cash
reported on bank statement and cash
balance in depositor’s accounting
records.
Provides information for
reconciling journal entries.

6. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Reconciling the Bank Statement
Balance per Bank
+ Deposits in Transit
- Outstanding Checks
± Bank Errors
= Adjusted Balance
Balance per Depositor
+ Deposits by Bank
(credit memos)
- Service Charge
- NSF Checks
± Book Errors
= Adjusted Balance

7. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Reconciling the Bank Statement
All reconciling
items on the
book side
require an
adjusting
entry to the
cash account.
Balance per Depositor
+ Deposits by Bank
(credit memos)
- Service Charge
- NSF Checks
± Book Errors
= Adjusted Balance

8. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Reconciling the Bank Statement
Example
Prepare a July 31 bank reconciliation
statement and the resulting journal entries
for the Simmons Company. The July 31
bank statement indicated a cash balance of
$9,610, while the cash ledger account on
that date shows a balance of $7,430.
Additional information necessary for the
reconciliation is shown on the next page.

9. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Outstanding checks totaled $2,417.
A $500 check mailed to the bank for deposit had
not reached the bank at the statement date.
The bank returned a customer’s NSF check for
$225 received as payment of an account
receivable.
The bank statement showed $30 interest earned
on the bank balance for the month of July.
Check 781 for supplies cleared the bank for $268
but was erroneously recorded in our books as
$240.
A $486 deposit by Acme Company was
erroneously credited to our account by the bank.

10. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Reconciling the Bank Statement
Example
Reconciling the Bank Statement
Example
Balance per bank statement, July 31 9,610$
Additions:
Deposit in transit 500
Deductions:
Bank error 486$
Outstanding checks 2,417 2,903
Adjusted cash balance 7,207$
Balance per depositor's records, July 31 7,430$
Additions:
Interest 30
Deductions:
Recording error 28$
NSF check 225 253
Adjusted cash balance 7,207$

11. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Reconciling the Bank Statement
Example
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebit Credit
Jul31Cash 30
Interest Revenue 30
31Supplies Inventory 28
Accounts Receivable 225
Cash 253

12. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Let’s turn our
attention to
accounts receivable.

13. © The McGraw-Hill Companies, Inc., 2002
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Uncollectible Accounts
If a company makes
credit sales to
customers, some
accounts inevitably will
turn out to be
uncollectible.
PAST DUE

14. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Reflecting Uncollectible Accounts
in the Financial Statements
At the end of each period, record
an estimate of the uncollectible
accounts.
Contra-asset accountSelling expense

15. © The McGraw-Hill Companies, Inc., 2002
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The Allowance for Doubtful
Accounts
Accounts receivable
Less: Allowance for doubtful accounts
Net realizable value of accounts receivable
The net realizable value is the amount of
accounts receivable that the business
expects to collect.

16. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Writing Off an Uncollectible
Account Receivable
When an account is determined to be uncollectible,
it no longer qualifies as an asset and should be
written off.

17. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Writing Off an Uncollectible
Account Receivable
Assume that on January 5, K-Max determined
that Jason Clark would not pay the $500 he
owes.
K-Max would make the following entry.

18. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Writing Off an Uncollectible
Account Receivable
Assume that before this entry, the Accounts
Receivable balance was $10,000 and the
Allowance for Doubtful Accounts balance
was $2,500.
Let’s see what effect the write-off had on
these accounts.

19. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Writing Off an Uncollectible
Account Receivable
Before
Write-Off
After
Write-Off
Accounts receivable 10,000$ 9,500$
Less: Allow. for doubtful accts.2,500 2,000
Net realizable value 7,500$ 7,500$
Notice that the $500 write-off did not change the net
realizable value nor did it affect any income
statement accounts.

20. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Recovery of an Account Receivable
Previously Written Off
GENERAL JOURNAL
Date Account Titles and Explanation
P
RDebit Credit
Accounts Receivable (X Customer) $$$$
Allowance for Doubtful Accounts $$$$
Cash $$$$
Accounts Receivable (X Customer) $$$$
Subsequent collections require that the original write-off
entry be reversed before the cash collection is recorded.

21. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
At December 31, 2003, MusicLand’s accounting
records indicate the following:
Accounts Receivable = $50,000
Allowance for Doubtful Accounts = $200 (credit)
Past experience suggests that 5% of receivables
are uncollectible.
What is MusicLand’s Uncollectible Accounts
Expense for 2003?
Monthly Estimates of Credit Losses
Example

22. © The McGraw-Hill Companies, Inc., 2002
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Desired balance in Allowance
for Doubtful Accounts.
Monthly Estimates of Credit Losses
Example

23. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Let’s look at
another way
to estimate
the
uncollectible
accounts!

24. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Estimating Credit Losses — The
“Balance Sheet” Approach
 Year-end Accounts Receivable is
broken down into age
classifications.
 Each age grouping has a
different likelihood of being
uncollectible.
 Compute a separate allowance for
each age grouping.

25. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Estimating Credit Losses — The
“Balance Sheet” Approach
At December 31, 2003, the receivables for
EastCo, Inc. were categorized as follows:


26. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Estimating Credit Losses — The
“Balance Sheet” Approach
At December 31, 2003, the receivables for
EastCo, Inc. were categorized as follows:
 

27. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Estimating Credit Losses — The
“Balance Sheet” Approach
At December 31, 2003, the receivables for
EastCo, Inc. were categorized as follows:
  

28. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
EastCo’s unadjusted balance
in the allowance account is
$500.
Per the previous computation,
the desired balance is $1,350.
Estimating Credit Losses — The
“Balance Sheet” Approach

29. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Guess What!
There is
another
alternative to
estimate the
uncollectible
accounts!

30. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
An Alternative Approach to
Estimating Credit Losses
Uncollectible accounts’
percentage is based on actual
uncollectible accounts from
prior years’ credit sales.
Focus is on determining the amount to
record on the income statement as
Uncollectible Accounts Expense.

31. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
An Alternative Approach to
Estimating Credit Losses
Net Credit Sales

% Estimated Uncollectible
Amount of Journal Entry

32. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
An Alternative Approach to
Estimating Credit Losses
In 2003, EastCo had credit sales of $60,000.
Historically, 1% of EastCo’s accounts have
been uncollectible.
For 2003, the estimate of uncollectible accounts
expense is $600.
($60,000 × .01 = $600)
Now, prepare the adjusting entry for December
31, 2003.

33. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
An Alternative Approach to
Estimating Credit Losses

34. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Uncollectible Accounts
Summary
% of Receivables
Emphasis on
Realizable Value
Accts.
Rec.
All. for
Doubtful
Accts.
Balance Sheet
Focus
Aging of
Receivables
Emphasis on
Realizable Value
Accts.
Rec.
All. for
Doubtful
Accts.
Balance Sheet
Focus
% of Sales
Emphasis on
Matching
Sales
Uncoll.
Accts.
Exp.
Income
Statement
Focus

35. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Direct Write-Off Method
This method makes no attempt to
match revenue with the expense of
uncollectible accounts.

36. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
End of Chapter 7