Problem Solving Survival Guide to accompany Intermediate Accounting, Volume 1: Chapters 1 - 14, 15th Edition

CHAPTER 7

CASH AND RECEIVABLES

OVERVIEW

In previous chapters, you learned the basic formats for general purpose financial statements. In this chapter you begin your in-depth study of accounting for items appearing on the balance sheet: (1) what is to be included in an item classification, (2) rules for determining the dollar amount to be reported, (3) disclosure requirements, (4) special accounting procedures which may be required and, (5) related internal control procedures. In this chapter, you will learn what is to be included under the cash caption on the balance sheet. Also, the methods of accounting for accounts receivable and notes receivable are discussed. Some key internal controls which should be employed for business activities involving cash are discussed in the first appendix to this chapter.

Many businesses grant credit to customers. They know that, when making sales “on account,” a risk exists because some accounts will never be collected. However, the cost of these bad debts is more than offset by the profit from the extra sales made due to the attraction of granting credit. The collections department may make many attempts to collect an account before “writing-off” a bad debtor. Frequently, an account is deemed to be uncollectible a year or more after the date of the credit sale. In this chapter, we will discuss the allowance method of accounting for bad debts. The allowance method permits the accountant to estimate the amount of bad debt expense that should be ...