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Financial Assets

Chapter 7

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All


The Valuation of Financial
Assets
Basis for Valuation in
Type of Financial Assets the Balance Sheet
Cash (and cash equivalents) Face amount
Short-term investments Current market value
(marketable securities)
Receivables Net realizable value

Estimated
Estimated collectible
collectible amount
amount

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Cash
Coins and
paper
money
Cash is Checks

defined as
any deposit
Bank credit
card sales
banks will Money orders
accept.

Travelers’ checks

7-3
Reconciling the Bank
Statement
Balance per Bank Balance per Depositor

+ Deposits by Bank
+ Deposits in Transit
(credit memos)

- Service Charge
- Outstanding Checks
- NSF Checks

± Bank Adjustments ± Book Adjustments

= Adjusted Balance = Adjusted Balance

7-4
Short-Term Investments
Capital
Bond
Stock
Investments
Investments
Marketable
Securities
Readily
Marketable
are . . . Current Assets

Almost As
Liquid As
Cash
7-5
The Allowance for
Doubtful Accounts
The net realizable value is the
amount of accounts receivable
that the business expects to
collect.
Acco u n ts receivab le
L ess: Allo w an ce fo r d o u b tfu l acco u n ts
N et realiz ab le valu e o f acco u n ts receiv

7-6
Writing Off an
Uncollectible Account
Receivable
When
When an
an account
account is
is determined
determined to
to be
be
uncollectible,
uncollectible, itit no
no longer
longer qualifies
qualifies as
as an
an
asset
asset and
and should
should bebe written
written off.
off.

7-7
Writing Off an
Uncollectible Account
Receivable
Be fore Afte r
Write -O ff Write -O ff
Accounts re ce iv able $ 10,000 $ 9,500
Le ss: Allow. for doubtful accts.2 ,500 2,000
Ne t re alizable v alue $ 7,500 $ 7,500

Notice that the $500 write-off did not change


the net realizable value nor did it affect any
income statement accounts.
7-8
Estimating Credit Losses
— The Balance Sheet
Approach

 Year-end
Year-end Accounts
Accounts Receivable
Receivable is
is
broken
broken down
down into
into age
age
classifications.
classifications.


 Each
Each age
age grouping
grouping has
has aa
different
different likelihood
likelihood of
of being
being
uncollectible.
uncollectible.

 Compute
Compute aa separate
separate allowance
allowance for
for
each
each age
age grouping.
grouping.

7-9
Estimating Credit Losses
— The Balance Sheet
Approach
At December 31, the receivables for EastCo,
Inc. were categorized as follows:

  

7-10
Estimating Credit Losses —
The Balance Sheet
Approach
EastCo’s unadjusted
EastCo’s unadjusted
balance
balancein
inthe
theallowance
allowance
account
accountisis $500.
$500.
Per
Perthe
theprevious
previous
computation,
computation, the
thedesired
desired
balance
balanceisis $1,350.
$1,350.

7-11
Estimating Credit Losses
— The Income Statement
Approach
Uncollectible accounts’ percentage is based
on actual uncollectible accounts from prior
years’ credit sales.

Net Credit Sales


× % Estimated Uncollectible
Amount of Journal Entry

7-12
Estimating Credit Losses -
The Income Statement
Approach
In 2009, EastCo had credit sales of
In 2009, EastCo had credit sales of
$60,000.
$60,000. Historically,
Historically, 1%
1% ofof EastCo’s
EastCo’s
credit
credit sales
sales has
has been
been uncollectible.
uncollectible.
For
For 2009,
2009, the
the estimate
estimate ofof uncollectible
uncollectible
accounts
accounts expense
expense isis $600.
$600. ($60,000
($60,000 ××
.01
.01 == $600)
$600)

7-13
Recovery of an Account
Receivable Previously Written
Off
Subsequent collections require that the
Subsequent collections require that the
original
original write-off
write-off entry
entry be
be reversed
reversed
before
before the
the cash
cash collection
collection is
is recorded.
recorded.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Accounts Receivable (X Customer) $$$$
Allowance for Doubtful Accounts $$$$

Cash $$$$
Accounts Receivable (X Customer) $$$$

7-14
Notes Receivable and
Interest Revenue
The
The interest
interest formula
formula includes
includes
three
three variables:
variables:

Interest = Principal × Interest Rate × Time

When
Whencomputing
computinginterest
interestfor
forone
oneyear,
year,“Time”“Time”
equals
equals1.
1. When
Whenthethecomputation
computationperiod
periodis isless
less
than
thanone
oneyear,
year,then
then“Time”
“Time”isisaafraction.
fraction.
For
Forexample,
example,ififwe
weneeded
neededto tocompute
computeinterest
interestforfor
33months,
months,“Time”
“Time”would
wouldbebe 3/1/212..
3

7-15
Notes Receivable and
Interest Revenue
On
On November
November 1, 1, Hall
Hall Company
Company loansloans $10,000
$10,000 toto
Porter
Porter Company
Company on on aa 90-day
90-day note
note earning
earning 1212
percent
percent interest.
interest. On
On December
December 31 31st,, Hall
st
Hall Company
Company
needs
needs anan adjusting
adjusting entry
entry to
to record
record thethe interest
interest
revenue
revenue onon the
the Porter
Porter Company
Company note. note.

$10,000 ×× 12%
$10,000 12% ×× //336600 ==
6600
7-16
Notes Receivable and
Interest Revenue
What
What entry
entry would
would Hall
Hall Company
Company
make
make on
on the
the maturity
maturity date?
date?
$10,000 ×× 12%
$10,000 12% ×× //336600 ==
9900

$300
$300

Days remaining in November (30-1) 29


Days in December 31
Days needed in January 30
Note term in Days 90

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End of Chapter 7

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