Kế toán, kiểm toán - Chapter 5: Accounting for and presentation of current assets

Learning Objectives

What is included in the cash amount reported on the balance sheet?

 

What are the features of an internal control system, and why are internal controls important?

 

What is the bank reconciliation procedure?

 

How are short-term marketable securities reported on the balance sheet?

 

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CHAPTER 5ACCOUNTING FOR AND PRESENTATION OF CURRENT ASSETSMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesWhat is included in the cash amount reported on the balance sheet?What are the features of an internal control system, and why are internal controls important?What is the bank reconciliation procedure?How are short-term marketable securities reported on the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesHow are accounts receivable reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts?How are notes receivable and related accrued interest reported on the balance sheet?How are inventories reported on the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesWhat are the alternative inventory cost flow assumptions, and what are their respective effects on the income statement and balance sheet when price levels are changing?What are the effects of inventory errors on the balance sheet and income statement?What are prepaid expenses, and how are they reported on the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 1What is included in the cash amount reported on the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Cash and Cash EquivalentsCash includes money on hand in change funds, petty cash, undeposited receipts, and checking and savings accountsCash equivalents are short-term investments easily convertible to cashCash management is concerned with maximizing earnings by having as much cash as feasible invested for the longest possible timeMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 2What are the features of an internal control system, and why are internal controls important?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Internal Control SystemA process designed to provide reasonable assurance that objects are achieved with respect to:The effectiveness and efficiency of the operationsThe reliability of the organization’s financial reportingThe organization’s compliance with applicable laws and regulationsIncludes financial and administrative controlsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Financial ControlsAre related to the concept of separation of dutiesIncludes a system of checks and balances such that one individual is not involved in an entire transactionExample: individual preparing checks does not sign the checksMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Administrative ControlsFrequently included in policy and procedures manualsReflected in management reviews of operations and activitiesExample: evaluating a customer’s credit history before approving a credit saleMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 3What is the bank reconciliation procedure?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Bank ReconciliationUsed to determine that the amount of cash shown in the general ledger is the same as the cash reported by the bankDifferences may result due to:Timing differencesErrorsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Timing DifferencesDeposits in transit – included in firm’s cash account, but not yet recorded by the bankOutstanding checks – deducted from firm’s cash account, but not yet deducted by the bankBank service charges – deducted by the bank, but not yet deducted from firm’s cash accountNSF checks – not sufficient funds- checks that have bounced from a customer’s accountMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002ErrorsCan be made by either the firm or the bankIf the error is in the recording of cash transactions on the firm’s books, an adjusting entry must be made to correct itOften a very time-consuming process to find errorsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Bank Reconciliation ExampleBank RecordsIndicated balance $5,233.21Add: Deposits in transit 859.10Less: Outstanding checks (1,526.58)Reconciled balance $4,565.73 =============Company BooksIndicated balance $4,614.58Add: Interest earned 28.91Less: Service charge (43.76)NSF Check (35.00)Reconciled balance $4,565.73 ============McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 4How are short-term marketable securities reported on the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Short-Term Marketable SecuritiesPart of a firm’s cash management strategyPrudent use of short-term marketable securities as investments can improve ROIExamples: U.S. treasury securities, commercial paper, and bank certificates of depositMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Reporting of Short-Term Marketable SecuritiesShort-term marketable debt securities that are classified as held-to-maturity are reported at costDebt and equity securities that are classified as trading or available-for-sale securities are reported at market valueInterest on these securities is accrued as it is earnedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 5How are accounts receivable reported on the balance sheet, including the valuation allowances for estimated uncollectible accounts and estimated cash discounts?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Accounts ReceivableAre reported on the Balance Sheet at net realizable value – the amount expected to be received from customersThe amount initially recorded may be different from net realizable due to:Bad debtsCash discountsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Bad DebtsBad debts are inevitable when sales are made on creditCredit managers are able to estimate the amount of bad debts fairly accuratelyTwo methods are used to estimate bad debts:Percentage of credit salesAging of accounts receivableMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Percentage of Credit SalesAn estimated percentage of credit sales losses is multiplied by the total credit salesAn entry is made in the firm’s records increasing bad debt expense and increasing a valuation adjustment accountMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Aging of Accounts ReceivableInvolves a detailed analysis of age of accounts receivableThe longer an account is past due, the less likely the firm is to collect the amount owedAn entry is made in the firm’s records increasing bad debt expense and increasing a valuation adjustment accountMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Entries Related to Bad DebtsRecording the estimated amount: Bad Debt Expense XX Allowance for Bad Debts XXWriting off an uncollectible account: Allowance for Bad Debts XX Accounts Receivable XXMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Cash DiscountsAre used to encourage prompt paymentCredit terms often abbreviated as 2/10, n30, meaning a 2 percent discount may be taken if the account is paid within 10 days, and the net amount is due in 30 daysThe estimation of cash discounts is similar to the estimation of bad debtsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 6How are notes receivable and related accrued interest reported on the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Notes ReceivableA firm may convert and account receivable into a note receivable if a customer has developed difficulties paying the amount dueA note receivable is a formal document that includes maturity date, collateral, and penaltiesNotes receivable are also used when lending funds to another entityMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Interest AccrualIf interest is to be paid on a note receivable at the maturity of the note, the holder accrues interest on a monthly basisThis shows that interest income has been earnedUse the account Interest ReceivableMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 7How are inventories reported on the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002InventoriesFor merchandising and manufacturing firms, the sale of inventory is the major, ongoing source of revenueAccounting for inventory is basically the same for all firmsAs inventory is sold, it is moved from an asset to an expense – Cost of Goods SoldAmount of cost of goods sold depends on the cost flow assumption used by the firmMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Inventory Cost Flow AssumptionsFour principal alternative cost flow assumptions:Specific IdentificationWeighted AverageFirst-in, First-out (FIFO)Last-in, First-out (LIFO)Only cost flow assumptions, not physical flow assumptionsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 8What are the alternative inventory cost flow assumptions, and what are their respective effects on the income statement and balance sheet when price levels are changing?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Specific IdentificationLinks cost with the physical flow of goodsWhen and item is sold, the cost of that specific item is moved to cost of goods soldNot practical for firms with a large number of inventory itemsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Weighted-AverageApplied to individual items of inventoryIs not a simple average of the costs of the inventory items; the average is weighted by the number of units purchased at a specific priceThe weighted average cost is then multiplied by the number of units sold to determine cost of goods sold, and by the number of units in ending inventory to determine the balance sheet valuation McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002First-In, First-Out (FIFO)The first costs in to inventory are the first costs out to cost of goods soldThe oldest costs are transferred to cost of goods soldThe balance sheet reports the most current costs of inventoryMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Last-In, First-Out (LIFO)The most recent costs of inventory are transferred to the income statement - cost of goods sold – when items are soldThe oldest costs are reported on the balance sheetMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Impact of Changing CostsIn times of rising costs, LIFO results in lower ending inventory amounts and higher cost of goods sold than FIFOWhen inventory purchase costs are decreasing, FIFO results in lower ending inventory amounts and higher cost of goods sold than LIFOMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Selecting an Inventory Cost-Flow AssumptionWhen rates of inflation are low, most financial managers choose FIFOIn periods of high inflation, managers choose LIFO to avoid high taxesHowever, consistency requires the use of a single cost-flow assumptionIf a change in methods is made, the effect of the change on both the balance sheet and the income statement must be disclosedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Inventory Accounting System AlternativesAccounting for inventory is very complexThere are two principal inventory accounting systems:Perpetual inventory systemsPeriodic inventory systemsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Perpetual Inventory Accounting SystemsA record is made of every purchase and saleA continuous record of the quantity and cost of each inventory item is maintainedComputers and bar codes scanning have aided in the development and use of this systemMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Periodic Inventory Accounting SystemsA count of the inventory on hand is made periodicallyThe cost of the inventory on hand, based on the cost-flow assumption being used, is reported on the balance sheetThe remainder of the beginning inventory and the purchases are reported on the income statement as cost of goods soldMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Inventory TermsIn a merchandising operation, inventory is referred to as “merchandise inventory”In a manufacturing operation, there are three categories of inventory:Raw materials inventory – raw material used in the manufacturing processWork in process inventory – items currently being worked onFinished goods inventory – ready to be soldMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 9What are the effects of inventory errors on the balance sheet and income statement?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Inventory ErrorsErrors in the amount of ending inventory have a direct dollar-for-dollar effect on cost of goods sold and net incomeIf ending inventory is understated, cost of goods sold will be overstated, and net income will be understatedThe effect in the subsequent period will be reversedMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Balance Sheet Valuation at the Lower of Cost or MarketThis reporting is an application of conservatismMarket is generally the replacement valueIf market is lower than cost, then a loss is recognizedThe determination may be done on an individual item basis or on the inventory as a wholeMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 10What are prepaid expenses, and how are they reported on the balance sheet?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Prepaid Expenses and Other Current AssetsPrepaid expenses are expenses that have been paid in the current fiscal period but will not be subtracted from revenue until a subsequent fiscal periodOften referred to as a deferral or deferred chargeExamples are prepaid insurance, prepaid rent, and office suppliesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Deferred Tax AssetsArise from differences in the fiscal year in which revenues and expenses are recognized for financial accounting purposes and when they are recognized for income tax determinationCan have deferred tax assets (expenses recognized for financial purposes before they are recognized for tax purposes) and/or deferred tax liabilities (just the opposite)McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002

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