II. Cash Equivalents: Short-term, Highly liquid, Less than 3 months to maturity.
Never includes: Stock regardless of how long management intends to hold the investment, IOU’s these are receivables, Postage stamps these are supplies
Always classify the following as cash equivalents if they mature in less than 3 mos.:
Treasury Bills
Commercial Paper
Money Market Funds
III. Short – Term Investments Trading Securities
Listed second in the order of liquidity as a current asset on balance sheet. Short-term investments are made with the intent to hold them for a very short period of time less than one
year, and sold to achieve trading profits i.e. price appreciation of stock or earn interest revenue if invested in interest-bearing bondsCD’s, etc., or dividend revenue. Be able to
calculate the maturity value of a CD and accrued interest at year end or at maturity.
IV. Accounts Receivable Accounting for Bad Debts: The “Allowance” Method is preferred”
because it follows matching. Using the “Allowance” Method means you will have the “Allowance for Doubtful Accounts” on
the balance sheet as a “contra” asset that reduces you’re AR to their Net Realizable Value NRV…NRV represents what you expect to collect in cash from the amounts owed to the
company from customers through credit sales AND this method REQUIRES an AJE at year end to ESTIMATE bad debts.
2 Allowance Methods for bad debts:
I. Income Statement Method II. Balance Sheet Method
of Credit Sales of AR or Aging
Estimate = Bad Debt Expense Estimate = End. ADA
Theory: Matching Concept Always PLUG Bad Debt Exp.
__Accounts Receivable Allowance for Doubtful Accounts
Beg. Bal | Beg. Bal.
+ Credit | - Cash Received - write offs + reinstate previous writeoff
Sales | - write offs Balance B-4 Adjustment
| + Bad Debt Exp. AJE
| End. Bal |
End. Bal.
Net Realizable Value NRV = End. AR - End. ADA Direct Write Off Method – Waits until specific bad debt customer can be identified, then
records bad debt expense removes AR. Potentially can violate the matching concept.
Notes Receivable: Watch your dates in calculating interest or maturity value on notes for less
than one year. For short-term notes, always use simple interest Simple Interest:
Maturity Value = Principle + Interest MV = Princ. + Princ. x Interest x mos12mos
CH 7 Inventory for Retailing and Manufacturing
I. Cost of Goods Sold: Expense on Income Statement.
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