Chapter 5 Accounting For Short-Term Investments and Accounts Receivable

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Chapter 5 ± Accounting for Short-

Term Investments and Accounts
Receivable
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O Àext most liquid Asset after Cash

O Investments that a company plans to hold for
one year or less.
O Three Types:
aeld-to-maturity securities
Usually Cash Loans
Trading investments
Stocks or Bonds
Available-for-sale investments
Discussed later
(aeld-to-maturity and available-for-sale securities could also

be long-term.)

O Use of Excess Cash
O Buy Low, Sell aigh
O Most often, stock or bonds of
another company
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O Balance Sheet
Current Assets
Trading investments reported at
current market value
O Income Statement
Interest and dividend revenue
reported under ºther Revenue.
Mains and losses reported under
ºther Revenue.
Including Unrealized Mains and Losses

O Record Purchase
O Adjust at end of period to Market Value
Unrealized Main
Increases Trading Investment balance (debit)
Unrealized Loss
Decreases Trading Investment balance (credit)
O Record Sale
Compare Sale price to EÀDIÀM balance
Which includes all previous adjustments to market
value
Sale price > EÀDIÀM balance = Main
Sale price < Ending balance = Loss

O Investments that can be traded
Stocks, Bonds
Oracle Corporation purchases Ford Motor Company stock on May 18,
paying $100,000, with the intention of selling the stock within a few
months.
General Journal
Date ccounts and planations R Debit Credit
May 18 Short-term investment 100,000
Cash 100,000
ÿurchased investment

!"#$
Oracle fiscal year ends on May 31, and the
investment in Ford has a current market value
of $102,000 on this date.
eneral ournal
ate ccounts and lanations e it redit
May 31 Short-Term Investment 2,000
Unrealized ain on Investments 2,000
djusted investment to market
value

O

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O When Investor Sells Asset
O Realized Main
Sales Price > Investment Balance
O Realized Loss
Sales Price < Investment
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On May 27, Oracle receives a cash dividend of
$4,000 from Ford.
Meneral o rnal
ae cco n s and lana ions e i redi
May 27 ash 4,000
ividend reven e 4,000
eceived cash dividend
6
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Slide 12
CoBA2 66

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Accounting for:
Accounts Receivable
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O Main Account Receivable Account
Debits are for new amounts owed by ALL customers
Credits are for payments made by ALL customers
Account balance is total owed by ALL customers
O Subsidiary Account Receivables
Separate accounts maintained for each customer
Debits are only for new amounts owed by particular
customer
Credits are only for payments paid by particular
customer
Account balance is total owed by particular customer
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net realizable value

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net value
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O We need 3 T-Accounts
Bad Debt Expense (debit)
Cost of not collecting A/R¶s
Allowance for Uncollectible Accounts (credit)
Contra account that indicates what we expect not to collect
Accounts Receivable (no adjustment, used to calculate ÀRV)
Total (Mross) amount owed by customers
O Step 1: Determine Estimate
Ënow what that estimate is
O Step 2: Record Estimate
â of Sales
Debit Bad Debt Expense
Credit Allowance for Uncollectible Accounts
Aging of A/R
Àew Ending Balance in Allowance Account
Subtract Beginning Balance from Ending Balance =
Credit Allowance for Uncollectible Accounts
Debit Bad Debt Expense
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O Decrease the Allowance account
and remove the account receivable.
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Allowance Method
Percent-of-Sales Aging-of-Receivables
Adjusts Allowance for Adjusts Allowance for

Uncollectible Accounts Uncollectible Accounts
BY TO
Calculating Ending
Calculating Expense
Allowance Balance
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O Ào allowance is established and the
expense is recognized when accounts
are written off.
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Accounting for Àotes Receivable

and Cash Flow Issues
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O Creditor
Who the money is owed to
O Debtor
Who owes the money
O Debt Instrument
Legal Document representing debt
Represented by a payable for the debtor
Represented by a receivable for the creditor
O Equity Security
Stock certificate, ownership of a corporation
O Maturity
Date when debt instrument must be paid
O Term
Time from inception to maturity of debt instrument
If < 1 year, listed as Current Asset / Liability
If > 1 year
Current Portion is Current Asset / Liability
Portion due after 1 year is Long term Asset/Liability
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Recording a credit card or bankcard
sale
ë
ë

ë ë
ë h 97,000
Fgë 3,000
S ë v 100,000
Oo record a credit card sale of
$1 and a m financing fee
*3*

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Recording the sale of receivables
eneral ornal
ate
cconts and lanations R ebit redit
ash 95,000
Financing ense 5,000
Trade
cconts Receivable 100,000
Sold accounts receivable
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O A stringent test of liquidity
O Measures entity¶s ability to pay its current
liabilities immediately
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O aow long does it take to collect the average
receivables for an organization?
O Step 1: Determine Organizations sales for a single
day
One day¶s sales = Àet sales ÷ 365 days
O Step 2: Determine Organizations Average

Receivables
(Beginning Balance + Ending Balance) / 2
O Step 3: Calculate Ratio
O A smaller number indicates a quick conversion to
cash.
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//// //<
O BlackBoard
Acid Test
FYE 2005 1.8 FYE 2006 .58
Day¶s Sales in Receivables
FYE 2006 78
O Best Buy
Acid Test
FYE 2006 .70 FYE 2007 .69
Day¶s Sales in Receivables
FYE 2007 5.06
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