Intermediate Accounting - Chap007 pot

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Cash and
Receivables
7
Insert Book Cover
Picture
7-2
Cash
Amounts on
deposit with
financial
institutions
Amounts on
deposit with
financial
institutions
Coins and
currency
Coins and
currency
Petty cash
Petty cash
Cashier’s checks
Cashier’s checks
Certified checks
Certified checks
Money orders
Money orders
7-3
Cash Equivalents
Items very near cash but

not in negotiable form
Items very near cash but
not in negotiable form
Money market
funds
Money market
funds
Treasury bills
Treasury bills
Commercial
paper
Commercial
paper
7-4
Learning Objectives
Define what is meant by internal control and
describe some key elements of an internal
control system for cash receipts and
disbursements.
7-5
Internal Control of Cash
Encourages adherence
to company policies and
procedures
Encourages adherence
to company policies and
procedures
Promotes operational
efficiency
Promotes operational

efficiency
Minimizes errors
and theft
Minimizes errors
and theft
Enhances the reliability
and accuracy of
accounting data
Enhances the reliability
and accuracy of
accounting data
7-6
Control of Cash Receipts
Separate responsibility for

handling cash,

recording cash transactions, and

reconciling cash balances.
Agreed cash amounts deposited with cash
amounts received.
Close supervision of cash-handling and
cash-recording activities.
Separate responsibility for

handling cash,

recording cash transactions, and


reconciling cash balances.
Agreed cash amounts deposited with cash
amounts received.
Close supervision of cash-handling and
cash-recording activities.
7-7
Control of Cash Disbursements
Separate responsibilities for

cash disbursement documents,

check writing,

check signing,

check mailing, and

record keeping.
All disbursements, except petty cash, made by
check.
Separate responsibilities for

cash disbursement documents,

check writing,

check signing,

check mailing, and


record keeping.
All disbursements, except petty cash, made by
check.
7-8
Learning Objectives
Explain the possible restrictions on cash and
their implications for classification in the
balance sheet.
7-9
Restricted Cash and
Compensating Balances
Restricted Cash
Management’s intent to use a certain amount
of cash for a specific purpose – future plant
expansion, future payment of debt.
Compensating Balance
Minimum balance that must be maintained
in a company’s account as support for
funds borrowed from the bank.
Restricted Cash
Management’s intent to use a certain amount
of cash for a specific purpose – future plant
expansion, future payment of debt.
Compensating Balance
Minimum balance that must be maintained
in a company’s account as support for
funds borrowed from the bank.
7-10
Learning Objectives
Distinguish between the gross and net

methods of accounting for cash discounts
7-11
Credit sales require:

Maintaining a separate
account receivable for each
customer.

Accounting for bad debts
that result from credit sales.
Credit sales require:

Maintaining a separate
account receivable for each
customer.

Accounting for bad debts
that result from credit sales.
Amounts due from
customers for credit sales.
Amounts due from
customers for credit sales.
Accounts Receivable
7-12
Cash Discounts
Increase sales.
Increase sales.
Encourage early
payment.
Encourage early

payment.
Increase likelihood of
collections.
Increase likelihood of
collections.
Cash discounts . . .
Cash discounts . . .
7-13
2/10,n/30
2/10,n/30
Number of
Days
Discount is
Available
Number of
Days
Discount is
Available
Otherwise,
Net (or All)
is Due
Otherwise,
Net (or All)
is Due
Credit
Period
Credit
Period
Discount
Percent

Discount
Percent
Cash Discounts
7-14
Cash Discounts
Sales are
recorded at the
invoice
amounts.
Sales are
recorded at the
invoice
amounts.
Sales discounts
are recorded if
payment is
received within
the discount
period.
Sales discounts
are recorded if
payment is
received within
the discount
period.
Gross
Method
7-15
Cash Discounts
Sales are recorded at the

invoice amount less the
discount.
Sales are recorded at the
invoice amount less the
discount.
Sales discounts forfeited
are recorded if payment
is received after the
discount period.
Sales discounts forfeited
are recorded if payment
is received after the
discount period.
Net
Method
7-16
Cash Discounts
On May 10, Eddy, Inc. sold $5,000 of
merchandise to a customer subject to a
cash discount of 1/10, n/30.

Prepare the journal entry to record the sale if
Eddy uses:
(a) the gross method.
(b) the net method.
On May 10, Eddy, Inc. sold $5,000 of
merchandise to a customer subject to a
cash discount of 1/10, n/30.

Prepare the journal entry to record the sale if

Eddy uses:
(a) the gross method.
(b) the net method.
7-17
Cash Discounts
7-18
Cash Discounts
Assume that on May 19, Eddy, Inc. received
a check in full payment of the sale made
on May 10.
Prepare the journal entry to record the cash
receipt if Eddy uses:
(a) the gross method.
(b) the net method.
Assume that on May 19, Eddy, Inc. received
a check in full payment of the sale made
on May 10.
Prepare the journal entry to record the cash
receipt if Eddy uses:
(a) the gross method.
(b) the net method.
7-19
Cash Discounts
7-20
Cash Discounts
Instead of the payment on May 19, now assume
that Eddy, Inc. received a check on May 31, in
full payment of the sale made on May 10.
Prepare the journal entry to record the cash
receipt if Eddy uses:

(a) the gross method.
(b) the net method.
Instead of the payment on May 19, now assume
that Eddy, Inc. received a check on May 31, in
full payment of the sale made on May 10.
Prepare the journal entry to record the cash
receipt if Eddy uses:
(a) the gross method.
(b) the net method.
7-21
Cash Discounts
7-22
Learning Objectives
Describe the accounting treatment for
merchandise returns.
7-23
Sales Returns
Merchandise
returned by a
customer to a
supplier.
Sales Allowances
A reduction in
the cost of
defective
merchandise.
Sales Returns and Allowances
7-24
Sales Returns and Allowances
On June 1, a customer of LarCo returns

$750 of merchandise. The merchandise
had been purchased on account and
the customer had not yet paid. LarCo
uses the periodic method to account
for inventory.
Record the journal entry for the return of
merchandise.
On June 1, a customer of LarCo returns
$750 of merchandise. The merchandise
had been purchased on account and
the customer had not yet paid. LarCo
uses the periodic method to account
for inventory.
Record the journal entry for the return of
merchandise.
7-25
Sales Returns and Allowances
Sales Returns and Allowances is a contra
account that reduces Sales Revenue in the
current accounting period.