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Reporting and Analyzing Receivables and Investments

7. Reporting and Analyzing Receivables and Investments. Chapter. UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee. ACCT 201 ACCT 201 ACCT 201. Day #2. IS FUN!. ACCOUNTING. Chapter 7 - Day 2 - Agenda.

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Reporting and Analyzing Receivables and Investments

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  1. 7 Reporting and Analyzing Receivables and Investments Chapter UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee

  2. ACCT 201 ACCT 201 ACCT 201 Day #2 IS FUN! ACCOUNTING

  3. Chapter 7 - Day 2 - Agenda

  4. ACCT 201 ACCT 201 ACCT 201 Notes Receivable

  5. Notes Receivable A note is a writtenpromise to pay a specific amount at a specific future date.

  6. Notes Receivable Term Payee Maker ACCT 201 ACCT 201 ACCT 201 Exh. 7.14 $1,000.00 July 10, 2002 after date I promise to pay to Ninety days the order of TechCom Company, Los Angeles, CA One thousand and no/100 --------------------------------- Dollars Payable at First National Bank of Los Angeles, CA Value received with interest at per annum 12% Julia Browne No. Due 42 Oct. 8, 2002 For TechCom.

  7. Notes Receivable Principal Interest Rate ACCT 201 ACCT 201 ACCT 201 Due Date Exh. 7.14 $1,000.00 July 10, 2002 after date I promise to pay to Ninety days the order of TechCom Company, Los Angeles, CA One thousand and no/100 --------------------------------- Dollars Payable at First National Bank of Los Angeles, CA Value received with interest at per annum 12% Julia Browne No. Due 42 Oct. 8, 2002 For TechCom.

  8. Interest Computation Even for maturities less than 1 year, the rate is annualized. If the note is expressed in days, base a year on 360 days. ACCT 201 ACCT 201 ACCT 201 Exh. 7.16

  9. Interest Computation • On March 1, 2002, Smithson, Inc. purchased a copier for $9,000 from Machines, Inc. Smithson gave Machines, Inc. a 12% note due in 90 days in payment for the copier. • How much interest will be paid to Machines, Inc. in 90 days?

  10. Interest Computation ACCT 201 ACCT 201 ACCT 201 Exh. 7.16

  11. End-of-Period Adjustments • When a note receivable is outstanding at the end of an accounting period, the company must prepare an adjusting entry to accrue interest income.

  12. Converting Receivables to Cash Before Maturity • Sell the accounts receivable to a financing company or bank (called factoring). • Borrow money and pledge the receivables as security for the loan (called pledging).

  13. Full-Disclosure Principle • Requires financial statements and notes to report all relevant information about the operations and financial position of a company. • Potential tax assessments • Guarantee of debts of others • Outstanding lawsuits

  14. ACCT 201 ACCT 201 ACCT 201 Short-Term Investments

  15. Short-Term Investments (Marketable Securities) • Management intends to convert to cash within one year or the operating cycle whichever is longer. • Are readily convertible to cash.

  16. Short-Term Investments . . . • Debt Securities reflect creditor relationship (notes, bonds, etc.) • Equity Securities reflect owner relationship (stock).

  17. ACCT 201 ACCT 201 ACCT 201 Accounting for Short-Term Investments

  18. ACCT 201 ACCT 201 ACCT 201 7-9 Exercise Accounting For Short-Term Investment Transactions

  19. ACCT 201 ACCT 201 ACCT 201 7-9 Exercise • Prepare journal entries to record the following transactions involving the short-term investments of Morford Co., all of which occurred during year 2002.

  20. a. Short-Term Investments ACCT 201 ACCT 201 ACCT 201 On February 15, paid $120,000 cash to purchase MRI’s 90-day short term debt securities (120,000 principal), which are dated February 15 and pay 8% interest (categorized as held-to-maturity securities).

  21. b. Short-Term Investments ACCT 201 ACCT 201 ACCT 201 On March 22, purchased 700 shares of GRE Company stock at $27.50 per share plus a $150 brokerage fee. These shares are categorized as trading securities.

  22. c. Short-Term Investments ACCT 201 ACCT 201 ACCT 201 On May 1, received a check from MRI in payment of the principal and 90 days’ interest on the debt securities purchased in transaction a.

  23. d. Short-Term Investments ACCT 201 ACCT 201 ACCT 201 On August 1, paid $80,000 cash to purchase Flash Electronics’ 10% debt securities $80,000 principal), dated July 30, 2002, and maturing January 30, 2003 (categorized as available-for-sale securities).

  24. e. Short-Term Investments ACCT 201 ACCT 201 ACCT 201 On September 1, received a $1.00 per share cash dividend on the GRE Company stock purchased in transaction b.

  25. f. Short-Term Investments ACCT 201 ACCT 201 ACCT 201 On October 8, sold 350 shares of GRE Co. stock for $34 per share, less a $140 brokerage fee.

  26. g. Short-Term Investments ACCT 201 ACCT 201 ACCT 201 On October 30, received a check from Flash Electronics for 90 days’ interest on the debt securities purchased in transaction d.

  27. ACCT 201 ACCT 201 ACCT 201 Valuing and reporting short-term investments

  28. Short-Term Investments . . . • Held-To-Maturity Securities • Trading Securities • Available-For-Sale Securities

  29. Held-to-Maturity Securities • Debt securities that management intends to hold to their maturity whose cash value is not needed until that date. • Carried on the Balance Sheet at cost.

  30. Trading Securities • Debt and equity securities that are bought and held principally for the purpose of being sold in the near term. • Frequently bought and sold to generate profits on short-term changes in their prices.

  31. Trading Securities • Entire portfolio of trading securities is reported at its market value with a “market adjustment” from the cost of the portfolio.

  32. Trading Securities • Any unrealized gain (or loss)from a change in the market value of the portfolio of trading securities during a period is reported on the income statement.

  33. Available-for-Sale Securities • Debt and equity securities not classified as trading or held-to-maturity securities.

  34. ACCT 201 ACCT 201 ACCT 201 7-10 Exercise Accounting For Trading Securities

  35. ACCT 201 ACCT 201 ACCT 201 • Focus Co. purchases short-term investments in trading securities at a cost of $66,000 on December 27, 2002. • (This is the first and only purchase of such securities). • At December 31, 2002, these securities had a market value of $72,000.

  36. Trading Securities ACCT 201 ACCT 201 ACCT 201 Let’s record the purchase.

  37. Trading Securities ACCT 201 ACCT 201 ACCT 201 • Prepare the 12/31/02 year-end adjusting entry for the trading securities’ portfolio. (Year-end value = $72,000)

  38. Trading Securities ACCT 201 ACCT 201 ACCT 201 • For each account in the entry for part 1, explain how it is reported in financial statements.

  39. Trading Securities ACCT 201 ACCT 201 ACCT 201 An adjunct asset account in the Balance Sheet. It increases the balance of the ST Investments – Trading account to the securities market value of $72,000. • For each account in the entry for part 1, explain how it is reported in financial statements. Reported in the Other Revenues and Gains section of the Income Statement.

  40. Trading Securities ACCT 201 ACCT 201 ACCT 201 • Prepare the 01/03/03 entry when Focus sells one-half of these securities for $35,000

  41. ACCT 201 ACCT 201 ACCT 201 7-11 Exercise Adjusting available-for-sale securities to market.

  42. ACCT 201 ACCT 201 ACCT 201 • On 12/31/02, Quaker Company held the following ST investments in its portfolio of available-for-sale securities. • Quaker had no ST investments in its prior accounting periods. • Prepare the 12/31/02 adjusting entry to report these securities at market value.

  43. ACCT 201 ACCT 201 ACCT 201

  44. Available-for-Sale Securities ACCT 201 ACCT 201 ACCT 201 • Make the journal entry.

  45. Held To Maturity Trading Available for Sale Debt securities held to maturity. Debt & Equity securities actively traded. Debt & Equity securities not in the other two categories. Cost. Market value.* Market value.** Exh. 7.17 Short-Term Investments *Unrealized gains/losses reported on the income statement. **Unrealized gains/losses reported in the equity section of the balance sheet and in comprehensive income.

  46. ACCT 201 ACCT 201 ACCT 201 Chapter 7 Ratios

  47. Accounts Receivable Turnover • This ratio provides useful information for evaluating how efficient management has been in granting credit to produce revenue. Net sales Average accounts receivable

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