Financial Accounting Chapter 7
steps in preparing a bank reconciliation
1. compare deposits listed in the bank statement with deposits shown in accounting records (deposits not yet recorded are deposits in transit and should be added to the balance shown in the bank statement 2. compare checks paid by the bank with corresponding entries in the accounting records (checks issues but not yet paid by the bank should be listed as outstanding checks to be deducted from the balance reported in the bank statement) 3. add the balance per the depositor's accounting reports any credit memoranda issued 4. deduct the balance per the depositor's records any debit memoranda 5. make appropriate adjustments to correct any errors in either bank statement or depositor's accounting records 6. determine that the adjusted balance of the bank statement is equal to the adjusted balance in the depositor's records 7. prepare journal entries
four basic events in accounting for investments in marketable securities
1. purchase of investments 2. the receipt of the dividends 3. sale of investments 4. end of period adjustments
How are financial assets shown in the balance sheet
At their current values
service charges
Banks often charge a fee for handling small accounts. The amount of this charge usually depends on both the average balance of the account and the number of checks paid during the month.
Financial Assets
Cash and assets convertible directly into known amounts of cash ((includes cash, short-term investments (aka marketable securities) and receivables))
3 Basic Forms Businesses Store Money
Cash, short-term investments, and receivables
Credits for interest earned
Checking accounts may earn interest. At month-end, this interest is credited to the depositor's account and reported in the bank statement.
How is the cash account labeled in the ledger?
Control account
Current value of marketable securities/short term investments
Current market value. May change daily based on fluctuations in stock prices, interest rates, and other factors. This is an expectation to the cost principle
Define cash and list examples of it
Money on deposit in banks and nay items that banks will accept for deposit. Coins, paper money, checks, money orders, traveler's checks
charges for depositing NSF checks
NSF: Not Sufficient Funds" • A bad check • debit your account when someone gives you a bad check In such cases, the bank will reduce the depositor's account by the amount of this uncollectible item and return the check to the depositor marked "NSF." The depositor should view an NSF check as an account receivable from the customer, not as cash.
cash management
Planning, controlling, and accounting for cash transactions and cash balances.
Cash sales
Sales to customers using bank cards are considered cash sales, not credit sales, because they are immediately converted to cash by the company
cash equivalents
Short-term, highly liquid investments that can be readily converted to a specific amount of cash - money market funds, us treasury bills, certificates of deposit, commercial paper
fair value accounting
The balance sheet valuation standard applied to investments in marketable securities. Involves adjusting the securities to market value at each balance sheet date. (Represents an exception to the cost principle.)
largest financial assets of many merchandising companies
accounts receivable
where are marketable securities listed on the balance sheet?
after cash
line of credit and where it's listed on the balance sheet
amount of money the bank has agreed to lend the company in advance.
used portion of the line of credit on the balance sheet
amount used it listed as a liability to the bank
account receivable that has been determine to be uncollectable is no longer a what
an asset
accounting department records cash collection
an entry made to reflect cash collection in the accounts receivable subsidiary ledger
miscellaneous bank charges and credits
banks charge for services such as printing checks, handling collections of notes receivable, and processing NSF checks the bank deducts these charges from the depositor's account and notifies the depositor by including the debit memorandum in the monthly bank statement. if the bank collects a notes receivable on behalf of the depositor, it credits the depositor's account and issues a credit memorandum
a bank statement includes
beginning and end balance of the month, deposits during the month, checks paid during the month
restricted cash and how it's labeled in the balance sheet
cash put aside for specific use and labeled as "investments and restricted funds"
deposits in transit
cash receipts recorded by the depositor that reached the bank too late to be included in the bank statement for the current month
primary elements of a company's liquidity strategy
cash, marketable securities, accounts receivable
what is listed on first on the balance sheet and why
cash/cash equivalents because they're extremely liquid
outstanding checks
checks issued and recorded by the company but have not yet presented to the bank for payment
Principal source of a company's daily recipes is the
collection of accounts receivables
allowance for doubtful accounts
contra-asset or valuation account containing the estimated uncollectible accounts receivable has a credit balance that offsets the accounts receivable control account is merely an estimate and not a precise calculation
summarize under the allowance method
credit losses are recognized as an expense in the period of which the sale occurs, not when it's determine uncollectible
journal entry for a write off
credit to accounts receivable control account in general ledger and an offsetting debit to the allowance for doubtful accounts net realizable amount is unchanged
when should cash receipts be deposited?
daily
debit and credit uncollectible accounts expense
debit uncollectible accounts expense to the income summary credit allowance for doubtful accounts
accounting department records sales by
debiting accounts receivable and crediting sales and by debiting Cost of Goods sold and crediting inventory last entry is made to reflect the credit sale in the accounts receivable subsidiary ledger
internal control over receivables is designed to
ensure that only revenue that has been earned is recorded as both a receivable and revenue and that all shipments of goods during the period have been appropriately recorded
uncollectible accounts expense
expense that means the loss of an asset
Current value of cash
face amount
investment sold at a gain
gain on a sale will increase the company's net income for the period and is reported on the income statement the credit balance in the gain on Sale of Investments account is closed to the Income Summary along with the credit balances of the other revenue accounts
write offs seldom agree with previous estimates
if amount written off as uncollectible turn out to be less than the estimated amount, the allowance for doubtful accounts will show a credit balance if the amounts written off an uncollectible are greater than the estimated amount, the allowance for doubtful counts will acquire a temporary debit balance which will be eliminated by the adjustment at the end of the period
investments sold at a loss
if it's sold for more than its cost basis a gain is recorded and if it's less a loss is recorded will appear in the other income/expense section of the income statement the loss will reduce net income and noted as a debit balance in the Loss on Sale of Investments account is closed to the income summary along with the debit balances of the other expense accounts
accounts receivable are typically listed in the balance sheet
immediately after cash and short-term investments in marketable securities
an account receivable that originates from a credit sale in January but if determine uncollected in June will be shown as an expense when
in January
Cash Subsidiary Ledger
includes separate accounts corresponding to each bank account and each supply of cash on hand within the organization
unrealized holding gain or loss
income statement account that represents the difference between the cost of investments owned and their market value at the balance sheet date. they're noted as unrealized because they haven't been sold yet this account reduces net income in the same manner as a loss form the sale of marketable securities
entries to bottom of the income statement to recognize dividend revenue
increase in cash and recognition of Dividend Revenue ex: foster corp receives $.30 per share dividend on 4,000 shares of coca cola cash = 1200 dividend revenue = 1200 notes: received a quarterly dividend on shares of coca cola ($.30 per share x 4000)
bank reconciliation may disclose
internal control failures such as unauthorized cash disbursements or failures to deposit cash receipts, as well as errors in either the bank statement or the depositor's accounting records
accounts receivable are
liquid assets, usually concerted into cash within a period of 30 to 60 days appear in the balance sheet immediately after cash and short-term investments in marketable securities
compensating balance and where it's at on the balance sheet
minimum average balance - condition for granting a loan banks will require this. included in cash amounts on the balance sheet but should be disclosed in the notes that accompany financial statements
cash budgets are prepared on what basis
monthly
how does cash/cash equivalent qualify to be labeled as cash?
must be very safe, stable market value, and mature within 90 days of the date of acquisition
Receivables value and way it's listed on the balance sheet
net realizable value
unused portion of the line of credit on the balance sheet
not listed as an asset or liability - simply represents the ability to borrow money quickly and easily - it does increase the company's liquidity and is disclosed in the notes
how do you account for cash over/short on the balance sheet
positive debit balance means that cash is missing and that amount is an expense a negative credit balance means that there is excess cash which is shown as miscellaneous revenue
internal control over cash
prevents fraud and theft, helps to include accurate accounting for cash transactions, anticipates the need the borrowing, and maintain adequate but not excessive cash balances
Objectives of Cash Management
provide accurate accounting for cash recipes/cash disbursements/cash balances, prevent or minimize losses from theft or fraud, anticipate the need for borrowing and assure availability of adequate amounts of cash for conducting business, prevent unnecessarily large amounts of cash from sitting idle in the bank accounts that product no revenue
bank statement
provided each month - shows the account balance at the beginning of the month, deposits, checks paid, and other additions and subtractions during the month, and the new balance at the end of the month
formula for purchasing marketable securitues
record at cost which includes any brokerage commissions ex: 4,000 shares paid at $48.98 per share plus brokerage comission of $80 (48.98 x 4,000 + $80) = 196,000 total. cost per share would be 196,000 / 4,000 shares = cost per share $49
one of the most fundamental principles of accounting is that
revenue should be matched with the expenses incurred in generating that revenue
Issues with accounts receivable that may result in changes in amounts to be received
sales returns and allowances. some customers just can't make the fully payment
bank reconciliation
schedule explaining any differences between the balance shown in the bank statement and the balance shown in the depositor's accounting records
steps for achieving internal control over cash transactions and cash balances
separate the function of handling cash from the maintenance of accounting records, prepare cash budget/forecasts of planned cash recipes, cash payments, and cash balances, scheduled month-by-month for the coming year, prepare a control listing of cash receipts at the time and place the money is received, require that all cash receipts be deposited daily in the bank, making all payment by check except for small petty cash transactions
marketable securities
short-term investments that do not qualify as cash equivalents
The adjustment of available for sale marketable securities to their current market value affects:
stockholder's equity
cash over and short account
used to accumulate any discrepancies between actual cash on hand and the recorded amount received.
