Level and control of cash:
Level of cash not too little or too much
Cash and cash equivalents (investments that can easily turned into cash)
Working capital: current assets minus current liabilities
Measures short term financial health
● Internal controls ease of theft
● Bank reconciliation is also an internal control
○ Highlights differences in timing between bank records and company records
○ Detect errors in banks or company records
○ Great control because two independent records of cash
● Rarely do balances in bank accounts and company records match
● Timing differences:
○ Outstanding checks (when suppliers dont cash checks until eom)
○ Outstanding deposits (cash deposited after bank hours)
○ Service fees/banks pay interest on checking acct (which you dont know until you
see your statement)
○ A customer’s check bounces
● Common reconciliation:
○ Banks Cash Balance: Timing differences
■ + deposits in transit
■ - outstanding checks
○ = adjusted bank balance
○ Companys cash balance (books): timing differences
■ + interest received
■ + Collection of receivable
■ - NSF checks
■ - bank service fees
○ =adjusted book balance
● Adjusted bank balance and adjusted book balance should be equal
● Examples:
○ Deposit in transit is $5500
■ Increase banks cash balance by $5500
○ Bank service charges $25
■ Decrease book balance $25
○ Interest credited to Horton’s account $31
■ Increase book balance $31
Bank Reconciliations and Receivables
○ Outstanding checks $7422
■ Decrease bank balance $7422
○ NSF check returned $377
■ Decrease books $377
○ Bank statement shows cash balance of $6922 (from bank statement) and cash
balance on companys books is $5371 (from general ledger)
Bank Balance
Books balance
Add:
● Deposit in transit: $5500
Add:
● Interest revenue $31
Subtract:
● Outstanding checks $7422
Subtract:
● Service charge $25
● NSF $377
Adjusted bank balance:
$6922+$5500-$7422
=$5000
Adjusted book balance:
$5371+$31-$25-$377
=$5000
● Interest revenue: DR cash $31, CR interest revenue $31
● Service charge: DR expense $25, CR cash $25
● NSF check: DR A/R $377, CR cash $377
Receivables: in general, accounts receivable should be reported at amount that will turn into
cash
Purchases on credit: risk that customer will not pay. Bad debt is expense of allowing credit sales
Bad debt is estimation of credit sales that will not be collected.
Never know exactly who will and won’t pay, so companies estimate
● 3 methods used to estimate:
○ Direct method
○ Allowance method (% of credit sales historically)
○ Allowance method (aging method)
● Direct method
○ Used for firms with bad debt that is not material or only have a few customers
who purchase using credit
○ DR bad debt expense, CR that customers A/R account (zero out)
○ If customer pays after you wrote off: Write back on the A/R you previously wrote
off
■ DR that customers A/R account, CR bad debt expense
■ Record payment of the A/R
● DR cash, CR that customers A/R account
● Allowance method: % of sales
○ Estimate if a company has large amounts of receivables
○ Allowance for doubtful accounts is contra asset account
○ Net accounts receivable = accounts receivable - allowance for doubtful accounts
○ % of credit sales
○ Determine appropriate % (usually historical) and multiply by net credit sales
● Example: MGM resorts issued total credit of $1500m and based on prior years estimates
that 6% of this amt will not be collectible
○ 1500m x 6% = $90m
○ DR bad debt expense $90m, CR allowance for doubtful accounts $90m
● As customers don’t pay, credit their AR accounts.
○ DR allowance for doubtful accounts, CR accounts receivable
● If a customer you already wrote off pays?
○ Write back on the AR you wrote off
■ DR customers AR account, CR allowance for doubtful accounts
● Aging method- harder, more accurate, more common.
○ Look at age of receivables. Older receivables are more likely to be uncollectible
○ Determine % uncollectible for each age. % rises for older receivables.
● Example: in 2017 Wynn resorts had AR balance of $173,644m. They estimate 16.6% of
receivables will be uncollectible. If current balance in ADA is credit of $2500, what is
their bad debt expense?
○ 173644m x 16.6% m = $28824.90m (balance we want in ADA)
○ $28824.90 - $2500 = 26324.90
○ DR bad debt expense $26324.90, CR ADA $26324.90
Short term notes receivable
● Similar to AR, debtor signs promissory note which stipulates terms of contract.
● Principal: original amount loaned
● Interest: amount charged by creditor for loan
● Interest rate: yearly interest rate charged by creditor
● Maturity date: date note is due
● Term: length of loan
● Debtor: the entity that
● Could stem from a customer who couldnt pay AR balance within the terms, lending
money, etc.
● Determining interest: amount of interest = principal x interest rate (annual) x time (1 year
or less)
● Example: john deere sells tractor for $2000. Customer signs note with terms 6 months,
5% interest
● If note originates on march 1, what is journal entry on march 1?
○ DR notes receivable $2000, CR revenue $2000
● August 30 customer pays (plus interest)
○ 2000 x 5 (yearly) x 6/12 = $50
○ Customer pays $2050 total
○ DR cash $2050, CR notes receivable $2000, CR interest revenue $50
● Example: $2000 loan at 5% for 6 months
○ Customer signs note on Nov 1:
■ DR notes receivable $2000, CR revenue $2000
○ John Deere fiscal year ends December 31. (they have earned 2 months in
interest) $2000 x 5% x 2/12 = 16.67
■ DR interest receivable $16.67, CR interest revenue $16.67
○ April 30th at end of term for note: customer pays John Deere.
■ DR cash $2050, CR notes receivable $2000, CR interest receivable
$16.67, CR interest revenue $33.33
● Example: some co. earned 697000 in credit sales. Industry experience suggests that fun
resorts uncollectible accounts will amount to 2 percent of credit sales. On dec 31,
accounts receivable totaled 196797. This company uses $ of credit sales allowance
method.
○ 697000 x %2% = 13940
○ DR bad debt expense 13940, CR allowance for doubtful accounts 13940
● Example: some co. earned 1462000 in credit sales. Industry experience suggests that
fun resorts uncollectible accts will amount to 3.5 percent of accts receivables. On dec 31,
accounts receivable totaled 27500 and allowance for doubtful accounts had credit
balance of 200. This company uses aging of receivables allowance method
○ 275000 x %3.5 = $9625
○ 9265 is balance we want in ADA
○ ADA already has credit balance of $200
○ Credit ADA $9425
○ DR bad debt expense $9425, CR ADA $9425
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