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江西不孕不育医院 http: //www. srsgyy. com Receivables and Short-Term Investments

Learning Objective 1 Understand short-term investments.

Short-Term Investments Short-term investments are investments that a company plans to hold for one year or less. – Held-to-maturity securities – Trading investments – Available-for-sale investments Held-to-maturity and available-for-sale securities could also be long-term.

Short-Term Investments Held-to-maturity investments are securities that the investor expects to hold until their maturity date. They earn interest revenue for the investor. Accounting for these securities is the same as accounting for notes receivable.

Short-Term Investments Suppose that Oracle Corporation purchases Ford Motor Company stock on May 18, paying $100, 000, with the intention of selling the stock within a few months.

Short-Term Investments May 18 Short-Term Investment Cash Purchased investment 100, 000 On May 27, Oracle receives a cash dividend of $4, 000 from Ford.

Short-Term Investments May 27 Cash Dividend Revenue Received cash dividend 4, 000 Oracle fiscal year ends on May 31, and the investment in Ford has a current market value of $102, 000 on this date.

Short-Term Investments May 31 Short-Term Investment 2, 000 Unrealized Gain on Investments 2, 000 Adjusted investment to market value Cost Adjustment to market value Balance Short-Term Investments 100, 000 2, 000 102, 000

Reporting on the Balance Sheet and the Income Statement Balance Sheet Current Assets: $ XXX Cash XXX Short-term investments at market value 102, 000 Accounts receivable XXX Income Statement Revenues $ XXX Expenses XXX Other revenues, gains, and (losses): Interest revenue XXX Dividend revenue 4, 000 Unrealized gain on investment 2, 000

Accounts and Notes Receivables are third most liquid asset – after cash and short-term investments. Receivables are monetary claims against others.

Types of Receivables Accounts receivable Notes receivable Other receivables (miscellaneous)

Accounts Receivable GENERAL LEDGER Accounts Receivable Bal. 9, 000 ACCOUNTS RECEIVABLE SUBSIDIARY RECORD Aston Bal. 5, 000 Harris Bal. 1, 000 Salazar Bal. 3, 000

Learning Objective 3 Use the allowance method for uncollectible receivables.

Accounting for Uncollectible Accounts Selling on credit creates both a benefit and a cost: The benefit: Customers who cannot pay cash immediately can buy on credit, so company profits rise as sales increase. The cost: The company will be unable to collect from some credit customers.

The Allowance Method The allowance method records collection losses on the basis of estimates, not waiting to see which customers will not pay. The Allowance for Uncollectible Accounts (Allowance for Doubtful Accounts) is a contra account to Accounts Receivable.

The Allowance Method Balance Sheet (partial) Accounts receivable Less: Allowance for uncollectible accounts Accounts receivable, net $10, 000 – 900 $ 9, 100 Income Statement (partial) Expenses: Uncollectible-account expense $ 900

Methods for Estimating Uncollectibles Percent-of-sales Aging-of-Receivables

Percent-of-Sales It computes uncollectible-account expense as a percentage of revenue. This method is also called the income-statement approach.

Percent-of-Sales The credit department estimates that uncollectible-account expense is 5% of total revenues, which were $11 billion for 20 x 1. Dec 31 (in millions) Uncollectible-Account Expense ($11, 000 × 0. 05) Allowance for Uncollectible Accounts Recorded expense for the year 550

Percent-of-Sales December 31, 20 x 1 (in millions) After Adjustment Accounts Receivable Bal. 11, 000 Allowance for Uncollectible Accounts 550

Aging-of-Receivables This method is a balance-sheet approach because it focuses on accounts receivable. Individual receivables from specific customers are analyzed based on how long they have been outstanding.

Aging-of-Receivables Accounts before the year-end adjustment: December 31, 20 x 1 (in millions) Accounts Receivable Bal. 2, 835 Allowance for Uncollectible Accounts 120

Aging-of-Receivables Aging the Accounts Receivable Days Overdue 1 -30 days 31 -60 days 61 -90 days 91 + days Allowance for Accounts Estimated % Uncollectible Receivable Uncollectible Accounts $1, 555 6 $ 93 750 10 75 311 20 62 219 79 173 $2, 835 $403

Aging-of-Receivables Uncollectible-Account Expense 283 Allowance for Uncollectible Accounts ($403 – $120) Recorded expense for the year Accounts after the year-end adjustment: December 31, 20 x 1 (in millions) Accounts Receivable Bal. 2, 835 Allowance for Uncollectible Accounts 120 Adj. 283 403 283

Writing Off Uncollectible Accounts Suppose that early in 20 x 2, the credit department determines that the company cannot collect from two customers. These accounts must be written off.

Writing Off Uncollectible Accounts Allowance for Uncollectible Accounts Receivable Customer A Accounts Receivable Customer B Wrote off uncollectible receivables 100 61 39

Direct Write-Off Method An account is written off only when it is decided that a specific customer’s receivable is uncollectible. January 2, 20 x 4 Uncollectible-Account Expense 2, 000 Accounts Receivable – Jones 2, 000 Wrote off a bad account

Direct Write-Off Method This method is defective for two reasons: Since no allowance for uncollectibles is established, assets are overstated on the balance sheet. It causes a poor matching of uncollectibleaccount expense against revenue and overstates net income.

Learning Objective 4 Account for notes receivable.

Notes Receivable Notes receivable are more formal than accounts receivable. The creditor has a note receivable. Not e The debtor has a note payable.

Notes Receivable The principal amount of the note is the amount borrowed by the debtor. The maker pays the payee the maturity value. The maturity value includes principal plus interest.

Notes Receivable Interest period starts PROMISSORY NOTE $1, 000 Amount Principal August 31, 20 x 5 For value received, I promise to pay to the order of Continental bank Chicago, Illinois One thousand no/100…………Dollars on February 28, 20 x 6 plus interest at the annual rate of 9 percent Interest period ends on the maturity date Maker (Debtor) Payee (creditor) Interest rate

Accounting for Notes Receivable Continental Bank entry is as follows: August 31, 20 x 5 Note Receivable 1, 000 Cash 1, 000 Made a loan How much interest revenue is accrued at December 31?

Accounting for Notes Receivable Interest = Principal × Rate × Time $1, 000 × 9% × 4/12 = $30 December 31, 20 x 5 Interest Receivable Interest Revenue Accrued interest revenue 30 30

Accounting for Notes Receivable The bank collects the note on February 28, 20 x 6 Cash Note Receivable Interest Revenue ($1, 000 × 9% × 2/12) Collected note at maturity 1, 045 1, 000 30 15

Learning Objective 5 Use the acid-test ratio and the days’ sales in receivables to evaluate financial position.

Reporting Assets in Order of Liquidity CURRENT ASSETS Cash and cash equivalents Short-term investments Trade receivables, net Prepaid expenses Total current assets Long-term investments Property, net Other assets Total assets CURRENT LIABILITIES Total current liabilities Long-term debt and liabilities Stockholders’ equity Total liabilities and stockholders’ equity 2001 $ 4, 449 1, 438 2, 432 644 $ 8, 963 – 975 1, 092 $11, 030 2000 $ 7, 429 333 2, 534 587 $10, 883 110 935 1, 149 $13, 077 3, 916 836 6, 278 $11, 030 5, 892 753 6, 462 $13, 077

Days’ Sales in Receivables One day’s sales = Net sales ÷ 365 days = 10, 860 ÷ 365 = 29. 75 per day Days’ sales in average accounts receivable = Average net accounts receivable ÷ One day’s sales = [(2, 534 + 2, 432) ÷ 2] ÷ 29. 75 = 83 days A smaller number indicates a quick conversion to cash.

Acid-Test Ratio This is a stringent test of liquidity which measures the entity’s ability to pay its current liabilities immediately. Acid-test ratio = (Cash + Short-term investments + Net current receivables) ÷ Total current liabilities = (4, 449 + 1, 438 + 2, 432) ÷ 3, 916 = 2. 12 This ratio value is extremely high and indicates great liquidity for this company.

End of Chapter 5