ACCT 2101 1st Edition Exam 2 Study Guide Lectures 7 12 Lecture 7 February 3 Cash In a business setting cash includes coins currency undeposited negotiable instruments i e checks amounts in checking and savings accounts and demand certificates of deposit CD Certificate of deposit An interest bearing deposit that can be withdrawn from a bank at will demand CD or at a fixed maturity date time CD Cash equivalents highly liquid short term investments with maturities of three months or less o Commercial paper a short term unsecured promissory note issued by a company when they don t have the money they need but they know they ll have it very soon in the future o Treasury bill a short dated government security yielding no interest but issued at a discount on its redemption price common length 90 days constantly issuing these items of debt you buy it and they pay you back Compensating balances required minimum cash balances on deposit when money is borrowed from banks Deposits in transit cash receipts recorded on the depositor s books but not yet recorded by the bank undeposited negotiable instruments Outstanding checks checks issued by a depositor that have not yet been paid by the bank on which they are drawn Credit debit memo form used by a bank to explain an addition credit or deduction debit to the depositor s account Not sufficient funds NSF check A customer s check returned to the depositor s bank because the funds in the customer s checking account balance were insufficient to cover the check a bad check Bank Reconciliation process that explains the difference between the bank balance shown in an organization s bank statement as supplied by the bank and the corresponding amount shown in the organization s own accounting records at a particular point in time o Start with Cash Balance per Bank or Books o Bank Side Add deposits in transit Subtract outstanding checks o Book Side Add note collected Interest Service Fee Subtract bank service charge o Adjusted Cash Balance Lecture 8 February 5 Current assets expected to be converted to cash or used up within a year Short term investments buy them to hold them and sell them Marketable securities liquid assets that hold maturities Trading assets A collection of securities held by a firm that are held for the purpose of reselling for a profit Accounts receivable payable paid out in 30 60 days Too much cash Current Ratio Current Assets Current Liabilities Quick Ratio Cash Marketable Securities Accounts Receivable Current Liabilities Liquidity how fast it can be converted to cash closeness to cash Productive uses of too much cash pay dividends to stockholders invest in projects research development capital investments Cash through Accounts Receivable Quick assets Revenue is recognized when BOTH of the following conditions are met o Goods or services are delivered to the customer that is revenue is earned o Cash or other asset Accounts Receivable is received that is revenue is realized Merchandising companies purchase goods in finished form for resale ex Macy s Home Depot Michael s Lowe s Major revenue account is a Net Sales account Net sales is defined as o Gross Sales Less Sales Returns and Allowances Sales Discounts Equals Net Sales Reduce net sales by expected returns from history Gross sales total sales revenue before deducing sales returns and allowances Sales returns products returned by the customer Sales allowances reductions of the original selling price Sales cash discounts reductions of invoice prices awarded for prompt payment Net sales total sales revenue reduced by sales returns allowances and discounts Trade discounts reductions to the gross selling prices for a particular class of customers These discounts are used to set the invoice prices Lecture 9 February 10 Accounts Receivable amounts that customers owe a company for goods sold and services rendered on account aka on credit o Also called trade receivables o Does NOT include other types of receivables such as interest receivable or rent receivable The allowance method for recording uncollectible accounts allows proper matching of expenses with revenues by using an allowance An allowance is a contra asset account The allowance reduces the Accounts Receivable balance to its net realizable value NRV Since we sell on account we might not know for a while if someone will pay us need to estimate bad debt people who won t pay us The allowance method yields an amount called Uncollectible Accounts Expense or Bad Debts Expense aka Doubtful Accounts Expense o To record the uncollectible accounts adjustment Journal entry Uncollectible Accounts Expense Allowance for Uncollectible Accounts No matter what they call it they refer to it as Bad Debt Expense NRV of Accounts Receivable use of the allowance method produces the net realizable value of accounts receivable There are two basic methods of estimating uncollectible accounts o Percentage of Credit Sales method estimates the uncollectible accounts from the credit sales of a given period The entry is computed without regard to the actual allowance balance The percentage used is based on past collection experience Amount of journal entry Net sales total or credit X Percentage estimated as uncollected o Percentage of Receivables method estimates uncollectible accounts by determining the desired size of the Allowance for Uncollectible Accounts and makes the adjustment accordingly An aging schedule of accounts receivable is often used to determine the balance needed Amount of journal entry Accounts Receivable ending balance x percentage estimated as uncollected CR balance in Allowance OR DR balance in Allowance o Both methods yield an allowance to reduce accounts receivable Lecture 10 February 12 Accounts Receivable Write off o Entry is Allowance for Uncollected Accounts XX Accounts Receivable name XX o There is NO net effect on the NRV of accounts receivable o Before the write off the NRV of Accounts Receivable is Accounts Receivable Less CR in Allowance Net Accounts Receivable o If an accounts receivable that had been previously written off is later recovered it will take TWO entries to record the recovery 1 to reverse the previous write off that is reinstate the account receivable Accounts Rec name Allowance for U A 2 to record collection on account Cash Accounts Rec name Gross margin Net sales Cost of Goods Sold Accounts Payable Current Liabilities Inventory Current Assets Office Equipment Noncurrent Long Term Assets Retained