Intermediate accounting 17e by kieso ch07

Intermediate Accounting
Seventeenth Edition
Kieso ● Weygandt ● Warfield

Chapter 7

Cash and Receivables
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Learning Objectives
After studying this chapter, you should be able to:
1. Indicate how to report cash and related items.
2. Define receivables and explain accounting issues related to
their recognition.
3. Explain accounting issues related to valuation of accounts
receivable.
4. Explain accounting issues related to recognition and
valuation of notes receivable.
5. Explain additional accounting issues related to accounts
and notes receivable.
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Preview of Chapter 7

Cash and Receivables
Cash

• Reporting cash

• Summary of cash-related items

Receivables
• Recognition of accounts receivable
• Measurement
• Variable consideration
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Preview of Chapter 7

Valuation of Accounts Receivable

• Direct write-off method
• Allowance method

Notes Receivable
• Recognition of notes receivable
• Valuation of notes receivable

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Preview of Chapter 7

Other Issues

• Fair value option
• Disposition of accounts and notes receivable
• Presentation and analysis

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Learning Objective 1
Indicate How to Report Cash and
Related Items

LO 1

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Cash
• Most liquid asset
• Standard medium of exchange
• Basis for measuring and accounting for all items
• Current asset
• Examples: Coin, currency, available funds on deposit
at the bank, money orders, certified checks, cashier’s
checks, personal checks, bank drafts and savings

accounts

LO 1

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Cash

Reporting Cash
Cash Equivalents
Short-term, highly liquid investments that are both
(a) readily convertible to cash, and
(b) so near their maturity that they present
insignificant risk of changes in value.
Examples: Treasury bills, Commercial paper, and Money
market funds.
LO 1

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Reporting Cash
Restricted Cash

Companies segregate restricted cash from “regular” cash.

Examples, restricted for:
(1) plant expansion, (2) retirement of long-term debt, and
(3) compensating balances.

LO 1

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Reporting Cash
Bank Overdrafts

Company writes a check for more than the amount in its
cash account.
• Reported as a current liability
• Offset against other cash accounts only when
accounts are with the same bank

LO 1

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Summary of Cash-Related Items
Classification of Cash-Related Items
Item

Cash

Classification
Cash

Comment
If unrestricted, report as cash.
If restricted, identify and classify
as current and noncurrent assets.

Petty cash and change funds Cash

Report as cash.

Short-term paper

Cash equivalents

Investments with maturity of less
than 3 months, often combined
with cash.

Short-term paper

Temporary investments Investments with maturity of 3 to
12 months.

Postdated checks and lOU's

Receivables

LO 1

Assumed to be collectible.

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Summary of Cash-Related Items

Classification of Cash-Related Items (continued)
Item
Travel advances

Classification
Receivables

Postage on hand (as stamps
or in postage meters)
Bank overdrafts

Prepaid expenses

Compensating balances

Cash separately
classified as a deposit
maintained as

compensating balance

LO 1

Current liability

Comment
Assumed to be collected from
employees or deducted from
their salaries.
May also be classified as office
supplies inventory.
If right of offset exists, reduce
cash.
Classify as current or noncurrent
in the balance sheet. Disclose
separately in notes details of the
arrangement.

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Learning Objective 2
Define Receivables and Explain
Accounting Issues Related to Their
Recognition

LO 2

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Receivables
Claims held against customers and others for money,
goods, or services.
Classified in the balance sheet as:
• Current or noncurrent
• Trade or nontrade

LO 2



Accounts receivable



Notes receivable

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Nontrade Receivables
1.

2.
3.
4.

Advances to officers and employees.
Advances to subsidiaries.
Deposits paid to cover potential damages or losses.
Deposits paid as a guarantee of performance or
payment.
5. Dividends and interest receivable.
6. Claims against: Insurance companies for casualties
sustained; defendants under suit; governmental bodies
for tax refunds; common carriers for damaged or lost
goods; creditors for returned, damaged, or lost goods;
customers for returnable items (crates, containers, etc.).
LO 2

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Nontrade Receivables

Receivables Balance Sheet Presentations

LO 2

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Recognition of Accounts Receivables
• Accounts receivable generally arise as part of a
revenue arrangement
• Revenue recognition principle indicates that a
company should recognize revenue when it satisfies
its performance obligation by transferring the good
or service to the customer.

LO 2

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Recognition of Accounts Receivables
Illustration

If Lululemon sells a yoga outfit to Jennifer Burian for $100 on
account, the yoga outfit is transferred when Jennifer obtains
control of this outfit. When this change in control occurs,
Lululemon should recognize an account receivable and sales
revenue. Lululemon makes the following entry:
Accounts Receivable

100

Sales Revenue

LO 2

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100

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Recognition of Accounts Receivables
Key indicators control has been transferred
1. Lululemon has the right to payment from the
customer.
2. Lululemon has passed legal title to the customer.
3. Lululemon has transferred physical possession of the
goods.
4. Lululemon no longer has significant risks and
rewards of ownership of the goods.
5. Jennifer has accepted the asset.
LO 2

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Receivables

Measurement of the Transaction Price
The transaction price is the amount of consideration that
a company expects to receive from a customer in
exchange for transferring goods or services.

Variable Consideration
In some cases the price of a good or service is dependent
on future events. These future events often include such
items as discounts, returns and allowances, rebates, and
performance bonuses.
LO 2

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Variable Consideration
Trade Discounts

• Reductions from the list
price
• Not recognized in the
accounting records
• Customers are billed net
of discounts

LO 2

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Variable Consideration

Cash Discounts (Sales Discounts)
• Offered to induce prompt
payment
• Presented in terms
 2/10, n/30
 2/10, E.O.M.,
 net 30, E.O.M.
• Gross Method vs. Net
Method
LO 2

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Cash Discounts (Sales Discounts)

LO 2

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Cash Discounts (Sales Discounts)
Gross Method

On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10,
n/60, f.o.b. shipping point. On June 12, the company received a
check for the balance due from Arquette Company. Prepare the
journal entries on Bolton Company books to record the sale.
June 3

Accounts Receivable
Sales

June 12 Cash ($2,000 × 98%)
Sales Discounts
Accounts Receivable
LO 2

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2,000
2,000
1,960
40
2,000
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Cash Discounts (Sales Discounts)

Net Method

On June 3, Bolton Company sold to Arquette Company
merchandise having a sale price of $2,000 with terms of 2/10,
n/60, f.o.b. shipping point. On June 12, the company received a
check for the balance due from Arquette Company. Prepare the
journal entries on Bolton Company books to record the sale.
June 3

Accounts Receivable
Sales

1,960

June 12 Cash ($2,000 × 98%)

1,960

Accounts Receivable
LO 2

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1,960

1,960
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