Horngren’s Accounting, The Financial Chapters

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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 Textbook

1. Horngren’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.

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