Review the available materials for the chapters covered this week, including the lecture, reading, publisher materials, demonstration problems and exercises at the end of the chapters. After reviewing these materials and attempting the assignment for the week, what challenges did you face? Do you have any questions on the material? Participate in follow up discussion by helping your classmates and sharing your tips for understanding materials, when possible

Lecture Note1. ACC-502 Lecture 4

Read Lecture 4.

ACC-502 Lecture 4 0 Textbook

1. Horngrenâ€s Accounting, The Financial Chapters

Read chapters 8 and 9.

http://gcumedia.com/digital-resources/pearson/2013… Electronic Resource

1. Cost of Goods Sold Demonstration

View “Cost of Goods Sold Demonstration.”

http://lc.gcumedia.com/zwebassets/courseMaterialPa…

2. LIFO Media

View “LIFO Media.”

http://lc.gcumedia.com/zwebassets/courseMaterialPa…

Reporting and Interpreting Cash and Receivables

Introduction

Assets are “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events” (Kieso, Weygandt, & Warfield, 2007, p. 173). Assets are classified as either current assets or long-term assets. Current assets are cash and those assets that can reasonably be expected to be converted into cash, consumed, or sold within one year or the operating cycle, whichever is longer; all other assets are considered to be long-term assets (Kieso et al., 2007). The three major current assets are cash and cash equivalents, accounts receivable, and inventory. Inventory was reviewed in the last module. Cash and accounts receivable are examined in this module.

Internal Control Structure

In recent years, there has been great focus on the internal control system of an entity. The Sarbanes-Oxley Act of 2002 mandated that the system of internal control for all publicly traded companies be adequate in the prevention or detection of errors or irregularities in financial reporting and that corporate executives and boards of directors are responsible for these systems of internal control (Kimmel, Weygandt, & Kieso, 2009). The internal control structure is the system of all related methods and measures adopted within an organization to “safeguard its assets, increase efficiency of operations, and ensure compliance with laws and regulations” (Kimmel et al., 2009, pp. 327-328). The six basic principles of internal control activities are:

1. Establishment of responsibility

2. Segregation of duties

3. Documentation procedures

4. Physical controls

5. Independent internal verification

6. Human resource controls (Kimmel et al., 2009)

Many of the internal control procedures of a company focus upon cash.

Cash and Cash Management

Cash is the most liquid of all assets, flowing continually in and out of a business. As a result, a number of critical control procedures should be applied to the management of cash. Cash must be physically safeguarded and internal control procedures must be utilized to limit employees’ access to cash and to ensure accuracy in reporting. Control procedures over cash receipts and disbursements must be put in place and adhered to in order to protect cash from theft. The use of a bank account provides physical security for cash as well as a secondary accounting of cash transactions. The bank reconciliation process compares the records of the bank with the records of the company to determine if cash is properly accounted for on the books (the company’s financial records or general ledger). The use of a petty cash system aids in protecting cash on hand from misuse. Cash management is critically important to decision makers who must have cash available to meet current needs, yet must avoid excess amounts of idle cash that produce no revenue.

Accounts Receivable and Bad Debts

Accounts receivable represents the amounts that are due from customers based upon prior sales or services rendered. Accounts receivable are inherently risky because when credit is extended to customers, there is at least a portion of the receivables that is at risk of being uncollectible. However, management cannot generally anticipate which accounts will be uncollectible until there is a default on an account. To adhere to the matching principle, management must estimate the amount of uncollectible accounts in the period that the sales are recorded so that the expense of the bad debt can be matched against the sales revenues.

The estimated amount that is uncollectible is recorded in the allowance for doubtful accounts, a contra-asset account that is shown on the balance sheet with accounts receivable. Accounts receivable minus the allowance for doubtful accounts is called net accounts receivable, or the net realizable value of receivables. The net realizable value of receivables is the amount that is actually expected to be collected on the outstanding accounts.

Bad debts can be estimated using the percentage of sales method or the percentage of receivables method. The percentage of sales method, also called the income statement approach, requires that the accountant estimate the bad debts for the company as a percentage of the period’s sales (usually credit sales, either gross or net of returns and allowances). Once the bad debts are estimated under the percentage of sales method, a periodic adjustment to the books is made by debiting the bad debt expense account and crediting the allowance for doubtful accounts for the amount estimated.

Under the percentage of receivables method, also called the balance sheet approach, the balance in the allowance account is estimated as a percentage of outstanding receivables. The percentage of receivables can be calculated on the gross amount or the net amount (accounts receivable minus allowance for doubtful accounts). The estimated uncollectible amount is the intended ending balance of the allowance for doubtful accounts. To get the adjustment amount, the current credit balance in the allowance for doubtful accounts must be subtracted from the estimated uncollectible amount or the current debit balance must be added to the estimated uncollectible amount to get the adjustment total. The adjustment is made by debiting the bad debt expense account and crediting the allowance for doubtful accounts.

Conclusion

Two of an organization’s most liquid assets are cash and accounts receivable. Improper management of these highly liquid assets could result in the inability to pay off liabilities as they come due. As such, safeguarding and managing cash and receivables are critical for the short-term and long-term viability of an entity. The internal control structure of an organization is designed to safeguard both assets and information within a company, and a strong internal control structure can lead to the prevention and/or detection of errors or irregularities regarding cash or receivables.

References

Kieso, D., Weygandt, J., & Warfield, T. (2007). Intermediate accounting (12th ed.). Hoboken, NJ: John Wiley and Sons, Inc.

Kimmel, P., Weygandt, J., & Kieso, D. (2009). Accounting: Tools for business decision making (3rd ed.). Hoboken, NJ: John Wiley and Sons, Inc.

Reporting and Interpreting Cash and Receivables

Introduction

Assets are “probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events” (Kieso, Weygandt, & Warfield, 2007, p. 173). Assets are classified as either current assets or long-term assets. Current assets are cash and those assets that can reasonably be expected to be converted into cash, consumed, or sold within one year or the operating cycle, whichever is longer; all other assets are considered to be long-term assets (Kieso et al., 2007). The three major current assets are cash and cash equivalents, accounts receivable, and inventory. Inventory was reviewed in the last module. Cash and accounts receivable are examined in this module.

Internal Control Structure

In recent years, there has been great focus on the internal control system of an entity. The Sarbanes-Oxley Act of 2002 mandated that the system of internal control for all publicly traded companies be adequate in the prevention or detection of errors or irregularities in financial reporting and that corporate executives and boards of directors are responsible for these systems of internal control (Kimmel, Weygandt, & Kieso, 2009). The internal control structure is the system of all related methods and measures adopted within an organization to “safeguard its assets, increase efficiency of operations, and ensure compliance with laws and regulations” (Kimmel et al., 2009, pp. 327-328). The six basic principles of internal control activities are:

1. Establishment of responsibility

2. Segregation of duties

3. Documentation procedures

4. Physical controls

5. Independent internal verification

6. Human resource controls (Kimmel et al., 2009)

Many of the internal control procedures of a company focus upon cash.

Cash and Cash Management

Cash is the most liquid of all assets, flowing continually in and out of a business. As a result, a number of critical control procedures should be applied to the management of cash. Cash must be physically safeguarded and internal control procedures must be utilized to limit employees’ access to cash and to ensure accuracy in reporting. Control procedures over cash receipts and disbursements must be put in place and adhered to in order to protect cash from theft. The use of a bank account provides physical security for cash as well as a secondary accounting of cash transactions. The bank reconciliation process compares the records of the bank with the records of the company to determine if cash is properly accounted for on the books (the company’s financial records or general ledger). The use of a petty cash system aids in protecting cash on hand from misuse. Cash management is critically important to decision makers who must have cash available to meet current needs, yet must avoid excess amounts of idle cash that produce no revenue.

Accounts Receivable and Bad Debts

Accounts receivable represents the amounts that are due from customers based upon prior sales or services rendered. Accounts receivable are inherently risky because when credit is extended to customers, there is at least a portion of the receivables that is at risk of being uncollectible. However, management cannot generally anticipate which accounts will be uncollectible until there is a default on an account. To adhere to the matching principle, management must estimate the amount of uncollectible accounts in the period that the sales are recorded so that the expense of the bad debt can be matched against the sales revenues.

The estimated amount that is uncollectible is recorded in the allowance for doubtful accounts, a contra-asset account that is shown on the balance sheet with accounts receivable. Accounts receivable minus the allowance for doubtful accounts is called net accounts receivable, or the net realizable value of receivables. The net realizable value of receivables is the amount that is actually expected to be collected on the outstanding accounts.

Bad debts can be estimated using the percentage of sales method or the percentage of receivables method. The percentage of sales method, also called the income statement approach, requires that the accountant estimate the bad debts for the company as a percentage of the period’s sales (usually credit sales, either gross or net of returns and allowances). Once the bad debts are estimated under the percentage of sales method, a periodic adjustment to the books is made by debiting the bad debt expense account and crediting the allowance for doubtful accounts for the amount estimated.

Under the percentage of receivables method, also called the balance sheet approach, the balance in the allowance account is estimated as a percentage of outstanding receivables. The percentage of receivables can be calculated on the gross amount or the net amount (accounts receivable minus allowance for doubtful accounts). The estimated uncollectible amount is the intended ending balance of the allowance for doubtful accounts. To get the adjustment amount, the current credit balance in the allowance for doubtful accounts must be subtracted from the estimated uncollectible amount or the current debit balance must be added to the estimated uncollectible amount to get the adjustment total. The adjustment is made by debiting the bad debt expense account and crediting the allowance for doubtful accounts.

Conclusion

Two of an organization’s most liquid assets are cash and accounts receivable. Improper management of these highly liquid assets could result in the inability to pay off liabilities as they come due. As such, safeguarding and managing cash and receivables are critical for the short-term and long-term viability of an entity. The internal control structure of an organization is designed to safeguard both assets and information within a company, and a strong internal control structure can lead to the prevention and/or detection of errors or irregularities regarding cash or receivables.

References

Kieso, D., Weygandt, J., & Warfield, T. (2007). Intermediate accounting (12th ed.). Hoboken, NJ: John Wiley and Sons, Inc.

Kimmel, P., Weygandt, J., & Kieso, D. (2009). Accounting: Tools for business decision making (3rd ed.). Hoboken, NJ: John Wiley and Sons, Inc.